[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
LEGISLATIVE PROPOSALS REGARDING
DERIVATIVES AND SEC ECONOMIC ANALYSIS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
APRIL 11, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-12
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises
SCOTT GARRETT, New Jersey, Chairman
ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama BRAD SHERMAN, California
PETER T. KING, New York RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
C O N T E N T S
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Page
Hearing held on:
April 11, 2013............................................... 1
Appendix:
April 11, 2013............................................... 41
WITNESSES
Thursday, April 11, 2013
Bentsen, Hon. Kenneth, E., Jr., Acting President and CEO, the
Securities Industry and Financial Markets Association (SIFMA).. 9
Childs, Christopher, Managing Director and Chief Executive
Officer, the Depository Trust & Clearing Corporation (DTCC)
Data Repository (U.S.)......................................... 11
Deas, Thomas C., Jr., Vice President and Treasurer, FMC
Corporaton..................................................... 12
Parsons, John E., Senior Lecturer, Finance Group, Sloan School of
Management, Massachusetts Institute of Technology.............. 14
APPENDIX
Prepared statements:
Moore, Hon. Gwen............................................. 42
Bentsen, Hon. Kenneth, E., Jr................................ 45
Childs, Christopher.......................................... 53
Deas, Thomas C., Jr.......................................... 60
Parsons, John E.............................................. 66
Additional Material Submitted for the Record
Fincher, Hon. Stephen:
Written statement of the Financial Services Roundtable....... 71
Written statement of the U.S. Chamber of Commerce............ 73
LEGISLATIVE PROPOSALS REGARDING
DERIVATIVES AND SEC ECONOMIC ANALYSIS
----------
Thursday, April 11, 2013
U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Hurt, Bachus,
Royce, Lucas, Neugebauer, Huizenga, Grimm, Stivers, Fincher,
Mulvaney, Hultgren, Ross, Wagner; Maloney, Sherman, Scott,
Himes, Peters, Foster, Carney, Sewell, and Kildee.
Ex officio present: Representatives Hensarling and Waters.
Chairman Garrett. Good morning. Today's hearing of the
Subcommittee on Capital Markets and Government Sponsored
Enterprises is called to order. Today's hearing is entitled,
``Legislative Proposals Regarding Derivatives and SEC Economic
Analysis.''
I want to thank the members of the panel for the testimony
that you are about to give.
We will begin today's hearing with opening statements, and
I will now recognize myself for 3 minutes.
Today's hearing will examine seven specific legislative
proposals to ensure an appropriate and thorough regulatory
regime for the U.S. swaps market, and codify a good government
regulatory approval process for the SEC.
Let me begin with the legislative proposals addressing
Title VII of the Dodd-Frank Act. All six of these proposals are
common-sense and bipartisan approaches to provide clear rules
of the road for the market participants, while ensuring a
robust regulatory regime exists over the marketplace. Many of
these proposals--including the end-user, the inter-affiliate,
and indemnification bills--actually passed the full House by
large margins last year. And I hope we do that again this year.
I also want to begin to thank a lot of folks on both sides
of the aisle who worked on all of these bills. I also commend
Mr. Hultgren and Mr. Himes on their bipartisanship and
bicameral work on the new version of the so-called ``swaps
push-out'' legislation. I believe that the legislation changes
made here were very appropriate. I look forward to having this
legislation signed into law this year.
Next, I would like to thank Mr. Fincher for bipartisan
legislation requiring that FSOC to study implementation of the
derivatives Credit Valuation Adjustment (CVA). Capital
adjustments is a very good idea. I look forward to its swift
passage, as well.
Regarding the new version of the cross-border legislation,
I wanted to start by complimenting--and I don't see either of
them here--Mr. Carney and Mr. Scott for their bipartisan work
on this legislation. In drafting this legislation, we decided
to take a different approach than last time in attacking a very
complicated problem of regulating swap transactions between
U.S. and non-U.S. persons.
Instead of drafting the exact legislation into legislation,
what we did here is to allow the regulators to continue to have
discretion and flexibility on how to implement the rules. I
note there has been some confusion by some commentators on the
impact of this legislation, so I would like to make certain
everyone understands exactly what it does and the effect it
will have. So, I will spend a moment on this.
First and foremost, the legislation specifically requires
the SEC and the CFTC to have identical cross-border rules. I
think it is difficult, if not impossible, for anyone to suggest
that it is appropriate for two domestic regulatory bodies to
have different standards governing very similar parts of the
market. By simply requiring the agencies to have identical
rules, the bill will limit any potential opportunities between
market participants by ensuring that we have a standard,
identical regulatory regime for all types of the swap markets.
First, there is a great deal of ongoing discussion about
how to limit regulatory opportunities to market participants,
as some of the past witnesses and the witnesses here today have
noted in testimony, as well. And actually, we heard this last
year, as well. Under this new regime, the most difficult,
glaring area of this is if the SEC and the CFTC have different
rules.
Second, the legislation requires that formal rules be
issued. Currently, the CFTC is moving down a path of
instituting a form of amorphous guidance, if you will, which
has questionable legal authority. And without a formal rule in
place that carries the force of law, there is a valid concern
that some of the entities won't feel the need to abide by the
guidance--whatever that is--if challenged by a court of law.
And the guidance might carry less weight. So by requiring a
formal rule instead of guidance, the bill ensures that the
force of law will not be in question.
And finally, the legislation specifically authorizes the
SEC and the CFTC to regulate swap transactions between U.S. and
foreign entities if the regulators are concerned about the
importation of systemic risk. Under current law, it is
questionable what authority the agencies actually have to
regulate potential transactions between them.
If the regulator is concerned about any foreign country not
living up to the Obama Administration's G-20 commitments
established back in 2009, then those regulators will be
specifically authorized to act. Now, the House Agriculture
Committee has already passed this bill by a unanimous vote, and
I hope this committee will do so the same.
The last bill up for discussion today is the FCC Regulatory
Accountability Act. It is similar to legislation which passed
the full House last year. The House Agriculture Committee
passed the identical bill for the CFTC and they did so in a
bipartisan manner. And I look forward to working closely with
my colleagues on both sides to do the same thing here.
So, I thank the members of the panel. And I thank the
members of this committee, on both sides of the aisle, for all
of these pieces of legislation that we have been able to move
forward in a bipartisan manner.
And with that, I will recognize Mrs. Maloney for 3 minutes.
Mrs. Maloney. Thank you very much, Mr. Chairman.
I am delighted to be at this hearing where we are reviewing
several bills that have already passed the Agriculture
Committee. Many have passed the House and this committee in the
last Congress. There is one new bill. And some of them are
working or directed at preempting the regulation of
derivatives.
We certainly do not in any way want to weaken Dodd-Frank,
the transparency, the oversight, and the accountability which
was put in place with that important bill. But I think it is
important to review these bills now in light of the progress
and steps that the SEC and the CFTC have made, in addition to
some of the improvements that Members of Congress have put in
place.
It is important not only to uphold Dodd-Frank and the
oversight and transparency and accountability, but it is
important that we get it right and make sure that it works for
our markets and helps our country remain competitive in the
global economy.
There is one new bill, H.R. 1341, which requires a study on
FSOC on capital surcharges that were placed on derivatives. The
E.U. apparently has exempted their banks, and the study will
look at what impact this has on our financial institutions.
I look forward to the hearing, and to hearing from our
distinguished panelists. I yield back.
Chairman Garrett. The gentlelady yields back.
Mr. Huizenga for 1\1/2\ minutes.
Mr. Huizenga. Thank you, Chairman Garrett, and Ranking
Member Maloney. I appreciate you holding this hearing today to
discuss these various issues. And I am happy to work with my
colleague from Wisconsin, Gwen Moore, on this, as well as with
some friends from the Agriculture Committee.
Thousands of companies, big and small, across the State of
Michigan as well as the whole United States utilize derivatives
to better manage the risks that they face every day. The use of
these derivatives to hedge risks benefits the global economy by
allowing for a range of businesses from manufacturing to health
care to agriculture to improve their planning and forecasting
and offer more stable prices to their customers as they are
managing those dips.
By imposing undue regulatory burdens on end-users, this
could increase costs and reduce liquidity, and it would prevent
end-users from using these markets efficiently and effectively.
That is why I am a proud co-sponsor of H.R. 742, the Swap Data
Repository and Clearinghouse Indemnification Correction Act of
2013. We have to come up with better names than these, I think
sometimes.
But this bipartisan legislation would remove that
requirement imposed on foreign regulators by the Dodd-Frank Act
as a condition of obtaining data repositories. The legislative
solution is a small technical fix, but it is desperately
needed, as we know. And it is vital to maintaining the
integrity of our domestic and global derivatives markets.
I look forward to hearing from the distinguished panel on
this as we are moving forward.
So with that, I yield back, Mr. Chairman.
Chairman Garrett. Thank you. The gentleman yields back.
We now go to the ranking member of the full Financial
Services Committee, the gentlelady from California, Ms. Waters,
for 3 minutes.
Ms. Waters. Thank you very much, Mr. Chairman, for having
this hearing today. This is a very important hearing and I look
forward to hearing more from our witnesses about today's bills
before the committee and their thoughts on how to best
implement Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
But before we consider these modifications to the Act, I
think it is important to remember what necessitated the
legislation in the first place. I think there is consensus that
the over-the-counter derivatives market proved to be a
tremendous source of systemic risk during the last crisis.
While many firms historically used derivatives like insurance
or as a tool to manage their risks, some of our largest
financial institutions constructed highly leveraged and opaque
positions in the mark-to-market in the lead-up to 2008's
financial collapse.
As a result, we were all put in the terrible position of
needing to provide government support to private institutions,
or else potentially witness the collapse of a $600 trillion
market.
The Wall Street Reform Act seeks to ensure that we are
never again put in that terrible position by remaking the OTC
derivatives market via transparent trading on exchanges and
swap execution facilities, and lowering risk through
centralized clearing, as well as regulation of swap dealers and
major swap participants and public reporting of swap prices and
trading volumes.
Though it has been 3 years since the crisis, we still await
final regulations on about two-thirds of the provisions
requiring rule-making. And while I remain open to changing the
Act to respond to legitimate concerns, I am very nervous about
potentially undermining our reforms or otherwise tying the
hands of regulators before they have had a chance to finish
their work. So, I will closely scrutinize each bill before us
today, and consider each one both individually and
cumulatively.
Finally, I will add that I am very concerned about the
continued push from the Majority on this committee on cost-
benefit analysis. The SEC is already subject to an onerous
requirement in this regard, and I feel that the Majority is
trying to tip the scales in the agency's rulemaking in order to
favor the interests of business over the interests of
investors. In fact, it could be said that this is really a
back-door way of repealing some of the most crucial provisions
in Wall Street reform.
Thank you, Mr. Chairman, and I yield back my time.
Chairman Garrett. And the gentlelady yields back.
Mr. Stivers is recognized for 1 minute.
Mr. Stivers. Thank you. I will be brief.
I want to thank my co-sponsors--Ms. Fudge, Ms. Moore, and
Mr. Gibson--for working with me to introduce this important
legislation. I also want to thank Ms. Waters and the members of
the minority for working on this bill. Last Congress, as you
may remember, it got 357 votes on the House Floor.
This bill clarifies that Dodd-Frank is not related to
inter-affiliate swaps. The charges and the restrictions should
not be required on the accounting end of those transactions. We
shouldn't charge companies 2 to 3 times more for managing their
risk in a centralized way, in a more advanced way, and in a
smarter way.
I look forward to working with the members of this
committee and the whole House to see that these important
clarifications get passed. And I want to thank the chairman for
this hearing, and for his attention to these important matters.
I yield back the balance of my time, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
Mr. Scott is recognized for 2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman.
As a long-time member of both the Agriculture Committee and
the Financial Services Committee, I have had a great amount of
time to study the intricacies of the issues presented by these
pieces of legislation that we are reviewing here today. So it
is not without deep examination and a keen eye on maintaining
the effectiveness of Dodd-Frank that I am in a position to
support the majority of these bills before us.
And I should mention that the majority of these bills do
have broad bipartisan support. Two of the more controversial
ones, I might add, that I am a co-sponsor on, the cross-border,
for example, as well as the push-out provision, are both
supported by our Federal Reserve Chairman, Ben Bernanke, our
former FDIC Chairman, Sheila Bair, and our good friend and
former chairman of this committee, and one of the authors of
this bill, Mr. Barney Frank.
