but cftc -- and here's -- here's the crunner: irk the cftc has limited legal authority to enforce this agreement. the bottom line: we need to make sure the cftc can oversee trading of american commodities, whether it happens through a computer server located on wall street or in singapore. the dodd-lincoln bill currently before us includes some important provisions to help close the london loophole. as drafted, the bill will require foreign boards of trade that provide access to american traders to comply with comparable rules enforced by a foreign regulator; to publish trading information daily; to supply data to the cftc,; and to enforce position limits. however, the cftc is unable to force a foreign board of trade to comply with those requirements. and that's just fact. and this is because the cftc's current method of overseeing foreign exchanges has tenuous legal underpinnings due to a commodity exchange act provision forbidding the cftc from "regulatorring" foreign boards of trade. so in many instances, our regulatory body, the cftc, can take action against a united states trader

and the cftc announced the creation of an advisory committee that will, among other things, work with us in reviewing appropriate regulatory changes in response to the events of may 6th. and the staff of our agencies intend to provide that committee with our preliminary findings next week. last thursday, the events could be likened to many dominos falling. and while we are all understandably focused on why the first domino fell, it's equally important to understand why so many others fail as well. i believe we will pinpoint the triggering events but it's fair to say the disparate events caused many more dominos to fall than should have. for this season, the s.e.c. convened a meeting yesterday with the leaders of six exchanges and finra where we agreed to examine circuit breakers that will not unnecessarily interfere with market activity but that will pause trading while the markets check for technical problems and recover liquidity. we also reached general consensus on the need for stock by stock circuit breakers. i expect that later today, we will further refine when those circuit br

>> well, i'm very proud of the group at the cftc. i inherited most of them. it's a terrific group. but i do think we've been underfunded on technology. we have a significant investment in front of us to do what we call automated surveillance and compliance. we're trying to build the flags and alerts that look at the hundreds of thousands of transactions a day by basically what's called simply exception reports and flagging them for good people like the man sitting behind me and his team. >> chairman schapiro? >> we are significantly underfunded in technology. our discretionary technology budget for development projects is still 50% below what it was in 2005. and our markets are vast and complex. >> i know. i've asked you this question before. how old is your technology? is it 10 years, 20 years? >> it probably depends system by system. for example, congress has been generous in the past year. we've been able to build some new technology to consolidate our tips and complaints and referrals more effectively. but we have some very old systems, some of which i recall from when i was a

responsibilities are divided between the securities and exchange commission and the cftc cftc.within equity markets, we have multiple self-regulatory commissions setting rules more silos, new york stock exchange, finra, national stock exchange and more. all too often, those rules have been watered down and eliminated in the absence of the s.e.c. establishing these and other regulatory controls across equity markets. we created a national market system but we forgot to create a national regulatory and surveillance system to go along with it. we need, we absolutely have to have a consolidated audit trail across all market centers as senator schumer and others have raised. as finra chairman rich ketcham admitted last october regulators are looking at -- and i quote -- "an incomplete pick picture of the market and knowing full well that this fractured approach does not work work." that's -- that's quoting chairman of the finra rick ketcham. the second obvious question is: why is it taking the s.e.c. so long to reconstruct the unusual market activity of last thursday? and there's an

or the cftc. and then as these instruments, these various derivatives, these various types of tkreurbts, and -- derivatives become more standardized, and a lot already are standardized, you move them over to an exchange, which is the ultimate process of making sure that that you don't have an issue of solvency behind the instruments. and so as you move them to an exchange, are you able to create an even stronger market. but you don't mandate that everything go to an exchange right out the door, because if you did that, you'd end up with a lot of derivatives which are still too customized to be able to move to an exchange and they would not be able to be brought forward unless you contract the market again. and you also don't take the swap disks and move them out of the financial houses, because in doing that, you would have to have a new capital base for the swap desk, which is expressed by the fed and the fdic and chairman volcker, which would force a massive contraction in credit because that ca

i think we need to merge the cftc and the cse.e are the only market on earth that does it this way. it's very stovepiped and the reason we don't do it as you know since we are sitting in this room is that there is a different jurisdiction. agriculture in the one hand and thinking on the other. we also need to rationalize more broadly the jurisdiction of the judiciary committee's with the banking committee because now we need to resolve these institutions and i made recommendations that had recommendations that may come back but the bankruptcy system needs to be tailored in order to resolve the large financial institutions and you can't do it if you've got to do it through the banking committee and house financial service committee and can do it either if you would only through the judiciary so i know that my two minutes to answer the question are up. please come back to me if you would like on that. >> thank you. >> thank you, mr. chairman. mr. donaldson, let me start with you because you had something in your remarks i thought wa

