of financial markets. he also served as senior advisor to chairman. daniel tarullo is a member of the federal reserve board of governors. prior to his appointment to the board, mr. carrillo was a professor at the georgetown university law center. he served as assistant secretary of state for economic and business affairs as well as deputy assistant to the president for economic policy and assistant to the president for international economic policy in the clinton administration. mary miller as assistant secretary for financial markets in the department of the treasury. in that role she advises the treasury secretary in a variety of issues related to domestic

finance, initial markets in other policy matters. previously, ms. miller worked as a director of the fixed income division, and served as a research associate for the government institute. chairman schapiro, you may proceed. >> good afternoon, chairman johnson, ranking member shelby and members of the committee. thank you for inviting me to testify today on behalf of the securities exchange commission regarding the imitation of title vii and title viii of the dodd-frank act regarding regulatory framework for derivatives. it's a pleasure to appear with my colleagues, chairman gensler, governor tarullo and assistant secretary noted as you know title vii and eight our intent to bring greater oversight and transparency to the derivatives markets and to payment clearing and settlement activity, and with that to increase the stability of our financial markets. while implement these provisions

is complex and challenging undertaking, particularly in light of our other regular responsibilities, we recognize the importance of this task and we're very committed to getting it right. these rules are intended among other things to reduce counterparty risk by bringing transparency and centralize cling to central-based swaps, reduce systemic risk, protect investors by increasing disclosure, and establish a record framework that allows otc derivatives markets to continue to develop in a transparent efficient, accessible and competitive man. since passage of the legislation would have been very engaged in an open and transparent implementation process seeking input on the various rules and interested parties, even before issuing a formal rule proposal. our staff has sought meetings with a broad cross-section of interested parties. we joined with the cftc to a public roundtables and hearings. we've been meeting regularly with other financial regulators to ensure consistent and

comparable definition and requirements across the rulemaking landscape. today that sec has proposed a number of security based swap related rule. among them are rules that would address potential conflict of interest and security based swap cling agencies, security based swap execution facilities, and exchange is that trade security based swap. rules that would specify who must report security based swap transaction, what information must be reported, and where and when it must be reported. rules that would require security based swap bating repositories to register with the sec, rules that would define security based swap execution facilities, and establish requirements for the registration and ongoing operations. rules that would specify information that clearing agencies would provide to the sec in order for us to determine if the swaps must be cleared and specify the steps that end users must follow to rely on the extensions clearing requiremen

requirements. and rules that establish standards for the operation in governance of clearing agencies. in addition with the cftc with opposed rules regarding the definitions of several of the key terms within the dodd-frank act. our staff also is working closely with the federal reserve board and the cftc to develop a common framework for supervising financial market utilities such as clearing agencies which are designated by the financial stability oversight council as systemically important. in the coming months we expect to propose rules to establish registration procedure for security based swap dealers and swap participants. and rules regarding business conduct, capital of margins, segregation, and recordkeeping requirements for security based swap dealers and major security based swap participants. we will also propose joint rules with the cftc governing the definition of the swap executed based swap as well as the regulation of next swaps. we recognize the magnitude and

interconnectedness of the derivatives market and so we intend to move forward at a deliberate pace continuing to thoughtfully consider issues before proposing and adopting specific rules and working closely with our domestic counterparts and international regulars. the dodd-frank act provides that the sec with important tools to better meet the challenges of today's financial marketplace and fulfill our mission to protect investors, maintain fair orderly and efficient markets, and the silicate capital formation. as we proceed with implementation we look forward to continue to work closely with congress, all the regulars and members of the financial committee and the public. thank you for inviting me to share with you our progress on and plans for implementation and i look forward to answering your question. >> thank you, chairman schapiro. chairman gensler, please proce proceed. >> good afternoon chairman johnson and ranking member shelby, and members of this committee. i thank you for inviting me here today. i am pleased to testify on

behalf of the commodity futures trading commission and i also thank my fellow commissioners and all of the staff of the cftc for the hard work and commitment in implementing the dodd-frank act. i'm pleased to testify a long with fellow regulators, chairman schapiro and governor tarullo and i had the honor to be announced by then-president elect obama two and half years ago so we get to be together and assistant secretary mary miller, who we've known each other now for about 15 years so it's great to be here together. the cftc is working very closely with the sec, the federal reserve and other regulators in the u.s. and overseas for courtney and consulting with international regulators to harmonize oversight of the swaps markets. we've received thousands of comments today, both before we've made proposals and after we have made proposals. at this point in the process the cftc has proposed rules and 29th of the 31 areas that the dodd-frank act required us to do

so. including proposing rules this morning on margin which, of course, as well the federal reserve and other regulars took up, consistent with what congress did in excepting nonfinancial in judicial clinton proposed rule would not require margin to be paid or collected when transactions involving nonfinancial end users hedging or mitigating commercial risk. over the next several weeks it's our goal to largely compete the mosaic of propose rules by proposing rules relating to capital as well as the joint product definition will along with the sec and segregation for clear to swaps. it is our goal to try to complete that in the next several weeks. one component that we have asked the public about is facing of implementation. we've not moved to any final rules. implementation is very important. the sec and the cftc actually earlier today jointly announced

that we would ask the public more on this. we've asked on everyone of a rules but we want to do it in a coordinated way, so curly in may we will hold two days of public roundtables to hear about effective dates and implementation schedules, which compliance should come later which may be earlier, how to be face, whether by asset class, my market participant, by other characteristics. we've also put a dedicated comment file up on her website today so that people can comment on this very important issue. we will be considering final rule only after staff can analyze, summarize, consider comments after the commissioners themselves can provide feedback, and that we can consult with other regulators not only here but around the globe. before i conclude i just want to briefly talk about resources. i appreciate any and all that this committee did that now that we're going to move forward and get some breathing room and certainty in 2011 funding.

