e midst of implementation. we have made great progress in bring common sense reforms to the swap market, promoting transparency and lower risk. it is important we complete these for the protection of the public. thank you. >> i would like to thank both of our witnesses for their testimony as we begin questions, i will ask the clerk to put five minutes on the clock for each member.what roler agencies have in monitoring this swap trades at issue in the j.p. morgan matter? and were any concerns raised about the trades at either agency. what changes will the derivatives reforms bring to the regulation of these types of trades and what are the potential in filtrations for the role. chairman, please start? >> as i mentioned, and more in

depth in my written remarks we're in the midst of standing up regime that will still take some time but the credit to it fault swap parts of products reported in the j.p. morgan was trading already come under antifraud and antimanipulation regime. three clear credit default swap entity is. later this year we anticipate seeking public comment on having a clearing mandate so that more of these trades will come into the clearing house. currently it's just dealers to dealers. later this year we'll have regime that actually i think dealers will start to register, but this bank was not yet as a swap dealer because we don't yet have complete rules to make that a true being and maybe in the end o 2013 you'll start to see the commencement of trade and transparent markets.

this not trying to do against a clock but trying to get it balanced. congress gave us one year to get the job done and we're pushing on two years. i do think the job needs to get done but take ten 30,000 comments we've received. you ask when it came to our attention? with matters like this i don't want to get in specifics of an investigation but as press reports have shown these are credit to fault swap under our jurisdiction and the clearing houses we monitor on a real time daily basis for the completeness of the margin and the clearing houses. >> pearl? >> thank you. to the best of our understanding none of the trance saxes were held in or executed in the u.s. broker deal. the activity took place in the london branch of the london bank and affiliate investment bank unit so the f.c.c. did not

have any direct oversight or knowledge of the transactions. i would reiterate what chairman said, is the ruled had been in place these positions likely would have all been cleared. some substantial number were but not only all of them were cleared but they would have likely been reported to a swap state repository and detailed transparency to regulators and public. under the f.c.c.'s proposed rules for reporting we would have known them 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 new rules for enhanced supervision.

think there are a number of pieces that would be in place once all of the proposald to implement are completed. >> chairman, can you commit to us the f.c.c. will implement the last of your proposed to rules in the coming months and that you will prioritize within the f.c.c. the importance of enacting the final rules and a timely manners in >> absolutely mr. chairman we have the last piece of proposing rules and financial responsibility rules for swap dealers and major swap market participants. i hope we'll issue that. two there key pieces from f.c.c.'s perspective. one as i spoke about in my testimony the implementation plan we'll lay out in a policy

statement our views on how the rules should be implemented and what the compliance time lines 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 to cross boarder board activity or entities and we want to pro o post that release before we adopt final rules beyond the definitional rules. >> senator shelby? >> thank you mr. chairman. a lot of people have been basically saying that chairman, that the sec and in the dark that you didn't know what was going on atjp more gavenlt we don't know that yet, but when did you first learn about these trades? >> i would say that the trades that came to many of our attentions personal attention

with 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 rest 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 does he recall yet but we do regulate the clearing houses and then have antifraud and antimanipulation. >> did you know what was going on there in such a large position that j.p. morgan has taken here? >> well, again. >> were you in the dark? or did you know what was going on? >> it's in transition to speak about this. our oversight of the clearing houses give us a lot of win goes the clears house that have 27 members and the margin

collected there. that's not the full j.p. morgan picture because they have a lot of swaps not cleared. that would have been a principal regulatory in terms of the bank we don't have that. >> you didn't know what was going on. or the problem with the trade until you read the press reports like us? >> that's what i've said, yes, sir. >> chairman shapiro, where was the f.c.c.? did they know what was going on and if not, why not? >> they became aware of the activity in press reports back in april when the london well trading was first reported on. just to remind everyone. this activity did not take place in a broker dealer and we don't have oversight responsibility over the broad based cdx index products that were the subject of much of the trading although i think there's still much to learn here about

the full >> what was your responsibility as you see it's a chairman of the f.c.c. looking to try and find out what happened atj m morgan chase? what's your responsibility? >> our focus 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? >> and if they knew something, say a month earlier that was going wrong, should they have disclosed that to the sec the c ftc and is that what you're trying to find out now? >> that's what we're investigating right now. to what were their earning release statements and theirq 1 financial reports accurate and truthful. >> but you're in the investigation of that now >> yes, sir.

>> what do they know inside? when did they know it and what should they have divulged? correct? >> yes and as congress gave the similar authority to the sec we didn't form early have a strong and antifraud and antimanipulation authority that included deceptive practices that's part of this new authority that we have so we have currently oversighted the clearing houses and then of course this on going investigation that i don't want to go into the particulars because it's really just best not to compromise the investigation itself but it's in that realm. >> chairman of the f or c ftc. you basically are telling us you didn't know there was a problem there until you read the press reports? >> i think that is accurate. we're standing up regime. we don't have any regulatory oversight of j.p. morgan chase

the bank. we will when they register as a swap dealer but they're not currently registered as that. we have oversight of futures merchant. man'sre's nothing, no land. there's things that have not crystallized in a regulatory fashion yet over such a big bank? >> the bank is over seen by banning regulators but under frank the market we will stand up and over see swap dealing activity in a bank or an affiliate of the bank or securities based swap activity but currently the american public is not protected in that way. >> chairman, were any of the trades conducted through jp morgan's future commisioner? chant? >> not that i'm aware of. it may be upon further review but today the knowledge is no.

>> thank you. senator menendez. >> at the last hearing on, m f global i asked the trustees who at the company was responsible for the wrong doing and they informed me their investigation was beginning to just determine that. i want to ask you the same question. can you shed 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 there? >> i think the agencies collectively including the criminal authorities are working 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 is responsible at this point for that? >> no. as i said, our focus is very much because we do not regulate

the london brand of j.p. morgan branch that's an o.o.c. fed is open company regulator. our focus is on the quality of risk disclosure and specific disclosures as a public company. when they talk about potential and all the risk as a business when they talk about potential losses. under their model. we are very focused to accuracy and timeliness of that disclosure. >> i just say that we're aware that it's primarily in the bank that much of this emanated from the london side 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 f.c.c. authority is

simply civil not criminal. >> are you working with entities conducting criminal investigations? i believe the fbi has announced they have opened one and we will all work closely together even though. >> into which of the two i'm referring to. >> i think actually with respect to both. >> okay. so in essence, it's the agencies that are conducting civil reviews, i assume and to text tenth that there are criminal reviews being conducted law're being conducted by enforcement entities is that right? so it's not senate tar bank committee conducting those? >> i wouldn't think to tell them what to do or not. >> but at this is points a far as i know we're not. do you hope to interpret the rule in in a way that what took place at j.p. morgan would not have taken place without real

consequences? >> i think that we've obviously been thinking a lot about that and the volker rule is foremost of where we are in the comment letters but also because of this activity and it strikes me that the statute is pretty clear in order to rely on the risk mitigating hedging exemption to the volker rule there has to be pretty strong criteria that needs to be met. whether or not the jp morgan trades meets those standards or not i don't think we have a view yet. they have to be correlated to the risk. they cannot give rise to significant new exposures but have to be subject to continue management. the compensation of the persons doing the trading cannot

partake to outside risk or unnecessary risk and they have to import or importantly document the trades when the hedge is being done at a desk that's different than the position that's being hedged was done at. languagehere's strong there and what we need to do is take what happened to jp and view it and see how that helps to inform it going forward. >> i think as one of those that supports the wall street the agencies will look at this broadly because if j.p. morgan lost 2 billion or slightly more through the trades what's to stop them from losing ten billion or even worse to stop another less capitalized bank from taking losses so large that could bring it down? is that the whole effort that we try to move here in the

senate, which is to have the type of reform does not create the systemic risk that places everyone in america responsible for the decisions of large entities such as this and i hope that's thaw regulators at the end today understand that was the mission that the all of us support at wall street reform want to see. >> thank you, chairman. >> senator? >> thank you and thank both of you for your testimony. when an event like one that's just occurred happens in the middle of a rule making process. that effects things. does it not? meaning that you have an example. a real live example and we have had this issue and realize it's a blip on the radar but it does effect the way rules end up being done. >> i believe it does in a more disastrous way.

this is not that. >> as american people watch they wonder why we're having hearings and the point is that there's a lot happening at the regulator level and event like this ends up affecting things and it effects the rules and end up being created and i guess i have this fear i think much of what we did was to you guys and the fact that you didn't do that. we did that but the fact that it's taking us two years to define what a swap is, is pretty incredible and it's because we never defined it offs 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 the issues. what you may do. we never debated that institutions should be.

we layered a lot on top. we have these highly complex organizations where even the ceo itself realizes he didn't know what happened in this london operation and i fear that you're under pressure that a lot of calls are being made that administration is concerned that american people will wake up and look at the last three years as a bad dream. maybe the healthcare bill becomes unconstitutional. this big bill doesn't address maybe real time issues and that what you're going to do, is end up causing the volker rule to be something that it was never intended to be and would like for you to respond to that. in the process possibly making these highly complex organizations even morris i can than they already are. just a couple of comments in that regard. >> i think our job that you

delegated or asked us to do is 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 the american public gets the benefit of transparency and lower risk because firms will fail in the future as they have in the past and the critical thing is they have a freedom to file and 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. this circumstance i think is just a reminder in one area. i look at it as cross border application. whether lehman bros. or long term capitol management who you might recall was a hedge fund that was set up in the kamans. just a reminder to make sure we

get that part right. the london risk can come back and hurt the good folks. >> 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. causes a stir. a highly complex institution like this to be in a position where they're not appropriately hedging the risk. >> we're most definitely public actors as you are as a member of this great body, the senate and we're influenced by we've had many meetings and this is part of the topic to dialogue but i think we have to just as we do get it balance and right and not if your concern is we can have the u.s. taxpayer come

stand on them. >> my time is running out and by previous history i'll be cut off immediately. i do want to ask when you're making rules that you're making we do it here to the benefit of cost benefit analysis. i know you know courts now are challenging rules and regulations because regulators are not doing that and secondly to ensure that we don't create another systemic risk by shifting off to these clearing houses, systemic risk that otherwise was held in other place so is think i thank you for what you do and looking forward to the next hearing with banking regulators suppose to oversee these activities. thank you.

