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Transcript: Volcker Rule Roundtable UNITED STATES OF AMERICA COMMODITY FUTURES TRADING COMMISSION VOLCKER RULE ROUNDTABLE Washington, D.C. Thursday, May 31, 2012 2 1 PARTICIPANTS: 2 GARY GENSLER CFTC Chairman 3 JEFF ACOSTA 4 Devon Energy Corporation 5 KEITH BAILEY Barclays 6 SHEILA BAIR 7 Former Chairperson of FDIC 8 KURT BARROW IHS 9 CERA DAVID CASTILLO 10 CalSTRS 11 ROBERT L. D. COLBY David Polk & Wardwell, LLP 12 Securities Industry and Financial Markets Association 13 JOSH COHN 14 Mayer Brown International Swaps and Derivatives Association 15 CURTIS ISHII 16 CalPERS 17 MARC JARSULIC Better Markets 18 SHAWN C. D. JOHNSON 19 State Street Global Advisors 20 SIMON JOHNSON MIT Sloan School of Management 21 LARRY MAKOVICH 22 IHS 3 1 PARTICIPANTS (CONT'D): 2 STEPHAN MEILI Barclays 3 JOHN PARSONS 4 MIT Sloan School of Management 5 DAVID C. ROBERTSON Treasury Strategies, Inc. 6 DAN RODRIGUEZ 7 Credit Suisse 8 PAUL SHANTIC CalSTRS 9 DAVE SIMMONS 10 Loomis Sayles 11 MARCUS STANLEY Americans for Financial Reform 12 LYNN STOUT 13 Cornell Law School 14 WALLY TURBEVILLE Demos 15 LAWRENCE YOUNG 16 Credit Suisse 17 DAN BERKOVITZ CFTC 18 STEVEN SEITZ 19 CFTC 20 STEPHEN KANE CFTC 21 22 * * * * * 4 1 P R O C E E D I N G S 2 (9:34 a.m.) 3 MR. BERKOVITZ: Good morning, everyone. 4 I'm Dan Berkovitz, General Counsel at the CFTC. 5 I'd like to thank all of our panelists for taking 6 time out of their busy schedule to participate in 7 today's CFTC roundtable on the Volcker Rule. We 8 are fortunate to have a wide range of panelists 9 with extensive expertise in financial markets and 10 financial market regulation. We look forward to a 11 very productive discussion today. 12 I have the pleasure of introducing 13 Chairman Gensler, who will provide a few 14 introductory remarks today. 15 CHAIRMAN GENSLER: Thank you, and 16 welcome to the Commodity Futures Trading 17 Commission Roundtable on the Volcker Rule. Thank 18 you, Dan, for that briefest of introductions. 19 But no, thank you for working with 20 Steven Seitz and Steve Kane -- Steven Seitz is 21 with the Office of General Counsel, Steve Kane is 22 with our Chief Economist Office -- in putting this 5 1 together. And I want to thank everybody from the 2 Treasury Department and other financial regulators 3 who are here as well. This task of implementing 4 the Volcker Rule is a five agency, and with 5 Treasury, a six agency effort and I think 6 everybody's been working enormously well together 7 in coordinating this effort. 8 I also want to thank Sheila Bair, former 9 chair of the Federal Deposit Insurance Corporation 10 for participating here today. Sheila, it's so 11 good to see you. Marty is doing a terrific job. 12 We do miss you over at the FDIC. It's good to see 13 you, Bob, too, as a former regulator as well. 14 Former Federal Reserve chairman, Paul 15 Volcker, was unfortunately not able to join us 16 because he's on international travel, but I want 17 to just acknowledge his many years of public 18 service as we talk about a rule named for him I 19 guess. 20 In 2008, the financial system and the 21 financial regulatory system failed; and the 22 crisis, caused in part by the unregulated swaps 6 1 market, plunged the United States into the worst 2 recession since the Great Depression. We know the 3 results. Eight million jobs were lost, millions 4 of families losing their homes, and thousands of 5 small businesses closing their doors. And the 6 financial storms continue to reverberate with the 7 debt crisis in Europe. I think when history is 8 told they'll look back and see these connections 9 between the two. And the prospects of people 10 around the globe are still very much at risk. 11 In 2010, Congress and the president came 12 together on the Dodd-Frank Act to promote 13 transparency in the markets, but also to lower 14 risk to the public from large, complex financial 15 institutions, and part of that, not the only part, 16 but part of it, was protection from the Volcker 17 Rule which prohibits banking entities from 18 proprietary trading and activity that may put 19 taxpayers at risk. 20 Now, this is our 17th roundtable at the 21 CFTC. We do these on important topics. They add 22 to the over 30,000 comments that we've received 7 1 and 1,600 meetings with the public we've held. 2 And we'll have an 18th roundtable next week on 3 promoting the price discovery function on the 4 designated contract markets and some related 5 issues on swap execution facilities. That's June 6 5th for those who want to come. I don't know that 7 it will be as well attended as today's. 8 But in adopting the Volcker Rule, 9 Congress prohibited banking entities from 10 proprietary trading while at the same time 11 permitting a number of other functions, 12 importantly, risk mitigating hedging and also 13 market making. So one of the challenges in 14 finalizing the rules for the five regulators is 15 somehow achieving these multiple objectives. 