[Senate Hearing 106-768]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 106-768




                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION




                           FEBRUARY 10, 2000


                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry

67-569 CC                   WASHINGTON : 2000

            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 


                  RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia              THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois        J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa            TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho                BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania

                       Keith Luse, Staff Director

                    David L. Johnson, Chief Counsel

                      Robert E. Sturm, Chief Clerk

            Mark Halverson, Staff Director for the Minority


                            C O N T E N T S



Thursday, February 10, 2000, President's Working Group Report of 
  OTC Derivatives--CEA Re-Authorization..........................     1


Thursday, February 10, 2000......................................    49
Document(s) submitted for the record:
Thursday, February 10, 2000......................................   113
Questions and answers:
Thursday, February 10, 2000......................................   135


                      Thursday, February 10, 2000

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois..........     3
Harkin, Hon. Tom, a U.S. Senator for Iowa, Ranking Member, 
  Committee on Agriculture, Nutrition, and Forestry..............     4
Conrad, Hon. Kent, a U.S. Senator from North Dakota..............     3

             Panel 1: Head of the President's Working Group

Summers, Laurence, Secretary, U.S. Department of the Treasury, 
  accompanied by Lewis A. Sachs, Asst. Secretary for Financial 
  Markets, U.S. Department of Treasury...........................     5

           Panel 2: Members of the President's Working Group

Greenspan, Alan, Chairman, Board of Governors of the Federal 
  Reserve System.................................................    13
Rainer, William, Chairman, Commodity Futures Trading Commission..    14
Nazareth, Annette, Director of Market Regulations Securities and 
  Exchange Commission............................................    17

 Panel 3: Representatives of the Futures Exchange and OTC derivatives 

Brennan, David, Chairman, Chicago Board of Trade.................    29
Salzman, Jerry, Chicago Mercantile Exchange......................    32
Grove, Richard, Chief Executive Officer, International Swaps and 
  Derivatives Association (ISDA).................................    34
Rappaport, Daniel, Chairman, New York Mercantile Exchange........    30
Rosen, Edward, Counsel, Ad Hoc Coalition of Commercial and 
  Investment Banks...............................................    36


Prepared Statements:
    Lugar, Hon. Richard G........................................    50
    Grassley, Hon. Charles E.....................................    52
    Brennan, David...............................................    81
    Greenspan, Alan..............................................    61
    Gordon, Scott................................................   100
    Grove, Richard...............................................   106
    Nazareth, Annette............................................    73
    Rainer, William..............................................    68
    Rappaport, Daniel............................................    92
    Rosen, Edward................................................   108
    Summers, Laurence............................................    54

Document(s) submitted for the record:
    Statement of the International Swaps and Derivatives 
      Association, Inc...........................................   114
    Statement submitted by Robert R. Champion, on behalf of 
      Champion Securities........................................   128



                      THURSDAY, FEBRUARY 10, 2000

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:05 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Richard G. 
Lugar, (Chairman of the Committee), presiding.
    Present or submitting a statement: Senators Lugar, 
Fitzgerald, Grassley, Harkin, and Conrad.


    The Chairman. This meeting of the Senate Agriculture 
Committee is called to order. Today the Committee holds its 
first hearing of this year on the reauthorization of the 
Commodity Exchange Act. This hearing with its distinguished 
list of witnesses will discuss the unanimous findings of the 
President's Working Group regarding the proper treatment of 
over-the-counter derivatives markets.
    In late 1998, House Agriculture Committee Chairman Bob 
Smith and I wrote Treasury Secretary Rubin requesting that the 
President's Working Group study and make recommendations to 
Congress regarding these instruments. Our request came on the 
heels of an economically turbulent period which witnessed a 
Russian default of debt, the devaluing of the ruble and the 
near collapse of Long Term Capital Management Hedge Fund.
    In addition, the CFTC was making overtures through its 
concept release on the over-the-counter derivatives that it 
might seek to unilaterally regulate these instruments. In 
requesting this report, we sought to bring certainty to these 
markets and to build a broad consensus on the Government's 
role, if any, in regulating them. I have stated that one of my 
goals for the Commodity Exchange Act reauthorization is to 
provide legal and regulatory certainty to the over-the-counter 
market. With its recommendations on the legal certainty of 
swaps, the Treasury Amendment, and electronic trading, I am 
confident this unanimous report will provide Congress with the 
guidance it needs for achieving this important goal.
    But the Working Group's recommendations cannot exist in a 
vacuum. Another important goal of reauthorization is providing 
regulatory relief for those entities that fall within the 
Commodity Exchange Act. The Working Group recognized that its 
recommendations regarding the over-the-counter market must be 
implemented simultaneously with the lessening of regulation for 
the futures exchanges.
    Along with other members from the House and Senate 
Agriculture Committees, I have requested the CFTC make its 
recommendations on regulatory relief by February 14. I 
understand that Chairman Rainer will meet this deadline and 
intends to brief members on the proposal shortly.
    Addressing the Shad-Johnson Accord is also a priority. The 
President's Working Group agreed that the current prohibition 
on single stock futures can be repealed if issues regarding the 
integrity of the underlying securities market and regulatory 
disparities can be resolved. Senate Banking Committee Chairman 
Phil Gramm and I have written Securities and Exchange 
Commission [SEC] Chairman Levitt and CFTC Chairman Rainer 
requesting that the agencies study this issue and make 
recommendations by February 21.
    Senator Gramm and I have pledged to work together 
throughout this process including the possibility of holding 
joint hearings to ensure that both over-the-counter and on-
exchange instruments are appropriately and consistently treated 
under our laws. Although it would be premature today to discuss 
in detail the reform of Shad-Johnson Accord without the benefit 
of the agencies' input, I would emphasize that this issue 
remains a priority with the Committee.
    Now this committee is finally faced with the daunting task 
of drafting this complicated legislation in a year drastically 
shortened by a full congressional calendar and a presidential 
election. In my view, given at least the advice of our Senate 
leadership on scheduling, we may have only a 3-month period to 
pass this bill or to resign ourselves to the fact that it will 
not get done until next year. However, the ramifications of 
waiting until next year are considerable given the fact that we 
will have a new administration, a new Congress, even possibly a 
new chairman of this committee. The present time appears to be 
most opportune and we are hopeful that we will have consensus 
in the industry for comprehensive reauthorization legislation 
promptly and I intend to actively promote passage this year.
    Turning toward today's discussion, our first witness will 
be the Treasury Secretary Lawrence Summers, head of the 
President's Working Group, who will outline, first of all, the 
unanimous findings of the commission.
    Our second distinguished panel will consist of other 
members of the Working Group including Chairman Alan Greenspan 
of the Federal Reserve; Chairman Bill Rainer of the CFTC; and 
Ms. Annette Nazareth, Director of Market Regulations of the 
    Our final panel will contain members from the private 
sector including representatives from the futures exchanges and 
the over-the-counter derivatives community. I would say in 
advance that we have been advised that a roll call vote will 
occur at 11 o'clock. We will have a short recess so that 
members may do their duty and then we will return so that we 
can have a full hearing of all the witnesses and questions by 
the Senators.
    [The prepared statement of Senator Lugar, can be found in 
the appendix on page 50.]
    Before I ask for our distinguished first witness to 
commence his testimony, I would turn to Senator Conrad for any 
opening comment he might have.


    Senator Conrad. Thank you, Mr. Chairman. Special thanks for 
your leadership in this area. Obviously this is critically 
important, important to our country, important to world 
financial markets as well. This is something we simply have to 
get right. The world is changing everyday around us. Last night 
I was hooked up to my Web TV surfing the net and going to 
various financial sites. It is just remarkable the information 
and the access to markets that are now available to everybody 
everywhere in the world that has access to the internet.
    This changes everything and we have got to be very mindful 
of two things. One, we have got to protect those who are 
participants in the market and, second, we have got to make 
certain that our industry can be fully competitive. We do not 
want to do things unintentionally that will prevent our 
companies from being able to compete on a global basis. I think 
those of us who have passed around the book, The Lexus and the 
Olive Tree, understand how globalization is altering the speed 
with which everybody has to respond, those who are in the 
private sector and those of us who are in government. 
Government moves much more slowly than does the private sector 
and we are going to have to speed up because things are 
changing everyday in every way and if we do not respond 
quickly, we are going to leave our people at a competitive 
    So again, Mr. Chairman, we are going to have to strike a 
balance. We are going to have to find how we balance the 
competing interests of making certain that our companies are 
competitive and at the same time protecting participants in the 
market. I again want to thank you, Mr. Chairman. I look forward 
to the panels that you have called before us.
    The Chairman. I thank the Senator for his faithful work on 
this issue as well as all other issues and his prompt 
attendance at these nine o'clock hearings. I now call upon 
    Senator Conrad. You know in North Dakota, we usually are up 
by five so it is a little late to get started.
    The Chairman. I understand. Senator Fitzgerald.


    Senator Fitzgerald. Well, thank you, Mr. Chairman, and if I 
could have leave of the Committee to introduce my remarks to 
the record, I would appreciate that.
    The Chairman. They will be published in full.
    Senator Fitzgerald. Well, thank you, and I would just like 
to make a couple of comments. Obviously, as the Senator from 
Illinois who represents Chicago and LaSalle Street and the 
futures business there, I have a great interest in these 
particular hearings. I thought the Working Group's report was 
very thorough and had many good elements and I was impressed 
that it left open the possibility of a level regulatory playing 
field for technically futures products and financial 
derivatives that are not technically futures. It left open the 
possibility of a level regulatory playing field where only 
institutional counter parties were involved. That is an 
interesting issue and we will want to pursue that more.
    What I would be concerned of at the outset is fragmenting 
the market between the retail and institutional customers. I 
think we have to ask whether there is a public policy interest 
sufficient to justify taking retail customers out of having 
access to that large institutional market and that is something 
that we need to focus on.
    But as I read the Working Group's reports and some of the 
testimony that has been submitted beforehand, there seemed to 
be an openness on the part of most of the members of the 
Working Group to have that level regulatory playing field 
between traditional futures products and over-the-counter off-
exchange financial derivatives but only in the case of 
institutional parties. I think we are going to have to pursue 
that a little bit more, but with that, I would like to welcome 
Secretary Summers to the Committee and thank the Chairman, 
Senator Lugar, for holding these important hearings.
    The Chairman. I thank the Senator for his special interest 
in this subject and we look forward to working with you. Let me 
ask that the first witness, Secretary Summers, attempt to 
summarize remarks in a 10-minute period. We will not be overly 
rigorous because the report is very important. Your testimony 
will be published in full and it is an important statement. 
Likewise with our second panel of those who have been working 
with you as members, we will ask each to have a 10-minute 
opportunity and that would allow for questions as members come 
and go from the hearing, but we want to make certain that we 
have plenty of dialogue with all of us. It is a pleasure to 
have you, Secretary Summers. I see that you are accompanied by 
a distinguished fellow alumni of mine at Denison University, 
Lee Sachs, also a trustee of that institution, which gives him 
special standing as you are sitting there.
    We are grateful for your participation as always. Your 
leadership in this has been extremely important and you have 
been most forthcoming with members of the Committee. Senator 
Harkin has arrived and I will ask, do you want to make a 
comment now or maybe later?
    Senator Harkin. Have others made remarks?
    The Chairman. Yes. Senator Conrad made a comment.
    Senator Harkin. Just briefly.
    The Chairman. Very well. Go ahead.


    Senator Harkin. Thank you, Mr. Chairman. I am sorry. I just 
had a previous engagement. I am sorry for being a little late, 
but I want to thank you, Mr. Chairman, for holding this 
important hearing on the report of the President's Working 
Group on the over-the-counter derivatives markets. I, first of 
all, take my hat off to you for chairing on three consecutive 
days two hearings on dairy policy and one on financial 
derivatives, two of the most esoteric and mystifying subjects 
to ever come before this committee.
    So I very much look forward to receiving the testimony from 
Secretary Summers and others who are here and working with you, 
Mr. Chairman, to craft legislation that we can enact this year. 
We have made a good effort at it. Three years ago we worked 
together in a bipartisan fashion toward a consensus bill, but 
for some reason the stars were not quite aligned at that time. 
I am optimistic now that the circumstances are more auspicious 
that we can move ahead on new legislation. The report of the 
President's Working Group should be very helpful to us in that 
    Again, with the rapid changes that we see in the technology 
and in the financial markets, it is essential that the CEA is 
updated to reflect these changes that have occurred and again 
to just make sure that we accommodate some of the future 
changes that are coming.
    Any regulatory system becomes counterproductive if it 
inhibits innovation and the creation of new and beneficial 
products and services. So again I just want to underscore the 
importance of avoiding action that would help the financial 
markets but in any way damage the functioning of the 
agricultural markets.
    Finally I want to stress that when we pass legislation, we 
take responsibility for its consequences. So as we work on 
regulatory reform legislation, we have to be sure we do all we 
can to guard against unforeseen risks, especially systemic 
risks to the broader financial system that could come back to 
haunt us later on. Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much, Senator Harkin.
    Secretary Summers.