but the cftc is a good investment and it's been asked to take on much more significant role than just overseeing the futures marketplace. the futures marketplace is about $40 trillion. may be about two and half, $3 in futures for every dollar in the economy. at the swaps market place that we've been asked to oversee is $300 trillion in size here in the u.s. give or take $20 of swaps for every dollar in the economy, we show that role with the sec but clearly, it's seven times the futures market place. we are good investment on the with what just looks like congress will be recommending this week, $202 million, it's dwarfed by the size of the financial industry itself which is measured in the hundreds of millions of dollars in revenue. so the president has put forward a plan for us at $308 million next year. i look forward to working with this committee, the

appropriators on both sides of the aisle, in both houses to see how we can assure that we have the resources to fulfill the mission. thank you. >> thank you, chairman gensler. governor tarullo, lee's proceed. >> mr. chairman, ranking member shelby and elements of the committee think it is opportune to provide the federal reserve board's views on the implementation of title vii of dodd-frank. abortion responsibilities fall into three broad areas. the first relates to coordination and consultation with other authorities, both domestic and foreign. as to domestic consultation, dodd-frank requires that the cftc and the sec consult with the board on rules to implement title vii. in providing comments to the to market regulators, we've tried to bring to bear our experience from supervising dealers and market infrastructures, and our familiarity with market and data sources. there's also very important international coordination activities related to

derivatives. most prominently a group of 20, orgy 20 leaders, sometime ago established commitments related to reform of the otc derivatives market. that would form a broadly consistent international regulatory approach. in an effort to implement the various portions of that commitment, the committee on payment and settlement systems is working with the international organization of security commissions to update international standards for systemically important clearing systems. including central counterparty steckler derivatives instruments, and repositories but even before the g20 leaders initiative, the basel committee on banking supervision had established capital standards for derivatives, more recently the committee has strengthened those standards and has great leverage and liquidity standards which will be applicable to th them. the goal of all of these efforts should be a level playing field

that will promote both financial stability and fair competitive conditions to the fullest extent possible. and i think for all of the agencies represented here today, the pursuit of this end is going to remain a priority for some time. the second task into the federal reserve under title vii relates to the strengthening of infrastructure. central counterparty a given an expanded role in the clearing and settlement of swap transactions. if properly designed, managed and overseen, central counterparty's offer an important tool for managing counterparty credit risk and thus reducing risk to market participants and to the financial system. title vii of the act couple that's the role of central clearing by heightening supervisory oversight as systemically important financial market utilities. this heightened oversight is important because financial market utilities such as central counterparty's concentrate risk

and thus have the potential to transmit shocks through financial markets. as part of title eight, the board was given new authority to provide emergency collateralized liquidity in unusual circumstances, to systemically important financial market utilities. we are at present carefully considering how to implement this provision in a manner that protects taxpayers and limits the rise in moral hazard. the third task committed to the board by dodd-frank is that of supervision. capital and margin requirements are central to the prudential regulation of financial institutions active in derivatives markets as well as to the internal risk management processes of those firms. the major rule-making responsibility of the board and other prudential regulators is to adopt capital in march and regulations for the non-cleared swaps the banks and other prudential regulator entities that are swap dealers or major

swap participants. the board any of the u.s. banking agencies played an active role in developing the enhanced capital leverage and liquidity regime that i mentioned before. these requirements will strengthen the prudential framework for otc derivatives by increasing risk based capital and leverage requirements and required banking firms to hold additional buffer of high quality liquid assets to address potential liquidity needs resulting from their derivatives portfolios. the statute also requires the potential regulars to adopt rules imposing an issue and variation margins on non-cleared swaps to which swap dealers, or major swap participants that they supervise, our party. the statute directs that these margin requirements the risk-based. in accordance with the statutory construction, the board and other prudential regulars and post implement the margin provisions in a way that recognizes the low systemic risk posed by most in use.

the proposed rule would not specify a minimum margin requirement. rather, it would allow banking organization that is a dealer or major participant to establish a threshold based on a credit exposure limit that is approved and monitored as a part of the normal credit approval process. below which the end-user would not have to post a margin to find i would note that the proposed regulation provides that the margin requirement should be applied only to contracts entered into after the new requirement becomes effective. thank you for your attention. >> thank you, governor tarullo. assistant secretary miller, please proceed. [inaudible] >> thank you for tested on 10 inviting me to testify today about everything dodd-frank's derivatives provisions. as you know, the president signed the dodd-frank act into law almost nine months ago to

act as data from for the country to protect consumers and investors, into taxpayer bailouts and improve the transparency, efficiency and liquidity of u.s. markets. the derivatives provisions are a critical part of that framework and the administration strongly supports them. dodd-frank's derivatives provisions will shed light on a market that present operate in the shadows. central clearing trade execution and reporting requirements and business conduct standards will provide substantial benefits. the work that the administration is undertaking in partnership with our colleagues at the cftc, sec and federal reserve board is vital in preventing the harmful buildup of risk that contributed so greatly to the financial crisis in 2008. as other treasury officials have previously testified, several broad principles guide our implementation efforts. first, we are moving quickly to meet the statute deadline, but we're also moving closely that

as we implement the act we get a record second, we're bringing transparency to the process so that as many stakeholders as possible have a seat at the table. the american people know who is at that table, and anyone who wants to provide input on requests for comment and proposed rule makings can do so. we are creating a more coordinated regular process. the financial stability oversight council is playing a key role by bringing together the financial regulatory agencies to help develop consistent and regulations and supervisory regimes. fourth, we're building a level playing field by setting high standards in the united states and working diligently with our international counterparts to follow our lead. fifth, we're crafting rules of the road that will provide u.s. investors and institutions the conditions they need to invest capital, develop innovative products, and compete globally. finally, we are committed to

regulate keeping congress informed about our progress. treasury secretary has specific statutory responsibilities with respect to derivatives implementation and also has other responsibilities in his capacity as the chairman of the fsoc. starting with the specific, congress gave the secretary the authority to determine whether foreign exchange, swaps and forward should be exempt from the definition of swap in the commodity exchange act. the secretary must consider the statutory factors set forth by the dodd-frank act, including the impact regulating affects swaps and forward swaps under the cda would have on systemic ricks and financial stability, the existing regulatory regime and supervision of for persistence and finally whether an exemption could lead to a vision of other predatory requirements. and we publish a request for comments to solicit public input on a wide range of issues relating to potential exemption.

