release statements, and their q1 financial reports accurate and truthful. >> but you're in the investigation of that now? >> yes, sir. >> what did they know inside, when did they no know it and wh shop have have divulged? >> exactly. >> is that correct? >> congress gave the similar authority to the sec. we didn't formally have as strong answer anti-fraud and anti-manipulation authority included also deceptive practices. that's part of this new authority that we have and so we have currently oversight of the clearing houses and that, of course, this ongoing investigation that i don't want to go into, you know, the particulars, because it's really just best not to compromise the investigation itself, but it's in that realm. >> as chairman of the cftc in a derivative position like this,

will you basically telling you that you didn't know there was a problem there until you read the press reports? is that -- >> i think that is accurate. we're also standing up a regime. we don't have any regulatory oversight of jpmorgan chase, national association, the bank. we will, i think, at some point when they register as a swap dealer later this you're, but they're not currently registerrd as a swaul dealer. future commission merchant, but that doesn't -- >> no-man's-land, there's nothing, things that have not crystallized in the regulatory fashion yet? over such a big bank? >> well, the bank is overseen by bank regulators. under dodd-frank, the market regulators, we will stand up and oversee swap dealing activity in a bank or in an affiliate of the bank or security based, but you're right. currently the american public is not protected in that way. >> chairman gensler, were any of

the trades conducted through jpmorgan's futures commission merchant? >> not that i'm aware of. it may be upon further review we'll find. today, our knowledge is, no. >> thank you, mr. chairman. >> senator menendez. >> thank you, mr. chairman. at the last committee hearing, i asked, who at the company was responsible for the wrongdoing there, and they informed me their investigation was just beginning to determine that. i want to ask you both the same question. can you shed any light at this point? >> not at this point, no, sir. >> so you do not know at this point who is responsible for what took place at mf global? >> i think the agencies collectively, including the criminal authorities are working very hard to untangle exactly what happened at that firm. >> with reference to what

happened at jpmorgan, where the huge losses there be take place, have you determined who was responsible at this point for that? >> no. as i said, our focus is very much, because we did not regulate the london branch of the, of jpmorgan bank, that's an occ regulated entity, the fed is the holding company regulator, our focus is on the quality of their risk disclosure and their specific disclosures as a public company. when they talked about the, their potential, all the risks they faced as a business. when they talk about potential losses under their model, we are very focused on the accuracy and the timeliness of that disclosure. >> yes? >> i just wom say that would say we're aware it's primarily in the bank. that much of this emanated from the london side of the -- london branch of the bank, and as news

reports have suggested, credit derivative products are at the center of it. >> in reference to these investigations, are they criminal or civil? >> the sec's authority is simply civil. not criminal. >> are you working with entities that are conducting criminal investigations? >> i believe the fbi has announced publicly that they have open the a criminal investigation, and we will all work closely together, even though we have different -- >> into which of the two that i'm referring to? >> i'm sorry? >> mf global? >> i think actually with respect to both. >> with respect to both. okay. so in essence, it's the agencies that are conducting civil reviews, i assume, and to the extent that there are criminal reviews being conducted, they are being conducted by law enforcement entities. correct? >> that's correct. >> not the senate banking committee conducting those? >> i would not -- tell the

banking committee what to do or not to do. >> at this point, as far as i know, we're not. let me ask you this. do you interpret -- do you hope to interpret the volcker rule until way that what took place at jp morgue won not have been possible to have taken place or would not have taken place without real consequences? >> i think we've obviously been thinking a lot about this and the volcker rule is foremost in everyone's minds because of where we are in the process of reviewing comment letters. but also because of this activity, and it strike meese that statute is pretty clear that in order to rely on the risk mitigating hedging exemption to the volcker rule, that there has to be some strong criteria that needs to be met. whether or not the jpmorgan trades out of their cio meets those standards or not, i don't think we have a view yet. but they have to be correlated to the risk.

