actions and maybe it's intuitive is that when you're an entity designed to be the risk manager and chastise everybody in the constitution for being too aggressive or not responsive to risk is where the profit set is. that might be a sign that the roles emerging in an unpredictable and maybe unproductive way. just a final point i want to make in response to the question is that, you pointed out that the international interconnections here, which suggest very strongly that our regulations have to be not only strong and internationally applicable, but we have to have people on the ground looking at these institutions. if an american institution is going to locate their activities overseas, in this case occ, should have not only been there but been there in force with

adequate personnel to look closely at what was happening, and be the first line of defense if you will. >> can't speak to them. i think the system we have at the cftc unfortunately or fire departmentally doesn't contemplate that. we're really have been kept reasonably small. and we rely foremost on the law and people complying with the law on the roles and the self regulatory organizations. we do examine the regulations but we don't have people on sight at the clearinghouses. that's just a decision made. >> but when did you know when we were, and could you have anticipated and recognize it's occ's responsibility that they don't have people on the ground sitting day-to-day in a desk. you won't know until sum enterprise or reporter breaks

the news, and by then a lot of damage could be done. >> agreed. >> the other tremendous benefit we do get, though, will be when we have full reporting of these transactions and transparency to regulators will make a big difference. >> senator toomey. >> thank you, mr. chairman. thank you both for being here. i would like to follow up on discussion that chairman gensler has been touching on. i think think you just used the expression about portfolio hedging tied to specific decisions. i'm wondering if you could clarify that. if you tie hedges to individual specific positions on a one off basis. that is obviously the opposite of hedging a portfolio with risk. so my question is is it your view that it is and will continue to be permissible as

well as cost effective to manage interest rate and currency and risk in the aggregate in the portfolios, rather than limiting to a one-op individual basis. >> i think congress addressed themselveses to this and said that it had to be tied to the specific risk of either individual or aggregate positions. but tied to the specific risks of some aggregate positions to answer. >> okay -- >> but it has to be tied to something. >> so for instance the aggregate interest rate. >> that may have 170 bonds on it. >> so you could measure that and quantify that and then hedge that, and then would the rule prescribe the kinds of instruments that would be permissible to use to hedge the portfolio? >> as written now, it speaks to, and this may change in a final role, but as written out talks to instruments that are

reasonably correlated with the risk. so it's all in that word reasonably. >> and who decides what's reasonably correlated to the risk? ultimately the regulators do. at first order the institution does, the firm does, but then there's a compliance program and the regulators. >> but the point of the rule is to set balance and say this is permitted and this is not. and that's the purpose of the rule. >> it is as written. i would consider it more a principles based and compliance regime that the firm has to have policies and procedures to ensure that the hedges are reasonably correlated to the specific risks. >> again, i think the ultimate question in hedge iing who gets decide. it's not a complete offset.

there's always risidual risk. there are a lot of choices available to someone who wants to hedge any given portfolio. and my concern, and it goes to the point of dodd-frank is all about, but they're given an impossible task. and the task is to micro manage the activities of these institutions. let me give you an example. my understanding is among the many specific rules that we're going to impose on financial institutions, we're going to establish metrics that will quantify for instance, how much income can be earned from the day one bid office spread versus what can be earned from subsequent market moves. we'll have rules that will prescribe how much business the market maker must do within

users versus that which would be done with the interdealer community. we're going to have to decide and have rules that will dig down into whether we're going to quantify these things at the level of the individual trader or will we aggregate several traders or aggregate the entire trading floor? how will we do this? we'll have rules that will establish which kind of asset classes are permitted to hedge which kind of risks. so you have a corporate bond portfolio, that has credit risk. can you shorten the s&p 500 against that or use credit default swaps. my point is, this has a huge co cost, but also the cost of less liquidity because traders have fewer options. it's going to lead to less innovation because people will be prescribed in what they can do, and who knows what kind of unintended consequences when people decide you know what,

it's better to just avoid this incredible micro management and go somewhere else, which is why i think, mr. chairman, we've gone down the wrong road here. the better solution is require more capital. so that we can let people do what we want to do. let the people in the marketplace make the decisions they will make and let them live with the consequences without having the taxpayer at risk because we acquired a sufficient buffer that a firm could lose 1% of their capitol in a recent example and not have everybody sweating bullets about it. frankly, he ought to be able to make decisions and live with the consequences. taxpayers shouldn't be at risk. i don't think you achieve that by trying to control every aspect of their business. which what these folks unfortunately have to do. i think the alternative of a tougher capital regime achieves the goal of reducing m systemic risk, without putting us in the impossible position of trying to run these institutions. >> senator hagen. >> thank you, mr. chairman.