we received 30 comments in response and treasury staff has also conducted an independent analysis including extensive discussions with a range of interested parties. we know that market participants and other stakeholders and the committee are closely following this issue. regardless of the decision the secretary makes, market participants need to be able to prepare for it. while we intend to move expeditiously, it's also critical we take enough time to make the right decisions for the safety and soundness of the markets. the secretary also has derivatives implementation responsibilities in his capacity as fsoc chairman. the fsoc recently approved the publication of a notice of proposed rulemaking make it regarding the designation of systemically important financial market utilities. the notice was published on

march 28 and will be open for comments for 60 days. one final area i would like to touch on is the importance of kabul international standards including derivatives oversight, the united states will set high standards of today's financial system is highly interconnected, mobile and global. we must work that on to protect the competitiveness of u.s. financial markets, but also to ensure that the reforms we implement here are not undermined by lack of standards and also. we will contend to work at home and abroad to build a regulatory framework for derivatives that will help our financial system become safer and sounder in a platform on which we can build strong financial markets that will fuel our economic growth. thank you. >> thank you, assistant secretary miller. i will start off with questions. thanks for your testimony. i will remind my colleagues that

we will keep the record open for statements, questions, and any other material you would like to submit. as we begin questioning the witnesses, i will put five minutes on the clock for each members questions. chairman schapiro and chairman gensler, how do you plan to reconcile the sec and cftc proposed rule makings governing swap execution facilities real-time reporting, trades and other infrastructure consistent with dodd-frank's comment to usher regulatory consistency and comparability and treat similar entities in a similar manner? >> mr. chairman, i'd be happy to start. we are very, very focused obviously on the issues

surrounding the fact that a number of areas and you just articulated several of them, we do have differences in our process between sec and the cftc. some of those differences, they may be necessitated by the fact that markets can while they're both derivatives markets, the products may treat differently, have different liquidity characteristics, and for that reason some differences may be appropriate and will continue to foster the development of these markets but we have asked for comment on whether our understanding in that regard is correct. but i will also say that we are continue to work extremely closely together through the proposing stage, and not for a number of rows, commentaries have close we are able to review the comments that come in on our proposals as well as those are coming on the cftc proposals would have gone in a slightly different direction. and we are very committed to continue to work through those differences. and if they are not grounded in very good market structure reasons because of the nature of the product, try to keep them as

consistent as we possibly can. where we have proposed after the cftc i would just add on some rules we have sought explicitly to get comment on the approach to see if that might have been a better way to go forward. so in a number of areas where would you have differences, i believe because we are still at the proposing stage and not at the adopting state we will be able to work too many of those differences. and then, of course, through implementation it may be necessary for either or both of us to engage in some interpretation of our rules in order to ease implementation and make them consistent. >> i'll keep it brief. i agree with what chairman schapiro said there is a lot of consultation and coordination. it's also in the context of the are some differences between the futures marketplace and the securities marketplace that either existed in statute or in rules, or just in market practice for decades. so we are trying to be as close as we can between swaps and

security based swaps while also not create some regulatory arbitrage and undercut for instance, in our case a futures marketplace that's worked with a great deal of transparency and a low risk to the american public and not undercut that marketplace through some differences as well. and i suspect the same issues on your site. >> if i could just add it's critically important for us as well because securities based swaps can be the economic equivalent to equity position that we want to make sure we don't create what we are trying to be more and more synced up with the swaps markets between the security based swaps and swaps markets that we are not creating great distance between the security based swap arkansas to equity markets as well. >> assistant secretary miller and governor tarullo, how our treasury and the fed working to harmonize international derivatives regulations through the g20 and the financial

stability board, especially given the different international time frames were moving ahead on new rules? how are your efforts in this area being coordinated with the cftc and the sec to be sure that procurement for capital and other rules are both appropriate and consistent? >> well, we are following this very closely because as i said we're very interested in having good harmonization globally on these rules. so in many settings, treasury staff are engaging with their counterparts in different international groups. that are number of working groups on derivatives that are occurring, the financial stability vote in your. we're also interested in things that are going on in asia. so we are following closely both the rulemaking process in the u.s. an and by engaging regulary with our counterparts in other countries. >> mr. chairman, living at a couple of thoughts there.

as you can tell from the testimony today, the other rule makings that the sec and the cftc have ongoing, dealing with the international equivalent of title vii and title viii it will implicate a number of different regulatory authorities in other jurisdictions. so i think what was look for by the g20 was a framework of agreement or commitment on a set of goals that would then be pursued in the various appropriate international bodies. what we've got now i think is a good bit of work, very productive work on efforts to get agreement on central counterparties, on electronic trading, on transparency for those counterparts come on risk management standards. and that's being done i think through a lot of cooperation among agencies, but in particular the fed and the sec because, in fact, we've got every survey president and the

commission of the sec who are cheering the key international committees. on this point. president doesn't of the new york fed and commissioner casey of the sec. on capital, as i said in my prepared remarks, apostle committee has come on banking supervision, as a set of capital requirement for derivatives any part of its overall capital international recognize capital standards that they have been updated to take account of what was bar during the crisis but their already agreed among all the basel committee members which constitution not just the g20 but some additional countries beyond the g20. i think the one area where we probably need some more work now is on margins for non-cleared derivatives, non-clear to swaps. and i think the fact that we potential regulars in the market regulars are now moving towards a proposal for the u.s. is going to enable us to have a clear go

hand in unified position internationally to try to move along some other countries which are actively in some cases not to actively considering putting these requirements in place. with respect to coordination, i think it's been very good. as you can tell from just my recitation of the different committees, we need to have everybody involved because there are different expertise is here. and from all accounts that i get from our staff and directly from talking to the principals at other agencies i think this is one where a convergence of cooperation among u.s. agencies. >> senator shelby? >> thank you, mr. chairman. assistant secretary miller, on our second panel today we will hear from the treasurer of fmc, a large manufacture, manufacturing company here in the u.s. who has grave concerns are going to his testimony about the excessive regulations

mandated by dodd-frank. his testimony indicates that these regulations will increase operating costs, making it more difficult for his company to both create jobs and manage risk. do you believe that fmc manufacturing company end user is a type of company that should be regulated under dodd-frank? and the treasury had any concerns about the potential consequences of dodd-frank derivatives regulation on job creation? have you done any work in this area? >> thank you for the question. we've heard a great deal from end-users, nonfinancial and financial comment in the markets. and i think that there's sufficient flexibility in the dodd-frank legislation to work with a company like fmc in terms of providing flexibility under derivatives regulation. >> in other words, a company

that is an end-user that is managing risk but not in pure financial speculation, is that right? >> yeah. we have not been any specific work on the economic impact and job creation of this particular title. >> will you do some research? i hope treasury does research in the area. there will be ramifications for quitting jobs. >> there have been many studies mandated by dodd-frank and we've been diligent deliver the work that has been delivered under the statute so we have put out quite a bit on the financial market ramifications. ..