    Secretary Summers. Mr. Chairman, Senator Harkin, Senator 
Fitzgerald, Senator Conrad, thank you very much for giving us 
the opportunity to discuss the report of the President's 
Working Group on Financial Markets on Over-the-Counter 
Derivatives and the Commodity Exchange Act. Let me say that we 
very much share your view on both the importance and the 
urgency of these issues for the Nation's financial markets and 
for the economy.
    This report reflects a great deal of effort on the part of 
the members of the President's Working Group including the 
Chairmen of the Federal Reserve, CFTC and SEC. After a great 
deal of effort, we were able to reach unanimous recommendations 
and it is my very great hope that they can be enacted into law 
this year.
    Let me address three subjects in my remarks this morning. 
First, the importance of OTC derivatives to the economy, then 
the objectives that guided members of the Working Group in 
formulating their recommendations, and third, the six 
recommendations of the Working Group.
    OTC derivatives now represent more than $80 trillion in 
notional value. They perform a crucial function in helping to 
share and allocate risk around our nation's economy. This 
confers a number of benefits. It helps businesses and financial 
institutions to hedge risks and lower their costs, thereby 
reducing prices for American businesses and consumers. It 
promotes more efficient allocation of capital across different 
sectors of the economy. It encourages better information with 
respect to the risks of various contingencies and promotes 
transparency which leads to better planning, and it permits the 
development of more imortive financial products by allowing for 
wider sharing of risk.
    The market is a valuable one and it can deliver many 
benefits to those who make proper use of it. For example, the 
agricultural sector benefits considerably from OTC derivatives 
used by importers and exporters of agricultural commodities. By 
using these products, they hedge their exposure to volatile 
movements in foreign currency markets and can build on the 
certainty to invest more in their businesses, allowing farmers 
to export more of their products to overseas markets.
    Mr. Chairman, I think we all have an obligation to work as 
rapidly as possible to develop a legal framework that is as 
modern as the market that it addresses. It is our judgment that 
because the counter parties to OTC transactions are highly 
sophisticated and because the issues involved are enormously 
complex, government can best contribute by promoting a 
framework for market discipline based on the principle of 
transparency. The objective of government should not be to 
protect individual institutions but to protect the system. And, 
of course, government should have a continuing role with 
respect to the protection of retail customers.
    With these broad principles in mind, our report had four 
objectives in developing a legal framework for this market: 
First, the reduction of systemic risk; second, the promotion of 
innovation; third, the protection of retail customers; and 
fourth, ensuring U.S. competitiveness in an important industry 
where there is a great deal of innovation taking place.
    With these four considerations, systemic risk, innovation, 
retail protection, and U.S. competitiveness, we developed six 
recommendations. Let me highlight, Mr. Chairman, that a failure 
to enact legislation along these lines would, in our judgment, 
carry important risks with respect to each of our objectives: 
the mitigation of systemic risk, the promotion of innovation, 
the protection of retail customers, and the competitive of the 
U.S. financial industry.
    Our six recommendations. First, to create an exclusion from 
the CEA for most swaps agreements. Because the combination of 
the broad definition of commodity and the absence of any 
definition of futures contracts implies that the CEA may apply 
to transactions that no one anticipated in 1974, we believe 
that the exclusion for certain swaps between sophisticated 
counterparts is appropriate, consistent with market discipline, 
and should be put into law. I would add that the enactment of 
an exclusion promotes legal certainty that is essential for the 
integrity of the market.
    Second, to create an exclusion for electronic trading 
systems. And third, to permit the use of appropriately 
regulated clearing systems for OTC derivatives. These two 
recommendations both go to the objective of allowing 
sophisticated parties to organize together to trade OTC 
derivatives in ways that are most efficient for them, in ways 
that promote transparency to each other and in ways that permit 
clearing arrangements which mitigate systemic risks in the 
event of counter party default.
    Fourth, to clarify the original intent of the Treasury 
Amendment. As you will recall, Mr. Chairman, the Treasury 
Amendment goes to the question of regulation of trading in 
foreign exchange and government securities. The proposal here 
would clarify their exclusion from regulation on an organized 
exchange, but it would at the same time recognize the CFTC's 
authority with respect to bucket shops and other practices 
affecting retail customers.
    The fifth and sixth recommendations are highly technical 
with respect to the exempt status of hybrid securities. These 
recommendations address some jurisdictional disputes, but I am 
pleased to report that the jurisdictional disputes have been 
resolved with the unanimous agreement of the parties involved.
    Mr. Chairman, these are highly technical issues. But for 
being highly technical, they are nonetheless very important 
issues for the U.S. financial services industry and the 
contribution that the financial sector can make to the 
maintenance of a sound economy. We look forward to answering 
your questions and speaking on behalf of all the members of the 
Working Group hope it will be possible to enact these 
recommendations this year. Thank you and thank you for your 
    The Chairman. Thank you very much, Mr. Secretary. First, a 
technical question. Has the Department of the Treasury been 
working on any legislative language that reflects the findings 
of this Working Group?
    Secretary Summers. We do not have a full set of legislative 
language to share, but we have been thinking through ways in 
which various of these ideas can be expressed in legislative 
language and we would be very pleased to have our staffs be in 
touch regarding these issues.
    The Chairman. I appreciate that because that will be a 
great help in making certain that the Working Group's findings 
and the conclusions you have reported today are appropriately 
reflected when we finally get to the language. Mr. Secretary, a 
broader question, and this was certainly a question before 
initial hearings on this subject. Now, clearly not only the 
financial markets but the public as a whole was intrigued and 
correspondingly alarmed by the failure of the Long Term Capital 
Management Hedge Fund and likewise the steps that were taken to 
try to bring that situation into some balance. At one of our 
hearings there was considerable argument over whether that 
failure meant that there were a lack of proper credit 
standards, a lack of appropriate regulation by someone.
    Now, in essence, in the sophisticated ways in which the 
financial community deals in an international way, as you 
pointed out, are things simply at some point beyond our scope 
and if so what kind of jeopardy does this bring to the American 
economy, quite apart from financial markets, and to what extent 
has your group, the Working Group, thought about all of that 
and how are your recommendations appropriate, given those 
    Secretary Summers. I think you have raised a very important 
set of issues, Chairman Lugar, and they are a set of issues we 
gave a great deal of thought to in formulating our 
recommendations. The Working Group, as you know, had prepared a 
separate report on issues raised by highly leveraged 
institutions. I would leave to others an attempt to fully 
analyze the LTCM episode, but I think most would feel that it 
represented a combination of leverage and illiquidity that led 
to those very serious difficulties. The approach that we have 
advocated in both the highly leveraged institutions report and 
this one is one based on the principle of promoting market and 
counter party discipline through greatly increased transparency 
and that is the focus of our recommendations.
    We believe that the best discipline, the most informed 
discipline, on institutions can come from counter parties in 
the context of transparent sharing of information. Some of the 
recommendations that are contained in this report, though, to 
some degree do go crucially to the objective of systemic risk, 
including in particular the proposals to allow clearinghouses 
to be set up with respect to over-the-counter derivatives that 
will promote netting and therefore make large outstandings 
smaller and contribute to systemic stability.
    I believe that we do, and I think this was the tone of 
several of the opening statements, do need to find a balance 
between assuring a framework that protects against systemic 
risk, on the one hand, and promoting innovation on the other, 
but I would hasten to say that we need to be very careful of 
establishing public regulation in a way that crowds out what is 
potentially more effective private regulation by counter 
    The Chairman. Well, the private regulation idea is clearly 
an important one and if there is a bias in the report or at 
least a trend, it really moves toward more of that as opposed 
to public regulation. This is an age-old dispute in our own 
governmental system with the pendulum going backward and 
forward; clearly I favor that move toward more private 
regulation. This appears to be the way the CFTC and perhaps the 
SEC are moving, but at the same time, let me just ask this 
    Much of the Working Group's findings discuss what should 
remain outside of the Commodity Exchange Act. What policies 
should we focus on in determining instruments that should 
remain within the Commodity Exchange Act? In other words, what 
is sort of the core of that situation, as you see it, with 
regard both to innovation and growth and international 
competitiveness, but at the same time the basic public function 
of regulation which that commission and our oversight try to 
    Secretary Summers. I think the core rationales for public 
regulation in this area go to three things. They go to the 
protection of retail customers. Where retail customers are 
going to be substantially involved, there is certainly a case 
for strong regulation. Where price manipulation is a 
significant risk, particularly because of finiteness of supply, 
there is a very strong case for regulation. There will be cases 
where regulation can be constructive in terms of the promotion 
of transparency and the price discovery function. The balance 
that has to be struck involves a balance of recognizing when 
the need for regulation with respect to those considerations 
exceeds the costs, potential costs, in terms of reduction of 
innovation and loss of international competitiveness.
    In general, where it is highly sophisticated and 
experienced parties trading with one another, we believe that 
the promotion of market discipline based on counter party 
scrutiny is likely to be most effective.
    The Chairman. I thank you. I will ask each of our 
colleagues to stay within a 5-minute time limit on a first 
round. If there are additional questions, we will have a second 
round. I call on the ranking member, Senator Harkin.
    Senator Harkin. Thank you, Mr. Chairman. Mr. Secretary, you 
know, you said it very aptly when you said that we should be 
looking at the system itself and that government should not be 
picking winners and losers within the system but look at the 
system itself. I have been wrestling with this for a long time 
on the derivatives market. You see--and this is a question I am 
going to ask everyone that comes up here--right now we have an 
exemption. CFTC gives exemptions. What the Working Group has 
proposed is an exclusion.
    What I wonder is if you have a problem that crops up, that 
signals that some kind of regulation or action needs to be 
taken? Something where you have tremendous leveraging, for 
example, going on like we had in the hedge funds, if you have 
an exclusion, then it would take an act of Congress to do 
something about it. That takes a long time. If you have an 
exemption, then the CFTC could respond more readily to 
something like that, that cropped up. That is an issue that I 
wrestle with a lot.
    Now I understand the need for an exclusion, the certainty 
of contracts. I understand that. But I am wondering if within 
the framework of an exemption, you could not accomplish the 
same thing? I just throw that out as a question for you to 
ponder and if you have any response. In other words, with the 
exemption, they could impose a regulation right away to stop 
something that may be going out of control. With an exclusion, 
you have to have an act of Congress.
    Secretary Summers. Senator Harkin, I think in the latter 
part of your remarks, you forecast correctly what would be my 
response, which is you are clearly correct that an exemption 
provides more flexibility than an exclusion, but it is 
precisely the presence of that flexibility and the recognition 
that it might be used that undermines legal certainty and 
creates a greater possibility that these transactions will take 
place and be booked abroad where they will not be subject to 
American law. It is precisely that flexibility and the 
expectation that it might be used that is potentially reducing 
of confidence with respect to these transactions.
    I do not think we would responsibly, nonetheless, favor 
exclusion in areas where strong public regulation would confer 
large benefits even despite that legal certainty consideration, 
but it is our judgment and the judgment of the staffs whose 
work went into this that in a range of financial transactions 
between very large and sophisticated institutions, the impact 
of public regulation in reducing the pressure for market 
discipline might actually be counterproductive and therefore 
the clear signal that an exclusion provides both would 
contribute to legal certainty and would contribute to greater 
pressure for the strongest possible market regulation.
    Senator Harkin. Thank you, Mr. Secretary. Thank you, Mr. 
    The Chairman. Thank you very much, Senator Harkin. Senator 
    Senator Fitzgerald. Thank you, Mr. Chairman. I want to 
follow up on a question by Senator Lugar. He asked about where 
you thought regulation was necessary. If I remember correctly, 
you said essentially that you felt public regulation was 
necessary where retail customers were involved and where you 
are trading a product such as a commodity which theoretically 
at least could be susceptible to market manipulation. Somebody 
in theory could corner the market on grain. I took that to mean 
that cornering the market on financial derivative products is 
not as much of a possibility as where you have a finite 
    If that is your test for the necessity of public 
regulation, and we had a situation in which institutional 
parties are trading a future on a financial product as opposed 
to an agricultural commodity or some other commodity on an 
exchange, would you support having no public regulation and 
just allowing those counter parties in that case to police the 
    Secretary Summers. Senator, I prefer not to comment in any 
real detail on issues that fall within the CFTC and Chairman 
Rainer's bailiwick. But I would say this. I think it is very 
important that while this report has focused, in line with the 
Chairman's request, on the OTC derivatives market, there are 
obviously a set of issues that arise with respect to exchange-
traded products and that the same basic principles of 
motivating innovation, protecting retail, avoiding systemic 
risk, and being internationally competitive that we have 
stressed with respect to OTC derivatives also arise with 
respect to exchange-traded instruments and the same kind of 
balances need to be struck.
    As the Chairman indicated in his opening statement, this is 
something that Chairman Rainer and the CFTC have been very much 
involved in and will be reporting on soon, and I would 
certainly support their efforts to remove any regulation which 
proves to be unneeded.
    I would say that I think the merits with respect to the OTC 
derivatives market are very strong. The economic importance is 
very great. I would hope that, that important issue would not 
be held hostage to debates, whatever the merits on both sides 
are, with respect to the proper regulation of the exchanges.
    Senator Fitzgerald. Now with respect to the swaps exclusion 
where institutional customers only are involved and retail 
customers are not involved, would that exclusion operate to 
deny retail customers access to the most liquid markets? Would 
it not encourage the creation of markets with pools of 
liquidity that are only available to the institutional 
    Secretary Summers. That clearly is a source of concern that 
has to be balanced, Senator Fitzgerald, but while I have said a 
number of things here that have suggested that in certain 
circumstances, regulation may not be constructive, I think it 
is important to remember that the premise of a view like the 
one you described is that regulation is all an excessive 
punitive burden, and in many cases, regulation can be a source 
of strength and integrity to markets. Indeed if you look at 
American financial markets, one of their strengths and one of 
the reasons why companies, for example, come to list here is 
the strength of our regulation. There has been some important 
recent economic research comparing securities markets in a 
number of the transition economies that have demonstrated that 
in certain cases, proper regulation with respect to issues like 
insider trading and the behavior by insiders can promote 
integrity, encourage people to trade there and promote 
    So I think the conclusion that I would draw is that we need 
everywhere to avoid unnecessary and unconstructive regulation 
but that proper constructive regulation can strengthen a 
market's integrity, confidence and thereby promote its 
liquidity, and my hope, and I have great confidence that with 
Chairman Rainer's leadership the CFTC will get there, would be 
to take an approach of that kind with respect to the exchange-
traded markets.
    Senator Fitzgerald. Well, thank you and I do agree with 
your comment with respect to proper regulation. I think we have 
the best capital formation markets here in the United States 
because we have outstanding securities laws, and my hope would 
be that we could come up with a similarly outstanding model to 
cover our derivatives market. Thank you.
    The Chairman. Thank you very much, Senator. Senator Conrad.
    Senator Conrad. Thank you, Mr. Chairman. I would like to 
follow up on the question by Senator Fitzgerald because I think 
it really goes to the heart of the controversy here and the 
questions that have to be answered by this committee. We had in 
Long Term Capital a situation in which there was enormous risk. 
There was huge leverage there and we saw a very fast action by 
government to bring together private parties to stem the tide 
there, to stop the hemorrhage. That could have become a very, 
very serious situation for the financial market and the 
confidence in financial markets.
    Let me ask you this. You are talking about counter party 
scrutiny as being what we should we look to for these large 
sophisticated financial traders. What would you say to the 
public who is listening here to give them comfort in light of 
Long Term Capital? What happened to counter party scrutiny in 
that case? Why did it fail? What is before us now that is going 
to prevent a future failure?
    Secretary Summers. No one can sensibly sit here and assure 
you that there will not be more financial crises, that there 
will not be problems in the future, Senator Conrad. The Working 
Group's proposals, not with respect to OTC derivatives but with 
respect to highly leveraged institutions, included a variety of 
steps that were intended to reduce the risk of systemic risk 
coming from a situation like Long Term Capital. Those involved 
much greater requirement of transparency in their reporting to 
their creditors.
    Senator Conrad. When you use--I am sorry to interrupt, but 
when you say transparency, what do you mean by that? What is 
provided for here that makes these transactions more 
transparent for those who are involved? Is there more reporting 
of what a company's positions are so that others could see how 
highly leveraged they were?
    Secretary Summers. Yes. Yes, and, in particular, there is 
more reporting at two levels, both with respect to the 
expectation of the information that will be shared between 
leveraged institutions and banks or other institutions that 
provide them with credit, and as those institutions that are 
regulated by the Government are supervised, there is much 
closer scrutiny of their exposure to highly leveraged 
institutions such as hedge funds. Is this going to be totally 
satisfactory? I am sure there will be problems at some points 
in the future, but I think the concern, and I think it is a 
legitimate one, is that we need to act in a way that ensures 
that the maximum degree of responsibility is felt by counter 
parties who inherently will be much closer to these situations 
and better able to judge them than any set of regulators are 
ever likely to be.
    There is a second type of policy response that is 
appropriate and one area where we get into it here is the 
Working Group's second recommendation with respect to 
clearinghouses which provides for arrangements in which there 
is some sharing of obligation and so credit can be extended 
with confidence that it will be repaid. And, greater reliance 
on clearinghouses, greater reliance on netting arrangements, 
more rapid settlements procedures, these are all very intricate 
issues, but if you look back to the time after LTCM, I think 
most would feel that better netting, faster settlements, more 
transparency, improved contractual relations in a variety of 
ways that reduce the pressure for forced liquidations are all 
constructive steps. With the support of those of us in the 
official sector, there have been a number of groups in the 
private sector that have come together to devise procedures and 
move forward along those directions.
    But I would hasten to distinguish somewhat the issues that 
we have just been discussing, which are very important, from 
the issues that are the primary focus of this hearing. It is 
possible to leverage a position heavily and lose most or all of 
an institution's capital whether you are trading on an over-
the-counter market or an exchange market. A substantial amount 
of the LTCM positions were actually on exchange-traded markets 
and the overwhelming preponderance of the Barings positions 
which had some similarity were traded on exchange markets. So, 
I think the set of issues involved in LTCM risk type problems 
is a somewhat different set of issues than the set of issues 
that are involved with respect to what type of markets we 
should have.
    The Chairman. Thank you very much, Senator Conrad. Senator 
    Senator Grassley. Mr. Chairman, I do not have any questions 
but I would like permission to put an opening statement in the 
    The Chairman. It will be published in full.
    [The prepared statement of Senator Grassley can be found in 
the appendix on page 52.]
    Senator Grassley. And I hope before I have to leave for the 
Finance Committee I get a chance to hear the next panel.
    The Chairman. Very well. Are there other questions of 
senators of our distinguished witness? If not, we thank you 
very much, Secretary Summers, for your testimony and for your 
    [The prepared statement of Secretary Summers can be found 
in the appendix on page 54.]
    The Chairman. The chair would like to call now a panel 
consisting of Chairman Alan Greenspan, Board of Governors of 
the Federal Reserve System; Chairman William Rainer of the 
Commodity Futures Trading Commission; and Ms. Annette Nazareth, 
Director of Market Regulations, Securities and Exchange 
    I welcome the panel and I will ask that you testify in the 
order that I introduced you and that will be first of all 
Chairman Greenspan, then Chairman Rainer, and Ms. Nazareth. 
Each of you hopefully can give us 10-minutes or so of testimony 
and then as you noticed with the previous witness, we will have 
a round of questions by senators. Chairman Greenspan, it is 
always a privilege to have you before the Committee and we 
welcome you again today.