But it goes without saying that some of this legislation is
indeed controversial. And I think the opposition to some of
these bills stems from well-founded and very respectful fears
of repeating some of the mistakes that in the past led to lax
regulation, poor oversight, and eventually economic turmoil.
However, I feel that these bills before us today are not a
radical departure from the necessary and proper reforms that
are laid out in Dodd-Frank. They will not blow a hole in the
bottom of Dodd-Frank, as has been suggested. They will not lead
to more Enron loopholes or London loopholes or London Whales.
They are, I firmly believe, corrections to portions of
Title VII that are not going to work and have unintended
consequences as they are proposed. And not only just for us and
our markets, but for foreign markets. And we must remember that
we deal in a worldwide market. Our regulations here are
basically for us. But we cannot and we must not put our
financial institutions in a weakened competitive position.
So I am very sympathetic to the concerns of those who feel
this legislation tilts a little bit back towards Wall Street's
favor, but I must respectfully disagree with this sentiment.
None of the bills we are considering today drastically alters
margin or clearing requirements, nor do they undermine
transparency by lessening the share of trading data.
And I should also mention that none of the bills before us
today does anything to alter even in the slightest the Volcker
Rule, which once implemented will be a key protection both for
the economy and for the taxpayers against high-risk proprietary
trading.
So, Mr. Chairman, again, I want to add my voice to the
support for these bills and I yield back my time.
Chairman Garrett. The gentleman yields back.
Mr. Fincher is recognized for 1\1/2\ minutes.
Mr. Fincher. Thank you. Thank you, Mr. Chairman.
A lot of folks believe Democrats and Republicans can't
agree on anything. However, the bills we are considering this
morning are examples of two parties coming together for good
governance. I am pleased that we are considering H.R. 1341, the
Financial Competitive Act of 2013, which I introduced last
month. Mr. Scott, the gentleman from Georgia, and I are working
to move this forward to ensure America remains competitive in
the global marketplace.
My bill simply requires FSOC to conduct a study of the
impacts that implementing the credit valuation adjustment
capital requirement, or CVA, will have on U.S. consumers, end-
users, and U.S. financial institutions. European Basel III
rules are being finalized and would provide a significant
exemption from the CVA market for risk-weighted assets for
European banks. Transactions with sovereign pension funds and
corporate counterparties, which are also exempt from clearing
obligations, will be exempted from CVA risk-weighted assets.
I have some serious questions about the impact the European
exemption will have on U.S. financial institutions and the
larger U.S. economy. To me, this exemption will provide a
significant financial business advantage to European banks,
European customers, and European end-users at the expense of
American businesses, banks, and end-users.
I am not alone. Canada recently announced it will delay its
CVA capital requirement for 1 year, even though it implemented
the rest of the Basel III package on schedule. Canada's
decision to delay implementation of the CVA requirement was
simple. It was driven by the concern that Canadian banks would
be at a competitive disadvantage because of the European CVA
exemption.
Mr. Chairman, the U.S. economy is in a fragile state. Any
additional hurdles, fees, or foreign advantage will cost the
U.S. economy valuable jobs. I look forward to hearing the
testimony of the panel today, and I appreciate Mr. Scott for
co-sponsoring.
I yield back.
Chairman Garrett. The gentleman yields back.
Mr. Peters for 2 minutes.
Mr. Peters. Thank you, Mr. Chairman.
Good morning. I would like to thank our witnesses for being
here today, and I look forward to your testimony.
I would like to spend a moment discussing one of the bills
we are examining today, H.R. 634, the Business Risk Mitigation
and Price Stabilization Act of 2013. I co-authored this
bipartisan legislation, which would help protect businesses
that rely on derivatives to responsibly manage risk, with Mr.
Grimm.
Derivative end-users represent a broad cross-section of
U.S. production, from farmers worried about the price of
fertilizer, to manufacturers that are concerned about
fluctuating interest rates. Businesses in all of our districts
use derivatives to ensure they pay a reasonable price for the
products they need, and keep consumer prices stable no matter
what happens in the financial markets.
During the consideration of the Dodd-Frank Act, there was a
bipartisan recognition that regulations to curb excessive risk-
taking in the financial sector should not stifle job creation
in the agriculture or manufacturing industries. Michigan is a
State that builds and grows things. And let me be clear: The
Dodd-Frank Act was not written to hinder the hardworking folks
building autos or growing apples.
End-users, companies that use derivative contracts to
offset legitimate business risk, were specifically exempted
from the clearing requirements, and Congress did not
specifically direct regulators to require end-users to post
margin. Our bipartisan bill simply clarifies that non-financial
end-users are exempt from the Dodd-Frank margin requirements.
Forcing non-financial end-users to post margin could have
several negative consequences by unnecessarily increasing
prices for consumers across a range of goods, slowing job
growth here in the United States, and driving businesses to
foreign, less transparent derivatives markets.
Our bill passed the House last year with overwhelming
bipartisan support, because it is both about protecting jobs
and clarifying congressional intent. Having served on the Dodd-
Frank conference committee, I can say that this bill will
ensure congressional intent to protect our manufacturing and
agricultural interests are carried out.
And I will continue to work with Mr. Grimm to get H.R. 634
signed into law to protect jobs across our country and help our
economy continue to grow.
I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
Let's turn now to Mr. Grimm for 1\1/2\ minutes.
Mr. Grimm. Thank you, Chairman Garrett. I appreciate it.
I would also like to thank the witnesses for testifying
today.
I, too, would like to focus on H.R. 634, the Business Risk
Mitigation and Price Stabilization Act of 2013. As we just
heard, this is truly a bipartisan piece of legislation that
myself and my friend from Michigan, Mr. Peters, introduced.
In the 112th Congress, H.R. 634 received a tremendous
amount of support. It passed the House 370 to 24. And as Mr.
Peters said, it is very common-sense, basic legislation which
will simply ensure that non-financial commercial end-users of
over-the-counter derivatives are not subject to margin
requirements which Congress--and that is the key part--never
intended. And it ensures that regulators do not attempt to
exercise authorities that they were not granted by Congress in
ways that would harm the economy by diverting working capital
from productive uses, such as promoting economic growth and job
creation.
A lack of such an exemption could lead to regulatory
arbitrage, increases in consumer prices, as we just heard, and
some firms could abandon hedging altogether, or a loss of jobs
as vital working capital is tied up in margin accounts with
financial institutions.
So I think we have said enough about it. I am now
interested in hearing what the witnesses' thoughts are on this
common-sense bipartisan legislation.
And with that, I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
And for the final word, Mr. Hultgren for 1\1/2\ minutes.
Mr. Hultgren. Thank you, Chairman Garrett, not just for
holding this hearing today but also for your leadership on
these important issues. I greatly appreciate the opportunity to
have a role in this important bill, and I am optimistic, as you
said, Mr. Chairman, that we can get it passed and signed into
law.
H.R. 992, the Swaps Regulatory Improvement Act, does two
basic things: one, it will allow depository institutions to
continue providing a spectrum of client services and products
that would otherwise be unnecessarily prohibited; and two, our
bill will clarify one of the unintended consequences of Dodd-
Frank, the complete prohibition on swaps trading applied to
foreign banks operating in the United States. Section 716
sponsor Senator Lincoln acknowledged this significant
oversight, saying, ``This double standard was not intended.''
You can't get much clearer than that.
It is also hard to find such a clear example of potential
arbitrage as Section 716 and the unilateral prohibition it
imposes on American businesses. Foreign jurisdictions have not
followed suit, and there is a clear possibility of market share
being pushed overseas because our banks can't provide the same
products and services.
Furthermore, multiple regulators have highlighted that
spinning off swaps trades may actually increase systemic risk.
Affiliates that will house these pushed out swaps trades will
be less supervised and not as well-capitalized as the banks
which currently engage in these trades.
H.R. 992 will strengthen regulatory oversight, it will
preserve U.S. competitiveness, and as we will hear today, it
will protect end-users from higher costs and more counterparty
risk.
Finally, I want to thank my co-sponsor and teammate, Mr.
Himes, for his leadership on this issue. I look forward to
working with him again, and with all of my colleagues on both
sides of the aisle to improve Title VII where we can.
With that, I yield back.
Thank you, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
We will now turn to the panel. And again, we welcome the
panel to the hearing today.
Without objection, your entire written statements will be
made a part of the record today. For those of you who have not
been here before, we will recognize each of you for 5 minutes.
The light in front of you will turn yellow when you have 1
minute remaining to wrap up, and it will turn red when your
time has expired.
We will now turn to Mr. Bentsen from SIFMA.
Thank you for being with us today, and you are recognized
for 5 minutes.
STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., ACTING
PRESIDENT AND CEO, THE SECURITIES INDUSTRY AND FINANCIAL
MARKETS ASSOCIATION (SIFMA)
Mr. Bentsen. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee.
On behalf of SIFMA and its member firms, I appreciate the
opportunity to testify on several of these important pieces of
legislation which would modify Title VII of the Dodd-Frank Act.
As you know, the Dodd-Frank Act created a broad new
regulatory regime for derivatives products, commonly referred
to as swaps. Specifically, the Act seeks to reduce systemic
risk by mandating central clearing for standardized swaps
through clearing houses, imposing capital requirements in
collection of margin for uncleared swaps, affecting customers
through business conduct requirements to promote transparency--
Chairman Garrett. Excuse me. Can you please pull the
microphone a little bit closer to you?
Mr. Bentsen. No problem, sir.
Let me just say, SIFMA strongly supports the intent of many
of these reforms. And I think it is important to note that many
of these reforms are actually moving into implementation at
this point in time, be it central clearing, data reporting, or
even registration. And the firms are taking steps to put these
reforms into place.
However, if Title VII is implemented incorrectly, reforms
may cause more harm than good. We believe that the appropriate
sequencing and coordination of the rules will be critical to
the successful implementation of the Act. In addition, we
encourage the regulators to harmonize their rules so that
similar products will be subject to similar rules.
Given the focus of today's hearing, I would like to offer
SIFMA's views on several pieces of the legislation, as well as
one or two other issues I would like to bring to your
attention. In particular, the swaps push-out rule was added in
the Senate in the final stages of the legislative process and
never debated in the House. As you know, it would force banks
to push out certain swap activities into separately capitalized
affiliates or subsidiaries.
The push-out rule, as has been noted today, was opposed by
senior prudential regulators, including Fed Chairman Bernanke
and former FDIC Chairman Bair. The push-out will increase
systemic risk and significantly increase the costs to banks in
providing customers with the tools that they need to manage
risk. As a result, end-users will pay a higher cost. We
appreciate the work of Congressmen Hultgren and Himes in
introducing bipartisan legislation to deal with this issue.
Another concern as it relates to our members is the cross-
border application of derivatives rules. Neither the SEC nor
the CFTC has finished their work and they are doing it in
apparently differing ways, with the SEC having not even
proposed a rule, and the CFTC doing so by guidance. We think
what the CFTC has proposed is unworkable, and it could result
in an uneven playing field across global markets that would be
to the detriment of U.S. financial markets.
We are encouraged by the bill that the committee is
considering today to bring harmonization to this, which frankly
is equivalent with what the original statute did with respect
to product definitions and registration, which required a joint
rulemaking. And we believe that should apply in this case to
cross-border application.
In addition, we think that the issue that was raised with
respect to the CVA that Congressman Fincher has talked about
today is of critical importance. We are seeing a growing trend
of diversion from the G-20 principles of harmonization, of
implementation of reforms, in particular as it relates to Basel
capital standards. And the action by the European Union with
respect to CVA creates a very unlevel playing field, but also
is incongruous to what the G-20 was trying to accomplish. So we
think it is entirely appropriate for the FSOC to look at this.
Congressman Fincher made the point about the Canadians and
what they are doing. And while there are clearly problems with
the CVA calibration--every market participant agrees with
that--exemption from rules and diversion from uniform
application is counterproductive and will lead to greater
systemic risk.
I would like to mention something which is not before the
committee today, but has been before the committee in the past,
and that is the question of swap execution facilities. I would
encourage the committee to take this issue up, because we
believe again you have diversion between the CFTC on this.
And I might mention our buy-side members, who are supposed
to be beneficiaries of the swap execution facility proposal,
are the ones who have the biggest concerns because of a minimum
mandatory request for quote model that they believe will impede
best execution for the benefit of their customers. So, this
committee has worked on this before, and we would encourage you
to do it again.