och when will treasury make its determination? >> i regret i don't have that decision to give you today for the hearing. we're very close. [talking over each other] >> when you get it? >> we would be delighted to brief you on our decision either way. >> a u.s. treasury aware of any markets in the foreign-exchange market to justify pro ratings? >> there are many parts of the foreign-exchange market, the part you just mentioned is one part of a foreign-exchange part. >> do you aware of any failures in that area that would justify further regulatory -- >> there are many parts of that market that were under severe stress during the financial crisis and some parts of our subject to dodd frank

regulations. >> if your knowledge were in derivatives where you're managing risk or under extreme stress i don't know of any. >> i would be happy to reply to that with further research. >> will you do that for the record? >> tour. >> kevin tarullo. central clearing house is here which is very important. last week ben bernanke of the federal reserve gave a speech about the importance of properly regulating clearing houses. he noted that one of the reasons they have a mat had trouble to date is, quote, good luck. you can't always count on good luck as you know. beyond relying on luck what steps can we take or can you take to ensure that taxpayers are never called upon to bailout clearing houses? because that was a concern of a lot of us when we bring debating

the dodd frank legislation as you recall. >> are recall your questions on that topic a year or two ago. with respect to the parties that a designated as systemically important, there will be oversight by the appropriate market regulator the federal reserve has a role to play as well. we have a quantitative rule and hope to be involved in the exam is bringing to bear in -- supervisory or prudential supervisory perspective on the institutions. we would hope they will all be subject to strong prudential requirements for credit risks, strong liquidity -- >> you said you would hope -- >> and the mechanism here, primary regulators -- >> we know. >> we have a role -- >> oversight role.

>> that is correct. and in that capacity i think we will hope to contribute to the perspective on the supervision of these organizations. the suspect there will be convergence among the agencies and the standards that are important and as i said i think we're going to draw on our experience not just with market entities which we do have but also supervising from a prudential point of view looking to safety and soundness and not simply market operations. >> in the same area. the united kingdom's financial services authority wrote a comment letter in response to a rule proposed on risk-management requirements for clearing house. the ffa, financial service authority warned cftc that lacks eligibility requirements but first members of clearing houses

could create new risks to the financial system. do you agree with f s a's comments? >> i have not seen the f s a comments. i would say an effective member qualification set of standards is important to the integrity of any central query. >> shouldn't we altogether do everything we possibly can to ensure there is no bailout of clearing house? >> absolutely. i think that is why we are all -- everybody on the table here -- share an interest in having a rigorous and effectively enforced standards. >> can i get chairman gensler's comments on that? >> it is a big yes. central clearinghouse needs robust oversight.

i view it as a partnership with the federal reserve. we like to be the front line on interest-rate and the sec has fare clearinghouse as well. they should not have central bank liquidity. dodd frank did allow for it. emergency exit circumstances when the secretary and the board of governors decide that. that should be the absolute rare occurrence. it shouldn't happen. clearinghouse hasn't failed in this country. we survived two world wars and great crises. the clearinghouses have to have a collection of margin. they have to have it on a daily basis. they have to have property bought management. >> have to make sure everything clears. >> they have to make sure everything clears and that which clears has available pricing, available with witty and also with regard to the comment letter you referred from the

u.k. it is important the clearinghouses have open membership, the access to the clearinghouse cannot just so narrow. clearing houses are at greater risk if it is narrow membership benefit broadened out and markets work best when they are open and competitive. >> since there are international implications in derivatives trading and everything, should we listen to our counterparts in europe? like the fis and others who have similar concerns? >> absolutely. we are consulting with sharing our drafts and memos not just with the fis a bad asthma and the european commission. their comments are very helpful. we believe membership should be opened up. and smaller members can only scale in to that membership and

not be like large members. the clearing house is thinking about an exclusive club deal. congress spoke to that in the statute saying they are supposed to have open access. >> clubs are dangerous thing. >> yes. that is what occurs in the swaps clearing today. not in the future clearing as much more open. swaps clearing today has been more exclusive. dodd frank said it had been more open and competitive. >> let me begin with comments that senator shelby said about clearing platforms to dissipate the risk with bilateral transaction and inherent danger of not well regulated trades and everyone at this stage is focused on that and i urge you to keep your focus on that

issue. following up on another line of questions about contracts, where these contracts part of the lehman bankruptcy? were there losses incurred when lehman failed because they could not fulfill more contracts and those losses would have been avoided if the contract were traded? >> there were open contracts when they failed. those contracts were settled. >> they were settled how? >> a large number moved through payment versus payment settlement system. i can't give you the precise percentage settled and that way but it is my understanding that all of the open contacts were settled. >> governor tarullo, does the federal reserve wish to flood the 4 x market in the late

months of 2008? >> there wasn't support for the foreign-exchange market. there was liquidity in the form of dollar liquidity through the discount window directly to institutions in the united states and central banks of some other countries but this was not in pursuit of saddling foreign-exchange, byproduct of general liquidity squeeze. >> part of their exposure was foreign-exchange contracts. >> it was much more a funding program. there was not access when you have obligations. >> there's a possibility if these contracts are exempt that there could be another situation where the liquidity freeze, not a question of settlement but the money to settle and the fed will

enter into supporting these. the sector. >> under dodd frank we are not permitted to offer institutions specific assistance except at the discount window or through the provisions here. secretary miller alluded to this. most people think the problems in foreign-exchange market have largely concentrated on settlement. quite short duration forward. all the international work on foreign-exchange began after the 1974 failure of hirsch dodd frank which produce these problems. most of the attention has been focused and today there are not i would say perfect or

