clearing on the standardized products. and also bringing the standardized products on to regulated trading venues, whether they be full ex-changes or electronic platforms. and this will lower risk and further enhance transparency. to fully achieve these objectives, we must enact both of these complementary regimes. regulating both the traders and the trades will ensure that we cover both the actors and the stages upon which they create the significant risk. i'm fortunate to have a partner in this effort in s.e.c. chair, mary shapiro. she brings in valuable expertise shrk gives me great confidence that we'll be able to work together on what is bound to be a lot of challenges moving forward. we have not only this, but we're going to be working together and advising congress and the rest of the administration on how we can best harmonize some of the roles between the securities and futures world and cover gaps in our regulatory oversight. president obama's call for action to lower risk and protect investors, and i look forward to working with members of this committee and others in congress to accomplish this goal. i thank you again for the opportunity to testify, and i look forward to answering any of your questions. >> thank you very much, chairman gensler. your questions. >> thank you very much chairman gensler. >> chairman reed, ranking member bunning and members of the subcommittee, i appreciate this opportunity to provide the federal reserve on the development of the new regulatory structure for the over-the-counter or otc derivatives market. the events of the last two years have demonstrated the potential for difficulties in one part of the financial system to create problems in other sectors and sidney macroeconomy broccoli. centralized clearing is standardized otc products is the key component of diverse to mitigate such systemic risk. the board believes moving toward centralized clearing for most or all standardized otc products would have significant benefits. if properly designed and overseen central counterparties orice ccp's offer an important tool for managing credit risk. benefits from centralized clearing would be greatest it ccp's are structured so as to allow participation by end users within a framework that ensures protection in their positions and collateral. infrastructure changes in the otc market's will be required to meet most otc contracts into centralized clearing systems. such changes include agreement on key terms that constitutes standardization and development of electronic systems for feeding data to ccp's. for their part, ccp's most seven place systems to manage the risk from this new business. a particular imports are procedures to handle defaults because of tc-99 products are likely to be less liquid than the exchange traded products that ccp's most commonly handled. although implementation challenges knodell whitehead, the board will work to ensure that these challenges are dressed quickly and constructively. major dealers have committed to making improvements and back office systems that are important prerequisite for centralized clearing. dealers also have committed to clearing standardized otc products and they will be expected to demonstrate progress on this commitment even as the broader regulatory reform debate evolves. substantial progress in improving the transparency of the credit default swap or cds market, occurred with the creation of the trade information warehouse. the contract repository that contains an electronic record of a large and growing share of cbs trades. the board supports grading contract repositories for all fset classes and requiring a record of all otc derivatives contracts that are not centrally clear to be stored in these repositories. aggregate data on volumes should be made public by repositories and more detailed data should be made available to authorities to support policy objectives related to the prevention and manipulation and systemic risk. although the creation of ccp's will provide an important tool for managing counterparty credit risk enhancements to risk management by individual participants will continue to be a high priority for supervisors. if the reforms outlined here are implemented the firms currently most active in bilateral otc market will become the firms most active clearing members of ccp's. as such the quality of their internal risk-management is important to the ccp. supervisory efforts are already underway to prove collateralization practices and to examine whether the current capital regime can be improved. policy issues associated with the otc derivatives are not limited to the united states. the markets are global and issues are unlikely to be fully addressed without international coordination. much work must be done but with effective oversight by supervisors, putin risk management by end users and dealers and appropriate changes in the regulatory structure, derivatives can continue to provide significant benefits to businesses and investors to use them to manage financial market risk. thank you very much and i look forward to answering your questions. .. mechanisms for that. the first is to encourage and use the tools apple and margin standardization and central clearing to the greatest extent possible and encourage exchange trading of otc, current otc derivatives and that will give chairman gonzales said control over the stage and will allow us to have centralized feeling of what is happening in these markets and benefits of capital and margin requirements with respect to those institutions but it's also critically important we have regulation of the dealers who participated in the marketplace, meaning in my view of registration, capital requirements, margin requirements, record-keeping, reporting to regulators, reporting at least eckert a disinformation to the public and very tight risk management processes within the dealers including governments, risk control, trading limits and all the things we would normally think about owls being important for dealers to control the risks they are undertaking. i also think that whether we have a systemic risk regulator at the end of the process or council or combination of the administration proposes a would be very important for the