s and cftc's actions. one existing circuit breakers. two, establishing stock-wide circuit breakers with a velocity of prices. three, handling trade breaks to rationalize moral hazard, and four changing the use of specific order types that impacted the trading on may 6. the focus on these is consistency. while each reports it fufpksed correctly, the changes will handle unusual trading events in the future and help handing market events. our markets are strong, despite the 17 minutes of trading that have garnered public attention. keep in mind, the global markets were nirveous operating during an unusually long upward price string. this was undoubtedly tied to greece debt. ratings lowered the sorreign debt of greece, turkey, and portugal. the euro-was down 15% in the last month, 17% in the last month alone. against this backdrop we arrived at the afternoon of may 6. the dow jones industrials was down 272 points for the day, down 500 the previous three days. second there was an institutional order to tie futures to the s&p 500 on the s. me

in closing we applaud the sec and the cftc for working together to review the defense of may 6th and develop aclosing, coordinated response. and t nyse are committed to maintain ongoing productive dialogue with these agencies and other trading venues. once again, thank you for the opportunity to appear and later on i will be happy to answer prv questions youe might have. tr >> thank you, mr. leibowitz. tor now we will hear from eric nollb executive vice president at ther nas-daq of services. >> good afternoon chairmant, mr. orski and members of the subcommittee for letting me speak to you today. we meet delete comet yesterday along with fellow exchange's chairman schapiro to develop the fellow car to the princeton and investors in the wake of last thursday. jointly to assess and implement changes to enhance the marketability to handlethury onusual trading events in thelyt future. assess the market for strong despite the 17 minutes of unusual trading occurred may 5th.future fight the market's rapid recoveryng desp during the peakc resilience of strength. to understand fully you have t

we support the sec and the cftc in four areas. what is circuit breakers, establishing new stocks reporters that include an element of loss of the price changes, 3, improving the handling of the trade breaks to maximize consistency, and finally changing the use of "tens of a order types that impacted trading on may 6. consistency is the key. each exchange says they function normally, the changes will improve the collective ability to handle unusual trading events in the future and help to restore investor confidence. markets like consistency and predictability. our markets are strong despite the 17 minutes of trading that have garnered public attention. on may 6, the global markets were nervous, becoming increasingly volatile and operating during a long upward price trend. this volatility was tied to the crisis increase in europe. rating agencies lowered the ratings of sovereign debt of greece, spain, and portugal. the european union was working to fashion bail outs and violence escalated in athens. the euro was down 15% in the pas

when you were at the cftc. when i served as a member of the president's working group, i know how valuable that interchange is. one of the things that i recognize looking through the distance of time and the fog of memory, there were, in addition to regulatory concerns, market concerns, and so on, there seemed to be turf concerns. it seems that some of the recommendations provided floated flowed -- flowed from the "our team is better" sense. it is the worst count reversed kind of rivalry. you have the sheriff's department and the city police who are both is supposed to be chasing after the culprit. there was a private -- a pride of brand. even though the sec's formal recommendation was that we should not regulate, i got a sense that it was a move as well and that possibly the sec would have had a different view if program ready. i do not know if that is true or not. i am also -- i am almost inviting a question from you. >> i will not testify here as to what motives were in 1998. >> i think looking forward that

had a lot of shorts of the euro piling into the markets even up to the last week according to the cftc. >> there are a lot of signs. it reminded me of 2007, that investors only bought the umbrella after it started raining rather than seeing the dark clouds and saying maybe i should get one before it starts to rain. a couple weeks ago we had one-year cds in greece trading at levels that venezuela and argentina were trading. this is not an emerging economy. this is not a developing country. this is a western, developed nation. and it wasn't just greece. it obviously had a ripple effect on all the other overleveraged economies where the rising cost of capital is going to impact growth, it's going to impact the financing of their countries, and it's going to impact global growth. we have to remember also what's going on in china too. europe is china's biggest trading partner at the same time china internally is trying to slow down. >> book, it's guy. it's just drizzling now. only 50 s&p points off the high. is it time now -- can you still have time to get the umbrella in can you get short

