governor of california, that i will be resigning my seat at the end of votes today. madam speaker, mr. speaker, i am deeply grateful for the trust that both president obama and secretary clinton have placed in me. i am equally grateful and humbled by the honor and privilege to have represented california's 10th congressional district for the last 13 years in the house of representatives. it has been the deepest and greatest professional experience of my life. and i am deeply, deeply grateful for the opportunity and the trust that my constituents have placed in me. in my seven terms in the congress, i have tried to keep my promise of being an independent effective moderate. i have worked hard and i have worked with you. i look around the room, many members i have served with for the entire time i have been here. and some of you i have flown on planes with and some of you i have taken could he dells --

codels with. what i know is we sit here and do the people's work. whether we agree or not doesn't always matter, what most -- is most important is that we represent our constituents, that we honor the constitution, and we keep faith with our conscience. those are the three c's that i have tried for these years to maintain and balance. it's not always easy, but i have tried. i look at all of you and i understand how difficult this world is and how troubling the lives of many americans are now and how heavy the burden is on you. what i pledge to you as i leave the legislative branch and this great house that i have grown to love and all of you that i love and my constituents that i love, what i promise to you in my new capacity is to work with you to achieve what we all know is important. to make sure that we have the

safety and security of the american people always in the front -- forefront of our minds. i have been blessed to have i think some of the best staff in the world. i have always told people i represent the smartest people in the world. i have the two national nuclear labs in california and i have travis air force base and 600 some odd,000 constituents, who apparently now 100% of them have voted for me every time. there's nothing like leaving to become popular. i just want to thank the staff that's worked with me both on the zpheet and my personal staff and my district staff that have been absolutely fabulous. i want to thank my friends in the house. my friends that started as friends and became family. and who have sustained me and with whom i have learned so much. i want to thank the speaker for her energy. i want to thank steny hoyer. i want to thank my partner and my county, george miller, and i want to thank ike skelton and jim oberstar, my chairman, for

being so generous and for helping me learn. i want to thank again my constituents for the honor. i especially want to thank my family, my parents, and my sisters and brothers, and my friends who have been patient and understanding when i couldn't be at birthday parties and volleyball games. i want to thank my daughter who was raised in the house. she came here as a 5 1/2-year-old. she is now going to college and i'm so thrilled that she's emans fate penn stated and happy and healthy and a smart young woman. we should be as proud of her as i am because you helped raise her. i want to thankspecially my fiance, jim, whom i will marry tomorrow.

thank you. it's hard to be a blushing bride at my age but i'll do my best. let me just close and say that no matter where i'm serving in government, i will always remember those that sent me here and i will always be be grateful for your trust and support. i just want to take a second and say that i have been honored to represent the speaker on the podium and there's nothing like having the view from up there. because the view from up there is of all of you and that's the best view i have had i think in my life and will i take that in my heart as i go to the state department. i want to thank all the people behind the scenes that work so hard to make sure that we do the job that we do. i'm not saying goodbye. i'm just saying farewell for the time being. i expect to work with you all very well. but know that this has been the

best experience of my life and with that, mr. speaker, i thank you for the time. god bless you. god bless america. thank you. thank you.

provide transparency and reduce the risk of the financial sector. this week we find ourselves more focused than ever on the important work of merchandising and outdated regulatory system for goeth call this hearing to explore one of the key aspects of such reforms. to modernize regulation of the over-the-counter derivatives market and the institutions that participate in these markets. both exchange rate and over-the-counter markets have grown extremely rapidly over the past decade.

and tillie recent downturn of the economic markets, every category of derivatives show almost a decade of extreme growth, in many cases more than tripling or quadrupling trading values according to data compiled by the data resource service. between 20,002,008 the number of contracts traded on exchanges rose by 425% and the total notional amount of over-the-counter contracts of standing rose by 522% over that period, representing trillions of dollars in trading fur coat this afternoon's hearing will focus in particular on over-the-counter derivatives markets, which today are subject to no direct regulation. one of the key questions we will examine is the extent to which existing and emerging to rip this market should be subject to regulatory oversight. until recently the prevailing presumption was that market discipline alone largely protected us from any potential risk we face from otc derivatives.

