i'll call this hearing to order. today we will review the made to reduce systemic risk and improve oversight of the groderivatives market. before we get to the subject of this hearing i want to make a few comments about the recent news made by jpmorgan chase. the company's massive trading loss is a stark reminder of the financial crisis of 2008, and that the -- wall street reform. since the firm's may 10 conference call our staff and ranking member shelby's staff have jointly held briefings with

regulators and a briefing with the company itself. following those briefings i announced last week that i intend to call jpmorgan's ceo jamie dimon, to testify before the committee. in calling for mr. dimon to testify i expect him to inform the committee of the details surrounding what has been reported to be a very complex trade. with today's hearing, our june 6th bank supervision hearing with other key regulators and the treasury and the hearing with mr. dimon, the committee is on its way to having a more complete understanding of the facts about the jpmorgan matter that will help us better oversee the implementation of wall street reform. this trading loss has been a

wake-up call for many opponents of wall street reform and the need to fairly fund the agencies responsible for overseeing the swap trades that appeared to be at the core of the firm's hedging strategy. it is my hope that all of my colleagues will express such alarm about this matter been now join democrats in advocating full -- full funding for our regulatory cuts to address this very issue that suddenly seems so concerned about. it is understandable that this high-profile trading loss has cause immediate to renew think interest in wall street performance, but as chairman, i have never taken my eye off the ball. that is why we are here today continuing our oversight responsibilities.

much of the reaction to recent events have focused on other provisions of wall street reform, but what has gotten far less attention is the impact of reform will most certainly have on reducing the likelihood that banks would want to engage in certain high-risk, complex swap transactions in the first place. our margin and capital requirements for uncleared swaps increase obligations, realtime reporting requirements and new interfought and anti-manipulation authorities included in the wall street reform will reduce market risk and improve integrity of swap trading between large financial firms. chairman shapiro and chairman

gensler, i commend you and your staffs for tireless efforts implementing these new reforms, and i look forward to hearing from you today. as you continue your efforts, i urge your agencies to take a single unified approach to transactions and integrate this approach into all your swap rooms. differences between your two sets of rules and implementation efforts should be minimized to improve compliance and limit costs, and interest bite u.s. to promote the decision abroad will be more challenging if we cannot harmonize efforts by our agencies here at home. possibly, i would like to apologize in advance to my colleagues, but i will need to

excuse myself for a 10:30 markup in the appropriations committee whereby, a bill. senator will serve in my absence. to save time, opening statements will the limited to the chair and ranking member. however, i would like to remind my colleagues that the record will be open for the next seven days for additional statements and other materials. i now turn to senator shelby for his opening remarks. >> thank you, mr. chairman. since the passage of the dodd-frank act, its proponents have repeatedly claimed that both consumers and our financial markets will benefit from the new law. we now know that both of those claims are false. since last year, chairman gary gensler oversaw the largest consumer protection failure in the history of the cftc under

chairman gensler's watch, customers of mf global it $1.6 billion of funds improperly taken from their accounts. the first and most basic responsibility, i believe, mr. chairman, of the scftc is to ensure customer funds are nor misappropriated, yet despite all the new authorities conferred on the cftc by dodd-frank, the cftc was still unable to fulfill this primary responsibility to mf global customers. the cftc issers specially troubling because the funds went missing during a time it was well known the firm was under severe financial stress and the risk of misappropriation there was very high. even more embarrassing for the cftc is the fact that there were numerous cftc officials on site at the firm when the funds went missing.

while i'm pleased to see that mf global trustee is making progress in returning funds to mf customer, chairman gensler owes the public, i believe a full accounting how they failed to protect those customer assets in the first place. unfortunately, chairman gensler continues to recuse himself from all matters pertaining to mf global, insulating him from congressional scrutiny. mr. chairman, i believe the public deserves more from their financial regulators. we need regulators who are willing to explain their actions rather than run for the hills. if there were regulatory failure, the responsibility parties need to be held accountable for their actions and they need to admit whatted. chairman gensler's recusal has impeded congress' ability to examine every asset of mf

global's faciilure. i hope chairman gensler will be more forward so congress can finally begin to understand what role he played and how congress should respond. i also hope chairman gensler will be more forthcome be about his management of the implementation of dodd-frank. chairman gensler and mary shapiro jointly created widespread uncertainty about the regulation of derivatives. according to a recent report, regulators have met only one-third of the dodd-frank rulemaking deadlines. and while there is no question that the rule writing process man dasted by dodd-frank makes it very difficult to meet some of the deadline, the regulators sharp culpability here. proposed numerous new rooms for derivatives, they have still not proposed rules that clarp pify

