Global Reform for Derivatives Markets

Summary

---

Global Reform for Derivatives Markets

LSE: Public Lectures and Events | Guest: Gary Gensler, Chairman of the U.S. Commodity Futures Trading Commission (CFTC)

Date: October 13, 2011

---

Episode Overview

This episode features Gary Gensler, Chairman of the U.S. Commodity Futures Trading Commission, discussing the challenge and necessity of global derivatives market reform. Against the backdrop of the 2008 financial crisis and ongoing global regulatory responses, Gensler details the implementation of the Dodd-Frank Act in the United States, parallel efforts in Europe (notably EMIR), and the essential need for international coordination to ensure effective, transparent, and resilient financial markets. The lecture is followed by a detailed Q&A with scholars and market practitioners.

---

Key Discussion Points & Insights

1. Context: The Financial Crisis and Regulatory Failure

• Gensler frames the discussion with a reflection on the 2008 financial crisis, emphasizing systemic failures—not only within financial institutions, but crucially among regulators worldwide.
• The crisis exposed how even those with no direct link to derivatives suffered severe consequences due to leverage and risk embedded in opaque markets (03:00–04:20).

"The financial system failed... but also the regulatory system itself failed."
— Gary Gensler (03:00)

---

2. Derivatives 101: What They Are and Their Growth

• Gensler provides a pedagogical history of derivatives:
  • Origins: Started as tools for grain farmers to lock in prices; evolved from forward contracts (requiring delivery) to futures (allowing trading without delivery).
  • Modern Swaps: In the 1980s, swaps were invented to hedge financial risks—primarily interest rates and currency exposure.
• Derivatives vastly expanded, especially in ‘off-exchange’ or ‘over-the-counter’ (OTC, i.e., unregulated) forms (06:30–07:30).

---

3. Role of Derivatives in the Financial Crisis

• Swaps, particularly credit default swaps (CDS), amplified risk and interconnectedness, often with little capital cushion—a key factor in the crisis (04:00–05:10).
• AIG Financial Products (headquartered in London) is cited as a major example, with $180 billion in U.S. taxpayer bailout required (04:33–05:20).

---

4. Principles of Effective Markets: Transparency, Competition, and Regulation

• Gensler emphasizes economic principles:
  • Markets function best when transparent, open, and competitive—citing U.S. traditions of financial regulation since the 1930s (05:25–06:30).

"Markets work best when they are transparent, open and competitive."
— Gary Gensler (05:30)

---

5. Dodd-Frank Act: Key Regulatory Reforms

• Central Objectives (08:44):

  1. Transparency:
     • Mandates real-time (post-trade) and pre-trade transparency for swaps—reported to both the public and regulators (08:46–09:11).
  2. Central Clearing:
     • Swaps must clear through central counterparties (CCPs), which lowers systemic risk by standing between counterparties and marking trades to market daily, requiring collateral (09:12–15:24).
  3. Dealer Regulation:
     • Dealers (mainly large banks) subject to capital and margin requirements, plus business conduct standards (15:55–18:29).

• International Comparison:

  • Europe is enacting similar reforms (EMIR for clearing; MiFID revisions for trade transparency) (09:35–13:05).
  • Critique: To be successful, regulation must be global, as risk and transactions easily move across borders.

---

6. The Case for Harmonization and Global Coordination

• The swaps market is enormous ($300 trillion in U.S. notional value; $620 trillion globally), and highly international (03:43; 51:24).
• Emphasizes ongoing coordination with European and Asian regulators, aiming for ‘comparable and comprehensive’ regulatory regimes to prevent regulatory arbitrage (17:36–20:27, 21:12).

"The effectiveness of reform really will depend on our partnership together."
— Gary Gensler (23:46)

---

7. Challenges and Potential Unintended Consequences (Audience Q&A Highlights)

a. Is International Uniformity Risky?

• Tim Frost (LSE Governor) raises: Could uniform regulations increase systemic risk if everyone behaves the same under stress?
  • Gensler’s Response (27:17): While acknowledging trade-offs, he defends global minimum standards, particularly for risk management and transparency, as migration to laxer jurisdictions would otherwise undermine reform.

"Capital and risk can at a click of a button...migrate to the darker market... I think transparency helps markets, lowers cost."
— Gary Gensler (27:17–28:41)

b. Asia and Fragmentation

• Peter Norman (researcher): Notes Asian fragmentation and asks about clearinghouse failures.
  • Gensler describes active global outreach and acceptance of cross-border clearinghouses, provided they're well-regulated. He notes past failures (Hong Kong ’87, Paris, Malaysia) and emphasizes the need for robust risk management in CCPs (30:07–32:01, 32:02–33:23).

c. Extraterritoriality and US Person Definition

• Baron Shrine (Morgan Stanley): Asks about legal definitions for cross-border transactions.
  • Gensler explains the CFTC will seek public input to clarify, but basic test is whether activity has direct/significant effect on U.S. commerce (33:30–35:37).

---

8. Market Structure: What Gets Cleared?

• Prof. Dempster (Cambridge) queries what proportion of the notional $620 trillion swaps market will really be centrally cleared.
  • Gensler: Dealer-to-dealer and dealer-to-financial (about 90%) are significant, especially in interest rates (likely “well over half” will be cleared) but not all products have sufficient liquidity for clearing (36:06–37:59).

---

9. Market Impact, Liquidity, and Cost Concerns

• Lan Sukla (ex-head, Canadian banks): Warns overregulation might drive banks out, reduce liquidity for corporates, and impact real-economy uses of ‘vanilla’ derivatives (41:02–42:35).

"We really rely on these financial institutions to be there in the future...to manage the liquidity needed."
— Lan Sukla (41:02)

• Gensler counters that public risk reduction outweighs possible lower bank profits:

"If you took one basis point...out of a $300 trillion marketplace...that's US$30 billion. All of corporate America would get some benefit."
— Gary Gensler (43:02–43:37)

---

10. Coordination with the SEC and Regulatory Gaps

• Audience notes U.S. regulatory overlaps between CFTC (commodities/interest rate swaps) and SEC (credit default swaps), risking inconsistent standards.
  • Gensler notes close cooperation but admits some differences persist due to distinct statutory origins and market structures (46:05–47:17).

---

11. Segregation, Portability & Client Protections

• Roy (industry): Highlights that customer protections in the clearing process differ between the U.S. (segregation, portability via FCMs) and Europe.
  • Gensler: Agrees—segregation and portability are crucial, with U.S. rules embedding these features (48:39–49:53).

---

12. Looking Forward: China and the Future of Regulation

• Gensler envisions China’s swaps market outgrowing the U.S. in coming decades, and urges them to “not take 30 years” to implement effective regulation, as transparency and risk controls must be in place before markets reach systemically risky scale (51:41–52:22).

