this? and obviously, that takes staff and you've been given huge amounts of responsibilities but without in my judgment, the resources to fulfill all those responsibilities. that's one of the reasons things are taking longer than they should. it's one of the reasons you aren't everywhere. one of my greatest regrets in the dodd/frank bill is we had a proposal that didn't affect the cftc but affected the ftc that would have allowed all the little levy on transactions that is supposed to fund the s.e.c. to actually fund the s.e.c. and unfortunately, we had an a fight in the appropriations committee and they incysisted on not doin that. so could you talk for a minute about the funding issue and how vital it is, especially in relationship to the oversight that you are being asked to do by everyone on both sides of the

aisle? >> sure. as you point out, we've been asked to take on very significant responsibilities. not just over-the-counter derivatives but hedge funds now registered and overseen by the s.e.c. municipal advisers which will add many new registrants, specialized corporate disclosure, a whistleblower program, quite a lot of new responsibilities. in fiscal year '12, we asked for 116 new positions for dodd/frank implementation. we did get a very good budget for fy '12. again, not as good as had we been self-funded. but we were very grateful to get an increase at a time when many agencies didn't. the hiring is going on right now for those new positions. and i will say we are fortunately able to attract tremendous talent to the s.e.c. in very different skill sets than we have traditionally had. >> 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 our additional resources. and have been able to make dramatic improvements, i think, in the agency's core technology. that said, we are still way outgunned by the firms we regulate in terms of technology. but we're making, i would say, steady progress in that regard. for fy '13 when many of these new rules will 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. >> we hope they do soon. chairman gensler? >> i applaud your efforts in the dodd/frank act to get mary's agency self-funded. >> you were on the -- in the conference committee trying to do the same thing, but we failed in both cases.

>> i think that this is a good investment for the american public. the cftc is funded at about $205 million. but i liken it to football. if you are a football fan, imagine if all of a sudden there was eight times the number of teams but no more referees and then instead of having seven rev refs you had one on the field. what would happen? there would be mayhem on the field. there's sometimes mayhem in the financial markets anyway. hopefully with seven refs, less of it. and the fans lose confidence. market participants in this case. and ultimately in these derivatives markets you need the 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. that's not a bad word, but that they feel that the market is a fair and accurate reflection of the pricing of risk. and 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 the need for transparency. i'd like to follow up on my good colleague from north carolina's commented on that. we know from media reports that the jpmorgan losses involved large positions and broad-based indexes comprised of default -- credit default swaps on over 100 companies. as i understand it, the vast majority of trades in this index are recorded in dtcc's 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 is buying and who is selling. is that correct? >> that's correct, though i think as our rules go into effect over the course of the next several months, we will have that information more specifically and we already do

have it in the clearing house as a significant portion of this transaction's dealer to dealer are in the clearing house. >> and as i take it, the counterparty coding system is what you are talking about? or will that add additional information? what's -- >> well, that will add additional information through. it's an international arrangement. >> what's the prognosis of that coming into effect? when? >> well, on the index credit default swaps we finalize rules last year which go into effect two months after we finish our joint product role. another reason we need to finish the joint product rule. and the legal identifiers to which the senator refers, we are actually, i think it will announce in a week or two weeks a service that we put it out to a service four parties came in, similar to a procurement and it looks very close that we'll pick somebody -- >> just one more quick question which is a consequence of this. would it be possible to set up

an early warning system that would warn us if, say, a single company accumulates 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. just early warning. that's what we do now in the futures world in the corn and wheat and interest rate products. we hope and plan to do that in the swaps products. >> it's harder to do, i guess, because they are more complicated? >> more complicated but once we have the information and tie 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 is going to get better? >> it's going to get better, but underfunded, it's stretched thin and something is going to give. it could give in the wheat market. it could give in the oil markets, but something will give. >> you have any comment on that,

chairman schapiro? >> no, i think the clearing house is also, obviously, to the extent these instruments are mandatorly cleared will have clear insight into early warning levels and be in a position to adjust the margin requirements to account for that. >> i might just add the clearing house is the two main clearing houses which is called ice clear credit here in the u.s. and ice clear europe over in europe. it 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. additional five-minute rounds. senator shelby, thank you. i'd like to go back to mf global if i can. chairman gensler, i'm referring to -- this committee, the banking committee here is due diligence has revealed to a

