in reality, this is something that remains yet to be done. >> i was just going to add, we're getting increased transparency also among the players, so we will be able to monitor. in fact, the fed is interested in monitoring not only dealer-specific activity and investors, but then collectively, the market. we're getting better and better information for that. >> as we get better information, i assume that the mean repo plays such a large role is it's the cheapest way to borrow, and you want to borrow at the cheapest cost. at some point, how much of kind of the source of credit can that be before it becomes a huge systemic risk to institutions? >> i would say that that's another aspect that all of us are looking at, which is, should dealers have limits on

the amount that they can actually extend during the day? that's another thing we're working in concert with the industry, as well as with the fed, to develop plans for that. >> in terms of the limits on the dealers or actually the limits on the amount of funds that a particular institution can raise through repo transactions? >> it's a bit of both, because you would naleds the name and what they could withstand, and, of course, that changes as the market changes. so we're building tools to do that. >> other insights on that? >> yes, we would see this, again, getting back to this liability, this topic of liability management, to the extend that less liquid assets are funded for short periods that they present risk, to the extent those are funded for longer periods of time, we see several works. first, investor due diligence has gone up considerably. the overklattization -- the overcollateralization risks are

higher. the books are maturing less quickly. so as dealers are funding for longer periods of time, because the reduction of intraday credit is taking place, it does require the books are term and had staggered with the focus on less liquid assets. that provides time that these adjustments can take place, not in a short period of time, but over periods of time, that move to three, six, nine, 12 months as opposed to seven days. i think that's a very big change, and i think in discussions about the liquidity coverage ratio, the reduction of intraday critics tension will force those issues. and again, the benefit that we see to investors is at that point the collateral becomes more stable, the ability to value and to make choices and to do due diligence that mr. meier has laid out becomes a much easier task over time. >> let me ask you a little bit of a different track question, and that's because your bank has been involved in the arrangements made on the spot markets, supply crude to

certain refineries and buy refined products. and that struck me as some sort of systemic risk given the volatility that can occur in natural resource markets. does that play at all in terms of the financing through repo? >> it's not an active asset in the repo world. >> ok. thank you. >> thank you very much. one of the points that mr. eichner made in his prepared testimony, it is still discretionary with the bank to extend credit on intraday arrangements, is that correct? >> yes, and i think at this point we've gone through several work streams with our clearing bank to begin to reduce the critics tent, particularly with a focus on less liquid assets. i think there's a major work stream underway at b.n.y. mellon. we can only speak from our perspective on this, but there are pretty clear deadlines in

terms of what that extension will be, which will certainly move to a very direct asset-based model very shortly. >> but the clearing bank for reasons, any reason, hopefully a prudent reason, could essentially say we're not extending credit to the broker dealer, which would force you, force a broker dealer like morgan to somehow -- how would you deal with that? >> reducing the amount of intraday critics tension certainly -- again, as we mentioned, there's no operational solution that will eliminate that. ultimately there's a few ways to pay for that. if the books are funded too short, you have to post up liquidity, so the extent the bank won't extend, it the dealer would replace that, or to reduce the activity that matures. again, getting back to this terming and staggering and reducing the amount that comes due on any given day, particularly with a focus on less liquid assets. so terming out the book, there's a cost to that, of course, because you're paying

for a longer duration in liability, and/or posting cash liquidity during the period of that unwind between then, and i think that's how it would be replaced, and we think that by taking the actions that we've laid out, that can be reduced very dramatically as well. >> we're still in a position for the cascade effect that the senator referred to, if the banks were their own prudent reasons to decide not to extend the credit, the dealer is now forced to take some -- basically come up with a cash, if they don't have the cash, they're in a very awkward position, and that leads to a downward spiral with respect to the whole system. >> yeah. >> potential, but less so today. >> we think it's been somewhat mitigated, but it's a point that that actually occurs. the bank, as we see it with a lot of the confirmation and the transparency around the collateral and the term will have a much clearer view of that, and we'll have lots more early-morning signals well in advance of an event.