---

Notable Quotes & Memorable Moments

• On the Human Cost of the Crisis:

  "Eight million Americans are still out of work. That had no connection to these exotic products."
  — Gary Gensler (42:35–42:56)

• On the Need for Consensus:

  "Effective reform cannot be accomplished by one nation alone. It will require comprehensive international response."
  — Gary Gensler (23:23–23:32)

• On Transparency’s Role:

  "The more transparent a marketplace is, the more liquid, the more competitive it is."
  — Gary Gensler (10:16–10:28)

• On Market Size:

  "There’s a $620 trillion swap market around the globe...That’s $12 of swaps for every dollar of goods and services in the global economy."
  — Gary Gensler (51:24–51:39)

---

Timestamps for Key Segments

• 03:00 — Systemic failures of financial and regulatory systems
• 04:33 — AIG as an example of derivatives contagion
• 06:30 — Explanation and history of derivatives, swaps & futures
• 08:44 — Three pillars of Dodd-Frank swap regulation
• 13:49 — Explanation of central clearing and its risk reduction
• 16:09 — Dealer regulations: Capital/margin requirements and risk mitigation
• 18:29 — Role of business conduct, back office standards
• 19:31 — Global coordination: Memorandums, mutual recognition, collaboration with Europe
• 23:32 — Call for comprehensive international response
• 27:17 — Should we worry about global regulatory uniformity? (Q&A)
• 36:06 — What percent of market will be centrally cleared? (Q&A)
• 41:02 — Will regulation kill market liquidity? (Q&A)
• 46:05 — Coordination with SEC, regulatory overlaps (Q&A)
• 48:39 — Segregation & portability in clearing client assets (Q&A)
• 51:41 — Gensler’s advice to China

---

Tone & Language

Gensler employs a conversational, sometimes wry tone, blending technical expertise with analogies (grain markets, gas stations, the cost of regulation vs. benefits). He is candid about the U.S. and Europe's unfinished business, and forthright in defending transparency and international standards as public goods outweighing private sector complaints.

---

Summary Takeaway

The global derivatives market is too large and interconnected for national approaches to suffice. The Dodd-Frank Act, EMIR, and related reforms mark a historic shift toward real-time transparency, robust clearing, and international consensus. But challenges remain—balancing uniformity and innovation, safeguarding liquidity without repeating past mistakes, and ensuring reforms keep pace with innovation and globalization.

Gensler’s parting message: “We ought to get the job done” with urgency and mutual cooperation, or risk repeating the very failures the world cannot afford.

---

Transcript

[Charles Buthardt]

Charles Buthardt, who normally chairs these proceedings of the regulation seminar at fmg, has asked me to step in. Charles is traveling. It's our great pleasure today to have Gary Gensler, who is the chairman of the cftc, the Commodity Futures Trading Commission in the United States, as you all know, and Gary is going to talk to us about global reform of the derivatives market. The CFTC has been on the line for implementation of the Dodd Frank act and is active in developing rules. And this is getting quite a bit of discussion in the United States. But as we know, there's been a lot of regulatory initiatives in Europe and the question of carbonization of rulemaking is a difficult topic and a lively topic. So just a word about Mr. Gensler's background. He's been in public service basically for the last decade or so in one capacity or another. He was in the US treasury in various functions in the Clinton administration. Then he was actively involved in the development of sardines Oxley, working with Paul Sardanes and his staff, and since 2009 has been at the CFTC. So I understand that Gary is going to have, he says, 17 minutes, but I have a feeling it's going to be a bit longer than that of prepared remarks and be open for Q.

[Gary Gensler]

And A. I want to thank Ron for that kind introduction, lse, for allowing me to speak here today and inviting me. It's quite an honor to speak here in London. I'm actually here for a conference tomorrow with a group of international regulators. We're going to be talking about high frequency trading, which will not be really the topic of my talk, but I guess if you wish, you'll ask me a question or two about that. I'm also here to talk and to coordinate with regulators here in London and market participants about reform of the derivatives marketplace, or what we in the United States calls the swaps marketplace.

[Moderator or Host (possibly from LSE or FMG)]

It's a bit of pride to actually.

[Gary Gensler]

Speak here at LSE also, because the last time I was here was actually 34 years ago. It was a different building. It's longer ago than some of your age. But my identical twin brother Rob went to LSE for a year, a sort of junior year abroad. I don't know what he really studied. Might have been much time in the pub, but enough on Rob.

[Moderator or Host (possibly from LSE or FMG)]

It'S been.

[Gary Gensler]

Three years since the financial crisis and I'm going to talk a bit on derivatives. That's really it. But it's been three years since the financial crisis in the United States and I think it's clear to anyone who's looked at it that the financial system failed. It failed in America, it failed here, but also the regulatory system itself failed.

[Moderator or Host (possibly from LSE or FMG)]

So many people in Europe and the.

[Gary Gensler]

United States who had never had a connection to these contracts called derivatives, and I'll talk a little bit about those.

[Moderator or Host (possibly from LSE or FMG)]

In a minute, or any other exotic.

[Gary Gensler]

Contract had their lives hurt by the risks that were taken on in this marketplace by financial actors.

[Moderator or Host (possibly from LSE or FMG)]

And the effects of the crisis remain.

[Gary Gensler]

And they're very real in the US and in Europe, where we still have.

[Moderator or Host (possibly from LSE or FMG)]

High unemployment, homes that are worth less.

[Gary Gensler]

Than their mortgages, pension funds that are still have not recognized the value that they once had. And we still have a significant uncertainty in the financial system in the US and even greater uncertainty here in Europe.

[Moderator or Host (possibly from LSE or FMG)]

And though there were many causes of.

[Gary Gensler]

The crisis, no doubt many causes, it's.

[Moderator or Host (possibly from LSE or FMG)]

Evidence that swaps, or what again you.

[Gary Gensler]

All might call off exchange derivatives here.

[Moderator or Host (possibly from LSE or FMG)]

Played a central role. Swaps added leverage to the financial system with more risk backed by less capital.

[Gary Gensler]

They also contributed, particularly through something called credit default swaps, to the bubble in our housing market in the United States with a lot of tiering and exotic products on top.

[Moderator or Host (possibly from LSE or FMG)]

They contributed to a system where large.

[Gary Gensler]

Institutions which were once thought too big to fail because a bank might be so big if it came down, it would hurt an economy. They also started to coin this frame too interconnected to fail. Who would have thought? But new phrase because the swaps connected the businesses. If we had any need for evidence, we could think right here in London. There was a company called AIG Financial Products. Now it was an affiliate of a US Insurance company. In fact the largest insurance company in the United States. But its main business was here in London, also in Greenwich, Connecticut. But when it failed, the sobering fact of the matter is that US taxpayers put up $180 billion. When I give speeches there, I note that it's $600 for everybody in the audience. It's just math.

