reasonable but not excessive period of time in which to comply with the new rules. this statement will let market participants know the commission's expectations regarding the ordering of the compliance dates for various rules. international implementation issues will also be addressed in a single proposal. finally, your invitation letter requested that i address recent trading losses reported by j.p. morgan chase. our best information is that the trading activities in question took place in the bank in london and perhaps in other affiliates but not in the broker-dealer directly supervised by the sec. although the commission does not discuss investigations publicly, i can say that in circumstances of this nature where the activity does not appear to have occurred in one of our regulated entities the sec would be 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 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 am pleased to testify along with sec chairman schapiro. today i am going to speak to the three topics of your invitation letter. first, where is the cftc on swaps market reform, second, the role in overseeing markets for credit derivative products such as those traded by j.p. morgan chase's chief investment office and international progress on swaps reform and related issues of cross border applications. i also welcome ranking member shel shelby's questions and look

forward to chatting about that in public as well as i would in private with any members. the cftc is a small agency tasked with overseeing the futures markets and now with passage of dodd-frank a market nearly eight times larger the swaps market. given these new responsibilities we're significantly underfunded but you heard me say that before. our market oversight critically relies on market participants foremost complying with the laws and related rules and then the self regulatory organizations like the cme and the national futures association that provide the first line of oversight, but in addition to that, we do rely on promulgating and implementing rules and in that context the cftc completed 33 swaps market reforms today. with he have just under 20 to go. what do they too? they bring transparency to this marketplace. secondly, they 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 reforms this year but it is still very much standing up and 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 completed eight key reforms including realtime reporting to the public and regulators that will 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 called the clearing mandate. to promote market integrity we have strong antifraud and manipulation rules as well as aggregate position limits and looking soon to finalize the end-user exception. to lower risk of the swap dealer's posed to the economy at large we completed rules requiring robust sales practices and risk management and a joint rule with the sec on the further definition of the word swap

dealer and securities based swap dealer. all of this is still pending because it has to rely to us finalizing the further definition of the term swap and securities based swaps. it is essential that the two commissions move forward expeditiously to finalize this rule and i am glad to say that both commissions now have a draft of this rule that's been worked out through staff and hopefully we'll be able to finalize this in the near term. we made significant progress as well working with domestic and foreign regulator bring a consistent approach to swaps market reform and not identical europe, japan and canada now all have made real progress legislatively and now in rural writing to bring similar reform and in particular i want to say we're working on a consistent approach to global margin for uncleared swaps and it is important for a lot of reasons and let me note one reason is that the cftc proposed rule that did not require financial end-users to post margin and we're advocating the same globally. i just wanted to make sure

people know that in the end-user community. the commission is also working on a balanced approach to cross border application and swaps reform. i think congress was guided by the experience of aig with the london affiliate and actually it was a london branch and lehman brothers, citigroup, bear stern and even long-term capital management when it applies reforms to transactions that might be booked offshore but nonetheless have a direct and significant effect on u.s. commerce and activities. that in essence is a stark reminder we got in the last two weeks when j.p. morgan's trading losses were over seen that lost multi-billion dollars in the credit default swaps and indices. the division of enforcement has opened an investigation related to credit derivative products traded by j.p. morgan chase's chief investment office and although i am unable to provide any specific information about a pending investigation, i will touch upon the commission's role in overseeing these markets and

the cftc has oversight and clear antifraud and antimanipulation authority regarding the trade of credit default swaps indices and oversee the clearing house that is clear some of these products. starting this summer there will be realtime reporting to the public and later this year but not yet we envision the dealers themselves to begin to register and that trading will commence on swap execution facilities, so we're in the midst of implementation that will take still some time and in conclusion though we made great progress in bringing common sense reform to the swaps market, promoting transparency and lowering risk it is critical we complete these reforms for the protection of the public. thank you. >> i would like to thank both of our witnesses for the testimony. as we begin questions i will ask colonel clark to put five minutes on the clock for each member. what role did your agencies have in monitoring the swap trades at