regulators to share as much information on a continuing basis as possible so that as new products are being developed and i'm sure else we sit here somebody is developing a product that perhaps falls between the regulators' current authorities but we know about those products as quickly as possible, i understand the implications for the system and bring them under the federal regulatory umbrella either by moving them into a central clearinghouse or exchange platform or through the regulation of the dealers who participate in those transactions on a bilateral basis. >> thank you. chairman dan -- gensler. >> i feel one of the lessons out of this crisis is we have large institutions that were find large outside of the regulatory regime. some had ineffective federal oversight but aig is exhibit s.a. and the that the dealers that were affiliated with lehman brothers and bear stearns were sort of modestly regulated but i feel we feel now we have to bring that in. so the dealers by regulating the dealers, we get i would say nearly 100% of the marketplace. it would be possible if you and i entered into a derivative neither of us is a dealer but any dealer that holds themselves out to the public and offers these types of transactions negative we can lower the risk of having the capitol margin, increase transparency with record keeping reporting. at the same time, we can let the tens of thousands of users of the products take greater comfort by regulating as i call the stages or promoting the standard products on two exchanges and on to central clearing while with the same time recognizing there will still be some tailored products that could be the airline companies that need a certain breed of jet fuel delivered in a certain location on a certain day. that would still be regulated because the dealer in the league could you were offering the product have to put aside capital and margin and not per dissipate and manipulation of fraud but at the same time allow customization so that tens of thousands of users can still use those products. >> thank you. senator crapo's comments and your comments -- this seems to be a range of economic arrangements. i mean, there's a specific thing they need a few o uncertain de hedging a certain price and there is a whole category as chairwoman schapiro said synthetics, that are more of the creations almost infinite supply of them. is that one dimension you would consider in terms of putting items on exchange? >> i believe, mr. chairman, anything a clearinghouse would accept for clearing under the pertinent risk reduction should be accepted for clearing and the regulators could also be given the authority working with congress to add if it is basically a high-volume product or similar product so it's not just used to avoid. i also believe those products not on central clearing and not on exchanges are by definition less liquid loss should appropriately have higher capital or a margin mary requirements so if a dealer wants to retain the customized product they might have to set a higher margin. >> chairwoman? >> i would add one of the benefits of higher capital margin might be to encourage more transactions into the central clearing or onto exchanges but i do think the challenge will be standardization and how do we achieve a significant proportion of the market moving into the central clearing. there is clearly the need for customized bilateral transactions as senator crapo said. the key is to be printed obligatory umbrella for the regulation of the dealer and that there is adequate margin for those positions and adequate capital and began the regulators have the ability to see what's happening between counterparties. >> before i recognize center bombing, ms. white, do you have a comment? >> thinks. the board has been focusing on the aspect of the market there really to systemic risk and how to fill the gaps and particular what infrastructure would be helpful. one thing we would like to point to is the creation of trade information warehouses for all asset classes and all contracts that would provide an important base of knowledge for the authorities as they try to evaluate what is standardized to next move into the clear environment. in addition i would want to add in terms of caps it's important to keep in mind these are international markets and we are going to need coordination to make sure all the gaps are full. >> senator bunning? >> thankou mr. chairman. as i sit in the statement i think similar activities should be regulated the same way by the same regulator. in other words, we need just one regulator for a derivative product. do you agree or disagree with that statement? go right ahead. >> thank you. i think my greater concern than having a single regulator for all derivative products is disconnecting securities related derivatives from securities markets because as i go on to probably at graceland in my statement the concern is you can create a synthetic security position utilizing derivatives projects intimately tied to the securities markets for which we have primary concern. they are important for capital formation and millions of investors in the united states so the impact these securities derivatives can have on the primary securities market is a concern i would hate to see be decoupled. it has been as many durham of attacks have banned from their primary markets over the last 15 or 20 years or so but to me that's the most important linkage between the securities derivatives and securities markets and the same would be true for the markets at the cftc regulates. >> go ahead. >> i think you raise a very important point. the securities and options markets that the s.e.c. regulates and the fruits markets with the cftc regulate, and now we're bringing this market of derivatives, hopeful well congress' help, under regulation. and derivatives have a lot of atrebts of securities and a lot of attributes of fruits, and in some cases, more attributes towards futures, and those products, knowing we have broad agreement on some of those, would be best maybe regulated under the cftc, and some would have far more attributes of securities that can clearly influence whether it's an issuer or the markets for an individual company or insider trading