[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]




                               BEFORE THE



                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION


                            FEBRUARY 8, 2012


       Printed for the use of the Committee on Financial Services

                           Serial No. 112-100

75-072                    WASHINGTON : 2012
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]  


                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois

           James H. Clinger, Staff Director and Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
    Pennsylvania                     KEITH ELLISON, Minnesota
ROBERT J. DOLD, Illinois

                            C O N T E N T S

Hearing held on:
    February 8, 2012.............................................     1
    February 8, 2012.............................................    29

                      Wednesday, February 8, 2012

Allen, Chris, Managing Director, Barclays Capital................     8
Brummer, Chris, Professor of Law, Georgetown University Law 
  Center.........................................................     9
Thompson, Don, Managing Director and Associate General Counsel, 
  JPMorgan Chase & Company.......................................    11
Zubrod, Luke, Director, Chatham Financial........................    13


Prepared statements:
    Allen, Chris.................................................    30
    Brummer, Chris...............................................    43
    Thompson, Don................................................    56
    Zubrod, Luke.................................................    62

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of The Depository Trust & Clearing 
      Corporation................................................    66
    Letter from the Institute of International Bankers dated 
      February 7, 2012...........................................    70
    Letter from the International Swaps and Derivatives 
      Association, Inc., dated February 6, 2012..................    72
    Letter to Representative Himes from the Securities Industry 
      and Financial Markets Association dated February 7, 2012...    74
    Letter to Treasury Secretary Geithner, CFTC Chairman Gensler, 
      Federal Reserve Chairman Bernanke, and SEC Chairman 
      Schapiro from the New Democrat Coalition dated April 15, 
      2011.......................................................    76
    Letter to Federal Reserve Chairman Bernanke, CFTC Chairman 
      Gensler, FDIC Chairman Bair, and Acting OCC Comptroller 
      Walsh from various Members of Congress dated May 17, 2011..    80
    Letter to FDIC Chairman Bair, Federal Reserve Chairman 
      Bernanke, CFTC Chairman Gensler, Acting OCC Comptroller 
      Walsh, SEC Chairman Schapiro, FHFA Acting Director DeMarco, 
      and Hon. Leland Strom from Senator Stabenow and 
      Representative Lucas dated June 20, 2011...................    83
    Letter to Treasury Secretary Geithner from Chairman Bachus 
      dated August 2, 2011.......................................    87
    Letter to CFTC Chairman Gensler, Federal Reserve Chairman 
      Bernanke, SEC Chairman Schapiro, and FDIC Acting Chairman 
      Gruenberg from Senator Johnson and Representative Frank 
      dated October 4, 2011......................................    90
    Letter to Federal Reserve Chairman Bernanke, SEC Chairman 
      Schapiro, FDIC Acting Chairman Gruenberg, CFTC Chairman 
      Gensler, and Acting OCC Comptroller Walsh from Senators 
      Johanns, Vitter, Crapo, and Toomey dated October 17, 2011..    92
Himes, Hon. James:
    Written statement of the ABA Securities Association (ABASA)..    94
    Written statement of Representative Gwen Moore...............    97