>> ms. peetz, with respect to this issue, morgan has taken these steps. do you have the contractual authority to require every one of your broker dealers to sort of step up to what you think is the appropriate standard in terms of the way they operate, the way -- the tenor of their arrangements, all these different aspects? >> yes, how we facilitate that is through different agreements. the near-term activity that we're pushing on at the moment is prefunding of collateral, and so there is a separate agreement that each of the broker dealers will now sign with us to acknowledge that they understand how that's changed. and so, as this kind of continues to change, we will amend those agreements giving us that power. >> you represent the investor side, basically the people

putting the cash up, and there has been a report that there's a higher amount of structured financed being placed on these repo transactions, which is not -- let me assume -- not as liquid as some of the other forms of paper that you have. particularly in the days of mutual funds, with the new rules, the rule about what they can hold and can't hold, is there a potential problem here where they get the collateral back, but it's collateral that they cannot hold or they have to dispose of immediately, so it basically, we have to give it away almost, is that a dilemma that you faced? >> i think it's a real risk, senator. i also read the report yesterday, and i was disturbed, and i mentioned it as well, that there still is a lack of, i'd say, proper diligence on the part of investors really to really look at the types of collateral, the suitability. so, for example narcotics money market fund, our position is

that the traditional collateral, treasuries, agencies, mortgage backed securities are appropriate and suitable forms of collateral. we do not go down in credit quality, don't take credit spreads, bonds, etc., into the money funds. and i do think -- i was actually encouraged. we had a meeting last week with someone from the federal reserve bank of new york and the s.e.c., asking all the right questions about, you know, our activities as an investor, do we have the full plans in place, and what our thoughts are around suitability of collateral, particularly from money market funds. those questions were asked by the s.e.c. i think the right questions are being asked. what i would like to see is the federal reserve start to audit the full plans and actually make sure that people have the thoughtful process in terms behalf they're acceptable as collateral and are they actually looking at it. we can rely on banks to do that. we don't feel it's appropriate, and we are very thoughtful in terms of the process we go through, and we determine what

are acceptable forms of collateral, even down to specific levels with various counterparties. >> but there still exists the possibility that either wittingly or unwittingly a mutual fund could have the collateral in that transaction that the dealer put up as something that would be very difficult for them to liquidate if that became their only mechanism to pay back. >> that is a real risk, senator, yes. >> and let me ask the final question. there's an alternate, at least one other alternate mode to this market, and that is to designate, rather than having clearing banks, to have what would be known as a financial market utility. briefly, could you all comment upon whether that's looked at, the efficacy of that, etc.? very briefly. >> sure. i guess i would start right where mr. meier left off in

saying that we remain very concerned about this collateral liquidation problem that you're discussing. obviously it is the largest concern with respect to less liquid collateral, but it is a concern with even morecollatera. so i think we feel that even once the credit issue has been addressed by reaching the target as others have described, there is more work to be done around collateral liquidation. there are a number of models that might work. we think you can be done in the context of a bank system although there are challenges because collateral liquidation systems rely on a membership structure and the ability to mutualize risked and the ability to assess cast -- capital contributions. we think that would work.

we also think that utility is another possibility and will be something that will have to be looked at seriously. as we move to this next phase. >> you have to have a chance to answer this question. >> i would agree with everything that was said. we have been discussing the topic that there are obstacles regarding the sharing of risk. we think that as we move toward our 2014 state, we will not necessarily need a utility, which is what you are getting at. >> from my perspective, i do not support a utility and i believe in terms of collateral, that is the job of the investment manager. you run the risk of rewarding those who are less diligent. from our interest, but we have

long and short collateral and that gives us a competitive advantage to provide funding against the curved and we land to morgan stanley and we take in from morgan stanley. if there is a problem, we go through a liquidation process. we optimize those liquidations in the marketplace. we think that is one of the net against we have as an organization -- mitigants we have as an organization. >> our goal is investor confidence. we have heard that the services provided are an important part of risk-management. what we want is a safe platform that accomplishes that but what do our investors need to see in terms of collateral management?