On the inter-affiliate swaps bill, we think that this is a
step in the right direction, and while I will acknowledge that
the CFTC recently took exemptive action to address this, it
doesn't go far enough and it is frankly onerous in its
application. So we think the legislation is the appropriate
step to take to do something that we believe Congress intended
all along.
Finally, let me just talk about cost-benefit analysis. I
know there is a lot of discussion and concern about it, but I
might note that President Obama, following on actions by
President Clinton through Executive Order, brought about the
imposition of cost-benefit analysis in non-Executive-Branch
agencies. And we think it is entirely appropriate that non-
Executive-Branch agencies, independent agencies as created by
Congress, should have similar cost-benefit analysis
requirements, as President Obama and President Clinton have
proposed before.
Thank you, Mr. Chairman, and I look forward to answering
your questions.
[The prepared statement of Mr. Bentsen can be found on page
45 of the appendix.]
Chairman Garrett. Great. Thank you very much.
Mr. Childs, you are recognized for 5 minutes, and welcome
to the panel.
STATEMENT OF CHRISTOPHER CHILDS, MANAGING DIRECTOR AND CHIEF
EXECUTIVE OFFICER, THE DEPOSITORY TRUST & CLEARING CORPORATION
(DTCC) DATA REPOSITORY (U.S.)
Mr. Childs. Thank you, Mr. Chairman.
I am Chris Childs, chief executive officer of the DTCC Data
Repository, or DDR, which is DTCC's U.S. swap data repository.
DTCC is a participant-owned and governed cooperative that
serves as a critical financial market infrastructure for the
U.S. and global financial markets. DTCC strongly supports H.R.
742, the Swap Data Repository and Clearinghouse Indemnification
Correction Act of 2013. I want to thank Congressman Huizenga
and Congresswoman Moore for their leadership on this issue.
I would like to focus on three points today. First, I will
briefly introduce DTCC's role in the swaps market. Second, I
will explain the indemnification provision in Dodd-Frank and
the problem it poses for swap sharing and systemic risk
oversight. And third, I will discuss why a legislative remedy
is needed to resolve this matter.
Let me begin with my first point. DTCC has a long history
in the over-the-counter swaps market as a trade repository
going back to 2005. Today, a swap data repository is
provisionally registered with the CFTC under Dodd-Frank, and is
the only registered SDR to offer trade repository and public
reporting access across all five asset classes.
In addition, the DTCC SDR was the first registered swap
data repository to publish real-time price information. As you
know, yesterday was the CFTC deadline for certain end-users to
begin reporting trade data to SDRs. DTCC has been working with
market participants to help them meet their reporting
obligations, and I am pleased to report that end-user
information is now being transmitted into our repository and
made publicly available on our Web site.
In addition to our work in the United States, DTCC provides
trade repository services in the United Kingdom, Singapore, and
the Netherlands. And we are the first organization to receive
regulatory approval in Japan to establish a trade repository.
As derivative trading is a global business, it is critical that
regulators worldwide have access to a complete data set for
systemic risk oversight.
So let me turn to my second point and explain how the
indemnification provision in Dodd-Frank has the potential to
inhibit the ability of regulators to fully understand market
exposures. The indemnification provision requires a registered
SDR as a condition to sharing information with an entity like a
foreign regulator to receive a written agreement that the
regulator will abide by certain confidentiality requirements
and indemnify the SDR for any expense arising from litigation
relating to the information provided.
We believe these provisions are complicated and unworkable.
Many foreign countries and their legal systems do not recognize
the concept of indemnification. Even where they do, many
foreign governments cannot or will not agree to indemnify
foreign private third parties, such as U.S.-registered SDRs, or
foreign governments.
In order to access the necessary information without
indemnification, each jurisdiction may have to establish a
local trade repository. And a proliferation of local trade
repositories would undermine the ability of regulators to
obtain timely, consolidated, and accurate view of the global
marketplace.
For nearly 3 years, regulators globally have followed OTC
derivatives regulatory forum guidelines to access the
information they need for systemic risk oversight. It is the
standard that the DTCC uses to provide regulators around the
world with access to global credit default and interest rate
swap data in its voluntary trade repositories, and it has
worked well to date.
The Dodd-Frank indemnification requirement has not been
copied by regulators overseas. In fact, the European market
infrastructure regulation, known as EMIR, considered and
rejected an indemnification requirement.
Turning to my final point, let me discuss potential
remedies to indemnification. During the 112th Congress, a
bipartisan coalition of more than 40 lawmakers in the House
signed on as co-sponsors of legislation identical to H.R. 742.
The SEC testified in support of such legislation and former SEC
Chairman Elisse Walter reaffirmed this position earlier this
week.
In addition, three of the five CFTC Commissioners publicly
endorsed the need for legislation to clarify this provision of
Dodd-Frank. Last month, the House Agriculture Committee held a
hearing on various legislative proposals, including H.R. 742.
No opposition was expressed at the hearing.
Soon after, H.R. 742 was approved unanimously by the
committee. We urge this committee to approve H.R. 742 to make
technical corrections to this provision of Dodd-Frank, and
ensure regulatory comity with international counterparts. The
legislation will help provide the proper environment for the
development of a global trade repository system to support the
goals of Congress and regulators in creating a more stable and
secure financial system.
Thank you.
[The prepared statement of Mr. Childs can be found on page
53 of the appendix.]
Chairman Garrett. Thank you.
Mr. Deas, welcome, and you are recognized for 5 minutes.
STATEMENT OF THOMAS C. DEAS, JR., VICE PRESIDENT AND TREASURER,
FMC CORPORATON
Mr. Deas. Thank you, sir.
Good morning, Chairman Garrett, Ranking Member Maloney, and
members of the subcommittee.
I am Tom Deas, vice president and treasurer of FMC
Corporation, and I am also chairman of the National Association
of Corporate Treasurers (NACT). FMC and NACT are also part of
the Coalition for Derivatives End-Users.
As you oversee the implementation of the Dodd-Frank Act, I
want to assure you that end-users comprising less than 10
percent of the derivatives market were not and are not engaging
in the kind of risky, speculative trading activity that became
evident in 2008. We use derivatives to hedge risks in our day-
to-day business activity. We are offsetting risk with
derivatives, not creating new risks.
We believe it is sound policy and consistent with the law
to exempt end-users from provisions intended to reduce the
inherent riskiness of swap dealers' activities. However, at
this point, 2\1/2\ years after passage of the Act, there are
several areas where continuing regulatory uncertainty compels
end-users to appeal for legislative relief.
Among several areas of concern, I would like to invite your
attention to three. First, in regard to the margining of
derivatives. FMC Corporation, an innovator in the chemical
industry, was founded almost 130 years ago. This is our 82nd
year of listing on the New York Stock Exchange. In 1931, the
NYSE was the largest pool of capital to grow our business.
Today, using derivatives, we have an additional market that
is the cheapest and most flexible way for us to hedge business
risks every day, to cover foreign exchange movements, changes
in interest rates, global energy, and commodity prices. Our
banks do not require FMC to post cash margin to secure mark-to-
market fluctuation in the value of our derivatives.
But instead, price the overall transaction to take this
risk into account. This structure gives us certainty, so that
we never have to post cash margin while the derivative is
outstanding. To do so would divert cash from funds we would
otherwise invest in our business.
The proposals by the banking regulators mandating
collection of margin from end-users are out of sync, not only
with the CFTC, but with the European regulators as well. We
believe end-users and their swap dealers should remain as they
have been since the inception of the derivatives market, free
to negotiate mutually acceptable margin agreements, instead of
having regulators impose mandatory daily margining with its
uncertain liquidity requirements. The coalition commends your
bipartisan efforts to redress this through H.R. 634.
Next, in our affiliate derivative transaction. The
coalition recognizes the efforts of the CFTC to provide relief
on inter-affiliated use, but we still have concerns. For
example, end-users have long used widely accepted risk
reduction techniques to net exposures within their corporate
groups so that they can reduce the derivatives they do with
banks.
However, the internal central Treasury units they use run
the risk of being designated as financial entities subject to
mandatory clearing and margining, even though they are acting
on behalf of non-financial end-user companies otherwise
eligible for relief from these burdens. We support H.R. 677 as
a straightforward and necessary remedy for this and related
problems.
Finally, capital requirements for derivative transactions.
With your help, end-users could successfully navigate the
complex regulatory issues I have described today, only to find
that the unclear OTC derivatives we seek to continue using have
become too costly because of much higher capital requirements
imposed on our banks. The bank regulators have proposed a new
credit valuation adjustment, significantly increasing capital
requirements on all derivatives.
However, European regulators have concluded endusers'
hedging activities are in fact reducing risk and should attract
less capital than swap dealers' trades. They propose to exempt
non-financial end-users from these capital requirements. This
would put FMC and other American companies at an economic
disadvantage compared to our European competitors. The
coalition supports legislation such as H.R. 1341 directing FSOC
to study this problem and report on the consequences for
American competitiveness.
A related issue is the swaps push-out provision of Section
716 of the Act, which would require that banks contribute
additional capital to establish separate subsidiaries by this
July to conduct much of their derivatives activity.
Although I have focused here on a few main concerns, end-
users are very concerned about the web of, at times,
conflicting rules from U.S. as well as foreign regulators that
will determine whether we can continue to manage business risk
through derivatives. The clear end-user exemption we thought
would apply is still uncertain, confronting us with the risk of
foreign regulatory arbitrage and potential competitive burdens
that could limit growth and ultimately our ability to sustain
and we hope grow jobs.
Thank you again for your attention to the needs of end-user
companies.
[The prepared statement of Mr. Deas can be found on page 60
of the appendix.]
Chairman Garrett. And I thank you as well.
Dr. Parsons, from MIT, welcome to the panel. You are
recognized for 5 minutes.
STATEMENT OF JOHN E. PARSONS, SENIOR LECTURER, FINANCE GROUP,
SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF
TECHNOLOGY
Mr. Parsons. Thank you, Chairman Garrett, Ranking Member
Maloney, and members of the subcommittee for giving me the
opportunity to testify here today.
It has been nearly 3 years since the passage of the Dodd-
Frank Act, and many of its derivative market reforms are still
not fully implemented. Americans remain threatened by the same
dangers that exploded on the country in 2008. Congress should
consider ways to encourage and enable the full implementation
of the Dodd-Frank derivative reforms.
Instead, five of the seven legislative proposals before the
subcommittee today take us in the opposite direction. They
reverse key elements of the reform. They resurrect the old
system in which major segments of the derivatives markets are
off limits to the cop on the beat. They reinstate the old
system in which the cop's discretion and authority is severely
limited, while at the same time financial players are given
greater license and more loopholes.
These pieces of legislation in their style highlight the
stark differences between parts of the OTC derivative markets,
which operate on two very different business models. The first
business model is organized around the unique services that OTC
swaps can offer to American and international businesses. It
was the model that was responsible for the origin of swaps at
the end of the 1970s.
The swaps marketplace is uniquely positioned to offer
customized as well as less liquid derivatives complementing the
standardized derivatives offered for trade on futures
exchanges, and the swaps marketplace provides an alternative
for competition in standardizable derivatives, too.
In serving these needs, the swaps market provides a real
service to the economy, and it can be supported in this by a
proper regulatory framework like Title VII of the Dodd-Frank
Act. Unfortunately, before the financial crisis, the OTC swaps
marketplace also had a second business model, organized around
the lack of regulation. It valued operating in dark markets and
the ability to evade supervision. It warehoused growing volumes
of credit risks on the balance sheets of derivative dealers. It
does not provide any unique service to the economy. It
undermines the economy's stability.
Growth in this trade was a classic case of regulatory
arbitrage. This arbitraged trade did not have an interest in
sound and stable markets, because its very existence relied on
the lack of regulation and oversight. This arbitraged trade did
not advocate wise regulation. It fought hard for no regulation.
This is best epitomized by the legislative fight over the
now-infamous Commodity Futures Modernization Act of 2000. Full
implementation of the Dodd-Frank Act's derivative reforms to
this arbitraged trade and push the OTC swaps industry to focus
on the truly productive business model.
Unfortunately, a large portion of the industry remains
wedded to the regulatory arbitrage model. It constantly turns
to Congress, and returns again and again, in a bid to repeat
the success it had before the financial crisis in blocking
sound and universal standards for market conduct.
