[Senate Hearing 106-922]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 106-922



                             JOINT HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY
                          UNITED STATES SENATE

                                and the


                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION




                             JUNE 21, 2000


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

69-533                     WASHINGTON : 2001

            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




                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
CONNIE MACK, Florida                 CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah              JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota                 RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                JOHN EDWARDS, North Carolina

                   Wayne A. Abernathy, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel


                            C O N T E N T S



Wednesday, June 21, 2000, S. 2697--The Commodity Futures 
  Modernization Act of 2000......................................     1

Wednesday, June 21, 2000.........................................    47
Document(s) submitted for the record:
Wednesday, June 21, 2000.........................................    93


                        Wednesday, June 21, 2000

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
Gramm, Hon. Phil, a U.S. Senator from Texas, Chairman, Committee 
  on Banking, Housing, and Urban Affairs.........................     3
Bennett, Hon. Robert F., a U.S. Senator from Utah................    25
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois..........    21
Grams, Hon. Rod, a U.S. Senator from Minnesota...................    30
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, 
  Committee on Agriculture, Nutrition, and Forestry..............     5
Sarbanes, Hon. Paul S., a U.S. Senator from Maryland, Ranking 
  Member, Committee on Banking, Housing, and Urban Affairs.......    11
Kerrey, Hon. J. Robert, a U.S. Senator from Nebraska.............    23
Schumer, Hon. Charles E., a U.S. Senator from New York...........    27

                                PANEL I

Greenspan, Hon. Alan, Chairman of the Board of Governors of the 
  Federal Reserve System, Washington, DC.........................     9
Summers, Hon. Lawrence, Secretary of the U.S. Department of the 
  Treasury, Washington, DC.......................................     6

                                PANEL II

Levitt, Hon. Arthur, Chairman of the Securities and Exchange 
  Commission, Washington, DC.....................................    32
Rainer, Hon. William, Chairman of the Commodity Futures Trading 
  Commission, Washington, DC.....................................    34


Prepared Statements:
    Lugar, Hon. Richard G........................................    48
    Fitzgerald, Hon. Peter G.....................................    50
    Santorum, Hon. Rick..........................................    56
    Edwards, Hon. John...........................................    57
    Craig, Hon. Larry E..........................................    59
    Greenspan, Alan..............................................    66
    Levitt, Arthur...............................................    73
    Rainer, William..............................................    85
    Summers, Lawrence............................................    60
Document(s) submitted for the record:
    Position statement of the Bond Market Association, submitted 
      by Frank R. Hampton, Vice President Legislative Affairs....    94



                        WEDNESDAY, JUNE 21, 2000

                                       U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry, and the 
           Committee on Banking, Housing and Urban Affairs,
                                                    Washington, DC.
    The Committees met jointly, pursuant to notice, at 10:07 
a.m., in room 106, Dirksen Senate Office Building, Hon. Richard 
G. Lugar, (Chairman of the Committee on Agriculture, Nutrition 
and Forestry,) presiding.
    Present or submitting a statement: Senators Lugar, Gramm, 
Bennett, Fitzgerald, Santorum, Grams, Harkin, Sarbanes, Dodd, 
Kerrey, Conrad, Johnson, and Schumer.


    The Chairman. This hearing of the Senate Agriculture 
Committee and the Senate Banking Committee, held jointly, is 
open for business. Today I would simply point out the 
Agriculture Committee and the Banking Committees will hear 
testimony from members of the President's Working Group in 
regard to Senate Bill 2697, legislation to provide legal 
certainty to the over-the-counter derivatives market and to 
reauthorize and to reform the Commodity Exchange Act. The 
Commodity Exchange Act expires on September 30 of this year and 
the Senate Agriculture Committee is charged with reauthorizing 
this statute.
    However, we cannot accomplish this endeavor without the 
strong assistance and cooperation of members of the Senate 
Banking Committee. I am very pleased to have the distinguished 
Chairman of the Senate Banking Committee, Senator Phil Gramm of 
Texas, joining me as a cosponsor of this important legislation. 
We look forward to working with the Banking Committee as the 
legislation proceeds.
    Our legislation has been several years in the making. The 
Senate Agriculture Committee held a two-day roundtable of 19 
industry experts in February 1999 to discuss the policies 
surrounding CFTC reauthorization. Asked to prioritize the 
issues of importance, most panelists thought legal certainty to 
be the most pressing issue. Others suggested repeal of the 
Shad-Johnson Accord and that testimony included Phil Johnson, 
former CFTC chairman and one-half of the accord's namesake, and 
several mentioned regulatory relief for the futures exchanges 
as an important priority.
    Today's hearing representing our committee's fifth public 
forum on CFTC reauthorization in the last 18-months will hear 
testimony regarding how all of these issues are addressed in 
our legislation.
    Signed into law in 1974, the modern Commodity Exchange Act 
requires that futures contracts be traded on a regulated 
exchange. As a result, a futures contract that is traded off an 
exchange is illegal and unenforceable in a court of law. When 
Congress enacted this act, the meaning of the terms ``future'' 
and ``exchange'' were relatively apparent and the over-the-
counter derivatives business was in its in infancy.
    In the 26-years since the statute's creation, however, the 
definitions of a swap and a future began to blur. In 1998 the 
CFTC released its concept release on over-the-counter 
derivatives, which was perceived by many as a precursor to 
regulating those instruments as futures. Just the possibility 
of reaching this conclusion threatened to move significant 
portions of the business overseas. This led the Treasury 
Department, the Federal Reserve and the SEC to ask Congress to 
enact a moratorium on the CFTC's ability to regulate these 
instruments until after the President's Working Group could 
complete a study of the issue.
    As a result, Congress passed a 6-month moratorium and in 
November 1999 the President's Working Group completed its 
unanimous recommendations on derivatives and presented Congress 
with those findings. This legislation adopts many of the 
unanimous recommendations of the Working Group's report, 
including an exclusion for over-the-counter derivatives 
transacted on an electronic exchange and a clarification of the 
so-called Treasury Amendment.
    Another important recommendation of the Working Group was 
to authorize futures clearing facilities to clear over-the-
counter derivatives in an effort to lessen systemic risk. This 
bill incorporates that finding.
    The second major section of this legislation addresses 
regulatory relief for the futures market. In February, the 
CFTC, under the leadership of Chairman Bill Rainer, issued a 
thoughtful proposal that would provide relief to futures 
exchanges and their customers. Instead of listing specific 
requirements for complying with the act, the proposal would 
require exchanges to meet internationally agreed upon core 
principles. The CFTC proposal tailors regulation for exchanges 
based on whether the underlying commodity can be manipulated or 
whether the users of the exchange are institutional. Our 
legislation incorporates this framework.
    The bill's last major section addresses the Shad-Johnson 
Jurisdictional Accord, which banned single-stock futures in 
1982. The Working Group unanimously agreed that the accord can 
be repealed if regulatory disparities are resolved between 
futures and securities. In December Senator Gramm and I sent a 
letter requesting that the CFTC and the SEC make 
recommendations on reforming the Shad-Johnson Accord. The SEC 
and the CFTC responded that although progress had been made, 
the agencies could not resolve these issues before October of 
this year.
    Disappointment with this answer led Senator Gramm and me to 
once again ask the agencies to attempt to resolve the problems 
surrounding lifting the ban. Unfortunately, an agreement within 
our legislative timeframe was not reached and we have decided 
to move forward with our legislation.
    This legislation would repeal the prohibition on single-
stock users and allow these products to trade on either a CFTC-
regulated futures exchange or an SEC-regulated securities 
exchange. Our bill also would provide for joint jurisdiction 
with each agency maintaining its core authorities over the 
trading of single-stock users. The legislation would further 
require that margin levels on these products be harmonized with 
the options market.
    The goal of the legislation is to ensure that the United 
States remains a global leader in the derivatives marketplace. 
Already the United States has lost much of its leadership role 
in the exchange-traded futures markets in Europe and the over-
the-counter market may not be far behind. Congress has a good 
opportunity at this point to reverse this tide by enacting 
sound legislation this year.
    For my own part, I am hopeful that the Agriculture 
Committee can mark up this legislation prior to the July 4 
recess, namely, next week.
    The importance of this legislation is reflected by the 
witnesses assembled before us today and we are grateful for 
each one of them. Our first panel consists of the head of to 
President's Working Group, the Honorable Lawrence Summers, 
Secretary of the United States Department of the Treasury, and 
the Honorable Alan Greenspan, Chairman of the Federal Reserve 
System. Our second panel will consist of the Honorable Arthur 
Levitt, Chairman of the SEC, and the Honorable Bill Rainer, 
Chairman of the CFTC. We look forward to their insights 
regarding their agencies' discussions on the Shad-Johnson 
accord, as well as on all of the other issues.
    [The prepared statement of Senator Lugar can be found in 
the appendix on page 48.]
    It is now a privilege to turn to my distinguished 
colleague, Senator Gramm, for his opening remarks.


    Senator Gramm. Mr. Chairman, let me first thank you for 
your leadership on this issue. Let me say for the record that 
it has been a great privilege to work with you and the 
excellent staff of the Agriculturee on this bill.
    This is an effort that has been undertaken by the 
Agriculture and Bamking Commmittees to do something that is 
both important and, obviously, very difficult.
    Whenever we work in areas that are cross-jurisdictional in 
Congress, those differences sometimes become barriers to 
legislative action, and I want to congratulate you for your 
leadership in seeing that, that has not happened in this 
important area.
    As I see this bill, we are trying to do three simple things 
that may not create great excitement among American consumers, 
but they are very important and affect the well-being, 
prosperity and financial security of everybody who works, 
saves, invests and benefits from living and working in the 
greatest economy in the history of the world.
    We want legal certainty for swaps. Most people do not know 
what swaps are. I am almost incapable of fathoming the volume 
of swaps in dollar value. When I heard the number as we first 
started discussing this issue, I was convinced that an error 
had been made and that someone had mistakenly said trillions 
instead of billions; I was wrong. This is a huge, critically 
important markets, and we cannot allow uncertainty about the 
enforceability of these contracts to stand.
    We are all aware that uncertainty occurs because of the 
off-exchange trading prohibition in the Commodities Exchange 
Act. If the Commodities Futures Trading Commission deemed these 
swaps to be futures, that would create this legal uncertainty.
    I believe that a similar uncertainty could be created if 
the SEC deemed them securities and then argued that they were 
being traded without fulfilling the reporting requirements of 
the Securities and Exchang4e Commission statute.
    Also, it is important for us to note that while two of the 
most enlightened people who have ever served now head the CFTC 
and SEC, we have no guarantee that, that leadership is going to 
remain in the future and regulation doth abhor a vacuum. So, I 
think it is very important that we have legal certainty as it 
relates to both CFTC and the SEC
    Let me also say that we had hoped, Mr. Chairman, and I know 
you had hoped, that we could get the CFTC and the SEC to work 
out an agreement as to how they were going to regulate the new 
instruments that would be created futures on individual stocks. 
The SEC and CFTC made a legitimate effort, but they were unable 
to reach a conclusion as to how to share this regulatory 
    Ultimately, I have not given up hope that this can be 
worked out. It is important that it be worked out so that these 
two important regulatory entities can do what they do best. We 
need the SEC in all areas to exercise its authority on anti-
fraud and insider trading. We need the CFTC doing the things it 
can do. I think an agreement as to how they can share 
regulatory responsibility on individual futures could also 
affect areas where there are still legitimate regulatory 
concerns concerning swaps.
    Second, this bill does provide a new financial instrument 
that in my opinion is long overdue. There are problems in 
providing it in that we have to harmonize margins, we have tax 
differences between options and futures, but none of these 
problems is insurmountable. We try to deal with them in this 
bill, and I am sure we will refine the bill as we go along.
    And finally, this bill does begin regulatory relief. I am 
hopeful that by the end of the bill, we can go further. I do 
not believe that we have done what we should do in providing 
regulatory relief. The world is very different today than it 
was in 1934, when we were willing to trade tremendous 
regulatory burden for transparency. It was the right decision 
to make at the time, but with modern technology, with the 
evolution of markets, we have transparency at levels that never 
existed before.
    We have competition from all over the world that would very 
much like to see this goose that lays the golden egg, these 
financial markets, roosting in their coop. They are trying to 
do things to attract it. They are unifying markets. They are 
reducing regulatory burden. I believe that we need to do it. No 
one can convince me that the regulations necessary to protect 
my parents are the same regulations that are necessary to 
protect my children in today's financial markets.
    We would do well, Mr. Chairman, to remember the Lincoln's 
adage that to ask a society to live under old and out-moded 
laws, and I think you could say the same about regulation, is 
like asking a man to wear the same clothes he wore when he was 
a boy.
    We need a comprehensive review of the regulatory burden in 
financial markets. We need to challenge every regulation and 
every law as to benefits versus costs, and when the costs 
exceed the benefits, we either need to change, overturn or 
repeal that regulation as law.
    Mr. Chairman, you have made an important start here. I want 
to congratulate you for it. We face a difficult challenge in an 
election year and the waning days of this Congress, but this is 
an important issue and, Mr. Chairman, I want to commit to you 
that I intend to work hard to try to help you be successful.
    The Chairman. Well, thank you very much, Chairman Gramm. I 
appreciate those comments and your testimony.
    Let me try to lay out a format that I hope will be 
agreeable. I am going to call now upon the distinguished 
Ranking Member of the Agriculture Committee for an opening 
statement and upon his appearance, Senator Sarbanes as the 
Ranking Democratic member on the Banking Committee.
    I will ask other members, if I may, to forego opening 
statements so that we may hear the witnesses. We will have a 
round of questioning with no more than 5-minutes per Senator 
because we do have two distinguished panels and we have two 
    So unless there are strong objections to that format, we 
will try to proceed on that basis and I will call now upon 
Senator Harkin for his testimony, his opening statement.


