>> you need not use a central clearing trading. in addition, if you are talking about a contract that is not a standardized contract that the firm in needs, that is also not subjective the center requirements. there is enormous flexibility built in to the chairman's bill with respect to the need for commercial firms in our economy what we want to avoid is a situation in which the financial sector avoids central clearing and transparency requirements. the want to have a system in which anh bank should be using central clearing and exchange trading. that is important to the safety of our system. it is important for protecting the community banks from large wall street firms on the other side of the deals. there is a central counterparty. we think that is critical not to open up the possibilities. >> iwas going to point out some differences at the appropriate time, but i'd the key race inappropriate point. we ought to discuss this now. room there are not many differences with the changes that have them made. >> then we will go to your amendment. >> with respect to the exchange trading issue that the witnesses have talked about, endusers are not asking for the mandatory exchange trading. the exchanges themselves simply will not work. it is a practical matter. it will not work. the only advantage we sell was in post-trade price reporting. we agreed to. we think it ought to be done. that is part of the transparency the one thing that you and i have agreed on from day one is the fact that at the end ofthe day, there needs to be 100% transparency of all transactions that are taking place. today we have minimal transparency. that only came about in recent months. we agree on that. where we disagree is with the 10% of the contracts. let me give a couple of examples of why i think this is so important. why the change senator lugar referred to it is not covered here. the treatment of the end users are going not to exempt our community banks who may not use derivatives on a regular basis. they do from time to time. all of a sudden, if they are plenty treated like goldman sachs or jpmorgan or these other major dealers on wall street. i do not think that is what we intended. we got a better decking to you in came to me. that me quote a provision. i think this highlights the unintended consequences of the provision. what this letter dated yesterday says, "under the provisions of the bill, farm credit would be required to submit swaps to clearing organizations and ultimately trade them on exchanges despite the fact that they are being used only to manage commercial risk and enhance the product flexibility. there are additional costs associated with these requirements which will impact the farmers, cooperatives and others. -- and others." those ridges the unintended consequences of the chairman's mark. if we make it more expensive for these lending institutions to hedge risk, they will be forced to raise the prices to cover the costs. i think they require a swat transaction that is required to be clear and be traded on an exchange that is a new type of exchange that will be operated like an electronic trading platform. i know this is your idea. we cannot understand it, because the compromise that we have required clearing in public reporting -- i understand what the purpose of the mandatory trading is the still have to be cleared. thirdly, the chairman contains a provision from preventing anyone from being able to borrow money or receive any type of federal assistance. this is characterized as an anti-bailout provision. frankly, the effect of it is much more than just preventing bailout. large banks need to maintain access to the fed's discount window. with this provision in place, large banks are not going to be able to access that discount window if they engage in swath dealing prevent the account for 99% of the u.s. market. if we get them out to the market, the end users and not want to have another party that they can engage in. the chairman's mark states that capital for those transactions that are not cleared should be significantly higher than those that apply to transactions that are clear produce everybody agrees -- i talked to secretary timothy geithner last night about this. pan am chairman lincoln does. we all agreed that there are some transactions that should not be cleared. they are not systemically risky. they are specifically given the end user exemption. if we are going to be quiet those folks who are not 6 the merkley risky to oppose -- systemically risky to pose higher remarks, it does not make sense. they need this capital to buy airplanes or equipment to manufacture tractors fop's. senator lugar, i think there is the opportunity to get this done and to close this gap even more. some of the things i talked about i think are the unintended consequences and the chairman would agree with me i know secretary geithner would agree that we need to move in that direction. i hope that whether we are able to do it right here or whether we are going to be discussing this at a table with all of this over the next couple of days as this bill comes to the floor, and that we can reach forward on these changes which are significant, but at least they are minor in number. with that, i hope that clarifies it. >> this to say they you are right. we are not that far apart. there are some definite differences. financial institutions are financial institutions. i think that is something that all of this have been concerned about. certainly, in terms of the capital requirements, those individuals have a choice in terms of what they can do. i do think it'll be important that the capital requirement exists in some form or fashion to be able to insure that that is the back of. -- back up. >> it hank you to the chair. i wantto thank you. we have had a lot of good discussions in your office with dawn and martha. they will not be swap dealers or major swap participants. unless they decided to be. they are farm credit banks and not in the business of buying and selling swaps and making markets. i recommend that the transactions -- if they enter into a transaction with the big wall street stock produce what dealer, we want to protect that community and that credit system. that major bank one day may fail. every three or five years, it looks like banks fail. i believe in america we should have the freedom to fail. these major banks should be allowed to fail. we are all grappling is that the taxpayers not standing behind it. every exemption makes it more likely that the tac payers stands behind the bailout. on the spot execution, i know that i have been an advocate