comprehensive mechanisms making sure foreign-exchange transaction settled. there has been substantial improvement over the last 36 years. >> you can explain the interaction between capital requirements of the vote rule with derivative activities and the general prudential guidelines of capital that you are developing for financial security. >> what are the three areas again? >> the full tour will requires -- with respect to companies the personal financial companies trading derivatives. there is also the requirements that talk about derivatives and general prudential safeguards that the fed can insist on a case by case general basis. in your mind are of these separate categories or does this

blend into a gut feeling about how much capital a company should have? >> it is not a gut feeling. there is an analytic backdrop and there already is. we devoted a lot of attention before the process to improving the market risk part of the general capital standards and derivatives were one of the focuses for attention including important the braves to counterparty risk evaluation and capitals set aside and also making sure you stressed the random thrill of the market environment. any capital of 40 we have aimed will be to have a set of rules by specific supervisory oversight which ensured those

activities are not creating risk to the institution that does not have an adequate set aside. that is what existed in the pre crisis period. there are opportunities for arbitrage that were taken by firms. i think there was in attention to counterparty risk and among regulators. those are the changes that need to be put in place and those are the changes in the rules promulgating under basil free with an eye to the specifics of a firm not just to a gut feeling about that. >> senator kroger. >> thank you for being here. the notion of a clearing house is something focusing on clearing trades was something that was very bipartisan moving the details and ends up being some differences on user fees

but for what it is worse among market participants and we're talking to many on that side and those who strongly support dodd frank and those who oppose it. there is concern about the rapidity that these rules are being put in place and even more so on their prescriptive nature and just being overly prescriptive so with that i will focus on a few things. people have to have five quotes. even a large institutional traders that might have a relationship with one institution has to have five quotes and the wonder who you are trying to help tour save or what is the point behind that? >> you are referring to the swap execution and in that regard congress said those transactions that are cleared and made available for trading would be

brought to swap executions. that is a mandate and its transparency, to promote free trade transparency. these are not large blocks. the block are accepted. it might be at $10 million trade and it is one that is cleared so it is anonymous with no credit risk. on those trades what congress suggested we do and we think we're doing is promoting transparency, multiple participants had an opportunity to execute against others and in the futures market place when a request goes out it goes out to the whole market place. doesn't just go to five but a broader group in the marketplace and the quote that come in are seen by the marketplace so there is more liquidity. what we are proposing is more transparency. less transparency than the

futures market place. [talking over each other] >> do you think this was something we asked you to do? >> yes. >> the real time reporting you came up with a 15 minute time frame. i am curious what was magic about that. a number of people think it was not long enough especially in larger transaction. >> i am glad you asked. congress said real time reporting after the trade should be as soon as technologically practical on the smaller trade and we could have a delay and look at what the lay we had in the futures market place. about five minute small and propose 15 minutes. if it is bilateral we asked a lot of questions. the securities world chairman shapiro could speak better but there delay is 90 seconds. it is three times the futures, ten times the security so we will get comments.

the proposal will change once we get to a final rule. >> the larger trade might be launderettes end of day or something. >> the larger traits in the facility we propose to -- if it is bilateral we did not propose specific but just ask a lot of questions. >> is it your version? a lot of people think is. the derivatives market and equity markets should be very similar when you finish all of these activities? >> markets work best when they are transparent, open and competitive. those 4 factors weathered as futures or securities ultimately help users and investors, helps the economy grow. it does shift some of the information advantage to tens of thousands of users away from the most sophisticated. >> so that is yes.

>> there are a lot of concerns because people use the two instruments as being very different and there is some concern that that is your vision and not taking into account the differences. >> u.s. about equities and derivatives and we regulate futures. markets work best. whether futures, equity for swaps when they are transparent more than competitive people get the benefit of that competition in contrast to a close tour dark market. if derivatives are moving out to electronic platforms is there any concern about growth of high-frequency trading taking place in that area? >> it is something that captivates our commission every day in the futures market place when 85% to 95% of the marketplace is electronic is something we think is on our mind as we think about regulation. >> we look forward to having

your office. if i could ask one more question, we have a lot of discussion. i remember in the hearing room when paul volcker talked about the evil rule, a flyer in the middle of regulation was part of dodd frank. i am out as you are, we talk about throughout the country small community banks and others about the examiner in charge. the examiner in charge that comes into their institution their attitude, their understanding of whatever regulator they are working with changes pretty dramatically how their bank's status is interpreted. the charge is basically -- as you look at the volt rule, mr. volcker who i respect greatly, couldn't really describe to us

what frustrating was. you just know it when you see it. how the institutionalize the hole volcker issue when you have these examiners out among these various institutions that have judgments? i don't see how you do that properly. i would love to have help understanding that. >> there are couple things. when you are talking about 7,000 financial institutions as you are with basic credentials standards the balance is always between allowing for the local knowledge of the examiner in charge because he or she will understand the institution better than anybody on the one hand and on the other hand insuring consistency and treatment across anybody in the united states because people deserve it. when it comes to something like the volt rules or other provisions we are talking about,

you are surely dealing with a smaller subset of institutions and i think the kind of horizontal approach to regulation and supervision with respect to larger institutions is going to be particularly important so once we've a provincial regulators come up with regulations to implement the volcker rule we are going to have to have a coordinated and coherent and unified approach to implementing and overseeing the implementation of that rule. i would expect as we have already done with some of our activities over the last couple years beginning with the stress test in early 2009 we won't have a process internally to make sure these things are

implemented consistently, the lead of the team in place a larger institution have a common framework of knowledge and training and we are making sure regular cheese have a chance to say we are uncertain what is going on and we are not sure we are being treated the same way. will it be a task? yes. would be more difficult than a lot of supervisory tasks that we have? i don't think so. this is not to wonderstate the attention it will require but once we get those rules in place we have a mechanism for making sure they are applied in a consistent fashion and people have recourse to the board to ask about interpretation of the rule. >> thank you for your work on dodd frank and getting

legislation passed. passing this bill last july was only the beginning of the effort to oppose transparency and accountability and derivative markets. it is pretty clear in newspaper reports that the opponents of transparency and oversight lost the first fight been working on budget issues to restrict the lot of things you are trying to do and handcuff efforts. just listening to your testimony and looking at the magnitude of the regulatory effort you are undertaking illustrates the importance of that so thank you. my questions are directed at you. i see letter in january about gas price speculation and the importance of limits curbing excessive speculation. i am concerned excessive speculation can once again

seriously hurt our economy. every time there's a pipeline outage or refinery fire or trouble in the middle east inseams one reaction is speculators and oil companies move in to spike prices up. that is a typical excuse for that happening. the commodity market oversight coalition, group of commercial end users point to fifty-seven studies conducted in the last five years showing the role of speculation and driving a pass at commodity prices with speculative interest and commodities was 15% to 30% typically. financial companies account for 1% of crude oil futures with 5% last month. we know what this means to the economy and individual motorists and small-business operating on small margins to so many others.