[Moderator or Host (possibly from LSE or FMG)]

Look, I think that because I'm at.

[Gary Gensler]

Lse, I'm speaking to a lot of converts to the point of view I'm about to express.

[Moderator or Host (possibly from LSE or FMG)]

Markets work best when they are transparent, open and competitive.

[Gary Gensler]

Why is that? I mean, we've had the benefits in the United States of well regulated markets since the 1930s in something called the futures market and something called the secur. President Roosevelt actually went to our Congress in the 1930s and asked for two regulators to address the manipulation and excessive speculation in the securities market. So you know, we have this thing called the securities and Exchange Commission. But he also addressed himself to the commodities markets. And derivatives started in the United States. I'm going off script, so you'll have to give me more than this 17 minutes now. But derivatives started in the United states.

[Moderator or Host (possibly from LSE or FMG)]

In the 1860s when folks in the grain markets wanted to lock in a price.

[Gary Gensler]

Do we have small animals crawling around or no?

[Professor Michael Dempster]

No, it's the head of the fmg.

[Moderator or Host (possibly from LSE or FMG)]

Head of the fmg. But very simply put, what is a derivative?

[Gary Gensler]

What is a swap or a future? It is an opportunity for somebody to lock in the price or rate of something. It started with people growing corn and wheat and they wanted to lock in the price at harvest time.

[Moderator or Host (possibly from LSE or FMG)]

Very simple concept, but they didn't want.

[Gary Gensler]

To necessarily have to deliver the corn or wheat. And so somebody invented this thing called a futures contract. It was a variation on something earlier used, a forward contract. Forwards have existed since antiquity. In Greek and Roman times, that means you're actually delivering the product. But here you didn't have to deliver the product, but you could lock in the price at a later date.

[Moderator or Host (possibly from LSE or FMG)]

Fast forward to the 1980s and a.

[Gary Gensler]

New product called swaps was invented and it was to hedge mostly financial risk in the interest rate markets. I wanted to lock in an interest rate, I wanted to lock in a currency rate. I didn't necessarily want to borrow money, by the way, but I just wanted to lock in the interest rate.

[Moderator or Host (possibly from LSE or FMG)]

And that market grew. The Dodd Frank act passed last year.

[Gary Gensler]

In Congress because the swaps market really did contribute to the calamitous results we had in 2008.

[Moderator or Host (possibly from LSE or FMG)]

And for the first.

[Gary Gensler]

Time brought oversight to the swaps market.

[Moderator or Host (possibly from LSE or FMG)]

The futures market in the United States.

[Gary Gensler]

Has been regulated since the 1930s. As I said, the swaps market was not regulated in the United States, not in Europe, not in Asia.

[Moderator or Host (possibly from LSE or FMG)]

There was a sort of a global.

[Gary Gensler]

Consensus that this market was a bank market. It didn't really have to be regulated, or it was only large and sophisticated players and it would in some ways take care of itself and have some self discipline. Or in fact, maybe we were regulating the bank somewhere and that would contain this thing.

[Moderator or Host (possibly from LSE or FMG)]

Well, in fact, all of those assumptions.

[Gary Gensler]

And others proved to be assumptions that were not good. I don't know what an economist say, not valid, I guess, if I remember some of this.

[Moderator or Host (possibly from LSE or FMG)]

And so Congress moved forward and they asked the Commodity Futures Trading Commission and.

[Gary Gensler]

The securities and Exchange Commission to oversee this market.

[Moderator or Host (possibly from LSE or FMG)]

And in essence, what the act does.

[Gary Gensler]

Is three main things, but lots of details.

[Moderator or Host (possibly from LSE or FMG)]

One, it brings transparency to the swaps.

[Gary Gensler]

Market, similar to the securities and futures market before it.

[Moderator or Host (possibly from LSE or FMG)]

And it does that by requiring after.

[Gary Gensler]

The trade reporting of the trade. We call it real time reporting. You might call it post trade transparency on the price and volume and before the trade transparency that some of this comes to the market or pre trade transparency. And we have a term it would come to something called a swap execution facility.

[Moderator or Host (possibly from LSE or FMG)]

Second thing, it helps lower risk by saying that the swaps have to be.

[Gary Gensler]

Cleared in a central clearinghouse. That's an innovation, by the way, of the 1890s, which I'll get to in a little bit.

[Moderator or Host (possibly from LSE or FMG)]

And thirdly, it says the dealers themselves.

[Gary Gensler]

Usually large banks, sometimes large oil companies, but the dealers themselves have to be regulated for capital and margin in other ways.

[Moderator or Host (possibly from LSE or FMG)]

Now in Europe, you're doing something similar. There's something called the European Market infrastructure.

[Gary Gensler]

Regulation that's wending its way through Parliament and the European Council and the European Commission. It goes by shorthand. Amir.

[Moderator or Host (possibly from LSE or FMG)]

The US Law and Amir both would cover the entire product suite. This is swaps on interest rates, currencies, commodities and equities, credit default swaps that.

[Gary Gensler]

Have been talked about so much. And it also covers both those that are traded on exchanges or cleared and those that are bilateral, that are just between two party.

[Moderator or Host (possibly from LSE or FMG)]

The Dodd Frank also has essential reforms.

[Gary Gensler]

To bring the transparency that I just spoke about. And again, speaking to economists, the more.

[Moderator or Host (possibly from LSE or FMG)]

Transparent a marketplace is, the more liquid, the more competitive it is.

[Gary Gensler]

And when markets are open and transparent.

[Moderator or Host (possibly from LSE or FMG)]

Price competition is facilitated.

[Gary Gensler]

It means more people can come in and bid away some of those spreads.

[Moderator or Host (possibly from LSE or FMG)]

It lowers cost to the companies that use these products and ultimately the people.

[Gary Gensler]

That stand behind those products. In the United states alone, there's a 3, $100 trillion swaps market. That means there's $20 of swaps for every dollar in our economy. So if we just narrow the spread on those derivatives just a little bit, it helps the economy throughout and all the customers throughout. I think about filling up a tank of gas these days at whatever it is, $60 or $70 US and think, well, maybe behind it there might be $1,400 a swap somewhere in our economy. Behind it.

[Moderator or Host (possibly from LSE or FMG)]

While the derivatives marketplace has changed significantly since swaps came into being in the.

[Gary Gensler]

1980S, a constant has been that financial.

[Moderator or Host (possibly from LSE or FMG)]

Institutions really maintain an information advantage. So whether it's Wall street or the City of London, when a bank enters into a derivative transaction with a corporation, the bank knows how much its other.

[Gary Gensler]

Customers are willing to pay for the similar transaction.

[Moderator or Host (possibly from LSE or FMG)]

That information, however, is not generally made.

[Gary Gensler]

Available to the public.