    Mr. Greenspan. Thank you very much, Mr. Chairman. I shall 
endeavor to be somewhat more brief than 10-minutes, but I tend 
sometimes to ramble on so I may end up in that particular area. 
I am particularly pleased to be here today before you and your 
committee members to underscore the importance of this 
committee's efforts to modernize the Commodity Exchange Act and 
to express my support for the Working Group's recommendations.
    Over-the-counter derivatives have come to play an 
exceptionally important role in our financial system and in our 
economy. These instruments allow users to unbundle risks and 
allocate them to the investors most willing and able to assume 
them. A growing number of financial and non-financial 
institutions have embraced derivatives as an integral part of 
their capital allocation and profit maximization.
    In considering regulation of derivatives under the CEA, we 
need to keep in mind that imposing government regulation on a 
market can impair its efficiency. Thus, when evaluating the 
need for government regulation, it is essential that the public 
policy objectives be identified clearly. As the Working Group's 
report discusses, the primary public policy purposes of the CEA 
are to deter market manipulation and to protect investors 
against fraud and other unfair practices. We must, of course, 
assess whether government regulation is necessary to achieve 
those objectives.
    As Secretary Summers has already testified, in the case of 
financial OTC derivatives transactions between professional 
counter parties, the Working Group has agreed that such 
regulation is unnecessary and that such transactions should be 
excluded from coverage of the act. Furthermore, the exclusion 
should extend to the electronic trading of such contracts by 
such participants.
    The rationale for these positions is straightforward. OTC 
transactions in financial derivatives are not susceptible to 
manipulation, and professional counter parties simply do not 
require the protections that the CEA provides for retail 
    The Working Group has also concluded that government 
oversight of clearing systems for over-the-counter derivatives 
is appropriate. However, provided such government oversight is 
in place, OTC transactions that would otherwise be excluded 
from the CEA should not fall within the ambit of the act 
because they are cleared. If market participants conclude that 
clearing would reduce counter party risks in OTC transactions, 
concerns about legal risks associated with the potential 
application of the CEA should not stand in their way.
    The Working Group's report does not make specific 
recommendations about the regulation of traditional exchange 
traded futures markets. Nevertheless, it calls for a review of 
the existing regulatory structures, particularly those 
applicable to financial futures, to ensure that they are 
appropriate in light of the objectives of the act. Consistent 
with the principles of regulation I identified earlier, the 
report notes that exchange-traded futures should not be subject 
to regulations that are unnecessary to achieve the CEA's 
objectives. The report also concludes that the current 
prohibition on single stock futures can be repealed if issues 
about the integrity of the underlying securities markets and 
regulatory arbitrage are resolved.
    Mr. Chairman, I want to underscore how important it is for 
us to address these issues promptly. I cannot claim to speak 
with certainty as to how our complex and rapidly moving markets 
will evolve, but I see a real risk that if we fail to 
rationalize our regulation of centralized trading mechanisms 
for financial instruments, these markets and related profits 
and employment opportunities will be lost to foreign 
jurisdictions that maintain the confidence of global investors 
without imposing so many regulatory constraints.
    My concerns on this score stem from the dramatic advances 
in information technology that we see all around us. In markets 
in which there are significant economies of scale and scope, 
like those for standardized financial instruments, there is a 
tendency toward consolidation or even natural monopoly. 
Throughout much of our history, this tendency has been 
restrained by an inability to communicate information 
sufficiently quickly, cheaply, and accurately. In recent years, 
however, this constraint is being essentially eliminated by 
advances in telecommunications. We have not yet seen clear 
evidence of the trend toward natural monopoly, but the 
diffusion of technology often traces a so-called S-shaped 
curve, first diffusing slowly but then rapidly picking up 
speed. Once we reach the steep segment of that S-curve, it may 
be too late to rationalize our regulatory structure.
    Already the largest futures exchange in the world is no 
longer in the American heartland; instead, it is now in the 
heart of Europe. To be sure, no U.S. exchange has yet to lose a 
major contract to a foreign competitor. But it would be a 
serious mistake for us to wait for such unmistakable evidence 
of a loss of international competitiveness before acting. As 
our experience with the vast eurodollar markets demonstrates, 
once markets with scale and scope economies are lost, they are 
very difficult if not impossible to recapture.
    Thank you, Mr. Chairman. I look forward to your questions.
    [The prepared statement of Mr. Greenspan can be found in 
the appendix on page 61.]
    The Chairman. Thank you very much, Chairman Greenspan. 
Chairman Rainer.

                       TRADING COMMISSION

    Mr. Rainer. Thank you, Chairman Lugar, Senator Harkin, 
Senator Fitzgerald. I appreciate the opportunity to come here 
and discuss these recommendations. The goals of the Working 
Group report have already been mentioned and the ability to 
achieve these goals will be enhanced through greater legal 
certainty for the OTC market. Congressional action to exclude 
OTC financial derivatives from the act would provide such 
certainty. I can advocate this step because OTC financial 
derivatives, as we know them today, do not present regulatory 
concerns within the scope of the act. Also, excluding this 
activity will not diminish the CFTC's ability to carry out the 
statutory mission it is charged to fulfill.
    When the Commodity Exchange Act was written, Congress 
articulated the rationale for regulating futures transactions. 
First, the act establishes the economic utility of futures 
trading, stating that futures prices are generally quoted and 
disseminated throughout the United States and in foreign 
countries as a basis for determining prices to the producer and 
the consumer of commodities.
    In addition to their price discovery function, futures 
transactions are used by commercial handlers as a means of 
hedging themselves against possible loss through fluctuations 
in price.
    The second prong of Congress' rationale for regulation is 
that the transactions and prices of commodities are susceptible 
to excessive speculation and can be manipulated, controlled, 
cornered or squeezed. The risks of price distortion and 
manipulation are the factors rendering regulation of these 
markets imperative. Congress thus identified the overarching 
public mission of the CFTC as that of preventing price 
manipulation and ensuring price transparency.
    Like exchange-traded futures, OTC derivatives are risk 
shifting instruments. The Working Group, however, has 
determined that prices established in OTC derivatives 
transactions do not serve a significant price discovery role. 
The Working Group has also concluded that most OTC derivatives 
are not susceptible to manipulation. Moreover, OTC transactions 
are entered into and traded by sophisticated institutional 
traders who are able to look out for themselves in these 
markets, and as has been pointed out the activities of most 
derivatives dealers already are subject to direct or indirect 
Federal oversight.
    Because there is no manifest regulatory interest warranting 
CFTC oversight of OTC derivatives, I support the exclusion 
proposed by the Working Group. Congress and the CFTC have acted 
before to resolve legal uncertainty affecting OTC derivatives. 
In 1992, amid strong signals that swap market participants 
feared their contracts could be declared unenforceable, 
Congress responded decisively instructing the CFTC not to 
regulate swaps entered into by sophisticated parties. Congress 
authorized the CFTC to provide exemptive relief for swaps 
without requiring the Agency to make a threshold determination 
that particular exempted transactions fell within its 
    CFTC promptly issued a rule exempting swap agreements from 
all provisions of the act except prohibitions against fraud and 
manipulation provided the swaps meet certain conditions. This 
exemption worked relatively well. Lately, however, evolution in 
the OTC derivatives market has rendered the exemption 
inadequate. The exemptive rule does not apply to OTC contracts 
that are standardized, cleared or executed under conditions 
that approximate those of an organized exchange.
    Technology, however, is dramatically changing the structure 
and nature of many aspects of the financial services industry. 
The rise of electronic screen-based trading has blurred the 
line drawn in our swaps exemption between bilateral and 
multilateral trading. The growth in swaps volume and the 
acceptance of these contracts by a wider range of users has led 
to their standardization. Public policy must meet these 
advances in the OTC market.
    I also believe that development of regulated clearing 
systems should be encouraged. Clearing systems can employ a 
variety of risk management tools such as mutualizing risks and 
offsetting multiple obligations. Consequently, clearing systems 
can help to reduce systemic risk.
    Finally, the commission's rule, the swap exemption rule, 
exempts bilateral swaps from all provisions of the CEA except 
those provisions prohibiting manipulation and fraud. The CFTC 
thought it prudent to retain its jurisdiction to act in the 
event the Agency learned that participants were engaging in 
fraudulent or manipulative conduct and that the transactions 
executed under the exemption were, in fact, futures.
    The swaps exemption does not alter the CFTC's 
responsibility to take action against this misconduct. In a 
given set of circumstances, however, the Agency's ability to 
act may be contingent upon proving that transactions are 
futures or options. This is a critical point to remember. At no 
time has Congress or the CFTC made the definitive judgment that 
swap transactions are, in fact, subject to the CEA's 
jurisdiction. The combination of responsibility with no more 
than contingent authority is simply bad public policy because 
as a practical matter the CFTC cannot exercise its residual 
enforcement authority under the swaps exemption without 
exacerbating the existing legal uncertainty in this area.
    While examining the applicability of the act to OTC 
markets, we also have conducted an inquiry into whether our 
current regulatory scheme is appropriately tailored to today's 
environment for exchange-traded futures. Since November, the 
Agency has undertaken a serious effort to answer the question 
what degree of exchange-traded regulation is necessary to serve 
the public interest entrusted to us?
    This inquiry is at the heart of the process that the CFTC 
has engaged in over the last several months. Impending 
technological and other changes require the CFTC to scrutinize 
the continued vitality and viability of its one-size-fits-all 
regulatory structure that currently applies to all futures 
transactions. While that process is not yet complete, certain 
clear principles have emerged.
    One, the historic needs of traditional physical commodities 
should not be the basis for regulating every futures contract 
traded today and, two, institutional market participants do not 
require all of the protections designed for retail traders.
    The key policy elements will include a move from direct to 
oversight regulation, a move from prescriptive rules to 
flexible performance standards, and the increased use of 
disclosure based regulation. This plan will not impair the 
Agency's ability to assure the fundamental market integrity 
expected when conducting futures exchange transactions in the 
United States or when relying upon the prices set in U.S. 
exchange-traded markets. The commission will continue to 
exercise its authority to assure this integrity.
    In conclusion, Mr. Chairman, time is not our ally in 
establishing a framework that achieves our national economic 
priorities with respect to derivatives trading. Technology has 
made it increasingly easy to establish rival markets in foreign 
jurisdictions. Technology has also increased the speed with 
which new innovations are introduced and widely used by market 
participants. Because of these realities, I ask Congress to act 
expeditiously on the recommendations of the Working Group. 
Thank you again for the opportunity to testify and I will look 
forward to our continued collaboration with the Working Group 
and members of this committee and look forward to your 
questions. Thank you.
    [The prepared statement of Mr. Rainer can be found in the 
appendix on page 68.]
    The Chairman. Thank you very much, Chairman Rainer. Ms. 


