CFTC CHAIRMAN TESTIFIES BEFORE SENATE COMMITTEE

Testimony Before the U.S. Senate Committee on Banking, Housing and Urban Affairs, Washington, DC Chairman Gary Gensler July 21, 2011 Good morning Chairman Johnson, Ranking Member Shelby and members of the Committee. I thank you for inviting me to today’s hearing on the one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. I am pleased to testify on behalf of the Commodity Futures Trading Commission (CFTC). I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation. Financial Crisis One year ago, the President signed the Dodd-Frank Act into law. And on this anniversary, it is important to remember why the law’s derivatives reforms are necessary. The 2008 financial crisis occurred because the financial system failed the American public. The financial regulatory system failed as well. When AIG and Lehman Brothers faltered, we all paid the price. The effects of the crisis remain, and there continues to be significant uncertainty in the economy. Though the crisis had many causes, it is clear that the derivatives or swaps market played a central role. Swaps added leverage to the financial system with more risk being backed by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail. Swaps – developed to help manage and lower risk for end-users – also concentrated and heightened risk in the financial system and to the public. FSOC To help protect the American public, the Dodd-Frank Act included the establishment of the Financial Stability Oversight Council. This Council is an opportunity for regulators – now and in the future – to ensure that the financial system works better for all Americans. Adding to our challenge is the perverse outcome of the financial crisis, which may be that many people in the markets have come to believe that a handful of large financial firms will – if in trouble – have the backing of the taxpayers. We must do our utmost to ensure that when those challenges arise, the taxpayers are not forced to stand behind those institutions and that these institutions are free to fail. Derivatives Markets Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives market – including both the historically regulated futures market and the heretofore unregulated swaps market – is essential so that producers, merchants and end-users can manage their risks and lock in prices for the future. Derivatives help these entities focus on what they know best – innovation, investment and producing goods and selling and services – while finding others in a marketplace willing to bear the uncertain risks of changes in prices or rates. With notional values of more than $300 trillion in the United States – that’s more than $20 of swaps for every dollar of goods and services produced in the U.S. economy – derivatives markets must work for the benefit of the American public. Members of the public keep their savings with banks and pension funds that use swaps to manage interest rate risks. The public buys gasoline and groceries from companies that rely upon futures and swaps to hedge swings in commodity prices. That’s why oversight must ensure that these markets function with integrity, transparency, openness and competition, free from fraud, manipulation and other abuses. Though the CFTC is not a price-setting agency, recent volatility in prices for basic commodities – agricultural and energy – are very real reminders of the need for common sense rules in all of the derivatives markets. The Dodd-Frank Act To address the real weaknesses in swaps market oversight exposed by the financial crisis, the CFTC is working to implement the Dodd-Frank Act’s swaps oversight reforms. Broadening the Scope Foremost, the Dodd-Frank Act broadened the scope of oversight. The CFTC and the Securities and Exchange Commission (SEC) will, for the first time, have oversight of the swaps and security-based swaps markets. Promoting Transparency Importantly, the Dodd-Frank Act brings transparency to the swaps marketplace. Economists and policymakers for decades have recognized that market transparency benefits the public. The more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, which ultimately leads to lower costs for borrowers and the public. The Dodd-Frank Act brings transparency to the three phases of a transaction. First, it brings pre-trade transparency by requiring standardized swaps – those that are cleared, made available for trading and not blocks – to be traded on exchanges or swap execution facilities. Second, it brings real-time post-trade transparency to the swaps markets. This provides all market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions. Third, it brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties. The Dodd-Frank Act also includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed to the system and can police the markets for fraud, manipulation and other abuses. On July 7, the Commission voted for a significant final rule establishing that clearinghouses and swaps dealers must report to the CFTC information about the swaps activities of large traders in the commodity swaps markets. For decades, the American public has benefited from the Commission’s gathering of large trader data in the futures market, and now will benefit from this additional information to police the commodity swaps markets. Lowering Risk Other key reforms of the Dodd-Frank Act will lower the risk of the swaps marketplace to the overall economy by directly regulating dealers for their swaps activities and by moving standardized swaps into central clearing. Oversight of swap dealers, including capital and margin requirements, business conduct standards and recordkeeping and reporting requirements will reduce the risk these dealers pose to the economy. The Dodd-Frank Act’s clearing requirement directly lowers interconnectedness in the swaps markets by requiring standardized swaps between financial institutions to be brought to central clearing. This week, the Commission voted for a final rule establishing a process for the review by the Commission of swaps for mandatory clearing. The process provides an opportunity for public input before the Commission issues a determination that a swap is subject to mandatory clearing. The Commission will start with those swaps currently being cleared and submitted to us for review by a derivatives clearing organization. Enforcement Effective