▶ 0:00:01The task force on monetary policy, Treasury market resilience, and economic prosperity will come to order. Without objection, the chair is authorized to declare recess of the committee at any time. This hearing is entitled, "Examining Derivatives' Role in the Treasury Market." And without objection, all members will have five legislative days within which to submit extemporaneous materials to the chair for inclusion in the record.
▶ 0:00:24I now recognize myself for an opening welcome to today's task force hearing examining derivatives' roles in the Treasury market. Thank you to our witnesses for providing their invaluable expertise.
▶ 0:00:38The Treasury market is the deepest, most liquid, most important market in the Today, we're discussing an aspect of the Treasury market that continues to grow in popularity and raises important questions ahead of anticipated market structure changes and capital Part of the depth and liquidity of the Treasury market is driven by trading on swaps, options, and futures on the underlying Treasury. These derivative markets are key to managing risk.
▶ 0:01:06They allow market participants to hedge their exposures, create demand for Treasuries, increasing market liquidity, and supporting price discovery and health of the broad Treasury market. A recent paper from the Chicago Fed has pointed out enhanced liquidity in the derivatives market strengthens the functioning of the cash market. And the enhanced liquidity supports more stable, lower public financing.
▶ 0:01:31It's important that Congress continues to support the resilience of the Treasury derivatives market, as these instruments are so closely linked to the bedrock of the global financial system. I must especially pay attention now, as the we, I should say, must especially pay attention now, as the industry undergoes a fundamental market structure shift, with the looming deadlines for central clearing of cash Treasury and repo in December and next June, respectively.
▶ 0:01:59The SEC, under the leadership of Chairman Atkins, has been responsive to industry comments and proposals to make sure that the transition to mandatory clearing causes no disruptions in the Treasury market. A recent example includes the approval of two additional CCPs, increasing market customer choice and competition, while reducing concentration risk.
▶ 0:02:21Demand for Treasury derivatives is and with it, demand for cash and for It is absolutely critical that our capacity for clearing these transactions rises in kind. Last week, the SEC and the CFTC also granted exemptive relief to allow customer cross margining for offsetting exposures of cash and future positions for Treasuries.
▶ 0:02:44This is a welcome step to ease the transition to mandatory clearing, and as witness testimony has pointed out, will allow the redeployment of capital back into our Treasury markets. I'm hopeful that all this risk-reducing activity will be fully recognized in the capital rules proposed by the bank regulators, as we discussed yesterday in the full committee hearing on this I have substantial data, we, I should say, have substantial data and experience on the
▶ 0:03:14benefits of clearing from a risk management and margin efficiency standpoint, due to its use in derivatives markets. But getting the transition right to the broader Treasury market will take Congress, the regulators, and the industry working to in lockstep together. I look forward to our discussion today, and I yield back. I now recognize the ranking member of the task force, Mr. Vargas, for 4 minutes for an opening statement. Thank you very much, Mr. Chairman.
▶ 0:03:41Again, I'd like to thank you for convening this hearing, and then also all the witnesses that we have here today. Thank you very much for being here today. The Treasury market, now exceeding $30 trillion, serves as the bedrock of our capital markets and the global benchmark for risk-free rates. Keeping it liquid, efficient, and resilient is essential. Derivatives play an important role in making that possible.
▶ 0:04:05Through futures, options, and swaps, they support price discovery, enhance liquidity, and give market participants the tools they need to manage risk, fostering broader participation in the Treasury market, as was stated by the chairman. But with that role comes responsibility, and some risks that are worth monitoring carefully. We have seen multiple episodes of significant volatility in the Treasury market.
▶ 0:04:30In October of 2014, September of 2019, March of 2020, and again in April of last year. The most noteworthy of these was the dash for cash, if you will, in March of 2020, when the market participants, including hedge funds, were forced to rapidly liquidate their Treasury holdings. The disruption was severe enough that the Federal Reserve deemed it necessary to intervene directly to restore order.
▶ 0:04:59It is in everyone's best interest that we work toward minimizing the conditions that led to that kind of volatility, the kind that forced the Fed to take emergency action just to keep the market functioning. One tool that can help is the implementation of the SEC's central cruel clearing rule. As we have previously discussed in this task force, central clearing increases efficiency, improves market plumbing, and lowers counterparty risk.
▶ 0:05:26For derivatives in the Treasury market, specifically, broader central clearing brings transparency and more standardized risk management, helping to reduce the and amplify stress during volatile volatile periods. As derivatives are increasingly utilized in this market, it is critical that regulations and policy makers have full visibility into these activities.