loufts that you played an active role in the oversight of the mf global during the week leading up to his failure. how many conversations did you have with mf global's ceo jon corzine. and during these final weeks was there any discussion 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, i think new york fed and the london regulators were on as well with presentations coming over a conference call with 40, 60 people on it which i believe once or twice jon corzine spoke up and gave some information. if i could answer your further question, i think about what was my role that weekend, would that be helpful? >> you were the chairman of the -- you still are --

>> yes, yes. >> -- of the cftc. go ahead. what was your role as chairman? >> so my role as chairman of the cftc, as 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, fnra was the first one to inform us. i complement them for that. there was negotiations going on to move the positions so we wanted to ensure that those customer monies and positions were moved. we were assured from the company and from the first line regulators, chicago mercantile exchange that all the monies were there. it was only about 2:30 in the morning that i was awoken on monday the 31st of october that we learned of the -- or i learned of the shortfall at 2:30 in the morning. but the sunday was really about

moving the customers and the key focus. we didn't caribbeans abo s -- beans. we were assured all the money was there and cme had been checking the books. >> how many people did you roughly have on site at mf global? >> i'm not assure of the number. whether it was less than a handful, but i think starting thursday, we sent some folks in on thursday, friday, the full commission and our surveillance meeting got a briefing that friday morning. and the first briefing was that they were in what's called segregation compliance. but then over the weekend, we kept asking questions for more details because, you know, you wanted to see the -- sort of the details. it wasn't fully forthcoming, but by sunday, we were all on these joint calls together. the s.e.c. and the others. and hearing, no, it's all there. and then we actually asked to

talk to the buyer late sunday night, interactive broker was at the time soto see that they were guaranteeing that they would ensure all the monies as well. >> so that was the steps you are relating that you took to protect the customers' assets after learning that customer assets were missing? >> well, no, all throughout the weekend, we were assured by the company and also the front line 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. >> it's really straightforward. >> and you are supposed to protect your customers' funds. >> absolutely. >> it's at the critical heart -- >> when you are talking about a segregated account, that's what -- >> people here, i agree with you, sir, were hurt, because that did not happen. i'm not involved in the specific investigation and i chose, even

though the general council and the chief ethics officer said i could be, i said once it turned to an investigation that was specifically about jon corzine i thought that made sense to step aside. >> 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. >> i can only speak to what i remember, but what i remember was being woken up at 2:30 in the morning by -- >> was that on sunday? >> no, monday. >> monday morning? >> sunday night/monday morning. >> 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. >> this was already -- >> it was already monday. i put on my bathrobe and went to

a conference call and joined with other regulators. i think it was four to six hours later that it was put into a sipc proceeding. >> on october thirt30th, 2011, employee gave cme employees a disc containing documents to support mf global's october the 26th, 2011 segregated fund statement which initially showed no shortfall. when did the cft, mr. chairman, receive this disc from mf global? >> i am not familiar with the disc, sir. >> you're not? okay. it's our understanding that the cftc did receive the disc and that the cft began reviewing the documents of the disc and we'd like to know when and i'd like to know for the record.

what was the result of this review of this document and did it show any shortfall? i think we'd like to know. if you don't know -- >> if the general counsel could follow up and make sure you get the information that you ask. >> for the record. >> chairman ginsler, on may -- in may, about a year ago, may 2011, fnra determined that mf global had a capital deficiency. mf global's ceo jon corzine personally appealed that decision to the s.e.c. chaired by chairman schapiro. the s.e.c. upheld fnra's determination and mf global publicly reported the 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?