>> thank you. and thank you all for your testimony. i wanted to start with returning to the basic premises of the volker rule creating a fire wall in the loan making institutions and hedge fund style investing and in the effort to create that fire wall, one of the issues was when banks were holding funds in between making o loans how would they utilize those funds so they had liquidity but it was relatively safe so it's clearly not in the world of the basic statute for a notion of investing in government bonds as the safe place to put your money. the draft regulation had liquidity management proposal and it's not if we look at j.p.

morgan they have 331 billion in fund that's were a waiting, 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 incorporate bonds. that started this sequence of event that is the led to the 2 3 billion or greater loss and then they said, we have these corporate bonds and better protect against them dropping in value and they bought insurance and said well we have to pay for that so we'll sell it another form to create revenues to pray for that. and when the bets went bad they had to pay off that hasn't been focused on much. what's the appropriate place to put your funds in between making loans so that you're clearly in the deposit taking lone making business and not in

the hedge fund business? >> i think that is a great question and the rational behind the liquidity management exclusion in the rules was to make sure that banking entities would have sufficient readily marketable assets to meet the short term liquidity needs and that's all critical to the safe and sound operation of a banking entity and there are requirements around that, it has to be a legitimate plan set out in the rule. the question you raised really requires us to go back and look at that and see if we carried that to his logical extreme. maybe we need to tighten this up and look at it more closely.

that's what i think in response to the senator's question this is very instructive. it would be wrong for us not to take this real life action example of the application of the cross border, provisions or the volker rule itself to use this example and to see what the impact would be of all the things we propose to do. if you take the provision of the funds making new loans if you will can be invested in a huge variety of things and it's a gateway and has two impacts. inverts funds that were intended to be lent out the door reducing credit for businesses and families and second it introduces a lot of risk and complexity. chairman? >> well, as a derivatives and swaps regulator we're mostly focused on the implementation of volker rule with

commisioner? chants and i don't have a many views of chairman and the management piece but if i can pick up on the second that was implied in there was we received a letter from jp morgan. all of us received on our side in february specifically saying that they thought we had to loosen up or widen out the hedging exception. we're entrusted by congress to figure out how to prohibit it so taxpayers don't stand behind the institutions but prevent market making important to markets and hedging which helps lower risks of the institutions it's that challenge and it's not easy by the way but you were clear. it has to be tied specifically to aggregate things and congress is clear on that and it's instructive it was february 13th.

j.p. morgan sent in like a 65 page letter and within that they said you have to leans up the portfolio hedging and this has to be looked at in the context of the february letter as well. >> okay. great. i'm out of time so we're going to return to senator. >> thank you for being here. madame chair, i want to flo up on a few things you said that f.c.c. did not regulate the london branch that actually was something over on the o.o.c. side. and i'm trying to maybe take the next step here with my question. could this risk management that was being done by j.p. morgan have been done in such a way that it would be under your

jurisdiction or are you just saying this doesn't fall within the purview of the powers given to me? >> if the trade where is done in an f.c.c. regulated entity. or ultimately when the rules are finalized security based swap dealer then it would be under the jurisdiction of the sec >> okay. which of course raises another question. if i were running j.p. morgan. auldn't i just set this up in way to avoid you? well that's an important issue that we're all wrestling within the context of the cross border release and how we'll apply our rules to activities that might not take place in the u.s. entity but might face a u.s. customer or take place in an affiliate of a u.s. entity or a branch overseas and those are the issues we'll lay out in the

cross border release. i think generally a foreign entity with a foreign customer we with that can feel our title seven would not apply. but the foreign entity that's regulated registered with us with the doing business with a foreign customer would be subject to our rules. including a branch of it operating in a different country or title seven. we want to lay it out. >> one of the concerns about dodd track and this area as you know it's been my concern. the more you crank it down the more the regulations become more and morethis way the greater the people are to hire smart lawyers and smart accountants and at the end of

the day avoid you. >> that's why international >> that is right. that is why international efforts are engaged. they are painstakingly time consuming. we have done this on a bilateral basis with the regulators in the markets and have gone the issues like pre- trade transparency and post- trade transparency and the margins and a clear mandate. we work through each and every one of these issues to try to get the regulatory regime -- as other is not an opportunity for them to disappear in arbitrage. if it has the potential to impact the u.s. financial system, we have to very seriously consider making that part of our mandate. >> mr. chairman, i want your comments on this.

before you comment, when you say -- i have no doubt you are working hard in the international arena and you want everyone to be as harmonized as they can be -- i look at that international arena and i look at it the position like yours, we would work days, months, years with the f wto process with 150 countries and tried to get people on the same page on trade. at the end of the day, they have their own agenda. they have their own in tests. -- interested. -- interests. i can go on and on. >> i think you are right on both points. we will obviously have differences.

there are different cultures, political systems, and agendas. there will be differences. second, i think you are correct. arden finance institutions will larger look to see if they confine the up lowest tax regime or counting machine that favors them. -- accounting regime that favors them. these large firms will do all of this. i used to do this when i work for a large firm. long-term capital management was in the cannes islands. aig financial products that we thought were in connecticut, they went to france. they put a branch in london. all of that came back here. we have to be very careful. there are costs on financial institutions.

yes there will be differences overseas. the bigger costs is -- we are trying to cast is appropriately in. we want to make sure transactions are in. wall street is rationally advocating something different. if i was on the other side, i would advocate something different than i am right now. it is an interesting challenge. we will not be as good as we hope to be. they will get something by us. in a few years, someone will say that you missed something.

>> mr. chairman, thank you. >> senator reid. >> in this joint will making and clever rulemaking, you are trying to define hedges in the way that covers the legitimate operations of the financial institutions and minimizing the risk without allowing speculation. there is this tension it seems -- the tension between a risk management. i know that you suggested criteria. do you have anything else to add to this dilemma of defining a head so that it is properly protecting clients and protecting investments and banks and not opening it up to speculation? >> i think that is the hard challenge the congress has given us. i would say that it is true with the market making extension as well. we believe deeply that businesses have to be able to engage in both activities such

as marketing to make sure our kids are operating as efficiently as possible at hedging to reduce risk. i think the criteria that are laid out are actually pretty good in terms of helping us keep the focus on hedging as truly hedging. mitigating more risk either in name individual positions are other positions. that is a themself have given -- monitoring hedges and adjusting, they march into something else over time.

let cannot be compensation programs. we have been working hard in the disclosure area that really incentivizes outside risk taking in a way that threatens the franchise by encouraging people to take bigger risk than they should. i think the criteria is there. it is really incumbent upon the regulators to figure out how to write a rule that allows legitimate having to go forward as it needs to. but it must be genuinely risk my gating hedging and not anything that people want to do and call it hedging. >> there is something else you have to deal with. in dodd-frank, is there any other exemptions? you could be doing hedging, but you could also be very aggressive in your hedging. warsaw an example of the company that was not a financial company.

>> congress anticipated it because they included major swap participants. congress said if you are not financial, you can choose if you are involved in this clearing, trading, and we suggest you do get to choose on that, too, if you are so big that your major swap participant would be brought into this. i think chairman schapiro said it very well. one thing i would add is this concept of portfolio hedging can mean different things to different people. what congress said, it has to be tied to specific risk of positions. this experience reminds us we have to make sure it is tied to specific aggregate positions. it is not like we think revenues will go up, like the european debt market these days. from my experience, these things sometimes mutate into something else when they are set up as a separate business unit and have

a separate profit and loss statement. hedges generally lose money as many days as they make money because they are hedging something, the position is going up, the position makes money, and a hedge goes down. when you set up as a separate unit in a different country, different leadership, you start -- it is prone to morph. >> an initial reaction is that when the entity designed to be the risk manager and chastise everybody in the institution for being too aggressive or not responsive to risk is a major profit center. that might be a sign that the rule is emerging in an

unproductive way. a final point, you have pointed out the international interconnections here which suggest that our regulations have to be not only strong, internationally applicable, but we have people on the ground looking at these institutions. if an american institution is going to locate their activities overseas, the regulators should not only have been there, but they are in force with adequate personnel to look at what was happening and be the first line of defense. >> i cannot speak to them, but the system we have at the cftc

does not contemplate that. we have been kept reasonably small, 10% larger than we were in the 1990's, and we rely for most on the regulations. we examine the organizations, but we do not have people on- site at a merchant, at the clearing houses. that is the reality of our funding and the decisions that had been made over the decades in a bipartisan way. >> did you know when -- could you have anticipated recognizing the occ's responsibility that if they do not have people on the ground, you will not know until a reporter breaks the news and then a lot of damage can be done? >> agreed. >> the benefit will be when we have full reporting. the transparency to regulators will make a big difference. >> thank you both for being here.

i would like to follow up on the discussion that chairman gensler spent touching on, your views of purpose and ability of hedging. i used the expression about portfolio hedging that is tied to specific positions. i am wondering if you could clarify that, because if you tie hedges to individuals, that is the opposite of hedging that has some kind of cumulative net risk. my question is, is it your view that it is and will continue be permissible as well as cost effective to manage interest rate and credit risk in the aggregate in these portfolios rather than limiting it to a one-off individual basis? >> congress addressed this and

said this had to be tied to the risk of either individual or aggregate positions, tied to the specific risk of some aggregate positions. it has got to be tied -- >> it could be the aggregate interest rate risk of a bond portfolio -- >> that may have 170 bonds in it. >> you could measure that and codify that and measure that. would the rule prescribe the kind of instruments permissible to use to hedge that kind of portfolio? >> as written now, it speaks to instruments that are reasonably correlated with the risk. it is all in that word "reasonably."