[Moderator or Host (possibly from LSE or FMG)]

The bank benefits from internalizing this information.

[Gary Gensler]

In essence, there's an asymmetry. They have the information, the market does not.

[Moderator or Host (possibly from LSE or FMG)]

The Dodd Frank act though says that.

[Gary Gensler]

Swaps transactions that are standard enough to be cleared and also those that are not cleared have to have transparency after.

[Moderator or Host (possibly from LSE or FMG)]

The trade price and volume out as.

[Gary Gensler]

Soon as technologically practicable.

[Moderator or Host (possibly from LSE or FMG)]

But also if it's traded, it should.

[Gary Gensler]

Be traded in a transparent central place, electronically most likely, but in a central place in Europe.

[Moderator or Host (possibly from LSE or FMG)]

The European Commission will address the public.

[Gary Gensler]

Transparency requirements later, not in this emir.

[Moderator or Host (possibly from LSE or FMG)]

But in something later called the Markets.

[Gary Gensler]

And Financial instruments directive or MiFID reform.

[Moderator or Host (possibly from LSE or FMG)]

I think it's critical when this reform does take place that it have a.

[Gary Gensler]

Strong requirement that standardized swaps be traded on exchanges or similar swap execution facilities have true pre trade transparency. I think it's critical that it has the post trade transparency as well. We're making progress, but I think in the United States we're probably a little ahead in time on these transparency initiatives.

[Moderator or Host (possibly from LSE or FMG)]

The Dodd Frank act also includes transparency to regulators.

[Gary Gensler]

In Europe this is very similar.

[Moderator or Host (possibly from LSE or FMG)]

Amir has this, that the transactions would have to be reported to something called a data repository. But that's so the regulators can have the information. This is very important. Not only that we have a window.

[Gary Gensler]

Into the market, which we do not have right now, neither in Europe or the United States do regulators really have.

[Moderator or Host (possibly from LSE or FMG)]

A window into the market. But also so there can be an effective cop on the beat that we.

[Gary Gensler]

Can police for fraud and manipulation and so forth.

[Moderator or Host (possibly from LSE or FMG)]

The second major reform I talked about is clearing. Clearing again from the 1890s, clearing houses.

[Gary Gensler]

Have functioned in tough times through two world wars, through the Depression, through tough crises.

[Moderator or Host (possibly from LSE or FMG)]

And what they actually do is they stand between two counterparties and if either.

[Gary Gensler]

Counterparty defaults, they fulfill the transaction.

[Moderator or Host (possibly from LSE or FMG)]

As.

[Gary Gensler]

If the party that defaulted was still there.

[Moderator or Host (possibly from LSE or FMG)]

Now when a customer does not clear a transaction, they take on the bank's credit risk.

[Gary Gensler]

So you have a choice central clearing, you don't take on a bank's credit risk. Clear transactions, you're protected in case the bank fails. And that's why it lowers systemic risk to bring as much of this into central clearing.

[Moderator or Host (possibly from LSE or FMG)]

And we've seen over many decades that banks do fail.

[Gary Gensler]

And as sure as I'm standing here at LSA and hopefully I come back before 34 more years Banks, there will be other banks that will fail. I mean in Europe we've just seen this in the last week. I don't know if we call that a failure, but certainly a bank that has to be supported by central governments.

[Moderator or Host (possibly from LSE or FMG)]

And what does central clearing do? It basically on A daily basis values.

[Gary Gensler]

The transaction, and on a daily basis says that one party or the other has to put up money, it's called collateral or margin, to support in case they go belly up, they go under. It's a simple concept from about 120 years ago, but it has to be well regulated, of course.

[Moderator or Host (possibly from LSE or FMG)]

And under Dodd Frank, all clearable swaps, whether they're done on an exchange or off or subject to this clearing requirement. And there is some debate here in Europe whether to cover the on exchange swaps. We do think that it's very important.

[Gary Gensler]

To have the same scope as we're having in the United States to cover the on exchange swaps as well as.

[Moderator or Host (possibly from LSE or FMG)]

Off exchange swaps in this clearing requirement. But I'm encouraged by some of the work done by the European Council.

[Gary Gensler]

But I know that they have to go in and negotiate with the European Parliament and just as we did in the United States, come to some resolution and compromise.

[Moderator or Host (possibly from LSE or FMG)]

Thirdly, is the regulation of the dealers themselves.

[Gary Gensler]

You can think of the banks generally in this.

[Moderator or Host (possibly from LSE or FMG)]

And Dodd Frank included significant reforms there as well. It did not just assume that because.

[Gary Gensler]

It'S a bank, it's well regulated. Proof positive, as the system did fail back in 08.

[Moderator or Host (possibly from LSE or FMG)]

And though Amir is organized differently, it does have many of the important features.

[Gary Gensler]

Of what we have in the United.

[Moderator or Host (possibly from LSE or FMG)]

States, including that the dealer has to have sufficient capital and margin for protecting the transactions and something called risk mitigation techniques. One of the lessons of the financial crisis was that dealers were insufficiently prepared for the losses they could take on if their swap counterparty was to fail.

[Gary Gensler]

That was most obvious in aig, but it was not isolated to AIG capital.

[Moderator or Host (possibly from LSE or FMG)]

Requirements for the students in the room.

[Gary Gensler]

Just so I do my little teaching moment.

[Moderator or Host (possibly from LSE or FMG)]

Capital requirements help protect the public by.

[Gary Gensler]

Lowering the risk of a dealer's failure margin.

[Moderator or Host (possibly from LSE or FMG)]

On the other hand, is that which you collect from the counterparty or that the bank pays the counterparty. So it sort of protects both ways, the dealers and the customers.

[Gary Gensler]

In volatile times or uncertain times, if.

[Moderator or Host (possibly from LSE or FMG)]

There'S some default, both are important.

[Gary Gensler]

In America, we do not just rely on one regime, but both are mandated in statute.

[Moderator or Host (possibly from LSE or FMG)]

Now, I think it's important that we work with European regulators and around the globe to align these. They're in Amir. And once Emir passes, one of the things that we'll be working with through.

[Gary Gensler]

International coordination with Iosco, which is this international securities regulators and Basel Committee or banking supervisors, is to try to align margin requirements so that we have harmonization as best we can across the two Continents.

[Moderator or Host (possibly from LSE or FMG)]

The Dodd Frank also allows us to.

[Gary Gensler]

Write business conduct standards to make sure that the banks are well managed or the dealers are well managing their risk.

[Moderator or Host (possibly from LSE or FMG)]

And that they have things. There's this boring stuff at the back office that matters, but documentation confirmations and so forth. And to protect against fraud and manipulation. I want to say just a word.

[Gary Gensler]

On our coordination here in Europe and elsewhere. We've been actively consulting and coordinating with regulators.