                       IMPACT OF TITLE VII OF THE
                             DODD-FRANK ACT


                      Wednesday, February 8, 2012

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:20 p.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Biggert, Hensarling, Neugebauer, Pearce, Posey, 
Hayworth, Hurt, Grimm, Stivers, Dold; Waters, Sherman, 
Hinojosa, Lynch, Maloney, Moore, Perlmutter, Carson, Himes, 
Peters, and Green.
    Chairman Garrett. The Subcommittee on Capital Markets and 
Government Sponsored Enterprises is called to order. Today's 
hearing is titled, ``Limiting the Extraterritorial Impact of 
Title VII of the Dodd-Frank Act.''
    I welcome the witnesses to the witness table. We will begin 
our opening statements. I will recognize myself for 3 minutes, 
and then move to the Minority side. So, good morning to the 
entire panel. I look forward, as always, to the testimony on 
this important topic. And today's hearing is important. Why? 
Because it gets to a broader issue that some of us on both 
sides of the aisle, quite frankly, have expressed concerns with 
regarding the Dodd-Frank Act and the issue of uncertainty. 
Uncertainty hurts growth, and it stifles investment.
    In this case, companies are uncertain how to respond to the 
litany of new rules proposed under Title VII because of the 
lack of clarity regarding the extent to which U.S. regulators 
intend to apply Title VII to entities in foreign jurisdictions. 
So while exact intentions are uncertain, there are indications 
that the U.S. regulators intend to have some matter of 
extraterritorial application of these rules.
    The legislation that Congressman Himes and I introduced, 
H.R. 3283, the Swap Jurisdiction Certainty Act, attempts to not 
only provide certainty on the application of the Dodd-Frank Act 
Title VII rules, but also aims to avoid the negative 
consequences that result if Title VII is applied too broadly. 
The concerns are not only confined to these shores. Foreign 
regulators have concerns as well. The following is a direct 
quote from the lead of a Reuters story published earlier this 
week: ``The United States is coming to be seen as a global 
threat, acting unilaterally and aggressively, with new market 
rules that critics say will hurt U.S. firms, foreign banks, and 
international markets in one fell swoop.''
    Indeed, the list of negative consequences is long if these 
issues aren't handled carefully and appropriately. First, 
depending on how this extraterritoriality is applied, the 
global competitiveness of U.S. firms could be impacted. Non-
U.S. firms may determine it is just too costly to serve 
customers and markets. So the overall health and liquidity of 
global markets therefore may suffer.
    Dual and contradictory regulations will add additional 
costs or make it impossible to comply with all the 
jurisdictional rules that are out there. Additional costs will 
be passed on to whom? The end-users, of course. And that is the 
real economy at the end of the day.
    The sovereignty of foreign countries may be inappropriately 
infringed upon. It might in turn invite regulatory retaliation. 
Concerns in this area are bipartisan in nature. Several of my 
colleagues across the aisle have joined me in cosponsoring this 
bill. In addition, the ranking member of the full Financial 
Services Committee joined the Senate Banking Committee chairman 
in sending a letter to regulators last October directly 
addressing these issues.
    In part, the letter reads, ``Congress generally limited the 
territorial scope of Title VII to activities within the United 
States. The general rules should not be swallowed by the law's 
exception which calls for extraterritorial application only 
when particular international activities of U.S. firms have a 
direct and significant connection with the effect on U.S. 
commerce or are designed to evade U.S. rules. We are concerned 
that the proposed imposition of margin requirements, in 
addition to provisions relating to clearing, trading, 
registration, and the treatment of foreign subsidies of U.S. 
institutions, all raise questions about consistency with 
congressional intent.''
    So, H.R. 3283 seeks to answer these questions through clear 
statutory language in order to provide certainty to market 
participants and international regulators as well.
    Once again, I look forward to the testimony today, and I 
also look forward to the comments and questions of the sponsor 
of this legislation as well, who is taking, obviously, a lead 
interest in this issue, and I look to his leadership on this 
matter as we go forward.
    With that, I yield back my time, and I yield 3 minutes to 
Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. I would also like to 
thank the witnesses for their willingness to help the committee 
with its work. I must say I have grave concerns about the 
legislation before us today. This bill before us exempts an 
alarmingly large portion of the swaps market from many of the 
important requirements of Title VII of the Dodd-Frank Act, 
which deals with the over-the-counter derivatives market.
    H.R. 3283 would exempt swaps between a U.S. company and a 
non-U.S. company or an affiliate from almost all transaction-
level requirements in Title VII, including margin, clearing, 
and execution requirements intended to make swaps transactions 
safer and more secure.
    If you need an example of how this bill would increase 
systemic risk to the American economy, look no further than 
AIG. AIG Financial Products, which almost single-handedly 
crashed the American economy, was a non-U.S. affiliate of a 
U.S. company that entered into subprime mortgage credit default 
swap transactions with a variety of American and international 
companies. When these subprime bonds tanked and it became clear 
that AIG could not honor margin calls required by these 
contracts, its imminent failure put the entire American economy 
in mortal peril. As a result, the American taxpayer pumped $85 
billion into AIG to keep it afloat.
    Under this bill before the committee, the same transactions 
that doomed AIG would receive less oversight--not more--and 
create more systemic risk. Even for the standards of this 
committee, this is an especially bad idea. Moreover, the 
sponsors of this bill argue that exempting these swaps from 
Title VII's margin, clearing, and execution provisions will 
increase America's competitiveness. That is far from the truth. 
I believe it will have the opposite effect, by encouraging U.S. 
companies to move their swap business into an overseas 
affiliate or subsidiary where they can fully enjoy the 
loopholes that this bill creates. This is a major and 
unwarranted exception to the carefully crafted Dodd-Frank 
reforms, and it creates the possibility of regulatory 
    Finally, this bill creates a regulatory race to the bottom 
by preventing U.S. regulators from acting until foreign 
jurisdictions act first. But of course, as we know, foreign 
regulators are similarly afraid to act unless the United States 
goes first. America should be the leader in financial 
regulation, and not allow a ``you first'' mentality to put 
Americans' financial security in jeopardy yet again.
    Again, this is a bad idea. And I think we are replanting 
the seeds that caused this economic crisis in the first place. 
For these reasons, I oppose the bill under consideration today, 
and I would urge my colleagues to do the same.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Schweikert is recognized for 1 minute.
    Mr. Schweikert. Thank you, Mr. Chairman. And to our 
witnesses, I appreciate you being here. I am hoping, actually--
and I have been looking forward to this hearing--we are about 
to have a discussion of the law of unintended consequences. And 
as witnesses, as you are speaking, I am hoping I will hear you 
touch on everything from jobs to capital availability to 
competitiveness. Also, I would love for you to touch on, as we 
just heard, AIG, because my understanding is OTS is gone, and 
under the regulatory framework we are under right now doesn't 
happen, and that we are living in a very, very different world, 
and that actually a problem crisis now has already been dealt 
    The other thing I would also love you to touch on is if the 
rules stay the way they are, and we see much of our swaps and 
derivative markets move away from us, move to Europe and other 
places, are we really systemically that much safer in the 
    So thank you, Mr. Chairman. I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Himes, the sponsor of the legislation, is recognized 
for 3 minutes.
    Mr. Himes. Thank you, Mr. Chairman. Thank you for holding 
this hearing and for the comity with which we have worked 
together on this legislation. I am looking forward to hearing 
from our witnesses today on what is a very complicated and 
technical topic. I do want to remind all of us that what we are 
talking about here is actually pretty esoteric. I suspect my 
co-author on this bill would disagree with that statement, but 
I actually think Title VII and the dragging of the heretofore 
unregulated derivatives market into a regulated environment is 
a significant achievement of Dodd-Frank.
    The notion that derivatives will clear through 
clearinghouses, trade on an exchange when possible, be subject 
to margin requirements, be subject to capital requirements, are 
very, very powerful remedies to what we saw happen with AIG. 
This particular bill does not touch on any of those issues. And 
I want to be very clear that this bill is designed really to do 
two things. First, perfectly consistent with the congressional 
intent of Dodd-Frank, to provide some certainty about which 
regulatory regimes apply when you are talking about multiple 
countries. Section 722(d) of Dodd-Frank took a crack at that, 
at saying that these laws would only apply where there was a 
direct and significant connection with activities in the United 
    Second, this legislation is important, very important for 
competitiveness. I will give an example. If prudence would 
dictate that a particular swap should have a 5 percent margin 
against it, and the United States believes that, and Germany 
believes that, we should have a 5 percent margin on that 
transaction, not 10 percent. Because if both jurisdictions 
impose 5 percent margins and you have 10 percent, that swap is 
not getting done. As in so many things related to derivatives, 
there is an awful lot more discussion than there is 
    With all due respect to my friend from Massachusetts, this 
has absolutely nothing to do with AIG. This bill would preserve 
all of the entity protections imposed by Title VII, ensuring 
that the manifest irresponsibility that was shown by AIG would 
not happen again. Capital requirements for the entity, specific 
supervisory obligations, and of course the kinds of oversight 
provided because, presumably, AIG would have been deemed to be 
systemically important, all that stays in place.
    Again, there is an awful lot of misunderstanding here. An 
organization I usually appreciate, Americans for Financial 
Reform, says that capital requirements would be eliminated for 
certain entities abroad. That is not true. Capital requirements 
would, in nations that are Basel signatories, defer to the 
capital requirements in that nation.
    So in conclusion, I would just say this is about 
competitiveness, about making sure that banks and nonbanks 
understand what jurisdiction they are subject to, and in no way 
weakens Title VII, the regulation of the derivatives industry, 
or is an effort to roll back Dodd-Frank, something I think 
would be a significant mistake.
    Thank you, Mr. Chairman. I yield back the balance of my 
    Chairman Garrett. The gentleman yields back.
    The gentleman from Texas, Mr. Hensarling, is now recognized 
for 2 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. This is the second 
hearing of the Capital Markets Subcommittee dealing with 
regulatory overreach and its adverse consequences on jobs and 
economic growth. Again, another data point: When you yield 
unprecedented, unfettered, historic discretionary powers to the 
unelected bureaucracy, they will indeed use it.
    Ultimately, we all know, notwithstanding a good jobs report 
last month, that there are still almost 13 million of our 
fellow countrymen who remain unemployed. Millions more have 
simply given up and dropped out of the labor force, which is 
why jobs and economic growth continue to be the number one 
issue for the American people. So we have to look very 
carefully at the subject of regulatory overreach.
    Allow me to engage in the time-honored tradition of this 
committee of quoting the Chairman of the Federal Reserve when 
he agrees with me, and ignoring him when he doesn't: ``If those 
margin rules for foreign operations are maintained, and 
Europeans and other foreign jurisdictions do not match it, that 
would be a significant competitive disadvantage.'' That is a 
quote from Fed Chairman Bernanke.
    We know that prudential oversight already exists for bank 
overseas swap activities by the Fed, and by the OCC. So again, 
we don't have any evidence now that international regulators 
will adopt the more controversial provisions of Title VII, 
putting us at a competitive disadvantage. We know that 
prudential regulation already exists, so we must question just 
what benefit is to be derived from what is arguably duplicative 
and inconsistent regulations.
    Significant sectors of the U.S. economy, including 
manufacturing, health care, and technology use these 
derivatives as a tool to manage risk and compete globally. 
Regulations that miss the mark will have a negative impact on 
jobs and the economy.
    I appreciate the chairman calling this hearing, and I look 
forward to hearing the testimony of the witnesses. I yield 
    Chairman Garrett. The gentleman yields back.
    Mr. Royce is recognized for 1 minute.
    Mr. Royce. Thank you, Mr. Chairman. There were three 
principles put forward in the Pittsburgh G-20 communique in 
September of 2009: ``All standardized OTC derivative contracts 
should be traded on exchanges and cleared through central 
counterparties. OTC derivative contracts should be reported to 
trade repositories. And noncentrally cleared contracts should 
be subject to higher capital requirements.'' So that is what 
the G-20 countries agreed to.
    My concern is with the regulatory crusade undertaken by the 
CFTC, which is not one geared toward making our markets safer, 
but rather an effort to fit an ideological narrative. The 
effort led by the CFTC goes against the very idea of 
international coordination on this. An overly expansive and 
aggressive implementation of Title VII will make our markets 
less competitive, and, problematically, they are going to 
provide justification for retaliation overseas. This approach 
has to be taken in tandem with our allies, not through a shot 
across the bow.
    Attempting to regulate the global markets from the CFTC 
headquarters on 21st Street is not a solution that is going to 
work with our allies. So I think the Himes-Garrett legislation 
here is the right approach. It brings much needed balance back 
into the process. And I yield back.
    Chairman Garrett. The gentleman yields back.
    The gentlelady from California is recognized for 2 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. As it turns 
out, we are getting some complaints from some in the industry 
who are alerting us to changes that could take place that were 
unanticipated. I don't know, and I have not decided about this 
or any other legislation. So I want to hear from the witnesses 
today. I want to hear what they have to tell us. And so, I am 
going to yield back the balance of my time.
    Chairman Garrett. I appreciate that.
    Mrs. Biggert is recognized for 1 minute.
    Mrs. Biggert. Thank you, Mr. Chairman. I have many concerns 
about the unintended consequences of U.S. regulators 
steamrolling ahead with the Dodd-Frank Title VII regulations. 
Will these regulations introduce more risk into our financial 
system, particularly for U.S. insurance companies? Will these 
regulations create an unlevel playing field for U.S. financial 
institutions with international subsidiaries, putting U.S. 
businesses at a competitive disadvantage in the global economy? 
And what will the impact of these regulations be on our U.S. 
economy? All these issues must be thoroughly vetted before the 
Federal regulators take action.
    I hope that today's hearing will shed light on the need for 
an internationally agreed upon regulatory regime, especially 
with our U.S. trading partners. I yield back.
    Chairman Garrett. And the gentlelady yields back.
    Mr. Grimm is now recognized for 1 minute.
    Mr. Grimm. Thank you, Mr. Chairman. I appreciate you 
calling this hearing to examine the efforts and clarify the 
reach of the derivatives title of Dodd-Frank and what it will 
do to business conducted outside the United States. I think at 
a time of both increased global competition and growing 
regulation, it is imperative that we ensure that new rules 
being implemented under Dodd-Frank do not subject American 
firms to double, and, in many cases, redundant regulations on 
overseas transactions. These redundancies will serve no purpose 
but to put U.S. firms at an enormous disadvantage in the global 
marketplace, and possibly encourage regulatory arbitrage, which 
could put the worldwide financial system at risk.
    I look forward to hearing our witnesses' thoughts on the 
legislation before us, and I truly hope that our regulators are 
paying attention to the discussions that we are having here 
today, and take it into account as they move forward with their 
rulemaking. With that, I yield back the balance of my time.
    Chairman Garrett. Mr. Perlmutter is recognized for 2 
    Mr. Perlmutter. Thank you, Mr. Chairman. I am sympathetic 
to the issues raised by Mr. Himes and the chairman. And I am 
glad we are highlighting these issues at today's hearing, 
although legislating, at this point, may be premature. It is 
important that we do not competitively disadvantage or penalize 
U.S. financial institutions just because the United States is 
further along in financial reform than others in Europe and 
Asia. Our rules should be constructed so foreign businesses 
still want to conduct business with U.S. financial institutions 
    Undoubtedly, imposing strict margin requirements on certain 
trades done abroad that only apply to U.S. financial 
institutions would place the U.S. institutions at a 
disadvantage because foreign businesses will choose to transact 
business with foreign institutions, where their rules don't 
    But I feel like there has been some amnesia reflected on 
the committee because I still have nightmares surrounding the 
events of 2008 and the financial crisis. I do not want to 
legislate broad exemptions or carveouts that could potentially 
bring down our financial system and the economy. If our 
financial institutions are going to stand behind the trades 
conducted by their foreign subsidiaries, we must ensure that 
they are adequately capitalized and protected so taxpayers, 
depositors, and shareholders are not at risk. With that, I 
yield back to the Chair.
    Chairman Garrett. I thank the gentleman.
    The gentleman yields back. Mr. Dold is recognized for the 
final 1 minute.
    Mr. Dold. Thank you, Mr. Chairman, and I certainly thank 
you for calling this important hearing. In listening to my 
colleague from Colorado, I want to agree that we don't want to 
have unintended consequences jeopardize American financial 
institutions abroad. And when we look at the global marketplace 
today, it is probably flatter than it has ever been. Certainly 
what we don't need is to make sure that U.S. financial 
institutions are operating from a disadvantage.
    What I can tell you is that when we look at a 2,400-page 
bill, inevitably in those 2,400 pages there are going to be 
mistakes that are made, couple with the idea that we are going 
to have literally thousands of pages of regulation on top of it 
trying to interpret that law. Inevitably, there are going to be 
mistakes that will be made.
    The task that we have is to try to make sure that we 
rectify some of those mistakes so that we aren't putting 
American institutions at a disadvantage. And certainly the 
CFTC, in terms of its interpretations, may simply be doing 
    So I want to thank my colleagues on the other side of the 
aisle for this bipartisan piece of legislation and for their 
leadership, and I look forward to hearing from our witnesses 
    Chairman Garrett. Thank you. The gentleman yields back.
    Now, we will turn to our panel. And as we turn to the 
panel, you will see that you have a piece of bipartisan 
legislation before you. And you can see from the opening 
statements today some supportive positions, but also some 
concerned positions, and also some open minds as we begin to 
look into something that is, as Mr. Himes said, a fairly 
technical piece of legislation before us.
    So with that, we will turn to our first witness. And of 
course, the entire written testimony of all of the witnesses 
will be made a part of the record. We are looking to you for 5 
minutes of testimony.
    And the first will be Mr. Chris Allen, managing director 
over at Barclays. Good afternoon, Mr. Allen.