regulation requires an effective enforcement program. The Dodd-Frank Act enhances the Commission's enforcement authorities in the futures markets and expands them to the swaps markets. The Act also provides the Commission with important new anti-fraud and anti-manipulation authority. This month, the Commission voted for a final rule giving the CFTC authority to police against fraud and fraud-based manipulative schemes, based upon similar authority that the Securities and Exchange Commission, Federal Energy Regulatory Commission and Federal Trade Commission have for securities and certain energy commodities. Under the new rule, the Commission’s anti-manipulation reach is extended to prohibit the reckless use of fraud-based manipulative schemes. It closes a significant gap as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers. Dodd-Frank expands the CFTC's arsenal of enforcement tools. We will use these tools to be a more effective cop on the beat, to promote market integrity and to protect market participants. Position Limits Another critical reform of the Dodd-Frank Act relates to position limits. Position limits have been in place since the Commodity Exchange Act passed in 1936 to curb or prevent excessive speculation that may burden interstate commerce. In the Dodd-Frank Act, Congress mandated that the CFTC set aggregate position limits for certain physical commodity derivatives. The law broadened the CFTC’s position limits authority to include aggregate position limits on certain swaps and certain linked contracts traded on foreign boards of trade, in addition to U.S. futures and options on futures. Congress also narrowed the exemptions for position limits by modifying the definition of a bona fide hedge transaction. When the CFTC set position limits in the past, the purpose was to ensure that the markets were made up of a broad group of market participants with a diversity of views. Market integrity is enhanced when participation is broad and the market is not overly concentrated. Rule-Writing Process The CFTC is working deliberatively, efficiently and transparently to write rules to implement the Dodd-Frank Act. This spring, we substantially completed the proposal phase of rule-writing and further benefited from an extra 30 days for public comment. Now, the staff and commissioners have turned toward final rules. We held two public commission meetings this month and approved eight final rules. In the coming months, we will hold additional public meetings to continue to consider finalizing rules. The Dodd-Frank Act set a deadline of 360 days for the CFTC and SEC to complete the bulk of our rulemakings, which was July 16, 2011. Last week, the Commission granted temporary relief from certain provisions that would otherwise apply to swaps or swap dealers on July 16. This order provides time for the Commission to continue its progress in finalizing rules. Phasing of Implementation The Dodd-Frank Act gives the CFTC and SEC flexibility to set effective dates and a schedule for compliance with rules implementing Title VII of the Act. The order in which the Commission finalizes the rules does not determine the order of the rules’ effective dates or applicable compliance dates. Phasing the effective dates of the Act’s provisions will give market participants time to develop policies, procedures, systems and the infrastructure needed to comply with the new regulatory requirements. In May, CFTC and SEC staff held a roundtable to hear directly from the public about the timing of implementation dates of Dodd-Frank rulemakings. Prior to the roundtable, CFTC staff released a document that set forth concepts that the Commission may consider with regard to the effective and compliance dates of final rules for swaps under the Dodd-Frank Act. We also offered a 60-day public comment file to hear specifically on this issue. The roundtable and resulting public comment letters will help inform the Commission as to what requirements can be met sooner and which ones will take a bit more time. This public input has been very helpful to staff as we move forward in considering final rules. We are planning to request additional public comment on a critical aspect of phasing implementation – requirements related to swap transactions that affect the broad array of market participants. Market participants that are not swap dealers or major swap participants may require more time for the new regulatory requirements that apply to their transactions. There may be different characteristics amongst market participants that would suggest phasing transaction compliance by type of market participant. In particular, such phasing compliance may relate to: the clearing mandate; the trading requirement; and compliance with documentation standards, confirmation and margining of swaps. Our international counterparts also are working to implement needed reform. We are actively consulting and coordinating with international regulators to promote robust and consistent standards and to attempt to avoid conflicting requirements in swaps oversight. Section 722(d) of the Dodd-Frank Act states that the provisions of the Act relating to swaps shall not apply to activities outside the U.S. unless those activities have “a direct and significant connection with activities in, or effect on, commerce” of the U.S. We are developing a plan for application of 722(d) and will seek public input on that plan in the fall. Conclusion Only with reform can the public get the benefit of transparent, open and competitive swaps markets. Only with reform can we reduce risk in the swaps market – risk that contributed to the 2008 financial crisis. Only with reform can users of derivatives and the broader public be confident in the integrity of futures and swaps markets. The CFTC is taking on a significantly expanded scope and mission. The Commission must be adequately resourced to effectively police the markets and protect the public. Without sufficient funds, there will be fewer cops on the beat. The agency must be adequately resourced to assure our nation that new rules in the swaps market will be strictly enforced -- rules that promote transparency, lower risk and protect against another crisis. Until the CFTC completes its rule-writing process and implements and enforces those new rules, the public remains unprotected. Thank you, and I’d be happy to take questions."