and chairman gensberg and chairman schapiro. thank you for your comments and your commitments. in senator reid's discussion, you mentioned data collection. when will the sec start collecting that data, and where does the implementation stand? >> the security based swap reporting data collection will begin when the rules are finalized, which they are not yet. for regulation sbsr. it's hard for me to say when we'll have adopting rules. hopefully some time later this year. we have one set of rules to propose. we've done one final. we'll do another in the next month and then a steady stream

after that. it's important, obviously. i'm a big believer in transparency in the marketplace. i find it works extremely well in other markets. we think it's critical for the public to have access to this information and very critical for regulators to have access. we will have granular information from the trader to the trading desk. >> and i would say maybe to senator toomey's comments earlier, i think transparency is so critical. i hope i can convince you in addition to capital transparency. in the credit default swap indices area and in interest rates and so forth, it will be later this summer. probably as soon as, possibly as soon as august.

and the commodity, oil, gas and others three months after that because we've already completed the rules. both for the public to see the trades, which is very big, and then for the regulators as well. >> you and i talked about length about that. we all agree it's critical to reducing the risk and creating sufficient markets. the north american investment grade you mentioned in your testimony, it has certainly received attention recently for the role it played with losses at jp morgan. this is a relatively transparent product that's tradeable, standardized and updated zl. i would like to hear your thoughts and how that can reduce risk in the financial system, and how could we see such large

losses in the tradeable product? and what lessons do you think the financial institutions will take from this incident? >> i think you're correct that it's a rather standardized product. the dealers are in a clearinghouse. the hedge fund positions will also come into the clearinghouse. seeing all of the trades, not only in the clearinghouse, but in the data repository. for the public right now, there's not mandatory post trade transparency. i can't remember where it gets a plus. a $100 million size or $200 million in credit default swaps. i think the public will greatly benefit from such transparency in addition to the regulators.

>> chairman, i want to ask about the value at risk. the standard reporting metric that most of the financial institutions include in their 10k filings. can you discuss the value at risk and how it's used by the financial institutions and what are the rules regarding disclosure? >> sure. the bar estimates or value risk estimates give you at a particular confidence level 95%, 99%. the potential decline in the valuable position or portfolio under normal market conditions. i would say that raises a weakness of ours that it doesn't measure for you the maximum possible losses in a portfolio that could occur, could be incured particularly during very stressed market conditions. so it has limitations. nonetheless, public companies are required to discuss their

risk, and they're kbifen an option really of three ways to go forward in their item 305 disclosure. we have they have to give quantitative information. they can use a tabular presentation of information. they can do a sensitivity analysis. or they can do a bar disclosure. they also have to disclose at the same time, though, any material limitations on the model. what it's not telling about risk exposures and when there are changes to the bar model, as the newspapers have reported was done at jpmorgan. they changed their bar model. those changes have to be disclosed, too. the changes to the model characteristics also have to be publicly disclosed. >> and have you followed that in

the recent past? how it impacted from the sec evaluations? >> our staff would look at, well, particularly in the capital complex where it's also used to allow certain firms, a very small number of firms to use it to compute the market risk. we make them back test and provide us with tul full information about why their estimates of losses were so far off. >> thank you. >> senator schumer? >> we heard a lot of people being critical. why didn't you know more about this. that takes staff. it's one of the reasons things

are taking longer than they should and run of the reasons you're not everywhere. that would have allowed all of the little levy on transactions, supposed to fund the sec. we had a fight here in the appropriations committee insisted on not doing that. they've increased your funding, but not to the extent it would have been under dodd-frank. so could you talk about the funding issue and how vital it is, especially in relationship to the oversight you're being asked to do by everyone on both sides of the aisle? >> as you point out, we've been asked to take on very significant irresponsibilities. not only the county derivatives but hedge funds that are overseen by the se skrrc. they will add many new

