SCOTT GARRETT FINANCIAL SenVICES coMsNTTEE oem Congress of the Cuited States oi ne suo cent House of Representatives en ‘CONSTITUTION CAUCUS Blashington, DE 20515-3005, a ee March 3, 2011 ‘The Honorable Gary Gensler Chairman ‘Commodity Futures Trading Commission Three Lafayette Centre 1155 21* St, NW ‘Washington, DC 20581 Dear Chairman Gensler; ‘Thank you for testifying before the Financial Services Committee at the February 15, 2011, hearing entitled, “Assessing the Regulatory, Economic, and Market Implications of the Dodd- Frank Derivatives Title.” I would appreciate your response to the following questions that, due to time constraints, I was not able to ask during the hearing, 1. Tam concerned that the CFTC, through its rulemaking, may be setting up a system that encourages regulatory arbitrage, one where American financial companies will be severely disadvantaged vis-d-vis their foreign competitors. Ata time when every job is critical to this recovering economy, it is imperative that we preserve America’s status as the preeminent financial center. Unnecessarily onerous rules will, without doubt, drive money to non-US markets. You have previously testified that you are in contact with regulators in Europe and beyond, and that you expect them to follow the American approach, But what assurances ~ real, concrete assurances ~ do you have that these jurisdictions will follow our approach? How can you convince us that we won't see ‘American fitms lose business to foreign competitors and lose jobs overseas? Asa follow-up to the previous question, the Dodd-Frank Act recognizes the limits of U.S. jurisdictional authority by clarifying that the provisions of Title VII do not apply to activities outside the United States unless they have a direct and significant connection with activities in, or effect on, commerce of the United States. What steps has the CFTC taken, or does it intend to take, to ensure that U.S. firms can compete internationally on a evel playing field with their foreign competitors in foreign jurisdictions? Title Vil-related rules are being proposed by both the CFTC and the SEC at a rapid pace and in many instances without apparent coordination, ‘Their seems to be no order in which the rules are being proposed, which can have a profound impact on the ability of the public to meaningfully comment on the rules and their impact on the financial markets, For example, the business conduet rules for swap dealers and major swap participants were proposed well before the rules defining swap dealer and major swapparticipant were proposed, You have justified this “cart before the horse” problem in order to meet statutory deadlines. Are you concerned that this pattern of rulemaking coupled with its unsustainable pace is depriving the public of the opportunity to provide ‘meaningful comment on the CFTC’s proposals? How will the CFTC ensure that the public has had a meaningful opportunity to comment on all of its proposals, consistent with the requirements of the Administrative Procedures Act? Will you re-propose rules where the overwhelming majority of the public comments disagree with the CFTC’s proposals (ie. real-time public reporting, designated contract markets core principles, swap dealer external business conduct standards, ete.)? Most observers of Title VII would probably agree that the requirements under the statute are demanding and will have far-reaching consequences. It is concéming to me, however, that the CFTC in many cases is going even beyond what the statute requires. For instance, many would like to preserve the ability of state pension funds to hedge risk. ‘Congress decided to maintain that flexibility in Dodd-Frank. Through your business conduct standards rule, however, you have clearly gone beyond what the statute requires and applied obligations on firms that will essentially make it impossible for pensions to affordably hedge their exposure. What authority do you cite in going beyond the scope of Dodd-Frank in this area and others? Given that Congress specifically modeled the "market maker" concept of the "swap dealer” and "security based swap dealer" definitions on the '34 Act, it would seem that a reasonable interpretation of those terms would be based on precedent from the securities laws. In the joint rulemaking defining "swap dealer" and "security based swap dealer," however, the CFTC and SEC appear to have taken different approaches to that precedent. Specifically, the CFTC seems to have rejected the "dealer/trader" distinction which exists under the relevant statutory precedent, and which the SEC acknowledges in interpreting nearly identical language in the definition of "security based swap dealer". Can you please explain how it would be consistent with congressional intent to have only one agency recognize the "dealer/trader" distinetion embodied in the "swap dealer" and "security based swap dealer" definitions? Proponents of position limits often claim that the so-called “massive passives” have adversely affected the functioning of the futures markets and contributed to price fluctuations, Iam aware of only two reports which attempt to provide a factual analy: of the issue and neither is compelling. The Senate Permanent Subcommittee on Investigations? 