we have seen what speculation can do. similar price increase in commodity markets. the ceo of starbucks said financial speculators came into commodity markets to drive those prices to historic levels and consumer is suffering. talk to us about financial speculation and it's effect on prices and answer this question. what a 40 under dodd frank do you have now to combat speculation. what you need in terms of additional tools to carry that out. >> hedgers meet speculators from the earlier days of the derivatives market place. a farmer planting corn, we tour school wanted to lock in that price at harvesttime and was a speculator on the other side to assure that price. when predecessors' reform do was to make sure markets were transparent.

100% of the market came to market place similar to the swaps market place transparency and we have the tool to combat fraud and manipulation. position limits was part of the tool kit we were given in the 1930s. in dodd frank it was expanded not just in futures but economically equivalent swaps. we are not a price setting agency but we ensure that markets have basic integrity that are not so concentrated. speculator you might say, someone not in the physical marketing channel. someone who is not producing oil or natural gas or corn or wheat for large part of the marketplace. well over half of the marketplace in different parts of its statistics will show.

we put statistics out. we need to complete a role on limits that had been in place in agricultural products for decades and were in the energy products in the 80s and 90s. we actually -- imus stated it. on the energy and agricultural comments. there were a lot of comments to sort through and many were repetitive. to your question, we need to promote transparency in the marketplace. the more transparent the more market participants can see the aggregate that is an important thing. we need resources. this small agency is a good investment to insure the integrity of these markets.

>> thank you, mr. chairman. thank you very much to all of you for testifying but i can't help but make one brief observation which is bosh, it is amazing to me. i have in my hand the cftc rules on position limits for -- looks like it is the 4 point drop. it is 25 pages long. dodd frank calls for 330 rules. not a criticism of this particular rule but it strikes me as an incredible cost to financial institutions to understand and digest these. hire manpower to comply with these and it strikes me as

something that could approach a miracle. if they are all perfectly consistent and compatible and operate exactly as intended with no and intended consequences, it is a difficult undertaking. an enormous cost to the financial institution to comply with. the very large ones will be able to afford it. smaller ones i am not so sure. have liked to follow up with a question, mr. chairman. my understanding of dodd frank is the bill does provide some flexibility in terms of how are you go about imposing position limits. my further understanding is far the european regulators have not promulgated any rules whatsoever regarding position limits. is there a danger that we go ahead and impose position limits and they don't that we simply have a migration of business to other venues?

are you concerned about that? >> we are working closely with european and asian regulators. capital and risk do not know any geographic -- boundary. weather position limits for other roles, that is something we are conscious of. position limits after numerous hearings starting in 2007/2008 in the house and senate our authorities were not only broadened to include economically equivalent swaps but also something very important, the exclusion from those position limits caught bonafide hedging was narrowed a bit. we take congressional direction on this as well. >> i understand that but are you concerned in the absence of comparable regulation that we have the opportunity for regulatory arbitrage across borders? >> i would have to say yes but not just with regard to position limits. we are so active in europe and elsewhere to harmonize where we

can but in terms of position limits, what we're looking at in the proposal is about futures and options on futures, where we set them for decades in agriculture. we did in energy in the 80s and 90s with exchanges that took the lead. looking to impose those and benefit because as i said we have 11,000 public comments in the file right now so this is one that the public is engaged in. >> i am concerned about this developing disparity between the regulatory regimes and another quick question if i could on the real time reporting. we had a little discussion earlier about speculators and the fact that speculators and i agree with your observation that speculators provide liquidity. speculators often need to have a certain amount of anonymity.

transparency has many virtues and can be important sometimes anonymity is important too. my understanding and maybe you can correct me, is the cftc's 15 minute disclosure requirement is different than the sec which has a longer period before comparable transaction has to be disposed. is there a difference between the two? >> there is with respect to block transactions which would give the concern about whether information was being revealed to run ahead of the head. we haven't actually proposed standard for how we will define a blocked transaction without your comment and propose a civic standards but we recommend disseminating the price of the transaction in real time, the size of the transaction wouldn't be disseminated as long as 46 hours after the transaction.

>> would your goal be to have harmonization? >> we are trying to bring them together as much as we can. there are differents in the underlying market between futures and security and interest-rate market which is a vast and large market different from the credit swap market which is largely over the sec. there will still be some differences but whether it is the block will or real-time reporting rule or swap execution we are looking to try to get as close as we can. there are some gaps between the underlying futures in the securities market. >> i see my time is expired. thank you, mr. chairman. >> chairman gensler, i would

like to discuss corporate simple issue with you. generally the complaints i get from the futures industry is the cftc is working at a curious case for, difficult to keep up with your rulemaking. there are 60 rulemaking procedures ongoing. more troublesome to me is the implementation of a provision in dodd frank that seems unnecessary to me which is the cftc is operated under core principle regime and most observers would say survive the disaster of several years ago in a sound way. yet as i recall you ask the

house agriculture committee that you have the authority to abandon core principles and moved to a mort sec tight regulatory environment for the futures industry. i would question you as to why you believe that the core principles method of regulating the futures industry which at least in my view worked well. i remember speaking to chairman petersen and we were a short this was a backstop if they don't intend to go down this path of changing the nature of its regulatory environment. that is the only not the way it turned out. where would you characterize my understanding has wrong? >> i never like to do that with