    Mr. Allen. Good afternoon, Chairman Garrett, Ranking Member 
Waters, and members of the subcommittee. I thank you for the 
opportunity to testify today. My name is Chris Allen, and I am 
managing director of Barclays Bank PLC based in London. I head 
the global markets legal group for the U.K. and Europe, and 
have been actively involved in Barclays' implementation of 
global regulatory reform. I would like to start off by thanking 
the committee for the leadership they have shown in trying to 
get this right.
    We strongly support the proposed bill, and believe the 
objectives of Title VII would be best served if this measure is 
enacted. As U.S. financial reform regulations are being 
finalized, there is concern that U.S. regulators are 
considering applying Dodd-Frank's swap dealer and other 
substantive requirements to non-U.S. aspects of a firm's global 
businesses. If these reforms are not modified, they will 
subject foreign firms and non-U.S. affiliates of U.S. firms to 
duplicative, inconsistent, and sometimes contradictory 
regulatory requirements.
    This is best illustrated by example. A firm may be required 
to execute a trade via a swap execution facility in the United 
States while simultaneously being under an obligation to 
execute the same trade via the European concept of an organized 
trading facility. The European rules are at an early stage of 
development. But to the extent that the rules end up looking 
different, firms may be presented with the dilemma of not being 
able to comply with both sets of regulations at the same time.
    Also concerning, an overly expansive application of Title 
VII could place global firms at material competitive 
disadvantage. If a firm which is conducting business from for 
example, Asia, with a client also based in Asia, is required to 
apply U.S. rules such as the clearing rules, while local 
competitors are under no such obligation by virtue of not being 
U.S. registrants, then the firm subjected to the U.S. rules 
will struggle to compete successfully.
    Many global firms transact across the world using a single 
entity structure; i.e., one company throughout the world. U.S. 
extraterritorial overreach will cause firms to have to 
reconsider the viability of that model in favor of local 
subsidiaries in order to avoid regulatory overlap.
    Why does that matter? First, it is likely to create hurdles 
for U.S. end-users seeking direct access to overseas markets, 
since firms may be concerned with establishing a U.S. 
connection which would bring them within the scope of Title 
VII. Also, there would be an increased likelihood of back-to-
back transactions within firms offering access to those 
overseas markets, making such access more expensive for end-
users. It is also unlikely that such an approach would enhance 
global consolidated supervision of firms and their swaps 
    We also note that the CFTC is likely to require firms to 
register as swap dealers prior to finalizing its 
extraterritoriality guidance; i.e., firms will be registering 
without knowing the global impact of that registration.
    Turning to the proposed bill, we believe that it 
appropriately reflects the jurisdictional intent of the Dodd-
Frank statute and serves the effective and transparent 
oversight of the global swaps market without having unnecessary 
negative impact. Specifically, we support the bill's aim of 
dividing the substantive Dodd-Frank requirements into entity-
level requirements, such as those relating to capital or risk 
management requirements, and then transaction-level 
requirements such as clearing or public reporting.
    Where comparable home company country entity-level 
requirements exist, such as in relation to capital, compliance 
with those requirements should satisfy Dodd-Frank. U.S. 
transaction-level requirements would apply to trades with U.S. 
customers, but local foreign requirements would apply to trades 
between foreign entities.
    That brings me briefly to the Volcker Rule. In our view, 
the proposed limitations on proprietary trading and the fund 
activities go beyond what is required by the statute and would 
have severe extraterritorial consequences that were not 
intended by Congress. The various exceptions in Volcker are, in 
our opinion, insufficient to avoid extraterritorial overreach.
    This is not just a case of the rest of the world playing 
catch-up. In the U.K., the Independent Commission on Banking 
released a proposal that specifically studied and determined 
that the Volcker Rule, as passed in the Dodd-Frank Act, was not 
necessary when evaluated in light of other systemic risk 
management measures the U.K. is instituting. Without revisions, 
the Volcker Rule is likely to decrease foreign investments in 
the United States, reduce investment opportunities for U.S. 
pension funds, reduce liquidity and market opportunity for 
issuing companies, and reduce the willingness of international 
financial institutions to trade with U.S. counterparties. All 
of this risks encouraging alternative financial centers to 
develop outside of the United States, and ultimately results in 
jobs and transactions moving overseas.
    In conclusion, Barclays appreciates the opportunity to 
testify today and your attention to these important issues 
under Dodd-Frank. We encourage you to continue to work with the 
CFTC, the SEC, and prudential regulators to ensure that Dodd-
Frank is implemented in a balanced and orderly manner, making 
efficient use of supervisory resources and promoting 
international comity. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Allen can be found on page 
30 of the appendix.]
    Chairman Garrett. And I thank you.
    Next, from Georgetown, we have Dr. Brummer.