SEC ALLEGES DIAGEO PLC VIOLATED FOREIGN CORRUPT PRACTICES ACT

The following is an excerpt from the SEC website: Washington, D.C., July 27, 2011 — The Securities and Exchange Commission today charged one of the world’s largest producers of premium alcoholic beverages with widespread violations of the Foreign Corrupt Practices Act (FCPA) stemming from more than six years of improper payments to government officials in India, Thailand, and South Korea. The SEC found that London-based Diageo plc paid more than $2.7 million through its subsidiaries to obtain lucrative sales and tax benefits relating to its Johnnie Walker and Windsor Scotch whiskeys, among other brands. Diageo agreed to pay more than $16 million to settle the SEC’s charges. The company also agreed to cease and desist from further violations of the FCPA’s books and records and internal controls provisions. “For years, Diageo’s subsidiaries made hundreds of illicit payments to foreign government officials,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “As a result of Diageo’s lax oversight and deficient controls, the subsidiaries routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments.” According to the SEC’s order instituting settled administrative proceedings against Diageo, the company made more than $1.7 million in illicit payments to hundreds of government officials in India from 2003 to mid-2009. The officials were responsible for purchasing or authorizing the sale of its beverages in India, and increased sales from these payments yielded more than $11 million in profit for the company. The SEC found that from 2004 to mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied other high-ranking Thai government officials extensively on Diageo’s behalf in connection with pending multi-million dollar tax and customs disputes, contributing to Diageo’s receipt of certain favorable decisions by the Thai government. According to the SEC’s order, Diageo paid 100 million in Korean currency (more than $86,000 in U.S. dollars) to a customs official in South Korea as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also improperly paid travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo routinely made hundreds of gift payments to South Korean military officials in order to obtain and retain liquor business. The SEC’s order found that Diageo and its subsidiaries failed properly to account for these illicit payments in their books and records. Instead, they concealed the payments to government officials by recording them as legitimate expenses for third-party vendors or private customers, or categorizing them in false or overly vague terms or, in some instances, failing to record them at all. Diageo lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting. The SEC’s order found that Diageo violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the findings, Diageo agreed to cease and desist from further violations and pay $11,306,081 in disgorgement, prejudgment interest of $2,067,739, and a financial penalty of $3 million. Diageo cooperated with the SEC’s investigation and implemented certain remedial measures, including the termination of employees involved in the misconduct and significant enhancements to its FCPA compliance program.”

SEC CHAIRMAN SCHAPRO DISCUSSES SHORT FORM REGISTRATION

The following is an excerpt from the SEC website: Speech by SEC Chairman: Opening Statement at SEC Open Meeting: Item 2 — Security Ratings by Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 Next, we will consider adopting rules that would replace credit ratings as a condition for companies seeking short-form registration when registering certain securities for public sale. If a company qualifies for short-form registration, it can offer its securities “off the shelf” — which is an expedited process for offering securities. These rules, which were proposed in February, are being considered in light of the requirements of Section 939A of the Dodd-Frank Act — a provision that requires regulators to reduce reliance on credit ratings. Today’s action is part of the Commission’s effort to do just that. In the securities arena, Forms S-3 and F-3 are the “short forms” used by eligible issuers to register securities offerings under the Securities Act. By using these forms, these issuers can rely on other reports they file to satisfy many of the disclosure requirements under the Securities Act. Currently, one of the ways that a company can qualify to use these forms is if they are registering an offering of non-convertible securities that have received an investment grade rating by at least one nationally recognized statistical rating organization (NRSRO). The rules being considered today would eliminate this eligibility test and replace it with four new tests, which the staff will describe shortly. In order to ease transition to the new rules, the rules also would include a temporary, three-year grandfather provision. We received valuable input from commentators on the proposing release, and I believe the amendments we are considering are better as a result. I believe the rules will provide an appropriate and workable alternative to credit ratings for determining whether an issuer should be able to use short form registration and have access to the shelf offering process. With the changes that we are making from the proposal, we expect just about all issuers that currently could rely on the existing test would be able to qualify for the revised forms. In addition, we also are considering rescinding Form F-9 under the Securities Act because we believe that regulatory developments in Canada have rendered that form unnecessary. And we are contemplating changes to several other rules that would be needed in light of the new eligibility criteria." I