[Moderator or Host (possibly from LSE or FMG)]

And just as we do domestically, we.

[Gary Gensler]

Actually share our memos. We've been sending term sheets and memos over to Europe since I guess, last September. Jackie Mace is the head of AIR International and I should have introduced Andrei Karolenko as our chief economist. And if anybody wants to talk about high frequency trading, he's. He's the man that's got that one.

[Moderator or Host (possibly from LSE or FMG)]

But as we share these documents and so forth, we get a lot of feedback, narrow differences and so forth. We've also been meeting regularly with European leaders, met with Michel Barnier, who's commissioner.

[Gary Gensler]

At the European Commissioner for Internal Markets. I have his title, right?

[Moderator or Host (possibly from LSE or FMG)]

Yeah, numerous times.

[Gary Gensler]

And it's been a true partnership and.

[Moderator or Host (possibly from LSE or FMG)]

A true partnership with the European Securities Market Authority as well. As part of our implementation efforts, we're.

[Gary Gensler]

Going to be working with international colleagues on memorandums of understanding and something called cooperative oversight.

[Moderator or Host (possibly from LSE or FMG)]

We have a lot history at the.

[Gary Gensler]

CFTC of what we call mutual recognition agreements. I think here they're called just foreign regulatory regime recognition.

[Moderator or Host (possibly from LSE or FMG)]

But the substance of it is we're.

[Gary Gensler]

A small agency, about 700 people, not that much bigger than we were in the 1990s, maybe 10% bigger. We need to be a lot larger.

[Moderator or Host (possibly from LSE or FMG)]

But so we like partnering up with foreign regulators where we can. And our statute, Dodd Frank says if.

[Gary Gensler]

Something is comparable and comprehensive, two key.

[Moderator or Host (possibly from LSE or FMG)]

Words, comparable and comprehensive, we can defer.

[Gary Gensler]

Or rely on that foreign regulatory regime.

[Moderator or Host (possibly from LSE or FMG)]

So as Amir is being completed, as MIFID is being completed, we're hopeful that we can find that it's comparable and.

[Gary Gensler]

Comprehensive along the various chapter headings. It won't be one big decision, but it will be be sort of bi key, you know, clearing capital margin. And along the line.

[Moderator or Host (possibly from LSE or FMG)]

The CFTC is working with international regulators.

[Gary Gensler]

This Iosco organization that I mentioned earlier.

[Moderator or Host (possibly from LSE or FMG)]

Interestingly, Iosco is actually restructuring this coming year and we're hopeful that given our.

[Gary Gensler]

New roles in this world that we might actually get ordinary membership. This little commodities regulator is not even an ordinary member. There's 170 worldwide ordinary members. We're just making my little pitch here that maybe we can be an ordinary Member.

[Moderator or Host (possibly from LSE or FMG)]

But then again, maybe some people wouldn't.

[Gary Gensler]

Want a regulator that oversees $340 trillion part of IOSCO. No, I'm kidding around a little bit. Hopefully they'll let us in.

[Moderator or Host (possibly from LSE or FMG)]

In conclusion, the 21st century of finance.

[Gary Gensler]

Knows no geographic borders or boundaries.

[Moderator or Host (possibly from LSE or FMG)]

You can push a click of a mouse, a touch of a button and.

[Gary Gensler]

Capital and risk goes around the globe. It's just what it is. I started in Finance in 1979. It wasn't the case, it was pre Internet, of course.

[Moderator or Host (possibly from LSE or FMG)]

Moreover, the US and European financial systems are interconnected. They have many linkages, many, many linkages. One of those key linkages is in.

[Gary Gensler]

The swaps marketplace and that's why this.

[Moderator or Host (possibly from LSE or FMG)]

Reform is so critical. And just to take a second on the current debt crisis in Europe and.

[Gary Gensler]

I'm not going to tell you anything.

[Moderator or Host (possibly from LSE or FMG)]

You can't read in the newspapers, but this is not a debt crisis just of sovereign nations.

[Gary Gensler]

It's also a debt crisis of the banks and a funding crisis of the.

[Moderator or Host (possibly from LSE or FMG)]

Banks and of certain sovereigns. It's a stark reminder of our interconnectedness. It's leading the news in the United.

[Gary Gensler]

States as well, and as it well.

[Moderator or Host (possibly from LSE or FMG)]

Should, often and at a time when many market participants are taking a critical look at their exposures to bank they continue to bear credit exposure to the.

[Gary Gensler]

Banks through their uncleared swaps.

[Moderator or Host (possibly from LSE or FMG)]

If they're a customer of a bank and they're doing a swap, central clearing is essential to protect those bank customers as much as to protect the taxpayers. Moreover, it's precisely in times of crisis periods like this heightened market uncertainty, that transparent pricing is essential. It's even more valuable in periods of.

[Gary Gensler]

Uncertainty because it helps to lower some of the uncertainty premium that has to be priced in.

[Moderator or Host (possibly from LSE or FMG)]

So while European leaders are working to avert a deepening crisis, it's also critical that we each implement regulatory reform in the global swaps market to do our.

[Gary Gensler]

Bit to lower risk and to promote transparency.

[Moderator or Host (possibly from LSE or FMG)]

And as such, I think effective reform cannot be accomplished by one nation alone. It will require comprehensive international response.

[Gary Gensler]

And with the significant of the majority of the worldwide swaps markets here in Europe and in the US some estimate upwards to 85% between the the two continents.

[Moderator or Host (possibly from LSE or FMG)]

The effectiveness of reform really will depend.

[Gary Gensler]

On our partnership together. And I think we have a true partnership, though we have different cultures and political systems that we work together and.

[Moderator or Host (possibly from LSE or FMG)]

Cooperate and generally find consensus. So I thank you. I'll take questions.

[Gary Gensler]

I went over 17, but hopefully we have enough time to take a bunch of questions and I'm going to have A press avail as well. So if I can take questions from students and faculty and whomever else FMG normally invites. But I'll certainly take all the questions from the press at the end if there's, you know, if that's all right.

[Baron Shrine]

You made comments about interconnectedness in the swaps market and of course one of the markets that is probably the most interconnected of all is the FX market, which you're not going to be significantly regulating, I believe. Do you have a view on that?

[Gary Gensler]

I have a view as. What's your first name? Tony.

[Moderator or Host (possibly from LSE or FMG)]

Thank you, Tony.

[Gary Gensler]

The FX market is rather interconnected, as you say, and our US Congress moved forward and said that if you enter into a foreign currency swap it has to be reported to the data repositories and that the dealers still have to have some business conduct standards around their risk management and so forth. It did give the Treasury Secretary the right to determine that maybe not to bring it into, in essence, the other provisions, the central clearing or the mandatory trading. And that's something the Secretary has moved forward on. He's not finalized yet. But I think that there are, there are key protections of the reporting to the regulators that will still be in place and also the business conduct standards, as I mentioned.

