Impact on overthecounter derivatives. Earlier testimony for managing directors of Goldman Sachs and barclays as well as other financial institutions. This is an hour 20 minutes. Panel greetings. What youre getting your papers, et cetera organized in front of you, i welcome the second panel. A couple first housekeeping items. Nsn members here have been to testify before others have not. As a reminder before that it had been, or complete statement will be made part of the record. You will be recognized for five minutes for your statement right now so sometimes we seek to capitalize your statement and right in front of you is that clark bair. Goes down to five minutes in the final time. Also, i saw all that you sitting there with the first panel. We understood from the first panel everything is going well. We are going to move quickly through the process and of harmonization not only run the world, but accurate thomas of abuse in the second panel will tell us the exact same thing that its moving smoothly and we have no strong need for concerns. But which case he can make her happily. If not, the old adage of the host, paul hervey and now we hear the rest of the story. So with that, well start right off as we normally do from the left. From berkeley is a recognized and welcomed me to the panel and you are recognized for five minutes. Thank you. Good afternoon, chairman garrett and members the committee. My name is keith bailey. I am from barclays in that division. I appreciate the opportunity to testify on behalf of the institute of International Bankers of the doddfrank at in its impact on the market. The iab greatly appreciates the hard work done by regulators and congressional committees. We face the cftc in getting this right to operate on such a global basis. A test on a focus on continuing certainty of the type of seven regulations the effect its having on the risk of the market of the implementation process is not on a more stable footing. They recognize the need for International Consistency and coordination implementations of derivative reforms. As the committee is aware in support of this goal, the overseas applications of you as two activities either a director in significant effect in the u. S. Commerce for the potential for evasion. We support the goals of title vii which provide great transparency and increased oversight of the swaps market. There is growing concern of the cftc and divergence and the sec regarding the process and timing in the house slots and security base wipes are a furry and declines. As the committee is aware, the industry is facing quickly approaching the highest deadline. Without the benefit of final payments with the International Scope of these rules. The lack of clarity related to the rules crossborder application manifests itself in particular with respect to three aspects. The cftc sdc to more pressing concerns with the requirements. The first is to has to register as a swap deal or. Given the nature register, firms of which make decisions if i look so as to which entities to register with the cftc. Making these decisions without being fully informed to the rules that apply in literal take to comply and position untenable love love and predict ability. The inability properly to plan affects the ability of firms. The second major challenges the creation of a new definition of u. S. Persons. The cftc has proposed a definition expansive and without precedence posing difficulty for Market Participants to know which would be in scope. This is important because if a dealer treats at the u. S. Person anywhere in the world, that transaction will be subject to u. S. Requirements to execute the trade on a u. S. Clearinghouse and soft execution facility, potentially with local regulations. Conflicts introduce Compliance Risks resulting in trades not occurring. Now i definition of u. S. Person will reduce instances this conflict regulated to initially recognize each others clearinghouse and exchanges. The u. S. Definition further contributes to the uncertainty over who has to register with the socalled aggregation rule. As it stands now, it they register with the cftc to themselves register a swap elucidate transect even a single transaction with the u. S. Person. This is significantly increase the number of registered swap dealers and the resources the cftc will require to regulate them. It is hard to see how the liabilities of nonus entities with only limited to u. S. Facing activities could pose a risk to u. S. Commerce. Substitute complaints is the third issue. For example, to what extent has it had accountable to the cftc for Risk Management of global swap it dvds if they are different than those of its home country prudential regulator. The cftc is proposing to apply the usher potential regulated growth, but only if there will surpass a substitute complaints test that will require a high degree of culpability. The iab agrees that the numerous Global Regulators who suggest such an approach wont work as demonstrated this past october come such uncertainties create paralysis in the market. Clients regulators and title viis objectives for transparency in efficient markets are the losers. The resolution of these issues cannot read until until the last minute. At greater length in a written statement thursday steps the cftc can take to eliminate uncertainties. Such actions would provide the space needed for Global Regulators to strive for convergence in achieving with derivatives reform, that provide the time for the cftc and the fcc to establish a consistent with the crossborder application of title viis requirements. Thank you from yesterday to contribute to dialogue and look forward to any questions you may have. Mr. Bopps for