>> who decides that? the regulators? >> the first quarter, the institution does, the firm does, but then there is a compliance program and regulators would -- >> the point of the rule would be to say this is permitted and this is not. that is the purpose of the rule. >> although as written, i would consider it more principles based, that the firm has that policies and procedures to ensure that their hedges are reasonably correlated to the specific risk. >> again, the ultimate question in hedging is a question of who gets to decide. there is an inherent risk in

hedging. it is not a complete offset. there is always some residual risk and always a subjective judgment call. in complex markets like ours, there are a lot of truths available if somebody wants to hedge a portfolio. my concern goes to the heart of what dodd-frank is about, but given an impossible task. that is to micromanage the activities of these institutions. we will limit systemic risk by controlling everything you can do increase detail. let me give you an example. chairman mary schapiro gave the challenges of the market-making exception. company rules that we will impose on institutions, which will establish metrics, and they will quantify how much can be barred from the day-one offer spread versus what can be barred from office moves. we will have rules for market makers. we will decide and have rules that will take out the two. whether we can quantify these things at the level of the individual trader or will we have several traders or the entire trading floor. how will we do this?

we will have rules that will establish which kinds of classes are permitted to hedge which kinds of risk. can you short the s&p 500 on that? can you use default swaps? this has a huge cost, not just the cost of compliance, but it has the cost of less liquidity because traders have fewer options. it will lead to less innovation because people will be prescribed narrowly. it will have who knows what kinds of the unintended cuts when people decide it is better to avoid this incredible micromanagement and go somewhere else. this is why i think we have gone down the wrong road here. the better solution is require more capital so we can let people do what they want to become, let the people in the marketplace make the decisions, and let them live with consequences without having a taxpayer at risk because we require a sufficient buffer that a firm could lose 1% of

their capital and not have everybody sweating bullets. frankly, firms should make decisions and live with consequences and taxpayers should not be at risk. you do not have to control every aspect of their business, which is what these folks have to do. the alternative of tougher capital regimes achieves the goal of reducing systemic risk without putting us in the impossible position of trying to run these institutions. >> thank you, mr. chairman, and thank you for your comments today and your commitments. discussion,eed's you mentioned data collection, and when will this data be collected? >> the security based swap reporting data collection will begin when the rules are finalized, which they are not

yet. it is hard to me to predict what the commission -- when we will have final adopting rules. hopefully sometime later this year. we have one set of rules left to propose and then we have done one final, we would do another final in the next month or so, and then a steady stream after that. it is important -- i am a big believer in transparency in the marketplace, and we have seen it work extremely well in other

markets. we think it is critical for the public have access to this information and critical for regulators to have access to this information, that ultimately translates to management as well, so the regulators and the public can see the information. when we have the rules in place, we will have a granular information right down to the trader and the trading desk, from which a particular transaction emanated. >> i would say and maybe to senator toomey's comments, in addition to capital transparency coming out in the credit default swaps industry area and in interest rates and

so forth, they will be later this summer, as soon as august. then in the commodity, oil and gas and the others, three months after that. both for the public to see the trades, which is very big, and for the regulators as well. >> you and i have talked at length about that, especially in the swaps market, and we agree transparency is critical to reducing the risk. the market north american investment grade you mentioned in your testimony only has received attention recently for the role it plays in the losses at jpmorgan. this index of credit default swaps contract is a relatively transparent product. i would like the hear your thoughts on the transparency of a product such as the cvx index and how that can reduce risk in the system, and how could we see such large losses in this tradeable product and what lessons do you think a financial institution will take from this incident? >> i think you are correct it is a standardized product right now.

the dealers are into a clearing house, but as we complete the rules, the nondealer, the hedge fund positions, will also cut into the clearing house. regulators will have more transparency in the data repository. from the public right now there is not mandatory post-trade transparency and as that comes into being in the next several months there will be a benefit the public. we will see the pricing. we masked the sizes. if somebody did a large size trade, it gets a plus at the end, whether it is at a hundred million dollars size or more. i think the public will greatly benefit from such transparency, in addition to the regulators. >> i wanted to ask about the value at risk. a metric that listed the financial institutions include in their filings -- can you discuss the value at risk and how it is used by the financial institutions and what are the work rules regarding its disclosure?

>> sure. estimates give you a confidence lever, potential of the client in a valuable possession or a portfolio under normal market conditions, and i would say that raises one -- that it does not measure for you the maximum possible losses in a portfolio. these could be incurred during very stressed market conditions. it has its limitations. public companies are required to discuss their risk and are given an option of three ways to go forward in their item 305 disclosure. when they have to give quantitative information, they can use a tabular presentation of information. they can do a sensitivity analysis or a bar disclosure. most institutions in fact choose to do that.

they also have to discuss at the same time any material limitations on the model, what it is not telling about risk exposures, and when there are changes to the bar model as newspapers have reported, at jpmorgan, they changed their bar model. changes have to be disclosed. they also have to be publicly disclosed. >> have you followed that with the recent losses, how it impacted from the sec valuations? >> our staff would look at cuts in the capital context. we allow certain firms, a small number, the use the bar to complete the market risk detection from the capital. if they have large losses, they provide us with full information

about why that their estimates of losses were so far off. >> thank you. >> my first question relates to funding. we have heard people being critical -- why did you not know more about this -- and that takes staff. you have been given huge amounts of responsibilities, but without in my judgment the concomitant resources to fulfill those responsibilities. that is one of the reasons you are taking long grip that they should. that is one of the reasons you're not everywhere. one of the greatest regrets in the bill is we have a proposal that did not affect the cftc, but it affected the sec that would have allowed all the

levies on transactions to fund the sec, and we had a fight in the appropriations committee that insisted on not doing that. they have increased your funding, but not to the extent it would have been under the proposal i had in dodd-frank. could you talk about the funding issue, especially in relation to the oversight you are being asked to do by everyone on both sides of the aisle? >> we asked and asked to take on new responsibilities, but hedge funds that are not registered and overseen by the sec -- municipal advisers, specialist corporate disclosure, a whistleblower program, quite a lot of new responsibilities. in fiscal year 2012, we asked for 116 positions for dodd- frank implementation. we got a good budget for 2012, not as good if we would have

been self-funded. the hiring is going on now for those new positions, and we have been able to attract tremendous talent to the sec in a different skill sets. >> what about investments in technology? >> we have made technology investments the significant focus of our additional resources, and have been able to make dramatic improvements in the agency's technology. that said, we are still way outgunned by the firms we regulate in terms of technology, but we are making steady progress in that regard. for 2013, when these rules will start to be in effect and we will have the clear responsibility for oversight and monitoring of the security- based swaps market, we asked for an additional 272 positions.

>> that is a lot? >> that is a lot. >> what are the vibes on the appropriations committee? >> they do not show their cards. >> you were in the conference committee trying to do the same thing, but we failed. >> i think this is a good investment for the american public. cftc is funded at $205 million. imagine in football, there were eight times the number of teams, but no more referees, and instead of having seven refs on the field, there was only one. there would be mayhem in the field. the fans would lose confidence -- in this case, market

participants -- and ultimately we need the corporate end users to have confidence that when they enter the market they can do it free of fraud and manipulation, they can enter the market with speculators, but they feel that the market is a fair and accurate reflection of the pricing of risk. we're way underfunded at the cftc. >> i agree with you, with reference to senator toomey, that even if you think capital requirements are the major protections here, because you cannot regulate every trade, that does not gainsay the need for transparency. i would like to follow up on my good colleague from north carolina's questions on that.

we know from media reports that the jpmorgan losses involved large positions in a broad-based indexes comprised of the credit default swaps on over 100 companies. the vast majority of trades in this index of record in the trade information warehouse, so that would mean regulators have access to some information. they may not have information about exactly who was buying and who was selling. is that correct? >> that is correct, although i think as our rules go into effect, we will have that information more specifically, and we already do have it in the clearing houses. and the dividend portions of this transaction, dealer to dealer, are in the clearing paths. >> as i take it, the coding system is what you're talking about, or will that add to additional information? >> that will add additional information. >> what is the promise of that coming into effect? >> we finalized rules last year. the legal identifiers to which

the senator refers, we are going to announce in a week or two weeks a service -- put it out to a service, for partisan gain and similar to procurement and it looks that we will pick someone. >> one more question. would it be possible to set up an early-warning system that would warn us when a company accumulates unusually large positions in any single product? is there any warning system that regulators could develop so regulators can identify risky positions? >> early warning -- that is what we do now in the futures world in corn, wheat, and interest- rate products. we plan to do that in the swaps. every friday, where we go over significant positions in the market. >> you think surveillance will

get better? >> yes, but underfunded it is stretched thin and something could be giving. it could be weeks, but something will give. >> the clearing house also to the extent these instruments are mandatory will have a clear insight into the early levels concentrations and be in a position to adjust the requirements to account for that. >> i might add that the two main clearing houses have a concentration where when positions get large they add additional margin on the top. without adding details, you can imagine what happened here. >> we will have an additional five-minute round. >> i would like to go to mf global. this committee's due diligence

has revealed that you played an active role in the oversight of mf global in the week leading up to its failure. we would like to know how many conversations did you have with jon corzine during the final weeks, and during these conversations, were there discussions about possible shortfalls in customer accounts? this is central to what we're looking at. >> i thank you for the question. i had no individual conversations with jon corzine. i participated on that sunday on a group call with chairman schapiro. presentations were coming over a conference call, which i believe

once or twice jon corzine spoke up and gave information. to answer your question, i think about what was my role that weekend. would that be helpful? >> you are chairman -- you still are -- of the cftc. your role is chairman. >> as that week developed and the firm looked to develop and be in a frail shape, to ensure customer movement of money, and we were informed in that we can, by other regulators -- and i compliment them for that -- there were the big movement of positions, so we wanted to be sure those customer moneys, positions were removed. we were assured from the company

and from the first-line regulators that all the moneys were there. it was only 2:30 in the morning that i was awakened on monday the 31st of october that we learned of the shortfall, at 2:30 in the morning. sunday it was about moving the customers and the key focus -- we did not care beans about jon corzine. we cared about the thousands of customers that needed those moneys. we were sure all the moneys were there. >> how many people did you have on site at mf global? >> i am not aware, whether it was less than a handful, but starting thursday, we sent folks in on thursday.

friday, the full commission in our meeting got a briefing that friday morning. the first reading was that they were in what is called segregation compliance, but over the weekend, we kept asking questions for more details, because you wanted to see the details. it was not fully forthcoming, but by sunday we were on these joint calls together, sec at others, and then we asked to talk sunday night, the interactive broker at that time, to see they were guaranteeing that they would insure the moneys as well. >> that was relating to the steps you were taking to protect customer assets after learning that assets were missing? >> throughout the weekend we were assured by the company and the front-line regulators. the law is 24 hours a day, that is, to be in compliance, and one must report that you are or not.

>> either you are in compliance or not? and you're supposed to protect your customers' funds. >> absolutely. people here, i agree with you, sir, were hurt because that did not happen. i am not in the specific investigation and i chose the general counsel and the chief ethics officer, so i said i thought that once it turned to an investigation that was about jon corzine, i thought that made sense to step aside. >> on what date and at what time did the cftc staff learn there was a shortfall in customer accounts? >> i remember at 2:30 in the morning on monday, 31st of october.