registrants. specialized corporate disclosure. a whistle blower program. quite a lot of new responsibilities. in fiscal year 12 we asked for 150 new positions. we got a very good budget for fy-12. we are very grateful to get an increase at a time when many agents didn't. so the hiring is is going on for the new positions. >> what about investment in technology, which is often more than a one-year deal? >> yes, it is. and we have made technology investment a significant focus of the additional resources and have been able to make dramatic improvements in the agency's core technology. that said, we're still way outgunned by the firms that we regulate in terms of technology.

but we're making steady progress in that regard. for fy13. when many of these new rules will start to be in effect. and we will have the clear responsibilities for oversight and monitoring of the security based swaps market, we've asked for an additional 273 positions. >> so that's a lot. >> it is a lot. >> what's the vibes on the appropriations committee? >> they don't show their cards. >> but we hope they do soon. chairman gensler? >> i thank you. i applaud your efforts. >> we were in the conference committee trying to do the same thing. we failed in both cases. >> i think this is a good investment. i liken it to football if you're a football fan. imagine if all the sudden there's eight times the number of teams but no more referees.

instead of having seven refs on the field, you have one on the the field. there would be mayhem on the field. there's sometimes mayhem in the financial markets anyway. hopefully with seven refs there's less of it. and the fans lose confidence, in this case market participants. ultimately you need corporate end users to have confidence, that when they enter the market, they can do it free of fraud manipulation. they can enter the market with speculators on the other side. it's not a bad word. but they feel the market is a fair and accurate reflection of the pricing. so we're way underfunded at the cftc. >> okay. i agree with your comment in reference to senator toomey, that even if you think capital requirements are the major protection here to provide the cushion, maybe because you can't regulate every single little trade, that transparency, that doesn't gain, say, the need for transparency. so i would like to follow up on my good colleague from north carolina's question on that.

we know from media reports that the jpmorgan losses involved large positions in broad based indexes on credit default swaps on over 100 companies. as i understand it the vast majority of trade indexes are recorded in the trade information warehouse. so that would mean regulators have access to some information about overall activity in the markets. but may not have information about exactly who was buying and who was selling. is that correct? >> that's correct, though, i think as our rules go into effect over the court of the next several months, we'll have that information more specifically. and we already do have it in the clearinghouse as a significant portion of in transaction's dealer to dealer are in the clearinghouse. >> and as i take it, the counter party coating system is what you're talking about, or will that add additional information?

>> that willed a additional information. >> what's the prognosis of that coming into effect? >> well, when the index credit default swaps we finalize rules last year that go in effect two months after we finish our joint product rule. another reason we need to finish the joint product rule. and the legal identifiers to which the senator refers, we're actually now it's been a week or two weeks of service, that we put it out to service four parties came in. similar to a procurement. >> just one more question. would it be possible to set up an early warning system that would warn us if say a single company accumulates unusually large positions in any single product? is there any warning system that regulators could develop that could help identify risky positions. >> i think on the first part

yes, the second it's a little harder. so just early warning, that's what we do now in the future's world in the corn and wheat and even interest rate products. we hope and plan to do that in the swaps product. >> it's harder to do because they're more complicated. but once we have the information and try into it and have the funding, we meet every friday in a closed door surveillance meeting where we go over significant positions in the markets. >> so you think your surveillance will get better? >> it's going to get better, but ub underfunded. it's stretched thin. it could give in the wheat markets. it could give in the oil markets. something will give. >> do you have any comment on that, chairman schapiro? >> i think the clearinghouse is obviously to the extent these instruments are mandatorily cleared will have clearance into early warning levels, concentrations by particular

firms and be in a position to adjust the margin requirements to account for that. >> i might add the clearinghouses, the two main clearinghouses which is caught in the u.s. and in europe has a concentration where when positions get large, they actually add additional margin on top. and without getting into details, you can imagine what happened here. >> so we'll have additional five-minute rounds with senator shelby. >> i would like to go back to mf global if i could, mr. chairman. chairman, gensler, i'm referring to. this committee, the banking committee's due diligence has revealed to a lot of us that you played an active role in the oversight of mf global during the week leading up to its failure. we would like to know how many conversations did you have with jon corzine during the mf global's final week.