SEC COMMISSIONER WALTER MAKES REMARKS REGARDING LARGE TRADER

The following statement is from the SEC website: Speech by SEC Commissioner: Opening Remarks Regarding the Adoption of Large Trader Reporting Requirements by Commissioner Elisse B. Walter U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 I, too, want to offer my thanks to our staff and, in particular, the individuals within the Office of Market Supervision in the Division of Trading and Markets who developed and finalized the adopting release before us today. As we all know, the Commission has, for some time now, been looking at market structure — finding ways to update our regulations and our tools to more effectively surveil the markets. The new requirements under Rule 13h-1 and Form 13H are intended to strengthen the SEC’s oversight of securities trading activities and to help us to detect potentially manipulative and abusive practices — by identifying large market participants and more effectively collecting information on their trading activity. The rule under consideration today is part of our ongoing efforts to ensure that the markets are fair, transparent and efficient — especially given that rapid technological advances have continued to produce fundamental changes in the securities markets, with new types of market participants, new trading strategies and new products in a trading environment that operates primarily on an automated basis. These changes have enabled significant market participants to use advanced trading methods to trade electronically in large volumes at high speeds. In my view, the need for the Commission to track and monitor large trading activity is even greater today than it was in 1990 when Congress passed the Market Reform Act. After three proposals, I am extremely pleased that today the Commission is considering the large trader rule for adoption. Some have expressed reservations about the rule before us, citing potential costs and the potential regulatory headache in complying with its requirements. But, I believe strongly — and Congress’ 1990 action reflects this — that regulatory agencies, like the Commission, simply cannot function or effectively carry out their missions without obtaining critical information about the activities they regulate and the people who carry out those activities. And, I believe that the new requirements in Rule 13h-1 will be a significant step toward accomplishing that. Specifically, the rule will further the Commission’s understanding of entities or individuals who qualify as large traders and help its analysis of the role they play in the marketplace, including, for example, the impact of their trading activities on the interests of long term investors. I also understand that some are concerned that the rule will impact persons who may not have had any previous contact with the Commission. However, one of the benefits of the rule is just that — it will provide the Commission with a better sense of who the significant market participants are. Having this knowledge will enable the Commission to engage in an open dialogue and discussion with large traders regarding their experience in the marketplace, which could better inform the Commission in future rulemakings and policy decisions. I would also highlight that this rule will be implemented within an existing regulatory framework, which should alleviate any undue burden and also quicken the time frame within which it can be implemented and thus provide the Commission with valuable information. Finally, I believe that another significant improvement under the rule is the timing within which the information must be provided to the Commission upon request. While the current EBS reporting system did not require that broker-dealers provide the information to the Commission by a definitive date, this rule will enable the Commission to have information at the opening of business on the day following a request, or on the same day if the situation warrants it. I think having timely information will be a huge improvement to the Commission in its surveillance and investigative activities. However, as I have said before, the large trader requirements are not a cure-all to the agency’s need for better audit trail information, but rather an additional mechanism that the Commission can use to monitor a particular set of market participants. We need to have an even more complete, timely picture of the markets, and it is my hope that the very near future will find the Commission, as the Chairman stated, in a similar position to consider for adoption the development and implementation of a consolidated audit trail that would capture customer and order event information across the markets. Today, we have an incomplete and possibly inaccurate picture of the markets. As order flow often moves from one marketplace to another, the Commission is not adequately equipped with the surveillance capabilities to gather and analyze cross-market data in a timely manner. In my view, a consolidated audit trail, along with the large trader reporting requirements, would begin to close this gap and enhance the Commission’s ability to perform its job — its market monitoring responsibilities. Thanks once again to the Division of Trading and Markets, and the rest of the staff for your excellent and hard work on this adopting release."

SEC VOTES FRO NEW RULE FOR LARGE TRADER REPORTING REQUIREMENTS

The following is an excerpt from the SEC website: Washington, D.C., July 26, 2011 – The Securities and Exchange Commission today voted unanimously to adopt a new rule establishing large trader reporting requirements to enhance the agency’s ability to identify large market participants, collect information on their trading, and analyze their trading activity. The new rule requires large traders to identify themselves to the SEC, which will then assign each trader a unique identification number. Large traders will provide this number to their broker-dealers, who will be required to maintain transaction records for each large trader and report that information to the SEC upon request. “May 6 dramatically demonstrated the need to enhance the SEC’s ability to quickly and accurately analyze market events. The large trader reporting rule will significantly bolster our ability to oversee the U.S. securities markets in a time when trades can be transacted in milliseconds or faster,” said SEC Chairman Mary L. Schapiro. “This new rule will enable us to promptly and efficiently identify significant market participants and collect data on their trading activity so that we can reconstruct market events, conduct investigations, and bring enforcement actions as appropriate.” The new rule has two primary components: First, it requires large traders to register with the Commission through a new form, Form 13H. Second, it imposes recordkeeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions. The new rule will be effective 60 days after its publication in the Federal Register."