Much of the legislation at hand in today's hearing supports
the bad business model of the arbitrage trade. The legislation
is animated by the private benefits of loopholes for select
constituencies and overlooks the value of universal standards
that benefit the U.S. economy.
What the country needs is good regulation that supports
sound and stable derivative markets providing real services to
America's businesses. What the country needs is to finish the
implementation of the Dodd-Frank derivative reforms. As of
today, this job is not yet done and that is where Congress
should focus its attention.
Thank you.
[The prepared statement of Dr. Parsons can be found on page
66 of the appendix.]
Chairman Garrett. Again, I thank you.
At this time, we will go to questioning, and I will yield
myself 5 minutes.
I will start with Mr. Deas. First, you did discuss this,
but maybe I will just give you a moment to elaborate on the
economic impact if traditional end-users were having to comply
with a margin requirement?
Second, in your testimony you talked about how under the
existing framework, the prior framework, end-users were not
required to have margin requirements. But I think you used
language as to the extent that the institutions would take this
into account with regard to their pricing.
Could you just flesh that out a little bit?
Mr. Deas. Yes, sir. Thank you for that question.
The coalition commissioned a study of the effect of having
to post margin, and FMC participated in that study. We are a
member of the Business Roundtable, and we surveyed the non-
financial members of the Business Roundtable and found that on
average, those members would have to set aside $269 million to
margin their derivative positions.
And the effect of this, when we extrapolate it across the
S&P 500, of which FMC is also a member, would be diverting cash
from investment and expanding planned equipment, building
inventory for higher sales, conducting research and
development, and ultimately growing jobs. And the jobs effect
across the S&P 500 was 100,000 to 120,000.
I think even Chairman Bernanke has said that he agrees with
the concept that end-users should not be subject to margining,
but he feels the legislation is ambiguous and requires the
banks he regulates to collect that margin. But the effect on it
would be to stifle growth.
Now, for the price that is built in, just to give you an
example, my company hedges energy exposure. We produce
chemicals, and energy is a large component of that. So we would
buy over-the-counter derivative strips to hedge the price of
natural gas for the future.
Today, you can buy that kind of locked-in protection for
2014, for let's say around $4 an MMBTu. And we estimate that
the credit spread that is built into that by our banks that
would cover a period of anywhere from 18 to 24 months and would
be something like 2 cents out of that $4 an MMBTu.
Whereas, the fluctuations in the price of natural gas could
be as much as 40 cents over that period, which would multiply
times our consumption of eight million MMBTus, be a
considerable amount of liquidity that we would have to hold in
reserve, because failure to meet that margin--
Chairman Garrett. So, would the argument be that 2 cents is
or is not adequate then, versus the 40 cents fluctuation?
Mr. Deas. Well, no, sir. I don't think there is an argument
against it.
Chairman Garrett. Okay.
Mr. Deas. That is how the market conducts itself, and so
all the end-users, FMC and all the other end-users I know have
opted to pay that credit spread--
Chairman Garrett. Right, right.
Mr. Deas. --rather than to margin. And then, the extreme
case would be if the regulators imposed daily margining which
would introduce more volatility.
Chairman Garrett. Okay, thanks.
I will jump over to Congressman Bentsen. I think you were
the one who commented on the SEC requirement of doing economic
analysis. I appreciate that. And I think you pointed out that
cost-benefit analysis is just basically in keeping with what
the Administration was trying to do elsewhere, right?
Mr. Bentsen. That is correct. The Obama Administration
issued an Executive Order, I think 2 years ago now, requiring a
cost-benefit analysis regime with independent agencies. They
don't have the exact authority to do it. The SEC has weighed in
on that and has been building it. But this legislation we see
is in line with that, with the Obama Executive Order.
Chairman Garrett. And isn't it also--my understanding of
it--we had Chairman Schapiro here 27 times, I think she said.
And she said that they are already doing it voluntarily; this
would just basically codify it.
Mr. Bentsen. I think that is right. If you talk--in our
discussions with the SEC, they are building out a cost-benefit
analysis regime. And that is evident in recent actions like the
request for information regarding H.R. 913.
Chairman Garrett. Thank you very much.
I appreciate the panel.
The gentlelady from New York is recognized for 5 minutes.
Mrs. Maloney. Thank you.
I want to welcome all the panelists, particularly my former
colleague, Ken Bentsen. It is very good to see you.
And Mr. Childs, who is DTCC is in the district that I
represent.
I do support H.R. 742, which would put us in line with the
rest of the world. But in your testimony today, it is almost
too good to believe when you say you can give on-time data on
interest rates, credit default swaps, the overview of exposure
trends.
Did you have this information before the financial crisis?
Could you have prevented the financial crisis and notified
regulators? It says you are in constant contact with them. Why
was this information not used in a way that it could have
alerted us to avert or take steps to avoid this financial
crisis from which we are still recovering? Every economist
tells us it is the only one we have had which we could have
prevented with better financial oversight and regulation.
Mr. Childs. Thank you for that question. I think it is
important to understand the development of how we got to where
we got to. And it is true that from 2005 we have been
collecting data, but not for the purpose necessarily of
regulatory oversight. Obviously, the DTCC itself is not a
regulator.
Actually, the trade information warehouse, which was the
pre-runner to the repositories that we are now building, was
built so that we could better administer the operations of
credit default swaps. Interestingly, when the crisis did hit,
it was at that point where it became very clear that the data
we held would be very useful.
And it was at the point that we actually started with the
industry, on a voluntary basis, making that data available to
regulators. And it was actually quite useful during the
aftermath of the crisis to understand the true risks that were
in, at least, the credit default swaps market.
In many respects, I think the repository we had drove a lot
of the legislative response to the crisis. So it is true to say
we had a lot of that data at the time of the crisis, but it
wasn't necessarily, or it wasn't being used at that point from
a regulatory oversight perspective.
Mrs. Maloney. How can you be sure that your data is
accurate if the industry we are trying to regulate is supplying
the data to you? So if a lot of the problems that we tried to
correct with Sarbanes-Oxley and really the derivatives and
other oversight is that the data that we were given--regulators
were given--was inaccurate? So the data is coming to you from
the industry we need to regulate. And so, how you be sure the
data is accurate?
Mr. Childs. It is a good question in as much that a lot of
this data is self-reported. Having said that, with the
provisions of Dodd-Frank there is the need for both sides to
the trade to verify their positions. So, there is not just one
counterparty reporting. The other side should be looking at
that data.
And when it is a trade between two swap dealers, as well,
one of the important pieces of provision of data is the value
of that trade. And so, both sides of the transaction are
independently sending in to the swap data repository their own
independent valuation of those OTC transactions. So right
there, hopefully there is a check and balance.
I think the third thing is there is obviously now it is
transforming into a highly regulated market, and the regulation
itself should force the market participants to comply with
their regulatory responsibilities.
As it relates to the data itself, there are also validation
techniques that we use when we are receiving data to ensure
that the trade information that is coming in meets the
requirements that are set forth within the regulation.
Mrs. Maloney. Okay.
I would like to ask Ken Bentsen on the extraterritoriality
of the bill, H.R. 1256, how has the proposed bill changed from
the bill that moved though Congress last time? And given the
fact that we are in a global economy and that some trades
executed overseas could have a direct impact, not only on our
financial institutions, but on our overall economy, what are
your thoughts about the new U.S. swaps regulations and how they
apply to U.S. entities operating overseas?
Do you think that this addresses it? Could you expand on
that?
Mr. Bentsen. Thank you. I think what this bill attempts to
do is to better coordinate the rulemaking, and do by rulemaking
in terms of process what the cross-border regime should be for
swap dealer registrants who are operating in the United States.
And the goal, from our standpoint, would be to have a
uniform application in the United States in as uniform an
application globally, because this is a global market.
So what we are concerned about with the process as it is
gone so far is that we have a potential uneven application
through the extraterritorial application of U.S. rules with an
uncertain definition of who is a U.S. person and who is not.
How that treats foreign branches and affiliates of U.S. swap
dealers, and that affects the market back here; whether you
have reundancy in regulation or duplication in regulation in
foreign markets and whether you have equivalency in regulation.
We see the Europeans who are moving forward with EMIR and
Mifid in implementing their rules. The various Asian
jurisdictions are moving, at maybe not as fast of a pace. But
there needs to be a level playing field across these markets.
And it has to start with, in our view, a joint or dual
rulemaking between the U.S. regulators, and we haven't had that
so far.
And I would just lastly say, we have seen because of the
process that has gone forward with the CFTC getting too far out
in front that they have had to backfill through exemptive
relief and no-action letters beginning on October 12th, at the
end of this year, at the end of March, and going--which will
continue through this year, which has created uncertainty in
the market and seen counterparties move away from U.S. swap
deals--U.S.-registered swap deals.
Mrs. Maloney. My time has expired.
Chairman Garrett. Mr. Hurt is recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman. And I thank each of the
panelists for being here and each of the patrons for bills that
we are considering today. I commend Mr. Grimm and Mr. Peters,
especially on the end-user bill.
I wanted to just follow up with Mr. Deas, a little bit. I
come from a rural district in Virginia. We have a lot of
farming--dairy, tobacco, beef, grain. And I was wondering, for
my constituents who are maybe watching this hearing, maybe not,
I was wondering if you could break it down a little bit more in
terms of what the threat to their operations--these are folks
who depend on fuel, stable prices for fuel, and they depend on
credit.
If you could elaborate a little bit on the effect of
increased capital requirements, and so forth, on end-users if
this legislation is not adopted here, and very importantly,
down the hall of the Senate, and made law.
Mr. Deas. Yes, sir. Thank you for that question. FMC, as I
mentioned, was founded 130 years ago, to make spray equipment
for farmers. Today, we make and sell over $2 billion of
agricultural chemicals to farmers. Your constituents depend on
our products to make their living. And they expect not only
innovation, but products at an effective cost.
So as I described in our manufacturing, we use natural gas,
and we have other inputs, and we try to achieve that low cost
and predictability through, in part, managing our costs with
derivatives. And so one of the important members of our
coalition for derivative end-users is the Agricultural
Retailers Association. And they have seen the effect on people
in your district who would be hedging what is in the silo or
hedging their future fuel costs of one type or another and then
having a network of suppliers who themselves depend on
derivatives to hedge their costs and provide products to them.
Mr. Hurt. Thank you. I also wanted to ask Mr. Bentsen about
testimony that was submitted in writing, and he touched on it
briefly in his oral testimony. But in talking about the swaps
execution facilities and some of the requirements--the CFTC has
proposed rules relating to the customers requiring at least
five market participants for a request for quotes, and
requiring SEFs to display quotes for a period of time.
In your testimony, your written testimony, you said this
differs from current market practice and could have significant
impact on the liquidity in the swap market. Could you talk a
little bit more, elaborate a little bit more about the effects
that would have, or those two proposals and the rest of the
things that are of concern in the CFTC proposal and the
importance of making sure we getting that right?
Mr. Bentsen. Yes, Congressman, thank you. This is an issue
which was part of the statute that requires, in lieu of an
exchange trading, if you will, the ability to trade swaps
through a swap execution facility. This is a new entity created
by legislative fiat, so it doesn't exist today.
And both the SEC and the CFTC are required to create these
under the Act for the swap markets that they have jurisdiction
over. They have come out with different proposals where the SEC
has proposed that it would be the--the customer can determine
whether or not or ask whether or not they want multiple
requests for quotes.
The CFTC has come out with a proposal requiring a mandatory
minimum of five requests for quotes, along with a block trading
exemption, so certain trades of a certain size are exempted
from that. The problem--and this really comes from our buy side
members, so our members who are mutual fund companies, asset
managers, managers for pension accounts, whatever, and their
concern is they do not want to have a requirement--they want
to--they don't mind having the ability to ask for multiple
quotes, and they are very sophisticated in the markets on a
regular basis, but they don't want to have to have a mandatory
requirement where they are effectively telegraphing to the
market when they are making a transaction to rebalance a
portfolio for liquidations, whatever the case may be.
And they are going to have to hedge that trade they are
making in equities or bonds, whatever it may be, that they are
telling the market what trade they are making. And that is
going to impede best execution at the cost of their end-users
and customers.
Mr. Hurt. And will impact liquidity and--
Mr. Bentsen. Absolutely. Yes, and so they are the ones that
this is designed to help, and they are saying, ``Stop, because
this isn't going to help us. This is going to hurt us.''
Mr. Hurt. Thank you. I think my time has expired.