issue in the j.p. morgan matter and were any concerns raised about these trades at either of your agencies? what changes will the derivatives reforms bring to the regulation of these types of trades and what are the potential implementations where the work volcker rule. please start. >> as i mentioned in more depth in my written remarks, we're in the midst of standing up a regime that will still take some time, but the credit default swap indices, these are parts of the products reported in the prosecute he is that j.p. morgan chase's chief investment office was trading already come under our completed antifraud and antimanipulation regime and the clearing house is three of them actually already clear credit default swaps indices,

voluntarily, later this year we anticipate seeking public comment and actually having a clearing mandate and so that more of these trades will come into the clearing house. currently it is just dealers to dealers. later this year we'll have a regime that i think dealers will start to register but this bank was not yet registered as a swap dealer because we don't yet have complete roles to make that a true bidding and later this year maybe into 2013 you will start to see the commencement of trading transparent markets. we're not trying to do this against the cloth. we're trying to get it balanced. i know that congress gave us one year to get the job done, and we're pushing on two years. i do think we need to get the job done to better protect the american public, but at the same time take in the 30,000 comments we have received. you ask when did it come to our attention. with matters like this i don't want to get into the specifics

of an investigation but as prosecute he is reports have shown, these are credit default swap indices under our jurisdiction for antifraud and antimanipulation and the clearing houses we monitor on a very realtime daily basis for the completeness of the margin and the safety and soundness of the clearing houses. >> chairman schapiro? >> thank you, mr. chairman. to the best of our understanding none of the transactions were held in or 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-frank rules had been in place when the activity was going on, these positions likely would have all been cleared, some substantial majority were or some substantial number were but not all were cleared. they would have likely been

exchangesed, traded. they would have been reported to a swap data repository and there would have been detailed transparency to regulators and transparency to the public and i would say under the sec's proposed rules for reporting we would have know the trading desk and the trader as well who put the positions on. the dealer would have been registered and subject to business conduct standards, and they would also operate under the new rules for enhanced prudential supervision for bank homding companies with assets greater than $50 million so a number of pleases would be in place once the proposals are completed. >> chairman schapiro, can you commit to us that the sec will issue the last of your proposed derivative rules in the coming months and that you will prioritize within the sec the importance of connecting the

final rules in a timely manner? >> absolutely, mr. chairman. we have the last piece of proposing rules and also the financial responsibility rules for swap dealers and major swap market participants. i hope that we will issue that in the next couple of months. there are also two other key pieces from the sec's perspective. one is as i spoke about in my testimony the implementation plan that will layout in a policy statement our views on how the rules should be sequence and had 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? >> mr. chairman. a lot of people have been

basically saying that chairman gensler that the cftc and the sec, chairman schapiro, were in the dark, that you didn't know what was really going on at j.p. morgan. we don't know that yet, but when did you first learn about these trades, chairman gensler? >> i would say that the trades that came to i think many of our attention personal attention with press reports. >> press reports? >> but our staff was aware of trades that are in the clearing houses because they monitor the clearing houses daily in an aggregate basis for the clearing house risk and that the clearing house is fully collecting margin to protect the risk of the clearing houses. again, we don't regulate j.p. morgan chase as a swap dealer yet, but we do regulate the

clearing houses and then have antifraud and antimanipulation authority. >> did the cftc really know what was going on there on such a large position that j.p. morgan had taken here? >> well, again -- >> were you in the dark or did you know what was going on? you said you learned about -- >> i would say it is 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 that are in that clearing house and the margin that's collected there. that's not the full j.p. morgan picture, of course, because they have a lot of swaps that aren't cleared. that would have been our principle regulatory -- in terms of the bank we don't have any -- >> you really didn't know what was going on or the problem with the trade until you read the are press reports like all of us? >> well, that's what i have said, yes. >> yes, sir. chairman schapiro, i pose the same question to you.