>> after you learned on monday, or sunday night, of the missing customer assets, what specific step did you take to ensure that customer funds were not improperly transferred over the weekend, if the firm failed? >> this was already monday. i put on my bathrobe and got in a conference call and joined in with other regulators. i think it was up to six hours later that it was put into a proceeding. >> on october 30, a cftc employee gave two cme employees documents to support the october 26 mf global segregated funds statement which initially showed no shortfall. when did the cftc receive this disk from mf global? >> i am not familiar with the

disk. >> it is our understanding that the cftc did receive the disk and that it began reviewing the documents of the disk, and we would like to know when, and i will ask for the record, what was the result of this review of these documents, and did it show any shortfall? >> if the general counsel could follow up and make sure you get the information you desire for the record. >> ok. chairman gensler, about may a year ago, finra determined mf global had a capital deficiency. the sec upheld the determination and mf global

reported deep deficits in august, 2011. when it did the cftc learn that mf global had a capital deficiency? >> if i could have the general counsel follow up on the specifics, but as i recall, my own memory was over the course of that summer. they can follow up on the specifics, the date the staff learned it. >> that goes to the heart -- and i will be interested in the answer of the sec and the cftc's coordination of the

regulation. if the sec did something they should not have, and if cftc did not know that, there is a problem, but if you did know it and did not do anything about it, that is a problem. >> my memory is there was coordination, but as to the specific dates and times, i do not recall. >> thank you. >> senator warner? >> thank you. i apologize for being out for so long. i do not have a specific question on mf global, but there are questions i would like ask. one of the items that senator shelby mentioned is this issue of coordination between your two agencies on approach to rule implementation. one of the things that i have been concerned about for some time on is that in dodd-frank, very active in title 1 and

title 2, we created the oversight panel forum i thought would at least be the resolution of areas where there might be this rubbing. i was interested in one area, and senator shelby did not agree with me -- ofr, which would be in effect the independent repository of data and information that could have the ability to adjudicate if need be between different interpretations or conflicts on rule promulgation. we are concerned that the administration is slow on getting the ofr nominee. they have one to get passed, but i would like you to weigh in on the ability -- to be that

adjudicating body where issues rise up, and has that been effective or not? either one. >> i think fsoc has been a good forum to share concerns and ideas and differences as they of rise and have a discussion and hear the views of other people from their unique perspectives, regulating different types of institutions, all connected with financial markets. we are working on our next annual report that we will try to lay out the systemic risk issues we see facing the economy. every agency contributes to that, and those issues become a very lively discussion on how to approach particular problems. i think ofr is hopefully starting to get going in a more

meaningful way, and it can be an important adjunct to the work of the individual agencies with respect to data collection and analysis. i think it is working pretty well, and one of the side benefits of fsoc has enabled us to form relationships. >> i would say having witnessed what was its predecessor, the president's working group in the 1990's -- being honored to serve that and in this administration -- it is a real enhancement. it is more formal, and with formality there is not as much flexibility, but it is a big enhancement. it has not been tested in two ways, not for any real crisis. that is yet to happen. i think it will serve better than just the old president's working group, and it has not

been tested when two agencies have a knockdown dragout disagreement. it has been helpful to smooth through smaller differences, and it has been positive in that way. >> my hope would be that the ofr would at least be that analysis. my concern is you are going to get data coming in from different agencies that might be counter to each other, and you have to have a trusted entity when sorting through that. let me ask one last question. 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 a foreign setup and you have a foreign counterparty to that american foreign-based subsidiary and how we deal with the extra- territorial application of u.s.

laws. what is your sense of the whole international implementation question, particularly in terms of counterparties? >> we have made progress, but there are differences between the u.s., canada, japan, and other jurisdictions. you get to the question of cross-border transactions. we believe in relying on compliance from overseas, but we are a believer in learning from experience. in 2008, the three or four biggest banks, they all had offshore entities, we have to learn from those experiences and not be naive that wall street will structure around these things. some of these large institutions have thousands of legal entities. we have to be thoughtful and cover a lot of those

transactions and not just leave it to say my guaranteed affiliate will meet your guaranteed affiliate in london, because that is the worst outcome. the risk will flow back here, but the jobs will move overseas, and that is a bad place to be. on the second thing, we can, if it is our affiliates meeting in london, that might be a way we could substitute plans. >> we will lay out a comprehensive approach to cross- border publication. we will do that before we send out the final rules so it can inform the reach of 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 be applied and comment. we know four regulators had a deep interest and this and it is an intense part of the

discussion that we have with our foreign counterparts. >> i would also add, if the overseas affiliate, a branch, is dealing with an insurance company in germany, we want to make sure they have a competitive field that they can compete in, like a barclays bank, deutsche bank. it is trying to get that balance as well. >> thank you, senator warner. chairman, you mentioned twice the list of factors that were essentially ways to define risk mitigation with regard to the full court-ruled statute and related issues, and there were you are addressing specific risk, and it does not give rise to risk and exposure.

if you think about a company that has funds in between making loans and the liquidity rule and chooses to do so in corporate bonds, some of those will be allowed, then the first easiest thing is to get worried about the quality of those bonds which have been described as extraordinarily high quality bonds, you can reduce your exposure by selling bonds. that is a strategy one. strategy two is you can take insurance directly against those bonds. that is insurance on a specific position you have. then you start getting further afield. you can imagine the spectrum of positions of field where you choose to do and index instead of insuring specific bonds. then you do a tranche and then you decide you need in come to raise your insurance.

at that point you have crossed the line in which you have introduced by selling insurance to others. you are in a whole different world of risk introduction. you have these two components. part of the challenge of the regulators is to define this word. when have you crossed the line, do you have an excuse to do hedge funds without trading? where do you see those lines being drawn in this? >> i agree, it is a continuum, and those may be perfect hedges, and there is a continuing to portfolio hedging, to being in the world of prop trading or speculating. we recognize all that just will not be perfect and this is a continuum, and finding that point will be difficult.

that is what the metrics are designed to do, and we have proposed metrics. i don't think there is an expectation all those will make it into the final bill. the goal is to see how behavior changes in time over in a firm, as a way to see if things hedged are moving into a different realm. that is the difficult piece, to find where something is no longer a hedge and how we can to find that, and not in a way that we just opened the door to a lot of other contact. >> would you say it is a red flag -- i will give you examples -- if the hedge is only loosely correlated -- would it be a red flag if you are buying insurance to ensure a larger quantity than you actually are

holding? would it be a red flag if you are in the business of selling insurance? >> it might well be because then you have a hedge transaction that is giving rise to significant exposures that were not there at inception because you have overhedged the position. you have to be able to identify the positions that are being hedged and demonstrate the hedge is in fact risk producing, and i keep going back -- a risk mitigation is an important piece of how we are describing the hedging here, and if you take all those factors together, you can build a pretty strong wall around this contact. >> one of the things that

senator levin and i had said on the floor in our colloquy was you need to identify the specific assets and you need to identify the specific risk that you are hedging, so that gives regulators a sense of what was it all about? if you cannot identify the risk you're hedging, then it is hard to get your hands around whether it was appropriate or not. >> that does not mean it has to be position. it is expensive to hedge and counterproductive to hedge by position. there's something between position by position and complete speculation. >> chairman? >> i said earlier i think this is one of the more challenging task, permit market making, to permit hedging. a question about hedging, hedging has a lower risk.

that is what congress wanted in this provision. they do overlap. it is not a perfect circumstance. it is our challenge amongst regulators to say if it is hedging, a big risk, but we put in a rule that is reasonably correlated. maybe "reasonably" needs more definition. they can mutate when you have a separate desk and they have a separate profit and loss and are motivated to take on positions and swing for the fences. my own experience on wall street is long ago, but i will say that when i saw these, they sometimes work for up to 24 months, and they would take a big loss and shut down, and several years later they would come up again. i'm like the old-fashioned.

i liked it when you could tie the hedge somewhere reasonably to the positions. >> that word "reasonably close" is in the statute, and that is because the word "correlated" by itself suggested that something could be barely correlated and meet the test. it did place challenge other regulators to define it reasonably, but it certainly was in all the conversations meant to identify the specific risk and have something as directly related to insuring against that risk or hedging that risk. senator warner, did you want to

take an additional time? >> we have each had our time. >> one more question? i was interested in being pursued because what is reasonable? in a sense, we are going to have an incident like this, it could be a blessing that it is happening with the strongest financial institution we have, and thank goodness we have higher capital requirements, so there is not a systemic risk or a risk to the institution, at least at this point. i want to get to the point of liquidation at how it relates to derivatives. one of the things -- thank

goodness this case did not result in an institution going down -- but one of the things we all worked very hard together, senator shelby, 85 votes on that, was to make sure that any institution that goes into liquidation, while we maintain the systemic -- neither one of your agencies are run to be involved in that process. the question of how you clear and handle the derivatives that might be involved in that institution's swaps is something that is important. i am curious how you are thinking through that portion of the liquidation process.

>> i think central clearing is important, and there is a central clearing, so a dealer facing the hedge fund is not yet in. that will help a lot. we spent a lot of time with the fdic on title 2 to give them advice and thoughts on it. the most challenging piece is on the swaps that are not cleared. they still leave this tangled web of interconnectedness, and that is why it is critical to get the rules right, that dealer to dealer, that there is margin being collected, not

against the commercial end users -- i have to say that -- but between the financial institutions and particularly between the dealers. fdicu're working with the and the fed on this? >> yes, and i will call them tabletops, where we take a hypothetical -- not a real company -- but we think it through. there is a challenge in one provision in title 2. you remember we worked on that. what uncertainty would be in the market. it seems these weekends everything is challenging before japan or australia open, which is sunday at around 5:00. at there might be this 24-hour stay, and that is an unfair set of challenges. >> i agree with what chairman gensler said. >> i have a few observations.

did both of you agree that you cannot delete risk in a marketplace? >> absolutely. risk is part of the marketplace. these large institutions are how our society manages that. >> you cannot take that out and should not try to. >> if you micromanage what entities are doing, for example jpmorgan -- a huge bank -- obviously going to be hard to micromanage them to begin with, but if they got capital and if there is no risk to the taxpayer -- i'm thinking about what senator toomey said -- i do not know of any financial institution that has been well- capitalized first, secondly, well managed, and well regulated that has gotten in trouble. i do not know of any. if you got one, tell us about it. capital is number one, to make sure that the banks are

adequately capitalized. i guess it is up to you to determine the difference between speculation and investment. it might be hard at times. i probably could recognize it if i saw it, but maybe not, because somebody might be speculating and call it an investment. i do not know how you get around it. you cannot take risk out of the marketplace, and i hope you as regulators will try not to do that. >> i agree, but i would hope -- i think transparency -- the more transparent markets are that it is harder to misunderstand the risk that you have.

the risk gets priced in the marketplace, and it might be painful, but if you are well managed and you say that risk is being priced differently than i thought, i'm just going to have to eat my beans here and mark the position. without that things start to get misunderstood. >> you should not institutes that you regulate operate in the dark hole somewhere. can't do it. thank you. >> thank you. i think we're on the point of wrapping up -- >> mr. chairman, could i just add -- i just feel that a lot of my friends, i agree we can't take risk out. but we can make banks

noncompetitive. the leverage ratios having this look that goes beyond the institution. many of these institutions have literally thousands of subs. that's why the fsok is important. i couldn't agree with you more, you can't take risk out of the marketplace. >> i would add if you think about hedge fund style invest ing, the question whether is it risky? yes, it's risky, but the question is will it be czyzed by taxpayers? and when those risks or those bets go bad whether it's simply going to -- if you will, blow up or meltdown the investments of the investors or whether it's going reverberate a wait.

and that's the theory of the fire wall of banking and hedge funds. it's compatible with that notion that you can't take out the risk. i thank you all for your testimony and for the dialogue and for the members. the derivatives remain an important issue for this committee. we look forward to work with you to ensure that imply mentation of derivative reforms includes important finance systems. >> the committee is adjourned.