on the benefits of transparency. i think this helps every end user to have public transparent trading. and now we agree on that. i do think that these swap execution facilities grant a little more for the small transactions. there has to the volume in it. the manager amendments include additional language that says there has to be block trading exceptions. those would not be -- do not have to show a billion dollar trade to your competitors before hand. where there is high volume -- i think trading does bring additional bigger to economists. economists say it actually lowers costs to commercial end users. the fourth issue and then i will turn to the third --the commercial end users are not on to be caught up in margins if i'm reading this correctly. i do not know that is a clarification for the ranking member. as i read the bill, the large swap dealers would have to have capital stand behind it. the reason to have higher capital is that they keep it on their books rather than moving it to clearing. then they have more risk. that is why they have to have higher capital. but the chairman does the says that is not one to be necessary to have that margin. the federal reserve and treasury has to think through these issues. i do think that what the chairman and is trying to address is how do we avoid taxpayer standing behind the swap dealers. we need to do that by bringing the 90% that this is doing into this clearing house, bringing this transparency comprehensively. >> thank you for the conversations we have had. it is part of our mutual effort to get comprehensive financial reform passed th. i do think we have made enormous progress together and bring greater transparency into the derivatives market. and improving the resiliency of the system for t and for major participants in the market. i would decreagree that the existence of pre trade transparency contribute importantly to reducing costs and the system overall for our country as a whole, for completion of -- for commercial and the users. it will require some adjustment. it will mean lower spreads for swap dealers. that is one to be an adjustment. i think it is going to be good for commercial and users what did they trade their exchanges. it will improve pricing in the system. that function will also improve the ability of regulators to measure and assess the risk that they are facing in their own transaction. we think it is an important tool for that reason as well. i would agree that it is important to distinguish the end users community from the question a major swap participants. this goes to the question of, should we think of farm credit institutions as being in users? we agree with the chairman ginsberg that financial institutions should not be end users. there participants of the system. there are significant risks that will increase the chance of failure and that system. the financial institutions are not treated that swap dealers. major swap participants have important capital requirements. in addition to those that would otherwise be required of them but it the exemption from the central clearing requirement is with respect to the central clearing requirement. it is a separate requirement from provincial oversight. with respect to capital requirements, we do think this is important for the financial world's that if i'm a financial company that i need to post a higher margin for and cleared trade picture and a provider of trade, i should hold higher capital. we are in the -- protecting the taxpayers. that is an important effort of the financial reform effort. it is embodied in the basic approach here. we would be happy to work with the chairmen, with the ranking member and others on the provision in question we make sure that we do not push activity into less regulated spaces. i think there is room to work together on these issues. >> thank you. i will say that i certainly count our ranking members as a close friend and partner. we have worked together before this legislation. the board as partners together on developing the major part. we will remain working partners after this committee finishes their work here today. crack>> thank you. you have a very good bill here. it is one i am supportive of. some of the recent changes i must say concern me. the test to do with the definition of end user. every exemption shows a link between the the year in the bailout. every size of the financial system we cut out would allow one bank's failure to spread like fire. i'm trying to get a handle on section 113, page 27. i'm trying to understand this but if i'm not mistaken, i believe to be close to the eron loophole. a thing that distemp -- i'm goio the financial entities. illus national gas and electricity it says in teaser clearing exemption subject to cause two. it says that it counterparty who is a commercial user -- and user may elect not to clear the swap purda. it seems to mea that i do know that these have to report it in real time. i got that. that is wonderful. i question whether not have the capability . how much personality going to require to the that every transaction that comes in in real time to be able to discern whether there is abuse going on? will these things as pilots? barry down there was a transaction we almost pried open the in line -- the loophole with them. >> i think you and i share to concerns that i heard. one is the resources. two is having any end user exception. i felt as this debate has evolved consistently that we should bring all the transactions into the clearing house. i appreciate there has been a tremendous and help the debate the non financial entities mfg. prada -- manager. we would like to continue our relationship with wall street. we have an honest difference. in the manager's amendment, i think a very logical distinction statistically -- the non-financial and users, the commercial ones that are carved out our 9% for the world wide interest-rate. it covers 90%. they are more prone to fail. if they walk in and say we are going to bring down the credit system, so i think this provision here covers the 90%. >> and do not know if it is 10% or 15%. i'm not certain it is 90%. what it is 10% or 20%, you do not have the personnel. these are reported. i'm not so certain about that. it could be offset by because the would-be incurred. >> everyone that meet me get my pie charts. on the cause, i think there to things we need. we need about two injured 15 more staff. did we need about 250 more staff. we are also going to need a lot more spending on technology. even in the futures market today, we need to use 21st century computing power to look at these