whoever can provide that, we need to be agnostic. we have to work on the work with our clearing banks. the overall goal is heightened confidence. >> i do not have further questions. i want to thank the panel for not only their oral presentations but they're written testimony. i found it helpful and i am encouraged by what i hear and think we might be able to make some good progress. >> you and i might need to talk about, who is in charge for the fed responds. >> i think that is a critical question, given the last several months of our experience. if they make for a moment, we are looking at the potential

triggering event for market behavior, which is dysfunctional. we have huge issues in europe with respect to the disability of their banks and it raises the question, is 2014 to long? we have given ourselves, i know you have pulled it back, but if there was a financial crisis even greater than the present one in europe, would it result in undue pressure is so that she would have to not extend credit, forcing dealers? all of this goes to the point,

do we have until 2014? >> as chairman bernanke and others have pointed out, this remains a big concern. i think we also recognize the importance of moving in a deliberate fashion, recognizing this is a complicated market that has implications across the economy. we want to see the industry move in a way that gets to the target state but does not do so in a destructive way. we would be on comfortable with 2014 if this were just 24 team. i think one of the things that the federal reserve has done in 2011, and by bringing some supervisory tools to bear, we

have asked market participants and others, over which the fed reserve has authority, for detailed pilot -- milestones. we do not want to be told we will get this done. trust us. we want to see a clear path to getting all of this done by 2014 with many intermediate steps and risk reduction along the way. that is the way we get comfortable with 2014 in light of the environment we are operating in. >> anyone else? >> we would say from our perspective, to the extent that this flows through where investors have a clarity on what they have and we have clarity on what our bank will do during a normal and distressed market to environments and against what

assets, the accountability falls back to the bank dealer. as it works through the due diligence, clarity between the clearing bank and the bank dealers in terms of what everyone can expect during times of stress and prudent liability management, we think is the best outcome. that is how we think we can get to 2014. >> i want to thank you all. i think we need to get a much more definitive, clarifying the notion of who is in charge from the federal perspective. one of the lessons we have learned, when everyone is in charge, no one is in charge. thank you for your testimony. if there are no further

questions, we will keep the record open because there could be some of our colleagues who have additional questions. we would ask you, my colleagues to submit to those questions no later than next thursday and we would ask you to respond as quickly as possible. thank you very much. the hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> next, a hearing on business opportunities in latin america. and at 7:00 a.m., your calls and comments on "washington journal." >> later today on boat tv, in depth with an economist, at a columnist will take your calls and e-mails for three hours beginning at noon eastern. >> what i tried to do is take a

look at this and go back to see, how did we get to where we are today? is there any trends through our relationship? with the ultimate goal of trying to write an account of what transpired on both sides. >> analyst david crist on 30 years of hostility between the u.s. and iran. part of the book tv this week announced the span -- this weekend on the c-span2. >> those comments came tuesday at a senate foreign relations hearing on business opportunities in latin america. this is an hour 20 minutes.

doing business in latin america. our goal is to examine ways for the government to help promote the myth -- american businesses in their -- -- region while considering the challenges of a growing chinese foot killed, barriers to market access, and the impact of weak institutions in some countries on american investments. it is my view that we have been distracted by the events in the middle east and around the world and have not had enough compasses on latin america. it is also my view that we ignore our own neighborhood at our own peril. while most countries in latin

america have escaped the worst of the downturn, there are troubling signs. our government has to engage in the region, working with the private sector to increase trade, promote american companies, and create jobs, jobs in new jersey, florida, and throughout the hemisphere. the changing economic policies, and in the discovery, and other factors in latin america have given rise to promising economies with robust exports and an expanding middle class. not only has trade between the united states and latin america expanded 40%, there are other positive trends. relative political stability that american companies should take advantage of. elected governments to encourage foreign investment and foster

economic growth. brazil, colombia, and aru enjoyed democracies favoring foreign capital and investment. with 56 million latin-american households joining a rapidly growing middle class, consumers in these countries enjoy greater buying power than ever before and that is an opportunity for american industry. as positive as these developments are, their region is not immune to the effects of the recession. the international monetary fund lowered its economic forecast growth for latin america to 3.7%, down from 4.5% in 2011. a renewed concern it as the weakening of democracies by leaders to use their office to grow their power by weakening democratic institutions, the