>> thank you very much. there we go. thank you. >> up next on c-span, kristin la guard of the international monetarily fund talks about britain's economy, greece and the eurozone and then a group of journalists back checks some of the claims of the 2012 election. secret service director mark sullivan and acting homeland security security general charles edwards will testify tomorrow morning about the firing of nine agents following an incident involving

prostitutes in colombia. the coverage starts at 10:30 a.m. eastern here on c-span and c-span radio. >> the u.s. are a number of countrys that have not ratified the treaty. the treaty would have governed a governing system for use of the ocean for mineral extraction purposes. on c-span 3, secretary of state clinton, defense secretary panetta and general dempsey will testify about it. live corge starts at 10:00 a.m. eastern. kristin lagard said that fiscal policies by britain's government has averted a larger crisis. she talked about the british and european economies including the possibility that greece might leave the

eurozone. >> her remarks came with george osbourne. this is just over half an hour. >> ladies and gentlemen, welcome to the treasury. i am delighted to welcome christine lagarde and her team for their assessment of the united kingdom. the scrutiny of our economy and the world economy is a vital part of the imf's role in supporting global stability. before i hand over the recommendations in detail, let me say the words about at home and in the eurozone. the imf could not be clearer today. britain needs to deal with its debt. and the government's fiscal policy is the appropriate part. sbu -- it is an essential part

of our road to recovery. it enables interest rates to stay low. it means we can use the credibility we have earned it for the government posted balance sheet to support lending businesses, new housing, and more infrastructure. i welcome the imf's continuing support. they agreed decreasing the deficit remains the essential. they made it clear they consider the current pace of consolidation to be appropriate. they have also backed our fiscal plan. some have argued that the events in the eurozone shows that britain should borrow and spend out of its crisis, but i agree with the. christine made about deficit-reduction. we have news that inflation is down. within 1% from england's target, falling from 3.5% to 3%.

it means for the first time since i became chancellor, i have received a letter explaining why inflation is off target. is the first time since 2009 this has happened. this brings welcome relief to families on tight budgets. and the bank of england, unemployment has also fallen this month but it remains too high and we need to do even more to help. the i.m.f. say nounsed that it will use the credibility of its banner sheets to go further to get credit for his housing and infrastructure. we have a flexible exchange rate, an independent monetary policy that allows us to ease the adjustment with supportive monetary policy.

the imf has advice for the bank of england on that day. indebted countries have to deal with high budget deficits without that support. it is clear we are reaching a critical point of the eurozone. they need to stand behind their currency or face up to the prospect of a greece of -- a greece exit. the british government is doing contingency planning for all potential outcomes. is our responsibilities to ensure we prepare for something worse. the imf must also prepare for the consequences if members in europe do not follow its advice. let me ask you to welcome christine lagarde. she will answer your questions afterwards. thank you.

>> good morning. thank you very much. i am particularly pleased to be here in london on the day when the inflation number is announced. i did not comfort that purpose. i came for the conclusion of the imf mission. and just to give you a bit of background in terms of what that is, it takes a team of more than seven members on a two week mission. they spend it those days walking to multiple stake holders reject talking to multiple stakeholders. offering confronting views and debating policies that have been in place and recommendation. it is an animated exercise but is conducted as is always the case with excellent cooperation. as a global hot and as an island with a long trading history, he understand better

the benefits of living in an interconnected world then the united kingdom. the authorities understand the challenges and opportunities of policy choices in a world where what happens in one country affects all others. it is welcome that the u.k. authorities have reinforced credibility at a time intensified global uncertainty. the bank of england has been nimble and easing monetary policy to support growth. just for one second, you have to appreciate that we do not assess the validity of policy but of policies and policy mix, which to us is the reason this policy mix in our view has been good.

i just want to get back to my text. it's been dropped by seven different drafters. i do not want to be to raise seven different drafters. the bank of england has been no. 0 in easing monetary policy. this helps rebalance the economy toward investment and external demand. the recovery in the u.k. has not yet taken hold and uncertainty is abound. the stress in the euro area of facts the u.k. through many channels. growth is too slow and unemployment including youth unemployment is too high. policies to bolster demand for low growth becomes entrenched are needed. i am encouraged prime minister cameron emphasized the need to use the credibility of the balance sheet to help the economy grow. i am often encouraged by the outcome of the g-8 leaders'

summit last week to promote growth and jobs while supporting sound and sustainable fiscal consolidation policies. my position certainly a couple of weeks ago, that growth without austerity is a failed debate. we should recognize policy options, with risk. these risks need to be weighed against the risk of lost years of growth. further monetary easing is required. underlying inflation pressure is weak. easing should be consistent with inflation returning to the 2% target in a reasonable time frame as indicated by the trend if only this morning. the slow pace of this consolidation is it appropriate. it is below the annual average two percentage point in the

previous two years. that is understated or hardly ever mentioned it. it has progress that a rate of 2%, which was a significant exercise. thanks to the decision made in november 2011, that pace of fiscal consolidation has abated at a risk of half a percentage point of gdp, which is the right way to address the current situation. it has embedded the flexibility that actually allows for the slowing of the fiscal consolidation. that is right. the quality of fiscal adjustment can be improved to provide support for growth. this budget neutral ships toward more infrastructure spending and measures to shield the poor.

if the economy turns out to be significantly weaker than forecast, fiscal easing should be considered. the measures would have to focus on supporting growth and encourage employment. a delay in fiscal consolidation in these circumstances would be a good use of the credibility of fiscal policy and institutions in the united kingdom. i should also mention the united kingdom has a financial sector assessment last year. that progress has been made since then to implement the recommendations. some of them were concluding on systemically important financial institutions. i cannot stress enough the importance of robust regulation and supervision for global financial hubs such as the united kingdom whose stability and soundness is a global public good. i would like also in conclusion to express my thanks to the authorities for their contribution of additional lending, to the imf resources to help strengthen the global economic and financial stability in the interest of our members. the very courageous chancellor osbourne has been appreciated in that regard in trying to strengthen the ability of international institutions such as the imf to protect stability. thank you very much to all the

authorities, the treasury, the bank of england, and the financial stability authority for their good spirit in which this work has been concluded. i am sure you will have some pressing questions. for those questions that are highly technical and complex, i have the support of the mission chief sitting next to me. >> i just wanted to have a question about are there other options to boost demand for credit. >> which dropper you talking about? the latest one? >> yes. the bank of england has always been very opposed to doing things like ltros and has said repeatedly they do not think they should do that. given that the bank has been relatively firm in saying they will not do that, how do you expect british authorities -- how do you recommend they thank you very much to all the authorities, the treasury, the bank of england, and the financial stability authority for their good spirit in which this work has been concluded. i am sure you will have some pressing questions. for those questions that are highly technical and complex, i have the support of the mission chief sitting next to me.

>> i just wanted to have a question about are there other options to boost demand for credit. >> which drops are you talking about? the latest one? >> yes. the bank of england has always been very opposed to doing things like ltros and has said repeatedly they do not think they should do that. given that the bank has been relatively firm in saying they will not do that, how do you expect british authorities -- how do you recommend they should actually go ahead with doing this -- meeting its recommendation? >> my understanding from the team -- i will let my team express additional views.

they cannot carry the risk on their own balance sheet. it would be with the bank of england acting as an agent on behalf of the treasury. that is the approach that would be acceptable. clots that is absolutely right. what we are trying to get that over here is that high funding costs are straining the credibility to the economy. any policies that lower the funding costs would be very valuable. the way these are designed should be specific to u.k. circumstances. as the managing director just said and as we say in this draft, the point is to utilize the government's balance sheet. the instruction would be for the bank -- what we are proposing is that if this is pursued, the bank would act as the agent of the government.

the additional point that would note over here is there has been experience with these schemes in the u.k. in the past. it is a matter of designing schemes that are appropriate for the u.k. circumstances. >> clearly one of the biggest risks facing the u.k. is the euro crisis at the moment. the chancellor said in his remarks they need to stand behind their currency or face up to the prospect of the greece exit. would you echo those words? what is your current advice as to what europe needs to do to sort out this crisis? >> i would at first of all

acknowledge the work that has been done by the members of the eurozone. in addition to the governance changes, they have clearly gone beyond by, no. 1, clearly expecting some of the nation's two do very serious technical adjustments, fiscal reforms, consolidation. i am thinking of countries like spain and italy that both of gone into strong programs of their own. they have also decided on the 30th of march to build a more serious fire wall. this is clearly work in progress. it is good. at third, the european central

bank has gone into completely different policies by the way of expanding the collaterals, by cutting the interest rates several times. clearly by going into the long-term refinancing scheme. all of that together is a serious improvement relative to anti crisis. we consider that more needs to be done. rather by way of fiscal liability sharing. there are multiple ways to do that. more needs to be done in relation to supporting growth, particularly by way of structural reforms, certainly not by way of suggest of stimulus because we do not think the fiscal position of the member states can bear that on an aggregate basis. there is still work on the way. we help the monetary zone that has been built for the last 10 years will continue to be strengthened. the political will of the members will be conducive to

that effect. that was not really the point to your question, was it? he would want to know what they would do to consolidate their currency zones. >> good morning. you said if the economy weakens further, the authorities should consider fiscal stimulus. the imf has been saying this for nearly two years. they always said there were risks, and if they materialize to my have to consider a different path. every time you said that, the risks have materialized. since last year the growth forecast for this year has been

more than halved. how much worse doesn't have to get for you to feel enough downside risk has materialized? >> every year since we said that, measures have been taken. -- ever since we said that measures have been taken. it would be shortsighted to exclusively look at the fiscal policy. i did not suggesting that you are at all. we look at the policy mix. what has been done in the bank of england to use the tools available to actually facilitate and ease financing to provide liquidity are the measures that are to be taken. they were taken in due course. the decision made by the u.k. government and the november 2 not add to the fiscal consolidation measures despite the fact the difficulty had been reassessed was the right decision.