                     UNIVERSITY LAW CENTER

    Mr. Brummer. Chairman Garrett, members of the subcommittee, 
my name is Chris Brummer, and I am a professor at Georgetown 
Law School, where I teach international finance--
    Mr. Perlmutter. Pull that microphone closer.
    Mr. Brummer. It is very rare that a law professor is ever 
asked to speak louder or to speak more.
    Mr. Perlmutter. We are older than most of your students.
    Mr. Brummer. Indeed. Indeed. My name is Chris Brummer, and 
I am a law professor at Georgetown. And I teach international 
finance and securities regulation. I have worked in London with 
Cravath, Swaine & Moore, and I serve periodically on NASDAQ 
delisting panels, as well as at the Milken Institute's Center 
for Financial Market Understanding. But this is the first time 
I have had the honor, as can you tell, to talk to you today. 
And thank you for the invitation.
    Each great failure of 2008, whether it be Fannie Mae, 
Freddie Mac, Lehman Brothers, or Countrywide held important 
lessons for the country, and AIG was no exception. Its tragic 
downfall illustrated, perhaps above all else, just what happens 
when complex or opaque transactions fall through the regulatory 
cracks, even when they take place in far-flung parts of the 
    Regulated by a weak and underfunded OTS, and escaping 
meaningful oversight in London and France, the insurance 
giant's affiliates were able to create and write credit default 
swaps that, when combined with poor lending practices, 
ultimately toppled the international conglomerate when its bets 
went wrong, and at a cost of $85 billion for taxpayers.
    To plug these gaps made apparent by AIG and other bailed-
out institutions, Congress passed the Dodd-Frank Act, which 
sought to enhance not only entity-level, but also transaction-
level credit quality in an effort to help prevent future 
financial crises. Two key elements of these efforts were: one, 
to regulate some of the, up to then, largely unregulated 
derivatives transactions which had caused and contributed to 
the crisis; and two, to direct supervisory agencies most 
familiar with the transactions, in this case the SEC and the 
CFTC, to take a more active role alongside traditional 
prudential regulators in the oversight of such instruments.
    Title VII is an important part of the overall reform 
package. Essentially, it is designed to move the United States 
toward a new system of regulation, with margin requirements to 
enhance the credit quality of swap transactions and provide a 
buffer against losses. It includes a push towards centralized 
clearinghouses to reduce counterparty default risk, and to 
allocate losses and reduce the likelihood of bailouts, and to 
ensure that credit risk is supported by realtime mark-to-market 
benchmarking. It also includes a move from over-the-counter 
trading to centralized exchanges in order to facilitate 
standardization, ensure price discovery, and increase 
    And these efforts have not been made in a vacuum. In the 
wake of 2008, G-20 countries, of course, have directed their 
attention to the task of reforming the international regulatory 
system and committed to a variety of goals including increased 
standardization and trading of over-the-counter derivatives, 
exchange and electronic platform trading, capital requirements, 
and reporting to trade repositories. However, up to this point 
even now, relatively few prescriptive standards have been 
articulated at the international level.
    The Dodd-Frank Act represents an effort to lead by example, 
but its approach has been in certain notable regards 
unilateral. We have sought to lead by example, but we have also 
exported, or at least sought to export, our own regulatory 
preferences by leveraging our own formidable capital markets.
    From the standpoint of financial diplomacy, this particular 
approach can serve an important purpose, both as a means of 
cross-border negotiation and to help get the ball rolling on 
international standards-setting that, as we have all seen, can 
be quite protracted.
    But unilateralism carries risks that have only grown as 
financial markets have become more globalized. Regulated 
entities may seek to avoid your shores, creating competitive 
disadvantages, as I am sure we will hear even more about 
momentarily. Foreign regulators can, if not retaliate, at least 
use your own unilateralism as a kind of precedent in their own 
territorially-based regulation. And in the future, 
collaborative efforts between regulators can be undermined. So 
a balance has to be met between financial stability, comity, 
and pragmatism.
    The particular approach in this bill carries the promise of 
rationalizing internationally the transactions between banks, 
but it carries the danger of rolling back all of the 
transaction-based progress that I had mentioned before.
    For that reason, in my written testimony I had expressed my 
own confidence in a more thoughtful and calibrated mutual 
recognition regime that is in the legislation standards for 
capital. I think a blanket carte blanche allows an offshore 
financial center in the future, or a country from Bangalore to 
Syria to open up its own haven for low-level regulation, and in 
doing so creates certain kinds of risks that could, 
unfortunately, bring us back to 2008. I think we do need to 
engage our international counterparts. It is essential. But we 
have to do so in a thoughtful way. And part of the bill, I 
think, moves us in the right direction, and quite frankly, part 
of the bill does not. Thank you.
    [The prepared statement of Dr. Brummer can be found on page 
43 of the appendix.]
    Chairman Garrett. Thank you, Professor.
    Mr. Thompson is welcomed back and recognized for 5 minutes.


    Mr. Thompson. Thank you, Chairman Garrett. My name is Don 
Thompson. As the head of the derivatives legal team at JPMorgan 
Chase, I am responsible for leading the firm's implementation 
efforts of Title VII. I would like to thank the committee for 
inviting me to testify today on the extraterritorial 
application of Title VII. And I look forward to addressing the 
concerns addressed by Congressman Lynch and others about AIG.
    This is an issue of the highest priority to our firm and to 
the competitiveness of the American banks internationally. 
Section 722 of Dodd-Frank states that Title VII should not 
apply outside the United States unless foreign activity has a 
direct and significant connection with activities and/or 
effects on commerce of the United States. The interpretation of 
this phrase is crucial because swap markets are global.
    Since Dodd-Frank passed, bipartisan letters from numerous 
Members of Congress have clarified that the intent of Congress 
is to not apply Title VII extraterritorially absent 
extraordinary circumstances. Notwithstanding these expressions 
of congressional intent, there are reasons for concern based 
upon the current state of the regulatory discussion.
    Today, I will focus on three important points related to 
this debate. First, the extraterritorial application of Title 
VII would create competitive disadvantages for U.S. firms. U.S. 
banking regulation has long recognized and preserved the 
ability of U.S. firms to compete on a level playing field in 
the international markets. If Title VII applies to our overseas 
operations serving European or Asian clients, but not to our 
European or Asian competitors, U.S. banks will lose much of 
this business. This ultimately will have a negative effect on 
the competitiveness of U.S. banks, U.S. job creation, and 
economic growth. Significantly, losing many of our non-U.S. 
customers would also deprive us of valuable diversification in 
our credit exposures. This would actually be risk-increasing to 
our firm rather than risk-reducing.
    Second, global harmonization is not the answer to this 
competitive disadvantage problem. We are aware that regulators 
are attempting to harmonize derivatives rules globally. These 
efforts are important to ensure against arbitrage and adverse 
competitive impact, but practical impediments to harmonization 
make this an unreliable solution to the competitiveness 
problem. Putting aside for a moment the fact that perfect 
harmonization will probably never be achieved, even with 
European regulators, it is reasonable to expect that there will 
be severe differences in the approach to derivatives regulation 
in Asia, Latin America, and other important markets around the 
globe. The timing of harmonization is also a problem. Europe is 
on a much longer timetable than the United States, and the rest 
of the world is even further behind. Applying Title VII 
extraterritorially would put U.S. firms at a significant 
disadvantage while the rest of the world catches up, and many 
customer relationships will be damaged or lost in the gap 
    Third, it is important to note that a prudential 
supervisory framework with respect to U.S. banks already exists 
and is effective. The stated rationale for an aggressive, 
expansive application of Title VII to the foreign swap activity 
of U.S. banks with their foreign clients is the potential to 
import excessive risk back into the United States. Proponents 
of this view cite the overseas swap activities of AIG, but this 
rationale no longer holds true for a number of reasons.
    First, the activities of U.S. banks outside the United 
States, including their swap activities, are already subject to 
a robust prudential supervisory regime that is administered by 
the Fed and the OCC. It is important to note that virtually all 
U.S. swap dealers are banks, or affiliates of banks, or bank 
holding companies, and are thus subject to this regime.
    Second, the regulatory regime for swaps has changed 
dramatically since 2008 and AIG. Major participants in the 
market now, because of Title VII, are required to register as 
swap dealers or major swap participants. This requires them to 
comply with requirements for sound risk management practices, 
minimum capital standards, and full regulatory transparency. 
Under these mandates, AIG would have been subject to this 
regulatory regime, and would not have been able to incur the 
exposures that led to the firm's demise. As such, an 
overreaching application of Title VII is not necessary to 
protect the U.S. financial system.
    Finally, I would like to mention the Himes-Garrett bill. We 
believe the Himes-Garrett bill is a sensible and workable 
solution to these problems. By maintaining the tough entity-
level regulatory framework for all swap dealer activity, even 
that outside the United States, it achieves the dual goal of 
providing important safeguards for the U.S. financial system 
while ensuring that U.S. firms can compete on a level playing 
field in the global marketplace.
    JPMorgan is committed to working with Congress, regulators, 
and industry participants to ensure that Title VII is 
implemented appropriately. I look forward to answering your 
    [The prepared statement of Mr. Thompson can be found on 
page 56 of the appendix.]
    Chairman Garrett. All right. Thank you.
    From Chatham Financial, Mr. Zubrod, you are recognized for 
5 minutes.