rule of law, and independent media. investors are reluctant to place their trust and resources in countries like venezuela, bolivia, and ecuador. the ongoing crisis is an example of market response to political instability. last week, a fitch downgraded its outlook from the country from stable to negative. the government to limit market access that, failure to pay debts, and nationalization without compensation has shocked investors. it will take many years for the country to recoup the loss of market confidence resulting from these policies. looking at the broader picture, china has taken note of the positive trends in the region and has fined a foothold in the region while all attention has

been in other places around the world. china has made significant inroads in latin america. trade has increased from 12 billion in 2000 to over 140 billion today with china's supplanting the united states as the largest trade partner. deals offered by china are often too good to pass up. in addition to offering loan terms and investment, china's policies -- policies make them in many cases a more attractive partner than western investors. that brings us to the purpose of this hearing. we are examining opportunities for american companies in latin america. we are here to consider opportunities for the government to promote business and trade and we are here with some of the

experts on the business and trade to help put the positive trends and the challenges we face in clear perspective so that we can move toward policies that maximize the positive trends and mitigate the challenges. i want to thank our panelists for being here. let me turn to my colleague, senator rubio. >> thank you for holding this hearing. a couple of items. i would ask consent this letter by senator lugar be entered into the record regarding the ecuador mischaracterization of the reports on the drug eradication act. i will need to leave around 2:30. there is a meeting. it should not take on. thank you for being here. i appreciate your service to our nation.

latin america is a place of importance that is crucial to our safety and our prosperity. it is important to note this will continue to grow. as i have said, the last three decades have seen an impressive expansion of economic freedoms in this hemisphere. with the exception of cuba, a leaders recognize the legitimacy of policies and operation to curb transnational crime. we have seen this in brazil, colombia, and mexico, to name a few. they have expanded the democratic space and their institutions have been strengthened. they have embraced competition and see the rewards of free enterprise. i urge the administration to take bolder steps to consolidate

our relations with similar nations. in the absence of a free-trade zone, the partnership offers new opportunities to integrate the region into the economy. i hope the administration will consider a mechanism to include as many countries as possible. they could develop a fast-track process to allow countries to join the community once these negotiations are finalized. we can work on expanding opportunities in the region -- region and should address the challenges plaguing the region. a working democracy depends on a system of checks and balances where institutions can work their will within a constitutional framework. argentina, ecuador, and venezuela is sing a reemergence

of elements in the legislative and executive branches of government, eager to serve their short-term political interests. according to a 2012 index, only four latin american countries, cuba, ecuador, rank as economically repressed. these countries also share the distinction of being led by totalitarian or authoritarian leaders. this trend will diminish any efforts to help american businesses grow and invest. the u.s. response should be clear and swift. a trade agreement is the seal of approval of certain best practices and to only stay in place based on meeting certain good governance. i look forward to your testimony and hope to learn more about policies to address the opportunities to american

businesses hoping to invest in this region. thank you so much. >> thank you, senator. let me turn to our panel. we will hear from francisco sanchez who will be joined by matthew rooney for the u.s. department of state. we look forward to your informed thought as representatives of two of the most prominent agencies in the u.s. government. and what, if any, tangible steps are being taken to grow our historical strong ties within the region. i do not know if you have this in your oral testimony, your full in testimonies will be included in the record. we ask you to summarize for

about five minutes. whether we pursue it in your testimony, i am concerned about some of the challenges and want to explore those with you. if you do it in your testimony, fine. let me recognize secretary sanchez. >> thank you, ranking member rubio, members of the subcommittee, i appreciate the opportunity to testify about our work to help american businesses thrive in latin america. two years ago, president obama launched the national export initiative and he set a goal of doubling exports by the end of 2014. the reason was simple. whenever more american products reach more markets, it strengthens american businesses. it means more american jobs. last year, exports reached a

record 2.1 trillion in total value, supporting 9.7 million american jobs. latin america was a key to this success. it was the destination of $370 billion in u.s. goods, an increase of 54% since 2009. there is potential to do more. latin america has a growing middle class. more customers for u.s. products. consider roh growth is projected across the region. brazil will spend billions on infrastructure development as it prepares to host the 2014 world cup and the 2016 olympics. u.s. companies can and should play a part in this growth. as president obama had made clear, the future of the united states is linked to the future of our neighbors in latin america. we are bound by it a shared