2009 report lacked direct causal evidence. The 2008 CFTC Interageney ‘Task Force on Commodity Markets Report found no direct causal relationship between speculative activity and the run-up in gasoline prices during 2007-2008. Are you aware of any credible reports providing a clear, factual record that diversified commodity index funds distort prices? Given the increased costs associated with the proposed! rule, including the risk that price discovery shifts to foreign boards of trade, doesn’t a eost- benefit analysis dictate the CFTC should wait to impose position limits until it has demonstrated a need to do so?7. In many sections of the statute (real time reporting, position limits, SEFs), the CFTC is, required to assess how its proposals might impact liquidity. Yet in none of the relevant notices of proposed rulemakings is there any discussion of the impact on liquidity. Has the CFTC reviewed how its real time reporting, SEF (including block trade definition) and position limit proposals will affect market liquidity? If'so, what are the results of that review? If not, why not? Is there a reason why the CFTC’s proposals do not contain a section that discusses whether the cost of its rules will increase the probability that ‘market participants in the derivatives markets may seek liquidity offshore? Will you ‘commit to placing such a discussion in your rules going forward? 8. The CFTC is charged with coming up with capital requirements for swap dealers and major swap participants. Relative to the banking regulators, however, the CFTC does not have the long-time institutional and technical expertise associated with developing policy on this issue, Yet capital requirements will have a significant impact on the swaps market. Please comment on how the CTC will approach this issue, How will the CFTC develop capital requirements to ensure a competitive marketplace and broad participation? Will the CFTC impose Basel capital requirements, which are bank requirements, on non-bank swap dealers in the energy and agricultural industries? Has the CFTC released an advanced notice of proposed rulemaking to get input from the public to determine how imposing Basel capital standards on non-bank swaps dealers i the agricultural and energy sectors would affect hiring, capital expenditures, and the pricing of goods and services for companies in those sectors? If not, will you commit to doing so? Does the CFTC intend to release an advanced notice of proposed rulemaking analyzing how the imposition of capital charges on swap dealers will impact the pricing of non-cleaced swaps between swap dealers and end-users? If not, will you commit to doing so? 9. The majority of end-user hedging is done with bank swap dealers, and the Federal Reserve Board's rules for margin will apply to bank swap dealers and bank major swap participants, Do you anticipate that the CFTC's proposed rule on margin for non-bank swap dealers will differ substantially from the rule proposed by the Federal Reserve Board? 10, The CFTC’s governance rulemaking proposed to limit the voting and ownership of enumerated entities (swap dealers, major swap participants, and others) in derivatives clearing organizations to a 20% individual limit and a 40% agategate limit, In proposing the aforementioned limits, the CFTC’s rulemaking ignored the fact that Congress had. already spoken on the issue of voting and ownership limitations when it explicitly did not include the “Lynch Amendment” in the Dodd-Frank Act. Please explain why the CFTC proposed a rule which contains almost identical language as that found in an amendment that was openly debated and rejected by Congress. In addition, please explain how the CFTC could propose a rule that limits the voting and ownership of derivatives clearing organizations, designated contract markets, and swap execution facilities when it has not yet conducted a review of these entities, as is required by Section 726(b) of the Dodd- Frank Act. Ifyou have conducted a review which recommends that numerical limits on ‘ownership and voting are “necessary”, then please provide it and make it publiclyavailable for comment, Iam especially interested to know how the CFTC could determine that a 20% individual limitation on voting and ownership is necessary for swap execution facilities, given that they do not yet exist. If you have not conducted a review, then please provide the legal and empirical justification for the voting and ownership limits for SEFs, DCOs, and DCMs in your proposed rule, 11, Why has the CFTC chosen to require market participants who use @ SEF to send a request for quote to five entities? What is the legal and policy justification for interpreting the ‘word “multiple” in the swap execution facility definition to mean five? Why is the CFTC’s proposal substantially different from the SEC’s on this interpretation? Are the agencies working together on the SEF definition? What legal and policy justification is there to require a dealer entering an order on a SEF on behalf of its customer to post that order for fifteen seconds? Has the CFTC thought through the market implications of this requirement? What are they? 12, Do you agree with Ranking Member Frank’s letter, dated February 18, 2011, in which he states that “swaps are very different products than those currently traded in the highly evolved equity and futures markets”? ‘Thank you for your consideration of these questions and your timely response. Sincerely, feat loot / Scott Garrett Chairman Subcommittee on Capital Markets andl Government Sponsored Enterprises