    Senator Harkin. Thank you very much, Chairman Lugar and 
Chairman Gramm. And we welcome Senator Sarbanes and other 
members of the Committee on Banking, Housing and Urban Affairs.
    I appreciate this opportunity to hear the views of the 
Members of the President's Working Group on Financial Markets 
concerning the legislation introduced by Senators Lugar, Gramm 
and Fitzgerald. I especially want to commend you and thank you, 
Chairman Lugar, for your conscientious work in crafting this 
important legislation.
    I have said before that when it comes to derivatives and 
everything else that we are dealing with here in terms of 
complexity, the subject matter of this legislation surely 
rivals anything that ever comes before our committee, with the 
possible exception of dairy policy. That may be more 
    The issues are indeed complicated. Their resolution has 
tremendous ramifications in the markets. The bill that has been 
introduced clearly reflects the hard work that Chairman Lugar 
and his staff has put into it. And, for the most part, it 
carefully follows the recommendations of the President's 
Working Group, provides legal certainty for over-the-counter 
derivatives, ensures regulatory relief for futures exchanges 
and brings clarity to the Treasury Amendment, finally, in the 
treatment of certain hybrid instruments, generally modernizes 
the Commodity Exchange Act to take into account the rapid pace 
of change in the financial markets and in technology. It seeks 
to maintain and strengthen the protection of investors in the 
public interest.
    To be sure, there are a number of issues that require 
further attention. I look forward to working with the Chairman, 
the Regulatory agencies and other parties to resolve the 
remaining issues.
    As we continue to work on this legislation, we, in essence, 
have a balancing act to perform. To be sure, there is a real 
need for legal certainty, for modernizing and reforming 
regulations. I just Chairman Gramm saying about the old 
Jeffersonian quote about--in fact, it is engraved in the 
Jefferson Monument down here, about expecting the adult to wear 
the clothes of childhood would be the same as expecting the 
Nation to live by the laws of its ancestors.
    But, at the same time, we must ensure that investors are 
protected and that we do not create disparities in regulation 
and in competitive positions of the various types of financial 
    Without a doubt, we now have a truly global financial 
market. The regulatory climate should not hinder; should 
enhance the competitive position of U.S. markets and firms. 
However, when it comes to international competitiveness, there 
is also a tremendous value to the integrity, safety and 
soundness of markets, an area where the U.S. has excelled. The 
cost of transactions is important but over time, money will 
flow to markets where integrity, safety and soundness are 
adequately protected. To me, that is the bottom line. Thank you 
very much, Mr. Chairman.
    The Chairman. Well, thank you very much, Senator Harkin. I 
commend you again for your thoughtfulness in working with us. 
Members of the Democratic staff, in a bipartisan way, have been 
working on this legislation and we appreciate that.
    At this point it is my privilege to recognize in the order 
that I have introduced the witnesses, the distinguished 
Secretary of the Treasury. He has been a good friend of our 
committee, coming before us not in each of these five 
iterations of the CFTC but in many of them, and in his role 
with the Working Group has already made a contribution, I 
believe, to American financial security.
    Secretary Summers.
    Senator Dodd. Mr. Chairman, before you do that, I presume 
that opening statements in which we lavish praise on you and 
Senator Gramm are appropriate?
    The Chairman. Oh, they would be welcome, published in full. 
Thank you.
    Mr. Summers.


    Secretary Summers. Chairman Lugar, Chairman Gramm, Ranking 
Members Harkin and Sarbanes, members of these Committees, thank 
you for giving me the opportunity to testify before you once 
again on the Commodities Futures Modernization Act.
    This is, as your opening statements recognized, an issue 
that the President's Working Group has grappled with for some 
time and it is an issue that these committees have been 
grappling with for some time.
    I believe it is a matter of great importance to the future 
of our financial system and to the future of our economy to 
move ahead with legislation that provides legal certainty for 
swaps and OTC derivatives transactions. And I believe that such 
legislation is now within our grasp, with the unanimous 
agreement of the President's Working Group and the very 
substantial consensus that has formed in the central area of 
legal certainty for OTC derivatives among members of these 
committees, members of the House of Representatives and the 
various constituencies.
    I believe that if anything, the events of the last year, as 
we have seen dramatic increases in competition in the financial 
services area across countries, only go to emphasize the 
importance of the United States moving to provide legal 
    So it is our very great hope that it will be possible to 
move this year on legislation that, in a suitable way, goes to 
create legal certainty for OTC derivatives while, at the same 
time, reducing systemic risk, protecting retail customers, and 
maintaining U.S. competitiveness.
    And it is our belief that the central provisions contained 
in this bill with respect to OTC derivatives make great 
progress in achieving these goals and are provisions that we 
can support as they follow very largely the recommendations of 
the President's Working Group.
    I want to address, however, three remaining issues: the 
securities question, certain technical questions with respect 
to regulatory relief for futures exchanges, and Shad-Johnson.
    With respect to securities, the bill provides a broad 
exclusion from the securities laws for swaps, including in 
particular, swaps based on securities. As a general matter, we 
do not believe that swaps should be regulated as securities. 
However, it is important to preserve prohibitions against 
insider trading, fraud, manipulation, and also to preserve 
other measures which are demonstrably necessary to protect 
retail customers.
    We are concerned that the provisions as currently drafted 
could have the unintended consequence of interfering with these 
vital protections that are now in place for the securities 
markets. Because the provisions as currently drafted have the 
potential to impact the underlying securities markets, we 
believe that it is imperative that they be amended to address 
these concerns with respect to insider trading, fraud, 
manipulation, and retail consumer protection.
    I would hasten to point out that this is very much 
consistent with the valid objective of removing unnecessary 
regulation. I think it is worth emphasizing, however, that 
there is one important distinction between the securities laws 
and the commodities laws in that the application of securities 
laws does not in any context create the kind of legal certainty 
issues that can arise under the CEA.
    The second concern we have is with respect to the 
regulatory relief section that permits exempt boards of trade. 
Let me first say that we have looked very carefully at the 
recommendations that the CFTC has made and while we will be 
making a formal comment down the road, I can say that we are 
very much supportive in general of the changes that Chairman 
Rainer has recommended and believe that they represent a 
landmark achievement.
    And we recognize the importance of competitive parity 
between the exchange and off-exchange markets, particularly as 
the status of off-exchange markets is clarified.
    Our concern is with certain provisions that, as drafted, 
could have the perverse consequence of creating a situation 
where protections that are present with respect to off-exchange 
trades could actually not be present with respect to 
transactions that took place on an exchange. These matters are 
particularly important with respect to the integrity of the 
Government securities market, as any reduction in the integrity 
of the Government securities market could lead to higher 
financing costs for the Treasury and an increased burden on 
American taxpayers.
    Let me turn finally to the question of the Shad-Johnson 
Accord. We believe that as the Working Group report states, the 
current prohibition on single-stock futures can and should be 
repealed if issues about the integrity of the underlying 
securities market and regulatory arbitrage are resolved. There 
are a number of concerns, however, that the regulatory agencies 
consider important that have not been resolved in the 
legislation. While we have no objection to the introduction of 
single-stock futures, it is vitally important that the 
integrity of the underlying markets be preserved and that these 
instruments not be used as a means to avoid the regulation of 
the cash market.
    But let me be very clear on one point. We believe that this 
issue should not be allowed to be an impediment to clarifying 
legal certainty with respect to OTC derivatives. It is our very 
great hope that it can be resolved in a mutually satisfactory 
way but we do not believe that it should be allowed to defer 
OTC derivatives legal certainty, given the overwhelming 
importance of that issue.
    Let me just take this opportunity to comment on an issue 
that is not part of the bill before you today, and that is the 
question of the treatment of OTC derivatives in instances of 
bankruptcy and insolvency.
    I would like to take the opportunity to strongly urge the 
Congress to adopt the President's Working Group's 
recommendations regarding the treatment of certain financial 
contracts, including OTC derivatives, in cases of bankruptcy or 
insolvency. This is a step that could have a meaningful impact 
on the mitigation of systemic risk.
    Mr. Chairman, let me conclude where I began. The 
achievement of legal certainty and a modern legal and 
regulatory framework for OTC derivatives is an issue of great 
importance to our financial system, the competitiveness of our 
markets and businesses and our economy. With this legislation, 
it appears that, that goal is within our grasp. I urge this 
committee to rapidly address the remaining concerns so that we 
can move forward on much-needed legal certainty in the OTC 
derivatives market. Thank you.
    [The prepared statement of Secretary Summers can be found 
in the appendix on page 60.]
    The Chairman. Well, thank you very much, Secretary Summers, 
for your comments and for your endorsement with the caveats 
that you have given and we will take those seriously.
    When I visited with you and with Chairman Greenspan 
earlier, the Chairman noted a very, very large audience here 
today for something that is very difficult to understand. I 
would say the audience is a tribute to the two of you. You are 
persons that are listened to. You make a difference in our 
thoughtfulness and I call now upon Chairman Greenspan for his 


    Mr. Greenspan. Thank you very much, Mr. Chairman. I should 
say chairmen and Ranking Members. This, incidentally, is the 
first time in all of my years testifying before the Senate that 
I recall, appearing before a joint committee of this nature, 
and I must say that considering the nature and presumed 
complexity and obscurity of this type of legislation, it is a 
clear testament of how important this issue is to the financial 
system of the United States, its integrity, and essentially the 
underlying prosperity which it has been so important in 
contributing to.
    I am especially pleased to be here to present the Federal 
Reserve Board's views on the Commodity Futures Modernization 
Act of the Year 2000. My testimony today will be largely 
identical to the testimony of my colleague Patrick Parkinson 
delivered on behalf of the Federal Reserve Board last week to 
the House Subcommittee on Risk Management, Research, and 
Specialty Crops.
    Let me say first that I wish to associate myself with all 
of the remarks of Secretary Summers and will endeavor not to 
repeat and go over similar grounds.
    The Federal Reserve Board continues to believe that the 
Commodity Futures Modernization Act of 2000, modernizing the 
Commodity Exchange Act, is essential. To be sure, the CFTC has 
recently proposed issuing regulatory exemptions that would 
reduce legal uncertainty about the enforceability of OTC 
derivatives transactions and would conform the regulation of 
futures exchanges to the realities of today's marketplace. 
These administrative actions by no means obviate the need for 
legislation, however.
    In my remarks today I shall focus on three of the areas 
that the legislation covers: first, legal certainty for OTC 
derivatives; second, regulatory relief for U.S. futures 
exchanges; and third, of course, repeal of Shad-Johnson 
restrictions on the trading of single-stock futures.
    In its November 1999 report, the President's Working Group 
concluded that OTC derivatives transactions should be subject 
to the CEA only if necessary to achieve the public policy 
objectives of the act, deterring market manipulation and 
protecting investors against fraud and other unfair practices. 
In the case of financial derivatives transactions involving 
professional counterparties, the Working Group concluded that 
regulation was unnecessary for these purposes because financial 
derivatives generally are not readily susceptible to 
manipulation and because professional counterparties can 
protect themselves against fraud and unfair practices. 
Consequently, the Working Group recommended that financial OTC 
derivatives transactions between professional counterparties be 
excluded from coverage of the CEA.
    The Federal Reserve Board continues to support the Working 
Group's conclusions and recommendations. Thus, it supports the 
exclusions of OTC derivatives from CEA that are included in S. 
2697 because with a few exceptions that appear readily 
resolvable, they are consistent with the Working Group's 
    The Working Group did not make specific recommendations 
about the regulation of traditional exchange-traded futures 
markets that use open outcry trading or that allow trading by 
retail investors. Nevertheless, it called for the CFTC to 
review the existing regulatory structures, particularly those 
applicable to financial futures, to ensure that they remain 
appropriate in light of the objectives of the CEA.
    The Federal Reserve Board supports the general approach to 
regulation that was outlined in the CFTC's recent proposals. 
For some time the Board has been arguing that the regulatory 
framework for futures trading, which was designed for the 
trading of grain futures by the general public, is not 
appropriate for the trading of financial futures by large 
institutions. The CFTC's proposals recognize that the current 
''one-size-fits-all'' approach to regulation of futures 
exchanges is inappropriate, and they generally incorporate 
sound judgments regarding the degree of regulation needed to 
achieve the CEA's purposes.
    Furthermore, the Board generally supports codification of 
the CFTC's proposal so as to provide the exchanges with greater 
certainty regarding future regulation. However, the Treasury 
Department is concerned that the exempt board of trade 
provisions might have unintended consequences that could reduce 
the effectiveness of the existing regulatory framework for the 
trading of government securities. To facilitate expeditious 
passage of legislation, it thus may be prudent to limit the 
codification of the exempt board of trade provisions, at least 
so that markets currently regulated under the Government 
Securities Act of 1986 are not affected. In such a scenario, 
the CFTC could address any unintended consequences for the 
regulation of government securities by changing the terms of 
its exemptions.
    The Working Group concluded that the current prohibition on 
single-stock futures, part of the Shad-Johnson Accord, can be 
repealed if issues about the integrity of the underlyng 
securities markets and regulatory arbitrage are resolved. The 
Board believes that S. 2697 provides an appropriate framework 
for resolving these issues. Such instruments should be allowed 
to trade on futures exchanges or on securities exchanges with 
primary regulatory authority assigned to the CFTC or the SEC, 
respectively. However, the bill recognizes that the SEC should 
have authority over some aspects of trading of these products 
on futures exchanges. The scope of the SEC's authority can and 
should be resolved in negotiations between the CFTC and the 
SEC. The Congress should continue to urge the two agencies to 
settle their remaining differences so that investors have the 
opportunity to trade single-stock futures.
    If it would facilitate repeal of the prohibition, the 
Federal Reserve Board is willing to accept regulatory authority 
over levels of margins on single-stock futures, as provided in 
the bill, so long as the Board can delegate that authority to 
the CFTC, the SEC, or an Intermarket Margin Board consisting of 
representatives of the three agencies.
    The Federal Reserve Board understands that the purpose of 
such authority would be to preserve the financial integrity of 
the contract market and thereby prevent systemic risk and to 
ensure that levels of margins on single-stock futures and 
options are consistent. The Board would note that for purposes 
of preserving financial integrity and preventing systemic risk, 
margin levels on futures and options should be considered 
consistent, even if they are not identical, if they provide 
similar levels of protection against defaults by 
    This bill reflects a remarkable consensus on the need for 
legal certainty for OTC derivatives and regulatory relief for 
U.S. futures exchanges, issues that have long eluded 
resolution. These provisions are vitally important to the 
soundness and competitiveness of our derivatives markets in 
what is an increasingly integrated and intensely competitive 
global economy. The Federal Reserve Board trusts that remaining 
differences regarding single-stock futures and the potential 
application of the securities laws to OTC derivatives can be 
resolved quickly and this important piece of legislation can be 
expedited through this Congress.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Greenspan can be found in 
the appendix on page 66.]
    The Chairman. Thank you very much, Chairman Greenspan.
    We have been joined by Senator Sarbanes, the Ranking Member 
of the Banking Committee. As the Chair announced earlier, the 
Ranking Member will be recognized for an opening statement and 
then we will proceed with a round of questions for the 
    Senator Sarbanes.