, obey received a wake-up call, having had to siege aig to kp its credit default swaps worth trillions of dollars from greatly exacerbating the financial crisis. it is now clearer than ever that we need to find ways to make these markets much more transparent and to ensure that the dealers of other users of these markets do a better job than aig of ensuring that their derivative activities did not threaten the stability of the overall financial system. but we face difficult questions as we move forward in accomplishing this goal. these products are often extremely complex and there is an equally complex history of regulation or lack thereof, of such products. as a result we need to take a careful and thoughtful approach to these issues. there is no doubt that improving the regulation and oversight of derivatives markets and those who trade in them is a key part of modernizing our regulatory system. i hope my colleagues and their witnesses will help us identify the key steps that we can and

should take right now to address the serious problems that we are confronting. for example, what key decisions need to be considered as congress weighs proposals to move more over-the-counter derivatives to central counterparties for exchanges. how do various proposals to enhance oversight of otc derivatives affect different market participants? how does the issue of improved otc derivatives regulation relate to broader reform issues such as the creation of a new systemic risk regulator and to what extent the u.s. efforts require an international court nation. these are just a few of the challenging questions that we will face together and we will rely on your expertise and your insights as we go forward. at this time i would like to call on the ranking member, senator bunning for his comments. >> thank you mr. chairman. i appreciate all of our witnesses coming here today for this very important hearing. it is important for everyone to understand the financial nature

of derivatives and does, the banking committee's interest in overseeing them. let me say at the beginning that i to not know what regulations and restrictions we should put on these product figuring that out is the purpose of this hearing. but, it should be clear to everyone that the current regulations are not enough. i understand the desire of the firm's to hedge their risks. whether those risks are interest or exchange rates, commodity prices, credit exposure, or something else, jenny when hedges are accurately priced, that are accurately priced in provide the risk management firms need, but it is not clear that all derivative products arjun yiwen hedges are accurately priced.

in fact, some look a lot more like a way to get around regulations, improper risk management, or just plain gambling. regulators and the public needs a better understanding of all the exposures of firms to eliminate uncertainty and the justification for further bailouts. increase transparency and standardization of derivative contracts will help, and must be accomplished. however, how far standardization requirements should go depends on whether there are two economic benefits to the custom products that outweigh the costs and risks associated with them. so far, specifics and credible

evidence on that point is then. a credit derivatives may present the toughest questions. should these products be treated as insurance, with proper reserves? should the bear have an insurable interest, and have to suffer actual losses or deliver the references referred@@@@@@@ r

effectively enforce the rules. thank you mr. chairman. >> thank you senator bunning. senator crapo comment you have an opening statement? >> thank you for holding this hearing. i believe although there is a breath of derivative action in our economy, i believe that a significant amount, if not a significant majority of the amount of those transactions falls under the jurisdiction of this committee and i appreciate your attention to that. i also agree with the comments that but the chairman and

ranking member have made. rescinded fence and the credit markets have highlighted the need for greater attention to risk management practices and counterparty risk in particular and although i agree with the need to focus on where we can standardize and the types of risk reduction and better practices that we need to address, i also want in my remarks to just focus very quickly on one specific part of it and that is not letting the pendulum swing too far to the other side to where we cause damage, and efficient economy. the creation of clearinghouse is an increased information to trade information warehouses are positive steps to strengthen the infrastructure for clearing and settling credit default swaps. wilson turrell kundra party qiuring in exchange trading of simple standardized contracts as the potential to reduce risk and increase efficiency, market participants must be permitted to continue to negotiate customized bilateral contracts