a senator. >> i appreciate that attitude but you would be thinking that if you didn't say it. >> i want to give some clarification. the cftc as part of the modernization act got core principles for two areas but not all the areas. it was for clearing and trading platforms. we do not have today nor have we had oversight in the futures commission and the like. there are many rules. dodd frank gave us a little bit greater ability on the clearing and trading and particularly on clearing because there is a mandate for what might be $300 trillion of derivatives in to these clearinghouses. it was fought and i still believe that this is a place that needs robust

risk-management. and we can't as americans just rely solely on the good risk-management standards of clearing houses themselves but regulators and financial stability oversight council has a role and the federal reserve has an important role to play advising us in joining those examinations. i could say congress set a 1-year time limit to put out been moves we proposed, actually 47 as of this morning. we proposed rules and not finalized any. we will get the rest of the proposal out in the next handful of weeks. a whole mosaic will be out of there. some common files have closed. we have discretion to take command and using that discretion we continue to take, and and we will move forward on final rules when we can sufficiently summarize it and get commissioner feedback and regulatory feedback. we are not going to make the

july deadline. many people are pleased to hear that. we are only going to do this according to when we are ready to move over the spring, summer and well into the fall on the timing issue. >> in response -- two responses to your comments. do you have examples of where the regulatory environment operated, failed in regard to circumstances we found our economy in that cause you to have that sense and certainly your comment about the mosaic. would it be your plan for the industry and congress to see the whole mosaic before any of the rules are individually approved and implemented? >> your second question, yes. as the mosaic we're hopeful to complete the next three to five

weeks working with the sec on one important joint rule and capital rule and so forth. >> we see the big picture before we get any move. >> and doing some joint meetings we announce today with the sec on implementation phase and we will be doing in early may. we have an open, and fail on that facing as well. in terms of your other question we didn't regulate as a nation. we need to think about the interconnectedness of the financial system. part of the cost when senator toomey referred to the cost, part of that cost is taxpayers don't have to bear greater risk to bailout financial institutions in the future. >> thank you, mr. chairman.

[inaudible] >> thank you, all of our witnesses on the first panel. i ask those on the second panel to take their place at the witness table. while you get seated on would like to welcome to introduced the witnesses on our second panel. the vice president and treasurer of the fomc corp. developed suv company in august with special americans. mr indeed has served in this position since 2001 or seen financing and investments, insurance and other company functions. we owe less key is chief executive officer of trend markets. provider of online trading

services. prior to working for trade web, oleski was the ceo of an opportunistic brokerage and also worked at credit suisse first boston in a variety of positi s positions. terry duffy is chairman of of the cme group which operates several major futures and exchanges and item line trading. mr. duffy has served in his current position since 2006 and has been a member of cme's board since 1945. chief executive of lc age clear in that group which is an independent group serving exchanges and otc markets.

mr. erics previously served as overhead of operations for barkley's capital. jennifer per catch is chief investment officer of public employees retirement association of colorado. this helped us position since 2003. she oversees the investment process for public pension fund that provides benefits to employees of the current state governments and municipalities and universities and colleges and other public entities. before we begin the testimony i will recognize senator toomey for brief remarks. >> thank you very much, mr. chairman, for giving me the opportunity to recognize mr.

thomas deeds, treasurer of fmc corp. in philadelphia. fmc is one of the foremost diversified chemical companies with leading positions in agricultural and industrial and consumer markets. mr deeds served as treasurer since 2001 and has responsibilities for worldwide treasury function including finance treasury operations and pension investments and insurance and risk-management bring in 20 years of experience in this field and i had the pleasure of having a number of discussions with mr. deeds particularly about the end user issue as applied to derivative use and i want to welcome you and thank you for coming to testify. >> mr deeds, you may proceed. >> good afternoon to you and ranking member shelby and the members of the committee. in addition to my role in fmc corp. i am president of the

national association of corporate treasurers. fmc and 80 c r with a coalition representing thousands of companies across the country that employ derivatives to it managed a to a business risk. of the life to express my gratitude to you and ranking member shall be for your bipartisan efforts on behalf of derivatives end users and particularly chairman johnson for your work with other committee chairmen in support of end user margin. we appreciate the effort to extend the statutory effective date for the proposed regulations and i thank you, senator toomey and ranking member shelby for your kind words about it. your care and interest for manufacturing companies of which we are a proud one. in fact fmc corp. was founded

130 years ago to provide spray equipment to farmers. today in addition to making agricultural chemicals that farmers supply to protect their crops tower 5,000 employees have worked to make fmc a leading manufacturer and marketer of a range of agricultural, specialty and industrial chemicals. we achieved this longevity by responding to our customers's needs with the right chemistry, delivered at the right price. this year marks tower 80anniversary of listing on the stock exchange. i had the newer financial market we have been discussing today. the first currency swaps tour in 1984. i have seen the market grow from the 1980s to its current size by adapting and responding to a newer market participant's need the. we support the committee's

efforts to address the problems with derivatives experienced during the financial crisis of 2008. i want to assure you that fmc and other end users were not and are not engaging in risky specter the fifth derivative transactions. we use over-the-counter derivatives to hedge risk in our business activity. we are offsetting rest. not creating new ones. fmc is the world's largest producer of nationals a note with the glass manufacturing and we are one of the largest employers in the state of wyoming. we can mine and refine soda ash products in southwestern wyoming, ship them to south asia and deliver them at a lower cost with higher quality than competing chinese producers. we achieved this in part because of the derivatives we entered into to head natural gas prices. these derivatives are done with several banks all of which are

supporting fmc through their provision of $1 billion of committed credit. our banks do not require fmc to post cash margin to take -- they take this risk into account as they prize the transaction with us. this structure gives us certainty so we never have to post cash margin while the derivative is outstanding. deterrent system where end use and their counterparties the side collaborative lee whether and how margins should apply is changing. the fdic proposed a rule that could in the future subject end users to margin requirements. we are still reviewing the details. appears regulators, not market participants will now determine how margin will be set. regulators will have the final say over how much cash a end user will divert to a margin account where it will sit and available for productive uses.