they cannot give rise to significant new exposures. they have to be subject to continuous monitoring and management. and they have to mitigate one or more specific risks on either individual positions or aggregated positions. the compensation of the persons doing the trading cannot contribute to their taking outside risk or unnecessary risk. and they have to importantly, i think, document the risk mitigating purpose of the trades when the hedge is being done at a desk that's different than the position that's being hedged was done at. so i think there's strong language there, and what we need to do is, take what happened to jpmorgan and view it through the lens of those criteria and see how that helps inform the rulemaking going forward. >> i hope as one of those who supported the wall street reform legislation that the agencies are going to look at this broadly, because if jpmorgan lost $2 billion or something reports are just ligslightly mo

what's to stop them from losing $10 billion or stop a less capitalized bank from taking losses that are so large that could bring it down? that's the whole effort that we tried to move here in the senate, which is to have the type of rear foreform does not systemic risk placing everybody in america responsible for the decisions of large entities such as this, and i hope that's how the regulators at the end of the day understand that was the mission that all of us that supported wall street reform want to see. thank you, mr. chairman. >> senator corker? >> thank you, mr. chairman, and i thank you both of you for your testimony. when an event like one that just occurred happens in the middle of a rulemaking process, that affects things, does it not? meaning you have a real, live

example, and we've had this issue. e we realize it's a blip on the radar as far as their earnenings but it effects the way rules end up being promulgated, would you both agree? >> experience like aig and lehman brothers in a more disastrous way. this is not it, but -- >> as americans are watching they're wondering why are we having these it meeting, the point is, there's a lot happening at the regulator level and an event like this ends up affecting things and it affects the rules that end up being created. and i guess i have this fear. i think much of what we did was a punt to you guys, and the fact that -- you didn't do that. we did that. but the fact that it's taken you two years to define what a swap is is pretty incredible, and it's because we never defined it ourselves or did the work to understand what a swap is.

but the thing i guess i fear is in a rush to make it look like the dodd-frank legislation addressed these kind of issues, what you may do, i mean, we never debated what these institutions should be. we just sort of layered a lot on top. we have these highly complex organizations where even the ceo itself realizes that he didn't know what was happening in this lopden operation. london operation. and i fear that you're under pressure that a lot of calls are being made, that the administration is concerned that the american people are going to wake up and look at the last three years as a bad dream. up know? that the health care bill becomes unconstitutional. this big dodd-frank bill really doesn't address realtime issues, and that what you're going to do is end up causing the volcker rule to it be something it was never intended to be. i would like for you to respond

to that, and in the process, possibly, making these highly complex organizations even more risky than they already are. just a couple of comments in that regard. >> i think our job, that you delegated or asked us to do is to be -- >> punt was the word i used. >> i always try to be more respectful to fful to congress. >> you don't need to be, and i appreciate that. i think was to ensure that american public gets the benefit of transparency and lower risk. firms will fail in the future as in the past. they have a freedom to fail and america doesn't stand behind them. the one industry we do this around the globe, and that's why i'm so committed permanently to getting this rear foform done. this is a reminder in one area. i look at it more about cross-border application than

the volcker area, if i can say respectfully, because whether it was lehman brothers, aig, long-term capital management. long-term capital management, you might recall a hedge fund in connecticut set up in the caymans. a reminder to make sure we get that part right. the london risk can come back and hurt the good folks -- of your state. let >> let me -- is there a pressure, though, to define what's occurred here in such a way that you may end up in the short term making a piece of legislation look good but in the process cause a highly complex institution like this to be in a position where they're not appropriately hedging activity so they can actually make it more risky? is that the kind of thing that you talk about from time to time? >> we are most definitely public actors, as you are as a member of this great body, the senate. and we're influenced by tv tv

we've had 30,000 comment letters. 1,600 meetings with folks from the markets. so this will be part of the topic of the dialogue, absolutely, but i think we have to just as we always do, to get it balanced, get it right, not, if your concern is, tipped too far one way or the other. but it's a good reminder that risks in london did come back here and we can't have the u.s. taxpayers stand behind them. >> my time is going to run out. i know from past history i'll be cut off immediately. ip do just want to ask, when you're making the rules you're making we really do it here's to the process of cost again fit analysis. i'm moving to other types of regulations. you now corp.s are challenging because regulators are not doing that. secondly, ensure we don't create another systemic risk by shifting off to these clearing houses a systemic risk that otherwise was held in other

places. so, anyway, i thank you for what you do, and look forward especially to the next hearing we have with the banking regulators that actually are supposed to oversee these activities. thank you. >> thank you, senator corker, and thank you all for your testimony. i wanted to start with returning to the basic premise of the volcker rule which is create a firewall between traditional banks, hedge fund-style investing. and in the effort to create that firewall, one of the issues was when banks were holding funds in between making loans, how would they be able to utilize those funds so that they had liquidity for making loans but it was relatively safe? so it's clearly not in the -- in the world proprietary trading or hedge fund investing, if you will. so the basic statute provided