    Ms. Nazareth. Thank you, Senator Lugar, Senator Harkin, 
Senator Fitzgerald. I am pleased today to appear to testify on 
behalf of the Securities and Exchange Commission as you 
consider issues pertaining to the reauthorization of the 
Commodity Futures Trading Commission. In my oral testimony, I 
will focus on the Report on Over-the-Counter Derivatives 
Markets and the Commodity Exchange Act, which the President's 
Working Group on Financial Markets submitted to Congress last 
    In preparing the Report, the Working Group's task was 
fairly specific: to focus on how the CEA might be modified to 
address issues related to OTC derivatives markets. Accordingly, 
the Report makes recommendations in several areas. First, the 
report recommends that Congress amend the CEA to exclude 
bilateral swap agreements among eligible swap participants 
acting on a principal basis. This exclusion would not apply to 
transactions involving non-financial commodities with finite 
    It would also not apply to transactions that are conducted 
on a multilateral transaction execution facility, as that term 
is defined by the CFTC. The Commission believes that excluding 
qualifying instruments from the CEA should create greater legal 
certainty than the current approach that merely provides for 
the possibility of exemption, thus leaving open the question of 
whether such instruments are futures.
    Second, the Report explores questions raised when 
electronic systems facilitate the trading of OTC derivatives. 
The Report recommends, among other things, that Congress amend 
the CEA to exclude electronic systems that are clearly not 
multilateral transaction execution facilities. It also 
recommends excluding electronic systems that limit their 
participants to sophisticated counter parties trading for their 
own accounts, as long as the systems are not used to trade 
contracts that involve non-financial commodities with finite 
    Electronic systems that assist eligible swap participants 
in communicating about or negotiating bilateral agreements 
would also be excluded. Moreover, to avoid disadvantaging 
existing futures exchanges, the Report specifically states that 
those exchanges would be permitted to establish these kinds of 
electronic systems for swaps as well.
    Third, the Report addresses systems for clearing OTC 
derivatives. Like electronic trading systems, clearance systems 
for OTC derivatives are subject to legal uncertainty. Because 
of their importance, the Report urges Congress to permit 
regulated clearing systems used for OTC derivatives. The Report 
clarifies, however, that a clearing system subject to 
regulation by one agency should not become subject to 
regulation by another agency simply because it also clears OTC 
    Fourth, the Report focuses on providing greater legal 
certainty for instruments covered by the Treasury Amendment. 
The Treasury proposed this amendment in 1974 out of concern 
that the broad statutory definition of ``commodity'' would 
subject OTC markets in government securities and foreign 
currency to CEA regulation. As a result, the amendment excludes 
a list of instruments from the definition of commodity. These 
listed instruments, however, still may be subject to CEA 
regulation when traded on a ``board of trade.''
    By proposing to replace ``board of trade'' with ``organized 
exchange,'' the Report seeks to clearly delineate the 
limitation on the exclusion. The Report also recommends 
clarifying the Treasury Amendment to permit the CFTC to address 
problems associated with foreign currency ``bucket shops.''
    Fifth, the CFTC's ``exclusive jurisdiction'' over certain 
matters has caused confusion over the appropriate regulator and 
regulatory scheme for complex derivative instruments that 
possess attributes of both securities and futures contracts. In 
order to provide legal certainty for these hybrid instruments, 
the CFTC has agreed that it will not propose any new rule that 
would cover these instruments without the concurrence of the 
other Working Group members. The Report recommended modifying 
the CEA's exclusive jurisdiction in order to eliminate 
questions regarding the authority of the SEC and bank 
regulators with respect to hybrid instruments. The report also 
urges Congress to clarify that the Shad-Johnson Accord should 
not be construed to apply to hybrid instruments that have been 
exempted from the CEA.
    Finally, the unanimous findings of the Report reiterated 
the commission's position that although single stock futures 
may possess elements of traditional futures contracts, they 
also have characteristics of traditional securities. 
Accordingly, when considering the Shad-Johnson Accord's ban on 
single stock futures, it is clear that regulatory issues 
associated with the introduction of such products would be 
complex. Indeed, the members of the Working Group agree that 
numerous issues would have to be resolved before the ban could 
be reconsidered. These issues include, but are not limited to: 
margin levels; insider trading; sales practices; real time 
trade reporting; floor broker activities; and CFTC exclusive 
    As you know, Chairman Lugar and Senator Gramm have asked 
the SEC and the CFTC to report back to their respective 
committees later this month on issues associated with modifying 
the Shad-Johnson Accord. The Commission staff has been working 
diligently with their counterparts at the CFTC to consider the 
relevant issues. We look forward to sharing our views with the 
Committee on these issues when our report is submitted.
    In conclusion, I would like to note that the Report only 
represents a beginning. In addition to implementing the 
Report's recommendations, we must all continue to study the 
rapidly evolving markets for OTC derivatives. With input from 
Congress and industry participants, we are confident that we 
may meet any regulatory challenges while permitting this 
important market to continue to develop efficiently. Thank you.
    [The prepared statement of Ms. Nazareth can be found in the 
appendix on page 73.]
    The Chairman. Thank you very much, Ms. Nazareth. Let me 
just comment because your very thoughtful testimony touches 
upon a couple of thoughts. In those you mentioned in one 
passage that the CFTC would not attempt to act arbitrarily 
where there are at least arguably issues that face the SEC or 
other Working Group members and that I like that idea.
    As you recall, during the last 2-years as we have come 
together, there was some question as to whether the CFTC 
unilaterally would take jurisdiction feeling that it was doing 
its duty in behalf of the American public and the integrity of 
the financial system with some dispute of other persons who 
have come together in this Working Group. Individual members of 
the Working Group approached this chairman to indicate their 
distress about that from time to time. So it is important--you 
know we are all one country, we have one administration, one 
president who makes appointments--to work together on this. 
Then the fact that this team effort has come together is 
significant and that it might be of some value.
    Second, each of you have pointed out that time is not our 
ally in this. When I mentioned in my opening comment that we 
need to act in the next 3-months, this strikes fear and panic 
into the hearts of legislators, drafters, all the parties that 
are involved, to want to approach this in a much more leisurely 
pace, sort of having several bites at the apple, but I think we 
all understand I hope the urgency of this. This is why we set 
some arbitrary deadlines for reports which we are hoping that 
each of the groups will come back to us.
    The third point touched upon by Chairman Greenspan and then 
amplified by Chairman Rainer, we had during one hearing in this 
room--in fact, someone sitting about where you are, Ms. 
Nazareth, demonstrated with a screen here a trade. He actually 
made a trade in a foreign country from this committee room. I 
think he sold a contract of corn and got confirmation. That was 
certainly interesting for all of us who are not involved in day 
trading here or elsewhere hopefully in the building, but 
nevertheless it demonstrated the fact that we really do not 
know all that is occurring. As Chairman Greenspan said, there 
is an S-curve here. Once you go over the curve, it may be 
beside the point to deal with all of this with the certainty 
that we had hoped with regulation. We still have a 
responsibility to do our best.
     But our confidence level probably diminishes rapidly.
    But in that respect, do we live in a world, and Chairman 
Greenspan, I ask you this philosophically, in which it is 
anticipated by the public that we will all be wise enough to 
have a regulatory mechanism that brings confidence to our 
markets and we do our very best to do that? But as I listen to 
your testimony and sort of read anecdotally the other material, 
is this a situation that is getting really beyond our abilities 
to do this? And to what extent, as we approach this, do we do 
so with some modesty that we do our best but at the same time 
not give the impression that I think some of us have given in 
the past that almost like the Food and Drug Administration 
pinning down safe food and after endless hearings and years of 
study we get it right? I am not certain this is applicable in 
this area, but would you give some philosophical perspective to 
    Mr. Greenspan. Well, Mr. Chairman, I think you are raising 
a very important concern. We have been very fortunate in this 
country that the regulatory structure we have put in place has 
been generally accepted by the American public. They have 
exhibited confidence in it, and even though you periodically 
hear of breakdowns in the system that the press goes a little 
berserk on in certain areas, what is really quite remarkable is 
how little of that there is. I do think that we are confronting 
a broader challenge to continue that level of integrity of our 
system largely because, as I point out in my prepared remarks, 
the technology of financial innovation has become so 
extraordinary, and, in many respects, almost discontinuous.
    We have seen quantum jumps in information technology in the 
nature of financial products, and as a consequence, the need 
for financial regulation to adjust itself to the rapidly 
altering financial structure which confronts us. I think the 
Working Group has endeavored in this particular area to 
recognize that a number of our definitions and our concepts 
with respect to financial instruments generally, and 
derivatives particularly, have got to be understood in a 
rapidly changing environment.
    I cannot promise you nor do I believe any of our colleagues 
can that we will get this all right. But I do say, and I think 
it should be emphasized, that the Working Group works very 
effectively. I am myself impressed at the interaction that has 
occurred and our ability to reach consensus. We do that not 
because each and every member of the group agrees 
wholeheartedly with each and every recommendation, but we 
recognize the need for consensus above the specific solutions 
that each of us would prefer, other things equal, and I take 
that as a very good sign.
    The Chairman. I can remember just anecdotally, Chairman 
Greenspan, your coming along with Secretary Rubin to Senator 
Dole's office at the beginning of the Mexican crisis, now I 
guess 4-years ago or so--five--time goes by rapidly.
    Mr. Greenspan. But memories do not fade.
    The Chairman. I know. The thing that I remember about the 
meeting, however, is the description of billions of dollars 
being electronically transferred, not just with regard to 
Mexico and the United States, but as you were pointing out at 
that time from Southeast Asia and strange places that we would 
not have thought were necessarily involved in a bilateral 
crisis but at the same time seeking safety presumably. I think 
this was impressive that unlike most types of protectionism, 
where you can try to keep out something or keep it in, with 
regard to money and electronics, even at that point, and as you 
say quantum leaps have occurred in that 5-year period. So that 
this is something to say the least that is very difficult, but 
it is reassuring and I like your comment that the Working Group 
has gotten together. Hopefully without knowing this is a 
permanent institution, there at least is enough tradition of 
your working together which is extremely helpful to the 
relevant committees.
    In that point, I am trying to work together, and I made 
explicit this morning, with Chairman Gramm of the Banking 
Committee. As we have gotten through the CFTC's situations 
during the last two decades or so in which I have been involved 
in this, frequently we have been in loggerheads with the 
Banking Committee or we have gone through several years in 
which nothing happened because there was sufficient stymie 
either way. I think Chairman Gramm is determined, and I am, 
that we have oversight over different institutions, but 
nevertheless we have a working group in which you have bridged 
those gaps in the administration, and I know the distinguished 
ranking member joins me in our attempts to bridge them in this 
Senate, bipartisan and by committee or whoever else we need to 
work with.
    In that respect, Chairman Rainer, let me ask you, you have 
talked, and Senator Harkin asked a very pertinent question 
about the difference between exemption and exclusion, but you 
have said exclusion, and you have said it because this gets to 
the heart of the legal certainty problem. You talked about a 
regulatory scheme that really did not seem to be quite focused. 
It never quite had the authority. It was out there, however, 
and a part of the crisis that brought us all together a couple 
of years ago was that suddenly CFTC, vague or not, decided it 
was in the public interest that unilaterally it would deal with 
this problem.
    So this then threw markets into potential turmoil. I do not 
want to put too fine a point on it, but this is a very 
important juncture in the legislation and would you just 
underline again the need for either certainty, exclusion as 
opposed to exemption, how this fits after all the studies and 
compromises that you may have made?
    Mr. Rainer. That is a very important question, Chairman 
Lugar, and not one that I have not spent a considerable amount 
of time thinking about. The first thing I did was to determine 
whether I agreed with everyone else in the Working Group 
whether or not the instruments of the over-the-counter 
derivatives were not manipulable, did not serve a price 
discovery role, and the impact of the types of participants 
with respect to regulation. I have satisfied myself that these 
instruments are not readily susceptible to manipulation and do 
not serve a meaningful price discovery role. As a result of 
that and given the sort of collision that the CEA and the over-
the-counter derivatives market has more or less been on for a 
long time, I thought it was time to resolve this matter, to 
resolve the issue. I thought it was in the public interest to 
get this cleared up and I did not see the benefits of the 
Commodity Exchange Act superimposed over this market.
    The Chairman. Those are the two major criteria, 
manipulation and----
    Mr. Rainer. Serving a price discovery role.
    The Chairman. And price discovery.
    Mr. Rainer. Since those two elements are not material with 
this market, I thought that the public interest would be best 
served if I agreed that we exclude this market from the 
Commodity Exchange Act. Exclusion versus exemption--that is not 
a complicated answer for me. I was seeking the greatest clarity 
for legal certainty and an exemption would provide clarity. A 
codified exemption would probably provide a little more 
clarity, but the greatest clarity would be an exclusion, and I 
support that.
    The Chairman. Thank you. Senator Harkin.
    Senator Harkin. Thank you, Mr. Chairman. I had three 
questions. That was one of them, and that is can we provide the 
same kind of legal certainty--after all, we write laws--and to 
provide the same kind of legal certainty under an exemption 
that we can under exclusions? I do not know why we cannot do 
that. Again, I get back to what I asked Secretary Summers in 
the beginning. That with an exclusion we have washed our hands 
of it. If anything happens, again, you say I do not know what 
is going to happen out there. I mean you say there is a 
notional value of about $83 trillion or something like that 
worldwide. I mean that is a lot of risk out there. These are 
risk instruments. That is a lot of risk.
    And so if you have this exclusion and something unforeseen 
happens, who does something about it? You cannot, Mr. Chairman. 
You cannot. You cannot. It has got to come back to us and we do 
not act that fast around here. So I am wondering that within 
the framework of an exemption, can you provide the legal 
certainty which I understand has to be done, and this is what I 
wrestle with, the legal certainty of these contracts, but 
keeping the hammer--I do not know--hammer may be the wrong 
word--but keeping the possibility that one of you or all of you 
can act rapidly to intervene at some point? I ask all of you 
that. I will start with you.
    Mr. Rainer. I will defer on some of these matters to 
Chairman Greenspan, but one of my answers is that I think we 
have to keep in mind that most of these participants are either 
involved in the banking system or investment banking industry 
and so there is regulation along those lines. I am not a lawyer 
and I cannot slice the differences very well between codified 
swap exemption and exclusion, but I have been assured that 
exclusion does provide the greatest clarity for legal 
certainty. And, if that is the case, that is what I am 
    Senator Harkin. Well, I have been told that, too, but I am 
not certain I am buying it right now. I may. Chairman 
    Mr. Greenspan. Senator, let me repeat what Secretary 
Summers says because I do agree with him on this. The problem 
would be less immediate if the CFTC had 20-year terms for 
Commission members, and the people in the CFTC stayed very long 
periods of time and did not change their philosophy 
particularly. Then the issue would be pretty much irrelevant, I 
would think. That is not the case. We have changing CFTCs. 
Indeed, the difference between the current CFTC and the one 
immediately preceding it with respect to how the CFTC viewed 
the markets is really quite significantly different.
    The result of that is that you have a situation where the 
uncertainty owing to the turnover of the commission does create 
a significant diminution of the degree of legal certainty, and 
I think that a major concern is that it is a critical issue 
which unless appropriately resolved can very readily move a 
very substantial part of this market, and it is a huge market, 
as you point out, overseas. There is virtually no reason why a 
lot of these transactions that are made by larger investors 
cannot be struck in London under a different set of laws.
    So I would just say basically that because of the easy 
ability to move abroad, it means that the sensitivity or the 
particular barrier which we have to cross with respect to 
degrees of uncertainty has been lowered, and I am fearful that 
unless we get legal certainty, and indeed it is the view of all 
of the Working Group members, we are fearful that we may end up 
with another eurodollar market.
    Senator Harkin. I try to interpret in my own words. Maybe I 
just wanted clarification of this, Mr. Chairman. It almost 
sounded to my ears like you were saying that if we were--if in 
the wisdom of Congress, we were to provide some kind of legal 
certainty to these derivatives and do it under an exemption 
basis, that the regulatory body that would be best able to 
oversee that would not be something like the CFTC, which as you 
say changes more rapidly, but perhaps something like the 
Federal Reserve System which is more stable and long term.
    Mr. Greenspan. I would say that even we do not, in my 
judgment, fall into the category which would create the same 
degree of legal certainty that a statute would do. I----
    Senator Harkin. Are my fears unfounded then that if 
something happens out there, there is no one that can do 
anything and we have to act here in Congress? Is that just an 
unfounded fear or----
    Mr. Greenspan. Senator, no, you are certainly raising a 
legitimate question which really is far broader than the 
question of the issue we are discussing today because all of 
government regulation is either discretionary with respect to 
various regulatory agencies or prohibitive. There is no 
capability of any element within this government, for example, 
to regulate home heating oil prices, to my knowledge. When we 
had this recent very sharp run-up in prices, there indeed was 
no authority to deal with it. It is a market adjustment process 
which will eventually deal with it and, as I think we have all 
argued, in the derivatives area, it is largely counterparty 
surveillance which is our primary source of regulation.
    I think that we have to recognize that regulation is a very 
difficult operation. I mean you point out that the LTCM episode 
was one over which we had no particular regulatory capability, 
yet the supervisory structure of this government worked. We had 
an ad hoc approach. The Federal Reserve Bank of New York 
brought together numbers of private parties because in our 
judgment it was to their interest to resolve the question. 
There is a great deal of that going on.
    Can I envisage a problem that will emerge in which if there 
had been regulatory authority, it would have been readily 
resolved and that we in the event did not have that authority 
and would be presumably worse off? Absolutely. I mean those are 
going to happen. I think that there is a very fundamental 
tradeoff of what type of economy you wish to have. I mean you 
can have huge amount of regulation and I will guarantee nothing 
will go wrong, but nothing will go right either.
    Senator Harkin. My time has run out. I do not know if Ms. 
Nazareth wanted to wade into this or not.
    Ms. Nazareth. Well, just briefly. I certainly agree with 
Chairman Greenspan and Chairman Rainer that there are very 
strong benefits to the legal certainty. I also think that 
there, in fact, have been a number of improvements and private 
sector initiatives in addressing the risks associated with this 
business. The improved transparency initiatives that came out 
of the President's Working Group Report on Highly Leveraged 
Institutions I think was very important. I do think that market 
discipline has been and will continue to improve significantly.
    I think credit standards have improved and, you know, as a 
result of the Working Group's Report on Highly Leveraged 
Institutions, we will probably see greater transparency of 
exposure to highly leveraged institutions and also the SEC 
asked for increased risk assessment authority. So there are 
other initiatives going on that I think will go to improving 
the issues of the systemic risk.
    Senator Harkin. Thank you. Mr. Chairman, I had two other, 
but obviously I have used up my time. The other two, and I may 
just write these in a letter to you all, number one, the 
exchanges are concerned about parity. In other words, they are 
looking for some regulatory relief, too, and if we do this and 
we do not do the other one, they are worried about the 
disconnect. I think that is a fair, rational concern on their 
part, and I wanted to ask you about that, but maybe I will in a 
    The other one was just on the clearinghouse concept. I am 
not certain how that works in this regime. I know how it works 
on the exchanges where you settle up and you make your marks 
everyday and you clear it at the end of the day. I do not know 
how it works in this setting and, again, perhaps in a letter 
you could outline it for me how this clearinghouse concept 
might work. Thank you, Mr. Chairman.
    The Chairman. Let me just respond for a moment. Senator, in 
my opening comment I mentioned that, just taking up this parity 
situation comparable problems with SEC or others. Chairman 
Gramm and other members of the Banking Committee have suggested 
and I think this may be a good idea that we may have joint 
hearings of the two committees.
    Senator Harkin. That would be good.
    The Chairman. To try to take a look at the level of 
regulation so that things do not get too disparate. We do not 
have a comparable situations entirely, but some members of the 
Banking Committee including the Chairman are much interested in 
this question, too. So this may be a way on our side at least 
of trying to do work that is comparably done by the Working 
Group. Senator Fitzgerald.
    Senator Fitzgerald. Thank you, Mr. Chairman. I have a 
question for Ms. Nazareth. I appreciate your being here and I 
gather you are the Director of Market Regulation at the SEC.
    Ms. Nazareth. That is right.
    Senator Fitzgerald. We talked with Secretary Summers about 
how well our securities laws have worked in this country and I 
think we have a wonderful regime that has held up well even 
though it was drafted in the 1930s. It has held up well even in 
this modern world. One feature of our securities laws in this 
country is that the basic core statutes apply to all securities 
traded everywhere. There are some minor exceptions to that 
general rule. One can sell stock to sophisticated parties 
without filing a registration statement. However, in general, 
if there were ever any fraud, you would come in under your 
authority under section 10(b)(5) and wherever that market 
trading occurred, whether it occurred on an exchange or out in 
the parking lot, you would have the authority to act.
    Furthermore, the definition of securities in the securities 
laws of this country is very, very broad. It is hard to create 
a financial product that does not have characteristics of a 
security. In fact, stocks, bonds, promissory notes can be 
classified as securities, and the scope of the securities laws 
is enormously broad, very hard to escape. The laws apply 
    In talking about how we are going to redo the CEA, we are 
talking about something completely different. Instead of having 
a CEA that applies to all financial derivatives everywhere and 
equally and having a broad definition of what is encompassed by 
the act, we are really carving out a little narrow area of 
financial derivatives that are going to bear the whole brunt of 
full-scale regulation; namely financial derivatives that are 
called futures contracts and traded on an exchange.
    Anything that is slightly different that can be called a 
swap as opposed to a future. An interest rate swap, if we call 
it a swap, even if it is fungible, standardized, and not traded 
on an exchange, it will not be subject to regulation. I am just 
wondering if that makes sense. Do you not think there is a 
possibility that all financial derivatives the business is 
going to migrate to the swaps area very easily because you can 
escape the definition of what is covered by the act?
    In fact, what is covered by the act is left really to 
something that is labeled a future and traded on an official 
board of trade. Do you not think a lot of that business is just 
going to go to where it is unregulated? In addition do you 
think our securities laws should have such kind of gaping 
exemptions and just apply in little narrow areas?
    Ms. Nazareth. I would not think that it would all migrate 
to the over-the-counter derivatives markets because those are--
they are really not standardized products. They are bilateral 
contracts. They are not fungible. They are used really for very 
specific financial purposes.
    Senator Fitzgerald. You do not think there is any 
standardization of interest rate swaps out there? I mean----
    Ms. Nazareth. Well, I think given the large market for 
them, there certainly has become somewhat more of a 
standardization in the sense that there obviously are 
agreements that people use, but they do negotiate the terms of 
those agreements on a bilateral basis.
    Senator Fitzgerald. How would you describe the difference 
in economic terms between an interest rate swap between 
institutional parties and institutional parties buying interest 
rate futures? What is the economic difference between those two 
    Ms. Nazareth. Well, there are differences in--again, I 
think there are differences in the fungibility, the closeout 
procedures. Currently certainly there were differences in the 
ability to net. There will be some more--they will become----
    Senator Fitzgerald. But what are the economic differences? 
Suppose we have a different futures contract for every interest 
rate swap. We change the contract in some regard so it is no 
longer fungible. What would be the economic difference?
    Ms. Nazareth. Well, I think in some cases they may serve a 
similar economic function. I think that is one of the 
challenges that we all have as regulators today is that you 
have a number of these products that start to resemble each 
    Senator Fitzgerald. What would be the public policy 
rationale for giving disparate treatment to similar instruments 
traded by similarly situated institutions, but just happen to 
be trading in different venues?
    Ms. Nazareth. Well, I am not here to sort of argue what I 
believe is, you know, Chairman Rainer's jurisdiction with 
respect to what should the commodities laws cover, but I do 
think that there are differences in that what we have done for 
purposes of this report is simply address over-the-counter 
derivatives and defined them, defined these swap transactions 
in a narrow way of just talking about counter parties with $25 
million in investments, bilateral contracts, contracts that are 
done purely on a principal basis. So it is a smaller subset. 
Certainly it does not cover, you know, retail products and 
things of that nature.But again I think----
    Senator Fitzgerald. Would anybody else care to address this 
issue? It seems to be a distinction without a difference.
    Mr. Rainer. Senator Fitzgerald, you raise very good points 
and I think it is very consistent with what is actually in the 
Working Group set of recommendations because there is 
difference paid to the fact that these recommendations may have 
an impact on our exchange-traded futures with differences in 
regulation for similar products. One of the reasons I think we 
have such a good strategy here is because this is not a one-
part recommendation, it is a two-part recommendation.
    The first part is to enact the recommendations with respect 
to the over-the-counter derivatives and the other part is for 
the CFTC with assistance from this committee and others to 
devise a regulatory framework that is more rational than the 
one that we have today. With your example, if I were to say 
eurodollar contracts, I would argue, although we have not made 
this judgment officially, I would say there is a good case to 
be made that the eurodollar contract is also a contract that is 
not readily susceptible to manipulation. Our challenge is to 
come up with a comprehensive framework that deals with the very 
issues that you were talking about.
    Senator Fitzgerald. Thank you. Mr. Greenspan, the Federal 
Reserve Board regulates the banks in this country and I am sure 
you have been looking very carefully at----
    Mr. Greenspan. Some of the banks.
    Senator Fitzgerald. Well, all bank holding companies.
    Mr. Greenspan. Correct.
    Senator Fitzgerald. You do look at the derivatives on the 
balance sheets, the derivative exposures of our banks. A lot of 
banks have purchased interest rate swap contracts. In fact, I 
saw that of that 80-trillion on OTC financial derivative 
markets, a large percentage of that are simply interest rate 
swaps, I would imagine most of those swaps are between 
financial institutions laying off interest rate risks that they 
may have. Have many banks bought interest rate futures on a 
board of trade or are they all interest rate swaps?
    Mr. Greenspan. There is both involved, but I think the 
point you are making, which I would agree with, is the fact 
that the proportion of derivatives which are exchange traded 
has been declining, and the reason they have been declining is 
that the market participants perceive that the costs of 
exchange-traded derivatives exceed the benefits that they 
create over and above over-the-counter derivatives. And, they 
do. I mean there are certain advantages in the settlement and 
clearing processes in exchanges which are not replicable in the 
over-the-counter markets and as a consequence the exchanges do 
have certain benefits which the OTC markets do not have.
    If, however, we see, as we do, a decline in the share of 
exchange-traded instruments, it presumably means that the 
markets generally perceive that the costs involved, essentially 
regulatory costs, are excessive relative to the benefits that 
are achieved. I think that it clearly is an issue that ought to 
be addressed. We at the Working Group certainly are aware of 
this problem and have been looking at it. And, precisely how to 
come at it, I think is an issue which does require efforts on 
our part and I would presume that we will be moving in that 
direction as best we can.
    Senator Fitzgerald. Would you be in favor of exempting 
exchange-traded transactions wherein the counterparties are 
strictly institutional?
    Mr. Greenspan. There has been a considerable amount of 
discussion and indeed certain efforts beginning to be directed 
in that particular area. Obviously, the concerns that a number 
of people have is that if you bifurcate the market, you will 
create a significant spread in at least part of the residual. 
That, is the bid-asked spreads will open up because the volumes 
will be substantially less.
    I do think we have an issue here that has got to be 
resolved and I would suspect that it is not so much an exchange 
issue as it is between retail customers and institutional 
customers. There is no question that if you have a very large 
volume market, the liquidity of that market will essentially 
create a very significantly lower per unit cost of transaction 
than you will get in a retail market, which by its nature is 
much smaller.
    The question is whether or not you want to do cross-
subsidization between these various types of markets. My own 
impression is that if you were concerned about this issue, one 
vehicle which we used to have, I guess, was in the grain pits. 
We used to have, I remember, thousand bushel wheat contracts. A 
thousand bushel wheat contract had a bid-asked spread which was 
significantly wider than the conventional 5,000-bushel wheat 
contract. But you had a considerable volume of retail business 
in the thousand bushel contract and what would happen would be 
is that the exchange traders would arbitrage the difference and 
effectively, significantly reduce the difference in the 
spreads, but not completely.
    In other words, they did not effectively cross-subsidize 
because that was not their business, but their arbitrage did 
bring down the differences quite considerably and I think what 
the issue here is not that we do not perceive of the necessity 
of making certain that retail markets are as efficient and 
liquid as they can be, but how do we do it without impairing 
the important competitive efficiencies of the large 
institutional markets. That is where the issue lies as far as I 
can see.
    Senator Fitzgerald. We have not bifurcated our securities 
market like that.
    Mr. Greenspan. Well, we used to have odd lots, remember. It 
was the same issue.
    Senator Fitzgerald. OK.
    Mr. Greenspan. I as a kid used to buy odd lots and some of 
them were very odd stocks, I must say.
    Senator Fitzgerald. Well, thank you very much. I appreciate 
that testimony. I have just one question on the Treasury 
Amendment, if I may? I know we have run over, but the report 
adopts a definition of organized exchange that has two parts. 
One, it permits retailer agency trades and, two, it provides 
for self-regulation. Under the proposed amendment to the 
Treasury Amendment, could an exchange which is open to retail 
customers and which trades Treasury Amendment products other 
than foreign currencies opt out of the CEA simply by either 
dropping its self-regulatory functions or barring the retail 
    Mr. Rainer. Is that to me, Senator?
    Senator Fitzgerald. Yes.
    Mr. Rainer. That is a very complicated question and I would 
like to answer it this way. The Treasury Amendment is in need 
of repair. The CFTC has a mission where it should and does find 
and prosecute and convict entities involved with foreign 
exchange on retail. This is a large problem in our country. The 
way it works is that for the CFTC successfully to prosecute 
such an entity, it must prove that entity is a board of trade. 
And the way it proves, at least one way it proves that it is a 
board of trade, is define the board of trade under the category 
called ``association of persons.'' If it is an association of 
persons, it is easier to establish that this bucket shop is a 
board of trade. That very act if successful has the Catch-22 
effect of potentially looping in legitimate bond dealers into 
the CEA, an unintended circumstance.
    So I think what the PWG is trying to solve is this problem 
by converting the definition to organized exchange with retail 
and SRO. I do not care to give full validity to your example, 
but it is not intended, I do not think, to allow your example 
to happen, and this is one of these technical details that we 
will be happy to work with the Committee on.
    Senator Fitzgerald. Once you write the legislation, will 
you come up with the way of solving it?
    Mr. Rainer. Yes.
    Senator Fitzgerald. Well, thank you all very much. 
Appreciate your time.
    The Chairman. Thank you very much, Senator Fitzgerald, for 
comprehensive questions and we thank each of you for giving us 
your testimony and your service. This panel is dismissed.
    The Chairman. We will proceed on to the final panel which 
will include Mr. David Brennan, Chicago Board of Trade; 
Chairman Daniel Rappaport of the New York Mercantile Exchange; 
Mr. Jerry Salzman of the Chicago Mercantile Exchange; Mr. 
Richard Grove, Chief Executive Officer of the International 
Swaps and Derivatives Association; and Mr. Edward Rosen, 
counsel, Ad Hoc Coalition of Commercial and Investment Banks.
    The Committee will come to order. It is a privilege to have 
each of you gentlemen here this morning for your testimony and 
I will ask that you testify in the order that I introduced you 
and that would be, first of all, Chairman Brennan, then 
Chairman Rappaport, Mr. Salzman, Mr. Grove and Mr. Rosen. If 
you can, try to summarize your testimony in 5-minutes and all 
of your statements will be made a part of the record so it will 
not be necessary for you to ask that, that occur. It will occur 
because we want a complete record of your views and the entire 
hearing. Chairman Brennan, good to have you again before the 