both the sec and cftc would decide whether changes to this existing measures are >> par appropriate. lack of uniformity across the markets. so who in in your estimation abl would be that entity that would make that determination that wld that particular time that deteri circuit record goes into effect? >> there are two ways to do it. brker go the way i figure, quites to do qnestly, is the one that hasfa, people milling every day whene s they walk in that the price of, if a stock moves. if i give you an example. t mi in 5 minutes, the market for that stock will be shed andry replaced for three or five a minutes or rivers appropriate. the certainty of knowing ahead of time, i think, is an enormou benefit to markets. i they thrive on that kind of certainty about what the rules will be. another way to do it wouldnd beo allow the listed markets. the new york stock exchange, thi itw york stock exchange stock to be able to say's t hethat we are shutting down. newstock ex we are going into a slow mode. down or we are turning off thelow electronic systems for one minute in this stock, and all

they went on to say we're not going to refer it to the cftc. we're going to look into it ourselves.re unusual. >> you know that some outliers are going to use your -- >> you know, once you hold yourself out publicly, you sort of lose control. >> i know. i know. >> i'll take responsibility for that. >> you're not necessarily saying gold and silver would be 1,000 times more expensive if free market forces were -- >> no, ten times. i am saying gold will get to 5,000. it's eighth grade math. the amount of gold, the amount of paper money, do the division, that's where gold has to get to. >> george, yesterday the one point of good news if you're a bull watching the markets fall yesterday was that when the market tested a key technical level, it bounced back up off of it. what are you watching today in terms of the technicals and what you think might happen? >> technically in the s&p, you know, it's been kind of a choppy range. it's really had a hard time. the june s&p contract sustaining any rallies above 1200. so i think we probably drift lower. i think the first target on the down side

our focus at the cftc is exchanges. we covered a lot of the same market participants.omplementary regimes. that is the way we have been for seven or eight decades. >> thank you both. i think you have great staffs. i appreciate working with you. i realize another issue. we have not dealt with one of the core issues regarding this last financial crisis with this bill. we lack the courage to deal with an obvious issue and that is the two issues -- agencies are separated. i thank you both for being here. i am sure you will remain separated for many years. >> thank you senator mccord her. they keep for your testimony. >> one of the potentially disturbing aspects of the testimony is that you are both not quite sure what exactly happened. it was a confluence of events. if i understand the testimony, the precise sequence has not been identified yet. is that a fair statement? chairman shapiro and been chairman guzzler -- >> it has been two weeks. our staff has been working around the clock. there is an extraordinary amount of data we have to process. we have so many trading bee

. >> the listener is correct but proxy war in the chair of the cftc at the time wanted to regulate derivatives very aggressively and said how dangerous they were and unfortunately, she was essentially over written by then secretary summers and thennd chr chairman greenspan and the sederal reserve. thi she is one of the heroes of thie particular story because i think had she been listened to the ha. derivatives wouldn't of gotten to the size they had.a i think durham evidence can plad a useful with their used correctly. i think they can be used for hedging appropriately to protect against interest-rate fluctuations currency fluctuations, commodity to watct patients but hedging means you are not taking undue risks. they have to be properly capitalized and have propern margin. eet has been fighting hard the notion of trying to push derivatives or on to the sy itearinghouses and exchanges so they are transparent.ve tak people know what positions the companies have taken and they have to be proper margins and ma proper capital.s intere it's interesting the currentairf chairman of the commodities fu

we have been strong supporters all along of giving the fdic and cftc across the board, no matter whos doing the derivatives. the suggestion was that banks and bank holding company should not do any type of derivatives activities. we think that needs to be thought through. not all derivatives are bad. interest rate derivatives -- we want them to manage their interest rate risk. some of that needs to be customized. so, this is an important step. at least we would know the derivatives activity would remain in a more regulated than you, a bank holding company. the banks do need capability to hedge their own exposures. this is an example that we need to make sure we think through what we're doing. many people are angry, and so my, but we need to lead with our heads, not parts. much of the anti-derivative sentiment is justified, but centered on the credit default swap market where there were abuses. in my letter to chairman dodd and chairman begin we would like that there be stronger rules regarding cds'. i would support a ban on the speculative cs trading -- on the cds trading. we don't w