definition of a swap. let me repeat that. almost two years after the passage of dodd-frank giving the cftc and the sec joint jurisdiction over the swap markets, they have still not agreed on the desfinition of a swap, yet somehow finalize rules based upon swap activities, defining and govern earning swap dealers. if market prarticipants don't know which activities fall under the swap, how can expect to know whether these are subject to the patchwork of registration, recordkeeping, clearing and trading rules, and if market participants do not know if their activities will cause them to be classified as a swap dealer or a major swap participant, how can they be expected to know when to submit comments? this is just one example that i'm bringing out here of how dodd-frank in its implementation have created unnecessary uncertainty in our markets.

as the american economy continues to struggle with high unemployment, sluggish growth and the fallout from the ongoing european crisis, the last thing i believe we need are self-inflicted wounds. this includes those inflicted by congress, regulators and most recently poorly conceived trading and hedging activities in one of our largest banks. today's hearing presents i hear, in the banking community, to discuss all of these and how to avoid this in the future. thank you for calming this hearing. >> thank you, senator shelby. i would like to briefly introduce our witnesses neither of whom are strangers to this committee. chairman mary shapiro is the head of the u.s. security and exchange commission.ary againged of the commodity trading commission. we appreciate both of you taking

time out of your schedules to be with us today. >> -- creates an entirely new regulatory regime for over-the-counter derivatives and directs the commission and cftc to write a number of rooms to implement. of course, title 7 is just one of the manier yas ranging from private rating agencies to private fund and municipal adviser registration to specialize corporate disclosures where the sec is charged with writing rules. the sek already has proposed or adopted rules for over three-fourths of the more than 90 provisions in the dodd-frank act that mandate sec rulemaking. additionally, the sec has finalized 14 of the more than 20 studies and reports that the dodd-frank act directs us to complete. and the commission has proposed almost all of the rooms required by title 7. we're continuing to work diligently to implement all

provisions of title 7 as well as the many other rules we are charged with drafting, and to coordinate implementation with the cftc and other domestic and foreign regulators. under the dodd-frank act regulatory authority over swaps is dwimded between the cftc and commission. the law siassigns sec to regula and the other over the bulk of the title 7 derivative markets calmed swap. our rulemakings are sdirned to approve transparenty, reduce asymmetries and facilitate the clearing of security based swaps to reduce counterparty risks. they are also designed to enhance investor protector in security based swaps actions and mid gating conflicts of interest. by promoting transparenty, efficiency and stability, this framework is intended to foster a hoar stable and competitive markets.

in implementing this, the sec staff is in regular contact with the cftc and other regulators. in particular, commission staff is coordinated extensively with cftc staff in the development of the definitional rules. including joint rules for the defining key product terms which we expect to finalize soon, and rules further defining categories of market participants which we adopted last month. although the timing and sequencing of the cftcs and secs rulemaking may vary they are a subject of extensive discussions and requirements will continue to guide our efforts. the dodd-frank act also specifically requires that the sec, the cftc and the prudential regulators consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards. accordingly, the commission is actively working with regulators abroad to address the regulation of otc derivatives encouraging

foreign regulators to develop rules and standards complementary to our own. the commission expects to complete the last of the core elements of our proposal phase in the near term. in particular, rooms related to the financial responsibility of security-based swap dealers and major security based swap participants. the commission is finalizing a policy statement regarding how the substantive requirements under title 7 within our jurisdiction will be put into effect. this policy statement will establish an appropriate and workable sequence and timeline for the implementation of these rules. as a practice tickle matter, certain ruleless freed to go into effect before others can be irpmented and market participants will need a reasonable, not excessive, period of time in which to kplip with the new rules. this statement will let kmashgt participants know the commission's expectations regarding the ordering of the compliance dates of various rules. relevant international implement issues will also be addressed in

the single proposal. finally, your invitation letter requested that i address recent trading losses reported by jpmorgan chase. our best information is that the trading activities in question took place in the bank in london and perhaps in other affiliates. the broker dealer directly supervised by the sec. although the commission does not discussion investigations publicly, i can say that in circumstances of this nature, where the activity does not appear to have occurred in one of our reglated entities, the sec would be primarily interested in and focused on the appropriateness and completeness of the entity's financial reporting and other public disclosures. in conclusion, as we continue to implement title 7, we look forward to continuing to work closely with congress, our fellow regulators, both at home and abroad and members of the public. thank you for the opportunity to share our progress on the implementation of title 7, and i will, of course, be happy to