Chairman Garrett. The gentleman yields back.
The gentlelady from California?
Ms. Waters. Thank you very much, Mr. Chairman. I have a
question for Mr. Deas, representing the Coalition for
Derivatives End-Users. I thank you for your testimony, and I
think you have clarified a number of things, but I would like
you to comment on the fact that this week we learned that ICAP,
the biggest broker of interest rate swaps between banks, is
being probed by the CFTC on whether their brokers colluded with
banks in fixing interest rate swap prices. In particular, the
CFTC is investigating whether ICAP brokers colluded with
dealers, who stand to profit from inaccurate quotes, including
failing to update published swap prices on a trading screen
until after the trades occur.
As I understand it, the ISDAfix prices that ICAP is being
accused of manipulating or the--it is ISDAfix prices that ICAP
is being accused of manipulating are used by many corporate
treasurers to gauge their funding costs. I raise this point to
ask a question. We are focusing quite a bit in this hearing
about the cost of Dodd-Frank to derivatives' end-users, which
include major U.S. companies. But in the wake of this probe,
along with instances of LIBOR manipulation, to what extent are
derivatives' end-users concerned that the system is rigged and
that we actually need enhanced enforcement to ensure that there
is an even playing field in our derivatives markets?
Mr. Deas. Ranking Member Waters, thank you very much for
that question, and thank you for your support of and attention
to end-user issues.
A derivative by its very nature is a financial instrument
whose price is derived from an underlying instrument. When my
company goes to issue a bond in the public debt market, perhaps
we have chosen to make it a 10-year term, we will hedge the
interest rate risk with a 10-year interest rate swap
derivative, custom crafted to meet that, and the price of that
derivative, we can determine independently by looking at the
actually second-by-second movement of the associated 10-year
U.S. Treasury note that would correspond to the maturity that
we are issuing.
And so we have, through access to these sources, a ready
way to check what we think the price is, and then what we do is
bid that transaction to a group of our banks--sometimes three
or four banks--and pick the winning bidder from that group. So
we have an independent means to get in the neighborhood, and we
have a competition that allows us to select the best price.
Now, the swap data repository will make that somewhat
easier in that it will provide, to the extent that it has data
for the term and the amount that we are specifically interested
in, that is yet another cross-check, but we feel that we are--
we have adequate means to assure that we are getting an
appropriate deal for our shareholders, our employees, and to do
a proper transaction for the company.
Ms. Waters. I would like to go to Mr. Parsons now. If
manipulation is allegedly occurring in the highly liquid
interest rates swaps market, what does it say about the
potential for a manipulation in less liquid markets? Does this
underscore the imperative for the reforms in Dodd-Frank Act?
And while you are speaking on this, as I understand it, the
ISDAfix is a benchmark for fixed rates on interest rate swaps.
You did not speak to that, Mr. Deas, but I would ask Mr.
Parsons to comment on that.
Mr. Parsons. Thank you. Certainly, if you can fix the
interest rate market, the largest market in which there are so
many, many other players, you can fix all sorts of other more
illiquid markets. I was a little startled by Mr. Deas' response
to you. If he prices his bonds off of U.S. Treasury rates, he
would be a very unusual corporate treasurer.
Typically, you would price your bonds off of the swap rate,
which is at a differential to the Treasury rate, and the swap
rate is sometimes at a higher differential, and sometimes a
lower differential. While they may not be manipulating the
Treasury rates, if they are manipulating the swap rate, the
premium or discount that the company is getting on selling its
bond has just been manipulated, and there is no way for Mr.
Deas to verify that by looking at the Treasury bill.
We need supervision to assure that markets work well. That
has to be true about all kinds of markets. And a non-
transparent market is going to have problems.
Ms. Waters. Thank you very much. I yield back.
Chairman Garrett. Thank you. The gentlelady yields back.
Mr. Royce?
Mr. Royce. Thank you, Mr. Chairman.
In March, the acting USTR sent a letter to the Speaker
noting his intention to launch negotiations of an E.U.-U.S.
trade deal. This is, I think, a very positive development. And
I am hopeful that we have a permanent USTR that can be named
expeditiously and that negotiations are going to be under way
very quickly.
But the letter noted, as it relates to trade and services,
that a deal should improve regulatory cooperation where
appropriate. Clearly, financial services of securities,
banking, and insurance are an area where improved cooperation
and coordination would be more than appropriate.
And I was going to ask Mr. Bentsen, do you agree that
renewed interest in an E.U.-U.S. trade deal can have a positive
impact on the ongoing conversation related to derivatives
regulations and other aspects of financial services regulation
in the United States and Europe? And specifically, could the
trade deal help facilitate a framework for developing
recognition arrangements?
Mr. Bentsen. Thank you, Mr. Royce. We completely agree with
that sentiment. We have been outspoken about the fact that we
think a U.S.-E.U. trade agreement is entirely appropriate. We
are very supportive of it on the broad range, but we also
believe that it should include a financial plank to accomplish
exactly what you are talking about. You are talking about two
of the most intertwined markets, and combined, the largest
financial market where you have similar efforts and new
financial reforms going on, and we believe this agreement could
be a model for regulatory coordination across very similar
markets.
We have seen this, as you know, in other agreements such as
the U.S.-Australian free trade agreement, where there is a
mutual recognition component. And obviously, there are mutual
recognition components in other sectors in trade agreements, so
we think it is entirely appropriate, and we have been
advocating such to the Administration.
Mr. Royce. Let me ask you another question. On the question
of extraterritorial application of derivatives regulation, we
have a problem where we need to ensure that we have similar
regulation and similar enforcement by regulators, but there is
also an important component that I think can't be
understressed, and that is we have a problem of trust between
nations which must withstand the pressures of crisis situations
like the last financial crisis, and we need to build this
trust.
In testimony before the House Agriculture Committee last
December, the head of the European Commission's market
infrastructure unit said that one consequence of the current
rules under consideration in the United States is that, in his
words, ``Trades will not be able to clear and end-users will
not hedge their risk or firms will hedge their risk, but they
will only take place within one jurisdiction, which means that
risk will be concentrated in one jurisdiction. The consequence
of that is a fragmented market and a significant concentration
of financial risk in the U.S. system.''
The regulations which have been imposed appear to have sort
of the opposite of intended intent here. The consequence has
been sort of the reciprocal. We wanted to decrease risk and
increase global cooperation, but at least as perceived by
Michel Barnier in that quote, he reached a different
conclusion.
So what can you tell this committee about the coordination
that you are seeing between U.S. and foreign regulators to
ensure that there is a level playing field? And how do we avoid
risk spilling over into the United States without adopting an
overly strict extraterritorial regulation that appears to place
distrust on the--in the part of our economic allies overseas?
Mr. Bentsen. Mr. Royce, I think since that time, since the
initial CFTC proposal and some of the push-back that has come
not just from Europe but from various Asian jurisdictions,
there has been increased dialogue through the IOSCO channel.
And I think that is very positive. I think comments from former
SEC Chairman Walter while she was in Australia about where the
SEC may be heading with their proposed rule on cross-border are
all positive steps.
But you are absolutely right. At the end of the day, there
is a reason for the G-20 principles in uniform application,
because you have--it is a global marketplace, and there has to
be very good global coordination to make sure that we have a
level playing field across the globe.
And, again, it goes back to your comments on trade. That is
a perfect opportunity to create a protocol to address it.
Mr. Royce. If I could just close with Mr. Barnier's quote
yesterday, he said, ``It would be a great concern if
duplicative rules were imposed in isolation, as it would start
a process of costly replication worldwide, leading to capital
and regulatory fragmentation.'' So, he is clearly still
concerned.
Mr. Royce. Thank you.
Chairman Garrett. Thank you.
Mr. Scott is recognized for 5 minutes, and a little extra.
Mr. Scott. Yes, okay. Thank you very much. I appreciate
that. I have questions for Dr. Parsons and Mr. Childs and Mr.
Bentsen.
First of all, Mr. Childs, I think the swaps data repository
deal is very critical to smooth operations of our derivatives
operation, but my understanding is that when a foreign
regulator requests information from a U.S.-registered swap
dealer repository, then that depository is required to receive
a written agreement from the foreign regulator that it will
abide by certain confidentiality requirements and that it will
indemnify the SDR and its U.S. regulator for any expenses
arising from litigation relating to inappropriate public
release of information. Is that correct?
Mr. Childs. That is correct.
Mr. Scott. All right. And our bill, the bill before us,
H.R. 742, would strike this indemnification requirement related
to both the swap data gathered by the SDR and the data
collected by the Commission.
So I think it is important for you if you can explain to us
just in plain terms what is indemnification as a legal concept,
both with respect to domestic law, as well as the regulatory
regime here and in foreign countries? And why would such a
concept need to be included in the section of Dodd-Frank
dealing with information sharing?
Mr. Childs. Thank you for the question. I think it is
first--it is probably important to point out that I myself am
not a lawyer, but I think that--or the concept here is that in
a global market, data will be held in repositories. And under
the legislation from Dodd-Frank, at this moment in time, if a
foreign regulator needs to see any data that is held within
that swap data repository, they would have to indemnify both
the repository operator and the CFTC against any potential
loss--litigation loss resulting from the use or misuse of that
data. That concept, as I understand it, is not necessarily a
concept which even exists in some foreign jurisdictions.
I think it is also important to note that in a reciprocal
arrangement, it is unlikely that a U.S. regulator would be
prepared to sign that indemnification language themselves.
Mr. Scott. So what sort of data protection procedures are
in place in DTCC and in the industry as a whole that would make
indemnification unnecessary, as this bill would do?
Mr. Childs. Again, a very good question. First of all, it
is obviously important for the transparency of data for
regulators around the world to get access to the data that they
need so that they can fulfill their function on systemic risk
oversight. But I think it is also important, in direct response
to your question, to note that it doesn't mean that any
regulator around the world can simply ask for all of the data
within the swap data repository. There are very stringent
controls that we would have in place and do, in fact, already
have in place on the voluntary side of data provision, which
ensures that regulators only get to see the data that they are
entitled to see to perform their function.
Mr. Scott. All right. Dr. Parsons, I would like to turn to
you for a moment and ask just a couple of quick questions about
some things that have been in the news, and I think it is
important that you comment on these, for example, the London
Whale trades which continue to be in the news. Can you tell us
very briefly, what was the nature of these trades? They were
proprietary trades, were they not, rather than trades done on
behalf of a customer of a bank?
And if they were proprietary trades, would they not be
covered by the Volcker Rule? As I mentioned in my opening
statement, none of the corrections to the portions of the
Volcker Rule are in place just yet, but would you comment on
that, please?
Mr. Parsons. As I read the facts as they have come out from
the investigations, that was prop trading, speculative trading.
It would be prohibited by the Volcker Rule. Of course, there
are people who want to broaden the definition about what
portfolio hedging is in ways which I think would make it
practically impossible to say that anything was not a portfolio
hedge. And so, they would defend those trades that way.
But it seems to me that the regulations--the first drafts
of the rules that the supervisors presented included a number
of provisions to examine the activities in an institution like
the CIO and would have identified this as the kind of trade
that is prohibited. But it wasn't yet in effect. The Volcker
Rule is not yet in effect.
Mr. Scott. Thank you.
Mr. Bentsen, quickly, I know my time is pressing, but this
pushout rule, the pushout rule results in pushing these swap
activities out of the bank and into an area. And it is provided
in Dodd-Frank that failure to do so then punishes or forfeits
the bank from participating in the Fed's window, as well as
FDIC insurance.
My concern is--and I would like for you to comment--does
this weaken the situation more? Is this not--
Chairman Garrett. If you can quickly respond, since we are
over by 1\1/2\ minutes here.
Mr. Scott. All right. Thank you.
Mr. Bentsen. I would say no, because the way the
legislation is written, it doesn't open up the access to the
payment system or to these particular swaps. And I think the
reason why you have the prudential regulators, who didn't like
this in the first place, is they don't like the idea of taking
capital out of the bank and putting it in a separate affiliate,
so they would rather keep it there where it is under their
jurisdiction.
Mr. Scott. Okay, thanks.
Chairman Garrett. Great. And thank you.
Mr. Huizenga, you are recognized for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman. I appreciate that.
And somewhat following on what my colleague was talking
about, Mr. Childs, if you don't mind, maybe expounding on this.