that would really be where the s.e.c. has best protected the investors. so i think working together and with this committee and congress, we're going to find we don't leave any gaps, if but also these derivatives have attributes sometimes that are far greater towards securities and some are far greater towards futures. under your basic concept -- >> well, i'm trying to prevent any from slipping through the cracks. >> and i think we both agree with that goal, and knowing we can achieve that goal together. >> does the fed have some opinion on this? on this? >> the product in the market has a lot of diversity to them and both the cftc and the sec will bring different skills to the regulatory oversight of the products. for the board what is the most important is we try to avoid the jurisdiction overlaps and harmonize the treatment of products. >> senator if i could add a point there i think where you have products that are economic substance for each other under the jurisdiction of different regulators it's really critical that we work as closely as we can to try to harmonize our regulatory regimes. >> isn't that where we failed in the last 15 years? >> well, except with respect to most over-the-counter derivatives they've been exempted from or excluded from virtually all regulation. >> that's because we have had two chairmen of the federal reserve who said at the banking committee that they shouldn't be regulated. i can go back and get the testimony. >> i'm sure that's right. that's certainly not the position of the securities exchange commission. we believe these products absolutely should be regulated and need to be regulated affectively because the impact they can have on the economy but also on a particular markets like the equity markets. >> there seems to be agreement that all derivatives need to be reported to someone. who should the trades be reported to and what information is necessary to be reported? and is there any information that should not be available to the public? anybody. >> senator, i think we need to bring a great deal more transparency in the markets, and i think this will actually lower the pricing for the tens of thousands of users. we found over many decades is when you have greater transparency markets are more efficient. so, all of the product the dealers trade should be reported into a central triet repository where the regulators did to see that and the record -- the public should get to see anything that can be on exchange for trading platform and was eckert 35 nurse letters supply fully subscribed to there should be a real time reporting, development of a consolidated tape, very similar to what is in the over-the-counter bond market -- >> what do we do about the dear of a tiff or the credit default swap or that individual, personalized edge? you still airlines as an example, the delivery at a certain date at a certain price, and that personalized derivative they used for hedging against the market. >> i believe, sir, that should be reported in to all the regulators and certainly aggregated in the aggregate positions by underlying commodity in that case jet fuel should be reported to the public. i think working together we have to think through rather that should be a part of this consolidated tape or whether there is some that would be so unique that the commercial attributes as you said of delta air lines might be put at risk but i believe they should be aggregated in part seeing clearly by the regulators and possibly part of the consolidators. >> i don't see how delta air lines would be put at risk if they had against the market's advance and future jet fuel or whatever it might be. >> in that case i would recommend it would be part of the consolidated tape but i recognize there may be transaction. >> thank you. >> thank you mr. chairman i have a couple of questions. the first goes back to this question of the clearing of centralist contracts versus customized contracts. both the agricultural committee we have had similar conversations and i heard you today talk about how it might be okay if we can put the customized by centralized clearing house because we will have different capital requirement for some capital requirements which makes a great deal of sense. my question is what do you think about all of you think about this, what incentives there might be if any for people to structure around the clearinghouse for no good business purpose? what would the incentives be to create a customized image that didn't have the business purpose of some kind? >> i would hope that once there is a running central clearinghouse there would be great benefits to moving all the transactions a dealer cut into that because it does lower risk for them as well instead of having this interconnected spider's web one of the lessons we learned is not only our institutions to big to fail but they are too interconnected so to speak but it helps lower the risk and that's why i subscribe to may be lower capital or margin. but it may well be some dealers don't agree with my point of view and they would want to keep some product outside of the standardized central clearing but i think it actually would help lower the risk for the institutions and lower risk for the system. also it would enhance transparency. the public would see if it were on an exchange or treating platform and it may well be some dealers would like to keep the information advantage, but many decades of markets have taught brought commerce and the economy benefits by having that type of information, and if you see the standard transaction of jet fuel we were talking about if you see the standard transaction jet fuel interest rates it could be a very plain vanilla interest rate and i think the small municipality or the small hospital that wants to hedge for and have your interest rate instead of a five-year interest rate would benefit by seeing that on an open and transparent exchange. >> the only thing i can think of the informational letter vantage that one has for not treating in a transparent market and the benefits to the extent there are some of anonymity. that is why i think it's important the dealer regulation include full transparency at least to the regulators and then over time a decision by