SEC CHAIRMAN STATEMENT ON LARGE TRADER REPORTING

The following is an excerpt from the SEC website: "Speech by SEC Chairman: Opening Statement at SEC Open Meeting: Item 1 — Large Trader Reporting by Chairman Mary Schapiro U.S. Securities and Exchange Commission Washington, D.C. July 26, 2011 Good morning. This is an Open Meeting of the Securities and Exchange Commission on July 26, 2011. Today, we will consider three items related to Large Trader Reporting, Asset-Backed Securities, and Ratings References. We begin with the new rule that would establish a large trader reporting regime to provide the Commission with better insight into critical segments of market activity. The rule has two primary components: First, it would require large traders to register with the Commission through a new form, Form 13H. Second, it would impose recordkeeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions. The Commission initially proposed the large trader rule in April 2010. And less than a month later, the importance of this proposal was highlighted when we experienced the “flash crash” of May 6. That day dramatically demonstrated the need to enhance the Commission’s ability to quickly and accurately analyze market events. The fact is we live in a time when trades can be transacted in milliseconds or faster. Large market participants can trade electronically in substantial volumes, at high speed, and in multiple venues. It’s a time of rapid developments in trading technology and strategies. It is for that reason that we launched a comprehensive review of U.S. market structure — a review we initiated months before the flash crash. The large trader rule is one of several measures that grow out of that review — a rule that would enhance the Commission’s ability to obtain information about the most active market participants. This new rule, Rule 13h-1, would significantly bolster our ability to oversee the U.S. securities markets by allowing the Commission to promptly and efficiently identify significant market participants on a cross-market basis, collect data on their trading activity, reconstruct market events, conduct investigations and, as appropriate, bring enforcement matters. The collection of this information is particularly important given the increasingly prominent role played by very active market participants including high-frequency traders. In addition to this large trader rule, the Commission previously proposed establishing a consolidated audit trail for equities and options — a system that would capture customer and order event information for many securities across all markets. I anticipate that a consolidated audit trail would take longer to implement than the rule we are considering today, but it would collect and consolidate much more extensive order and transaction information than that contemplated by the large trader rule. In particular, the large trader regime is much more limited in terms of its scope and objectives. For instance, the technology requirements of this large trader regime should entail much less change than the proposed consolidated audit trail. Further, the large trader rule would leverage existing systems to address the Commission’s compelling near-term need for access to more information about large traders and their trading activities. It also would begin to improve the Commission’s ability to analyze such information. Today’s large trader rule would establish procedures for a large trader to self-identify to the Commission, which will provide important information to the Commission even after a consolidated audit trail is fully implemented. The staff is working on recommendations for Commission consideration with respect to consolidated audit trail, and I am hopeful that we will be able to move forward with that proposal in the very near term. I expect that a consolidated audit trail plan will build on and complement today’s large trader rule, and avoid unnecessary duplication or undue burden on market participants. I would like to thank the staff of the Division of Trading and Markets for their work on this matter, specifically Robert Cook, Gregg Berman, Nathaniel Stankard, James Brigagliano, David Shillman, Richard Holley, Christopher Chow, Gary Rubin, and Kathleen Gray. I also would like to thank staff in the Office of the General Counsel, specifically Mark Cahn, Meridith Mitchell, David Blass, Paula Jenson, and Deborah Flynn as well as staff in the Division of Risk, Strategy, and Financial Innovation including Jennifer Marietta-Westburg, Charles Dale, Adam Glass, and Matthew Kozora. Thanks also to Thomas Sporkin and Mark Lineberry from the Division of Enforcement; Tom Kim, David Orlic, Michele Anderson, and Ann Krauskopf from the Division of Corporation Finance; John Polise from the Office of Compliance Inspections and Examinations; Douglas Scheidt and Stephen Packs from the Division of Investment Management; and Kelly Riley from the Office of International Affairs for their contributions and collaborative efforts. Finally, I would like to thank the other Commissioners and all of our counsels for their work and comments on the rule." Now I'll turn the meeting over to Jamie Brigagliano, Deputy Director of the Division of Trading and Markets, to hear more about the Division’s recommendation."