▶ 0:05:51That makes the recent reporting on the Office of Financial Research, or OFR, all the more alarming. The OFR was created specifically to identify risks in our financial system. Yet, it is now reportedly facing staff cuts of up to more than 60%. To make sure regulators and policy makers can do their jobs, adequate staffing levels at the OFR must be preserved.
▶ 0:06:15Finally, no discussion of Treasury market resilience is complete without addressing the importance of an independent central bank. The president has continued his public attacks on both Chairman Powell and Governor Cook. And I appreciate my colleagues who have spoken up in the defense of this essential principle. Central bank independence is not a partisan issue. It is a cornerstone of the market confidence, and we must protect it.
▶ 0:06:42Again, I look forward to today's testimony, and I thank the chairman and the witnesses. Gentleman yields back. I now recognize the chairman of full committee, Mr. Hill, for 1 minute for an opening statement. Thank you, Chairman Lucas. The strength of the US Treasury market depends not just on size, but on its depth, its liquidity, and its Today, we're going to examine how derivative markets support that foundation. These instruments play critical a critical role in price discovery, risk management, and overall market functioning.
▶ 0:07:12And when used effectively, derivatives certainly can enhance liquidity in Treasury markets, ensuring greater stability. We'll also review recent developments in the Treasury clearing, including establishment of new clearing platforms. And finally, we'll carefully consider how regulatory proposals, such as the new Basel III re-proposal, could impact clearing costs and market participation.
▶ 0:07:34Getting this balance right is essential for maintaining deep, resilient Treasury markets that serve global and US investors, our taxpayers, and the US economy. I look forward to the discussion, Mr. Chairman, and I yield back. If I might ask just for a personal moment of privilege, I just want to Absolutely. pay tribute to my good friend, David Scott, from Georgia.
▶ 0:07:57You see at the end of uh our our day, yes, on the Democratic side of the aisle, a beautiful flower arrangement and memorial in his seat. Uh David was an exceptional person. I chaired our Ag Committee, so he knew the uh and he and Mr. Lucas worked together for many, many years. But he always had a smile on his face. He loved this committee. He loved the American economy. He loved baseball.
▶ 0:08:20Uh and uh it was just remarkable and such a positive experience to have him on the on on uh our committee. He voted last week in our markup, and then was gone the next day. And so, we love David, and I just want to salute him, and grateful to the uh majority-minority staff that have paid tribute to him today. Yield back. Thank you, Mr. Chairman, for those very thoughtful, kind, and accurate words. Today, we welcome the testimony of Mr.
▶ 0:08:47Kevin McPartland, the head of the research at Market Structure and Technology at Crisil Coalition Mr. Terry Duffy, chairman and CEO of the CME Group. Mr. Jeff Cranston, chairman of the Corporate Strategy Optimizor. And And thank you for being kind to my phonics. The Milton R. Underwood Chair and Professor of Law and Associate Dean at Vanderbilt Law School.
▶ 0:09:17We thank each of you for taking time to be here. Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. Without objection, your written testimonies statements will be made a part of the record. Uh Mr. McPartland, you are now recognized for 5 minutes for your oral Uh thank you. Thank you, Chairman Hill, Ranking Member Waters, and the members of the Task Force on Monetary Policy, Treasury Market Resilience, and Economic for the opportunity to discuss derivatives in the US Treasury market.
▶ 0:09:46Again, my name is Kevin McPartland. I am the head of Market Structure and Technology Research at Crisil Coalition The US Treasury market remains one of the the and most liquid financial markets in the In 2025, the Treasury market saw an average of just over $1 trillion traded each day, up an impressive 60% from While this While this growth correlates with the increase in debt outstanding over the same period, the uptick in market activity exceeded what debt growth alone would suggest.
▶ 0:10:17Market turnover, measured as trading volume to debt outstanding, grew from 3% in 2022 to 3.8% in 2025, quantifying a true expansion of market activity. The transparency of this critical market has also seen tremendous growth.
▶ 0:10:34We have transitioned from weekly volume reports in 2020 that included only primary dealer activity to the current reporting regime that provides public access to daily trading activity by market segment and the details of nearly every on-the-run US Treasury coupon bond traded each day. This has brought the Treasury market more closely in line with other US securities and listed derivatives markets, ensuring that investors and market participants of all types and sizes have the information they need to make informed decisions.