    Mr. Zubrod. Thank you. Good afternoon, Chairman Garrett, 
and members of the subcommittee. I thank you for the 
opportunity to testify today as the subcommittee considers 
legislation to limit the extraterritorial impact of Title VII 
of the Dodd-Frank Act.
    My name is Luke Zubrod, and I am a director at Chatham 
Financial. Today, Chatham speaks on behalf of the Coalition for 
Derivatives End-Users. The Coalition represents thousands of 
companies across the United States that utilize over-the-
counter derivatives to manage day-to-day business risks. 
Chatham is an independent service provider to businesses that 
use derivatives to manage interest rate, foreign currency, and 
commodity risks. A global firm based in Pennsylvania, Chatham 
serves as a trusted adviser to over a thousand end-user clients 
ranging from Fortune 100 companies to small businesses. Our 
clients are located in 46 States, including every State 
represented by the members of this subcommittee. Many of them 
operate globally. And we serve them from offices in the United 
States, Europe, and Asia. The Coalition has long supported the 
efforts of this subcommittee to mitigate systemic risk and 
increase transparency in the derivatives market.
    Additionally, we have appreciated the bipartisan efforts of 
this subcommittee to ensure that end-users of derivatives are 
not unnecessarily burdened by new regulation. Throughout the 
legislative and regulatory debates, end-users have expressed 
concerns to Congress and to regulators about a number of 
issues, most notably, the imposition of government-mandated 
margin requirements on end-user transactions and the regulation 
of an end-users inter-affiliate transactions.
    In addition to these regulatory requirements that would 
directly burden end-users, the Coalition has raised concerns 
about regulatory actions that could indirectly burden end-users 
by making risk management more expensive.
    We have, for example, expressed concerns that certain 
derivatives-related proposals by the Basel Committee on Banking 
Supervision could deter end-users from managing their risks or 
could make it materially less efficient to do so.
    Today, we add to these concerns by highlighting the ways in 
which an expansive extraterritorial application of Title VII 
could adversely impact end-users. Global companies often manage 
risks arising from their foreign operations by executing hedges 
out of the foreign subsidiaries that are actually exposed to 
those risks. Such entities often have relationships with both 
foreign and U.S. banks. Having a robust pool of bank 
counterparties enables end-users to enjoy numerous benefits, 
including achieving efficient market pricing and diversifying 
counterparty exposure.
    Importantly, and as I elaborate upon in my written 
testimony, the transactions end-users execute abroad are not 
designed to evade U.S. law; they are so executed for important 
business, legal, and strategic reasons. Because it is 
practically infeasible to perfectly align U.S. and foreign 
rules, expansive extraterritorial application of Title VII 
could create structural disincentives for end-users to transact 
with counterparties that are subject to U.S. law. Such 
disincentives could lead foreign end-users or the foreign 
subsidiaries of U.S. end-users to transact with a smaller 
potential pool of counterparties, thus reducing competition and 
liquidity, increasing pricing, and concentrating counterparty 
exposure. Measures banks may take to limit competitive 
disadvantages that result from expansive extraterritorial 
application of Title VII would inevitably increase costs for 
    Additionally, the expansive application of these same 
requirements to foreign banks operating in the United States 
could further impact U.S. end-users operating domestically. 
U.S. end-users presently transact with a wide array of banking 
partners, including both U.S. and foreign banks. In order to 
avoid the duplicative application of U.S. and home-country law 
to transactions executed with non-U.S. end-users, foreign banks 
have incentives to spin off their U.S. operations into 
separately capitalized subsidiaries. This would adversely 
impact the end-users in numerous ways, which I elaborate upon 
in my written testimony. In essence, it would likely make 
hedging risk more expensive and more burdensome. In effect, 
expansive extraterritorial application of Title VII could 
undermine end-users' ability to manage risk efficiently, both 
when they transact domestically and abroad.
    We therefore appreciate this subcommittee's consideration 
of legislation that would clarify the territorial scope of U.S. 
law. Proposals such as the Himes-Garrett bill will increase 
certainty for market participants and resolve inevitable 
conflicts that would result from overlapping regulations in 
foreign jurisdictions.
    We acknowledge the complexity of the task before 
policymakers in considering the appropriate boundaries of U.S. 
law, and believe the Himes-Garrett bill thoughtfully recognizes 
the need to defer entity-level regulations to home-country 
regulators, while clarifying U.S. transaction-level 
requirements apply only in circumstances in which there is a 
U.S. counterparty.
    We appreciate your attention to these concerns, and look 
forward to continuing to support the subcommittee's efforts to 
ensure that the derivatives markets are both safe and 
    Thank you for the opportunity to testify today. And I am 
happy to address any questions you may have.
    [The prepared statement of Mr. Zubrod can be found on page 
62 of the appendix.]
    Chairman Garrett. Great. I appreciate your testimony.
    I have just been advised that we are going to have votes in 
a little while, so I am going to try to keep everybody right to 
their 5-minute time limit so that everybody here gets the best 
chance possible on their time for questioning. So I will 
recognize myself, and also abide by the 5 minutes.
    Running down the line, thanks, Mr. Zubrod, on this point. 
You said that companies, investment companies would invest 
overseas for strategic reasons, and not to avoid foreign law, 
or in this case U.S. law, right?
    Mr. Zubrod. That is right.
    Chairman Garrett. Okay. They do that now. But your argument 
would be that if you did have an onerous anticompetitive 
position, would that change, that they might change from 
strategic purposes of investment to trying to avoid U.S. law in 
the future?
    Mr. Zubrod. I think if the law is applied expansively 
abroad, it would ultimately be a cost issue for end-users.
    Chairman Garrett. So that is part of the strategic decision 
then at that point. It is cheaper to do it over here than to 
comply is part of the strategic--okay. A second question on 
that would be--and anybody else on the panel can chime in on 
this--when they do do that, without the expansiveness of the 
regulation, to advocate for a minute for that position, when 
they do make that strategic position, does that potentially 
have a direct and significant impact on the United States?
    Mr. Zubrod. I think it does not. I think when end-users 
transact abroad with, for example, the foreign branches of U.S. 
banks, those foreign branches of U.S. banks, of course the key 
concern here is could that activity potentially transmit risk 
back to the United States? And I think there you have to look 
at the entity-level requirements that are imposed on that 
foreign branch.
    Chairman Garrett. Okay.
    Mr. Zubrod. And I think you would look and say those are 
    Chairman Garrett. So maybe just moving down, Mr. Thompson, 
following along that line of thinking then, or that discussion, 
part of the seminal question is to define--or the understanding 
of what that term ``direct and significant impact'' would be, I 
guess, right, under Dodd-Frank? How would you define that? 
Would it require that you have a material impact upon the U.S. 
financial markets, a material impact upon the U.S. economy to 
fall under that definition? Is that appropriate?
    Mr. Thompson. Unfortunately, the direct and significant 
test has no direct analog in any other statute that we have 
been able to identify. There are some which are similar, but 
none uses the exact language. So we don't have the benefit of 
court cases to interpret it.
    In my mind, though, it implies something other than a U.S. 
firm losing money on a particular swap with a particular client 
because there is no margin associated with that particular 
transaction. I think it needs to be something that rises to the 
level where it affects not just the creditworthiness of a 
particular institution, but there are ripple effects for the 
financial system as a whole.
    Chairman Garrett. Okay. Great. Dr. Brummer or Mr. Allen, 
would you like to chime in on that? Dr. Brummer?
    Mr. Brummer. Sure. It is absolutely true that we don't have 
any direct analog. However, effects-based regulation, 
effectively Congress regulating internationally when certain 
activities have an impact here, that is, at least under 
international law, quite common. I would say that in this 
particular instance where you have a parent company perhaps 
guaranteeing the swaps of a foreign entity, and where those 
swaps--when bets, quite frankly, go wrong on those swaps and 
could imperil the financial health of Parentco here in the 
United States, it is hard for me to imagine a situation where 
that is not having a direct effect in the United States.
    I think it is worthwhile to think about whether or not, in 
the absence of Title VII's transactional requirements, what we 
have here in the United States for Parentco would be sufficient 
under, say, just Regulation K or the OCC, many of which--where 
you have under Regulation K, sure, you have capital 
requirements, but even those capital requirements under Reg K 
were originally envisioned in a world which, if you go through 
Reg K and 210 and other provisions, there are no references 
made to, say, derivatives activities. When you look at the 
permitted activities of a foreign--
    Chairman Garrett. And I am going to have to cut you short 
since I am going to abide by my own rule.
    Mr. Allen, do you want to comment on this? And if there is 
uncertainty, as we hear from the panel so far as to that 
terminology, what have you--what is the cost, legal, 
operational, or otherwise, to that uncertainty for firms such 
as yours not knowing as far as whether the swap is going to be 
subject to it or not then?
    Mr. Allen. I think in order to answer the question, it is 
useful to go to the issue of the entity-level versus the 
transactional-level basis of regulation. The reason I say that 
is that when one looks at the question of the safety and 
soundness body of regulation embodied most notably through 
capital, I don't think there is any suggestion under the bill, 
or more generally, that there should be deference or deferring 
to overseas regulators in circumstances where those regulations 
are less robust. And in fact, I have heard members comment that 
the European regulatory agenda, for example, is somewhat behind 
