Rep. Scott Garrett (R-NJ), Chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, delivered the following opening statement today at a hearing to review legislative proposals to bring certainty to the over-the-counter derivatives market:
"Good morning, and welcome to our witnesses. I look forward to your testimony. I also look forward to a good discussion of the legislation before us today. It is my hope that at least several of these bills will have bi-partisan support, and I am pleased that my colleagues on the other side of the aisle have joined me and others in engaging on the implementation of Title VII of Dodd-Frank.
"We have several proposals before us today that I believe are appropriate to make sure the Dodd-Frank Act is implemented by regulators in a common-sense manner that actually works. For this to happen, regulations must not impose overly burdensome and unjustified costs on American businesses, they must not drive business overseas, and they must not unnecessarily place American businesses at a competitive disadvantage vis-a-vis their foreign counterparts.
"While derivatives are often vilified, they serve an extremely important risk mitigation role for thousands of American businesses and pension funds. Regulators must be mindful about not harming the functioning of a mature market and instead should focus on a regulatory structure that allows them to understand where the risk in the system actually resides.
"In an effort to provide certainty and direction to the rulemaking process, I recently introduced the Swap Execution Facility Clarification Act with Ms. Maloney, Mr. Hurt and Mr. Meeks.
"Dodd-Frank gave the SEC and the CFTC broad latitude to get the rules right. Unfortunately, after their proposals were released, virtually the entire market, from buy-side asset managers, pension funds, and commercial end-users, to sell-side dealers and even prospective swap execution facilities, told me that regulators got it wrong.
"In order to respect congressional intent reflected in the heavily negotiated language of the SEF definition, we carefully drafted H.R. 2586 to direct regulators to provide market participants with the flexibility they need to obtain price discovery in the market and in the method of execution they use. In addition to allowing voice execution on a SEF for any trade, the bill prohibits "the 15 second rule,' restrictions on the RFQ model and a "sweep the book' requirement. I feel the specific nature of this direction is necessary to promote the conditions for a competitive regulated swaps market to thrive in the U.S.
"Mr. Canseco's legislation, H.R. 3045, was also introduced, at least in part, because of concerns over regulatory interpretation of the statute. I have been hearing from pension plans that the SEC and CFTC rules would prohibit them from using swaps to hedge against market volatility and manage the obligations owed to retirees. H.R. 3045 ensures ERISA pension plans can engage in swap transactions without their swap dealer counterparties incorrectly being labeled as "fiduciaries,' which would make it impossible for the transactions to take place in the first place.
"We will also discuss Mr. Stivers' bill, HR 2779, which seems to be a common-sense solution to address inter-affiliate trades, along with Ms. Hayworth's bill, H.R. 1838, which repeals Section 716 of Dodd-Frank, otherwise known as the "swap push out' provision. Because there was no hearing on this issue, and as Ben Bernanke has said, it "would make the U.S. financial system less resilient and more susceptible to systemic risk,' I look forward to having a thoughtful discussion about Section 716 and this bill today.
"Once again, I look forward to a healthy dialogue this morning and to continuing to work with my colleagues on the other side of the aisle to make the necessary legislative fixes to effectively regulate our derivatives markets."