                         URBAN AFFAIRS

    Senator Sarbanes. Mr. Chairman, thank you very much.
    I will really forego an opening statement except simply to 
observe that this is a very complex issue and I think we have 
to proceed with considerable caution and when I have my 
question period, I will have an opportunity, I think, to pose 
some questions to the secretary and the Chairman in this 
    I think we have to work extra hard at trying to get the 
regulators, who are, after all, the experts in this area upon 
whom we rely, to see if they can reach a consensus on how they 
would recommend proceeding with respect to these important 
    Thank you very much.
    The Chairman. Thank you very much, Senator Sarbanes.
    We will have questions now. I will ask that Senators stay 
within a 5-minute limit. I will ask questions. I will then 
defer to Chairman Gramm, then to the distinguished Ranking 
Members--Mr. Harkin, Sarbanes--and then we will alternate back 
and forth, republican and Democratic Senators as they have 
    Secretary Summers and to some extent Chairman Greenspan has 
reflected this, in a comment that you make on page 5 of your 
statement you say, ``To be clear, there are provisions of the 
bill as currently drafted which could have the perverse 
consequences of creating the situation where protections that 
are present with respect to off-exchange trades would not be 
present with respect to transactions that took place on the 
exchange. These matters have particular importance with respect 
to the integrity of government securities markets.''
    Could you amplify that somewhat more? That general point of 
view of the Treasury, which has been fairly well known in the 
securities markets for the past week or so, has brought 
considerable consternation and I would like for you to explore 
that more in your testimony.
    Secretary Summers. Let me just say that I think this is an 
important but somewhat limited issue in the following sense. We 
are supportive of the broad program that Chairman Rainer has 
laid out for deregulation. We are supportive of the pillar of 
that broad program, which is the idea of exemption for boards 
of trade.
    Our difficulty comes from what is almost a drafting 
question. In the way the legislation is drafted, it appears to 
us to allow participants in the exempt boards of trade to avoid 
the kinds of rules that we have had in place with respect to 
the Government securities market.
    You will recall that there was a major episode a decade ago 
in which one major firm was involved with an excessive share of 
a number of different Treasury auctions, subjecting the market 
to possible manipulation. It is our intent and our desire only 
that nothing in this legislation preclude the effective 
enforcement of those provisions with respect to the Government 
securities markets.
    And my understanding is that there has been considerable 
discussion among the affected parties and I think there is a 
feeling that it is possible to find language that would address 
our particular and quite narrowly focused concern, which does 
not go to the desirability of regulatory relief for futures 
trading, but only goes to the question of whether or not it 
would be possible to avoid restrictions that are in place with 
respect to cornering and the like in the Government securities 
markets by trading on one of these exempt boards of trade.
    The Chairman. I thank you for that response and I raise the 
question knowing that there have been considerable efforts on 
the department's behalf with exchanges with other parties to 
try to clarify this language. I think Senator Gramm and I share 
the thought that the greatest hope we have with this 
legislation is that you and Chairman Greenspan and others are 
still working with us. This is a work in process because these 
clarifications are important.
    This legislation might last for a long while and it would 
be difficult to get everybody concentrated again, so we want to 
do it right. But we appreciate the flexibility that you have 
already demonstrated and I simply wanted to offer that thought.
    Mr. Greenspan. Mr. Chairman, if I may, I think it is 
important to emphasize, as the Secretary has just done, that 
this is a very narrow technical amendment. It is not 
questioning the usefulness, the potential usefulness of the new 
board of trade vehicle. There are many different types of 
usefulness of that vehicle and we certainly at the Federal 
Reserve Board see advantages in it.
    This is a very narrow issue which we fully subscribe to the 
Treasury's position on and would like to see some amendment to 
this particular provision to take care of the Treasury's 
    The Chairman. Well, we look forward to working with you on 
that language and your proposal would be welcome.
    Let me just initiate a subject I suspect that Chairman 
Gramm will get into further. With regard to legal certainty, we 
have talked about legal certainty that arose from the so-called 
Concept Paper on Swaps that the CFTC was responsible for, so we 
have tried to settle that over there.
    Now Chairman Gramm has raised the question, ``Well, what 
about legal certainty with regard to the SEC in this sort of 
situation?'' This seems to have kicked off tremors in various 
    Let me just say that what is sauce for the goose is sauce 
for the gander. I share Chairman Gramm's thought that we need 
to explore really where we are headed with regard to legal 
certainty. It may have started in one agency but has picked up 
other problems somewhere else.
    Why has this become an element of such consternation? 
Because obviously it is and your testimony, you mention this, 
Secretary Summers, as a point of considerable concern.
    Secretary Summers. Let me make three points, if I could. I 
will preface them by saying that having spoken with Chairman 
Gramm about this, my impression is that there are not 
fundamental differences that cannot be bridged on this 
    The Chairman. Well, that is reassuring.
    Secretary Summers. Having said that, let me make three 
    First, there is, I think, an asymmetry that we need to be 
clear about between the securities law issues and the 
commodities law issues and that is that were these to be 
subject to the commodities law, there is the possibility that 
past contracts that have been entered into would be unwound and 
would not be legally binding. That is why we speak about legal 
    There is no parallel feature of the Securities Act that 
would enable or create any possibility or nexus for past 
contracts to be unwound and that is why those who have been 
concerned with the legal certainty question have, until it was 
recently introduced into the discussion, been focused on the 
commodities issue and not focussed on the securities issue.
    Second, there is nonetheless, in our judgment, a valid 
objective of responding to some of the kinds of concerns that 
Chairman Gramm articulated in his earlier statement that we 
cannot be assured that the prudent forbearance that the SEC has 
exercised with respect to these issues in recent years will be 
a permanent state of affairs.
    And therefore it may be appropriate for there to be 
legislative clarification that the intent of the OTC legal 
certainty is not to shift jurisdiction from one agency to 
another but, for the reasons that the Chairman articulated in 
his testimony, involving the fact that it is professional 
counterparties who are involved with one another, to provide 
for a structure in which these transactions would not be 
subject to extensive regulation. We recognize that as a 
legitimate and appropriate legislative purpose, even if one 
that is not perfectly parallel with the commodities case.
    The third point though, and the point that I must say, Mr. 
Chairman, we feel strongly about is that there are a number of 
types of issues that the securities law provides that are not 
issues that are covered by the commodities law where we believe 
it is very important to continue to maintain protection.
    To take what may be the easiest example to explain: 
functionally, through a total return swap, one can do something 
that is the equivalent of purchasing a share of stock. It would 
not, in my judgment, be an acceptable outcome for an individual 
who had benefitted from insider information and who would be 
legally prohibited from buying a stock or buying an option to 
be able to engage in a total return swap that was the 
functional equivalent of buying that stock.
    Insider trading, fraud, manipulation, and possibly where 
there is a demonstrable link, questions of retail protection, 
it seems to us need to continue to be subject to regulation, 
not so as to extend some net of regulation to OTC derivatives 
in a way that they are not now subject to regulation, but only 
to assure that the basic protections we provide in our cash 
markets do not become circumvented through this legislation.
    And it seems to us that the valid and important objective 
of clarifying with respect to the future the limits of 
regulation in this area can be achieved while, at the same 
time, respecting the very necessary functions the regulation 
has to perform.
    The Chairman. Thank you very much.
    Senator Gramm.
    Senator Gramm. Thank you, Mr. Chairman.
    Let me first say, Mr. Secretary and Mr. Chairman, I do not 
think there are substantive differences as to what we want to 
do and what you are concerned about.
    The best thing you could do about the Government securities 
is write the language you need and give it to us so that we can 
put it in the bill and solve that problem. If it creates other 
problems, obviously we can work them out. But we are in a happy 
time when government borrowing is diminishing, we do not know 
how long that is going to last, and we want the Government to 
be able to borrow when it needs to do so.
    Our whole focus to this point on legal certainty has been 
related to the CFTC and its jurisdiction because it was always 
believed that if someone was going to claim jurisdiction over 
swaps, it would be the CFTC. If they asserted jurisdiction, as 
we all know from that very unhappy period when they were trying 
to do so, then the potential existed of contracts on swaps 
being deemed unenforceable because they were traded off the 
    But what I am concerned about is the totally different 
environment where the CFTC has been banned from exercising any 
jurisdiction, in essence, creating what some regulation 
innovator would see as a no-man's land, and I would see as 
freedom but some regulator would see as a no-man's land. An 
innovative SEC might step in and say, ``well, swaps are 
securities and therefore this swap is illegal because the 
security was not registered with the SEC, because the security 
did not meet our disclosure requirements.''
    We can deal with the anti-fraud concern and the insider 
trading concern, but we need this dual protection. I agree with 
the Chairman that we need to work together because in an 
election year, the only way anything can or should become law 
is if it is bipartisan and is supported by the administration 
and Congress.
    So if we want to do this, we have to work it out, and I do 
not see any insurmountable differences. I would like to ask 
both of your staffs to look at this concern about potential SEC 
action in the future.
    Let me just ask one question that is not related to this, 
but I ask because it is a simple yes or no answer, but you can 
elaborate in the time I have left if you want to.
    Recently there has been a proposal by the FDIC and a lot of 
clamoring in the banking industry to raise the FDIC insurance 
from $100,000 to $200,000 per account. Having lived through the 
S&L debacle and having seen it first-hand in my state, I have 
been very reluctant to support this because it represents to me 
a shifting of risk from the investor to the Government and 
ultimately to the taxpayer. And I remember that era of brokered 
deposits, and knowing now that we have Internet banking, this 
is something that I am concerned about.
    I know that you all have looked at it and I just wanted, in 
a simple, straightforward way, to see what you think about the 
proposal to raise the insurance limit to $200,000.
    Secretary Summers. The Chairman and I have discussed this 
and I believe we have similar views but I guess we will soon 
    We believe that such an increase would be ill advised and 
would represent a serious public policy error that would 
potentially increase systemic risk by eroding market discipline 
and it is not, in our judgment, necessary in order to protect 
small savers. So it is not a change that we would support.
    Mr. Greenspan. I agree with that, Mr. Chairman. Let me just 
say that there is no question arithmetically that if one looks 
at the change in consumer prices since 1980 when the original 
$100,000 ceiling was instituted that for purchasing power 
parity with the original $100,000 change, it would require a 
very significant increase.
    However, I think that most economists would look back at 
that $100,000 number and say it was a mistake, probably a bad 
    If you go back to the $40,000 change when, in the fall or 
late part of the year 1974, the ceiling was raised from $20,000 
to $40,000, and then ask what is the purchasing power of that 
as of today, it is just a little more than $100,000. So in that 
regard, one can very readily see that the problem really gets 
back to a judgment as to whether the move from $40,000 to 
$100,000 was the correct move and I think, in retrospect, that 
the evidence very strongly indicates that it was a mistake and 
for very much the reasons that Secretary Summers argues.
    We are in the process now, driven largely by technology, of 
very dramatically expanding the domestic and international 
financial system and it is very important that our market 
processes are sound and that they are not distorted 
inordinately by a subsidized structure in the financial system.
    And, as a consequence of that, I think it is quite 
important for all of us to be certain that if we want the 
really quite extraordinary developments in the financial 
system, which is what we are discussing today, to effectively 
assist in what is a change in the world economy and 
specifically in the United States, where standards of living 
are rising in a way which we have not seen for a very long 
period of time, and where we have had an economy which is being 
supported by a very increasingly sophisticated financial 
system, we want to be certain that, the market safeguards of 
that system are not undercut.
    And it has been the experience of the Federal Reserve and, 
I believe, all the remaining banking regulators, and I presume 
the Treasury Department, as well, that the necessity of having 
a fully functioning market pricing structure as a means for 
containing risk is crucial to the system.
    We regulators cannot conceivably substitute for the 
effectiveness of containing risk that counterparty judgments 
within the market create. It is not even a close call. Anything 
that we can do to sustain and enhance the viability of 
counterparty surveillance and the accordingly important 
strengthening of the financial structure that ensues as a 
consequence of that, we should endeavor to do.
    Increasing that is, doubling--deposit insurance--which 
essentially would be giving increased subsidies to upper income 
individuals almost by definition, is, in my judgment, a 
    There is a problem, however, which is associated with this 
issue, which is discussed mainly with regard to the clear 
difficulties that our community banks are having with regard to 
maintaining core deposits as a consequence of a very dramatic 
increase in mutual funds, money market mutual funds, and the 
capital markets expansion itself. And they understandably are 
looking for means by which they can get an increased degree of 
liability support, if I may put it that way.
    I certainly sympathize with their concerns and the 
community banking system is a very important vehicle in this 
country and I think something which is crucial to the dual 
banking system, which I, as you have known before, very 
strongly support.
    I do think, however, that other means to solve that 
particular problem must be found. To employ a major change in 
the underlying financial structure creating weakness in that 
underlying financial structure for the purpose of resolving a 
real problem, but a different type of problem, in my judgment, 
would be a major policy mistake.
    Senator Gramm. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Gramm.
    Senator Harkin.
    Senator Harkin. Thank you, Mr. Chairman.
    I would like to focus my remarks and questions on this idea 
of a level playing field and what this legislation might do to 
that. Early on, the futures exchanges, as we started this 
process several years ago, were concerned that regulatory 
relief for the swaps would put them at a disadvantage. So the 
futures exchanges sought relief and that is basically what this 
bill provides in that regard.
    Summarily, Shad-Johnson, if relief is provided for single-
stock futures trading, raises questions about the level playing 
field for other market participants, namely the stock options 
markets. So again it raises the general question, I think, of 
the levelness of the regulatory playing field and I think that 
is an important question for us and overall to the functioning 
of our U.S. markets.
    So I would ask both Chairman Greenspan and Secretary 
Summers again to once again enlighten us on approaching these 
questions of a level playing field, whether on Shad-Johnson or 
in other areas, like swaps versus on-exchange transactions, or 
electronic versus the traditional exchange markets.
    Most of the input that I have had from people in these 
fields has been along those lines. They are concerned that what 
we do is going to skew it one way or the other. One will be 
advantaged and one will be disadvantaged. And I just need some 
enlightenment on that.
    Secretary Summers. We have sought in the President's 
Working Group recommendations and commenting on this 
legislation to achieve exactly the principle that you stressed, 
Senator Harkin, of a level playing field.
    The original rationale, as you know, was legal certainty in 
the OTC area. In my judgment, the suggestion that if one was to 
provide legal certainty that a level playing field required 
certain changes in the regulations regarding the exchanges was 
valid and appropriate. And, as I indicated, the suggestions 
that Chairman Rainer and his colleagues at the CFTC have put 
forward seem to us to be very much broadly in the right 
direction and to be leveling the playing field and subject to 
the relatively minor concern around the board of trade--minor 
but crucial, I hasten to say--concern that I highlighted. They 
seem to us to be broadly appropriate, and I think there is a 
good case for them being embodied in law and not just in 
    So I think we are doing a good job on the level playing 
field area in that dimension.
    I think that if I might, the playing field slopes in many 
different dimensions in the single-stock futures area and so 
far, a universally agreed definition of a level playing field 
has been illusive, precisely because you have the consideration 
of the cash market, you have the consideration of the single-
stock futures market, you have the consideration of the options 
market, you have the reality that much of this is going to be 
traded overseas in any event.
    So I cannot tell you that a formal agreement has been 
achieved in the Shad-Johnson area that is universally 
recognized to represent a level playing field.
    What I would suggest to you, however, is that it is, I 
think, very unfortunate for the financial system if the 
continuing debate over the precise definition of a level 
playing field with respect to Shad-Johnson is to preclude us or 
delay us from achieving legal certainty with respect to OTC 
derivatives. And any of a variety of possible resolutions of 
the Shad-Johnson issues, in conjunction with legal certainty, 
would be in the Nation's interest relative to no movement 
forward on legal certainty because of the outstanding Shad-
Johnson issue.
    That is why I very much would join the Chairman's support 
for the Congress's encouraging the parties to reach a mutually 
satisfactory resolution, but in any event----
    Senator Harkin. We have been trying that for a long time.
    Secretary Summers. But in any event, not holding legal 
certainty hostage to the resolution of the Shad-Johnson issue.
    Mr. Greenspan. Senator, obviously I think the issues you 
are raising are crucial and they are very simple to state and 
very difficult to implement. Level playing fields, 
unfortunately, are too often in the eyes of the beholder and 
with one tilt in an Einsteinian way, it looks like another tilt 
if you are coming from another direction.
    There are a number of practical issues here which really 
get down to, for example, margins. Margin requirements in 
commodity exchanges are markedly lower than they are in general 
for stocks and here I think there is a legitimate concern about 
the issue of competitiveness, but it is very important to 
distinguish between consistent margins and the same level of 
    Margins basically should be constructed in a manner to 
protect counterparties against default or nonpayment. And in 
the commodities business or in the commodities markets, where 
there is a far more rapid payment of cash when prices move--
more exactly, when margins are readjusted very much more 
quickly in the commodities markets in general and obviously 
under those conditions, if you have a number of margin calls 
during the day, which you generally do have on many occasions, 
and they get paid, that clearly is an issue of having lower 
margins than would necessarily be the case in securities 
    And how things are cleared and how things are basically 
managed can differ quite significantly from one system to 
another and yet competitively, they can turn out to be very 
close to being identical.
    I think at the end of the day we will only be able to tell 
whether there are real playing field differences if we, for 
example, see actual differences in markets as, for example, we 
have seen a significant shift from exchange-traded derivatives 
to over-the-counter derivatives and that is suggestive of the 
fact that clearly there is far more regulatory burden imposed 
on the exchanges because that is the reason that is often given 
as to why a goodly part of businesses that could go in either 
direction would tend to go over the counter.
    In that case, you can see what the problems are and you can 
address them as indeed they are addressed in this bill. But to 
make ex ante judgments about levels of margins, merely looking 
at the absolute percentages, is insufficient to make a judgment 
as to whether they are consistent and indeed competitive.
    Senator Harkin. I see my time is up but it just seems to me 
that in the futures exchanges, where we have always had to 
clear our margins on a daily basis, and if you have another one 
on the option where you do not, then it skews it one way or the 
other, it seems to me.
    Mr. Greenspan. And it can be adjusted, however, by having 
different levels of margins, and that is indeed what does 
    Senator Harkin. That may be true, yes. That is what you are 
suggesting we do, perhaps?
    Mr. Greenspan. Senator, that is actually what they do. And 
the question I think we have to make a judgment on, is whether 
the margins that are imposed by securities firms and/or 
exchanges and commodity firms and/or exchanges are consistent. 
And all I am saying is that is not the same statement as they 
are identical.
    Senator Harkin. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Harkin.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Chairman Greenspan, in his statement, Secretary Summers 
observes that the bill provides a broad exclusion from the 
securities laws for swaps, including, in particular, swaps 
based on securities. He then goes on to say, ``As a general 
matter, we do not believe that swaps should be regulated as 
securities. However, it is important to preserve prohibitions 
against insider trading, fraud, and manipulation and also to 
preserve other measures which are demonstrably necessary to 
protect retail customers.''
    I take it you agree with that position?
    Mr. Greenspan. I do indeed, Senator.
    Senator Sarbanes. I would like to ask both of you, what are 
the risks of implementing the language as currently drafted in 
the legislation?
    Secretary Summers. I think this is an issue that is easily 
remediable but nonetheless needs to be remedied because I think 
the language as currently drafted would at least raise the 
prospect of substantial evasion of existing predications with 
respect to insider trading, with respect to fraud and with 
respect to market manipulation and thereby could undermine the 
integrity not just of the OTC derivatives markets but also of 
the underlying markets with which they are arbitraged.
    So as drafted, we would have very great concerns about the 
    We do believe that the objective which we believe was 
sought in drafting the legislation, which is to clarify that 
the objective here is deregulation rather than a shift of 
regulatory jurisdiction, is an objective that can be achieved 
without compromising these critical objectives.
    As we suggested earlier, I think we can all work together 
on language that would achieve that objective, but the bill as 
we understand it in its current form would, without amendment, 
potentially pose a real risk to the integrity of financial 
    Senator Sarbanes. Mr. Chairman, do you want to add to that?
    Mr. Greenspan. I would only like to say, Senator, that this 
problem of the definition of swaps and securities I think is 
getting us tangled up in verbose language.
    I had a chance to read the legal definition of a security 
that is in the 1933 and 1934 acts and I will tell you I 
appreciate the difficulties that lawyers have in this world. I 
defy anybody to read it and come up with a reasonably good 
judgment of what it says.
    Swaps are even worse. Not only are they difficult to define 
but after you have defined them, you will find that everyone 
has a different view of what constitutes a swap.
    I think that what is important here is for the Congress to 
look at the fundamental structures of the markets with which we 
are dealing, try to make a judgment of what the appropriate 
regulatory structure is, one, as Senator Harkin has said, that 
creates a level playing field and also, as he talked in terms 
of the integrity, safety and soundness of markets, which I 
think is a very important issue with respect to the 
competitiveness of the United States in the world markets.
    I think that we should do that in trying to make judgments 
of what is appropriate and try to eliminate this particular 
detailed discussion of whether something is a swap or it is a 
security, and therefore if it is a security, something should 
happen; if it is a swap, something should happen. I think this 
is a very difficult type of issue to get involved in and I am 
afraid we are getting tangled up in language, and the issues 
are very difficult as they are. If we are going to have those 
types of problems, we are not going to get an effective 
resolution of this issue.
    Senator Sarbanes. That would suggest, in view of your 
previous answer, that we should focus on insider trading, 
fraud, manipulation, and make sure that any possibility for 
those practices to take place is precluded under the regulatory 
scheme. Would that be correct?
    Mr. Greenspan. Exactly, Senator.
    Senator Sarbanes. I think the President's Working Group on 
Financial Markets was an important initiative and I know the 
legislation contains a number of the recommendations that came 
forward from the group, which represented a consensus judgment 
by the group, unanimous, as I understand it.
    My question is, what do you see as the prospects on those 
remaining outstanding issues on which a consensus has not yet 
been reached within the Working Group but which are resolved 
one way or another in the legislation? If we continue to press 
the Working Group to continue its discussions and 
consultations, would they be able to come up with a consensus 
    You have been involved in that byplay back and forth. What 
are the prospects?
    Secretary Summers. With the exception of Shad-Johnson and 
possibly with the exception of the securities question that we 
have been discussing, I believe the Working Group has 
essentially agreed on all important aspects of this legislation 
and that you could have full agreement on this legislation.
    I believe with respect to the securities question, I would 
not want to be in the position of speaking for the SEC and the 
CFTC but I think you have seen the Chairman and I have 
essentially identical positions with respect to that question.
    With respect to Shad-Johnson, I would not want to 
confidently predict that there would be a conclusion. It is an 
issue, unlike some of the other issues, that is a very crucial 
issue for two members of the Working Group--the SEC and the 
CFTC. And my understanding is that they have worked in very 
good faith to try to reach common ground and have not yet 
    I suspect that I speak for the Chairman in saying that we 
are very much prepared to do anything we can do to facilitate 
reaching an agreement and I thought that the Chairman's offer 
in his testimony that the Federal Reserve would be prepared in 
a variety of different formulations to become involved with 
margin requirements for single-stock futures, if that would be 
facilitating of an agreement, was a constructive and valuable 
step. But I do not think I can honestly predict for you with 
great optimism that an agreement will be reached in the near 
    I would repeat the judgment that the Chairman and I both 
expressed earlier that any of a variety of possible resolutions 
that pave the way to the passage of this legislation would be 
better than no resolution and a continuing risk to legal 
    Mr. Greenspan. I might just add that in a certain sense, if 
Shad-Johnson is not revised in a manner which is to the 
interests of the American regulatory structure, it is going to 
get revised for us because there is just little question in my 
judgment that we are not all that far away from single-stock 
futures on U.S. stocks trading in other countries. And if we do 
not resolve this issue, Shad-Johnson will get resolved but not 
in a manner which I think would be desirable for any of us.
    I have worked with many SEC and CFTC Chairmen. I have never 
had the pleasure of, as some of you have mentioned, working 
with two committed individuals of the types we now have in 
those chairmanships. If they are having trouble with this 
issue, it is because it is a very difficult issue to meld very 
complex regulatory structures.
    My concern is that if they cannot get it resolved and we 
cannot get it in a legislative vehicle, that the issue is going 
to get resolved for us but not in the way that we would like it 
to happen.
    Senator Sarbanes. Mr. Chairman, I just make the observation 
that not too long ago we were working in the Banking Committee 
on an important piece of legislation and they said, ``Well, you 
will never get the Treasury and the Federal Reserve to reach an 
understanding on that issue.'' And in the last analysis, they 
did reach an understanding, which was an important breakthrough 
in moving that legislation forward. So, if we keep working at 
this, maybe we can get it resolved. Thank you very much.
    The Chairman. I thank you, Senator Sarbanes, for your 
question and likewise both of you for your response. I will 
just editorialize before I recognize my colleague that we 
really are at the heart of the matter.
    Without being chauvinistic, we are Americans talking about 
United States markets and it is inconceivable that however 
learned people are in various agencies, they cannot come to 
some agreement.
    Now, we are attempting to facilitate that, I think calmly. 
Senator Gramm and I are not hysterical about the issue but we 
are determined. This is very, very important for our country 
and both of you have testified amply to that this morning in a 
very technical way.