    Mr. Brennan. Thank you, Senator, and thank you for having 
me. Mr. Chairman and members of the Committee, I am David 
Brennan, Chairman of the Chicago Board of Trade. With me today 
is our President and CEO Tom Donovan. We thank you for the 
opportunity to discuss with you the Working Group's report on 
derivatives markets.
    Before I begin, I would like to mention that the new 
leadership at the CFTC, Chairman Bill Rainer, has been a breath 
of fresh air. He has brought market experience and creativity 
to the Agency. As you have already heard this morning, under 
Chairman Rainer, the CFTC is looking to transform and modernize 
its regulatory approach. We applaud his efforts and look 
forward to working with him.
    We have submitted to this committee a written statement 
that describes in detail where we agree and disagree with the 
Working Group's report. Sometimes in all that detail the big 
picture does get lost. I want to make sure that I emphasize 
that picture today.
    The Working Group's recommendations add up to a 
comprehensive overhaul of the Commodity Exchange Act. Broadly 
stated, the Working Group's framework would do three things: 
give legal certainty to over-the-counter derivatives; transform 
the CFTC into an oversight agency for execution and clearing 
facilities; and reconsider the single stock futures ban in 
Shad-Johnson and its competitive implications.
    Chicago Board of Trade fully endorses the need to reform 
the CEA and the Working Group's three-part framework. That 
should not be too surprising. Restructuring Federal regulation 
is driven by the same market forces-technology, globalization, 
innovation and competition-which have caused exchanges to 
restructure themselves. The Board of Trade is no exception. 
This last month our board of directors overwhelmingly adopted a 
bold strategy to restructure our exchange by creating two 
independent for-profit companies. One will focus on pit 
trading; the other will focus on trading electronically. Both 
will try to attract business by providing liquid trading 
markets. Both will innovate and invest in technology to provide 
customers the best service. Both will provide customers with a 
market that they can trust.
    What our plan does is give both companies a fair chance to 
compete, and no business should really ask for more. Federal 
regulation is part of that fair chance. We believe in open 
markets and fair competition. To us, similar products traded in 
similar circumstances should have similar government oversight. 
That means privately negotiated transactions may be excluded, 
but all public execution facilities should be treated alike. 
That is our ``golden'' rule of fair competition.
    Today that rule is not being met. After almost 80-years, 
the Commodity Exchange Act has become unworkable. Over-the-
counter derivatives, especially in the area of equity swaps, 
are plagued by legal uncertainty, as the Working Group 
describes. Exchange markets suffer from extreme regulatory 
arbitrage, as the Working Group acknowledges. For single stock 
futures, it is even worse. We are barred from competing at all 
under a statutory provision that we were told 18-years ago 
would be ``temporary'' until a regulatory impasse could be 
    The Working Group recommendations cover each of these 
areas. Some of those recommendations are specific statutory 
changes. Some involve working with the CFTC and the SEC. We 
know that many details need to be worked out and are likely to 
be controversial, but we are eager to help bring these issues 
to closure. Mr. Chairman and members of the Committee, all we 
have ever asked for is a fair chance to compete. This year's 
CFTC reauthorization may present us with our best chance to 
achieve that goal. We look forward to working with you and this 
committee to make sure that, that common objective becomes a 
legislative reality. Thank you very much.
    The Chairman. Well, thank you very much, Mr. Brennan, and 
we look forward to working with you and your associates in the 
Chicago Board of Trade. We noted with interest the developments 
that you described there in your organization which are 
indicative of some of the issues that have been a part of this 
hearing today.
    [The prepared statement of Mr. Brennan can be found in the 
appendix on page 81.]
    Chairman Rappaport.