coalition users. Thank you for being on the panel. To recognize for feminists. Make sure you do clothier might close to you. Mr. Chairman, Ranking Member waters, i want to thank you remedy the coalition for derivatives and users to be presented at this important hearing. The coalition includes more than 300 enduser companies and trade associations and collect it would represent thousands of users across the country. And as i united one respect to the strip it is to manage risk not to create it. They are able to maintain more stable and successful operations through the use of a variety of Risk Management tools including derivatives. Yet come attributes used and users must be put in it. Enduser trades account for less than 10 of the notional value of the overall Derivatives Market. The coalition has been drink each that the regulatory process, many with regulators dozens of times submitting nearly 20, others. We very much appreciate regulators to hearing our concerns and taking time to meet and speak with us on numerous occasions. We also work with congress in a particularly Care Committee on legislative means to prevent unnecessary burdens from being imposed on businesses. On behalf of the coalition id like to take a moment to think the Financial Services for his hard work in all of the legislation to the house to address an unintended consequences of the doddfrank ites. In particular want to thank congressman grimmett peters for the enduser does, cumbersome and were. The overwhelmingly bipartisan complete show process to both those in the house demonstrates changes to the doddfrank act that makes sense and can achieve a concert. With Regulatory Compliance deadlines looming, and the next you must however the coalitions concern with the direction in which circles appeared to be headed. Regulations relating to Merchant Capital requirements to enter affiliate trade commission centers and application of rules across borders. Ill touch upon these points briefly. The proposed margin requirements in particular those proposed by prudential banking regulators are especially troubling with her main street businesses. Congress is clear throughout the legislative process and text of the doddfrank act that endusers should not be subject to margin requirements because they do not natively contribute Systemic Risk. Congress also made clear imposing margin requirements for necessarily impede users ability to efficiently and effectively manage risk. As proposed, however, the rules contradict intent to impose the necessary margin requirements on users are diverting working capital from productive business use a survey conducted by our coalition 23 initial margin requirement could reduce Capital Spending by as much as five to 6. 7 billion in the s p 500 companies alone, cost them 100,000 to 120,000 jobs. Barroso concert in her affiliate derivatives trades, which take place between affiliated entities within a Corporate Group peace market spots. There were two Serious Problems that need addressing. First out of the cftc is proposed will come at financial endusers have to clear purely internal traits between affiliate unless endusers posted variation margin between the affiliates are not specific requirements for an exception. If endusers have to post variation margin, and theres little to exempting trade clearing requirements is the cost could be similar. Second, many endusers approximately one quarter of those who survey executes swaps at this of course makes sense as Many Companies make it more efficient to manage their risk sensually and have one affiliate in the market except dozens or hundreds of affiliates making trades and coordinated fashion. It appears in the regulars interpretation of the doddfrank act that nonfinancial endusers of the situates. Either dismantle are hedging centers and finding your way to manage risk or quickly rather trades. Stated another way, this problem threatens to deny the enduser clearing exceptions to endusers because theyve chosen to hedge risk and it shouldnt highly effective in risk reducing my. It is difficult to believe this is the result Congress Hope to achieve. Finally the proposed crossborder guidance also a cause for concern for the coalition. Guidance on impose additional costs on endusers to diminish hopes of counterparties. Her concern for the creation of the new bacon bits of entity from nowhere in the four corners of the doddfrank act. The term commonly used in the proposed guidance could be applied to hedging centers enforce endusers to abandon structures for executing trade. At the congressional development of the doddfrank act regulatory process. The coalition has advocated a more transparent to reduce market for the imposition of lawful Company Regulatory standards that enhance Financial Stability while avoiding needless cost on endusers. We believe imposing bush did not contribute to the financial crisis would create more economic instability, restricts job growth, decrease productive investments and hamper u. S. Competitiveness in the global economy. Thank you. The appreciate that. Ms. Cohen, welcome to the panel. You recognize for five minutes. Chairman terry, Ranking Member waters, my name is colin abbott direct tour at Goldman Sachs. The responsibilities include developing and delivering trading hedging and Risk Management solutions to the first otc trip to client specific focus on the market changes resulting from global Regulatory Reforms. And my current broadband church regularly with Market Participants that transacting swaps two miniaturist, excess liquidity and improve returns. Thank you for inviting me to testify at todays hearing to hear her live and answer any questions you have. Goldman sachs supports the