[Charles Buthardt]

Could I ask you, when you ask your questions, to introduce yourself and if there's an organization that you affiliated with that organization.

[Tim Frost]

I'm Tim Frost. I'm proud to be a governor here at the LSE and also a market practitioner.

[Gary Gensler]

Oh my God.

[Tim Frost]

Thanks very much for coming to school.

[Gary Gensler]

How many governors are there? Oh, there are quite a few governors, I assure you that 600 governors, that's.

[Moderator or Host (possibly from LSE or FMG)]

More than we have in the United States.

[Tim Frost]

If you'd like to be a governor.

[Peter Norman]

I'm sure we could.

[Gary Gensler]

Think so. I'd be honored. But maybe, you know, I can't. I can't accept such honors.

[Tim Frost]

Is there such a thing as too much international coordination? So work done in this parish by Professor Charles Goodhart Abernash episode latterly work by Andy Haldane at the bank of England focused on the potential negative consequences of everyone acting the same way. When I think about regulation and I hear the uniform cry for regulatory standardization across the globe, I worry that the same regulation will have the unintended consequence of getting everyone to behave the same way in particular circumstances. And that work, I'm very risky putting words in the mouth of Professor Goodhart, but that work makes me think that that would make markets more unstable. Should we celebrate differences, regulatory differences? Should we think that different regulation regimes and different approaches will help us situate towards some wonderful future standard. Or should we try and get everyone to do everything the same way?

[Gary Gensler]

That's an excellent set of questions. I don't normally get it that way. It's normally people are, you know, saying let's get it together and bemoaning that the CFTC is because of the. In the United States it passed first that we're moving ahead more promptly than elsewhere. I think that it's a trade off balancing but I think on net it's better if we can get particularly risk management standards at least the minimum risk management standards at a certain uniform level. And I think that because capital and risk can at a click of a button. If the City of London had roles that were say less transparent, they didn't have real time reporting, didn't have some trading requirement, you might find transactions migrating here to the darker market, so to speak. Some people might think that was good, I would not. I think transparency helps markets, I think transparency lowers the cost of the people using these products.

[Moderator or Host (possibly from LSE or FMG)]

But I think also there will be.

[Gary Gensler]

Some differences and there's room for innovation as well. But I think that you need some minimums of risk management and transparency.

[Peter Norman]

My name is Peter Norman. I'm researching trade issues for a small London think tank centre to study financial innovation and also have written books on post trade issues including one on clearance. So that lengthy preamble. Two quick questions. One, you spoke of the fact that modern financial markets know no frontiers and there is cooperation. What about Asia? Because there's clear cases of of fragmentation of swatch regulation going on there. Every country seems to be wanting to set up its own CCT and also I do protect a lot of fears in London that there's too much regulation across the pond as it were that Singapore and other countries will start attracting things. Another quick question. You mentioned how CCPs in the US have never failed. I think they have to failed elsewhere and came very close to disaster in Hong Kong in 1987. What work are you doing on resolution regimes and where does that fit in with the sort of global efforts on dealing with systemically important financial infrastructure?

[Gary Gensler]

All right, I'll try. It reminds me of appearing in front of the European Parliament when members of parliament ask five questions and say it was just one or say it was two. On Asia we are making good progress and we get together often with our counterparts in Asia. It's not as far along as here in Europe and there's really a very real commitment at the highest levels of the European Commission and I think at the governments to get this done here. And as I say, estimates are there's some 80 or 85% of the markets between the two of us, the two continents, at least Canada is making good progress. Japan actually passed the first law on central clearing and data reporting and they'll probably be done with that by the end of 2012. They don't have the transparency initiatives that I mentioned. You asked about central clearing and fragmentation. We at the CFTC are fine with a clearinghouse being anywhere around the globe and that US parties can use it. It has to be well regulated, it has to have certain risk standards. But we're not one that thinks that there should be geographic or locational mandates because that does lead to fragmentation and higher costs when you can't bring some of that in about clearinghouses failing. We're aware of Hong Kong, I think it was after the 87 market crash and also one in France and I can't remember the third one, but there was a third one. Which was it? The Paris sugar market. But what was the third one? Malaysia one, I think. Malaysia Palm oil. Palm oil. Palm oil.

[Moderator or Host (possibly from LSE or FMG)]

And though there's probably much more for.

[Gary Gensler]

Me to study about it and learn about all three, I think it's really critical that the clearinghouses of course have vigorous risk management by marking the positions to market every day and actually bringing in collateral, having enough initial margin as well, and then the whole waterfall of risk management behind that. We're hopeful next Tuesday to take up our risk management roles. Final rules. And there's this international principles again out of this international organization called Iosco that I believe will be up to snuff on. Critical in a clearinghouse is that the contracts, they clear have some liquidity and reliable pricing. And that actually that is another reason why it's important to have transparency. The more transparent a marketplace, the lower you the risk of the clearinghouse. If you're relying on three or four or even 10 dealers for pricing, the clearinghouse has more risk than if you can see the pricing real time after the trade. You mentioned post trade transparency. So I was trying to tie that in. I don't know if I got all your questions, but hopefully enough of them. Thank you. Chairman.

[Baron Shrine]

My name is Baron Shrine and I'm with Morgan Stanley. I have a question around the time frames on territory.

[Gary Gensler]

I'm sorry, the time frames on what?

[Baron Shrine]

The time frames. Your thoughts on the time frames and the rules around extraterritoriality and on the.

[Gary Gensler]

Definition of US person. What's the second one definition of US person? So the question is timing around this topic of who is a US Person, customer. I've used a different phrase than person. Our statute is very clear that we're not to cover something unless it's one of those sort of negatives, unless the transaction, I'm paraphrasing, but the transaction has a direct. I think it's transaction or activity might be it's activity.

[Moderator or Host (possibly from LSE or FMG)]

So unless the activity has a direct.

[Gary Gensler]

Or significant effect on the commerce or activity in the US So activity has direct or significant effect on commerce or activity in the U.S. we think that's probably pretty clear to most people. But to get some guidance on it, we are going to probably seek some public comment. I don't know exactly when. I'd be hopeful later this year, this calendar year and put it out and get some feedback from people. Of course, what some folks, whether it's from Morgan Stanley or others are sort of saying is well, if a German bank does a transaction with a German insurance company, is that something you'd cover? Probably not. That's probably not a direct and significant effect on US commerce or activities therein. But if a US bank happened to be in London doing transactions with a US hedge fund that happens to be in London, is that covered? Well, we'll see. But probably yes. But then Morgan Stanley and others would say well probably not. And that's what public comment is, you know, and we'll, we'll go back and forth, particularly if the transaction's guaranteed by the parent in New York, you know, and you have all sorts of fact patterns and so forth. So we'll tease that out by getting more public comment on these matters.