answer any questions. >> thank you. chairman gensler, please begin your testimony. >> good morning, chairman johnson, ranking member shelby, and members of this committee. i'm pleased to testify along with sec chairman shapiro. today i'm going to speak to the three topics of your invitation letter. first, where's cftc on market reform, second, overseeing markets for credit derivative products such as those traded by jpmorgan chase chief investment office and third, international progress on sbaup swaps reform and related issues of cross-border application. i also welcome ranking member shelby's questions and look forward to chatting about that in public as i would in private with any of the members. the cftc is tasked with overseeing future markets and now with passage of dodd-frank, a market much larger. we're significantly underfunded,

but you've heard me say that before. market oversight critically relies on market participants foremost complying with the laws and related roles and then the self-regulatory organizations like the cme and the national fufers association that provide the first line of oversight. in addition to that we do rely on promulgating and implementing rules. 's in that context the cftc completed 33 swaps market reforms today. we have just under 20 to go. wrap dom they do? they bring transparency to this marketplace. secondly, he lower risk through something called central clearing of standardized swaps and thirdly, lower risk by comprehensively regulating the dealers. we are on track to finish the re230r78s this year but it's still very much standing up and we are also giving the market time to phase in implementation to lower the costs and burdens on this very significant transition. to increase market transparency we've completed eight key

reforms including realtime reporting to the public and to regulators that begin later this summer. when clearing we finalize risk management and will soon seek public comment on which contracts themselves would be under what was calmed the clearing mandate. to promote market integrity we've completed strong anti-fraud and anti-ma lip mation rules and aggregate positions and looking soon to finalize the end user exception. to lower risks of the swap dealers posed to the economy at large, we've completed rules requiring robust seams practices and risk management and a joint rule with the sec on a further definition of swap dealer and security based swap dealer. all pending because it has to relay to us finalizing it's further definition of the term swap and security based swapped. it is essential the two commissions move forward expeditiously to finalize this

rule and i'm glad to say both have a draft of this rule worked out through staff and hopefully we'll be able to finalize this in the near term. we've made significant progress as well working with domestic and foreign regulators to bring a consistent approach to swaps market reform, and though not identical, europe, japan and kar canada made progress and bringing similar reform. 's in particular we're working on ap consistent approach to global margin for uncleared swap. it's important for a lot of reasons. let me note one reason. the cftc promotioned a rule that did not require financial end users to proost margin. we're advocating the same. i wanted to make sure you know that in the end user. a cross-border application of swaps reform. i think congress was guided by experience of aig with its london affiliate. actually, a london branch. lehman brother, st. group, bear

stearns and long-term capital management it a applying reforms to transactions that might be booked offshore were but not the les effect on u.s. activities. that is a stark reminder we got in the twlooft weeks when jpmorgan of trading losses were overseas from trades that lost multibillion dollars in the credit default swaps and indices on credit default swaps. the cftc's open and investigation related credit derivative products by jpmorgan chase's chief investment office. i'm unable to provide specific information about a pending investigation i will touch upon the commissions role in over seeing these markets. the cftc has oversight on clear anti-fraud and anti-ma lip lation regarded the traded credit default swaps indices and oversee clearing houses clearing these prots. starting this summer, reartile

repo realtime. and we invision the dealers themselves to begin to register and trading will commence on swap execution facilities. we're in the midst of implementation that will take still some time and in conclusion, though we've made great progress in bringing common sense reforms, lowering risk it's critical we complete these reforms for the protection of the public. thank you. >> i would like to thank both of the witnesses for their testimonyish, as we begin questions, i will ask colonel dlooshg put five minutes on the clock for each member. charmtden againstler a ee ee eet about swap trades at issue and the jpmorgan and what about these trades at either of your agencies? what changes derivatives reforms bring to the regulation of these

types of trades and what are the potential implications for the work of the role. please start. >> as i mentioned, in my written remarks rear in the midst of standing up a regime that will take time. the credit defaults indices, these are parts of the products reported in the press that jpmorgan chase's chief investment office was trading. already come under our completed anti-fraud and anti-manipulation regime and the clearinghouse, three of them actually, already clear credit default swap indices, voluntarily, later this we're we anticipate seeking public comment on actually having a clearing mandate so that more of these trades will come into the clearinghouse. currently it's just dealers to dealers. later this year we'll have a regime that actually dealers will start to the register but