I understand--I was not here when Dodd-Frank was created. But
what I tell people is I am living with the echo effects of it,
and we are trying to sort through and figure out how we make
these things more manageable.
And my understanding is that this indemnification process
was actually inserted during the conference committee. There
weren't any hearings or discussions about it. And so, I think
we are obviously dealing with some of those unintended
consequences.
I am curious if you can give some perspective as to why
foreign regulators have rejected the inclusion of these
indemnification provisions in their derivatives reform
legislation and why suddenly we think it is a good idea for us
to be sort of an outlier or why some believe it is a good idea?
Mr. Childs. Yes, thank you. I think there are probably two
reasons. One is, as I had mentioned, that indemnification is
not even recognized in some jurisdictions. And the second
reason, without talking on behalf of regulators and what they
were really thinking, I think that it is generally accepted
that in order to provide the right level of oversight and
transparency, it is important that the data flows to where the
data needs to be.
And the indemnification provisions would make that much
more difficult, in some respects almost impossible. And, of
course--
Mr. Huizenga. Specifically how?
Mr. Childs. Because if we as a swap data repository
operator cannot provide the data without the indemnification,
and if they cannot provide the indemnification, then the data
cannot flow. And at that point, you don't have the transparency
and the oversight that you need. Obviously, it is even more
important in times of crisis that data can flow quickly. Just
the kind of paperwork--
Mr. Huizenga. An irresistible force moving an immovable
object.
Mr. Childs. Right, exactly.
Mr. Huizenga. Okay.
Mr. Childs. So, it feels like a correction is required to
bring the rules in line with what is being enacted elsewhere in
the world to allow that transparency to occur.
Mr. Huizenga. And then who exactly determines what
information is available and to whom? As you are dealing with
these--I assume that data is available to those regulators,
right?
Mr. Childs. Obviously, anything that is in the swap data
repository at that moment in time is available and is provided
already to the CFTC. If we get requests from--in fact, there is
already a kind of voluntary regime which applies to credit
default swaps and interest rate swaps, where the OTC
Derivatives Regulatory Forum, which is around about 50
regulators, together with the industry agree the terms under
which data can be provided, so we already do actually provide
some data to foreign regulators, but under the voluntary regime
that is in place as opposed to the legislative regime.
But, again, as I had mentioned earlier on, I think it is
important to note that the rules around data and who gets to
see what will always be pretty clear. And so, the swap data
repository operators would provide the data underneath those
rules. And it would provide data to regulators around the world
based on the role that they perform in the world.
Mr. Huizenga. But in general, it is not available to the
public?
Mr. Childs. Correct.
Mr. Huizenga. Okay. I appreciate that.
Mr. Chairman, I yield back.
Chairman Garrett. Okay, the gentleman yields back.
The gentleman from California?
Mr. Sherman. Thank you.
I can understand the political reasons and the fairness
reasons why we have exempted end-users from posting capital. My
concern is that the financial institution that enters into an
agreement with an end-user is thereby taking the counterparty
risk. What do we have in the system to make sure that no one
financial institution is taking too much counterparty risk
dealing with end-users who are taking positions and may, when
the market moves one way or another, be unable to come forward.
Yes, Mr. Bentsen?
Mr. Bentsen. Mr. Sherman, we have a couple of things in the
system that deal with that. For starters, we have existing
capital standards that require financial institutions which are
subject to that, so principally banks or any institutions that
are subject to the Basel, that they have to put capital on a
risk-weighted basis against various types of assets, including
derivatives. So, there is that.
Second of all, under Section 165 of the Dodd-Frank Act,
under enhanced prudential standards for systemically designated
institutions and among banks under the statute, any commercial
bank with $50 billion in assets or more is systemically
designated by statute, they are required--there is something
known as single-counterparty credit limits. Now, that is still
in the rulemaking process, and, to be fair, the initial
proposal, in our view, was not as well done as it could be, but
it is in the rulemaking process at the Fed right now, and that
puts a further limitation that Congress imposed under Dodd-
Frank on the level of concentration of risk that an institution
can have with individual counterparties. And so, there are
really two areas there where there is that requirement.
The last would be--and it is in process now, both in the
United States and then through the BCBS-IOSCO working group--
the capital and margin requirements for uncleared swaps. And
that is in the proposal stage. Plus, you have the prudential
regulators who have capital margin proposals out, as well as
the SEC and the CFTC. The SEC just closed the books on their
proposal about a month or so ago, and so there is a regime that
is being established for uncleared swaps associated with that.
Mr. Sherman. Thank you for a comprehensive answer.
Dr. Parsons, back in November, Treasury issued a
determination exempting certain foreign exchange swaps. I don't
know if you are familiar with this. One situation would just be
cash on the barrelhead literally, and one side delivers $1
billion worth of dollars, the other side delivers $1 billion
worth of euros. The others could be that it is a transaction to
be taken in the future. They bet on the movement of those
currencies. Which of these does the Treasury exempt just the
immediate delivery of currency from one to the other or, in
effect, a bet on the future?
Mr. Parsons. I have to say--
Mr. Sherman. And I am only asking you because Treasury is
not here and--
Mr. Parsons. I believe it includes bets on the future. But
I have not investigated that exemption carefully. But my
recollection was--
Mr. Sherman. Your colleague, Mr. Bentsen, did you have a
comment?
Mr. Bentsen. The Treasury exemption, which the Congress put
in statute to allow Treasury to make this exemption, excludes
all swaps and forwards for FX. And I think it does so
importantly because of the tenor of the vast majority of swaps
and forwards are less than 2 years, but there is a full--
Mr. Sherman. Currency can move a lot in 2 years. But
whomever is on the losing side of that bet, then under this
exemption, wouldn't have posted any capital. What risks are
there to the financial institution that there is a 1-year bet
on which way currency is going to move and the person on the
losing side of that bet, or the company on the losing side of
that bet doesn't have the funds to produce?
Mr. Bentsen. Congressman Sherman, I would be happy to get
back to you for the record, because I don't, off the top of my
head, recall. But I would say, even within that 2-year tenor,
the great--the vast--the majority within that is even in a
much--below a year. So the way the FX market works is a very
short-term market, and that is the reason Congress, we think
appropriately at the time, recognized the monetary policy
function of the FX market, the very short-term nature of the FX
market, and designed the exemption accordingly. And I would
say, it is still--it still nonetheless is subject to the
reporting requirements under Title VII.
Mr. Sherman. I yield back.
Chairman Garrett. The gentleman yields back.
Mr. Fincher is recognized for 5 minutes.
Mr. Fincher. Thank you. Thank you, Mr. Chairman.
There are a extraordinary number of moving regulatory
reforms in a derivative space. People often forget about Basel
and the layering effect that new capital mandates, along with
these other reforms, will have on the real economy, and for job
creators hedging risk and seeking access to credit to expand
their business.
In my opening statement, I talked about European regulators
creating an exemption from CVA, and they gave the exemption
based on two things: concerns with Basel methodology; and the
impact on end-users, which is critical to economic growth.
Mr. Bentsen, I think you alluded to this earlier: are you
at all concerned about the different implementations of CVA?
And wouldn't it be prudent for policymakers to examine the
impact on U.S. financial institutions and end-users?
Mr. Bentsen. Absolutely, Mr. Fincher. We think your bill is
the right step to take. We have reached out to U.S.
policymakers because of our concern, as I said before, this
really is counter to the G-20 principles of uniform application
of capital standards as proposed under Basel III.
As you pointed out, the Europeans provided this exemption
because of their concerns. And to be fair, the proposed credit
valuation adjustment--the methodology everyone believes is
flawed and that should be reviewed. But if you start providing
exemptions in one jurisdiction, you have the Canadian
regulators who are now looking to see--again, they are very
concerned about the CVA, as well, and how it will work and what
the impact will be--you end up with a patchwork, and that
doesn't do anyone any good and it results in an unlevel playing
field that is unfair, frankly, commercially unfair to certain
sectors.
So it is something that U.S. policymakers should, we
believe very much, as well as we think other jurisdictions who
aren't part of the E.U. should look in and also that the FSB
and Basel should deal with.
Mr. Fincher. Mr. Deas, would you like to comment on that,
as well?
Mr. Deas. We agree, sir, that if--I was commenting on the
margin requirements for end-users, so it would require us to
put capital aside, and this is a concern and there is actually
a parallel effect here with requiring banks to separately
capitalize a subsidiary to take their own capital.
What we know happens is that they are going to obtain a
return on that capital and they are going to build a price into
the swaps that they do with us. We are going to ultimately bear
that, and that is going to just be a higher cost on the
economy.
Mr. Fincher. The second question is for Mr. Deas. Canadian
regulators decided to finalize Basel III, but delay CVA, until
both end-user cost and whether countries will implement it.
Likewise, we are seeing similar concerns beyond Europe and
Canada.
I actually have a quote here in an article in Risk
magazine, which is entitled, ``Asia Corporates Unfairly
Penalized by CVA Capital.'' One European bank is quoted saying
corporates shouldn't be penalized with higher prices because
banks have to hold extra capital against these trades.
Corporates don't pose a systemic risk, and their derivatives
trades are used for hedging their real-world exposures. They
are good for the economy.
Are you worried about, as the article reads, uncompetitive
pricing which could spill over into the problems with the real
economy? And couldn't progress--and Mr. Grimm's margin bill--be
undermined by different capital treatments?
Mr. Deas. Yes, sir. We have estimated as an example for my
company, which is highly creditworthy and has access to the
capital markets, that the swap spreads for my company could
increase by a factor of three. And for less well-capitalized,
less creditworthy companies, there would be potentially--
actually, the way the formula works, it would be an exposure
increase from that for less well-capitalized companies. And so,
that cost would just be spread through the economy, and
ultimately, we fear it would have an effect on jobs.
Mr. Fincher. In wrapping up, Mr. Chairman, being a farmer,
from 7 generations of cotton farmers, I am very familiar with
FMC and the products that you make. And using derivatives,
being able to hedge your positions and make the product
affordable to the agricultural community and to other areas of
the spectrum trickles all the way back down to the consumer in
the end, because if we don't have your products, we can't grow
the commodities that we produce for Americans and people all
over the world to eat and to clothe themselves.
We have to be careful that this one-size-fits-all approach
usually ends up not being the right fit, and just be careful as
we proceed. So with that, Mr. Chairman, I yield back, and I
thank the panel for the testimony.
Chairman Garrett. The gentleman yields back.
Mr. Himes is recognized for 5 minutes.
Mr. Himes. Thank you, Mr. Chairman.
I would like to thank the panel for participating today and
for your insight. And I would like to start by noting that I
think that Title VII of Dodd-Frank is one of the signal
achievements of that legislation, remedying a wrong that many
of you have talked about, which was of a very large and almost
completely unregulated market, bringing derivatives into the
light of day through clearinghouses, trading over exchanges,
being subject to margin requirements, power for government
regulators to step in and require additional margin to unwind
businesses. I believe that this is a very important step
forward within Dodd-Frank.
I also believe that as the work of mortals, it is not
perfect and subject, therefore, to amendment to improve it. I
find that this turns out to sometimes be a lonely point of
view, as some of my friends--particularly on the other side--
would suggest we should repeal the other thing, while others
believe that any effort to amend or improve the legislation is
the very work of Satan.
I find that the facts get lost in this. And now I turn to
H.R. 992, which I have coauthored with Mr. Hultgren. There has
been quite a bit of press about it. I talked to reporters at
the Huffington Post, at Mother Jones, to name two. After
extension of interviews, I asked the reporters, and they had
actually not bothered to read Section 716 or H.R. 992, as they
did these interviews.
Americans for Financial Reform issued a letter on March
15th, critical of H.R. 992, which had a number of factual
errors in it. When I called AFR to point out these factual
errors, they issued a second letter on March 19th,
interestingly back-dated to March 14th, showing that sometimes
the facts get lost.
I want to turn, though, to the substance of the question of
Section 716 and H.R. 992. It is puzzling. People like Sheila
Bair and Ben Bernanke have suggested that Section 716 is
problematic. Former Financial Services Committee Chairman
Barney Frank made the statement that this provision, Section
716, added nothing in terms of protection. And so one asks, why
is there such opposition to something that is bipartisan and
supported by regulators?