regulators how much information needs to be available. i did what is critical is that we noss structure the regulatory regime in any way that creates on intentionally incentives to go off exchange or of a central clearing and stick with bilateral contracts. >> i completely agree and what we can see here with this and much of the other regulation we are talking about we need to be very careful that we are not creating incentives to do more harm than good and i was trying to scratch my head to think. i get the point on transparency all the other hand if it is reported to the regulator i'm not sure there is much of an issue but we will keep working on it. the other question i had, and it may go back to the systemic risk regulator proposals we've seen the last week or so. you talked, chairman gensler, about the swap that hadn't yet been invented and i started to sweat again about what we might be facing because the american people are so tired of having this look in the rearview mirror and say what happened? there's all of this carnage all there and i just wonder whether on a going forward basis any of you felt we are going to be in a better position now to predict the future necessarily but a better position to monitor when things are starting to move a certain way in the financial markets. my understanding is between 2000 and in 2008 the number of over-the-counter derivatives, contracts to grips by 522% but during that time the regulatory had little power to examine that. i wasn't here to know or not but prospectively is this some of the work the council is meant to do? how are we going to keep track of the swaps that have no name? [laughter] >> i think as it relates to the over-the-counter derivatives, and i can let ms. white answer the council but in terms of the derivatives i think the federal regulators should have broad authority if somebody holds themselves how to the public as a dealer whether it is in the known derivatives that we know now from interest rates to securities to credit the fault swaps or maybe something that isn't yet known we should work together to make sure the statute gives the authority to also bring that into the regulatory regime i think that is important and one of the big lessons of the past that i have learned. i think in terms of a systemic regulator but the administration has put forward is to make sure that the largest financial institutions, those either interconnected or by scale or scope can affect the american public that those have to be under provincial regulation meaning you can sit capital and margin and so forth. and i think that's very important. >> the only thing i would add is in addition to the system at regulator the role of the functional regulators, sec and cftc or bank regulators looking at the business of the dealers in a way that we have never been able to before because the assumptions that exist under the existing law ought to make a difference in ability to understand what kind of products are being developed and marketed and the business conduct rules that try to get into how these derivative products might be marketed and sold to state and local governments are pension funds or less sophisticated institutions will give real insight into what's happening within the firms and the ability hopefully to shut down problematic practices before decor out-of-control. >> thank you, mr. chairman. >> senator crapo? >> thank you mr. chairman. each of you in your testimony indicated as i indicated in my remarks there are circumstances in which nonstandard products are very legitimate and there are legitimate reasons to engage in customized transactions and obviously the question i am interested in today how do we regulate to the extent possible in such a way that makes certain that we don't -- basically engender greater inefficiencies and risk in our economy as a result of the way that we treat these types of customized transactions. as i have read your testimony, ms. white for example indicates these non-standard products can pose significant risk management challenges because they can be complex, opaque, illiquid and difficult to value and in your testimony, chairman schapiro, you indicate one way to deal with these non-standard type of arrangements is to impose appropriate margin and capital requirements on the participants in the reactions to reflect the risk they pose to the system in general. the question i have when we get to the point is do these -- can we dalia with the risk peace transactions pos? i think he would each i agree with me that as we have watched derivatives operate in the last few years there have been incredible abuses that have put incredible systemic risk in the economy but there's also been a phenomenal number of affective uses of credit to default swaps and other derivatives that helped create efficiency and strength in the economy and so the question i am getting is can we evaluate these nonstandard arrangements in such a way that we can't tell whether they are generating risk that should then be subjected to greater margin and capital requirements? >> i think we can. can we do it perfectly? probably not that i think through imposing risk limits on dealers, stress testing, ensuring that the margin levels are sufficiently conservative and a high end stress tested so we can have some comfort about that and requiring operational controls, things as simple separation of duties and trade limitations on the individual traders requiring that they have robust compliance systems to ask the firms have credit policies they are required to know the counterparty and understand the risks of a bilateral arrangement with that particular counter party. i think through vigilance on the part of dealers which will come mostly with vigilance on the part of the regulators overseeing the dealer conduct i think we could certainly do a better job than has been done historically. >> i think we can. it certainly poses challenges. much of the marketplace is standardized. there are various estimates, and i haven't seen any very good data, but over half of the market is certainly standardized, and some say a lot more. and even on the tailored or customized side, sometimes it's just that it's one month off, but on the truly exotic,