it has produced half a percentage point of fiscal consolidation as opposed to the two percentage points that had been harvested in the two previous years. that pace of decelerated -- that was the appropriate measure. we are saying there are more tools that can be used from a monetary policy. of year and we have discussed the extensively with the bank of england. we believe they have quantitative easing measures that could be resumed. we also believe that there is room in terms of interest rates that could be used as well prior to considering the improved fiscal consolidation

at budget neutral basis. in addition to the measures that were common, which are really to use the government budget and the extremely favorable financing terms under which are involved today to try to support the economy by facilitating the financing of households in order to stimulate the economy. the gain resulted from the fiscal consolidation that was decided over two years ago has been the such a result, the credibility of the u.k. government and its ability to borrow at extremely favorable rates. sometimes you feel like you could look back and wonder what if. what i think back to may 2010 when the deficit was at 11%. i tried to imagine what the situation would be like today,

if no such fiscal consolidation program had been decided, i shiver. >> but you have done a lot of analysis in the last two years in europe as well on the impact of fiscal consolidation. how have the views change compared to two years ago because of what happened? as that had a larger impact on growth and what you would have expected two years ago? >> as i said, there is no question fiscal consolidation has effected -- well the fact growth as a general principle. there is no question that fiscal consolidation has been adopted across europe, that has improved in due course. that is the case in the united kingdom. what we have said -- you are right.

we have conducted a lot of research and analysis. we have said the consolidation is not a matter that can be decided across the board in a one size fits all principle. it has to be tailored to the specifics of each and every economy. what we see at the moment is that it as broadly appropriate under the circumstances and in the current outlook. there is no question that some countries have to take from loaded measures. >> kristin lagard talking about the eurozone. you watch this briefing at our website, span.org/video

library. >> on washington journal, thomas man and norm ornstein discuss their books "it's even worse than it looks." and chris chocola talking about club for both. after that timothy ferris on his resent stories on the sun. your e-mails, phone calls and tweets. washington journal live today at 7:00 a.m. eastern on c-span. >> right. i want you to take a look around you and thin not where they have been but where are

they going. the guy in front of him can win . the guy sitting here right to be a future of nobel laureate, ok maybe not the one to your right but certainly the one on your left. >> business leaders share their thoughts to the graduating class of 2012. >> next a forum on fact checking the 2012 mt.tial campaigns. -- presidential campaigns.

>> good morning and welcome. my name is kathleen hall jamison. we'd like to welcome you to our morning ma tell from fact checking. this is a policy that they would fact check that by the generous contributions of doan donors and our first channel is director brook jackson. brook? >> thank you kathleen. our panel is going to through some of the common deceptions that we've heard from and about, the two presidential candidates. i'll introduce you in a second.

then we are going to discuss just what changes have been brought about by our collective fact checking. our predictions collectively for the reds have campaigned 2012. >> my panelists from my immediate left, phil adeer and the inventor of the truth o meter.

. .

i hope they're going to receive both and as a result we are creating a positive structure for them. i think that ratings are expressing part of that appreciation. we would also like to encourage you to go to the website and, "patterns of deception because we think this is a way to determine whether you need to go to the web sites if you are not already there in order to see whether or not the facts involved in the issues you care about might be distorted.

finally, i would like to thank the panelists and the moderator's and our funders, the annenberg foundation, and i would like to invite all of you to lunch. [applause] >> they told lawmakers yesterday that the agency is investigating j.p. morgan chase following the $2 billion in trading losses. that hearing is next on c-span serious and don "washington

journal," we will talk about the book "is even worse than that looks." each morning at 7:00 eastern. there will testify about the firing of nine agents following an incident following -- involving prostitutes. the u.s. is one of a number of countries than has signed but not yet ratified a treaty for the use of the ocean for military transportation and mineral extraction. on c-span 3, secretary of state clinton, leon panetta, and dempsey will testify.

cover stars at 10:00 a.m. eastern. -- coverage starts at 10:00 a.m. eastern. >> gary gensler and mary schapiro questions on jpmorgan chase's recent losses. they testified about derivatives and financial regulations. the chairman is tim johnson of south dakota. this is two hours. >> i will call this hearing to

order. today we will review the progress being made to reduce systemic risk and improve oversight in the derivatives market. before we get to the main subject, i want to make a few comments about the recent news made by jpmorgan chase. the massive trading losses is a reminder of the financial crisis of 2008. since the conference call, our staff and members have held briefings with the company itself. following this briefing, i announced that i intend to call jpmorgan's ceo to testify before the committee. all in for him to testify, i expect him to inform the committee of the details on what was purported to be a very

complex trade. our june 6 supervision a hearing, said there on their way to having a more complete understanding of the jpmorgan matter that will help us better oversee the implementation of wall street reform. this has been a wake-up call for many in the needed to fully funded the agencies for overseeing the trade that appeared to be at the core of the strategy. it is my hope that all of my colleagues to express such alarm about this matter will now join democrats in full funding to address this very issue they

seem so concerned about. this loss has called many to renew their interest in wall street reform. as chairman, i have never taken my eye off the ball. that is why we are here today continuing our oversight responsibilities. much of the reaction to recent events are focused on other provisions of wall street reform. what has gotten the most attention is the impact reform that will reduce the likelihood that banks would want to engage

in swap transactions. higher margins increased obligations and anti- manipulation authorities included in the wall street reform while improving the integrity of the swap trading between large financial firms. chairman schapiro and gensler, i applaud you and your staff for implementing these reforms and i look forward to hearing from you today. i urge your agencies to take a single unified approach in cross border transactions and to integrate this approach into all of your swap rules.

difference between your two sets of rules should approved compliance costs. it will be more challenging if we connected these efforts by our agencies here at home. lastly, i would like to apologize in advance to my colleagues. i will need to excuse myself for a markup in the appropriations committee. the senator has agreed to chair this in my absence. the reserved time for questions and opening statements will be limited to the chair and the ranking member. i would like to remind my colleagues that the market will be open for the next seven days

for other comments. i now turn to senator shelby for his opening remarks. >> since the passage of the dodd-frank act, it's proponents have claimed they will but if it from the new law. we now know that both of the claims are false. since last year, gary gensler oversaw the largest consumer failure in the history. customers had $1.6 billion of funds improperly taken from their accounts. the first and most basic responsibility is to ensure that customer funds are not misappropriated. despite all the new authorities conferred a on thecgfg, the

cftc was unable to fulfil this primary responsibility. the cftc's failures are troubling because the funds went missing at a time that it was well known that they were under severe stress and the rest of misappropriation was very high. even more embarrassing is the fact that there numerous employees when it went missing. although i am pleased to see they are making process, he owes the public a full accounting of how they failed to protect as customer assets in the first place. chairman gensler refuses to excuse himself from mf global. the public deserves more from

their financial regulators. we need regulators willing to explain their actions. if there were failures, the responsible parties need to be held accountable for their actions. they had impeded congress's ability to examine every facet of the figure. i hope he will be more forthcoming about his involvement so that progress can begin to understand what role he played and how congress should respond. they have jointly created widespread uncertainty about the regulation of derivatives.

according to a recent report, regulators have met only one third of the dodd frank deadlines and while there's no question that the rule writing process mandated by frank makes it very difficult to meet some of these deadlines the regulators share culpability here. although they have promoted new rules for derivitives they have still not proposed rules that clarify the definition of a swap. let me repeat that. almost two years after the passage. giving the cftc and fcc jurisdiction on the swap markets they've not still agreed on a definition of a swap yet they finalize rules based on swap dealers and major swap participants. if market participants don't know which activities will fall

under swap definition how can they be expected to know whether these activities are subject to the patchwork of registration. record keeping and clearing and trading rules and if market participants do not know if their activities will cause them to be classified as a swap dealer, how can they be expected to know when to submit comments. this is one example of how dodd frank has created uncertainty in markets at the american market continues to struggle and the fall out from the on-going european crisis. the last thing i believe we need are self-inflicted wounds. this include those inflicted by congress. regulators and most recently poorly conceived trading and hedging activities in one of our largest banks. today's hearing presents here

in the banking committee an opportunity to discuss all of these and how they can be avoided in the future. i thank you for calling this hearing. >> thank you senator shelby. i would like to introduce our witnesses of whom are neither strangers to this committee. the head of the u.s. exchange commission and chairman and head of the commodity futures trading commission. we appreciate both of you for taking timeout of your schedules for being with us today. please begin your testimony. >> ranking member shelby and members of the committee. i appreciate the opportunity to testify regarding on-going implementation of title seven of the dodd frank act. it creates a new regime and

directs to write a number of rules necessary to implement. of course title 7 is just one of the many areas ranging from credit rate together private fund and municipal advisor to disclosures where the fcc is charged with writing rules. the f.c.c. has proposed or adopted rules for over 3/4 of over 90 provisions in the act that mandate f.c.c. rule making. additionally it's finalized 14 of the more than 20 reports or studies that it directs us to complete and commission has proposed almost all the rules requireed by title seven. we're continuing to work diligently to have all the provisions and other rules we're charged and with the other domestic and foreign regulators. under the act. regulatory authority over swaps is divided. the law assigned the f.c.c. the

authority to regulate security based swaps while the cftc primary authority is over the bulk of the derivative market. to rebuts transparency and similarly the and security based swaps to reduce counter party risk. they're also designed to enhance investor swap transactions and mitigating conflicts of interest. by promoting efficiency and stability this framework is intended to fast another more stable and conservative competitive market in the staffs of the cf tc and other financial regulators in particular commission staff is coordinated extensively with staff in development of the definition rules including joint rules for the defining key product terms and rules further

defining categories of market participants that we adopted last month. although the timing and the sequences of the f.c.c. rules making may vary they're the subject of interagency discussions and the objective of consistent and comparable requirements will continue to guide our efforts the act specifically requires that the f.c.c., the cftc and regulators consult with foreign regulatory authorities in international standards. the commission is actively working with regulators to a the regulation of derivatives encouraging development of rules and standards complimentary to our own. the commission expects to complete the last of the core elements of our proposed phase. in particular rules related to the financial responsibility of

swap dealers and major security based swap participants. it's finalizing how the substantive requirements under title seven will be put into effect. this policy statement are establishing workable sequence and time leadership for the implementation of these rules as a practical matter certain rules will go into effect before others can be implementing and reasonable but not excessive time to apply with the new rules. this will let market know the expectations regarding ordering of the compliance date for various rules. relevant and national implementation will be addressed in a single proposal. your single letter asked i address recent tragic losses by j.p. morgan and chase. our best estimate is that it took place in the bang, london and perhaps other affiliates.