>> certainly. >> 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 when the london whale 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 and i think there is still much to learn about the full -- >> what was your responsibility as you see it as chairman of the sec looking at what happened or trying to find out what happened at j.p. morgan chase? what's your responsibility? >> 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. >> 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 we're investigating right now is were there -- their earnings release statements and q1 financial reports accurate and truthful. >> but you're in the investigation of that now? >> yes, sir. >> what did they know inside and when did they know it and what should they have divulged, is that correct? >> exactly. >> is that correct, chairman? >> yes, and as congress gave the cftc similar authority to the sec, we didn't formally have a strong and antifraud and antimanipulation authority which 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 then of course this on going

investigation that i don't want to go into the particulars because it is really just best not to compromise the investigation itself, but it is in that realm. >> as chairman of the cftc in a derivative position like this were you basically telling us that you didn't know there was a problem there until you read the press reports? is that basically correct? >> i think that is accurate. we're also standing up a regime. we don't have any regulatory oversight of j.p. morgan chase, national association, the bank. we will, i think at some point when they register as a swap dealer later this year but they're not currently registered as a swap dealer. we have oversight of future commissions merchant but that doesn't -- >> are you saying no man's land, nothing, that there is things that have not crystalized in a regulatory fashion yet over such a big bank? >> the bank is over seen by bank

regulators, but under dodd-frank the market regulators, we will stand up and oversee swap dealing activity in a bangor an affiliate of a bank and securities based swap dealing activity but you're right, currently the american public is not protected in that way. >> were any of the trades conducted through j.p. morgan's future commission merchant? >> not that i am aware of. it may be upon further review we'll find but today the knowledge is no. >> thank you, mr. chairman. >> senator menendez. >> thank you, mr. chairman. at the last hearing the committee had on mf bloebl i asked the mf global trustees, from free and from giden who at the company was responsible for the wrongdoing there and they informed me that 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. >> no. 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 j.p. morgan where the huge losses there 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 j.p. morgan bank, that's an occ regulated entity, the fed is holding company regulator, our focus is on the quality of their risk disclosure and specific disclosures as a public company when they talked about their potential, all the risks they faced as a business when question talk about potential losses under their var model and we are very focused on the

accuracy and timeliness of that disclosure. >> i just say that we're aware that it is primarily in the bank, that much of this em natured from 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 opened a criminal investigation, and we will all work closely together even though we have different aspects. >> into which of the two that i am referring to? >> i am sorry? >> mf global? >> i think actually with respect to both. >> with respect to both. okay. in essence, it is the agencies

that are conducting civil reviews, i assume, and to the extent that there are criminal reviews that are being conducted they are being conducted by law enforcement entities, is that correct? >> that's right. >> so it is not the senate banking committee that's conducting >> 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 in a way that what took place at jpmorgan would not 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 strikes me that the 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 some reports are suggesting slightly more, 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 reform does not create the systemic risk that then places 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. we realize it's a blip on the radar as far as their earnings, but it affects the way rules end up being promulgated, would you both agree? >> i think it gives us real live experience like aig and lehman brothers and citigroup did in a more disastrous way. this is not that, but -- >> i think as the american people are watching, they are wondering why in the world we're having these hearings. and the point is there's a lot happening theatregulator 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 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.

maybe 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 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. i would just love a couple of comments on that regard. >> i think our job that you delegated or asked us to do is to be -- >> punted was the word i used. >> i was trying to be more respectful 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

the american public doesn't stand behind them. the one industry we do this around the globe, and that's why i'm so committed personally to getting this reform done. i think this circumstance is just 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 was 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 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 -- 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 can 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. i do just want to ask, when you're making the rules that you're making we really do

adhere to the process of cost fit analysis. i'm moving to other types of regulations. you know, courts are challenging because regulators are not doing that. secondly, to 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 banking and 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 of 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, they 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