The New York Times editorial board, and Americans for
Financial Reform, their thesis is this: ``A taxpayer backstop
to derivative speculation is a bad idea. That is what H.R. 992
would permit.'' Now, H.R. 992, the idea is that the swaps that
are not dangerous, the swaps that have always been in banks and
that had nothing to do with what happened in 2008, the interest
rate swaps, the currency swaps, the commodity swaps, not the
structured asset-backed swaps, the CDOs, that they get to
remain within banks while those more dangerous swaps, which, in
fact, did have something to do with 2008, are pushed out.
What I want to focus on and bring the panel's attention to,
though, is this premise put forward by the New York Times and
by AFR that H.R. 992 opens up a taxpayer bailout or backstop.
Let me read the very first line of Section 716, which is in no
way altered or amended by H.R. 992: ``Prohibition on Federal
assistance. Notwithstanding any other provision of law,
including regulations, no Federal assistance may be provided to
any swaps entity with respect to any swap, security-based swap,
or other activities of the swaps entity.'' Now, I am not a
lawyer, but that looks to me to be a very clear prohibition on
any Federal assistance associated with swaps activity.
So my question to the panel is--and anybody can answer it--
can the fact of that very clear prohibition on any taxpayer
bailout for swaps activity, is there any merit to the
contention that H.R. 992--and, again, I quote the AFR letter--
``opens us up to taxpayer backstop for derivatives activity?''
Yes, Dr. Parsons?
Mr. Parsons. Yes, I think it does. I think it is very clear
that we have too-big-to-fail banks. I think no matter what
first line you write in a piece of legislation that says, ``We
will never, ever bail them out,'' the day that the dominoes
start falling, it would be a huge mistake if you didn't bail
them out. And you will be forced to do it.
The only way to prevent a bailout is to plan ahead of time
for institutions which can be resolved and closed down.
Derivatives present a very significant danger for that problem.
We know that there was a run on the bank of Bear Stearns--
Mr. Himes. Dr. Parsons, can I just ask you a question? I am
running out of time here. The bailout that was done in 2009 was
done pursuant to clear legal authority on the part of the
Federal Reserve, was it not?
Mr. Parsons. The problem was the--
Mr. Himes. And--
Mr. Parsons. The Federal Reserve has no ability to resolve
those banks. It didn't have the legal tools in its hands to
close them down.
Mr. Himes. No, I understand that, but there was--
Mr. Parsons. And the derivative portfolio--
Mr. Himes. There was clear legal authority, and that
subsequently has been altered, of course. If I understand your
argument, you are making the argument that we would be required
to violate the law if we were again faced with the need to or
the proposition of buttressing too-big-to-fail institutions.
Mr. Parsons. If we can avoid having too-big-to-fail
institutions, then there won't be a problem with the law and
necessity conflicting. Derivatives present a very major problem
in the event of a crisis. We had a run on the bank of Bear
Stearns, and part of that run was a run on the derivatives
portfolio of the bank. We had a run on Lehman, and part of the
run was a run on the derivatives portfolio of Lehman.
The Financial Crisis Inquiry Commission documented both of
those and identified that portfolio as a major source of the
run problem for both of those banks.
Mr. Himes. If the chairman will indulge me for just one
second, under H.R. 992, of course, all structured asset-backed
swaps are, in fact, pushed out, so would you fear that the
interest rate, currency, commodity swaps that would be
permitted in federally-backed institutions, would you fear that
there is a significant risk that those swaps would, in fact,
create a system danger within those institutions?
Mr. Parsons. Yes, I think it is important when we try to
prevent a repeat of 2008 that we not try to prevent just the
very, very, very same things from happening, but that we learn
a lesson and say, oh, wait a second. Letting that kind of thing
go on without our paying attention is a problem. All
derivatives pose a risk. All derivatives have the danger of a
bank run. It is not just structured derivatives.
Mr. Himes. Okay, thank you, Mr. Chairman. I yield back.
Mr. Bentsen. Mr. Chairman, could I just--if I might, to Mr.
Himes, I think his points were well made. Two points: One,
Section 716 wouldn't apply to Bear Stearns, and it wouldn't
apply to Lehman, because neither of them were commercial banks.
They were just broker-dealers. Neither of them were bank
holding companies or financial services holding companies.
Two, Dodd-Frank does provide--not for the Federal Reserve,
but for the Federal Deposit Insurance Corporation--the ability
to step in and take over and resolve a failing institution. So
that is in statute. I know it is of much debate, but that is in
statute today because of Dodd-Frank.
And the last thing I would say is, there is risk in the
financial system, be it a derivative, be it to a consumer loan.
That is the nature of finance and credit intermediation.
Chairman Garrett. I thank you all for those answers and for
that discussion and also for the gentleman from Connecticut's
candid observation on the journalistic integrity of the
Huffington Post and Mother Jones, as well.
[laughter].
So, thank you.
Mrs. Wagner is recognized.
Mrs. Wagner. Thank you, Mr. Chairman. I am pleased today
that we are able to address a lot of these issues relating to
Title VII of Dodd-Frank in a bipartisan way, and I know when
individuals or families around the country hear us talk about
derivatives or swaps, it is easy to lose sight about who
exactly is impacted by misguided regulations. So I do want to
note a survey of Main Street businesses that was released
yesterday by the Center for Capital Markets Competitiveness, a
U.S. Chamber-sponsored entity. It says, of all businesses which
responded to that survey, one-half stated that they are ``very
closely involved'' with the use of derivatives. Many of them
use these instruments to manage risk and keep costs low for
their customers, so we have to keep in mind that it is
manufacturers, technology companies, their customers, and
others that are impacted when regulation in this area misses
the mark.
The survey also showed that for an overwhelming number of
these businesses, it is important that the financial
institution they use ``has a wide spectrum of services to meet
their needs.'' In other words, if regulation leads to fewer
choices and less competition in the market, there is a real
price to be paid.
With that said, I do want to focus my questions on Chairman
Garrett's bill, because I believe robust economic analysis is a
critical factor that, frankly, I think has been missing
recently.
Congressman Bentsen, thank you for being here. Thank you
all for being here. But the SEC was given an enormous amount of
new authority as a result of Dodd-Frank and was tasked with
writing around 100 different rules. Are you concerned that a
proper cost-benefit analysis has been a missing factor in some
or all of these rules?
Mr. Bentsen. I think that the SEC, obviously, saw in the
case of the proxy access case that a cost-benefit analysis was
a necessary legal principle. And I think Congress has
recognized and the Administration has recognized, certainly in
Executive Branch departments, that there is a need for cost-
benefit analysis, that regulation isn't free. There is a need
for regulation, but you should weigh various factors in
crafting that regulation.
And so, we think it is appropriate to follow up on what the
Obama Administration and the Clinton Administration proposed by
Executive Order. And again, to be fair, I think we are seeing
the SEC now beginning to build a cost-benefit analysis
structure, but we think this is an appropriate approach to
take.
Mrs. Wagner. And you do agree that this needs more
attention, especially in the wake of Dodd-Frank?
Mr. Bentsen. Absolutely.
Mrs. Wagner. In your opinion, what has the SEC's track
record--you talked a little bit about their movement forward in
this--been in considering the cumulative costs of regulation
and determining whether a regulation is inconsistent or
duplicative of other regulations?
Mr. Bentsen. Congresswoman, I almost think that is a
broader question that--I don't think anyone has looked at the
cumulative cost associated with all of the Dodd-Frank reforms.
It doesn't mean not necessarily to do them, but I do think it
is important to understand what the cost is in terms of capital
allocation and capital formation and making--and then the other
point you make is consistency, that you can't do these in a
silo and just say, oh, we are just going to look at Title VII,
we are going to ignore what is in Title I or Title II or the
other costs attendant to that, but they all come together.
Mrs. Wagner. Could you explain why it is, in fact, sound
policy to exempt enforcement actions and emergency orders from
the economic analyses?
Mr. Bentsen. I think that would be appropriate in the sense
that it reflects the enforcement and investor protection
component of the Commission that you want to make sure that
they have the ability to move swiftly in enforcing the law.
Mrs. Wagner. I think the President actually put forward
some very good principles for regulators in his Executive Order
2 years ago, and considering that the SEC has been one of the
more active regulators recently, wouldn't you agree that it
makes a lot of sense to codify those principles for the SEC, as
well?
Mr. Bentsen. For the SEC and the CFTC, I think that the
President can only do so much by way of Executive Order, but I
think it sets the pathway that this is as appropriate for
independent agencies as it is for Executive Branch agencies.
Mrs. Wagner. Thank you. I appreciate that, Congressman
Bentsen.
And I yield my time back, Mr. Chairman. Thank you.
Chairman Garrett. The gentlelady yields back.
Mr. Foster is now recognized.
Mr. Foster. One of my questions is, I guess, kind of a
detail. In regards to the H.R. 677, the inter-affiliate bill,
one of the--there are a couple of changes made with respect to
last year's bill, and one of them is the change that would not
include the affiliates of bank swap dealers and the affiliate
exemption. And I was wondering, does this change allow in
principle to have back-to-back swaps with a U.S. affiliate as a
mechanism where you could potentially re-import overseas swap
exposures with the--you have an overseas affiliate and you have
a swap, and then it comes back to the United States, so that
you effectively have a loophole? Do you understand what I am
worried about here?
Mr. Bentsen. I think we would be concerned that we think
from a technical matter that the provision maybe should be
looked at, because we think that the bank--that bank inter-
affiliate swaps should be included in the exemption.
In terms of back-to-back swaps, cross-border back-to-back
swaps, I think that--in something we have talked with the CFTC
about and the SEC about is, the reason for inter-affiliate
swaps is a risk management tool within institutions, and where
you have global institutions, they are having to manage risk
globally.
So they are subject to tremendous oversight and regulation
even within inter-affiliate exemption, so we don't think you
should necessarily bifurcate and not allow that treatment
cross-border.
Mr. Foster. Okay. And it is my understanding that the
affiliates don't have to be wholly owned or anything like that,
so that there can be misalignment of interests, where you have
a partially owned affiliate? Or something like that? So this is
not like you are just netting out to zero the risk from 2
affiliates that have 100 percent common ownership, so that they
are actually--in principle, the situation could arise where you
have a misalignment, where a part of the risk is transferred
out of the organization, because of partial ownership and one
of the affiliates involved in inter-affiliate swap.
Mr. Bentsen. You are talking about either--within a
financial institution or within a corporate entity?
Mr. Foster. Yes. Yes. One or both.
Mr. Bentsen. I don't know if Mr. Deas wants to--
Mr. Foster. Is that a legitimate worry? Actually, if I
could just go to a more general question, in this job, you get
a massive respect for the ability of Senate not to do stuff,
and so if we do not pass H.R. 677 and we are left only with the
CFTC rulemaking, what are the major gaps that you see in the
response of this? What is left undone by the CFTC rulemaking
that would not be covered?
Mr. Deas. Congressman, one of the things that we are
concerned about is that the central Treasury units that serve
the risk-mitigating function of taking these exposures from
majority-owned subsidiaries and netting them out and then doing
one smaller trade with a bank, for instance, could themselves
be designated as financial entities and, if so, even though
they are wholly owned subsidiaries of a U.S. manufacturing
company like my own, they would be as financial entities
ineligible for exemption from margining central clearing, all
the end-user exemptions.
And so, that is one of the important aspects of H.R. 677,
that it would make them eligible for the end-user exemptions.
Mr. Foster. Okay, but that is also something that in
principle could be handled by a rulemaking--further rulemaking
by the CFTC, correct?
Mr. Deas. Well, sir, it hasn't been, and so that is why--
and here we are, you know, 2\1/2\ years on, and so these
ambiguities would require huge increases in information
systems, if they are not resolved, so that we could do real-
time reporting. It would cause us to make an investment in
technology almost replicating a bank's trading room, in order
to--
Mr. Foster. Sure. I understand the downside.
Mr. Deas. Yes, sir.
Mr. Foster. Yes, very well. And just a quick question on
the cost-benefit, this presumably will require significantly
more resources for economic analysis before the rulemaking. I
would normally have thought this would be accompanied by an
increase in the budget of the regulator. And I was wondering if
you had any comment on whether the extent to which this will
simply just create a further delay in rulemaking, dilution of
the SEC's ability to undergo enforcement, the fact that there
is not--this is not accompanied by an increase in the budget to
cover this additional workload? Any comments on that?
Mr. Deas. Sir, I know there are various rules in this body
on things that have to be offset, and I wouldn't be prepared
to--I wouldn't pretend to understand that.
I can tell you that the economic analysis I cited to you of
the $269 million that we would have to set aside to margin
derivatives was one that end-users funded--we funded ourselves.
