Opening Statements

Remarks as prepared for delivery: 

Good morning. Thank you for being here today. Today’s hearing builds on the important work done by the CEEC subcommittee last year, under the helm of Chairman Austin Scott and Ranking Member David Scott. I want to thank them for their work examining how well our regulators responded to the financial crisis. While those hearings were focused on past performance, today’s hearing examines the possibility for a future financial crisis and how our cleared markets may respond.

Failure of a major clearinghouse would be an unprecedented event. Such an event would mean there was a cataclysmic breakdown of interlocking risk management schemes, despite our highly-regulated system to prevent its collapse. While this probability is remote, recent history demonstrates that words like “improbable” and “implausible” do not necessarily mean “impossible.”

To be clear, I don’t know if or when another financial crisis might hit. What I do know is that markets are comprised of millions of people interacting and responding to incentives; regulated by thousands of able civil servants applying the best knowledge they can; overseen by hundreds of lawmakers trying to recognize and prioritize the tradeoffs in regulatory goals. There are many smart but fallible people involved in our markets, offering numerous opportunities for mistakes. That is what we’ve gathered today to discuss – what happens when the best laid plans of men go awry. 

Today’s hearing is important for two reasons – first to provide this committee with an understanding of the work that has been done to prepare for a crisis, and second to consider how we want regulators to respond in the event our planning has failed.

Recovery from a default is not an automatic process. While substantial planning has gone into preparing for a crisis, there are wider factors outside a clearinghouse’s control that may impact the recovery process. Things like the availability of liquidity, the impact of regulations like the Supplemental Leverage Ratio, and even the stability of the broader economy will all impact the implementation of recovery plans.

Finally, if a clearinghouse cannot be recovered, Congress needs to identify the ultimate goal of any government intervention. Today, Dodd-Frank generally assigns the FDIC the power to resolve failed, systemically-important institutions, but it is largely silent on the clearinghouses. We must fully consider what the resolution process might look like and understand its impact on broader financial markets before putting it to use.

We should consider – as clearly as we can – the expectations of our regulators and the potential consequences of the limits on their actions. Absent a plan, I fear regulators will respond to a crisis with the only tool in their arsenal – a bazooka of money.

Thank you to our witnesses for coming in today. We have a panel with deep knowledge of the derivatives industry who have spent time wrestling with these challenging issues and we appreciate your willingness to share your views with us today.

With that, I’ll turn to Mr. Peterson, for his opening remarks