    Senator Fitzgerald. Thank you very much, Mr. Chairman, and 
I thank both of you for testifying today.
    Mr. Greenspan, I appreciate your comments about Shad-
Johnson and I wholeheartedly agree with you. If we do not 
repeal Shad-Johnson, we are going to be confronted with foreign 
nations that are offering individual stock futures on our 
American companies. I think if we can put a man on the moon, we 
can repeal Shad-Johnson and get an agreement between the SEC 
and the CFTC.
    Mr. Greenspan, maybe you could elaborate on how the 
regulators cooperate in the banking industry. We actually have 
many more regulators in the banking industry than just the two 
we are talking about here--the CFTC and the SEC. You have state 
banking examiners examining state banks. Across the street from 
a state bank in Main Street, U.S.A. there is typically a 
national bank that is regulated by the OCC. Both of them, if 
they offer FDIC insurance, are subject to the regulation of the 
FDIC. If they have holding companies, they are monitored by 
    Now, I notice in Mr. Levitt's testimony, reading ahead, 
that he objects to provisions in this bill that require the 
SEC, before taking enforcement action, to ask permission of the 
CFTC. Now I do not know if any of the banking regulators, such 
as the FDIC or the OCC, would have to ask permission of other 
regulators if they wanted to take an enforcement action. 
However, I do think that they commonly notify other regulators 
as a matter of course. I do not get the impression that, that 
slows down the enforcement very much.
    Would you care to comment on that?
    Mr. Greenspan. Yes, Senator, I think that is quite correct. 
One of the vehicles that we have is an organization of all of 
the regulators in which we work together in a fairly formal 
systematic way. And over the years we have recognized the 
various problems that inevitably arise when you have a dual 
banking system, multiple regulators, and the system will either 
work or it will not work. And if it will not work, what is 
going to happen inevitably is clearly the Congress is going to 
decide to run a single regulator bill through both houses of 
the Congress and it will get passed very readily and the issue 
will be resolved, frankly, to the detriment of the system.
    I think that to have different regulators effectively 
competing in many respects and jointly endeavoring to come up 
with new ideas as to how to integrate regulation into the 
market structure to get maximum efficiency has been a very 
effective tool of the American regulatory system.
    And I think that, despite the fact that there are 
inevitable significant disagreements, and there are 
unquestionably unbelievable delays in getting agreements on 
certain issues, nonetheless, at the end of the day, it works.
    Senator Fitzgerald. What is your super regulatory body 
    Mr. Greenspan. It is the Federal--my problem is I have so 
many acronyms in my head, I cannot unleash----
    Senator Fitzgerald. Did that come in after the FIRREA 
legislation or after the S&L?
    Mr. Mattingly. Senator, it is Federal Financial 
Institutions Examination Council and it goes back to about 
    Senator Fitzgerald. 1978, okay.
    Mr. Greenspan. That is Virgil Mattingly, our General 
Counsel, and you can see why we find him a significant source 
of insight.
    Senator Fitzgerald. Well, maybe the SEC and the CFTC could 
just jointly put some task force together with members from 
both regulatory bodies just so that they have ongoing 
communication. That would seem to make sense to me.
    Well, in the interest of time, I will yield to some of my 
colleagues for further questions.I thank you for that positive 
encouragement about how it works in banking.
    [The prepared statement of Senator Fitzgerald can be found 
in the appendix on page 50.]
    The Chairman. Thank you very much, Senator Fitzgerald.
    Senator Kerrey.