this bank was not yet registered as a swap dealer because we don't have the rules to make that a true being. later this year, end of 2013, you'll start to see commencement of trade and transparent markets. we're not trying to do this against the clock. we're trying to get it balanced. congress gave us one year to get the job done and we're pushes on two years. i do think we need to get the job done to better protect the american public. at the same time, take in the 30,000 comments we've received. you asked when did it come to our attention? with matters like this, i don't want to get into the pacifics of specifics of an investigation, these are credit default indices under our jurisdiction for anti-fraud and anti-manipulation and the clearing houses monitoring 0 a realtile daily basis for the margin and safety of the clearing houses. >> chairman shapiro?

>> thank you, mr. chairman. to the best of our understanding none of the transactions were held in our executed in the u.s. broker dealer. the activity took place in the london branch of the occ regulated bank and in a london based affiliate investment management unit. so the sec did not have any direct oversight or knowledge of the transactions. i would reiterate what chairman gensler said, if the dodd franc rules had been in place when the active tib was going on, these positions likely would have all been cleared. some substantial majority, number were, but not all cleared. they would have likely been exchanged, traded. they would have been reported to a swaps data repository and there would have been damed transparency toy regulators and to the pun lick and i would say under the sec's proposed rules for reporting, we would have known the trading desk and the trader as well who put the

positions on pt the dealer registered and subject to business conduct standards, and there would also operate under the new rules for enhanced supervision for banks holdings with assets greater than $50 billion. a number of pieces that would, would be in place once all the proposals to implement dodd-frank are completed. >> chairman shapiro, can you commit to us that the sec will issue the last of your proposed derivatives rooms in the coming months, and that you will prioritize within the sec the importance of enacting the rules in a timely manner? >> absolutely, mr. chairman. we have the last piece of proposing rules, also the financial responsibility rules for swap dealers and major swap participants. i hope we will issue that in the next couple of months. two other key pieces from the pe

spective. as i spoke about in my testimony, the implementation plan that we'll lay out in a policy statement. our views on how the rules should be sequenced and implemented. what the compliance timelines would look like and we'll see comment on that. and finally, across border release that will talk about the application of each of our rules potentially to cross-border activity or cross-border operating entities, and we want to propose that cross-border release before we adopt final rules beyond the definitional rules. >> senator shelby. >> thank you, mr. chairman. a lot of people have been basically saying that chairman gensler, that the cftc and the sec, chairman shapiro, were in the dark. that you didn't know what was really going on at jpmorgan. we don't know that yet, but when the did you first learn about

these trades, chairman gensler? >> i would say that the trades came to i think many of our attention personal attention, with press reports. >> press reports. >> burt ot other staff was awar trades that the in the clearing houses because they monitor the clearing houses daily in an aggregate risk a and that the clearing house is fully -- collecting margin to protect a risk of the clearing houses. again, we don't regulate jpmorgan chase as a swap dealer yet. but we could reg late the clearing houses, and anti-fraud and anti-manipulation. >> did the cftc really know what was going on on such a large position that jpmorgan had taken here? >> well -- >> were you in the dark or did you know what was going on?

you said you learned about -- >> it's in transition to speak about this. our oversight of the clearing houses give us a lot of window into the clearing houses which i think has 27 members in it, and the risks in that clearing house. the margin there. that's not the full jpmorgan picture, of course, they have a lot of swaps that aren't clear. our principle regulatory. in terms of the bank, we don't have any oversight there. >> you really didn't know what kwos going on or the problem with the trade until you read the press reports like all of us? >> well, i had -- that's what i've said, yes, sir. >> yes. >> chairman shapiro, i pose the same question to you. where was the sec here? did they know what was going on and if not, why not? >> the sec became aware of the activity, again, also through press reports back in april when the london wale trading was first reported on.

just to remind everyone, this activity did not take place in a broker dealer and we do not have oversight responsibility over the broad based cds index products that were the subject of much of the trading. although i think there's still much to learn here about the full -- >> what was your responsibility as you see it as chairman of the sec looking at what happened, trying to find out what happened at jpmorgan chase? what's onresponsibility? >> clearly, our focus right now is on whether the company's public disclosure and financial reporting is accurate in light of what the press has teed up as what did they know and when did they know it. >> absolutely. >> so there were -- >> and if they knew something, say, a month earlier that was going wrong, should they have disclosed that to the sec? the cftc? and is that what you're trying to find out now, or do you already know? >> that's what's we're investigating right now. were t