the United States in terms of implementation of those reforms. 
That is not necessarily the case.
    In fact, I don't think that is the case at all in relation 
to capital. When it comes to the transaction-level regulation, 
I think it is absolutely right that to the extent that there is 
a U.S. nexus, derived by virtue of the fact that, for example, 
the one client is based in the United States, then absolutely 
the CFTC or the SEC rules, as appropriate, should be the ones 
that apply. But I think the point is that they shouldn't apply 
in circumstances where the activity is exclusively outside the 
United States.
    Chairman Garrett. Thank you. Gotcha. I thank the gentleman. 
Mr. Lynch is recognized for 5 minutes.
    Mr. Lynch. Thank you Mr. Chairman. If I listened closely 
enough, it seems to me what people are saying is that in order 
to remove the uncertainty in the regulatory process that Dodd-
Frank Title VII, Section 722 creates, in order to remove that 
uncertainty we are just going to exempt all the stuff from 
regulation, so there won't be any uncertainty because none of 
it will apply. That is the solution here. And that exception 
that you are creating swallows the rule entirely.
    Under H.R. 3283, its provision would exempt foreign 
affiliates of U.S. banks from basically all the major 
protections against derivative risk contained in Title VII. It 
doesn't eliminate registration, albeit, but margin, capital 
requirements, clearing requirements, all that is gone.
    What bothers me is looking at the Fed filings, first of 
all, five U.S. banks control 95 percent of all the derivatives 
trading that is going on. So it is concentrated in five banks. 
You look at the filings of these five banks, let's just take 
right off the top Goldman Sachs, they have 62 percent of their 
derivatives books in foreign affiliates or subsidiaries for 
international banking. That is about $134 billion in fair 
    Let's look at Morgan Stanley. They have 77 percent of their 
derivatives book, $101 billion, in non-U.S. operations. So if 
you do this, if you say, okay, these--because you have these 
foreign subsidiaries, if you do your business through them, you 
can do an end-around of all this regulation. That is what you 
are doing here. This is a big end-around. This is recklessness. 
I understand there is a danger here in uncertainty, and we 
would like to, if not harmonize, using Mr. Thompson's term, if 
not harmonize, certainly reconcile the regulatory framework 
between our country and the countries of Europe and Asia. But 
what you are suggesting here is getting rid of--giving a huge 
escape hatch for these firms so they don't have to do any of 
the things that Dodd-Frank has required to minimize the risk. 
And by doing so, you are again planting the seeds for the next 
crisis, the next collapse.
    This is a return back to the bad old days. That is what is 
going on here. Dr. Brummer, tell me I am wrong. Tell me that 
this is not what they are trying to do.
    Mr. Brummer. Certainly, when you see that most of the 
derivatives transactions that are currently--
    Mr. Lynch. I am sorry, could you pull your microphone 
closer? Thank you.
    Mr. Brummer. Certainly when you see that most derivatives 
transactions are occurring overseas, this would effectively 
exempt those transactions. And I think it is an overstatement 
to say that in the absence of Title VII, the protections that 
will exist for the U.S. part of the company are going to be 
robust. I will say that the G-20 process is slowly grinding 
    Mr. Lynch. Very slowly, right? Facially they have set a 
deadline of 2012, but do you think that is going to happen?
    Mr. Brummer. No. It is not going to happen in 2012. And 
even with the capital requirements, you see Germany and France 
trying to slow down certain parts of Basel III. But my personal 
concern is not merely that this encourages a kind of regulatory 
arbitrage or opportunity, but the way in which the bill is 
drafted, you can go anywhere. You can go to Syria, you can go 
to Iran, you can go wherever you want to go, right, set up a 
financial center. And if you are a country looking to attract 
transactions that are lowly regulated, at least as I interpret 
the bill, you can set up that financial center in order to 
evade--or to appeal to firms seeking to avoid the protections 
that were fought for under Title VII. And I personally don't 
understand why one would want that to happen.
    I do understand and respect the fact that we want to keep 
our financial centers here very strong. But it seems like there 
are better ways to go about engaging our international 
    Mr. Lynch. Thank you. Thank you, Dr. Brummer. I appreciate 
    Mr. Thompson. Might I have a moment, Chairman Garrett?
    Chairman Garrett. I am going to come back to you for that 
response if we get through this circle. So hold that thought.
    We will now turn to the gentleman from Arizona. But before 
we do, I ask unanimous consent to enter into the record some 
documents with regard to this issue of intent. They are letters 
from Senator Schumer pointing out, as we said in the opening 
statement, with regard to their concerns about inconsistencies 
with the congressional intent on this matter; a letter from 
Senator Johnson and Representative Frank with regard to the 
same concern about unintended consequences from the proposed 
regulations; a letter from the New Democrat Coalition on this 
point; and a letter from the chairman of the Financial Services 
Committee, Chairman Bachus, as well. Without objection, it is 
so ordered.
    Now, to the gentleman from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman. And we are going 
to do some bouncing around, so we will get a chance for that.
    Mr. Zubrod, help me, just because I want to make sure I am 
doing the flow. If this portion of Volcker goes forward, how 
different would a transaction look? Do you have to find a flat 
in London? What happens here?
    Mr. Zubrod. You said ``Volcker,'' I assume you mean the 
    Mr. Schweikert. The derivatives portion, I am sorry.
    Mr. Zubrod. I think, again, it is a matter of cost. If 
there is a foreign firm or a foreign subsidiary of a U.S. firm 
transacting in Europe, and these requirements have the effect 
of limiting the number of counterparties who are effectively 
available to bid on a transaction, that is going to impact my 
price because I have a smaller, less liquid pool of 
counterparties. So I think it ultimately just burdens end-users 
with additional and unnecessary costs.
    Mr. Schweikert. Thank you, Mr. Zubrod. Do you end up moving 
the book of business somewhere else to execute? What do you do?
    Mr. Zubrod. No, I don't think so. I think you pay a higher 
    Mr. Schweikert. Mr. Thompson, same question.
    Mr. Thompson. Sure. I think this talk of being able to move 
around like you are on a chessboard to evade these requirements 
is wildly overstated, the example that Dr. Brummer gave of 
Syria. The reality is we are international because that is 
where our clients are. That is why we are in London. That is 
why we are in Paris. That is why we are in Hong Kong. That is 
why we are in Singapore. That is why we are in Tokyo. We are 
not going to, and we are not capable of picking up shop and 
moving to Syria or Iraq, or some other light-touch regulatory 
jurisdiction, because you don't have the facilities there, you 
don't have the infrastructure there. In our derivatives trading 
businesses, every front office person is supported by seven or 
eight back office and support people. You can't find those 
people in light-touch jurisdictions. It is simply not possible.
    I will also add that the CFTC and the SEC under Title VII 
have broad anti-evasion authority to impose Title VII 
requirements upon any registrant who structures his business in 
a way to avoid the Title VII requirements.
    Mr. Schweikert. You hit on something. You are one of the 
big shops, correct?
    Mr. Thompson. Yes, we are. We are a major dealer in all of 
the asset classes.
    Mr. Schweikert. Just for a reference point, how many 
employees do you have who actually do interest rate hedging 
compared to how many employees you have on the regulatory 
    Mr. Thompson. We are seeing--and this trend is increasing, 
generally speaking--as I said, the number of front office 
people who actually do the business are dwarfed by the number 
of support people, the people who process payments, the people 
who deal with documents, the people who do regulatory 
reporting. And our compliance effort around this is vastly 
increasing. We have a whole Title VII implementation 
infrastructure in JPMorgan now, and that is between 350 and 400 
    Mr. Schweikert. So you have 350, 400, and how many interest 
rate hedgers?
    Mr. Thompson. Our number of front office people, certainly 
in New York, where most of them are, is probably 40 to 50.
    Mr. Schweikert. Okay. So an interesting ratio there.
    Mr. Thompson. Right.
    Mr. Schweikert. Just tell us and make sure, because I think 
it is worth an expansion because some of the emails and things 
that I have gotten keep referring to this as sort of, you are 
going to allow AIG to happen again. And I am going to ask you, 
Mr. Thompson, because you started, and then I will ask some 
solicitation of other people whether they agree or see a hole 
in your argument, why won't AIG happen again?
    Mr. Thompson. Great. So there are three reasons why AIG 
won't happen again under the current regulatory framework. The 
first is that, as Congressman Lynch noted, the derivatives 
business in the United States is vastly concentrated among five 
or six large bank holding companies. All of these entities are 
subject to a full and robust system of prudential regulation 
globally where the Fed and the OCC have ample oversight 
authority on a safety and soundness basis to examine our 
foreign branches, subsidiaries, and affiliates. That is a 
robust regime. It is ongoing, and it is quite--
    Mr. Schweikert. Forgive me, I want to live up to my 
chairman's expectation of having only 30 seconds left.
    Does anyone on the panel disagree with that as sort of an 
explanation? Could I start with Mr. Allen in just the last 
couple of seconds that we have? When you see what is coming up, 
particularly in the rules being written and we are moving under 
Dodd-Frank, do you believe that the regulators are following 
the way the statute was intended?
    Mr. Allen. No. It is my belief that they are adopting a 
very expansive approach to what is written in the statute.
    Mr. Schweikert. Thank you.
    Dr. Brummer?
    Mr. Brummer. All of the examples in Mr. Thompson's 
testimony were not prudential, but were disclosure-based, and 
so I would disagree with the idea that our system is robust 
enough to deal with derivatives transactions.
    Mr. Schweikert. Thank you. And I am over my time.
    Thank you, Mr. Chairman.
    Chairman Garrett. And the gentleman yields back.
    And before I yield to the gentleman who just came to the 
panel, also without objection, I would like to offer a 
statement into the record which was submitted to us by the 