    Senator Kerrey. Mr. Chairman, first of all, I want to thank 
both you and Chairman Gramm for holding this hearing and I hope 
it leads to a mark-up of the bill.
    It seems to me the challenge of the Committee, and I put 
this to both Secretary Summers and Chairman Greenspan, the 
challenge for both of the Committees is that we have to 
separate out those concerns raised by individuals who simply do 
not want to compete because, at the end of the day, this is 
about money and that is why this room is full of people; this 
is about money and it is about jurisdiction that controls who 
gets to regulate.
    And you can see it in the pattern of lawsuits over the last 
25-years, initiated in the early 1970s. In fact, there has been 
a pattern. It starts with a lawsuit filed in 1975, resolved in 
favor of the CFTC. That led to Shad-Johnson. Another lawsuit 
filed in 1992. That leads to another piece of legislation.
    And then the most recent lawsuit filed after the SEC 
objected under 2(A)(1)(b) of the CEA, to an instrument that was 
being traded on the Chicago futures in a Dow-Jones utility and 
transportation index. So they have objected. That is in court 
and still not settled. So I do not know; maybe there is a case 
to be made that we should wait until this lawsuit gets settled.
    I would not, Mr. Chairman, because I think we have to 
separate, and I put it to you gentleman, it seems to me we have 
to separate out those concerns that are just about money and 
control from those legitimate concerns having to do with what 
has been raised on several occasions--risk to investors, and so 
forth, including, by the way, one additional risk that was 
raised after the stock market crash. The SEC claimed that one 
of the reasons the stock market crashed in 1987 and perhaps 
again as a consequence of concerns for making a case so they 
could continue to control, that it was stock market indexes 
that caused the crash. Trading and speculating in stock market 
indexes, the SEC argued in 1987, caused that crash.
    So I would ask you, it seems to me that we did that. This 
committee heard concerns that there was regulatory uncertainty 
having to do with swaps and other instruments. They were being 
offered, derivative instruments, offered OTC. And we listened. 
We had hearings on it and we listened to all the concerns. It 
was a hot issue and I think the Agriculture Committee did a 
pretty good job of sorting out and coming up with a 
recommendation that would create regulatory certainty, as well 
as the other piece of our legislation that codifies a lot of 
the regulatory changes that CFTC has put in place.
    And it seems to me that we ought to do the final thing with 
these stock indexes, the stock future instruments that are 
being proposed. They were proposed first by the CFTC, 
challenged now in court. A, we have to decide, do we want to 
wait for the court to make a decision, or do we sort of take it 
into our own hands and try to decide on our own? And I would 
argue the latter, frankly, that we ought to try to separate out 
where we think a case is being made in a legitimate way and 
where a case is being made in an illegitimate way that these 
instruments should not be allowed to be traded.
    So I would just ask--seek your advice on this. Do you think 
we should wait for the court to make a decision or do you think 
we should, in our best judgment, now that the two chairmen have 
gotten us together, and some have argued that it is about money 
on our side, as well, that we are concerned about losing 
jurisdiction between the Agriculture and Banking Committee. I 
have personally never seen any evidence of that but maybe it 
exists, in fact, back in the old days.
    Would you recommend that this committee take action to try 
to resolve this most recent conflict that is being raised over 
individual stock futures?
    Secretary Summers. I basically share the impulses behind 
your question, Senator Kerrey. I do not think that waiting 
until particular lawsuits have wended their way through the 
courts is a good way to make public policy in this area. I 
think case-by-case litigation is probably, as a general 
proposition, a poor way to make public policy in this type of 
issue, first. And second, as both the Chairman and I have 
stressed, we think that it is important that the legal 
certainty issue not be delayed with respect to the Shad-Johnson 
    So, as I have said several times now and just to make the 
point clear, any of a number of possible approaches that this 
bill could take to Shad-Johnson in conjunction with legal 
certainty would be better than this bill not moving forward 
because of Shad-Johnson.
    To be sure, one of those approaches would be simply not 
treating the Shad-Johnson issue within this legislation and 
leaving it to other legislation. Another possibility would be a 
number of different possible resolutions of this issue. But I 
think the point on which, if I can speak for him, also, the 
Chairman and I feel most strongly is that it would be terribly 
unfortunate if the debate over Shad-Johnson were just to 
continue in a way that delayed resolution of the Shad-Johnson 
    Senator Kerrey. I must respectfully disagree. We resolved 
the one conflict and this is basically the CFTC and the SEC 
fighting this thing out. That is what is going on here. We are 
concerned about risk about insider trading, fraud, 
manipulation, leverage and risk and potential temptation of 
stock manipulation. We will factor all that into consideration 
but at the end of the day, the SEC and the CFTC, they are going 
to go into court and fight this thing out.
    So we figured the one out, the derivative issue, the Ag 
Committee figured that out, but now we have another issue that 
is being raised on behalf of the SEC filing a lawsuit against 
the CFTC. So on behalf of the Ag Committee and the CFTC, I have 
to say that we have to do both of them together.
    And if we were able to sort out and figure out what is best 
for the consumer and what is best for financial risk, it seems 
to me we ought to be able to do it on this issue, as well, and 
we should before we move a piece of legislation.
    Secretary Summers. It would certainly be very desirable to 
achieve. It would certainly be very desirable----
    Senator Kerrey. All the issues having to do with insider 
trading, fraud, manipulation, leverage and risk and the issues 
that Senator Gramm raised about having differentials in 
margins, the insider trader issues that are different between 
the SEC and the CFTC, all these, the tax problems, we have high 
enough IQs to figure this out and it seem to me that we ought 
to figure it out and we ought to include it in the legislation.
    Mr. Greenspan. Senator, I think, without commenting on the 
particular suit that you are raising, in this type of issue it 
is a mistake to leave it to the courts to decide. The reason 
basically is that what we are dealing with at this point is a 
changing economy and the changing necessary regulatory 
structure that would be required with it.
    The courts, of necessity, are required to reach judgment on 
existing statute and on existing precedent and indeed, what 
they are effectively measuring is the judgments that the 
Congress made in an earlier period. And it strikes me that it 
is terribly important when dealing with an issue such as this 
in a rapidly evolving financial industry that the Congress 
should address it from scratch in a sense, to take a look at it 
de novo and make judgments of an appropriate type to determine 
what is the structure because there is no way that the courts 
can do that; nor should they. They are there for a 
fundamentally different purpose and to abandon a decision of 
this nature to legal issues, in my judgment, is a mistake.
    Senator Kerrey. I agree. Or to wait until we have put 
another man on the moon. The last time we put a man on the moon 
was before Shad-Johnson. That is the other thing we could do. 
We could wait for another man to arrive on the moon and do this 
    I agree with you, Mr. Chairman. It seems to me that we have 
enough information, we have good enough judgment that we ought 
to be able to figure this thing out and we should. And I 
personally would object to saying well, we will do the 
derivatives, along with codifying the changes that the CFTC has 
made in the regulation, but we are not going to resolve the 
single-stock issue. We can do that, as well, and I think we 
    The Chairman. Thank you very much, Senator Kerrey.
    Let me just comment that Senator Kerrey deserves 
congratulations, along with our colleague, Senator Roberts. 
They were major proponents of a crop insurance risk management 
bill that this committee worked on--tremendously complex 
issues. And with our House components, the president signed the 
legislation yesterday. It was not well heralded but it should 
have been because it is a genuine achievement in a year in 
which not much legislation is occurring that is complex and 
that crosses a lot of boundaries.
    So when the Senator from Nebraska speaks, we all listen and 
he is energized this morning. I am grateful that, that is so.


    Senator Bennett. Thank you, Mr. Chairman.
    I do not have the technical background to challenge any of 
the discussion that has gone on. Let me ask a potentially 
stupid but hopefully big picture question.
    This situation is fraught with turf battles between the 
CFTC and the SEC and we are going to hear from both of those 
gentlemen in just a moment and each one will be very articulate 
and eloquent in defending his own agency and his own position.
    Do either of you have a big picture kind of sense as to 
where this regulation, the center of gravity ought to come 
down? Is this really an SEC kind of thing or is this really a 
CFTC kind of thing? And should most of it be on one or most of 
it be on the other?
    Mr. Greenspan. I have just gotten laryngitis.
    Senator Bennett. It is either a really dumb question or a 
very good one.
    Secretary Summers. It is a very good question.
    Mr. Greenspan. Senator, I may just say whenever you make 
those remarks I zip up my pockets and run.
    Secretary Summers. It is a very good question and I am 
seeking to draw on what I have learned from watching Chairman 
Greenspan over the years to formulate a suitably vague, a 
suitably extensively analytical but yet nondecisive answer.
    Senator Sarbanes. In other words, you just got laryngitis, 
as well.
    Secretary Summers. I think the difficulty involves, and the 
two chairmen will speak in a much more learned way to this than 
I can, that what you are discussing is a future, which 
naturally falls within the ambit of the CFTC. And the issues 
that are of concern having to do with insider trading, having 
to do certain kinds of market integrity, are issues that go 
to--having to do with consumer protection--are issues that 
really go to core SEC, what have been core SEC concerns for 
many years. I think it is that dichotomy between where the 
instrument would tend to naturally fall and where the concerns 
would tend to naturally fall that creates the difficulty.
    But it does, to borrow on the kind of analogies that have 
been used before, it does strike me that a Nation that has been 
as successful as ours has been at mediating conflicts in a 
range of settings internationally ought to be able to find a 
way of mediating the tensions that exist here. But I suspect 
the right answers will not be ones that are heavily tilted to 
either end of the spectrum.
    Senator Bennett. Does that mean then that both regulators 
will stay fully involved and anybody who is in this business is 
going to be wondering from day to day which regulator is going 
to come down hardest? Don't we want some degree of--you talk 
about certainty; we talk about predictability--don't we want 
some degree of unity here where you deal with one set of 
regulations and you know that another regulator will not come 
in and penalize you for having done that? Or can we really 
split the baby and say they both still are in the arena?
    Secretary Summers. At least in my judgment, Senator 
Bennett, any formula that resolves this will be just as the 
agreement that Chairman Greenspan and I reached with respect to 
the operating subsidiary issue was one of very substantial 
complexity and I think in some ways in that complexity lay its 
strength. It was neither fully satisfactory nor fully 
unsatisfactory to either of us and it enabled us both to feel 
that our core concerns had been expressed.
    I do think that a resolution which subjects these 
transactions to the full weight of regulation of both agencies 
would, for the reasons you suggest, be an unfortunate outcome. 
I also think a resolution which subjects them to whichever was 
the least regulation of the two agencies might well apply 
substantial pressure in a negative direction.
    So I think some more complex formula involving certain 
kinds of joint rule-making might prove to be most effective. 
But I think this is a question that is really better addressed 
to the two agencies.
    Senator Bennett. Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Bennett.
    Senator Schumer.


    Senator Schumer. Well, thank you, Mr. Chairmen. I very much 
appreciate this hearing on an issue that I am very interested 
in. It obviously affects New York in a great many ways.
    I think this proposal has potentially profound and dramatic 
effects on our securities and future markets and I am 
disappointed, frankly, with the bill's treatment of Shad-
Johnson and giving the CFTC sole jurisdiction over single-stock 
futures. I am not opposed to single-stock futures. If we do not 
allow U.S. exchanges to offer them we could see them offered in 
London or Tokyo. And in general, when the market comes up with 
new types of products, my general view is let it rip. But the 
regulatory framework has to be right and the President's 
Working Group recommended that Shad-Johnson be repealed and 
that single-stock futures be allowed to be traded if and only 
if could achieve regulatory parity for futures and their 
underlying equities.
    There is no way with the SEC regulating one and the CFTC 
regulating the other that we will have regulatory parity. They 
are different types of regulators. They have a different 
regulatory structure. And this bill creates regulatory 
disparity by substantially different regulatory frameworks for 
    We know why we are doing this. It is always a turf war, as 
you gentlemen are very familiar with from last year's 
discussion of financial futures, and neither side wants to give 
us their turf. And, at the end, we come up with this topsy-
turvy gyro gearless solution that satisfies turf needs and does 
not make any sense from a regulatory point of view.
    The SEC has always been charged with protecting investors 
and providing full and fair disclosure of corporate market 
information and preventing fraud and manipulation. The CFTC 
regulates commercial and professional hedging and speculation 
in an institutional framework. CFTC cannot regulate insider 
trading. Margin requirements are different. I hate to see 
investors shopping as to which instrument to use or to buy for 
that reason. So neither regulation nor the lack of it should 
pick winners and losers among products or exchanges and fair 
competition should.
    Simply put, to me, the SEC cannot fulfill its legal 
obligation to oversee the securities markets if single-stock 
futures, which will likely have significant effect on the 
securities markets, are solely regulated by the CFTC.
    And today I am going to introduce legislation that would 
provide for joint jurisdiction of single-stock futures by the 
SEC and the CFTC, that will create a fair framework for trading 
these products while minimizing the regulatory burden on the 
exchanges. Specifically, it would only apply to core securities 
laws--anti-fraud sales practice requirements and harmonize 
margin levels to single-stock futures. I think this represents 
a fair compromise and I would like to work with the Chairmen of 
both committees, as well as you gentlemen, to deal with that 
    So having stated my views somewhat strongly, because I feel 
strongly about the issue, I would like to ask both Chairman 
Greenspan and Secretary Summers your view of whether the 
present bill provides a fair and even regulatory framework, 
specifically whether the President's Working Group 
recommendations, that we repeal it only if we could achieve 
regulatory parity for futures and their underlying equities--
that is the President's own Working Group statement--is met in 
the bill that was introduced by my two men I greatly respect 
and work with, Chairman Gramm and Chairman Lugar.
    So since it is the President's Working Group, I will call 
on Secretary Summers first.
    Secretary Summers. Thank you. As I have said a number of 
times, Senator Schumer, we think there are a range of possible 
outcomes that would be consistent with this bill advancing the 
national interest, first.
    Second, if I might just refer back to the analogy that you 
had used of the issues that the Chairman and I worked through 
successfully last year, I think it is tempting for those 
looking on to these issues to see only concerns of turf, but in 
that issue there were real concerns on both sides having to do 
with spreading safety nets on the Fed side, having to do with 
business choice on our side. And similarly with respect to this 
issue, I think we are not fair to our colleagues in the two 
agencies if we do not recognize that there were real issues of 
principle that the agencies feel strongly about that go totally 
behind and are outside of any question of turf that are 
involved in these issues.
    I have not studied as fully as I could the provisions, the 
precise provisions of the bill as currently written but I think 
I speak for all of us in saying that we would be more 
comfortable with a resolution in which the SEC could feel that 
its core interests with respect to insider trading and consumer 
protection were addressed, and my understanding is that they do 
not have that feeling about this legislation as it currently 
    On the other hand, I would hasten to stress I think it is 
very important that there be an outcome here and that this 
issue be resolved in a mutually satisfactory way and I would 
not want to see us adopt a posture of handing the ability to 
hold this issue hostage to multiple different parties and 
therefore delaying forward movement on the OTC certainty 
    Mr. Greenspan. I agree with what the Secretary said and I 
think that as you said, Senator, time is crucial here because 
if the two agencies cannot work it out or if the Congress 
cannot work it out, foreigners will. It is not a question of 
whether or not there will be single-stock futures out there it 
is only: traded where? And unless this issue is resolved, if it 
is continuously debated endlessly, the issue will get resolved 
but not to our advantage.
    I think that Secretary Summers and I have recognized that 
the Chairmen of the SEC and the CFTC are far more knowledgeable 
than either of us on the technical details and the 
ramifications and the unintended consequences of various 
different types of stipulated regulatory structures and there 
are certain types of issues which that type of expertise is 
just not substitutable by just people's off-the-top-of-their 
head opinions which, in my case, it would be the case.
    So I sort of am looking to the two of them to get the issue 
resolved because if they resolve it, in my judgment, I will 
feel comfortable that there are no latent secondary 
consequences that the less informed on these issues would 
endeavor to miss.
    Senator Schumer. I would just say, and I could not agree 
with you more, that they ought to be resolved between the two 
agencies. I will not ask you this but it seems to me that the 
legislation introduced does not really attempt to resolve those 
issues but rather, just goes to one side.
    And I would ask both of you to use your good offices. You 
do not have the expertise that the two agencies have. On the 
other hand, you are both very bright people who understand 
financial markets and who do not have, because maybe not all of 
this is turf--clearly it is not--but it not that none of it is 
turf. And we can argue about whether it is 50/50, 80/20, 20/80, 
but I think you are both going to be needed to come up with 
some kind of compromise that allows us to go forward with 
single-stock futures which is, as I said, something I support, 
but do it and avoid regulatory arbitrage.
    I mean for instance, just on margins, almost inevitably you 
will have people go to the less regulated market if you have 
such disparities between the regulation between the one and the 
other, and that may be a desirable outcome, it may not, but we 
ought not to come to that conclusion by default.
    We need your help. Both of you are reluctant to mix in but 
my guess is we are not going to come up with a proposal that 
both sides can work unless some folks like yourselves mix in. I 
am gloomy about passage for this year unless some outside 
forces help work out a compromise.
    The Chairman. Let me just thank you very much, Senator, and 
commend you for that request of our two witnesses. I would 
share that desire for counsel and likewise, your own counsel 
with regard to this.
    I am not so gloomy. I think we need to proceed and before 
introducing Senator Grams, I just want to mention I just 
received word that the House Subcommittee on Risk Management 
and Specialty, perhaps stimulated by our hearing this morning, 
has announced a mark-up for tomorrow on their bill.
    Senator Gramm. They have obviously solved all these 
    The Chairman. The full committee, Agriculture Committee of 
the House, will mark up their work next Tuesday, so that offers 
at least some incentive for us to move ahead.
    Senator Grams.