    Mr. Rappaport. Thank you, Mr. Chairman. Thank you, Senator 
Fitzgerald. I had a number of comments that I was going to make 
but I will not make, and I think I will keep my comments 
relatively brief because I cannot tell you how encouraged I was 
sitting out in the audience listening to your questions to the 
other panels and after coming and going to these hearings over 
the last 7-years for the time that I have been chairman of the 
New York Mercantile Exchange, I see that finally we have gotten 
our point across because you are asking the questions that we 
were asking years ago coming to you trying to make you aware of 
this disparity of regulation, this inequitable disparity of 
regulation that did not put us on a level playing field with a 
marketplace that was selling the same product to the same 
customers at the same exact time, and we really appreciate the 
fact that you are beginning and clearly now understand this 
    We think that while the Working Group report begins to 
address some of the issues associated with legal certainty and 
some of the other related issues, I was very glad to hear your 
comments in terms of this is really only half the puzzle and 
that the other half of the puzzle needs to be resolved and that 
you have an interest in resolving it in more of a simultaneous 
manner than some other people are discussing, not permitting 
our side to be held hostage to resolution of this other issue 
because, as you recall, when Congress passed the Futures 
Trading Practices Act in 1992, they also encouraged that the 
commission use its exemptive authority to take care of the 
exchange issue. Here we sit 8-years later not having got any 
real relief, although I will echo Chairman Brennan's remarks 
that Chairman Rainer's initiatives in this area in a very short 
time have made incredible accomplishments and we look forward 
to more.
    But even the report itself says that U.S. futures 
exchanges, on page 21, are at a competitive disadvantage to OTC 
derivative markets as a result of the Commodity Exchange Act 
observing what major market participants have said and the 
report itself goes on to say that if the recommendations in the 
report are implemented that they hold out a good possibility 
that it will only exacerbate that perceived balance. And, that 
is really where we are today. We are here to say that we agree 
with some of the recommendations in the report. We are looking 
forward to seeing the commission's response to the rest of the 
puzzle and I look forward to being here again to talk to you 
more about that. Thank you.
    The Chairman. Well, thank you very much, Chairman 
Rappaport. As you know, we have asked for specific comments on 
issues that we are not taking up in great detail today from the 
chairmen of CFTC and the SEC and in a fairly short time frame 
because these are relevant clearly and I have stressed again 
the potential cooperation with Chairman Gramm and the Banking 
Committee. You cite correctly the 1992 act is one in which some 
cooperation came only have a long stretch and so we are back, 
at least----
    Mr. Rappaport. It did not really come to us though.
    The Chairman.--into a different report at that point.
    [The prepared statement of Mr. Rappaport can be found in 
the appendix on page 92.]
    Mr. Salzman.


    Mr. Salzman. Chairman Lugar and Senator Fitzgerald, I am 
honored to represent the CME's Chairman Scott Gordon who was 
unfortunately too ill to get on the plane last night or this 
morning. He sends his regrets to this committee. I am going to 
essentially present his remarks, if I may, and, of course, as 
usual I may add something of my own. I want to begin by 
unequivocally expressing the CME's support for the efforts of 
the CFTC under Chairman Rainer to reexamine and reassess the 
regulatory structure of our industry. The commission has made 
valiant initial revisions to its very thick white book of 
regulations. We think that demonstrates the commitment to bring 
regulatory burdens into line with regulatory needs. We are 
extremely happy about that.
    That said and without criticism of our Regulator's 
endorsement of the President's Working Group's Report, it is 
fair to say that the CME is extremely concerned about the focus 
of that Report. We are, of course, heartened by Senator Lugar's 
remarks that he is going to ensure that we get some parity when 
legislation is put into place. But it is clear to us that the 
Report itself unjustifiably tilts the playing field against the 
existing exchanges.
    Our goal, the goal of the exchanges, has been equivalent 
regulatory treatment for functionally equivalent execution 
facilities, clearinghouses, and intermediaries. That is, if an 
execution facility is performing a function, all execution 
facilities performing the same function in an equivalent manner 
should be treated equally. Same for clearinghouses and the same 
for intermediaries. We have carefully assessed the Report and 
we do not think that the Report endorses this principle. The 
Working Group has recognized the regulatory disparities and 
blurred product distinctions that handcuff U.S. futures 
exchanges in today's competitive global markets. I think 
Senator Fitzgerald's questions have been very pointed in saying 
what is the difference between these products? What are the 
differences between the intermediaries? What are the 
differences between these end users in these two markets? That 
has really called the issue into a clear perspective.
    We consider that omission in the Report a serious flaw. Now 
the Report does call for some changes that are in accord with 
our principles. But it's recommendations for regulatory relief 
and legal certainty we think are only going to bring immediate 
benefits to the over-the-counter market and to enterprises that 
are now springing up all over this country intending to operate 
or operating unregulated exchanges at this very point in time. 
All you have to do is look on the internet or look in the 
newspaper clips everyday. There is a new one every morning.
    The Report itself begins with what I think we would all 
agree is a conservative call for legal certainty for the over-
the-counter swaps market. We agreed with that call and we 
sponsored and have made proposals to that effect beginning 
early last year. The Report, however, veers from that simple 
principle to a more radical realignment of markets and 
regulators by essentially redefining what a swap is to include 
standardized, cleared, financial futures contracts that are 
traded on electronic exchanges. So effectively, while calling 
for legal certainty for a swap, they then redefine swap and 
call for special treatment for special kinds of exchanges that 
essentially duplicate what our exchanges are doing.
    The call for legal certainty for a bilaterally negotiated 
swap contract, which we support, is effectively converted into 
a demand for exclusion from the CEA for exchange traded and 
cleared financial futures. Now this creates two problems. 
Senators Harkin and Fitzgerald have pointed out that the 
exclusion may cripple somebody at a later point in time when 
action needs to be taken and it is not clear why you need an 
    There is another problem that I do not think has been 
raised, except in our testimony, which is that the exclusion 
may not lead to the legal certainty. Legal certainty has been 
code for avoidance of CFTC regulation and risks of equities or 
derivatives that have underlying securities from the CEA. Given 
the public statements of the SEC and the statements and briefs 
that they filed in many courts, there becomes a serious 
question as to whether these excluded derivatives are or are 
not securities. As Senator Fitzgerald has noted, given the 
broad scope of that definition and given court decisions that 
the only reason they are not securities is because of the 
CFTC's exclusive jurisdiction.
    My concern is that we are not creating legal certainty but 
transferring uncertainty from one regulator to another 
regulator. I think this issue has to be faced at a very early 
stage in this process. I see my red light is on. I have a 
little more, but I do not want to hog time up here so I will 
just stop.
    The Chairman. Proceed if you can summarize.
    Mr. Salzman. OK. I want to draw special attention to a 
discrepancy between the treatment that the OTC market gets in 
the Report and exchanges that is in respect to equity 
derivatives. As we all know, the Shad-Johnson accord raises 
questions as to legality of both exchange-traded single 
security futures and over-the-counter single security futures 
or derivatives. The President's Working Group proposes to 
exclude swap agreements that ``reference non-exempt securities 
from the CEA.'' Non-exempt securities, I believe, is a term of 
art for equity securities and certain kinds of other municipals 
and things like that.
    In fact, the Presidential Working Group urges that single 
stock futures and all stock indexes be permitted both over-the-
counter and on the unregulated exchanges it describes. If that 
reccomendation were enacted, we would be in this strange 
situation where the places to trade derivatives on single-stock 
futures are either over-the-counter or unregulated markets. A 
regulated market with transparent pricing and careful 
protection of ultimate customers is the only place left where 
you cannot trade the instrument. That proposal is made without 
any suggestion that we have to work out regulatory issues, 
where we have to work out margins, where we have to work out 
    In fact, it is just carte blanche for unregulated exchanges 
and over-the-counter markets and the same old story for the 
existing regulated markets. This to us does not seem reasonable 
or fair. And with that, I will stop. Thank you very much, 
    [The prepared statement of Mr. Gordon, submitted by Mr. 
Salzman can be found in the appendix on page 100.]
    The Chairman. Well, thank you, Mr. Salzman. Let me mention 
at this point two things. First of all, I should have mentioned 
that Commissioners David Spears and Jim Newsome have come to 
the hearing today from CFTC and we appreciate their presence in 
addition to the distinguished chairman.
    The other thing is that Senator Fitzgerald and I will need 
to go to vote. There are 5-minutes left in the roll call on the 
bill that is on the floor. Fortunately, it is a single vote and 
so I will ask the patience of Mr. Grove and Mr. Rosen because 
we will both want to hear the testimony from the beginning.
    Senator Fitzgerald. We will be right back.
    The Chairman. We will be right back. The hearing is 
recessed for a moment.
    The hearing is called to order. We look forward now to the 
testimony of Mr. Grove. Will you please proceed?


    Mr. Grove. Thank you very much, Mr. Chairman. I am the CEO 
of ISDA, the International Swaps and Derivatives Association, 
and before joining ISDA, I was actively engaged for many years 
in sales and trading of OTC derivatives and other financial 
products. ISDA has had the privilege of appearing before and 
working with this committee for more than a decade and we are 
pleased to be here again today. ISDA's more than 450-members 
include the world's leading dealers in off-exchange principal-
to-principal derivatives transactions. These transactions are 
typically referred to as swaps and their status under the CEA 
is the focal point of the report of the President's Working 
    Swaps, as you know, Mr. Chairman, are powerful tools that 
enable American businesses and other end users in each of the 
50-states to manage the interest rate, currency, commodity, 
credit and other related risks that are inherent in their 
activities. In this way, businesses and other users of swaps 
are able to lower their cost of capital, manage their credit 
exposures and increase their competitiveness both here and 
abroad by focusing on their core areas of expertise.
    The United States has been a leader in the development of 
swaps and American businesses were among the earliest to 
benefit from these risk management tools. The dramatic growth 
in the volume and diversity of swaps is probably the best 
evidence of their importance to, and acceptance by, end users. 
It is no coincidence that the U.S. economy and the volume of 
swaps both grew dramatically during the last decade. Let me add 
at this point that ISDA's membership includes many of the 
businesses, financial institutions, government entities and 
other end users that rely on swaps to manage their financial 
and commodity market risks with a degree of efficiency and 
effectiveness that would not otherwise be possible.
    The Working Group report is the product of a great deal of 
effort by each of the members of the group and their 
colleagues. It reflects a solid understanding of, and 
sensitivity to, the factors that enable the U.S. financial 
markets to so efficiently allocate capital and so effectively 
sustain economic growth. The report embodies an unprecedented 
consensus among four key financial regulators that legislation 
should be enacted to provide legal certainty for swaps.
    As you know, legal certainty simply means that parties, 
both dealers and end users, must be certain that the provisions 
of the swaps agreements they enter into are enforceable. Any 
uncertainty with respect to the enforceability of swaps creates 
risks not only for parties involved but for the financial 
system as a whole. For example, when unilateral actions by the 
CFTC in 1998 suggested that the CFTC might treat some swaps as 
futures contracts, congressional action was required to 
preserve legal certainty for swaps and thus ensure continued 
market stability.
    The underlying policy considerations were not addressed by 
Congress in 1998, but they have now been carefully considered 
by the Working Group. The Working Group concluded that 
financial swaps do not present public policy concerns of the 
sort that the CEA is intended to address and that legal 
certainty can therefore best be provided by an exclusion from 
the CEA.
    In one respect ISDA believes that Congress should go 
further than the Working Group by excluding from the CEA swaps 
involving commodities with deep and liquid markets such as 
various energy products. Indeed, the failure to do so may 
stifle the continued development of innovative energy risk 
management tools in the United States to the detriment of 
American businesses and other end users. That having been said, 
ISDA agrees with the thrust of the Working Group's 
recommendations. There is broad consensus on the merits of the 
issue and I cannot emphasize too strongly ISDA's belief that 
the time for congressional action to provide legal certainty is 
    I would also stress that legal certainty should be provided 
in a manner that does not restrict financial innovation. As you 
know, Mr. Chairman, U.S. financial institutions and U.S. 
technology companies are world leaders in their respective 
fields. From the broad perspective of our national interest, we 
should not compromise these leadership positions by creating or 
maintaining regulatory structures that discourage financial 
institutions from using and benefiting from the most efficient 
and innovative electronic technology available.
    To summarize, ISDA hopes that the Working Group's report 
will serve as the catalyst for the enactment of bipartisan 
legislation this year to provide legal certainty for swaps. As 
described more fully in our written statement, ISDA believes 
that this legislation should also provide appropriate 
regulatory relief for the futures exchanges.
    Let me conclude with the promise that ISDA will remain 
committed to working with this committee on a cooperative and 
constructive basis to ensure that the key objective of legal 
certainty for swaps as well as appropriate regulatory relief 
for the futures exchanges is translated into legislative 
reality this year. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Grove can be found in the 
appendix on page 106.]
    The Chairman. Thank you very much, Mr. Grove. Mr. Rosen.