for a notion of investing in government bonds as kind of the safe place to put your money. and, but allow the regulators additional flexibility. the draft regulations has the liquidity management proposal, and it's not really clear in the end what would be allowed here, but if we look at jpmorgan, they have 381 billion in funds that were awaiting, if you will, lending out. so in between loans. unlike other institutions that largely put it in government bonds, took half and put it in corporate bonds. that started this sequence of events that led to this $2 billion to $3 billion or greater loss. they then said we have corporate bonds. better protect against them dropping in value and bought some insurance and then said, well, we've got to pay for that insurance. we'll sell another form of insurance to create the reserves

and soon in the position of doing what aig did. to sell lots of insurance cheaply and when the bets went bad, they had to pay off. so it begins with this liquidity management issue, and that really hasn't been focused on much. what is the appropriate place to put your funds in between making loans so you are clearly in the deposit taking loanmaking business and not in the hedge fund business? >> sir, i think that's a great question, and the rationale behind the liquidity management exclusion included in the rules was to make sure that banking entities would have sufficient readily marketable assets to meet their short-term liquidity needs and we can agree that's critical to the safe and sound operation of a banking entity. and there is requirements around that that have do be a document liquidity management plan and criteria set out in the rule but

the question you raise really requires us to go back and look at that and see if we had carried that to its logical extreme, could we have anticipated what happened to jpmorgan and maybe we need to tighten this up and just look at it much more closely, carefully. in response to senator corker's question, this is very instructive. it would be wrong not to take this example as a real-life, real-world example of what can happen, whether it's the application of the cross-border provisions or the volcker rule itself, to use this example and to see what the impact would be of all the things we've proposed to do. >> so if you take the situation that you have funds awaiting, making new loan, if you will, can be invested in a huge variety of things and essentially it is a gateway to be involved in pry priority trading, two-one, funds that wen out the door, reducine liquidit

and second, introduces a lot of risk and complexity. chairman gensler? >> well, as derivatives and swaps regulator we're mostly going to be focused on the implementation of volcker rule with regard to swap dealers and future commission merchants. i don't have as many views as chairman shapiro on the liquidity management piece, but if i could pick up on a second implied in there was, we received a letter from jpmorgan, all of us received, on our side, of the regulators, in february, specifically saying that they thought we had to loosen up our widen out the hedging exemption. we're entrusted by congress to figure how to prohibit proprietary trading so taxpayers don't stand behind these i instituti institutions. permit hedging, helping lower risk rs of these institutions.

it's that challenge. not an easy challenge, by the way. but you were very clear. it's got to be tied specifically to individual or aggregate positions. and i think congress was pretty clear on that, and it's instructive to me that it was actually february 13ening that jpmorgan sent in like a 65-page letter and within that they said, you have to loosen up this portfolio hedging. so i think this la to be looked at in the context of their february letter as well. >> great. i'm out of time. so we're going to return to senator johanns. thank you. >> thank you, mr. chairman. thank you both for being here. madam chair, let me follow-up on a statement you made a couple of times during the hearing that i just want to understand better. you said that sec did not regulate the london branch that that actually was something over on the occ side. and i'm -- i'm trying to maybe

take the next step here with my questi question. could this risk management that was being done by jpmorgan have been done in such a way that it would be under your jurisdiction, or are you just saying this doesn't fall within the purview of the powers given to me? >> if the trades were done in an sec reg lamted entity, broker dealer or ultimately when the rule, finalized the security based swap deemer, then it would clearly be under the jurisdiction, excuse me, of the sec. >> okay. which, of course, raises another question. if i were running jpmorgan, couldn't i just set this up in a way to avoid you? >> well, that's an important issue that we're all wrestling in with in the context of the

controversy border and how to apply our rules to activities that might not take place in the u.s. entity but might face a u.s. customer or take place in the aaffiliate of a u.s. entity but over seas or in a branch overseas border release. i think generally a foreign entity with a foreign customer, we can feel reasonably comfortable our title seven rules wouldn't apply. but the foreign affiliate of the u.s. embassy, rather foreign entity that's registered with us with doing business with a foreign customer would likely be subject to our rules. a u.s. entity, including a branch of the u.s. entity operating in a different country or doing business with any u.s. person would have title seven rules of line. we want to lay this out in detail for commenters.