Depository Trust & Clearing Corporation--that is the DTTC, of 
course--which has written to us with regard to an important 
issue dealing with indemnification, which, by the way, I will 
just add as an aside, is an issue that the regulators have also 
chimed in on. Last week, Congress got a report from the CFTC 
and the FTC which stated that a legislative amendment to the 
indemnification provision is appropriate. So without objection, 
that letter will also be added to the record.
    Mr. Hinojosa is recognized for 5 minutes.
    Mr. Hinojosa. Thank you, Chairman Garrett. I commend you 
for holding today's hearing on limiting the extraterritorial 
impact of Title VII of the Dodd-Frank Act. I believe this bill 
represents an accomplishment in bipartisanship, and I thank 
Chairman Garrett and Congressman Himes for their efforts on 
behalf of this legislation.
    If there is any financial market that begs for clarity, it 
is the derivatives market. These financial tools can be used to 
hedge against risk, or, as we have seen in the subprime lending 
crisis, they can be used to obscure risk. I believe this market 
is now transparent, much more transparent than it has ever 
been, thanks to the Dodd-Frank Act and its implementation by 
U.S. regulatory agencies.
    At this point, U.S. financial firms are asking for clarity 
in return from this body and from the regulatory agencies. 
While the Dodd-Frank Act sought to ensure the soundness and 
transparency of the derivatives markets, its intent was never 
to overextend its reach in a way that might harm the 
competitiveness of U.S. financial firms on the global stage. 
There has been unneeded confusion over the extraterritorial 
reach of the regulations set forth regarding swaps markets. 
Regulatory agencies should recognize the intent of this body 
with regards to Title VII of Dodd-Frank. While I commend the 
efforts of the CFTC in implementing this Dodd-Frank Act, I also 
would encourage them to limit the scope of their rules to the 
United States.
    With that, Mr. Chairman, I yield back the remainder of my 
    Chairman Garrett. Thank you.
    The gentleman yields back his time.
    Mr. Stivers is now recognized for 5 minutes. Thank you.
    Mr. Stivers. Thank you, Mr. Chairman, I appreciate it. And 
I appreciate the witnesses' testimony today.
    And obviously, we all want to make sure that we don't drive 
jobs out of America and we don't make it harder for companies 
that need to manage their risk to do so. And I want all of you 
to be able to serve your customers wherever they are, 
    So I guess I would like to start by asking a couple of 
questions about the big nature of Title VII. Do you think that 
Title VII is, as written--if the regulators would implement it 
the way it was written by Congress, would cause a problem for--
I will start with Mr. Allen--for firms like yours that are 
foreign based, but doing business here in America?
    Mr. Allen. I believe the answer is no, not as written by 
Congress, and not as we interpret the relevant sections of the 
Act, principally Sections 722 and 772. I see those sections as 
fundamentally limiting the extraterritorial scope of the Act 
subject to, obviously, the well-known caveats from that. Our 
concern is that a regulatory approach which takes a different 
view and views those provisions as the foundational basis for 
an expansive application of regulation is where the problem 
starts to arise.
    Mr. Stivers. Right. And so you have answered the second 
part of the question. Obviously, those regulators have extended 
their reach beyond what Congress intended.
    What do you think the choices for you will be you, Mr. 
Allen, in the long run for Barclays and firms like yourselves 
that are foreign based if that extraterritoriality continues 
and expands? What will your choice be for jobs in the United 
    Mr. Allen. It is important to stress that Barclays is very 
much in favor of an enhanced and enriched regulatory 
marketplace, regulatory-enforced marketplace, but the concern 
is where we find ourselves faced with regulations which we 
cannot comply with, as a matter of, say, U.S. regulation on the 
one hand and European, or specifically U.K., regulation on the 
other, but forces us into the position of potentially having to 
walk away from that business because, of course, we cannot be 
noncompliant with CFTC rules on the one hand, U.K. FSA rules on 
the other.
    Mr. Stivers. Right. And what does that mean for jobs in 
    Mr. Allen. It means that we have to look at our U.S. 
businesses and consider whether or not we need to try and 
insulate that business in some way. The United States is a very 
important market for Barclays, and Barclays has no intention of 
walking away from that business. It is a core part of our 
    Mr. Stivers. But it is bad for jobs in America. Is it good 
or bad?
    Mr. Allen. It makes it more difficult for us to do that 
    Mr. Stivers. Thank you. I really just wanted it that 
    And, Mr. Thompson, you have the other extreme. You are an 
American company trying to compete with foreign companies and 
trying to follow your customers and clients around the world.
    Mr. Thompson. Correct.
    Mr. Stivers. Tell me about how extraterritoriality would 
complicate American firms, and what it means for your ability 
to serve your clients and compete internationally with those 
that might not have to have the same regulations.
    Mr. Thompson. In the worst case, it severely disadvantages 
our overseas business because we would have to apply Title VII 
requirements to business with our non-U.S. customers out of our 
non-U.S. operations in a way that our competitors would not 
have to do so.
    It is important to note that this affects not just our 
derivatives business, but a lot of our other businesses, such 
as investment banking, debt underwriting, and equity 
underwriting, also have a symbiotic relationship with our 
derivatives business, so being unable to compete with respect 
to the derivative has an adverse impact on your entire 
investment-banking franchise.
    Mr. Stivers. And as your competitiveness, Mr. Thompson, 
decreases internationally, what does that do to your profits 
of, obviously, an American company that you might be able to 
repatriate some of those profits?
    Mr. Thompson. Yes. It would be a significant impact to our 
revenues. We are a very international firm. It varies from 
quarter to quarter, but in some quarters we derive more revenue 
from our investment-banking business overseas than we do in the 
United States.
    I would also point out that it would have a perverse effect 
on the ability--and regulators are united on this, and we 
believe that by and large it is true--the industry needs to 
become better capitalized. Especially in the current 
environment for bank equity, the only way for banks to add 
capital is through retained earnings. So impairing our ability 
to earn significant revenue from our European and Asian and 
Latin American franchises will hinder our effort to build our 
capital cushion.
    Mr. Stivers. Thank you.
    So the bottom line for jobs and profits--
    Mr. Thompson. Simply phrased, it would be bad.
    Mr. Stivers. If the bill is not passed, it is bad. Kind of 
simple, getting to the point.
    Thank you. I yield back the balance of my time, Mr. 
    Chairman Garrett. Thank you.
    The gentleman yields back, and before I yield back, without 
objection, I have three other letters to enter into the record.
    Again, these are in support of the underlying legislation, 
and also raise the question of the uncertainty under the 
proposed rules. They are from SIFMA and ISDA, and the last one 
is from the Institute of International Bankers. And the reason 
why I left that for last is because I just want to make one 
point, and this goes to what Dr. Brummer was saying before. 
They raise the point, the fact that this can be satisfied for 
those countries that are signatories to the Basel Capital 
Accords, which is, in other words, their protection in that 
area. And when we have more time, I will probably allow Dr. 
Brummer to address that.
    But with that, Mr. Carson is recognized for 5 minutes.
    Mr. Carson. Thank you, Mr. Chairman.
    Thank you, witnesses, for appearing before us.
    This question is for Professor Brummer. The CFTC has 
indicated that it plans to work on clarifying guidance on this 
issue by April. It is not clear whether this will be a formal 
regulatory proposal, or if they will utilize a less formal 
guidance procedure.
    Please give me, Professor, your assessment of the need for 
legislative action now versus waiting to review the guidance we 
anticipate from the regulators. Do you think more legislative 
action now could make the regulators' work more difficult? Or 
do you think it will be more timely and even useful in some 
    Mr. Brummer. Yes, that question, is in part very difficult, 
because it is not just a question of the CFTC, it is also a 
question as to what our European counterparts are doing and the 
schedule with which they are moving with reforms.
    Certainly we are ahead of time, and particularly with 
regards to our implementation of something like the Volcker 
Rule, that is a question that has to be addressed sooner, quite 
frankly, rather than later. But I think that we certainly have 
the time for most of the Title VII, as opposed to Title VI 
Volcker Rule, to--we have the luxury to see whether or not--see 
precisely what the CFTC and their Office of International 
Affairs and other folks are doing with regard to accommodating 
other regulatory programs in other parts of the world.
    Mr. Carson. I yield back. Thank you, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    Mr. Hurt is recognized.
    Mr. Hurt. Thank you, Mr. Chairman. Just kind of a general 
question, and I, first of all, thank the witnesses, and I 
apologize that I wasn't able to hear your statements, but I 
have reviewed them. And again, thank you for your appearance.
    I come from Virginia's Fifth District, which is a rural 
southern Virginia district, and over the years we have--over 
the last 10, 20, 30 years, we have been really hit hard by the 
loss of our manufacturing sector, textiles and furniture in 
particular. As you look at the loss of jobs in our area, one 
can't help but be struck by the fact that our inability to 
compete in the global marketplace has contributed a lot to the 
decline of those sectors. And when you look at the barriers 
that we in Washington over the years have put up to make it 
more and more difficult for American companies to succeed, I 
think that we have to be extremely sensitive to the issue that 
we are discussing today.
    When you think about the Tax Code, when you think about the 
environmental regulations and the labor regulations, all of the 
litigation, and the accounting that has to go along with all of 
the different regulations, I think that our American companies 
have a steep challenge. And I hope that, whether we as a 
Congress or the regulators that are implementing our 
legislation, it seems to me that it is more important than ever 