overarching goals of doddfrank derivative positions including decreasing Systemic Risk and increasing transparency and devoted substantial resources to build necessary compliance systems. Commissioners and staff at the regulatory agencies including the cftc were given a difficult task and we commend a burst of vocalists of the legislation. Along with customers we been carefully monitoring the way regulators who the crossborder region, including how the u. S. Regime will interact with the Regulatory Reform efforts underway in iguchi 20 jurisdictions. Today i will race for challenges we and our clients with title vii implementation and consequences that might result from proposed crossborder guidance. First come in the cftc has taken a sleeping approach to his jurisdiction beyond u. S. Shores. Recent meetings held by the cftc and others have made it clear swap Market Participants in nine u. S. Regulators have substantial concerns about the expansive approach. These concerns will inform the ways in which Market Participants operate with some local banks in asia, europe and south america signally to u. S. Financial institutions they will have to start treating to avoid cftc swap dealer registrations. Approach may also encourage foreign break theaters to be similarly expansive as they crossed the Regulatory Reform machines. Second, the cftcs definition of u. S. Persons that dictates registration and application of title vii requirements is overly broad and at times they hurt as a result, Market Participants do not know whether they or their counterparties are or are not u. S. Persons and cannot make informed business planes. In addition, the breadth of the definition makes it nearly certain that some Market Participants will be the u. S. Person for the purpose of u. S. Regulation and media person, causing unnecessary overlap and potential regulation. Third, regarding sequencing, the cftc is chosen to finalize the title vii rules and require compliance with them before specifying. As a result, Market Participants be significant uncertainty as to oppose me apply. In contrast, the sec recognizes the need to finalize the crossborder application of its rules well before requiring compliance. Our fourth and final concerns relates to the fact that the cftc is crossborder approach has not been developed in coordination with nonus regulatory regimes. In the shortterm, the timing dispatch to the Cftc Skolnick and that of the iguchi 20 jurisdictions could cause swap customers to move their business to u. S. Regulations cannot govern swap transactions. While a permanent solution to these issues is being developed, its critical the cftc address the industrys immediate concern to avoid harmful and potentially permanent disruption to the swap market on and around December December 31st. Specifically come the cftc should temporarily permit the simplified form of the u. S. Person definition in the cftc is october 12 registration election letter for compliance with all title vii obligations. This definition is simple and clear, but still captures the vast majority of entities that Market Participants generally consider u. S. Persons. All family u. S. Person definition is developed in consultation with other regulators from the cftc should apply. Frank requirements to transactions between registries want to lose in the u. S. Person customers only. We appreciate the opportunity to offer views to congress and regulators as we Work Together to fully implement these new rules. Thank you and i look forward to your questions. From the new jersey association, welcome to the panel. Thank you, chairman terry, Ranking Member waters. I am representing to feel Merchants Association of new jersey, Petroleum Association and feel institute. Our members collectively distribute 60 of the castling and 90 of the heating oil consumed by the american public. We want to commend the cftc for dedication moving forward to featuring swaps market regulations which would bring greater transparency, certainty and fairness to a commodity Market Participants. Bona fide users of commodities, feel those features and sauce markets are not serving the best interest for what they were created for managing risk in discovering praise. So i title vii . For the first time all swaps are there clear not reported to repositories. This is an important step to help the cftc capture transit dollars traded in the swaps market. Additionally title vii is important because it limits speculation on energy trade enhances prohibition prosecution of fraud manipulation, promotes consumer protection. While the rules might not be perfect, the commodity futures modernization act of exempted wall street Firm Position limits and requirements to ensure transparency and competition and prevent fraud manipulation excessive speculation. Before passage of the csma, 60 to 90 of market for commodity. Today peerless speculative and thats only markets we know about. The sub was speculation undermines mechanisms and exacerbate markets from supply and demand fundamentals. Commodity futures markets established as a tool for true physical hedgers. It wasnt set up for banks to dominate the marketplace. The swaps lookalikes means the christmas financially settles swap markets impacts what occurs in the physical market. We set your speculation has driven prices at the pump. Oldman facts marketrate privacy for oil and other markets reversed from suggesting speculators boosting prices as much as 27 a barrel, which translates upwards of 40 cents to 60 cents a gallon at the pump. Klugman noted thats an eight to 10cent rise. What does they were opposed to speculation. Many speculation the marketplace for fiscal endusers, but distort the market. The speculation on