and during the conversations were there any discussions about possible shortfalls in customer accounts? this is central to what we're looking at. >> i thank you for that question. i had no individual conversations with jon corzine. i did participate on that sunday on a group call with chairman schapiro, our staff, her staff and the new york regulators were on as well with presentations coming over a conference call with 40 or 60 people in it, which i believe once or twice jon corzine spoke up and gave information. if i could answer a further question about what was my role that weekend, would that be helpful? >> you still are the chairman. of the cftc. go ahead. your role as chairman. >> so my role as chairman at cftc is that week developed and the firm looked to be in frail

state to ensure for the movement of customer money over that weekend, we were informed by other regulators. this was the first one to inform us. and i complement them for that. there was negotiations going onto move the positions. so we want to ensure those customer moneys and positions were moved. we were assured from the company and first line regulator that all the moneys were there. it was only about 2:30 in the morning that i was awoken on monday, the 31st of october. that i learned of the short fall at 2:30 in the morning. we didn't caribbeans about jon corzine. we cared about the thousands of customers that needed the moneys moving. >> how many people did you

roughly have on sight. >> i'm not aware of the number. it was less than a handful. but starting thursday, we sent some folks in. friday, the full commission and our surveillance meeting got a briefing that friday morning. and the first briefing was in segregation compliance. but then over the weekend, we kept asking questions for more details, because you wanted to see the details. it wasn't fully forthcoming, but by sunday we were all in these joint calls together. the sec and the others. and hearing it's all there. and then we talked to the buyer late sunday night. interactive broker was at the time to see that they were guaranteeing that they would ensure all the moneys as well. >> so that was the steps relating that you took to protect the customers' assets

after learning that customer assets were missing? >> no, no. all throughout the weekend we were assured by the company and also the front time regulators, they were in compliance. the law is that 24 hours a day, every minute of every day, one is to be in compliance, and one must report if you're not. >> you're either in compliance or you're not, right? >> yeah. it's really straight guarforwar >> sure. and you're supposed to protect your customers' funds. >> that's what we're saying. and i agree with you sir. people here were hurt because that did not happen. i'm not involved in the specific investigation, and i chose even though the general counsel and the chief ethics officer said i could be, i said i thought that once it turned into an investigation that specifically was about jon corzine possibly that i thought that made sense. >> let me ask you this question, mr. chairman. on what date, and at what time

did the cftc staff first learn that there was a possible shortfall in the customer segregated accounts. >> well, i can only speak to what i remember. but what i remember is being woken up at 2:30 in the morning. >> on sunday? >> no. monday. well, the 31st of october. >> okay. and after you learned there at 2:30 in the morning on monday or sunday night, of the missing customer assets, what specific steps did you take to ensure that customer funds, funds were not improperly transferred over the weekend before the firm failed? >> well, it was already monday. i put on my bathrobe and went to a conference call and joined it with other regulators. and i think it was four to six hours later that it was put into a proceeding. >> on october 30th, 2011, a cftc

employee gave two cme, chicago ameri mercantile exchange, a document to support mf global's on 26th of 2011, segregated fund statement, which initially showed no short fall. when did the cft, mr. chairman, receive this disc from mf global? >> i'm not familiar with the disc. >> you're not familiar? okay. it's our understanding that the cftc did receive the disk and that the cft began reviewing the documents of the disc and we would like to know when, and i'll ask you for the record, and what was the result of this review of these documents and did it show any shortfall? >> i'll make sure you get the information that you asked for, for the record.

>> chairman gensler in may of 2011, finra determined that mf global had a capital deficiency. mf global ceo jon corzine personally appealed that decision, chaired by chairman schapiro. the sec upheld to determination. and the mf global publicly recorded a deficiency in august of 2011. when did the cftc first learn that mf global had a capital deficiency? did you learn it then? or did you never learn it? >> again, if i could have the general council follow up in the specifics. but as i recall it, my own memory was over the course of that summer. but it could follow specifics if there was a date that the staff learned it. >> well, it goes to thehe