it would give toasted the cftc to police and deter fraud and manipulation in these markets. this is the most comprehensive reforms -- a revolution for the markets as a whole. we strongly support a bill that incorporates a comprehensive set of protections and oversight over these more it -- these markets. senator dodd and senator like in a working through this provision -- senator lanincoln are working through this provision and they're working to the -- three concerns. >> you are not expressing your opinion on that today? >> i have not taken a position on that now, but i would like to emphasize the following basic strategy that underpin this reform process. to make the system more stable, you need to make sure that we're doing a better job of limiting risk-taking by core institutions that are so important in these markets. you would not make the system more stable by taking functions that are integral and essential to banking and separating them and putting them somewhere else. that would create a less able still some -- less stable system, and that basic strategy underpins

major institutions writing these commitments, that margins are conservative mouth and the ftc and cftc have the tools they need to better police fraud and manipulation to deter fraud and manipulation earlier. those are the reforms working their way through the congress and they are a very strong package of reforms. >> you essentially indicated that the lack of regulation or the lower level of regulation and shadow banking made the shadow banking sector more vulnerable to the financial problems that we experienced in 2007 in 2008. and, i wanted to ask about kind of the flip side of the, which is whether the growth and competition of the shadow banking system impacted subtly or at all on banking regulation, because this was a less regulated system. i think the banks did suffer competitively with various aspects of the shadow banking system. they lost deposits to the money market funds. they lost potential commercial loans to commercial paper and repo, and i can imagine that commercial banks having felt this competitive pressure would have wanted to be able to engage in broader activities

short, they simply ignore -- cftc. in short, they simply ignore the strong provisions included in the rest of the underlying bill. that's convenient for their argument but not so convenient when seeking the truth. let me reiterate, mr. president, every swaps dealer and major swap participant will be subject to strong regulation. wall street lobbyists have also argued that this will prevent banks from using swaps to hedge their risk. again, completely false. banks who have been acting as banks will be able to continue doing business as they always have. community banks using swaps to hedge their interest rate risks on their loan portfolio will continue to be able to do so. and most importantly, we want them to do so. community banks offering a swap in connection with a loan to a commercial customer are also still in the business of banking and will not be impacted. using these products to manage risk or designing exotic swaps which have led to the financial demise of places like jefferson county, alabama; orange county,

it would give toasted the cftc to police and deter fraud and manipulation in these markets.is is the most comprehensive reforms -- a revolution for the markets as a whole. we strongly support a bill that incorporates a comprehensive set of protections and oversight over these more it -- these markets. senator dodd and senator like in a working through this provision -- senator lanincoln are working through this provision and they're working to the -- three concerns. >> you are not expressing your opinion on that today? >> i have not taken a position on that now, but i would like to emphasize the following basic strategy that underpin this reform process. to make the system more stable, you need to make sure that we're doing a better job of limiting risk-taking by core institutions that are so important in these markets. you would not make the system more stable by taking functions that are integral and essential to banking and separating them and putting them somewhere else. that would create a less able still some -- less stable system, and that basic strategy underpins the

we just did that with the cftc. that's an agency that was reauthorized during the farm bill last year. when we did that, we were able to fine-tune its mission. it also gives you an opportunity to reorganize an agency if you have to go through a reauthorization process and sunset process. so i don't think it's asking too much, when you're talking about literally hundreds of millions of dollars annually and what would appear to be thousands of new federal employees in this new agency, and what would also appear to be incredibly broad and vast new powers and authorities that will be unchecked. because there isn't any accountability to the congress. congress is not going to appropriate annually as we do with most agencies the power of the purse. this is all going to be run through the federal reserve. and yet it is taxpayer dollars that are at risk here. it is taxpayer dollars that are being used to finance this new bureaucracy. so, mr. president, i would hope that my colleagues would be able to find their way to suppor

that major institutions writing these commitments, that margins are conservativeouth and the ftc and cftc have the tools they need to better police fraud and manipulation to deter fraud and manipulation earlier. those are the reforms working their way through the congress and they are a very strong package of reforms. >> you essentially indicated that the lack of regulation or the lower level of regulation and shadow banking made the shadow banking sector more vulnerable to the financial problems that we experienced in 2007 in 2008. and, i wanted to ask aboutind of the flip side of the, which is whether the growth and competition of the shadow banking system impacted subtly or at all on banking regulation, because this was a less regulated system. i think the nks did suffer competitively with various aspects of the shadow banking system. they lost deposits to the money market funds. they lost potential commercial loans to commercial paper and repo, and i can imagine tt commercial banks having felt this competitive pressure would have wanted to be able to engage in broader activities and w