    Mr. Rosen. Thank you, Mr. Chairman, and thank you for the 
continued leadership role that you have played in this issue 
over the years. The coalition believes that the most important 
attribute of the President's Working Group report is the 
consensus. In reaching any consensus obviously all individual 
views succumb to the weight where agreement meets. Undoubtedly, 
left to their own devices, each of these agencies would have 
produced a different report, but we have something better than 
four different views on this subject. We have one view. Whoever 
it was that first said that less is more I think had something 
like this in mind.
    We should not really overlook the importance of this 
consensus because when we look back to the not too distant 
past, it was clear that we nearly compromised the vitality of 
our financial markets as a result of interagency jurisdictional 
competition. But we now for the first time have four agencies 
who are all rowing in the same direction.
    Now I think the exchanges really have it right when they 
say that to some extent this is about drawing lines, and as we 
noted in our written testimony, the coalition believes that 
there is more that can be done in certain areas in establishing 
a regulatory framework within the Commodity Exchange Act for 
electronic trading systems that are not eligible for one of 
these exclusions in the area of hybrid instruments and legal 
certainty for non-financial derivatives. We also support 
modernization of the regulatory regime for exchanges and we 
also support the trading of single stock futures.
    Even though we might have drawn the line somewhat 
differently had we had the luxury of drafting a report like the 
President's Working Group report, we think that it is 
nonetheless a very valuable starting point of departure for 
this legislative effort. Confirming the recommendations in the 
President's Working Group alone will be a very important step 
in providing legal certainty and ensuring financial innovation 
going forward in the U.S. financial markets, but we must 
maintain our perspective on what is most important in this 
process and what is less important in this process.
    It is most important in this process to resolve the issues 
of legal uncertainty and barriers to innovation that hold back 
the United States financial markets and it is very important to 
provide a framework for the exchanges that allows them to 
compete on an appropriate basis both domestically and 
internationally. But there are other issues that are somewhat 
less important in this debate, issues that it would be nice to 
address, but it may be very difficult to address. For too long, 
accomplishing the legal certainty agenda has been held hostage 
to some of these other issues like the trading of single stock 
    This is, I think, the fourth appearance I have made before 
this committee on these issues. I think we have been talking 
about these issues now for 10-years. We really need to resolve 
these issues. It is nice to see a general recognition that time 
is not our ally on them, and I want to confirm to the Committee 
that the coalition is committed to participating in a process 
that will result in successful legislation, but we must not 
allow our inability to achieve a perfect result to interfere 
with our ability to accomplish what can be accomplished.
    I had some longer remarks prepared, but I candidly think 
that the debate and discussion that has occurred prior to this 
panel on issues of exemption versus exclusion, analogies to the 
securities law regulatory structure, comparability of 
economically similar products, has really raised the level of 
the debate on these issues and I look forward to an opportunity 
to addressing those issues.
    [The prepared statement of Mr. Rosen can be found in the 
appendix on page 108.]
    The Chairman. Well, thank you very much. Let me commence 
the questioning and I will call upon my colleague, Senator 
Fitzgerald. Let me address this to Chairman Brennan and 
Chairman Rappaport and Mr. Salzman. The Working Group report 
goes out of its way to state that futures exchanges are 
eligible to qualify for both the over-the-counter derivatives 
exclusion and the electronic trading system exclusion if they 
meet proper criteria. I am wondering has this been discussed at 
your exchange and what are your general conclusions with regard 
to that part of the report? Do you have a comment on that, Mr. 
    Mr. Brennan. Yes, Senator. I think we have discussed this 
and I think to crystalize it, I think we are concerned about 
the fragmentation when you split off either pit versus 
electronic or retail versus institutional. We are very 
concerned about the fragmentation issue that has been discussed 
and maybe the ag versus the financial, you know, the finite 
supply versus the infinite supply, and we are wrestling with 
that, but that is the framework which we have been discussing 
    The Chairman. Do you have any comment on that, Chairman 
    Mr. Rappaport. Yes. I think we agree in that sense that we 
are very concerned about what seems to be an effort to create 
what some people have referred to as the two-tier market, the 
retail versus the institutional, and we wonder why a similar 
structure in the securities law could not be created for the 
commodities. I think one of the problems that we have all been 
struggling with, and I agree with Ed Rosen before, I think the 
debate here, I think, is somewhat elevated from some of the 
ones we have had in the past years, is that we continue to 
struggle with this Commodity Exchange Act, trying to make it 
work within this environment. That is a very difficult thing to 
do because the simple question is, as Senator Fitzgerald 
pointed out, why is it that I can buy one share of a tech stock 
that has daily volatility of 500-percent, not unlike and 
perhaps a lot more than a lot of the commodities that we trade, 
and I can trade that right next to Goldman Sachs and Morgan 
Stanley and the most sophisticated investors in the world and 
there is no issue with that. And it is one marketplace, price 
discovery, transparency, everybody knows where it is, and I 
cannot do that with bond futures or I cannot do that with crude 
oil or gold, real global commodities? I think that is a very 
simple question that needs to be answered, and if it is, I 
think that will drive us to the solution. So in response to the 
simple question, we are very concerned about the fragmentation 
of the retail versus the institutional market.
    The Chairman. Mr. Salzman.
    Mr. Salzman. In addition to that fragmentation, I think we 
are also concerned about the notion of whether you need a 
disinter mediated market or an intermediated market and why 
should that make a difference. We have customers out there 
entering orders through the internet, but they do not go 
directly to our market. They first stop at an FCM's computer, 
if you could call it stopping, to have a credit check performed 
in a tenth of a second or even less, and then they come into 
our market. It seems to us that there is no good reason why 
that sort of a market ought to be treated differently than one 
where the customer comes in directly and his own credit is 
    We actually think that there are very good reasons why 
intermediaries should exist in these markets, why they are the 
ones best suited to actually give customers information and to 
deal with customer credit, why it makes the market easier, more 
efficient to operate and why it makes clearinghouses work 
better. Until we fully understand why we would distinguish 
between those two markets, it does not seem to us we should be 
forced into the paradigm adopted by the Working Group in order 
to get the exemption or exclusion even. It just does not--we 
have not seen the reason behind it.
    The Chairman. Mr. Grove and Mr. Rosen, I ask these 
questions of you. How important is clearing to the over-the-
counter community? Most of the users of the over-the-counter 
derivatives market are large institutions that perhaps do not 
need clearing, may actually perceive clearing as an added 
expense. If OTC derivatives were allowed to clear outside the 
CEA, would there be a demand for those services?
    Mr. Grove. Clearing is an option that would be desirable 
for us to have but not necessarily one that dealers would take 
advantage of, at least not initially. There are other 
mechanisms that exist now, such as bilateral netting, and 
increasing the use of collateral, that serve some of the same 
purposes. But to prevent clearing for reasons that are not 
compelling, in our view, would be a mistake, and to the extent 
that clearing mechanisms evolve, we would certainly like the 
option to be able to take advantage of those mechanisms going 
    The Chairman. Do you have a further comment on that, Mr. 
    Mr. Rosen. No. I would just note that there are different 
forms of clearing and there are different needs in different 
industry sectors. So, that informs the appetite for clearing, 
but I think it is clearly something which ought to be there 
because it does provide a benefit to the market and there ought 
to be a framework for it if it is going to exist.
    The Chairman. Senator Fitzgerald.
    Senator Fitzgerald. Thank you, Mr. Chairman. Mr. Grove, Do 
you believe that futures between sophisticated parties on non-
agricultural or non-commodities, say on financial futures, 
between sophisticated parties on futures exchanges should be 
exempt from the CEA? Would you support legislation to exempt 
them from the CEA?
    Mr. Grove. Well, Senator, I support exclusion from the CEA 
of OTC derivatives products that, as the Working Group report 
concludes, are not susceptible to manipulation, do not serve a 
price discovery mechanism and do not involve retail investors.
    With respect to the issue of competition, which is raised 
in Chairman Lugar's initial question to my colleagues from the 
exchanges and which I think follows on what from in the 
direction that you are going, the OTC derivatives market is one 
of the most competitive segments of the financial markets. 
There are no barriers to entry other than the competence of the 
dealers, the competence of their staffs, their reputation and 
their credit standing. My end user members would welcome even 
more competition, including from the exchanges, and our dealer 
members at this point face significant competition. It would 
not matter to them. We certainly welcome greater competition 
for financial derivatives.
    Senator Fitzgerald. So you could support legislation that 
would exempt exchange-trades futures transactions involving an 
underlying financial instrument, as opposed to a commodity that 
could be manipulated or susceptible to manipulation? Could you 
support legislation to exempt them from the CEA?
    Mr. Grove. I would support legislation that would exempt 
those types of financial OTC derivatives products.
    Senator Fitzgerald. You are saying OTC products. Futures by 
definition are not OTC products. They are traded on a futures 
exchange. I am talking about an exchange-trade financial 
futures contract, an interest rate futures contract, where the 
trading is between institutional parties.
    Mr. Grove. Senator, if Congress is of the view that those 
products can be appropriately deregulated, I would not oppose 
that legislation.
    Senator Fitzgerald. OK.
    Mr. Rosen. Senator, may I chime in here?
    Senator Fitzgerald. Sure.
    Mr. Rosen. Because I think you are asking an excellent 
question, and candidly I think if you strip away all of the 
different perspectives that people bring to the President's 
Working Group report, it is a wonderful catalyst for this 
debate because what it is really trying to do is strip away the 
labels, on exchange, off exchange, swap, future, and for the 
first time it is trying to say let us look at what is 
happening. Let us calibrate the level of regulation to the 
policy concerns that are raised. So when you say trading on an 
exchange, one wonders what do you mean by that? But I think the 
question is fair whether it is in an exchange environment or a 
non-exchange environment, if the nature of the participants, 
the way they interact with each other, the nature of the risks 
presented by the trading and the contract are identical to what 
they would be in an OTC context, there is not a legitimate 
basis for regulating them.
    And candidly, I think this also answers the exemption 
versus exclusion question because if you believe that the basis 
for this treatment, whether you call it exemption or exclusion, 
is because you have analyzed the products and concluded that 
they do not raise policy issues of the type that this statutory 
framework was designed to address, then the question is what 
are you leaving for somebody to exercise their exemptive 
authority to do? There is no congressional directive or 
guidance for the execution or implementation of that 
administrative authority and you have sort of a free-floating 
you can step into any crisis authority or you have a 
meaningless authority, and that is why the truth of the matter 
is that Congress cannot escape the need if a situation arose 
that raised a different set of concerns than are currently 
addressed under the Commodity Exchange Act to establish the 
framework for addressing it. I think as a practical matter, 
though, there are other considerations that it is important to 
focus on.
    These markets are populated mostly by regulated entities or 
affiliates of regulated entities who live in a regulated 
culture of shared risk management and direct and indirect 
oversight. If you look back at the LTCM event, what was of 
concern was not that LTCM got a leverage and blew itself up. I 
mean who really cares? What people really care about is what is 
the spillover effect to the people in the marketplace and the 
financial community who might be indirectly affected by that?
    If you look at that landscape, the parties that were 
dealing with LTCM were regulated. They were comprehensively 
supervised. But we have all learned very important lessons from 
LTCM which will contribute to preventing a reoccurrence from 
that and I do not think we can escape responsibility for 
understanding that these are markets that are maturing and 
there are some things that regulators can do in addressing 
these problems and there are some things that they cannot do.
    Senator Fitzgerald. I noted, Mr. Grove, in your testimony 
you said that the ISDA has developed master documentation 
templates for swaps transactions that are today used in the 
United States and around the world by the vast majority of 
swaps participants for their transactions. That sounds to me 
like these are pretty standard contracts and that they are 
fungible. And yet historically, the justification for disparate 
regulatory treatment between OTC swaps and futures traded on an 
exchange has been, well, the futures, they are fungible, they 
are the same contract, but right in your testimony you seem to 
indicate that really they are just a word processed document 
and you are changing the names of parties and maybe the terms 
of whatever interest rate flow is being swapped; is that 
    Mr. Grove. Most of my colleagues on the legal side wish it 
were so, but I can assure you, Senator, that those agreements 
are heavily negotiated, sometimes for periods of many months 
and on into years. The important point, though, is that those 
templates, those master agreements, allow market participants 
to engage in, an infinite variety of OTC derivatives 
transactions. The economic terms of each transaction differ 
from trade to trade and that is the important point.
    Senator Fitzgerald. So if you had contracts where the 
economic terms did not differ, say you are right now selling 
five banks interest rate swaps and they all want the same deal 
right now, then there might be justification for some 
regulation there because they would all be the same agreement? 
Theoretically, at least 5 banks could get the same swap 
agreement if they are coming in the same interest rate 
environment trying to hedge their current interest rate 
    Mr. Grove. The volumes are such that it could occur that 
there would be identical transactions, but, it would be 
coincidental that there would be identical transactions, and if 
there were five identical transactions, there would be tens of 
thousands of transactions executed during that period of time 
that would be very different.
    Senator Fitzgerald. So you would have no objection to 
putting into this exclusion that would apply to interest rate 
swaps, for example, that the exclusion would not apply if the 
contracts were identical, that some prohibitions so no two 
contracts be the same?
    Mr. Grove. Senator, that would not be workable because as a 
party to a transaction, I would not know what other 
transactions existed in the market. So it might be that two 
other banks or two other parties were engaging in that same 
transaction or a transaction with the same exact notional 
amount, the same exact interest rate and the same exact 
maturity, but I would not know that and it would be pure 
coincidence. It would be an unworkable----
    Senator Fitzgerald. But the underlying legal documentation 
is pretty standardized; isn't it? We are really just talking 
about you attach immense importance to changing these little 
things like exactly how much is the notional amount and exactly 
when the contract is going to end. I mean that is where you 
hang all this importance on those little tiny differences?
    Mr. Grove. That is because the contract deals with issues 
like bankruptcy; what happens if a counterparts goes into 
bankruptcy? Credit-type terms are dealt with in the master 
agreement. The economic terms vary from trade to trade and, not 
the credit terms are not important, they are, But economic 
terms are quite important as well.
    Senator Fitzgerald. I notice that you also request that 
there be some provision in the bankruptcy code and I take it to 
mean that you would like something in the bankruptcy code that 
a defaulted party under one of these swap transactions could 
not discharge that debt in bankruptcy? Is that what you are 
looking for?
    Mr. Grove. No, what we are looking for--in fact, this 
provision is included in the bankruptcy bill that has just 
recently passed the Senate for which we are very appreciative. 
We are looking for provisions that further solidify the law as 
it now exists in the United States which recognizes that swap 
transactions between two counter parties in a bankruptcy 
situation could be netted down to a single amount. This has the 
effect of reducing systemic risk. What we are looking to do is 
bring more transactions within that umbrella so that again if a 
bankruptcy does occur, more transactions can be netted down to 
a single number, thereby reducing the exposure of the financial 
system as a whole to the bankruptcy of that one entity.
    Senator Fitzgerald. Throughout your testimony or in your 
paper that you have submitted, you talk about the importance of 
legal certainty and you say that there are three things you 
need: clarity concerning how swap transactions will be treated 
under U.S. law, certainty that they will be legally 
enforceable, and certainty that key provisions in swap 
transactions will be enforceable even in the case of bankruptcy 
of one of those parties. So you keep focusing on legal 
certainty, but is there not one thing, one other thing that you 
want that you have not mentioned? You do not just want legal 
certainty. We could give you legal certainty within the ambit 
of CEA in their regulation. You might not like it, but you 
would have legal certainty. You want complete exemption from 
the CEA in addition to legal certainty; is that correct?
    Mr. Grove. We support the Working Group's recommendations 
that an exclusion is the best way to achieve the objectives 
that the Working Group has set out in its report. We think that 
as Secretary Summers said earlier and as Chairman Greenspan 
said earlier, that bright line distinctions, absolute 
certainty, is important in the financial markets. We need to 
know in good times and in bad that contracts will be enforced, 
that the agreements that we enter into in good faith, whether 
we are end users or whether we are dealers, that those 
agreements will be enforced in accordance with their terms.
    We are skilled, particularly on the dealing side, skilled 
at managing market risk and we are skilled at managing credit 
risk. That is our business. But legal risk is not a risk that 
we can manage in any way. And, legal uncertainty, particularly 
in a time of market volatility and market crisis, can undermine 
the confidence of the public in the financial system of the 
United States and lead to systemic implications.
    Senator Fitzgerald. Let me--I understand your position on 
that--I want to pursue this area a little bit more on the 
exemption. The report recommends that only principal trades be 
eligible for exclusions from the CEA and frequently refers to 