[Professor Michael Dempster]

My name is Professor Michael Dempster from the University of Cambridge.

[Gary Gensler]

I've heard of that.

[Professor Michael Dempster]

Speculate on how much when all the regulation settles down globally.

[Gary Gensler]

Hopefully I agree with you.

[Professor Michael Dempster]

It should be informal. How much do you think of the. What is it now, 620 plus trillion notional of derivative products will actually be cleared?

[Gary Gensler]

It's an excellent question. Some of it will be determined by the clearinghouses themselves. But we're going to note that today in the interest rate market there's a clearinghouse right here in London that clears significant portion of the transactions between dealers, dealers to dealers. The bank of International Sentiment estimates that dealer to dealer transactions are somewhere around a third or 35 of the market. But under Dodd Frank, the dealer to financial institutions have to come in. That's about 55% of the market.

[Moderator or Host (possibly from LSE or FMG)]

So about 90, 91% of the swaps.

[Gary Gensler]

Market is between financials and financials or.

[Moderator or Host (possibly from LSE or FMG)]

Financials and dealers, I think of that 91%. Then the question is what portion of.

[Gary Gensler]

That can come in and in the interest rate market, a very significant portion probably, I'm going to get a little detailed here. The straight swaps in the euro, in the sterling and the yen and the US dollar out to 30 years and sometimes out to 50 years is currently cleared at this clearinghouse right here in the commodities space. Energy swaps are pretty successfully cleared by two large clearinghouses in the US and one here, I mean the folks in Chicago and Atlanta and here.

[Moderator or Host (possibly from LSE or FMG)]

And so I'll leave it to market.

[Gary Gensler]

Researchers to estimate the exact numbers. But it's likely to be well over half. But it's probably not the full 90% because some of that doesn't have the liquidity aspects, some of that doesn't have the pricing aspects that could come in.

[Professor Michael Dempster]

The reason I asked the question is because I've heard contradictory data. It's been said to me that take the least estimate, 30% of derivatives are bought and 70% are sold. Now, you know, supply doesn't seem to equal demand. And the point is that that was an estimate of actually interbank trading, the 30%. And also of course with major corporates like oil companies, power generators and so on and so on, who have technical staff who can do what they can assess risks fairly priced, maybe shop around amongst the few dealers there are and so on. But the other 70% was the estimate is sold to people who really don't know what they're doing and they've lost a lot of money. And these include of course, financial institutions and as we know from some of the products you were talking about three, four years ago based on credit, were bought by German and other European institutions. They're still on their books. There have been estimates between say 3 and 10 trillion as positive mark to market on say the leading 20 swap dealers in the world using American terms swaps. That worries me and I'm wondering if you're addressing this because most of the regulation, I mean of course if it's 90% is all interbank and sophisticated traders, then there's not too much to worry about. But my personal experience is not that.

[Gary Gensler]

Well, I'm not sure what the kernel of the question is, but is there something to worry about? Yes, the markets are not yet getting the benefit of our Dodd Frank or getting the benefit of wherever Emir lands. The markets are not getting that benefit yet.

[Moderator or Host (possibly from LSE or FMG)]

They're starting to grow into it.

[Gary Gensler]

People are anticipating market behavior starting to change. But it's really not there yet. We need to finish our rules. And I think it's really critical here in Europe that EMEA is finished and implemented. Once it is implemented, I think there will be a significant portion of the market. I don't know the exact percent, but I think it will be over half though, not the 90% that will come into central clearing, particularly in interest rates. The interest rate market is probably 80% of that 600 billion number or 600 trillion. And the interest rate market is right now. The proof positive of clearability is it's being cleared right here in London, the largest clearing else. Tom Waitwood, Dow Jones. Press avail. Press avail. You'll get it. You'll get it. I just want to make sure.

[Lan Sukla]

There's another question. Lan Sukla. I'm a global markets head of two Canadian banks that traded a lot of.

[Gary Gensler]

Wow, you get two Canadian banks at.

[Lan Sukla]

Once, one after the other 10 years.

[Gary Gensler]

Oh, oh.

[Moderator or Host (possibly from LSE or FMG)]

I didn't know if they were both paying you. I mean that would be kind of cool.

[Lan Sukla]

Now they're customers because I head up a company that I founded called Market Group.

[Gary Gensler]

Oh, so they both are paying you?

[Lan Sukla]

They are. I guess one thing I worry about as an ex global markets head is the amount of liquidity. Obviously the wholesale side of the banks provide a lot of liquidity and pricing into the huge amount of derivatives that are out there. And really the transparency that you try to create postray and you have a company that consolidates that information, that liquidity is on such a small portion of the total outstanding. If you had 620 trillion of swaps outstanding, obviously it would take decades to try to trade all of that. And that liquidity and the transparency is that last price. We really rely on these financial institutions to be there in the future to be able to continue to manage the liquidity needed for corporates, retail, mortgage markets. A whole bunch of things that financial institutions actually on the vanilla side have done historically quite well. I know a lot of the US institutions, followed by many of the Europeans got carried away in unstructured markets. But those vanilla derivative markets also serve some pretty important purposes. And I just do worry that over regulation scares these banks out of these markets. And you can already see it. High unemployment, no lending. There's a whole another kind of five to 10 years of no, you don't worry about it.

[Gary Gensler]

I worry about, I worry about that if we don't get this done, European public and American public still is at risk. We failed collectively, the financial systems failed. Eight million Americans are still out of work. That had no connection to these exotic products.

[Lan Sukla]

I agree with you on the exotic side, but lack of oversight or regulation or.

[Gary Gensler]

I think this cost benefit analysis is kind of so heavily weighted one way that, look, some dealers, economics may change. It might change. If you took one basis point, which is 1/100th of 1% out of a $300 trillion marketplace, that would lower the margin. I don't know what it would, but one basis point, you can do the arithmetic. It's US$30 billion.

[Moderator or Host (possibly from LSE or FMG)]

Well, but that means all of corporate.

[Gary Gensler]

America would get some benefit.

[Moderator or Host (possibly from LSE or FMG)]

Usually we say that's a good thing to lower the cost of corporate America.

[Gary Gensler]

But here some people are saying, well, I'm a little worried about those banks in New York.

[Moderator or Host (possibly from LSE or FMG)]

I mean, it will shift, it will shift some. It will shift some of the, it will. No, no, I understand. So here is a natural tension. There's a natural tension between a market.

[Gary Gensler]

Market regulator like the SEC or CFTC and maybe a bank regulator. Market regulators like me have a job to make sure markets are open, competitive, transparent, free of fraud and abuse and so forth, but that they really do serve in a price discovery method where everybody gets to come in there and margins collapse and liquidity is steep. Some bankers might want their profit margins higher. I don't think that's what Dodd Frank said to do. Dodd Frank didn't say to take any profits away, but it said bring transparency, lower risk and ensure that the American public doesn't stand behind this again. So, I mean, last one or I don't know, maybe two more. Oh my God. Brian, where do you work? Did you say you're just a market participant? Great, great. Do you know it's me and not my twin brother?