in our world of finite limits in financial constraint posting cash margin would be direct dollar for dollars subtraction from funds we would otherwise use to expand our plans, build inventory to support higher sales, conduct research and development and ultimately sustain and grow jobs. the coalition survey of derivative end users extrapolated the effect of margin requirements across the s&p 500 of which fmc is also a member to predict consequent loss of 100 to 120,000 jobs depending on these proposed threshold. the effect on the many thousands of end users beyond the s&p 500 would be proportionately greater. and focused on margin. end users are also concerned about the 100 new rules that will determine whether we can continue to manager business risks through derivatives. we heard about capital

requirements that are counterparties would be required to hold and we heard through the publication of rules today that unclear the over-the-counter derivatives, the kind we employ to hedge our business risk are singled out as high risk transactions which will attract additional capital we are concerned could be almost punitive and could end the ability of end users like fmc to had their business risk with them. thank you very much for your attention and i would be happy to answer your questions. >> please proceed. >> members of the committee, thank you very much for inviting me to participate in this hearing. my name is lee oleski and i am founder of trade web and i appreciate the opportunity to talk about the regulatory framework for dodd frank. the last 15 years train webb has

been at the forefront building electronic markets for the training of fixed-income securities. the core competency is around leveraging technology to create more transparent and efficient markets to provide a valuable service to the institutional banks for our clients. before electronic markets were established, institutional clients picked up the phone and spoke to different dealers to obtain prices and trade government bonds. this trading model is how the otc derivatives market works today. >> host:s due to technological advances and acceptance of the internet we saw an opportunity to provide clients greater price transparency and execution efficiency in the u.s. government bond market. in 1997 we established trade web and created the first multi bank electronic request for u.s.

treasury securities. our model gave clients the opportunity to run an electronic auction to run the best price and automate manual trading process. trade webs our marketplace for u.s. government bonds transform phone base and co-pay government bond market -- asset managers and pension funds have access to trading systems that provide greater price transparency and more efficient execution. the global platform for government-bond we trade on average approximately $40 billion each day with 1,000 institutional clients located in every financial center around the world. across our platforms the daily volume on trade with is in excess of three hundred billion day. with for the goals of dodd frank

which we believe to be enhanced transparency and reduction of systemic risk. tower is it vital to understand and give consideration to the needs of market participants and promulgating rules for implementing title vii. the aim is to achieve the goal of the act without disrupting the market and liquidity it provides to end users. market participants need confidence to participate in these markets and careful consideration is not given to what the rules say we fear this could be materially shaken. we need to provide flexibility to trade swaps trading arbitrary or artificially prescriptive limitations on the manner in which market participants in iraq and trade could result in liquidity drying up, increased cost to trade swaps and market participants seeking a the less efficient ways to manage their risks. finally there's a great deal of discussion about how to implement the proposed rules.

there is no doubt an overly hasty timetable for implementation could directly impact the health of the derivatives market given the complexity of the system. implementing these regulations in one big bang is unrealistic. phasing in the rules is a sensible approach. trade web builds -- to support these markets. it is important for the sec to set clear time frames for when rules will be effective as soon as practical. we commend chairman gensler for taking the initiative to discuss this in open forum in may and take public comment on time frames. furthermore any difference in moved between the sec and cftc should be largely eliminated. if there are material differences between the two regulators, cost for compliance

and building technology will go up considerably. by ensuring that the sec and cftc rules have sufficient flexibility for market participants clients can train in the matter that suits their trading strategy in profiles. some institutions may transact on prices and others use disclosed are a few model and others may want to trade anonymously. regulators should not mandate platforms. pick one model or offer all models. flexibility that allows for innovation and technology providers is critical to attract the capital necessary to fund investments in these technologies. in conclusion we support the goals to reform the derivatives market and provide a solution regulation seeks to achieve but we are concerned the commissions may be overly prescriptive. in doing so create an intended consequences for market participants and the marketplace as a whole. we have power experience in the electronic markets can be

helpful and instructive as congress and regulators take on great challenges of implementing title vii of dodd frank. >> mr. duffy, please proceed. >> members of the committee, thank you for the opportunity to testify on the implementation of the dodd frank wall street reform and consumer protection act. terry duffy of see any group which includes clearinghouse and exchanges of nynex and kovacs. in 2000 congress objected the modernization act. this level the playing field with foreign competitors and permitted us to recapture our position as the world's most innovative and successful regulated exchange and clearing house. as a result we remain an engine of economic growth in chicago, new york and the nation. in 2008 the financial crisis focused attention on overleveraged underregulated banks and financial firms. regulated futures markets and clearing houses operate flawlessly before, during and

after the crisis. congress responded by reining in the market to reduce systemic risk in central clearing and exchange trading derivatives. to increase data transparency and price discovery and prevent fraud and market manipulation. we support the goals. we are concerned the cftc launched an initiative to a new modern regulation of clearing houses. we are not alone. most careful observers and some commissioners concluded many of the proposed regulations rollback principle based regulation and unnecessarily expand the commission's mandate. the cftc is expanding to change its role. it is an oversight agency whose purpose has been to assure compliance with sound principles. now it appears as if it is trying to become a front line decisionmaker to impose its business judgments on every operational aspect of derivative, trading and clearing. this role reversal is inconsistent with the dodd frank. it will require doubling of commission staff and budget and

impose astronomical cost and end users of derivatives. this includes numerous examples of rulemaking with adverse consequences on customers. of -- in to mediate your knees and the economy. obviously the increased cost will have in direct impact on business and employment in the united states. of equal concern the creation of international regulatory disparities will drive business overseas. we recognize the cftc has been working to induce international regulators to be equally prescriptive. that effort seems to be failing. as other jurisdictions capture u.s. business and the cftc, driving off shore. the threat of prescriptive position limits and restrictions on hedging in the united states are already driving business overseas and into unregulated markets. the threat that margin control will be used to influence prices of commodities will be more disastrous. abroad undefined prohibition and destructive trading practices and strategies will not only

drive liquidity providing u.s. markets but impair hedging and price discovery. we are strong proponents of a budget for regulators and support funding to modernize this technology. we strongly object to the expansion of commission steps to enforce regulations that are uncalled for by dodd frank or duplicate the duties now being performed by as our owns that are self regulatory organizations. this is no cost to the government. chairman gensler talked about the size of the market. the commission justified budget demands with the notion value of the contracts that oversee regulated futures market and the notional value of the slot market that will be responsible for under dodd frank but there is no valid relationship between the notional value and regulatory -- the swap market and cftc will regulate only four to 5,000 transactions per day. the parties are all