    Senator Grams. Thank you very much, Mr. Chairman.
    Gentlemen, thank you for being here, of course. Just a 
couple of brief questions. I know you have been at the panel 
for a long time this morning.
    Chairman Greenspan, you indicated in your statement that 
over-the-counter derivatives could remain free from regulation 
so long as the transaction involved professional 
counterparties. How do you define professional counterparties?
    Mr. Greenspan. There are legal definitions of that but 
essentially, somebody who is in the business of dealing with 
securities and has sufficient net worth to segregate them from 
what we would want to determine are retail customers whose 
basic activities do not give them the level of knowledge which 
people who are in the business have. By professional, we mean 
somebody who is a professional securities or commodities 
    Of necessity, it is clearly a somewhat arbitrary legal 
definition, but indeed in legislation and in regulation, we do 
make those distinctions and we make them in a very rigid form. 
We do not always get it exact, but for 98-percent of the 
problem that we would have with respect to making that 
division, I suspect we are successful.
    Senator Grams. And second, we go to some length to try to 
assure that stock futures have a similar type of oversight as 
do the stock options. This gets to the heart of the Shad-
Johnson debate. When we turn our attention to legal certainty 
for OTC derivatives, do we need to have the same level of 
oversight for the over-the-counter swaps involving stocks or 
other forms of equity?
    Mr. Greenspan. Well, I think that if the basic purpose is 
to have a sound market, the first judgment you have to make is 
does the market structure itself have in it the means for 
stabilization? In other words, as the issue I raised before, it 
has been our experience that having effective counterparties in 
transactions, people who understand the financial statement of 
the people with whom they are dealing is unquestionably the 
most important aspect which keeps risk at a minimum level in 
the system.
    Regulation can only substitute at the margins and oversee, 
so far as over-the-counter securities are concerned, in a 
professional manner very broad notions of guarding against 
systemic risk. When you get to questions of retail markets, it 
is a wholly different issue and I think there is general 
agreement amongst all of us about how that should be handled.
    Our major concern is to make certain that these very 
effective over-the-counter derivatives markets which have been 
so important to the financial development of this country can 
operate in the most effective manner. In our judgment, that is 
best maintained with a minimum of regulation, largely because 
any regulation which is imposed, which would undercut 
counterparty surveillance does, far more damage than good.
    Senator Grams. Thank you, Mr. Chairman.
    Secretary Summers, we have heard this morning about losing 
derivative markets to Europe. If this bill passed, the legal 
environment for derivatives?
    Secretary Summers. I should give you a detailed answer, a 
more detailed answer than I can give you right now to that 
question in writing. But the core of that answer would be that 
the failure to pass this bill would create a situation where 
derivatives contracts entered into in the United States would 
be subject to more risk, to be sure, an extremely remote risk, 
but more risk of being arbitrarily unwound because of a 
regulatory action than in Europe.
    And in a world where it is easy to change the location at 
which contracts are booked, that residual uncertainty could 
become an important feature of competitive disadvantage. So the 
core of the answer would be greater residual uncertainty 
associated with OTC swaps in the United States.
    Senator Grams. Maybe if you can provide a more detailed 
written answer.
    And just one final quick question. In your concern, 
Secretary Summers, about exempting swaps from securities laws, 
are you suggesting that all swaps be given the same treatment, 
regardless of the underlying financial instrument involved?
    Secretary Summers. No. I am suggesting that one craft the 
set of provisions that are necessary to assure that--I think 
the most prominent examples of this will be those that involve 
individual equities--that one craft the minimal set of 
provisions that assures that there will not be circumvention of 
the existing regulatory protections with respect to the factors 
that we have enumerated--insider trading, manipulation, fraud, 
and protection of retail investors.
    There are also, and this is not something we have commented 
on so far, there are also certain questions having to do with 
the technical definition of a swap in portions of this 
legislation which on some readings could lead it to be called a 
swap if a transaction took place in what we today regard as 
ordinary financial instruments on an off-exchange basis and 
would therefore nullify the regulation that would apply to 
that. That is a concern that we believe should also be 
addressed in clarifying the language that is contained in these 
    It is not my impression that, that is anyone's intent and 
so we do not believe that should be a difficult clarification 
to accomplish.
    Senator Grams. Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much, Senator Grams.
    Secretary Summers, Chairman Greenspan, we are grateful to 
you for your testimony, for your forthcoming responses to our 
questions, and we look forward especially in these next few 
days to working with you and your associates very carefully. 
Thank you very much for coming.
    The Chair would like to call now the Chairman of the SEC, 
Mr. Arthur Levitt, and the Chairman of the CFTC, Mr. William 
    We are grateful that the two Chairmen are with us. We 
appreciate your being here to hear the testimony that has 
preceded yours, but we look especially to your thoughts this 
morning and I would like to call upon now Chairman Levitt for 
his testimony.


    Mr. Levitt. Chairman Gramm, Chairman Lugar and members of 
the Committees, thank you for the opportunity to address the 
Committees concerning Senate Bill 2697. This bill would provide 
important legal certainty for over-the-counter derivatives and 
would lift the ban on single-stock futures. As you know, the 
Commission fully supports both of these objectives. In other 
important respects, however, I believe that the bill presents a 
number of serious risks to the investing public and to our 
securities markets.
    As we consider the implications of the bill, it serves us 
well to remember both the wisdom embodied in our securities 
regulatory framework and the extraordinary prosperity it has 
fostered. Its wisdom, I think, is simple--a recognition that 
protecting investors is not just the right thing to do, but the 
smart thing to do; that it is investor confidence that 
ultimately fuels competition, that vibrant markets rest on a 
foundation of integrity. I strongly believe that the 
unequivocal commitment to protecting investors made by your 
predecessors and mine has been critical to the success our 
securities markets have enjoyed for more than half a century.
    The bill before you, consistent with the Working Group's 
recommendations, goes a long way towards providing greater 
legal certainty for over-the-counter derivatives by excluding 
certain products from the Commodity Exchange Act.
    The bill, however, goes well beyond this objective. Indeed, 
it would place all swap agreements beyond the reach of the 
securities laws. In doing so, it might result in a wholesale 
removal of SEC oversight of a wide array of securities 
    For example, one could potentially avoid long-established 
investor and market integrity protections applicable to equity 
securities by merely documenting an equity transaction as a 
``swap.'' In my judgment, the risk of this regulatory approach 
is simply unacceptable for America's investors. Moreover, I 
think there is no apparent public policy justification for this 
far-reaching provision.
    The bill also lifts the ban on single-stock futures 
contained in the Shad-Johnson Accord. I certainly have no 
interest in justifying the historical origins of that ban here 
today. I have made clear my view that market demand--and not 
regulatory fiat--should determine the availability of 
investment vehicles. But I would hope we face squarely the fact 
that single-stock futures are an economic substitute for the 
underlying security. We should not ignore the fabric of 
protections that retail securities investors rely upon and the 
confidence that these protections engender.
    Some may dismiss this concern as a guise for protection of 
turf. I assure you, the questions surrounding how best to 
ensure that regulatory disparities do not erode investor 
confidence are profoundly serious and substantive to me.
    Chairman Rainer and I, and our staffs, have spent a great 
deal of time exploring how single-stock futures might trade. 
Although we did not reach agreement on all aspects of a 
regulatory framework, we did agree that we should jointly 
regulate these products. Building upon that recognition, my 
staff has crafted a plan under which these products could 
trade. In my judgment, an enduring regulatory framework must 
have the following elements.
    First, single-stock futures are undeniably a substitute for 
stocks and stock options. Thus, the framework must recognize 
the legitimate interests of both the SEC and the CFTC in 
regulating these products.
    Second, the framework must encourage fair competition among 
markets by, for example, including mechanisms to harmonize the 
regulatory requirements across the securities and commodities 
markets, particularly those related to margin. Competitive 
market forces, rather than government regulation, should pick 
winners and losers.
    Legislation also should facilitate the listing of the same 
single-stock futures on multiple exchanges. This avoids any one 
market having an exclusive franchise by forcing all markets to 
compete for investors' business. The history of our securities 
markets makes it crystal clear that vibrant competition between 
markets is the surest path to protecting investors as well as 
the guardian of our global competitive edge.
    Third, the framework must acknowledge that single-stock 
futures will be retail products. While extremely complex 
derivative products might not attract retail customers, a 
simple future on a share of a blue chip stock is the type of 
product that is sure to do so. Investor protection is therefore 
essential, as is clear and direct SEC authority over market 
participants that trade single-stock futures.
    The alternative is neither workable nor wise. Consider for 
a moment a corporate insider who learns that his company is 
about to receive an unsolicited bid to be taken over. The 
insider buys a substantial amount of single-stock futures on a 
futures exchange and earns huge profits on the transaction, 
which he plans to send to an off-shore bank.
    Without direct authority over the futures exchange and 
direct access to the information we need to detect insider 
trading, the SEC might learn of the futures purchase by the 
insider either late or never. Even if the SEC was notified of 
the suspicious futures transactions, our enforcement staff 
would be forced, under the current bill, to seek CFTC 
permission to proceed. Needless to say, enforcement is an area 
where dispatch is essential and delays are fatal to the cause 
of securing relief.
    Or consider the disparity in obligations that would apply 
to a broker authorized to sell both stocks and single-stock 
futures to clients. If he sells the future, he need provide no 
more than a one-time risk disclosure document that, in effect, 
tells customers that futures are risky. If he sells the stock, 
on the other hand, he takes on a duty to tailor the 
recommendation to the specific needs of the client. One does 
not have to be a cynic to spot his incentive to sell the 
product offering less protection and it is hardly apocalyptic 
to recognize the danger. Should the protections given a 
brokerage client really depend on which product the broker 
chooses to sell? Ignoring these obvious questions today, it 
seems to me, will almost certainly result in disillusioned 
investors tomorrow.
    Finally, the framework must avoid any harm to existing 
capital markets. In lifting the ban on single-stock futures and 
reopening jurisdictional issues, legislative changes should not 
take away existing SEC authority over financial products. The 
Shad-Johnson Accord clarified the SEC's jurisdiction over 
securities options, and that jurisdiction should not be 
diminished in any way. Nor should legislation eliminate the 
SEC's existing role in evaluating products such as stock 
    Achieving these four principles will leave U.S. markets for 
these products better positioned to compete against their 
foreign counterparts. As markets around the world compete for 
customers and capital, one overriding principle will serve as 
our competitive advantage: the quality of our markets. 
Unfortunately, as written, the bill ultimately does not 
vindicate those principles.
    I look forward to providing additional technical assistance 
to help you reach the right answer for our markets. Thank you.
    [The prepared statement of Mr. Levitt can be found in the 
appendix on page 73.]
    The Chairman. Thank you very much, Mr. Chairman.
    Chairman Rainer.