markets. we are embarked on that. >> i mentioned that. i will still continue to but that this. i just have a great concern about your ability to catch these. i still think the more transparent any of the swaps are, every swap has to be transferred. everyone has to be put out there for everyone to see. even if it is the customized swaps between two people. it may involve a derivatives that have a profound effect on a lot of the economy. if these are not caught early on, they can build up. i am concerned about that. maybe my concern will be debated as we get into this. i do not know. that is one concern. whether or not the -- i know these financial entities are those that are closely aligned with the manufacturing that type of thing. quite frankly, it occurs to me that those kind of over-the- counter swaps -- that has been my position for a long time ago. we are going to have over the counter swaps. hopefully we can give you the authority to print them out for transparency. the key field and let the leading to an abuse, and does have a real concern about this card out. >> thank you and nothing any of us assume that is going to be capable of doing this. i think that'll be up to appropriators to make that happen. there are several understanding that they will need a staff. i think that is important . i would say to the financial pieces you were talking about, this is something that we are particularly interested in. you have done a tremendous job in helping us figure out an awful lot of the things that need to happen. you work on resolving those issues. >> if i can make a clarification. the draft anticipated the extent issues that you are talking about, the capability for the commission to actually oversee all of these uncleared swaps that may be occurring and how you are able to sort 3 them. they are all to be reported. one is a clearing house that has trade surveillance and monitoring capabilities. we are actually catching upper to fraud or manipulation separately, the swap dated depositories. there will be receiving the trade. there are built into the requirement. they must have automated systems in place for receiving, analyzing, and screening unfair swaps so they can use the data as their file cabinets. it is not like throwing a bunch of 7 to the file cabinet. it to have an electronic system that can be used for monitoring data. they do not have the ability to sort through this depository brities. >> it to be on page 46 under subsection c, duties of the suppository. i would point you to c-5 that says it establishes automatic systems for monitoring, screening, and analyzing swap data, including frequency of the in the using clearance claims. >> of one to be able to read this. >> i'm looking at my revision. i have it on page 46. line 27 through 30. i just found it. >> of the to draw your attention to two provisions above that which are also intended to make it. section 2 requires that a confirm with both counterparties with the data was submitted. i would sit in your livinookingt 4. it has to provide direct electronic access to the commission so it can utilize the systems in debt and that they have. this is intended to permit the depositor to be used on a daily basis. >> we will continue to work with you. we understand your concerns. we will go to that amendment. thank you for the patients. >> i want to go to the question of repositories obverses repository. in my mind i, but but there is going to be one repository. as i read this and go through it, it becomes clear to me that there would be the possibility of multiple. is that correct? >> that is true. today that our swap data repositories both in the u.s. as low as europe. they are actually existing today. it seems like it is possibly breaking down on a regional basis as opposed to being an international side . >> the concern that the raises in my mind is, how you have ordination between potentially dozens or hasnhundreds of repositories? it strikes me that it could create its own complexity. somebody help me understand how you coordinate if there are dozens or hundreds of repositories? >> though i do not think there will be hundreds, i think you raise an important wine. information will be housed the clearing houses and repositories. i believe the bill has clear authority from the sec to write rules about how information is brought in, how it is shared. i would envision we would have public hearings. we really looked to make sure there is a uniformity with regard to identification codes and key information. we will need to abrogate this information. we are policing the markets f. it is a very real issue. we will have to quickly and electronically link persistence. i believe it gives a statutory authority. -- to oversee the information issues. >> tonight to say in a previous life itself that the mundane thing to do. i worry very much and see the potential for many repositories. how you coordinate identification codes say you do not wind up with a pilot garbage at the end and nobody can make head or tails. >> we complete the share your call. we are grappling with the global market. we would like to work with the. we really think that the sec needs a clear statutory authority to write rules to narrow that, recognizing there will be some geographic repositories. >> i would just like to care fly to care f -- clarify. it specifically is on standard settings. odata collection, i did vacatio. we address that directly. we are making sure that everybody is using the same codes so that they can talk to each other. >> let me pursue that if i can. this is a u.s. law that we are talking about. this is obviously involving international transactions. how do leisure ordination between depositories around the world? i understand that you have done the best he can do with respect to the u.s. law. how do we fisher that this is done with international entities since many of these are international transactions? >> i think you have hit on exactly the right point. we need to focus that we have the standard position necessary so that they can link with the tether. they can have adequate authority to make standards are built them. there will need to be a to witness to the sec process. it keeps the standard uniform and interoperable in the united states. we have been engaged in greeley conversations on this topic since the beginning of the administration. we are working international to raise the standards. we have been focused on the derivatives conversation. they have been deeply engaged in the process. >> the me ask one final question. it goes back to the farm credit issue. you said that as you read it, farm c