that we be sensitive to those challenges and those--and, 
frankly, those burdens that we put on our American companies.
    So, I guess my question would be when you--and this would 
be for everyone. I would love to start with Mr. Allen and then 
just go down the line. When you look at the importance of 
harmonizing our regulatory and legislative structure as it 
relates to other countries, can you think of examples that jump 
out where we have done that successfully, and can you think of 
examples, the worst-case scenario, where we haven't done that 
successfully? I would think that certainly manufacturing might 
be one of those, but if you could speak just generally to that 
topic, because at the end of the day, as my colleague from Ohio 
Mr. Stivers said, at the end of the day, this is about jobs for 
    Mr. Allen. If I may cite an example which actually resides 
within Title VII itself, if we think about the position that 
Europe is currently heading in regarding the clearing of 
derivatives, the proposals there are substantially the same as 
those that we see under Title VII. There is a timing question 
there, there is a timing delay, that is unquestionably the 
case, but there has already been a pretty much arrived-at 
political consensus in Europe as to what the shape of that 
statute should look like. And it is intended that that statute 
be on the statute books by the end of 2012 of this year.
    When one looks at the substantive regulation that sits in 
that clearing framework, it is very substantially aligned to 
what we see in the United States. There are other areas where 
that is not the case, admittedly, potentially around execution 
through SEFs and things of that nature, as I mentioned before. 
But clearing is a good example of where there is a reasonable--
reasonably high prospects of a degree of international 
harmonization and convergence around how that is going to work, 
which, of course, should not be surprising given that it is 
embedded within the G-20 commitments articulated at Pittsburgh.
    Mr. Hurt. Thank you.
    Mr. Brummer. I would agree.
    Mr. Hurt. Mr. Thompson?
    Mr. Thompson. There clearly are some areas where 
harmonization is working, and I agree that clearing is one of 
them, but it is important to note that there are many where 
harmonization does not seem to be working. I will give a couple 
of examples.
    The swaps push-out rule of Section 716, which is a feature 
of Title VII, no other jurisdiction of commercial importance 
has indicated any interest in adopting it soever.
    A second example with respect to the margin rules for 
uncleared swaps, the U.S. approach is very proscriptive and 
significantly varies from current market practice. The 
indications of the approach in Europe will be quite different, 
and that you can deal with the risk relating to uncleared swaps 
by either capital or margin, but not both, as is in the case in 
the United States.
    Finally, the approach to the execution mandate on 
electronic trading platforms will probably be quite different 
in Europe as opposed to the United States.
    So it is important to note that although there are some 
successes on the harmonization front, there are many areas 
where the global regulatory framework will not harmonize.
    Mr. Hurt. Thank you.
    Mr. Zubrod?
    Mr. Zubrod. I would echo some of those comments. In 
particular, among the most salient aspects of regulation that 
will impact end-users, both financial and nonfinancial, is the 
imposition of margin requirements. The U.S. prudential 
regulator's rule on margin does impose margin requirements on 
all market participants, albeit to varying degrees, depending 
on the type of participant. It is not clear that the world will 
follow that approach. Indeed, that approach isn't aligned with 
congressional intent here in the United States, but even 
globally foreign regulators have given signals that they have 
questions about the U.S. approach and whether or not capital 
requirements are sufficient to address the risks associated 
with noncleared swaps. And I think that whether or not 
harmonization is possible on that front is a question that will 
be answered in time.
    Chairman Garrett. The gentleman yields back.
    The gentleman who sponsored the legislation is recognized 
for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman. Just to start, I would 
like to seek unanimous consent to submit two statements for the 
record, one from my colleague Gwen Moore, and one from the 
ABASA. Thank you.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Himes. I guess I would like to explore--I hear two 
criticisms of the bill that the chairman and I have written. 
One is the whole AIG thing, which I think is faulty, to say the 
least, and if I have time, I will come back to that. But I 
would also like to explore the concept that this bill would 
lead to a race to the bottom. And to do that, I guess I am very 
interested in currently.
    My understanding is that the vast bulk of the swaps market 
occurs within the G-20, and, in fact, specifically trades 
largely in New York, London, Hong Kong, Tokyo and Germany. Can 
somebody just ballpark for me what percentage of the swaps 
market happens in those five jurisdictions?
    Mr. Thompson. I will give you my guess. I would say north 
of 90 percent, probably closer to 95.
    Mr. Himes. Okay. So just for shorthand, let me say that all 
of the trading in these instruments happens in those five or 
six jurisdictions. If I listen to some of my friends on the 
other side, and some of my friends in the banking industry, I 
would hear that the efforts that were made to address the 
financial meltdown, whether it was Dodd-Frank, or transaction 
taxes being discussed in Europe, compensation limits imposed in 
the U.K., that we have unleashed the four horsemen of the 
apocalypse on the industry. And I wonder, in these last 3 years 
in which we have done this, how much of the swaps market has 
migrated away from these five or six entities to low 
regulation--Dr. Brummer talks about Syria and Iran. How much of 
that market, in the face of this assault on the industry, has 
migrated away from those jurisdictions?
    Mr. Thompson. Certainly at JPMorgan the answer is zero, and 
the reason is we are in those jurisdictions because that is 
where the clients are, that is where the business is, that is 
where the infrastructure is.
    As a practical matter, we can't pick up and move to Syria. 
Even aside from the anti-evasion authority that the CFTC has 
under the statute, we simply can't do it as a practical matter.
    Mr. Himes. So my colleague from Massachusetts says that if 
we enact this, that effectively we will lift all regulations on 
the transactions. Do any of these jurisdictions, London, Hong 
Kong, Tokyo, Germany, that effectively are all of the swaps 
market--do any of the witnesses want to characterize the 
transactional level requirements in those jurisdictions in 
which all of these transactions occur? And I am talking about 
margin, registration, reporting. Does anybody want to 
characterize the regulations in those markets where these 
transactions occur as lax?
    Yes, Dr. Brummer?
    Mr. Brummer. I would certainly not characterize them as 
lax, in part because we don't really know what they are. And 
they are yet on the books yet, which creates its own problems.
    Mr. Himes. But in each of those markets, there are 
currently clear regulations subject to evolution.
    Mr. Brummer. We have proposals, right. And I would also 
want to emphasize, as I said in my report, when you look at the 
European Union--and I would agree with Mr. Allen--that there 
are some broad levels of consensus. We are different countries 
with different histories; we are going to come up with 
different approaches. I am not for trying to find a way to 
accommodate those differences.
    Mr. Himes. But if I could just interrupt you there. 
Regulations exist currently in those jurisdictions. It is 
probably fair to assume that they will get through Basel III or 
through other mechanisms probably more regulatory, probably 
fair to assume that. So, again, I just--my question is is the 
status quo in any of those jurisdictions currently--can you 
characterize the status quo as lax?
    Mr. Brummer. I don't think so.
    Mr. Himes. Okay. I yield back the balance of my time.
    Chairman Garrett. The gentleman yields back, and the 
gentleman from California is recognized for 1 minute, and then 
we will close since we have votes that were already called.
    Mr. Sherman. Thank you.
    Mr. Brummer, given the sizable derivative exposures of 
foreign branches of some of our major U.S. banks, how can we 
ensure that such exposures do not contribute to the systemic 
risk here in the United States? And is it typical for the U.S.-
based corporate entity to guarantee or otherwise expose 
themselves to the risk of these foreign branches?
    Mr. Allen. If I may--
    Mr. Sherman. I guess, Dr. Brummer, although--
    Mr. Allen. My apologies, of course.
    I was just going to say that when it comes to the safety 
and soundness regulation which underpins the prudential 
approach to the activities of the non-U.S. branches of the U.S. 
firms, and this is true internationally as well, they are 
subject to considerable regulatory oversight--in the case of 
the United States, by the Federal Reserve, and in the case of 
the U.K., by the likes of the FSA--which goes to the safety and 
soundness of the activities which those institutions undertake.
    Much of what we are talking about around Title VII relates 
far more to the transactional level-type regulation, where 
there is more of a fragmentation in terms of the international 
approach to the regulation of those issues, but far less the 
case when it comes to fundamental principles of prudential 
safety and soundness.
    Mr. Brummer. I agree. That is certainly the case. But it is 
also useful to understand that many of our prudential 
regulations are created with certain expectations as to what 
kinds of activities our entities are permitted to do. So 
therefore, if you have capital requirements, say, under Reg K 
that is not necessarily anticipating foreign banking 
organizations from engaging heavily in derivatives and swaps 
transactions, and if you also have, say, under Dodd-Frank 
provisions that say we are not going to bail out dealers in 
derivatives and swaps, then you have to think very hard about 
whether or not preexisting capital standards sufficiently 
account for the additional risk not only at the entity-level, 
but also at the transactional level.
    Chairman Garrett. I thank the gentleman for his answers. I 
thank the sponsor and all of the members of the subcommittee. I 
thank the panel as well.
    The Chair notes that some Members may have additional 
questions for the panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their response in the record.
    And with that, this hearing is adjourned. Again, thanks to 
the panel.
    [Whereupon, at 3:43 p.m., the hearing was adjourned.]

                            A P P E N D I X

                            February 8, 2012