one of the concerns about dodd-frank, and it's been one of my concerns. the more you crank it down, the more the regulations become more own ownerness. the greater need for accountants and lawyers and at the end of the day avoid you. >> that's why the international efforts were engaged and are really critical. they're pain stakingly time consuming as we sit on a bilateral basis and multilateral basis with regulators in the other major markets and go through issues like prepaid transparency, post trade transparency, margin t clearing mandate, the exchange trading mandate. and work through each issue to try to get the regimes as confident as possible so there isn't a reason to do their business in the least regulated

market. if it faces u.s. customers and has the potential to impact the u.s. financial system, we have to very seriously consider making that part of our mandate. >> mr. chairman, i want your comments on this. but before you comment and i have no doubt you're working hard and want everyone to be as harmonized as they can be. i've worked in that arena in a position like yours. we would workdays, weeks, months, years with 150 countries trying to get people on the same page for sanitary issues and trade. at the end of the day they all had their own agenda and interest. and some saw an economic benefit in doing something very different than what we were

proposing they do, and before i take all the time, go ahead, mr. chairman. >> i would go on and on. it's a serious problem. >> you're right on both points. e with will ult hatly have differences. we're working tell together. but different cultures, different political agendas. there will be differences. and two, you're correct. modern finance, large complex financial institutions will rationally look to see if they can find the lowest tax regime and accounting regime that favors them. or regulatory regime to put customer money to risk with less capitol. there will be differences and that rationally the large firms will do all this. i did it once, when i was a cofinance officer of a large firm. we set up four to six legal entities in every jurisdiction. and long-term capital

managements was in the cayman islands. and aig financial products we think are this connecticut needed a back lance. so they wept to france and got a license and put a branch in london. and the gentleman around it was running it out of london. we have to be able to say yes, there are costs and financial institutions. we are trying to address this appropriately where there's direct and cig capital affect on u.s. commerce or activities that the transactions be in, wall street rationally is advocating something different. if i was on the other side of the table representing them, i would advocate something different than i am in this job right now. it's a challenge. and we're not going to be as

good as we open. >> mr. chairman, thank you. >> senator reed. >> thank you very much. chairman, you've already indicated that you don't have direct jurisdiction over the activities of the jp morgan entity. but you're trying to define hedges in a way that covers the a legitimate operation of the institutions without allowing speculation. there's a tension, it seems, between risk management and profit making. and i know you have suggested so the criteria, do you have anything else to add in terms of this dilemma of defining a hedge so that it's properly protecting clients and protecting investments of the bank, but not

opening up to speculation. >> well, i think that is the hard challenge that congress has given us. and i would say it's also true with the market making exemption as well. and we believe deeply that businesses have to be able to engage in both activities. market making to ensure our markets are operating as efficiently as possible and hedging to reduce businesses risk. and i think the criteria that are laid out are actually pretty good in terms of helping us keep the focus on hedging is truly hedging. you know mitigating one or more specific risks of either individual positions or aggregated positions. the hedge itself, not giving rise to significant exposures, at least at the inception, but also monitoring and adjusting hedges as we've seen in the newspaper articles about the jp morgan transactions, they morph into something else over time. that there be -- not be

compensation programs, and as you know we've been working hard in the disclosure area with respect to compensation. that really incentivize this risk taking. so i think the criteria there is really incumbent upon the regulators to figure out how to write a rule that allows legitimate hedging to go forward as it needs to, but it must be really genuinely risk mitigating hedging, and not anything people want to do called hedging. >> another variation that you have to deal with. and that is with have end user exemptions for a nonfinancial company, you could be doing hedging as a user, but you can also be very aggressive in your hedging. we saw an example of enron, which was not, you know, a financial company, but it

collapsed because of very aggressive use of derivatives. is there anything that you're contemplating in your rules, or anything you're going to do to anticipate this type of problem. >> i think congress anticipated it because it included another category called major swap participant. and i think congress said that if you're nonfinancial you get to choose whether you're involved in this clearing and trading and we're suggesting through the margin rule that you get to choose on that, too. and i think, but if you're so big that your major swap participant and could be systemic, then you would be brought into this. could i answer your first question a little bit? i think chairman schapiro said it very well. this concept of portfolio hedging can mean different things to different people. what congress says, it has to be

tide to specific risks. this experience we minds us we have to make sure. it's really tied to specific positions. it's not like well, we think revenues will go up or we like the european debt markets these days. and one thing that from my experience is these things sometimes morph or mutate into something else. particularly when they're set up as a separate business unit and they have a separate profit loss statement, separate compensation. because hedges to really be hedges generally lose money just about a many days as they make money. because they're hedging something, the position is going up. the position makes money. the hedge loses money. and if the position goes down, vice versa. when you set it you were as a separate unit somewhere else, maybe as different country, different leadership, you start to -- it's prone to morph. >> yeah, i guess one of these