go ahead. >> again if i could have the general counsel follow up on the specifics, but as i recall at my own memory was over the course of that summer, but they could follow up as to spfrk specifics there was a date the staff learned it. >> that goes to the heart of -- and i'd be interested in the answer of the s.e.c. and the cftc's coordination of the regulations. so if s.e.c. did something that they should have upheld the fnra determination and if cftc didn't know that, then there's a problem. but if you did know it and didn't do anything about it, that's a problem. >> my memory is that there was coordination, but as to the specific dates and times, that i don't recall. >> thank you, mr. chairman. >> senator warner? >> thank you mr. chairman. i apologize for being out for so long. maybe i'll -- i don't have a

specific question on mf global, but two quick questions i would like to ask and get on the record. one is, some of the items that senator shelby were mentioning is this issue of coordination between your two agencies on approach to rule implementation. one of the things that i've been concerned for some time on is that in dodd/frank, very active in title one and title two and we created the financial stability oversight council to try to have this forum for, i thought at least or hoped would be resolution of areas where there might be this rubbing. i was particularly interested in one area. i think senator shelby didn't agree with me on this one but on the ofr which would be the -- in effect, independent repository of data and information so that

the fsoc could have the ability to adjudicate if need be between different interpretations or conflicts on agency promulgation or on rule promulgation. we're very concerned that the administration were a little slow on getting the ofr nominee. they now have one together to get passed. but i would like you to weigh in on fsoc's ability to -- maybe not so much with the mf global circumstance, but be that adjudicating body where issues rise up and has it been effective or not? and either one -- and i've got one follow-up as well. >> i actually think fsoc has turned out to be a very good forum for the agencies to share concerns and ideas. and differences as they arise and have a discussion and hear the views of other people from their unique perspectives.

regulating different types of institutions but all connected within the financial markets. so i think we're working on our next annual report that we'll try to lay out the systemic risk issues that we see facing the economy. every agency contributes to that and those particular issues become, you know, very lively discussions for how to approach particular problems. i think ofr, hopefully, is starting to get going in a more meaningful way. and i think it can be an important adjunct to the work of the agencies with regard to data collection and analysis. but i think it's working pretty well, and i think one of the real side benefits of fsoc has been this -- enabled us to develop much stronger bilateral relations within fsoc as well and dodd/frank has done that because of the necessity to write joint rules. >> shairm gensler. >> having witnessed what was its predecess

predecessor, the president's working group in the '90s, being honored to serve then, and in this administration, i think it's a real enhancement. it's more formal and so with formality sometimes there's not as much flexibility. but i think it's a big enhancement. it hasn't been tested in two ways yet. it hasn't really been tested in a real crisis yet. so that's yet to happen. but i think it's -- it will serve better than just the old presidents working group. and it hasn't truly been tested, as you say, when two agencies have a knockout, dragdown disagreement. it's been helpful to smooth through some smaller differences, and i think it's been positive in that way. >> my hope would be that the ofr would be that kind of -- at least the data analysis, because my concern is, you are going to get data from different agencies coming in that maybe completely countered each other. and somebody you have to have a trusted independent entity in there sorting through that. my time is about up. let me ask one last question. and again, not directly related

to the jpmorgan issue, but one of the challenges we got on the international implementation is when we have a large american entity that has got a foreign sub and you have then a foreign counterparty to that american t american based subsidiary and how we deal with the extraterritorial laws. what is your state on -- what's your sense on the international implementation question in terms of counter parties, foreign counter parties? >> i think we have made real progress. there will be differences between europe, u.s., japan and other jurisdictions. you get to the question of cross border transactions. we rely on compliance regimes.

we are a believer in learning from experience. in 2008, in the three or four different circumstances, lehman brothers, they had areas in london or french banks. we have to learn from that and not be naive that wall street will structure around it. some of these large institutions have legal entities. it was in the cayman islands. it operated out of connecticut. we have to be thoughtful and cover a lot of those transauctions and not leave it to say my guaranteed affiliate will meet yours in london. that's the worst outcome. the risk will flow back here, but the jobs move overseas. that's a bad place to be. when the second thing, though, i think we can, even if it's our guaranteed affiliate being yours, it might be we rely on

substituted compliance where we can. >> i would add that rather than deal with the issues rule by rule, we are going lay out a comprehensive approach to cross border application and will propose it before adopting rules so it can, in form, actually reach each and every rule as we adopt them. i think that will give everybody an opportunity to see the entire picture of proposed rules and how we expect them to apply and comment to us on that. we know foreign regulators have a deep interest in this. it's a very intense part of the discussion we have with foreign counter parts. >> i would also add, if an overseas affiliate, not a branch, but overseas affiliate is dealing with an insurance company in germany, we want them to have a competitive field to