markets where quote ``principals are trading for their own 
account.'' Is it always easy to tell when somebody is a quote 
``principal trading for their own account''? If a firm acts as 
a buyer to customer one and turns around and acts as a seller 
to customer two, has it really acted as a principal or as an 
intermediary? What would be your position on such transactions?
    Mr. Grove. Senator, when counter parties transact, they 
know who they are transacting with. They cannot always know 
what their counter party is then doing with the position and 
what other trading that counter party is engaging in. And I 
think to suggest that it should be the obligation of Party A to 
know what Party B will do next or what other transactions Party 
B is entering into would be inappropriate.
    However, should there be a transaction between Party B and 
Party C that raises different regulatory implications, then 
perhaps a different regulatory regime should apply. In other 
words, if we have an institutional transaction here and a 
retail transaction there, I take your point that perhaps a 
different regulatory regime ought to apply, but it is not the 
obligation of Party A to know what Party B does.
    Senator Fitzgerald. But put the Working Group's report into 
law, I mean it looks like there would really be nobody policing 
that to make sure it is really principals trading between 
principals. That one of those apparent principals is really not 
just an intermediary.
    Mr. Grove. Take the example of retail foreign exchange, 
Senator. In that case, I assume that if those recommendations 
of the Working Group report were enacted into law that there 
would be some mechanism in place for policing whether those 
transactions were being done in accordance with the law. I 
would believe that, that would be part of legislation or 
regulatory enactment following legislation.
    Senator Fitzgerald. Because then it would be governed by 
the CEA?
    Mr. Grove. Because then you are into a different part of 
the statute and it would be governed perhaps by CEA.
    Senator Fitzgerald. But in this case, leaving aside foreign 
currency and so we are out of the Treasury Amendment, and you 
have an interest rate swap, and you have a trade between what 
you think are two principals. One of them turns around and 
sells to a retail person. Who would come in to the regulate 
    Mr. Rosen. Senator, if an exemption of an exclusion were 
crafted that depended upon transactions actually being 
conducted as principal transactions and they were not, the CFTC 
has the authority to investigate that the act is, in fact, 
being complied with or not. And, if those are, in fact, not 
principal trades, the CFTC can take action. The focus on the 
principal character of the relationship is extremely important 
because there is relatively little opportunity for abuse when 
you and I do not have a transaction with each other until we 
have looked each other in the eye and agreed on the terms as 
opposed to a situation where I ask you to represent me in a 
market that is opaque to me and you come back and tell me what 
you have done at the end of the day after the order has been 
passed through three other hands.
    If you look at the history of CFTC reparations and 
enforcement and abuses, I am sure the vast majority of those 
problems have resided in situations where agents were 
representing parties and not dealing directly with them as 
    Senator Fitzgerald. Now this vast OTC unregulated 
environment that exists now and that you anticipate would 
continue in the future under new legislation, I mean the 
exclusion would have the effect of denying retail customers 
access to that market, which is very liquid. What do you think 
about that? I mean what is the policy behind setting up a 
regime that keeps retail customers away from that market and 
having no access to those available pools of liquidity?
    Mr. Grove. Senator, this is a market, the OTC derivatives 
market, that is most appropriate for institutional 
participants. It does involve in most cases two-way credit 
exposure so that if you were a bank and I am a retail person, 
you would not enter into an interest rate swap with me because 
of my credit standing. You want to enter into these types of 
transactions with entities that have a fair degree of credit 
worthiness because at any given point in time the value of the 
obligations could run either way.
    So in that sense, it is not a market that is likely to 
expand into the retail arena. But I appreciate your point about 
bifurcation between retail and institutional markets. Let me 
say, though, that to deny the benefits of this market to 
American businesses, to American financial institutions, to 
American governmental entities, and to prevent them from 
hedging their financial market and commodity market exposures 
in the most efficient and most effective way possible simply to 
put them on a parity with individuals like me would be an 
inappropriate costly step. It would deny the benefits----
    Senator Fitzgerald. Now you know how the exchanges feel.
    Mr. Grove. It would deny the benefits of these transactions 
and that would clearly have an impact on the profitability of 
those companies, and those financial institutions, and on the 
ability of governments to deliver services as efficiently, and 
would obviously have an impact on the U.S. economy.
    Senator Fitzgerald. Would you guys like to comment, 
Chairman Brennan or Chairman Rappaport, Mr. Salzman, from the 
exchange perspective on the bifurcation of the market? Would 
you like to elaborate on that a little bit more? Would you be 
opposed if the Chicago Board of Trade, say the new legislation 
would allow you to set up an exchange where only institutional 
parties could trade financial derivatives and there would be no 
application of the CEA? Would you be opposed to that?
    Mr. Brennan. Separating out the retail from the 
    Senator Fitzgerald. Yes.
    Mr. Brennan. I think we would, yes, because what drives 
liquidity in these markets is not only the big players, but it 
is all the players I do not think that we want to get into a 
situation where we exclude a certain segment of the players; 
everybody should have access to that liquidity. I would be 
troubled by the bifurcation because some of these markets are 
very deep and liquid and some are not. It depends on the 
product. It also depends on volatile times and sometimes it is 
not always that transparent to the marketplace who is providing 
that liquidity.
    Senator Fitzgerald. I mean if we were to bifurcate this, I 
mean you could end up just with a place for trading for 
institutional people or ways for institutional parties to trade 
and really no market for the retail investors potentially. I 
mean does anybody on the panel care to comment on that? Yes.
    Mr. Rappaport. Can I make an analogy that is related to the 
securities analogy that I made before? I mean how do you think 
the securities industry would feel if the rules were that you 
could not really trade stocks unless you traded above 100,000-
shares and anybody who traded less than 100,000-shares had to 
go through some sophisticated entity that had good credit 
worthiness to trade that? You can imagine that the price, that 
if you were trading 1,000-shares instead of 100,000 is not 
going to be as good and it is not going to be as competitive. I 
think that is the situation that we are talking about. What 
would happen in that situation is exactly the scenario that you 
laid out before is that the parties that did not have the 
credit worthiness, parties like myself and Mr. Grove, would 
have to go a credit worthy party and say buy this for me.
    If the marketplace were transparent enough that the price 
would be readily available that we could all look at it and 
say, okay, buy it for me at that price, then they would do it 
and then they would do their transaction with me. How that 
lesser transaction would be regulated would probably be under 
some more onerous level of regulation because the philosophical 
approach to the market would be the retail customer has to be 
protected, whereas the other market would be in this relatively 
unregulated environment, which by the way we support. There are 
a lot of things that we disagree with here, but it is mostly 
because we are at this and have historically been at this 
regulatory disadvantage and while we understand why the OTC 
marketplace is seeking this regulatory certainty and some other 
advantages, clearing and some other, which I have a lot of 
questions on clearing that I would like to address, you know, 
here or at some other time, we understand why they are seeking 
that. It is just the fact that we have never been able to get 
there ourselves to get that regulatory parity that sort of 
brings us here today.
    Mr. Salzman. Could I just explain? The Chicago Mercantile 
Exchange now operates electronic markets for its stock index 
products, its S&P and its Nasdaq. They are the most 
tremendously successful markets in terms of the time to 
maturity that we have ever seen. And the great thing about 
these markets is that a public customer with an internet access 
can get the price he sees in the market by pushing a button. He 
can get to the front of the line by pushing a button sooner 
than an institutional customer. He is exactly on a par with 
that customer. He sees the market equally. He has equal access 
to all the prices in the market.
    The only difference between him and a futures commission 
merchant is, as I said, his order flows through somebody else's 
computer to have its credit check before it gets to our market. 
I think we would be very reluctant to all of a sudden say to 
the retail customer you cannot have access to the same market 
in which the institutional people are playing because you have 
to have your credit checked by somebody else's computer or 
because you do not have $10 million in net assets. So long as 
the person has had appropriate risk disclosure and so long as 
the futures commission merchant is setting a credit limit on 
the positions he can take, which they do for their own 
protection, we do not want to see these markets fractionated. 
We just do not want to see them divided up. We have nothing 
against what they want, I assure you.
    Senator Fitzgerald. That would be much different than what 
we do in the area of regular securities trading where everybody 
is treated pretty much the same.
    Mr. Rosen. All of these references to the securities 
markets remind me of the admonition ``Be careful what you wish 
for.'' I think that if the principle of securities law 
regulation were applied to futures, people would be very 
surprised with the results. Again I go back to the President's 
Working Group report, if you analyze what the purpose of this 
statutory framework is, it is a different, very, very different 
framework than the securities laws.
    Securities laws are protective of the capital formation 
process. Commodities do not give rise to information 
disparities in the same way that the securities markets do and 
the integrity of the capital formation process and the 
securities markets depends upon regulation of the informational 
disparities in the marketplace whoever you are. If you go back 
to the history of the Commodity Exchange Act----
    Senator Fitzgerald. Well, basically inside information is 
legal in trading commodities. It is legal in trading real 
estate. They may know the state is going to put a new 
interstate right next to where you want to put this office 
building. It is legal there, but we have said it is not legal 
in securities.
    Mr. Rosen. Right. But because the essence of the use of 
futures as hedging devices is trading on inside information. 
The very purpose of the market and the regulatory regime was to 
ensure that the prices that were being discovered on the boards 
of trade were accurately reflected market conditions because 
businesses were relying on them and the reason speculation was 
permitted in those markets at all was because it contributed to 
the liquidity that make those markets more vibrant, but there 
is a very, very great disparity between basically commercial 
risk shifting transactions and investment opportunities.
    I think we have to also bear in mind that the President's 
Working Group report does not require you to bifurcate the 
model. It allows you to build your business model. It allows 
you to build your business model and says when you build your 
model, if you introduce factors that give rise to a legitimate 
public interest and regulation, then you will live with the 
regulatory consequences. So nobody has to drive toward that, 
and if the regulatory regime for the exchange markets is 
rational and appropriately calibrated to the risks and not 
overly burdensome, there should not be an inducement for 
someone to shed their traditional market participants in order 
to survive.
    I think that is the goal to ultimately be hoped for is that 
at the end, each level of activity is appropriately regulated 
because as you know, if you look at on the international 
dimension, you cannot get exactly the same trade terms with 
every country or the same economic conditions, and if your 
predicate was to make all of this playing field level, you 
would never have anything to do. So we have to get focused on 
what the right issues are which is to make sure that legitimate 
activity can be conducted with an appropriate level of 
regulation that does not hold the participants back and harm 
this country's economy.
    Senator Fitzgerald. I think I have gone on long enough, 
Chairman Lugar. So I yield to you.
    The Chairman. Well, you have, I think, conducted a really 
very important dialogue that has occurred I suppose behind the 
scenes. It has occurred now in front of the scenes. Let me just 
say, and I do not mean to diminish the importance of anything 
that has been said, but some who are in the room, many of you 
who are participating in this hearing, will recall that about 
4-years ago we attempted much more modest type of reforms 
principally with the CFTC. We were not as global as the 
President's Working Group, which arose largely because of the 
over-the-counter difficulties that our country and the world 
was facing. Of course, that was 4-years ago. Chairman Greenspan 
corrected me that the Mexican was 5-years ago--time goes by 
rapidly. One reason we did not progress maybe as we should have 
was that, first of all, we did not have Senator Fitzgerald who 
has an intense interest in the whole subject.
    There was at that time, and there were other disputes, but 
the board of trade and the Merc even in Chicago had very 
diverse views on many of the issues, in fact, so diverse and so 
embattled that most of the members of our committee were simply 
exhausted by the process. They said finally our constituents 
are hog farmers and people that are in cotton and so forth, and 
this is all very interesting, but by and large--this is not 
withstanding, Senator Fitzgerald, who is deeply interested in 
this--simply lost interest. They moved on to a different 
agenda, but say life moves on.
    Now lots of things have happened in the world subsequently, 
and one of the four points of the Working Group, which is not 
necessarily definitive with regard to all the rest of them, is 
just simply the problem of all of our markets vis-a-vis the 
world. In other words, we could have a situation, I can 
envision, in which we are deeply concerned defensively about 
who does what business on which floor and in which way, but 
most if not all of it diminishes, and as a matter of fact, we 
are left dealing with a smaller and smaller pie which would be 
    Now, at this particular stage, each of you appreciate the 
gravity of the issues. Everything seems to be up for grabs 
again, and I understand that, and Senator Fitzgerald's 
questions have offered an opportunity for advocacy and 
defensiveness and what have you, as the case may be. What I 
hope at the end of the day might be possible, and we will hear 
from Chairman Rainer soon, in terms of his recommendations, but 
if he has a substantial proposal that brings significant 
regulatory relief to everybody that deals with CFTC, 
conceivably this will be attractive.
    Now other parts of the bill may be unattractive. Each of 
you finally have to decide at the end of the day what the 
pluses and minuses are of this business because having heard 
this all today and having heard it other times, I cannot find 
at least a path that you weave through all of the mine fields 
here that will leave everybody excited about the product.
    But I do think it is important to have one and so I in a 
general way will say that I am determined to proceed to try to 
get one and so we really appreciate the testimony you have 
given today as well as very important answers on details and 
very specific, very technical questions. Because whether the 
Senate as a whole is interested in this question or not, at 
least the two of us are, and there are other members, and 
ultimately that will probably guide whether we have a bill or 
    Now if we do not have a bill, many people would say time is 
not in our favor. Maybe some of you would say, well, that is 
not true of my situation, but in a way I think it probably is. 
Leaving aside the jurisdiction we are talking about today, it 
was my privilege to open up the New York Stock Exchange in 
December one day. After I did my duty, I went down on the floor 
and visited with traders and other people who are involved in 
that sort of thing and very quickly they were making an 
argument of why what they do there is unique and important as 
opposed to where else it could be done, namely maybe on the 
commodity exchanges with single stock trading, for example, why 
New York Stock Exchange can do this better than somebody else. 
I understand. I listened to their argument. Likewise, why that 
stock exchange as it is important.
    Now at the same time, you know, you visit, as I did the 
same day, barely off the floor with people who already are 
envisioning plans for handling it in a very different way. Mr. 
Grasso and others understand that and they have been busy as 
all of you have in managing your situations. This is changing 
rapidly with major players who sort of pay the bread and butter 
of all of this and the upkeep and so forth, but suddenly have 
decided the way the world works some other way may be better. 
Maybe some other country. And, that is serious.
    So I take that seriously and this is why we are in the 
urgent time frame of this and asking, subjecting you to all 
these questions. But I appreciate your coming. Senator, do you 
have another comment or question?
    Senator Fitzgerald. I guess we were not supposed to talk 
about Shad-Johnson today. Was that the----
    The Chairman. The thought was that we would take that up 
after we get a report from both the SEC and the CFTC who were 
asked by Senator Gramm and me and others to sort of come 
together jointly and they are supposed to do that I think by 
the 21st of February.
    Senator Fitzgerald. Well, without discussing it here, could 
I ask Mr. Grove and Mr. Rosen to maybe give the Committee in 
writing what their views would be on the possibility of futures 
on individual stocks?
    Mr. Grove. Sure.
    Mr. Rappaport. Be happy to do that.
    The Chairman. For that matter, any of you may offer 
thoughts about that. This is obviously----
    Senator Fitzgerald. They like the idea.
    The Chairman.--a very big issue.
    Senator Fitzgerald. They do.
    The Chairman. Yes. Clearly, Senator Fitzgerald points 
toward a demarcation point. I know Secretary Summers asked 
prior to the hearing the extent to which we would get into that 
and we did mention. I mentioned in the opening statement that 
this is an issue out there, but we are trying very hard once 
again to work on a parallel with the Banking Committee, the SEC 
and the CFTC in the spirit of this Working Group, see what we 
can find. We have had comments by Phil Johnson, one of the 
authors of the accord. My service in the Committee and in this 
particular area even goes back to visiting with Phil Johnson 
when he was working with John Shad on the agreement they came 
up with.
    Those of you who participated in our round table last year, 
and Senator Fitzgerald was here, will recall some historians 
sort of recalling their thoughts about how permanent, how 
temporary, what the conditions were, but all of this is to be 
revisited soon.
    Well, gentlemen, I thank you very much for giving us your 
time and we appreciate the attendance of all the audience that 
listened in today. Thank you very much.
    Mr. Grove. Thank you, Senator.
    [Whereupon, at 12:12 p.m., the Committee was adjourned.]

                            A P P E N D I X

                           February 10, 2000



































































                           February 10, 2000
























                           February 10, 2000