    Mr. Rainer. Thank you, Chairman Lugar, Chairman Gramm, 
Senator Sarbanes, Senator Harkin and Members of the Committee. 
I am pleased to appear before you this morning and thank you 
for inviting me as I represent the CFTC.
    The Commission commends your efforts to modernize the 
Commodity Exchange Act and to provide legal certainty for over-
the-counter derivatives, remove impediments to innovation, and 
to reduce systemic risk. This bill responds to the President's 
Working Group's request for urgent legislative action on its 
recommendations so that the U.S. may retain its leadership in 
these rapidly developing markets.
    The Commission welcomes your proposal to enhance legal 
certainty for over-the-counter derivatives by excluding from 
the CEA certain bilateral transactions enter into on a 
principal-to-principal basis by eligible parties.
    The market for derivatives has expanded dramatically over 
the past two decades as financial institutions rely 
increasingly on these transactions to manage interest rate and 
foreign exchange risk.
    The Commission has reservations, however, about the bill's 
exclusion of OTC energy derivatives from the CEA and I would 
like to take a moment to expand on that if I may. On this point 
the bill diverges from the recommendations of the President's 
Working Group, which limited the proposed exclusion to 
financial derivatives. The Commission believes the distinction 
drawn by the Working Group between financial and nonfinancial 
transactions was a sound one and respectfully urges the 
Committees to give weight to that distinction.
    Most dealers in the financial swaps market are either 
institutions subject to supervision by bank regulatory agencies 
or affiliates of broker-dealers regulated by the SEC or 
affiliates of FCMs subject to CFTC oversight. The same cannot 
be said of trading in energy derivatives. The decision to 
extend the exclusion in 2697 to energy derivatives would leave 
these OTC products in a regulatory gap neither directly 
regulated as financial products nor indirectly regulated by an 
agency with jurisdiction over commercial participants in the 
energy market.
    The Working Group's recommended exclusion from CEA for 
financial contracts focussed on the facts that such contracts 
are not susceptible to manipulation and do not serve a price 
discovery function. The consensus exists within the markets and 
among financial regulators that trading in financial OTC 
derivatives is not susceptible to manipulation. That case has 
not been made with energy products.
    The unanimous recommendation for an exclusion for financial 
products resulted from months of deliberation by Federal 
financial regulators. No comparable coordination has occurred 
between the CFTC and any of the other Federal entities and 
programs with jurisdiction over cash markets for energy. An 
exclusion for trading in energy contracts may create incentives 
for existing exchanges to convert to restricted, institutional 
markets or, more likely, may lead large traders to migrate to 
unregulated markets. Either event would threaten the important 
price discovery role played by regulated energy futures. A step 
of this magnitude should be preceded by public discussion.
    The CFTC therefore believes that there is insufficient 
evidence to support the bill's exclusion of energy products. 
Regulatory relief is more appropriately provided through the 
commission's exemptive authority. We have a substantial history 
of responsiveness in this area.
    For example, the commission's staff has issued two no-
action letters within the past 6-months to electronic trading 
platforms, the sponsors of which include several of the largest 
participants in the energy markets. And, as the Committees are 
aware, bilateral OTC energy trading between commercials, 
dealing with each other on a principle-to-principle basis, has 
been exempted from all but anti-manipulation provisions of the 
CEA since 1993.
    As the discussion over the treatment of energy commodities 
progresses, the Commission will be pleased to continue working 
with the Chairmen and members of these committees to find an 
acceptable resolution of this issue.
    The Commission supports 2697's exclusion for electronic 
trading facilities for OTC financial derivatives which will 
promote an environment in which innovative systems can flourish 
without undue regulatory constraints. Electronic trading 
systems have the potential to foster efficiency and 
transparency and such systems should be permitted to develop 
unburdened by an anticipatory regulatory structure.
    The bill also permits clearing of OTC derivatives and 
authorizes a mechanism for the CFTC to regulate facilities that 
clear OTC derivative contracts. Again the President's Working 
Group specifically recommended removing the legal obstacles to 
the development of appropriately regulated clearing systems to 
reduce systemic risk, and we support this recommendation with 
the following reservation. The bill would allow securities 
clearinghouses to clear a broader range of contracts than 
futures clearinghouses. Futures clearinghouses would have to 
register in a dual capacity--as futures and as securities 
clearinghouses--to clear the same mix of contracts available to 
securities clearinghouses holding a single registration. By 
declining to grant futures clearinghouses equal opportunity to 
compete, the bill may put the Government in the position of 
determining winners and losers. We recombined that the 
Committees avoid placing futures clearinghouses at a 
competitive disadvantage.
    The Commission supports the bill's revision of the Treasury 
Amendment to make clear our jurisdiction over transactions 
entered into between retail customs and unregulated entities, 
including so-called bucket shops. We have long sought legal 
clarity in this area in order to protect fully the public from 
foreign currency fraud.
    Earlier this month the Commission approved for publication 
in the Federal Register its comprehensive regulatory reform 
package which alters fundamentally the Commission's regulation 
of futures and options markets. This bill attempts to codify 
much of the Commission's regulatory reform proposal and we 
welcome your support of the Commission's initiative.
    The CFTC staff is undertaking a comparative analysis of our 
proposed framework as released on June 8 and the relevant 
provisions of this legislation and we would be pleased to 
submit the results of that review to the Committees in the very 
near future.
    S. 2697 addresses the issue of equity futures contracts and 
reflects efforts to develop a plan to amend the Shad-Johnson 
Accord. The Working Group recommended, as we have heard a lot 
today, that the CFTC and SEC work together to determine how the 
accord should be amended. We agree in principle that equity 
futures should be available to the marketplace. Agency staffs 
have agreed on many specific areas related to lifting the ban, 
such as harmonizing margin requirements, restricting dual 
trading, testing for sales and supervisory personnel, 
establishment of uniform listing standards for single-stock 
futures, among others, such as notice registration for 
exchanges and intermediaries. We acknowledge, however, a 
fundamental disagreement concerning the appropriate legislative 
    The CFTC has sought to avoid creating a framework that 
potentially could result in overregulation of markets and 
intermediaries and therefore have advocated identifying those 
core principles from each regulatory regime necessary to ensure 
an appropriate level of oversight for trading these products. 
While the agencies agreed that duplicative regulation must be 
avoided, the CFTC staff expressed concern that an ``umbrella'' 
approach, meaning the application of the panoply of both 
securities and commodities regulations to these products, could 
result in overburdensome regulation. The SEC staff insists that 
defining equity futures products as securities is essential to 
its regulatory functions. This fundamental difference in 
approach has led an impasse.
    With respect to this bill, S. 2697, we, the CFTC, have no 
objection to the Shad-Johnson provisions that bear on 
regulatory issues related to the CFTC's oversight of single-
stock futures.
    Again we appreciate the opportunity to present our views 
and I will be happy to answer questions. Thank you.
    [The prepared statement of Mr. Rainer can be found in the 
appendix on page 85.]
    The Chairman. Well, thank you very much, Mr. Chairman.
    Let me just begin this round of questions. We will have a 
5-minute limit again for Senators to raise questions with 
    Chairman Levitt, you mention in your testimony that the 
Commission staff of the SEC has prepared a discussion draft 
that incorporates the legislative goals that you have 
enumerated in your testimony with regard to the single-stock 
option situation, Shad-Johnson Accord repeal.
    Unfortunately, given the pendency of this bill, as well as 
bills in the House, the CFTC has not apparently had a chance to 
review or comment on our draft in detail.
    Chairman Rainer indicates, not really to respond to that, 
that there appear to be some fundamental disagreements with 
regard to regulation or overregulation, a panoply or umbrella, 
as he discussed it.
    I am just simply curious really, to both of you. It is 
obvious this is important legislation. The Committee has been 
intent upon moving toward conclusions and we appreciate the 
discussions that you have held and cited the meeting of May 23 
with Chairman Gramm and myself in which you indicated you have 
been making headway but, as you stated last winter, I guess, it 
was going to be this winter before you could arrive at it.
    This is not meant, I am certain, to be disrespectful to the 
Committee or to show a casual approach but it should have been 
apparent to the two of you that we are intent upon passing a 
    Now, is the strategy you have in mind to stop the bill? Is 
really your intent simply to indicate to members of the 
Congress that whatever we have is unacceptable and therefore 
you are prepared to continue at your own pace, sort of in your 
own sweet time, to work it out--November, December, January, 
whenever you get around to it?
    In other words, I really cannot understand, given the 
gravity of this situation of markets in the United States and 
the intent of this committee to try to work with the Banking 
Committee, why the two of you and your commissions are not 
equally arduous, have not set a priority to get on with it and 
to come to agreement.
    Now obviously you have not, so we have. Now, you objected 
to that and indicated that you are still passing papers back 
and forth, but you are not listening to each other apparently 
or have no intent upon reaching an agreement.
    I just ask simply why not?
    Mr. Levitt. Mr. Chairman, I respect the effort you have put 
into this, and I certainly share your feeling about the 
importance of aspects of this bill. I think Chairman Rainer and 
I have worked very hard, as have our staffs, on dealing with an 
issue that most of the members of the Committee agree is 
terribly complex issues that we have not, of our own volition, 
raised, issues that we have inherited, that courts have dealt 
with and others have argued about for a quarter of a century.
    I think that had we a greater amount of time, we could move 
further toward a solution. But when, as you full well know, you 
have the political imperatives of the process that we have, 
together with constituent pressures, together with agency 
habits and traditions, that makes it difficult. But I honestly 
believe that, because of the nature of the relationship of the 
Chairs that sit before you, we certainly do not wish to 
frustrate the Congress or the bill. But I would say to you in 
fairness that I regard one portion of the bill with respect to 
certainty--legal certainty for derivatives--as being absolutely 
critical to the national interest.
    I place a lower priority with respect to Shad-Johnson, even 
though I firmly support giving up the prohibitions of Shad-
Johnson. But one is a matter, in my judgment, of great national 
economic necessity; the other simply is not.
    The Chairman. Chairman Rainer, do you have a comment?
    Mr. Rainer. Yes, thank you.
    First of all, from the CFTC's perspective, your bill is one 
that we do not object to. We think that our interests, the 
CFTC's interests, are adequately covered by the bill.
    However, as you know, I have said several times that we 
recognize the legitimate interest of the SEC and we think that 
it would be very important for the structure that goes out the 
door to be one that both agencies can support.
    I guess that the longer story is that we have two wonderful 
industries--the securities industry, with its exchanges and 
associations, and the futures industry--and they have grown up 
in different regulatory environments. It would be one solution 
for the CFTC to walk away from what I consider its obligation 
and say well, just let the SEC do it. What happens there is you 
have opened up a potentially large--we've used the word unlevel 
playing field several times, but a large unlevel playing field 
because the apparatus, the costly regulatory apparatus in place 
with the futures industry is not organized to meet SEC issues.
    And I felt that the CFTC should do everything it could to 
analyze those issues that would be duplicative, that we they 
already do a good job meeting regulatory tests, and we simply 
have not had time using the SEC approach to make sure that any 
recommendation that the CFTC endorses for these committees is 
the recommendation that is the least cost approach and does not 
attach unnecessary costs.
    Now, if there are burdens that are necessary, so be it. 
That is just the way it is. But we have not been able to find 
that answer yet.
    The Chairman. Well, I thank both of you for those 
thoughtful responses.
    Chairman Levitt, I just disagree with you profoundly that 
there is one aspect of this bill that has national interest. 
That dismays me with regard to the thought about the markets in 
this country, the importance of this. That is, I think, a very 
narrow view, but it is an interesting one, one that you hold 
strongly, but it leads me to believe that we have a problem 
    Now, there is going to be a presidential election, a 
congressional election. We may have a different president--
probably will have, given the fact that there are two different 
candidates running, no incumbent. A lot of new cabinet people, 
a whole new working group, maybe some new appointees to 
regulatory commissions, a lot of new Senators, maybe new 
    Senator Gramm. Now wait a minute. You have gone too far.
    The Chairman. Phil will still remain.
    But it is not a cavalier approach that somehow this can all 
be settled out in the fullness of time, given the agencies' 
ability, their staffs to get together, to shuffle the papers 
and think through the issues. I am confounded. This has gone on 
for months.
    We have had five different hearings here. We have had all 
sorts of sessions about emergencies. So we finally come to a 
meting and everybody is asking Chairman Greenspan, Secretary 
Summers, to get the two of you together and somehow mediate 
this dispute, to give their judgment. Chairman Greenspan gets 
laryngitis at the thought of trying to mediate what seems to 
have been an impossible predictable in Washington to do. So 
this committee is going to try.
    Now, you can try to stop us if you want to but by and 
large, I think the public interest is on our side, and I hope 
you get that picture.
    Mr. Levitt. Mr. Chairman, I have absolutely no interest in 
trying to frustrate the will of the Senate, but I think we must 
recognize that what is happening in this bill with respect to 
Shad-Johnson is taking basically an institutional product, a 
product that has been used by professional investors, and 
turning it into a retail vehicle.
    At this level of the market, with the amount of leverage in 
our system today, for me to look away from the responsibility 
of protecting a different segment of the market than is now 
available to these products would be irresponsible, in my 
judgment. That is not a political judgment; that is a 
conviction based upon my years in the securities industry and 
my firm belief that there are limits to regulation, but that 
protection of that individual investor is fundamental to the 
glorious success of our equities markets.
    And I must raise my hand if I feel that those interest are 
being jeopardized. I believe that a Shad-Johnson bill allowing 
investors to buy a leveraged product of that kind without the 
basic protections that the securities laws have provided 
through the years is just unacceptable.
    The Chairman. Thank you.
    Senator Gramm.
    Senator Gramm. Mr. Chairman, thank you. I will be brief.
    I want to thank each of you for appearing today and for 
your hard work as we try to put the bill together.
    Obviously, it is easy for us to ask ``why can't these two 
guys get together and work this thing out?'' Now, I can work 
out anything with anybody, but there are people who think they 
have trouble working things out with me, so I have some 
understanding of your problem.
    I also understand that you are representing institutions 
that have long and proud histories, and I also understand the 
basic fact that part of what your staff is doing, and they are 
going to be there long after you are gone, is protecting their 
jurisdiction, their turf, and their jobs. I never understood 
jurisdiction till I became the Chairman of a committee. I now 
understand it very, very well. And if I forgot it, my staff 
would remind me.
    The only point I want to make is that this is an important 
bill. It is easy for each of us to go down the list of items in 
the bill and identify what we think is the most important. I 
have my own set of priorities, but my guess is that if we are 
going to have any success, we have to move forward with the 
overall thrust of the bill.
    Now, the only plea I would make--a plea instead of a 
question--is that as we continue to move forward and work on 
this, both of you and your two agencies continue to work 
together. I would like to ask each of you formally to give us 
your review of the bill and your proposed changes so that we 
can go ahead and do the things we can agree on.
    And, as we go through the legislative process, if you would 
continue to pray over this thing, in an effort to work it out. 