compete like a deutsche bank might do. it's trying to get that balance as well. >> thank you, senator warner. chairman shapiro, you mentioned twice the list of factors that were essentially the ways to define risk mitigation in the rule statute. related issues in there were that you are addressing a specific risk that it's correlated and it doesn't give rise to the significant expo sure that you didn't have to begin with. often, if you think about a company that has funds in between making loans under the liquidity rule and chooses corporate bonds, assuming those would be allowed, then the first easiest thing, if you are wor worried about the quality of bonds, the extraordinarily high quality of bonds, you can reduce your exposure by selling the

bonds. that's strategy one. two is take insurance directly against the bonds. that's certainly specifically insurance on a specific position you have. then you start getting further and further. you can imagine the spectrum of positions further afield then you choose to do an index with the bonds you have. you choose to do a particular tranche in the water fall and then you decide you need to raise income to pay for your insurance so you sell insurance against something else. at that point, you have clearly crossed the line which you introduced by selling insurance to others. you are in a whole different world of risk, introduction. you have two components correlated to begin with, not with additional risk. part of the challenge of regulators is to define this world, when you cross the line,

simply having an excuse to do hedge style fund trading. where do you see the line being drawn in that correlated insurance to remotely correlate it? >> i agree with you. it's a continuum. there are ways to hedge. they could be more or less perfect hedges and then there's portfolio hedging or perhaps stepping off the hedging bandwagon and being in the world of prop trading or speculating. i think, we recognize that all hedges won't be perfect. this is a continuum. finding that point is going to be difficult. the metrics are designed to help with that. senator toomey mentioned some of them. i don't think all of them will make it into the final rule. the goal is to see how behavior changes over time. how transactions change over time and the way to see whether

things are hedging are moving into a different realm. but, that is clearly the difficult piece of this, to find where that -- where something is no longer a hedge and how we can define that and not in so specific a way we opened the door to other conduct. >> would you say it would be a red flag if, i'll give you some examples. one, if the ledge is loosely correlated, would it be a red flag if you are buying insurance to insure a larger quantity than you are holding? and would it be a red flag if you are suddenly in the business of selling insurance? >> it might well be. then you have a hedge transaction that is giving rise to significant exposures that weren't there at inception. you have overhedged the

position. you have to be able to identify the positions being hedged and demonstrate that it is risk reducing. i keep going back, you and i talked about this, the risk mitigation is an important piece of how we are describing the hedging here. if you take all the factors together, you can build a strong wall around this conduct. >> yeah. one of the things that senator levin and i said on the floor in our colloquy was that you really need, and you just said it, you need to identify the specific assets and identify specific risks that you are hedging. that at least gives the regulators a sense of what was this trade about? if you can't identify the risk that you are hedging, it's very hard to get your hands around whether it was appropriate or not. >> i think to senator toomey's point, it would be extraordinarily expensive to hedge position by position.

there's something between position by position and complete speculation. >> chairman gensler? >> i said earlier, i think this is one of the more challenging tasks the regulators have been given to prohibit proprietary trading, permit hedging. to your question about hedging, hedging really does have lower risk. it's what congress wanted, i think, in this provision. they come and they do overlap. i mean, it's not a perfect circumstance. it's our challenge amongst the regulators to do as congress said, say if it's hedging a specific risk, individual or aggregate positions. we put in the rule, proposal reasonably correlated. maybe reasonably needs more

definition. i think it can start to morph and mutate when you have a separate desk and a separate profit loss and they are motivated at times, take on positions or swing for the fences. for a little bit of the extra potential for that desk to have profits. my own experience on wall street is long ago, but i will say that when i saw these desks, they sometimes worked for eight, ten, 24, months then they are shut down. several years later, they come up again. i might be old fashioned. i liked it when you could tie the hedge somewhere reasonably to the positions. in a few moments, a hearing on the system used to evaluate veterans disabilie