16 Prohibiting one thing on one hand and then 17 permitting at least these two: market making and 18 hedging on the other. 19 I'm looking forward to the lively 20 discussion. I just wanted to take this 21 opportunity to highlight three issues that I think 22 will be very helpful, and then I'm going to step 8 1 away from this desk and sit with Commissioner 2 Wetjen and Mark, if you want to say a few words, 3 too. I don't know if I see other commissioners 4 here, but certainly welcome to do so. 5 So I'm going to just mention three 6 things. First, as prescribed by Congress, the 7 Volcker Rule prohibits proprietary trading while 8 permitting risk mitigating hedging. These two 9 provisions I think are consistent with each other 10 in that they both are meant to lower risk in the 11 banking entities. Prohibiting one thing and 12 permitting the other might sound like they're in 13 conflict, but they actually both go the same 14 direction to lower risk. 15 But the question is how we as regulators 16 balance these two risk-lowering provisions. Some 17 commenters have said that we're too prohibitive in 18 one area and we may be limiting the banking 19 entity's ability to engage in risk- mitigating 20 hedging. On the other hand, if we were to follow 21 comments of some of the banking entities, then the 22 rule's allowances for permitted hedging might 9 1 actually swallow up Congress's intent to limit the 2 risk of proprietary trading. So it's how we, you 3 know, do both of these. 4 Specifically, under the statute, banking 5 entities may engage in "risk-mitigating hedging 6 activities in connection with -- and the words are 7 important -- and related to individual or 8 aggregated positions, contracts, or holdings. So 9 individual or aggregated positions, but it's 10 risk-mitigating hedging. And to qualify as one of 11 these hedges it has to be designed to reduce the 12 specific risks to the banking entity in connection 13 with such positions or contracts or holdings. So 14 these are Congress's words. They're not our 15 rule's words; they're Congress's words. 16 So the criteria for the hedging 17 exemption as included in the proposed Volcker Rule 18 are basically as follows: Hedges must mitigate 19 one or more specific risks on either individual or 20 aggregate positions. They cannot generate 21 significant new exposures. These are what we 22 included in our proposed rules. They must be 10 1 subject to continuous monitoring and management. 2 Compensation for the hedging cannot reward 3 proprietary trading. And the hedges must be 4 reasonably correlated to specific risk of the 5 positions. And we're looking for comments on 6 those types of criteria. Did we get it right? 7 Should we change it? Should the final rule be 8 different? 9 I think a further question about hedging 10 activity, and it was actually highlighted by all 11 of the agencies --it happened to be question 109 12 if anybody wants to look at it in our proposal. 13 But everybody asks this, is whether "certain 14 hedging strategies or techniques that involve 15 hedging the risk of aggregated positions, e.g., 16 portfolio hedging, create the potential for abuse 17 of the hedging exemption." That was written in 18 October but that was a question that was out there 19 in our proposal stage. 20 A related question on which I think it 21 would be helpful to hear: Is it possible, and if 22 so, if it were possible, could a separate trading 11 1 desk with its own profit and loss statement engage 2 in risk mitigating hedging? Is it possible to 3 have somebody over here, you know, motivated by 4 profits, solely by profits, actually still be a 5 hedging desk? The further removed a hedging 6 activity is from a specific position of a banking 7 entity, isn't it more likely that such trading 8 activity is prone to express something other than 9 the hedging itself? 10 As Dan will explain in a moment, we're 11 not going to be speaking about the specifics of 12 the credit derivative products trading at JP 13 Morgan Chase's Chief Investment Office.
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