We got together and that is really the only economic analysis
that I have seen on that issue.
I would just think, with all the resources of the Federal
Government, somewhere that work ought to be done. And I
wouldn't presume to say how that should be funded.
Mr. Bentsen. I would just add, again, to give credit, the
SEC has built out their RiskFin group, which started under
then-Chairman Schapiro, and so they--I can't speak to the
budget. That is your business, not mine. But they have started
down that process in establishing--not just for cost-benefit,
also look at, take an asymmetric look at markets, but in
addition to build out a cost-benefit apparatus.
Mr. Foster. Okay, thank you. I yield back.
Mr. Hurt [presiding]. Thank you. The gentleman yields back.
The Chair now recognizes Mr. Hultgren for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman. And thank you all
for being here.
First of all, I just want to agree with, and second, my
good friend and colleague, Congressman Himes, on many of his
statements. I do have a couple of questions or clarifications
that I wanted to ask.
Mr. Bentsen, you issued a statement in support of H.R. 992
when it was introduced and highlighted the strong reservations
from multiple Federal prudential regulators expressed regarding
Section 716. I wonder if you could expound briefly on those
concerns. And why are regulators nervous about sending certain
swap trades to less-regulated entities?
Mr. Bentsen. I think that they are concerned for two
reasons. I think one concern is the creation of additional
affiliates or subsidiaries, which creates a separate entity
that has to be regulated, and the other concern is it takes
capital from the parent or the holding company and puts it in
another affiliate, so I don't think they like that. I think
they like to have the supervision that they have over the
direct entity, and this goes back to when Dodd-Frank was being
adopted, but I think that concern still exists today, because
Dodd-Frank in statute gives the prudential regulators even
greater, more explicit regulatory oversight of both the holding
company and the various entities.
So I think that they feel it is better to keep it close in
and to keep the capital close in.
Mr. Hultgren. Mr. Deas, from your perspective--really, from
the perspective of end-users--many of whom use depository
institutions as counterparties for their swap trades--could you
talk just a bit about how they might be affected by pushing out
certain swap trades, and whether if commodities, equities, and
credit derivatives are spun off to affiliated entities, would
you expect prices to go up for end-users?
Mr. Deas. Yes, sir. We believe that--one of the themes of
my comments here today has been that capital--excessive capital
that is required to be placed against a derivative transaction
has a cost that ultimately end-users and their customers have
to bear. And so if these are pushed out into separately
capitalized subsidiaries, the banks which have done that will
need to get a return on that capital, and that will, we have
estimated for--I think in my testimony I mentioned, for a 7-
year interest rate swap, it could increase the credit spread by
a factor of three.
And for a less creditworthy entity than my corporation,
which has an $8 billion equity market cap, the formula works in
a way to increase that credit spread almost exponentially. So
those costs ultimately would float through the economy and we
fear would result in the loss of jobs.
Mr. Hultgren. Mr. Bentsen, back to you quickly, if I may.
Am I correct that other jurisdictions have not passed similar
prohibitions as those contained in Section 716, foreign
jurisdictions?
Mr. Bentsen. Not to my knowledge, no, sir.
Mr. Hultgren. I wonder also, am I correct that all swap
activities that remain within banks would be subject to a
finalized Volcker Rule?
Mr. Bentsen. That is correct.
Mr. Hultgren. So these trades, if a bank is involved, would
still generally be client-facing, is that right?
Mr. Bentsen. We don't know where the Volcker Rule is going
to come out, and to be fair, an affiliate or subsidiary of a
bank would be subject to Volcker, as well. But you are right.
Volcker would apply.
Mr. Hultgren. Okay. All of these swap trades are still
subject to the new regime outlined under Title VII, including,
but not limited to, the reporting requirements, entity
registration, exchanging clearing requirements. Is that right?
Mr. Bentsen. That is correct.
Mr. Hultgren. One last question. And just, again, Mr.
Bentsen or others--I just have a minute left--but does the
CFTC's expansive international reach and its lack of
coordination with foreign regulators have the potential to
impose additional costs on end-users? And I wonder again, if
time allows, what effects might this have on the ability of
end-users to hedge their risks?
Mr. Bentsen. I don't know if you want to comment--
Mr. Hultgren. Maybe it is best going to you.
Mr. Deas. Sir, we fear that there could be a foreign
regulatory arbitrage that would disadvantage U.S. users of
derivatives vis-a-vis our foreign competition, that our costs
would go up while their regulators would not have imposed those
requirements. And so, ultimately, that is where the cost would
be.
Mr. Hultgren. I see we are winding down. I only have 20
seconds left. I yield back the balance of my time, so that
others may be able to follow up further on this, if they are--
Mr. Hurt. Thank you. The gentleman yields back.
The Chair now recognizes Mr. Carney for 5 minutes.
Mr. Carney. Thank you, Mr. Chairman.
I want to thank the panelists for coming today and for your
testimony. And I want to thank and compliment the members on
both sides of the aisle who have worked on these pieces of
legislation, most of which--I think all but one of the bills is
a repeat from last time, with some minor changes, and so we are
going about it again. And most of those bills passed last time,
as I recall, some here in committee by a voice vote, and all of
them on the Floor with votes of over 300 Members.
And I say that at the outset, because I like to associate
myself with some of the frustration that Congressman Himes
articulated in terms of some of the public debate that has been
in the press and in other places about this legislation, that
somehow these pieces of legislation are trying to roll back all
of Dodd-Frank.
Dr. Parsons, I read your testimony and listened to your
comments today, and you used some pretty strong language to
criticize the bills that are before us. And in your testimony,
on page two, you say, ``The subcommittee should not advance
legislation that weakens the security of U.S. taxpayers by
inviting continued risky behavior by the largest U.S. banks and
by return to the deregulation of derivative markets.''
Congressman Himes talked about all the regulations
contained in Dodd-Frank and, frankly, significant changes to
this situation prior to 2008. Could you be specific about the
things in these bills that trouble you the most that would
undermine, as you say, the security of the U.S. taxpayer?
Mr. Parsons. To speak about the swaps pushout, I think I
replied to Mr. Himes very directly about--
Mr. Carney. Right, and he said that it would basically
require us to--or the Treasury to violate the law, which--I
have heard that not just with respect to this piece of
legislation, but with Dodd-Frank itself, in terms of resolution
authority, that somehow we would do something different than
what the law says that we are required to do or that the
Administration would, I guess.
Mr. Parsons. I understand that people may disagree. I am
just answering your question. That is my reason on this
particular issue, the pushout bill--
Mr. Carney. Okay.
Mr. Parsons. --that because I think we have--in the larger
picture of things, we have not yet finished taking care of too-
big-to-fail, more steps--it would be--it is important to finish
that job. I think when we invoke names like Bernanke and Bair
and Frank, and say that they are in favor of it, it is a little
bit out of context, because it would--there are different ways
of solving the too-big-to-fail problem.
Mr. Carney. Okay, let's put too-big-to-fail aside for a
second. Congressman Frank, by the way, supported most of these
bills the last time around, with the exception of one, which
has changed dramatically from the last time. So pushout gives
you heartburn because of the too-big-to-fail problem. What else
among the bills, in your view, undermines the taxpayer
security?
Mr. Parsons. That is the one for the taxpayer security. The
other ones are because of not having the cop on the beat, so to
speak, returning to a less regulated derivatives market.
Mr. Carney. So by exempting some of the end-user venues and
that type of thing--the purpose in doing all that is to not--
first of all, are there--in your view, are there systemic
issues that are implicated in those end-user legislative
changes?
Mr. Parsons. Yes, absolutely. I think--first of all, end-
users are already exempt in the legislation. What we are
concerned about is banking supervisors, prudential supervisors
who are worried about the credit risk on the balance sheets of
their various financial institutions, imposing prudential
standards for how those banks manage margin, manage credit risk
embedded in derivatives.
And I am worried that we seem to think that instead of a
race to the top of having financial markets with good
standards, where we lead the global community to an efficient
market that is sound and everything, we are desperately saying,
``Oh, my God, the other jurisdiction isn't doing something, we
are losing competitiveness.''
If you just look around you, we have a futures market in
oil that has no exemption from clearing mandates, lots of
margin is put up. It is the best-run commodity market in the
world, and traders from all over the world come to the United
States to this market, which mandates clearing, has no
exemptions whatsoever, and trade there, because good markets
win business. Sound, well-regulated businesses win business.
Exempted markets, loopholes, loopholes, loopholes for this
constituency and that constituency, do not promote a successful
marketplace. No other country has been able to compete with our
oil derivatives market, except by creating unsupervised
markets.
Mr. Carney. I see my time has expired. I wish I had more
time, but I guess--
Mr. Hurt. I thank the gentleman. The gentleman's time has
expired.
The Chair recognizes Ms. Sewell for 5 minutes.
Ms. Sewell. Thank you, Mr. Chairman.
I want to thank our panel participants today. This hearing
gives us yet another opportunity to hear from witnesses and
discuss Dodd-Frank's derivative reform and some of the
challenges facing the U.S. and international markets.
We must, I think, remain vigilant in making sure that we
address any unintended consequences of this new regulation, and
that is why I support the bipartisan and common-sense technical
corrections and clarifications, such as H.R. 742, the Swap Data
Repository and Clearinghouse Indemnification Correction Act of
2013, which helps to ensure that regulators continue to have
the transparency in the derivatives markets needed, but at the
same time helps to mitigate the risk in our domestic and our
international markets.
I really do want to applaud both the CFTC and the SEC in
drafting and implementing the crucial new regulations, many
aspects of which were fine, but I think that in helping us
clarify it, we only make this legislation better.
So I actually have two questions. One is to Mr. Childs. Can
you please provide your perspective on how your trade
repository has responded and cooperated with the regulators in
the crisis and how the indemnification provisions would help or
hurt those effects in the future?
Mr. Childs. Yes, thank you for that question. There is very
rarely a day that goes by that we are not actually talking to
the CFTC about how we as a swap data repository can help
increase the transparency in the derivatives markets, and how
we can provide them the data that they need to fulfill their
function, how we can improve upon that data. So there is a very
good collaborative effort at the operational level with the
regulators on the provision of data.
Specifically to the indemnification side of the language,
obviously, as we talked about earlier, it is really important
in global markets that the data is provided to those in
regulatory roles that need that data. And the indemnification
language, as it stands at the moment, just makes that sharing
of data that much more difficult.
Ms. Sewell. Thank you.
Mr. Bentsen, on cross-border issues, what are your concerns
related to the proposed CFTC cross-border guidance?
Mr. Bentsen. I would say we have three concerns. Number
one, in terms of what the U.S. person definition is, the
initial proposal was a departure from established law and
regulation with respect to who is deemed a U.S. person or not,
that had a potential discriminatory effect at worse or at least
a redundant effect.
The second is the substituted compliance regime, which went
across, I think, 16 different transactional or entity-level
activities on almost a country-by-country basis and company-by-
company basis that we think really sort of goes against the
international comity and the sort of traditional mutual
recognition approach.
And then the third would be a matter of process, both in
terms of coming out too quickly and then having to backfill, as
I mentioned earlier, with various exemptive relief and no
action relief, which we have been to three stages of now and we
will have more, but the other in doing it--in terms of guidance
as opposed to an actual rule proposal, which we think is
appropriate.
And, lastly, we think, given that cross-border application
really tees off of definitions, and Congress wisely said that
definitions had to be proposed jointly by the SEC and the CFTC,
that would have been appropriate here.
Ms. Sewell. Very good. Are there any examples of any
adverse impact on market participants? Can you give us--
Mr. Bentsen. We have seen--we have had members report to us
that certainly around October 12th, which was sort of the
kickoff date of swap dealer registration in the United States,
that confusion over who would be deemed a swap dealer or not, a
major swap participant, resulted in certain foreign
counterparties moving away with swap entities that were
required to register as a swap dealer in the United States. And
so, that continues to be a concern if there is confusion in the
marketplace around the globe.
Ms. Sewell. Thank you. I yield back the rest of my time.
Mr. Hurt. The gentlelady yields back.
Before we adjourn, are there any Members who wish to be
recognized? No? With that, I would like to thank each of the
witnesses for appearing today for this important testimony.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And without objection, this hearing is now adjourned.
[Whereupon, at 12:15 p.m., the hearing was adjourned.]
A P P E N D I X
April 11, 2013
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