history, cultural ties, and our proximity. as we look to the future, it is critical we strengthen these ties in a way that benefits all partners. allow me to mention a few of the administration's efforts to strengthen integration. administration officials, including myself, and private sector partners participated in a summit to create new pathways to prosperity. in june, president obama announced that the u.s. and its partners extended an invitation to mexico to join the partnership trade negotiations. at the u.s. department of commerce, we lead the forum and we lead the u.s. brazil commercial dialogue. we do this to strengthen the $74 billion trade relationship. in our work with mexico, we are

focused on intellectual property rights, and on making north american supply chain more efficient to enhance borders and infrastructure. of course, we work to provide a level playing field so the u.s. businesses can compete. our latin american trade agreements, covering 84% of our regional trade, do more than it eliminates tariffs. they promote predictability and recourse where necessary. that is why the trade agreement, which took effect in may, is so important. u.s. businesses have access to sell their goods in this important market. the service is ready to meet u.s. businesses with opportunities across the region. entrepreneurs can visit our web site and we will help them succeed in latin america and the

global marketplace. a couple of examples of our services, in new jersey, our center helped them secure a $15.5 million contract with the government to provide bridges. our miami office provided counseling to trader brothers, a distributor of oil and gas equipment, helping them secure several cells. the potential is there for even more. as part of this work, the administration will continue to collaborate on critical issues. let me take a moment to thank the senate finance committee for reporting on a bill that would take care of some technical corrections to the u.s. pre- trade agreement. it will maintain a create jobs

across the united states and latin america. i hope congress will pass this bill very soon. the goal of the united states, and our latin american partners, is a shared prosperity through shared ideals and values. i want to thank both of you for your leadership in this part of the world and the opportunity to testify today. i look forward to working with you as we move forward our commercial relationship with latin america. >> thank you. secretary rooney. if you would put your microphone on. >> ranking member rubio, thank you for the opportunity to be here to discuss efforts to promote the competitiveness of u.s. business in latin america. the western hemisphere is a region of opportunity for u.s. business.

since 2002, the gdp of the region has approximately tripled. these developments and numerous others have lifted millions of households into the middle class. rising exports demonstrate u.s. companies are already taking advantage of these opportunities. some countries such as argentina and venezuela have chosen policies that result in higher rates of inflation. this has caused commodity prices to come off their highs, highlighting the risk of overreliance on as a single sector. sustaining economic expansion will require the region to transition away from commodity- led growth driven by demand from china to a more balanced model based on productivity. many countries are coming to see the benefit of trading

relationships with countries like the united states. u.s. businesses also face challenges in taking advantage of the opportunities in the region. a lack of transparency can discourage investment. nevertheless, our private sector is well positioned to overcome these and other barriers and the administration is working to help them. to help compete, we are working with the department of commerce to provide better and more available information on business opportunities. in particular through an initiative to focus on probe but in promoting business opportunities in 9 countries worldwide, including brazil and latin america. secretary clinton opened the latin american idea partnership to encourage u.s. small businesses to build a partnership with small

businesses in latin america. it is a piece of a larger initiative that president obama launched as he was traveling in april to help small businesses navigate the complexities of international trade. we have linked are now works with similar centers throughout the hemisphere to create a network of the americas with over 2000 serving 2 million businesses, leading them closely together to provide small business owners with an on ramp to the economy. it builds on several years of work under an initiative in building and development throughout latin america. we are focused on the fact that women of her special obstacles. this is why the president launched the women's initiative to promote access to training,

finance, and access. our businesses have moved beyond selling products to latin america. they are working hand in hand to build complete businesses from supply chains to retail partnerships. secretary clinton's initiative challenges all of us to focus on shaping the policy environment so these can thrive. with this in mind, we're collaborating more closely than ever with canada and mexico on economic issues such as regulatory cooperation and more efficient borders. we have set up a line to talk with our ambassadors and their teams throughout the hemisphere to get advice on navigating the political and economic landscape. as you noted, the americas holds important for the united states in terms of energy. in the coming years, the region will provide more and more of will provide more and more of our