[Unidentified Regulator or Industry Expert]

I think it was you. And seeing the other commissioners.

[Gary Gensler]

All right.

[Unidentified Regulator or Industry Expert]

It's very good to see them basically. And I applaud your transparency, actually.

[Gary Gensler]

Thank you.

[Unidentified Regulator or Industry Expert]

I wish you luck, global coordination, but I am a little over lucky that I have such luck globally. And the reason why I say that is right now, as the term of it regulator for say interest rate swaps and commodities bonds, you are not the primary regulator for credit default swaps.

[Gary Gensler]

Mr. That's correct. That's correct.

[Unidentified Regulator or Industry Expert]

They're seeing inconsistencies, unfortunately, between some of your proposed regulations and the CSEC's proposed regulations. And that's concerning.

[Professor Michael Dempster]

So how do we get, how about.

[Unidentified Regulator or Industry Expert]

US Compensation rather than global compensation?

[Moderator or Host (possibly from LSE or FMG)]

Excellent question.

[Gary Gensler]

The SEC and CFTC are in partnership and Mary Shapiro and I talk often and the staff share all the memos and we sort through these things as you Noted we probably have 90 to 95% of the notional value because of the large interest rate commodities and they have the single name and narrow based CDS market. Though we actually ended up with the indexes.

[Moderator or Host (possibly from LSE or FMG)]

What we've done is we work together.

[Gary Gensler]

On the proposals and then when we get comments in, we work together and see how we can bring it together. One thing that constrains us a bit, we have historical differences between the oversight of what we call futures and the oversight of securities. Remember back to President roosevelt in the 1930s. My little story, well over 70 or 80 years there's some things that have grown up a little differently. And of course the interest rate swap market is a little different than the credit default swap market as well. We're conscious of not undermining the futures market. They appropriately don't want to undermine the securities market. So we're going to try to narrow any differences that are out there.

[Moderator or Host (possibly from LSE or FMG)]

But there still may be some because.

[Gary Gensler]

We don't want to undermine the futures market. Over here. Roy. I might have been referring to you all earlier.

[Roy (Industry Expert or Participant)]

This is more a comment than a question. Just wanted to see your reaction. In your earlier presentation you differentiated between clear transactions and uncleared transactions, saying that a non clear transaction. I know that he knows that.

[Gary Gensler]

A bit more complicated.

[Roy (Industry Expert or Participant)]

And I just wanted to get this out that classically speaking, and certainly in the UK and Europe, even a filler transaction was still transacting with the dealer, the bank and the bank itself is the value as the contract and therefore the extent of the protections and safety relies very much on an area that we don't tend to get into of segregation, portability. I just wanted to get your view as to whether I'm right to really concentrate on that aspect of.

[Gary Gensler]

I think what Roy's saying is there's a lot more than just clearinghouses and clearinghouses aren't perfect, though I would say they're far better. Even with the three failures that have happened over the decades in Hong Kong and Malaysia and Paris, banks fail far more often. Just I mean any statistical survey of it. Why is that banks are in more businesses. This is one case where diversification might not be the best thing. I mean they're lending, they're proprietary trading, they might be underwriting and so forth, a lot of other things. And they're not forced as you are on every day to value all the transactions and collect that margin.

[Moderator or Host (possibly from LSE or FMG)]

But I do agree with you.

[Gary Gensler]

There's some other features that are important in our law. We actually say that customer transactions can only come to a clearinghouse through something called a futures commission merchant. This is again, something that was set up many decades ago in our regime where that futures commission merchant has to be sort of a separate. It ends up being a separate legal entity and separately capitalized. And that's what's guaranteeing it, even if it's part of a bank.

[Moderator or Host (possibly from LSE or FMG)]

You have a little bit different approach in Europe.

[Gary Gensler]

So that's one of the features. And I wholeheartedly agree the segregation issues are very important. We're hopeful in the next several months to finalize some rules on the segregation. And our Congress was kind enough to have views on that too, and that they're very important. And as you say, portability. But a client clearing model with the FCMS is embedded in our state statute. Segregation is embedded. Portability, I don't think is specifically mentioned in the statute. If it is, you can remind me. But we have it in our, in our mind and in our rules, so. And actually, you might answer the earlier question, what percentage of the market do you think there.

[Moderator or Host (possibly from LSE or FMG)]

Why don't I just do that?

[Gary Gensler]

What percentage of the market do you think you're the largest clearinghouse of swaps in the world?

[Roy (Industry Expert or Participant)]

I think interest rate swaps, I think.

[Gary Gensler]

Yeah. So there's an estimate 70 to 80% interest rate swaps from LCH, which is the largest clearer. So. So I thank you all. This has been. I don't even know. All right, So I thank you all. This has been very helpful. I get feedback too. So it's really terrific. Again, I think this is relevant. It's a narrow topic, but very deep. And I'll use the worldwide statistics, if the number is correct, that there's a $620 trillion swap market around the globe.

[Moderator or Host (possibly from LSE or FMG)]

That is.

[Gary Gensler]

Let'S say that's $12 of swaps for every dollar of goods and services in the global economy. It's $12 of swaps every time. And there's some countries that don't have much swaps market, like China right now.

[Moderator or Host (possibly from LSE or FMG)]

Even though they have a little nascent.

[Gary Gensler]

Thing starting over there. I think it between their big four banks, though.

[Charles Buthardt]

Really?

[Gary Gensler]

Yeah, just between their big four banks. I had a meeting with them, actually. I said, you know, 30 years from now. I said, it took us 30 years. This was my vice premier and some others, the central bank governor. I said it took us 30 years to debate whether to regulate this. These. My advice to you is don't take 30 years because.

[Moderator or Host (possibly from LSE or FMG)]

And then I said, because 30 years from now, your swaps market will be bigger than ours.

[Gary Gensler]

And they looked at me and they said through the translators, no.

[Moderator or Host (possibly from LSE or FMG)]

And I said, no, no, no, no. Actually, it will be, it will be.

[Gary Gensler]

Your economy is likely. It's just, you know, sort of what's predicted. And when it is that big, you will have a swaps market. I said, just learn from us. This is one where we would have benefited, I think, from some of the transparency and lower risk earlier. But with that amount of sort of global reach, I think it's time to bring some transparency, some risk reduction, to have balance. Not to get it overly prescriptive, but I think it's really important. And our crisis was certainly evidence of it. I think the issues that you're dealing with here in Europe, and particularly on the continent right now are just really stark reminders that we ought to get the job done. So thank you.