although the commission does not discuss investigations public i can say in circumstances of this nature where the activity does not appear to have occured in our regulated entity the focus be on the appropriateness of entities financial reporting and other disclosures in conclusion as we implement title seven we looking forward to continuing to work with congress, our fellow regulators home and a broad and members of the public. thank you for the progress of the implementation of title seven and i'll be happy to answer any questions. >> thank you, chairman. please begin your testimony.

>> i am going to speak to these three topics of your letter. first, where's the cftc on swaps market reform and over seeing markets for. chase chief investment office and third international progress on swaps reform and cross border applications. i welcome ranking member shelby's questions and looking forward to chatting that with public and private as i would. a small agency is tasks with overseeing the futures markets and now with passage of frank a market nearly eight times larger the swaps market. given the new responsibilities we're significantly under- funded. a market oversight relies on market participants with laws and related rules and self regulatory rules and in addition we do rely on implementing rules. in that the cftc has redone 33 to date.

we have just under 20 to go. what do they do? bring transparency to the market place and lower risk on central clearing of standardized swaps and lower risk by regulating dealers. we're on track to finish the reforms this year but it's still very much standing up and we're also giving market time to phase in implementation to low tear cost and burdens on this very significant transition. to increase we have real time report together the public and regulators this summer. on clearing we finalize risk management and will seek public comment on which contracts would be under clearing mandate to. promote market integrity we've had antimanipulation rules and we're looking soon to

finalize the end user exception. to lower risk of the swap dealers post to the economy at large we've completed rules requiring robust sales and joint rule with the f.c.c. on the further definition of swap dealer and security based swap dealer. all this is tending to finalizeing the further definition of swap and security based swap. it is essential that the two commission's move forward to finalize this rule and i'm glad to say both commission's now have a draft of this rule that's been worked out through staff and hopefully we'll finalize this in the near term. we've made significant progress working with foreign regulators to bring a consistent approach and though not identical europe, japan and canada now all have made real progress

legislatively and rule writing to bring similar reform. we're working on a consistent approach to global margin for uncleared swaps. it's important for a lot of reasons but let me no one reason. the cftc proposed a rule that did not post more and we're at the same globally. wanted to make sure people know that in the end. the commission's also working on a balance approach to cross border applications of swaps reform. i think congress was guided buy aig with the london affiliate and actually along don branch. leyman bros. city group and bersterns and even transactions that might be booked uh shore but nonetheless have a direct and significant effect on u.s. congress and activities that in essence a stark reminder of the last two weeks when j.p. morgan trading losses were overseas from trades that lost multibillion

dollars and the credit default swaps. the cftc division of enforcement has open investigation related to credit derivative products credited by j.p. morgan's chief investment office and although i'm unable to give you specific information i'll touch on the commissionest role in overseeing the markets. we have oversight and clear antifraud and antimanipulation fraud regarding trade of de fraud and the clearing houses that we see clearing these products. starting this summer there will be real time report together the public. later this year we envision the dealers to begin to register and trading will commence on swap execution facilities so

we're in the midst of implementation that will take still some time in conclusion we've made great progress to the swaps market lowering risk. it's critical we complete these for the protection of the public. >> thank you for your testimony. as we ask questions i'll ask the clock have five minutes for each member. what role did you and your agencies have in monitoring this swap trades at issue in the j.p. morgan matter? and were any concerns raised about the trades at either agency. what changes will the derivatives reforms bring to the regulation of these types of trades and what are the potential in filtrations for the role. chairman, please start? >> as i mentioned, and more in depth in my written remarks

we're in the midst of standing up regime that will still take some time but the credit to it fault swap parts of products reported in the j.p. morgan was trading already come under antifraud and antimanipulation regime. three clear credit default swap entity is. -- indices. later this year we anticipate seeking public comment on having a clearing mandate so that more of these trades will come into the clearing house. currently it's just dealers to dealers. later this year we'll have regime that actually i think dealers will start to register, but this bank was not yet as a swap dealer because we don't yet have complete rules to make that a true being and maybe in the end o 2013 you'll start to see the commencement of trade and transparent markets.

we're not trying to do this against a clock but trying to get it balanced. congress gave us one year to get the job done and we're pushing on two years. i do think the job needs to get done but take ten 30,000 comments we've received. you ask when it came to our attention? with matters like this i don't want to get in specifics of an investigation but as press reports have shown these are credit to fault swap under our jurisdiction and the clearing houses we monitor on a real time daily basis for the completeness of the margin and the clearing houses. >> thank you. to the best of our understanding none of the trance saxes were held in or executed in the u.s. broker deal. the activity took place in the london branch of the london bank and affiliate investment bank unit so the f.c.c. did not have any direct oversight or knowledge of the transactions.

i would reiterate what chairman said, is the ruled had been in place these positions likely would have all been cleared. some substantial number were but not only all of them were cleared but they would have likely been reported to a swap state repository and detailed transparency to regulators and public. under the f.c.c.'s proposed rules for reporting we would have known them 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 new rules for enhanced

supervision. think there are a number of pieces that would be in place once all of the proposald to implement are completed. >> chairman, can you commit to us the f.c.c. will implement the last of your proposed to rules in the coming months and that you will prioritize within the f.c.c. the importance of enacting the final rules and a timely manners in >> absolutely mr. chairman we have the last piece of proposing rules and financial responsibility rules for swap dealers and major swap market participants. i hope we'll issue that. two there key pieces from f.c.c.'s perspective. one as i spoke about in my testimony the implementation plan we'll lay out in a policy statement our views on how the rules should be implemented and 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 to cross boarder board activity or entities and we want to pro o post that release before we adopt final rules beyond the definitional rules. >> senator shelby? >> thank you mr. chairman. a lot of people have been basically saying that chairman, that the sec and in the dark that you didn't know what was going on atjp more gavenlt we don't know that yet, but when did you first learn about these trades? >> i would say that the trades that came to many of our attentions personal attention with 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 rest and that the clearing house is fully collecting margin to protect the risk of the clearing houses. j.p., we don't regulate morgan chase as a swap does he recall yet but we do regulate the clearing houses and then have antifraud and antimanipulation. >> did you know what was going on there in such a large position that j.p. morgan has taken here? >> well, again. >> were you in the dark? or did you know what was going on? >> it's in transition to speak about this. our oversight of the clearing houses give us a lot of win goes the clears house that have 27 members and the margin collected there.

that's not the full j.p. morgan picture because they have a lot of swaps not cleared. that would have been a principal regulatory in terms of the bank we don't have that. >> you didn't know what was going on. or the problem with the trade until you read the press reports like us? >> that's what i've said, yes, sir. >> chairman shapiro, where was the f.c.c.? did they know what was going on and if not, why not? >> they became aware of the activity in press reports back in april when the london well trading was first reported on. just to remind everyone. this activity did not take place in a broker dealer and we don't have oversight responsibility over the broad based cdx index products that were the subject of much of the trading although i think there's still much to learn here about the full

>> what was your responsibility as you see it as chairman of the f.c.c. looking to try and find out what happened at jp morgan chase? what's your responsibility? >> our focus 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? >> 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? >> that's what we're investigating right now. to what were their earning release statements and theirq 1 financial reports accurate and truthful. >> but you're in the investigation of that now >> yes, sir. >> what do they know inside? when did they know it and what

should they have divulged? correct? >> yes and as congress gave the similar authority to the sec we didn't form early have a strong and antifraud and antimanipulation authority that included deceptive practices that's part of this new authority that we have so we have currently oversighted the clearing houses and then of course this ongoing investigation that i don't want to go into the particulars because it's really just best not to compromise the investigation itself but it's in that realm. >> chairman of the fed or cftc. you basically are telling us you didn't know there was a problem there until you read the press reports? >> i think that is accurate. we're standing up regime. we don't have any regulatory

oversight of j.p. morgan chase the bank. we will when they register as a swap dealer but they're not currently registered as that. we have oversight of futures merchant. >> there's nothing, no man's land. there's things that have not crystallized in a regulatory fashion yet over such a big bank? >> the bank is over seen by banning regulators but under frank the market -- we will stand up and over see swap dealing activity in a bank or an affiliate of the bank or securities based swap activity but currently the american public is not protected in that way. >> chairman, were any of the trades conducted through jp morgan's future commisioner? chant? >> not that i'm aware of. it may be upon further review but today the knowledge is no. >> thank you. senator menendez. >> at the last hearing on, m f

global i asked the trustees who at the company was responsible for the wrong doing and they informed me their investigation was beginning to just determine that. i want to ask you the same question. can you shed 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 there? >> i think the agencies collectively including the criminal authorities are working 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 is responsible at this point for that? >> no. as i said, our focus is very much because we do not regulate

the london brand of j.p. morgan branch that's an o.o.c. fed is open company regulator. our focus is on the quality of risk disclosure and specific disclosures as a public company. when they talk about potential and all the risk as a business when they talk about potential losses. under their model. we are very focused to accuracy and timeliness of that disclosure. >> i just say that we're aware that it's primarily in the bank that much of this emanated from the london side 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 f.c.c. authority is simply civil not criminal. >> are you working with entities

conducting criminal investigations? i believe the fbi has announced they have opened one and we will all work closely together even though. >> into which of the two i'm referring to. >> i think actually with respect to both. >> okay. so in essence, it's the agencies that are conducting civil reviews, i assume and to text tenth that there are criminal reviews being conducted they're being conducted by law enforcement entities is that right? so it's not senate tar bank committee conducting those? >> i wouldn't think to tell them what to do or not. >> but at this is points a far as i know we're not. do you hope to interpret the rule in in a way that what took place at j.p. morgan would not have taken place without real consequences?

