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House Agriculture Committee Hearing - The Role of Credit Derivatives in the U.S. Economy

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Location: Washington, DC


House Agriculture Committee Hearing - The Role of Credit Derivatives in the U.S. Economy

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REP. JIM MARSHALL (D-GA): Thank you, Mr. Chairman.

Mr. Sirri, it seems to me that the SEC's argument for having jurisdiction simply because over-the-counter swaps have been cleared is a bit of a stretch. And it's also clear that it adds a layer of regulation that could discourage people from wanting to clear.

So I'm kind of curious to know what you think the SEC brings to the table that's worthwhile if, in fact, it asserts jurisdiction just as a policy matter. And I guess I'd like to hear from Mr. Radhakrishnan what his view is of the added value that the SEC might bring to the table. This is the sort of dual-regulation problem, it seems to me, to be potentially problematic.

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REP. MARSHALL: You've got both of those now; the latter two. And you wouldn't lose that, with regard to OTC swaps that are cleared.

MR. SIRRI: Well, if they were no longer individually subject to individual negotiation, we would lose our anti-fraud authority. So that's a curiosity. You could actually have a situation where we would have over-the-counter anti-fraud authority, but if it's no longer subject to individual negotiation, that authority would vanish.

REP. MARSHALL: So your concern -- and part of your concern here is that you would not -- no longer have the authority to investigate fraud?

MR. SIRRI: I think the point you raise is a good one. It doesn't go to the fine, legal point. I think we police markets. We are fundamentally a market regulator. That's one of the things we do.

There are investor protection issues that are out there, because --

REP. MARSHALL: The CFTC, though, is also a market regulator. That's what we've charged them with the responsibility of doing. And so you're sort of piling on, it seems to me, from the perspective of the market, if you've got two regulators.

MR. SIRRI: We have a unique charge, which is explicitly investor protection that sits, I think, uniquely with us. It's a mandate we've had. Because these instruments are --

REP. MARSHALL: If I could interrupt. The inventors we're talking about here are these over-the-counter characters that we've, for a long time, decided that we were going to exempt from that kind of protection. We thought they were big boys and were able to take care of themselves.

And so here, we want to encourage them to clear, because it's in our best interest, societally, that they clear. And we never thought they needed your protection in trying to do their deals.

MR. SIRRI: That's only a portion of the investor protection. You're right. That's -- those are the direct counterparties to the trade.

But because these instruments are struck on other financial claims -- debt, bonds, things like that -- they drive the pricing of those bonds. Just as, as you know, futures contracts struck on equities can drive the pricing of equities.

So the point is that they're -- in this space, we have an interest. And I think something we bring that's unique is our ability -- in this case, they would be in exchange creditor centrally cleared markets -- to police, with respect to insider trading, investor protection, anti-fraud.

Those are things that we have a long history of.

REP. MARSHALL: So if we -- if we clean the statute up and simply made it clear that you'd continue to have that kind of authority, you wouldn't feel the necessity to otherwise have to approve use of the clearing operation on the Fed or a clearing operation under the CFTC?

MR. SIRRI: I couldn't answer that question for the Commission. I think such a thing would be helpful, but I couldn't -- you're asking me, would that be enough to satisfy the interests of the Commission? I just couldn't answer that for the Commission.

REP. MARSHALL: Actually, I'm -- Mr. Radhakrishnan, I'm not going to go to you because I'm not going to have much time left.

Mr. Parkinson, in your testimony -- or, I guess in response to questions you noted that the Fed will be regulating these banks -- you know, these institutions of investment banks that have now decided to become full-fledged banks, that the lion's share of credit default swaps will involve one of these banks as a counterparty.

Is the Fed -- I mean, what do you anticipate will wind up being the relationship between the Fed's regulation of these institutions as counterparties, and their decision to use either ICE or CME as the clearing agency? Don't you think that the Fed is going to want all this business to go through the clearing agency that it's regulating?

MR. PARKINSON: I think we're going to want the banks we supervise to take advantage of the central counterparty services that are offered. I don't believe we'll be giving them advice as to which, of a number of competing services, they should be utilizing. That will be their decision.

REP. MARSHALL: Mr. Radhakrishnan, what impact do you think it has on the decision of a bank to choose a clearing party, that if it chooses CME it's now subject not only to Fed regulation but also to CFTC regulation?

MR. RADHAKRISHNAN: Well, I think, as Mr. Parkinson has said, it's -- I hope that the banks will choose the clearinghouse that they believe best fits their needs, and also that they believe has the best solution. And if that -- and if they choose the CME, then they will fall within, first of all, the jurisdiction of the CME itself, and then with our jurisdiction.

And I think, Congressman, as part of the MOU, you know, I think we've -- if the Fed should need any information to aid it in its supervision of its regulatees, then, you know, we will be willing to provide that information as part of the MOU.

REP. MARSHALL: My time is up, Mr. Chairman. There are obviously a lot more questions that we could ask about this subject.


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