Also please think about the possibility of a mandate, similar 
to the provision that we are now talking about in terms of 
harmonization of margins, where we give the Federal Reserve, 
working with your two agencies, the ability to set regulations 
that harmonize margins. It may very well be at some point that 
the best we can do--unless our prayers are answered and you 
work these things out in advance--is to establish a mechanism 
for you to work them out.
    My fear is double regulation. I think that in some areas, 
the SEC has expertise that ought to dominate in this market. I 
do believe futures on individual stocks are predominantly 
equities. What I would like to be able to do is work out a way 
of sharing jurisdiction in those areas where you have a 
legitimate legislated interest.
    So continue to work it out. Think about ways we might 
actually set a mandate in place that it be worked out in the 
future if, all else failing, that is the only way we can do it. 
It is not a terribly good way to legislate, but it is often 
better than not legislating when there are other major items.
    So Mr. Chairman, I want to thank you and the heads of our 
two agencies.
    The Chairman. Thank you, Senator Gramm.
    Senator Sarbanes.
    Senator Sarbanes. Mr. Chairman, I want to sort of sound 
some words of caution here. First of all, it seems to me that 
the quickest way to get to a solution may be to continue to 
push hard on the track of the two chairmen before us working 
out between themselves a resolution of this matter. That 
essentially is what, I think, both Chairman Greenspan and 
Secretary Summers suggested.
    I am mindful of what Senator Gramm said at the outset, that 
at this point in the legislative process, it is going to be 
very hard to move legislation through if it does not rise to 
the level of consensus.
    Now, I happen to think that this perspective that is being 
imposed on this difference that it is just a turf war, a fight 
over jurisdiction, misses the mark. I frankly do not attribute 
that basic motivation to either of these two chairmen that are 
now before us and they obviously have a public interest to 
serve that transcends any jurisdictional or tough turf 
considerations. I do not think this can be viewed as well, we 
have met the CFTC interests but we have not met the SEC 
interests, or vice versa. The question is have we met the 
public interest? And the premise, I think, with which most of 
us are approaching it is that if the two agencies can reach an 
agreement, that it is highly likely that the public interest 
has been met, although obviously we will review that. We do 
not, in the end, give away that judgment. But that 
significantly heightens the ability to conclude that the public 
interest has been met and I think investor protections are very 
    It is all fine to talk about this thing prospectively but 
if we do something that, in the end, results in eroding or 
undermining the investor protections that have been at the 
heart of making the U.S. security market so attractive and the 
leaders worldwide, we have done real harm and real damage.
    Now, it seems to me it ought to be possible to move ahead 
on this issue without jeopardizing that important 
accomplishment, which has sustained not only our markets but, I 
think, been a tremendous boost to the functioning of our 
economy. And if we are now going to move off on a legislative 
path and, in effect, bring to a halt or sort of undercut the 
effort for the agencies to see if they cannot reach an 
understanding, and I gather they have made some progress; is 
that correct? I gather from what you have both said you have 
made progress from when you started out wrestling with this 
issue. Am I correct in that assertion?
    Mr. Rainer. That is a very safe assertion.
    Senator Sarbanes. All right.
    So I think that sometimes haste makes waste. Obviously if 
there is an agreement amongst the president's committee, all 
four of the people who appeared this morning, in the light of 
such an agreement, it ought to be possible to move pretty 
quickly here in the Congress.
    Now, how quickly you can move in the Congress if you do not 
have that agreement is another question, which I think we need 
to be very mindful of because the issues that are at stake 
here, in my perception, at least, are not simply some kind of 
turf fight and we ought to sort of dismiss one or the other or 
come down hard on both. They are issues that go to very 
important national and public interests and I think we need to 
be mindful of that every step of the way.
    Thank you very much.
    The Chairman. Well, thank you very much, Senator Sarbanes. 
Let me just comment that I agree with you. Very clearly the 
work of the Agriculture Committee and the Banking Committee, 
working with the SEC and CFTC, has been to not only protect the 
integrity of the markets, to offer protection to individuals 
and groups, but really to recognize that the integrity of those 
markets is our strength.
    Now the predicament I think we all have to weigh, and this 
is a judgment call, is that during the last year I visited the 
New York Stock Exchange; I have visited the NASDAQ people. I 
have been in the Chicago markets. There are a lot of changes 
going on in these markets. People who are making a living out 
there, tens of thousands of employees, face erosion of their 
job potential.
    We face competition in the world. There are other people 
who are doing all sorts of things. In the course of our 
hearings we had an electronic demonstration and transacted a 
trade right in front of us on his computer on a European market 
and demonstrated really, I suppose, the benefit of our 
regulation one way or another was irrelevant to all of that.
    So, on the one hand, we are trying to think through how do 
we offer these assurances and more of them and, at the same 
time, how do we retain at least the ability to see what is 
going on in the world and retain the strength and the vitality 
of our markets that have all these protections, and that is a 
difficult thing to do.
    Now one item that is unacceptable, it seems to me, is to do 
nothing. If we do that, the markets will run their course 
without regard to what the Congress has to say and there will 
be winners and losers but I think the American people will be 
the losers.
    Now, the case has been made that the American people will 
lose if somehow protections are taken away from them and that 
is a very good point and it is an important one. But again and 
again we have tried to come, I think, to a conclusion, are the 
kinds of persons who are involved in the markets, as Alan 
Greenspan said today, the countervailing market forces that 
eyeball each other, that bring transparency, that bring 
competition--he made the point that regulators are never a 
match for all of the competing forces in markets, that at best, 
they sort of have a safety net after really those who are 
competitors have had a go at it.
    So that is the problem.
    Senator Sarbanes. Well, the problem is if we are going to 
continue this dialogue, and I am quite happy to do it, the 
problem to some extent is a process problem.
    Now, we have this President's Working Group. I gather that 
the President's Working Group limited the proposed exclusion to 
financial derivatives. The bill before us now is going to 
exclude energy derivatives, if I am correct.
    Is that right, Mr. Rainer, as you read the bill?
    Mr. Rainer. Yes.
    Senator Sarbanes. You are opposed to that. Is that right? I 
mean that is counter to the recommendation of the Working 
    Mr. Rainer. My position is that the case has just not been 
made that is a good idea.
    Senator Sarbanes. Yes. And therefore it ought not to be 
done at this point.
    Now, we discussed earlier the swaps question and it is very 
clear from that conversation that significant changes have to 
be made in the swaps provision. Everyone acceded to that.
    Now, I understand that the CFTC put a proposal out on a 
regulatory framework for future markets and clearing 
organizations on June 8. Is that correct?
    Mr. Rainer. Yes.
    Senator Sarbanes. Now, that proposal is contained in this 
legislation; is that right?
    Mr. Rainer. In large part, yes.
    Senator Sarbanes. Well, it may be all right; it may not be 
all right. But you are putting the proposal out to have a 
comment period. Is that right?
    Mr. Rainer. Yes.
    Senator Sarbanes. And further hearings.
    Mr. Rainer. Yes.
    Senator Sarbanes. The premise of those further hearings and 
the comment proposal is the possibility that you would revise 
the proposal, correct?
    Mr. Rainer. Yes.
    Senator Sarbanes. That is why you do that.
    Mr. Rainer. Yes.
    Senator Sarbanes. And you approach it with an open mind so 
that people who make comments have confidence that they will be 
considered on the substance and a judgment will be made.
    Now, where does that leave you if this legislation passes 
that contains the proposal you have submitted but does not 
reflect the comment period and the hearings that subsequently 
take place in shaping that? I mean it renders it all sort of 
meaningless in a sense. Plus it then puts you in a 
straightjacket in the future if you want to revise the 
regulations because they have been statutorily codified. So at 
that point if you wanted to make changes, you would have to 
come back to the Congress and get a legislative change.
    Now, that is only to underscore the haste makes waste 
observation that I made earlier. But in the end, we are going 
to come back. I appreciate that the industry wants to move and 
I am not unsympathetic to that, but it ought to be possible to 
do that and, at the same time, assure ourselves that these very 
important protections for investors that have been at the 
heart, in my judgment, at the heart of these very successful 
markets are not lost. And to the extent we short-circuit this 
process and make it less likely we are going to reach this kind 
of consensus, I think the problem becomes more difficult, not 
less difficult.
    The Chairman. The Senator makes a good point. I would just 
simply say that everybody is struggling, given the amount of 
time that Senators, regulators, what have you have to give to 
these particular issues, to get our focus. We have comment from 
everybody today on language that might be incorporated. That is 
a serious proposal because we are in the process of heading 
toward a mark-up in which something is going to happen in the 
Committee, and then we hope to proceed.
    You have not had an opportunity to get into this round, 
Senator Schumer. Would you like to raise questions or make a 
    Senator Schumer. Thank you, Senator Lugar. Yes, I have some 
questions relating to my concern.
    I guess the first one is to Chairman Levitt. Do you worry 
about the effect that introducing single-stock futures will 
have on the underlying equity markets if it SEC has no 
jurisdiction over the product? What will be the worst case 
    Mr. Levitt. I do worry about it. I worry a great deal about 
it. I think there are some irrationalities in this process, and 
I guess the very fact that we have two regulators regulating 
similar segments of the market provides us with some 
irrationalities to begin with. Then when you suggest in a bill 
that has something as nationally urgent as giving legal 
certainty to swaps and you combine that with creating a new 
vehicle for investors, you have to ask yourself what is the 
importance of that new vehicle? That new vehicle, has dramatic 
importance to the liquidity of our markets with respect to 
institutions that are used to trading highly leveraged 
products. You are now opening that market to the retail 
investor, who does not have the slightest idea about this.
    We found in surveys, in terms of an understanding of the 
risks of investment products, many do not understand the risks 
of products even that have been with us for many years. We are 
now opening up this new product, which essentially is leverage 
on leverage.
    Is this in the national interest to begin with? If you say 
it is, if this new product is offering America's investors 
something they can get no place else, which I absolutely 
categorically deny, then you have to say are we giving them the 
same protection that they would have when they buy IBM or 
General Motors or any other equity?
    And remember at what point in the market cycle we ask 
ourselves this question. Is this the time to introduce yet an 
even more highly leveraged product into a market which, in my 
judgment, has an abundance of leverage today?
    Senator Schumer. Well, there is a little ad that I would 
like to submit for the record from--I do not know who they 
are--Lynd Waldock. It says, ``There are lots of reasons you 
should consider on-line stock index futures trading''--this may 
be an example of what you are talking about for a broader-based 
product. ``At Lynd Waldock you get''--it says, ``Stocks are 
great for the long term but for short-term trading, try stock 
index futures. At Lynd Waldock you get a of bang for your 
commission buck. One stock's index future commission is 
equivalent to trading 2,000 to 3,000 shares of stock at $30 a 
stock at about half a penny a share.''
    And that will be nothing compared to what happens unless we 
have, as you say, a level regulatory field here. Does the 
Gramm-Lugar proposal, as written, provide that field? To me it 
certainly does not.
    Mr. Levitt. I think it leaves the retail investor with an 
absence of basic protections. I think, working closely with the 
Committees and with the CFTC, it is possible for us to develop 
such protections for investors from the things that I fear the 
    Senator Schumer. What is the rationale for an option being 
governed by the SEC and a future being governed by the CFTC of 
an equity? Options are now governed by the SEC.
    Mr. Levitt. They should not be. You know, I hate to 
criticize a bill that has been sponsored by someone whom I 
admire so much, but, with respect to the kind of regulation 
that we are talking about, Senator, it is split regulation, and 
that is very different from shared regulation.
    Senator Schumer. Correct.
    Mr. Levitt. And if collectively we could work toward shared 
regulation, you would remove many of my feelings about this 
bill, which are not motivated by any issue other than the 
protection of investors.
    Senator Schumer. Would you agree with that, Chairman 
Rainer? Right now the bill has--Chairman Levitt put it right, 
at least as far as I can tell--split regulation. Would you 
agree that a shared regulation formula could work and would you 
be willing to entertain that?
    Mr. Rainer. Senator Schumer, I have been from the outset in 
favor of both joint regulation and the ability for both 
markets--the equity markets and the futures markets--to be able 
to offer these products.
    Senator Schumer. The issue is not who offers the products. 
The issue is who regulates the product. Would you be willing to 
say that shared regulation is, if not the best, certainly a 
good way to go, particularly if it can break the deadlock that 
we seem to have?
    Mr. Rainer. Senator, I think that when I say joint 
regulation, I mean shared regulation, but I am not 100-percent 
sure I know what you mean by a definition of shared versus 
    My position, which I have mentioned, is that this bill, 
strictly from the perspective of the CFTC, adequately addresses 
our concerns. Having said that, I have said in other venues 
that I recognize the important and significant interests of the 
SEC and that I believe that any final regulatory structure 
should be one that both agencies can support.
    Senator Schumer. OK. So you would, if Chairman Levitt has 
in his delicate way--he is more delicate than I am--indicated 
he has real troubles with the bill as proposed, as much as he 
respects Chairman Lugar and Chairman Gramm, and let's put that 
in the record 10 times, would you then encourage that we wait 
and see if we can come up with something that you and he can 
agree upon, provided it can be done in a relatively short frame 
of time? Would you agree that we should not move forward with 
this bill, which seems to me is not a shared regulatory regime 
at all?
    Mr. Rainer. Senator, I am going to withhold that for right 
now. Let me get back to you on that.
    Senator Schumer. If you could submit that in writing.
    And one other thing I would ask that you submit in writing 
is your comments, your objections to the--you cannot know much 
about it yet but the proposal that I have put in today, which I 
think is a shared regulatory regime that I think would be fair 
and sort of go right down the middle, as opposed to this bill, 
which I think does not really do that.
    Mr. Rainer. Of course, Senator.
    Senator Schumer. Great.
    Thank you, Mr. Chairman.
    The Chairman. Well, thank you very much, Senator Schumer. I 
appreciate your comments likewise and will examine your 
legislation, too. It is an important factor. I just ask from 
you, as well as everyone else, some appreciation of the time 
frame that we all have to work in because the Senate session 
will be over soon, the window of opportunity to deal with this 
at all, whatever its merit.
    So my hope, and this is obvious in terms of trying to press 
this issue on this morning, is that there is a certain season 
for these things to happen. If we are not able to, why, we will 
all have a lot of time, but there will be maybe different 
players, a different situation and different position of our 
markets, for better or for worse.
    So it seems to me that this is an appropriate time for us 
to focus as our two committees have attempted to do so this 
morning and will be doing so in a concerted way in the next few 
    Senator Schumer. The only thing I would say, Mr. Chairman, 
I agree with you but I would rather--if there were a choice and 
I agree with you I hope there is not a choice or a division, 
but I would rather do it right than do it quickly. I am sure 
you would agree with that.
    The Chairman. I do agree with that and we are most hopeful 
we can do both, always.
    Senator Schumer. Great.
    The Chairman. We thank both of the Chairmen for your 
patience. It has been an extended hearing this morning but you 
have been with us all the way and we appreciate that. Thank 
    The hearing is adjourned.
    [Whereupon, at 1:03 p.m., the joint Committee hearing was 

                            A P P E N D I X

                             June 21, 2000

















































                             June 21, 2000