>> i think that we've obviously been thinking a lot about that and the volker rule is foremost of where we are in the comment letters but also because of this activity and it strikes me that the statute is pretty clear in order to rely on the risk mitigating hedging exemption to the volker rule there has to be pretty strong criteria that needs to be met. whether or not the jp morgan trades meets those standards or not i don't think we have a view yet. they have to be correlated to the risk. they cannot give rise to significant new exposures but have to be subject to continue management. the compensation of the persons doing the trading cannot partake to outside risk or unnecessary risk and they have to import or importantly document the trades when the

hedge is being done at a desk that's different than the position that's being hedged was done at. i think there's strong language there and what we need to do is take what happened to jp and view it and see how that helps to inform it going forward. >> i think as one of those that supports the wall street the agencies will look at this broadly because if j.p. morgan lost 2 billion or slightly more through the trades what's to stop them from losing ten billion or even worse to stop another less capitalized bank from taking losses so large that

could bring it down? is that the whole effort that we try to move here in the senate, which is to have the type of reform does not create the systemic risk that places everyone in america responsible for the decisions of large entities such as this and i hope that's thaw regulators at the end today understand that was the mission that the all of us support at wall street reform want to see. >> thank you, chairman. >> senator? >> thank you and thank both of you for your testimony. when an event like one that's just occurred happens in the middle of a rulemaking process. that effects things. does it not? meaning that you have an example. a real live example and we have had this issue and realize it's a blip on the radar but it does effect the way rules end up being done. >> i believe it does in a more disastrous way.

this is not that. >> as american people watch they wonder why we're having hearings and the point is that there's a lot happening at the regulator level and event like this ends up affecting things and it effects the rules and end up being created and i guess i have this fear i think much of what we did was to you guys and the fact that you didn't do that. we did that but the fact that it's taking us two years to define what a swap is, is pretty incredible and it's because we never defined it offs to -- ourselves 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 the issues. what you may do. we never debated that institutions should be. we layered a lot on top. we have these highly complex organizations where even the

ceo itself realizes he didn't know what happened in this london operation and i fear that you're under pressure that a lot of calls are being made that administration is concerned that american people will wake up and look at the last three years as a bad dream. maybe the healthcare bill becomes unconstitutional. address bill doesn't maybe real time issues and that what you're going to do, is end up causing the volker rule to be something that it was never intended to be and would like for you to respond to that. in the process possibly making these highly complex organizations even morris i can than they already are. just a couple of comments in that regard. >> i think our job that you delegated or asked us to do is

-- 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 the american public gets the benefit of transparency and lower risk because firms will fail in the future as they have in the past and the critical thing is they have a freedom to file and 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. this circumstance i think is just a reminder in one area. i look at it as cross border application. whether lehman bros. or longterm capitol management who you might recall was a hedge fund that was set up in the kamans. just a reminder to make sure we get that part right. the london risk can come back and hurt the good folks.

>> let me is there a pressure though, to define what's occurred here in such a way that you may end up in the shortterm making a piece of legislation look good. but in the process. causes a stir. a highly complex institution like this to be in a position where they're not appropriately hedging the risk. >> we're most definitely public actors as you are as a member of this great body, the senate and we're influenced by we've had many meetings and this is part of the topic to dialogue but i think we have to just as we do get it balance and right and not if your concern is we can have the u.s. taxpayer come stand on them.

>> my time is running out and by previous history i'll be cut off immediately. i do want to ask when you're making rules that you're making we do it here to the benefit of costbenefit analysis. i know you know courts now are challenging rules and regulations because regulators are not doing that and secondly to ensure that we don't create another systemic risk by shifting off to these clearing houses, systemic risk that otherwise was held in other place so is think i thank you for what you do and looking forward to the next hearing with banking regulators suppose to oversee these activities. thank you. >> thank you. and thank you all for your

testimony. i wanted to start with returning to the basic premises of the volker rule creating a fire wall in the loan making institutions and hedge fund style investing and in the effort to create that fire wall, one of the issues was when banks were holding funds in between making o loans how would they utilize those funds so they had liquidity but it was relatively safe so it's clearly not in the world of the basic statute for a notion of investing in government bonds as the safe place to put your money. the draft regulation had liquidity management proposal and it's not if we look at j.p.

morgan they have 331 billion in fund that's were a waiting, 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 incorporate bonds. that started this sequence of event that is the led to the 23 billion or greater loss and then they said, we have these corporate bonds and better protect against them dropping in value and they bought insurance and said well we have to pay for that so we'll sell it another form to create revenues to pray for that. and when the bets went bad they had to pay off that hasn't been focused on much. what's the appropriate place to put your funds in between making loans so that you're

clearly in the deposit taking lone making business and not in the hedge fund business? >> i think that is a great question and the rational behind the liquidity management exclusion in the rules was to make sure that banking entities would have sufficient readily marketable assets to meet the shortterm liquidity needs and that's all critical to the safe and sound operation of a banking entity and there are requirements around that, it has to be a legitimate plan set out in the rule. the question you raised really requires us to go back and look at that and see if we carried that to his logical extreme. maybe we need to tighten this up and look at it more closely. that's what i think in response to the senator's question this

is very instructive. it would be wrong for us not to take this reallife action example of the application of the cross border, provisions or the volker rule itself to use this example and to see what the impact would be of all the things we propose to do. >> if you take the provision of the funds making new loans if you will can be invested in a huge variety of things and it's a gateway and has two impacts. inverts funds that were intended to be lent out the door reducing credit for businesses and families and second it introduces a lot of risk and complexity. chairman? >> well, as a derivatives and swaps regulator we're mostly focused on the implementation of volker rule with commisioner? chants and i don't

have a many views of chairman and the management piece but if i can pick up on the second that was implied in there was we received a letter from jp morgan. all of us received on our side in february specifically saying that they thought we had to loosen up or widen out the hedging exception. we're entrusted by congress to figure out how to prohibit it so taxpayers don't stand behind the institutions but prevent market making important to markets and hedging which helps lower risks of the institutions it's that challenge and it's not easy by the way but you were clear. it has to be tied specifically to aggregate things and congress is clear on that and it's instructive it was february 13th. j.p. morgan sent in like a 65 page letter and within that they said you have to leans up

the portfolio hedging and this has to be looked at in the context of the february letter as well. >> okay. great. i'm out of time so we're going to return to senator. >> thank you for being here. madame chair, i want to flo up on a few things you said that f.c.c. did not regulate the london branch that actually was something over on the o.o.c. side. and i'm trying to maybe take the next step here with my question. could this risk management that was being done by j.p. morgan have been done in such a way that it would be under your jurisdiction or are you just

saying this doesn't fall within the purview of the powers given to me? >> if the trade where is done in an f.c.c. regulated entity. or ultimately when the rules are finalized security based swap dealer then it would be under the jurisdiction of the sec >> okay. which of course raises another question. if i were running j.p. morgan. couldn't i just set this up in a way to avoid you? issuehat's an important that we're all wrestling within the context of the cross border release and how we'll apply our rules to activities that might not take place in the u.s. entity but might face a u.s. customer or take place in an affiliate of a u.s. entity or a branch overseas and those are the issues we'll lay out in the

cross border release. i think generally a foreign entity with a foreign customer we with that can feel our title seven would not apply. but the foreign entity that's regulated registered with us with the doing business with a foreign customer would be subject to our rules. including a branch of it operating in a different country or title seven. we want to lay it out. >> one of the concerns about dodd track and this area as you know it's been my concern. the more you crank it down the more the regulations become more and morethis way the greater the people are to hire smart lawyers and smart accountants and at the end of

the day avoid you. >> that's why international efforts are engaged and they're critical here. painstakingly time consuming as we it is on a bilateral and multi a lateral basis as we sit through issues like pre trade and post trade transparency. clearing mandate. the trading exchange trading mandate and work through each one of these issues to try to get the regulatory regime as comparable as possible so there isn't an opportunity for people to engage and just do their business in the least regulated market. if it faces u.s. customers and that is potential to impact the u.s. financial system we have to very seriously consider making that part of our mandate. >> mr. chairman i want your comments on this. before you comment, when you say you know and i have no

doubt your work can harden the international arena and you want everyone to be as harmonized as they can be. i've worked there in the position much like yours and you know, we would work days, weeks. months. years with the wto process with 50 countries trying to get people on the same page. , have their own agenda and interest. some said they had something different than we were proposing they do and before i take all the time go ahead. mr. chairman because i could go on and on. >> senator, you're right on both points we will ultimately have differences. we're work well together but there's different political systems and agendas. there will be differences and two, i think you're correct

modern finance large complex financial institutions will rationally look to see if they can find the lowest tax regime and a counting regime that favors them or regulatory regime that they can put customer money at risk and less capitol and rationally the large firms will do all of this. i did it with a cofinance officer for a large firm. we would set up 4-6 legal entities in every jurisdiction and longterm capitol management was in the kaman islands. and aig needed a bang license so they went to france and put a branch in london and the gentlemen that ran it was running it out of london and all that risk came back here.

we have to be careful as chairman said, to say yes, there are costs on financial institutions and yes there will be differences overseas but the bigger cost is letting the american taxpayer be at risk so we're trying to cast this appropriately with direct and significant effect on u.s. commerce or activities so that those transactions be in. if i was on the other side of the table representing them i would advocate something different than i am in this job right now, so it's an interesting challenge and we're not going to be as good as we hope to be. there will be something get by us in 3-6 years they say you figured out something in the islands or something. >> mr. chairman. thank you. senator reed. >> you've already indicated that you don't have direct jurisdiction over the j.p. morgan entity but in this

collaborative rule making you're trying to define hedges in a way that covers the legitimate operations of financial institutions minimizing their risk without allowing speculation. there is this tension it seems. the tension between risk management and profit making. i know you've suggested so the criteria. you have anything else to in terms of the dilemma of defining a hedge so it's protecting investments of the bank and clients but not opening it up to speculation? >> i think that is the hard challenge the congress has given us. i would say that it is true with the market making extension as well. we believe deeply that businesses have to be able to engage in both activities such ar