and over-the-counter markets. many businesses use over-the-counter derivatives to minimize the impact of commodity price, interest-rate and exchange-rate volatility and order to maintain stability in earnings and predictability in their operations. if congress overreaches or bands or generate significant uncertainty with regard to legitimacy of decisions to customize individual otc derivatives transactions, i believe there could be very significant negative risk. in the contemplation of this hearing in this issue mr. chairman i actually requested that a number of the end users of these types of transactions respond to a question about what increase flexibility or reduction of flexibility would do and at this time i would like to share three or four examples of responses that i have received. david dines, the brezhniv cargo risk-management indicates, while marching other credit support mechanisms are in place in utilized every day in the otc market there is flexibility in

the credit terms, the credit threshold some type of collateral that can be applied. this flexibility is a benefit for end users of derivatives such as cargill in managing working capital. losing this flexibility is particularly concerning because mandatory marching will divert working capital from investments that can grow our business and-- well it depends on market conditions the diversion of working capital from cargill for marching could be in excess of $1 billion. multiply this across all companies in the united states and the ramifications are enormous especially at a time when credit is critically tight. kevin colgan from the corporate treasurer caterpillar, our understanding of current and pending regulation in this area is it would require clearing function which would standardize terms like duration and amount. any standardization of this type would prohibit us from matching exactly the terms and underlined exposure we are attempting to hedge. this in turn would expose us to uncovered risk and introduce the

list volatility into our financial crisis. i have a number of other examples in which i will insert for the record mr. chairman, and if possible i'd like permission of the committee to answer the letters that i received in response to these inquiries into the record and i may get another in the next couple of days. the bottom line mr. german is i completely agree with the need to do as much as we can to assure that we have covered the risks in our economy that have been created by the utilization of these types of derivatives, different types of derivatives that credit default swaps for example. i just believe that we want to pay careful attention to making sure that we do what is necessary to protect and strengthen our markets, and that we leave flexibility where it is necessary and helpful for the utilization of these credit instruments to advance the interests of our businesses. thank you. >> you have illustrated the

challenges very well in terms of that balance. senator bennett, you have an opening statement? >> thank you for holding the hearing and we are appreciative of the witnesses better here. >> senator johanns. do you have an opening statement? >> i do not. >> let me introduce our witnesses. we are very pleased to be joined today, first by the honorable mary schapiro chairman of the securities and exchange commission. prior to becoming chairman she was ceo of the financial industry regulatory authority, the largest non-governmental regulator for all securities firms doing business within the united states. chairman schapiro served as the commissioner at the fcc from december 1988 to october 1994 and chairman of the commodity futures trading commission from 1994 until 1996. thank you chairman. next is the honorable gary gensler. gary gensler is the chairman of

the commodity futures-- he served at the u.s. department treasury as undersecretary of domestic finance from 1999 to 2000, assistant secretary of financial markets from 1997 to 1999. persia joining the treasury he worked it 18 years of goldman sachs most recently as the co-head of finance. our third witness is ms. patricia wide, secede director of the federal reserve, a division of research and statistics. ms. white is oversight responsibilities for sections that analyze risks in process microeconomic data and she is participated in domestic and international working groups on central counterparties, securities settlement in financial regulation. we very much appreciate all of you joining us here this afternoon and chairman schapiro would you give your testimony? >> thank you very much. mr. chairman, ranking member bunning and members of the subcommittee i am pleased to have this opportunity to testify to the house and securities exchange commission concerning

the regulation of over-the-counter derivatives. the severe financial crisis that has unfolded over the last two years has revealed serious weaknesses and the structure of u.s. financial regulation. one of these gaps is the gap in regulation of otc derivatives, which under current law are largely excluded or exempted from regulation. the ker regulatory framework has permitted certain opaque securities related otc derivatives to develop outside investor protections afforded by the securities laws. the fcc is committed to working closely with this committee, congress and the administration and our fellow regulators to close this gap and restore sound structure for u.s. financial regulation. i am pleased to be able to report to you that u.s. regulatory authorities have reached a broad consensus on the pressing need for comprehensive regulatory framework for otc derivatives. this consensus covers all of the basics of sound financial regulation and the 21st century including record-keeping and

reporting requirements, appropriate capital and margin requirements, transparent and efficient markets, clearing and settlement systems that monitor kimmage risk, business conduct and disclosure standards to protect the interests of market participants in vigorous enforcement against fraud and other wrongdoing. dscc is strongly supportive of ongoing initiatives to promote the standardization and central clearing of otc derivatives. the sec working in consultation with the board of governors of the federal reserve system and the commodity futures trading commission and operating under the parameters of the current legislative structure already has taken a number of actions to help further centralized clearing for otc derivatives, including providing temporary conditional exemptions for three central counterparties to begin centrally clearing credit default swaps. more needs to be done however and in building in a regulatory framework for otc derivatives it is vital that the system be designed to protect the public

interest, manage systemic risk and promote capital formation and general economic welfare. treasury secretary geithner's may 13th letter to the congressional leadership outline the administrations plan for establishing a comprehensive framework for regulating the otc derivatives. multiple federal regulatory agencies will play critical roles, including those represented here today. in fashioning a regulatory framework for otc derivatives, it is crucial to recognize the close relationship between the regulated securities and futures markets and that no, mostly unregulated, markets for otc derivatives. for example with respect to the securities markets, when otc derivative references an issuer of securities such as a public company or security itself, it can be used to establish synthetic, long or short exposures to an underlying security or group of securities. in this way, market participants can replicate the economics of

the deray purchase or sale of securities without purchasing or selling the securities themselves. because market participants can use these securities related the otc derivatives, to serve as synthetic substitutes for securities, the markets for these otc derivatives are interconnected with the regulated securities markets. moreover, the market for these securities related otc derivatives implicate the policy objectives for capital markets that congress has set forth in the federal securities laws, including investor protection, the manus of their and orderly markets in the facilitation of capital formation. for this reason it is important congress carefully consider whether securities related otc derivatives be subject to the federal securities laws so that the rest of arbitrage and manipulation is minimized and certainly has a similar analogy can be made to the futures market by the cftc. michael today's to assess the congress in its efforts to craft

legislation that empowers the respective regulatory authorities to do their jobs effectively and operatively. i am confident that working together we will meet the challenge that is so important to the financial well-being of individual americans and i would be pleased to answer your questions. >> thank you very much chairman schapiro. chairman gensler. >> chairman reed, ranking member bunning, other members of the subcommittee thank you for inviting me here to talk to you today about the over-the-counter derivatives market. i would like my full testimony to be entered into the record, if that is all right. i too and talking on behalf of the full commission. i believe we must urgently move now to bring the over-the-counter derivatives marketplace on the regulation. there are four key objectives in doing so in accomplishing this goal. one is to lower systemic risk. two, we need to provide the transparency, and efficiency of

these markets that we believe we would have in our securities and futures and options markets when need to bring to the derivatives marketplace. three, when he to ensure integrity in this market preventing fraud, manipulation and other abuses and for me to protect the retail public in these markets as we do and other markets we oversee. meeting these objectives will require close coordination between the cftc and sec and other federal regulators. senators, i believe these reforms must establish a regulatory regime that governs the entire over the counters marketplace, and a matter who was treating them, what type of derivative is traded, whether the standardized or tailored or highly customized. i think it should include interest-rate products, the currency product, a commodity product, equities products, credit default swaps and those slots we have not yet thought of that are just a blip on the horizon. as the administration laid out

in its may 13th letter i believe this can best be accomplished in two complementary regimes. one, to regulate the derivatives dealers or the actors otis beat, and another regime to regulate the big market functions where the stages upon which the actors perform their duties. for the dealers, in this marketplace, the large financial institutions by and large the deal, we should set capital standards in margin requirements to help lower the risk in the system. we should set business conduct standards to make sure that the market is, exercises itself with of fraud, manipulation and other pieces and thirdly, we should set recordkeeping and reporting with audit trails that we have transparency in this market. so, lower risk, promote but i think this dealer regime won't really be enough, and i think it's important that all markets customize and standardize, but we can further lower risk b