▶ 0:11:05Cyclical factors such as macroeconomic shifts and recent periods of volatility contributed to the market's recent growth. However, increased participation, advances in electronic trading, improved access to data, a market structure that encourages innovation, and an increasingly robust derivatives market played an equally important role in the market's recent US Treasury futures in particular are critical to keeping the Treasury market In 2025, the average daily traded
▶ 0:11:35value of US Treasury futures equated to 93% of the value traded in the underlying bond They provide an efficient method for investors to manage their exposure, for banks to hedge positions obtained from trading with their clients, and for speculators to take the other side of those trades in hopes of generating returns while simultaneously providing to the market. The Treasury bond and derivatives markets are inextricably linked.
▶ 0:12:02We see strong futures and swaps markets not as competition for the US Treasury market, but as catalyst for ongoing demand and growth. Bond traders and investors look to the futures and swaps markets as a cost-effective method of managing their exposure and the risks in their Conversely, derivatives traders must often trade bonds in parallel, whether to hedge or to profit from pricing This interplay between bonds and derivatives ensures that asset prices accurately reflect current market conditions, allowing long-term investors
▶ 0:12:33and large corporations to feel confident about their investment decisions, and the United States to fund itself at the best possible rate. The addition of a central clearing mandate for some Treasury bonds and repo transactions can serve as a further tailwind for the market, with the potential to reduce systemic while simultaneously standardizing market entry and ongoing participation for market makers and investors alike.
▶ 0:12:58However, we must be careful to not disincentivize market participation when implementing this change by making the rules of engagement too onerous or the cost of trading too high. Longer implementation timelines and the recently revised US Basel III endgame proposal suggests we're headed in the right direction.
▶ 0:13:16Banks with more available capital to deploy to market making activity, better incentives to hold Treasuries on their balance sheets, and greater recognition of cross-product netting are all critical to the market's health and will act as tailwinds to Treasury market participation, liquidity, and The Treasury market has experienced its fair share of shocks over the past decade, and it is a near certainty that unpredicted market dislocations will cause stress for some market participants in the years to come.
▶ 0:13:46As such, we should continue to pay close attention to areas of concentrated risk and leverage. However, the shocks of the past few years have left us with a market that is more resilient than ever. Liquidity providers are better equipped to continue making markets when volatility spikes, and users have more access to better market data, and electronic trading venue providers can ensure that markets continue to function as expected despite volatility-driven high volumes.
▶ 0:14:14This was most recently evidenced in March 2026 when the Treasury market averaged a record 1.4 trillion of bonds traded each day with no evidence of stress in the market's plumbing. With this foundation strongly in place, we look forward to a future that leverages common sense oversight, new technologies such as tokenization and stablecoins, and market participants committed to ensuring that the US Treasury market remains liquid, transparent, and efficient. Thank you very much. Thank you. Mr. Duffy, you are now recognized for 5 minutes for your oral remarks.
▶ 0:14:44Thank you, Chairman Lucas, Ranking Member Vargas, and the distinguished members of this task force. I also want to thank Chairman Hill and Chairman Lucas for recognizing David Scott. He was a friend to many of us in this industry for many years, and he is sadly missed. I'm Terry Duffy, Chairman and Chief Executive Officer of CME Group. I want to thank you for the opportunity to appear before you to discuss the important role of derivatives in the Treasury market.
▶ 0:15:07CME Group services the entire Treasury market ecosystem, providing trading and clearing for derivatives, offering trading in cash Treasuries, and soon launching clearing services for cash Treasury markets. My testimony today focuses on three critical pillars: the vital role of derivatives, updates on the clearing landscape, and the positive implications of the Basel III endgame re-proposal.
▶ 0:15:32Derivatives are foundational to the price discovery, liquidity, and functionality of the US Treasury market. Highly liquid Treasury futures allow market participants to secure risk management hedges in customizable sizes without having to source the individual Treasury securities. Critically, open interest in Treasury futures closely monitors volumes in Treasury in cash Treasuries. You just heard from my colleague the futures volume in notional terms represents approximately 93% of the cash volume.
▶ 0:16:03Two primary links connect the cash and futures markets. market makers, including primary dealers such as banks and others, use Treasury futures to hedge their Treasury inventory. Second, asset managers use Treasury futures to add duration to their portfolios while leveraged funds meet this demand through the Treasury basis trade.
▶ 0:16:26The widespread use of Treasury basis trade tightens price alignment between cash bonds and futures, enhances overall market liquidity and ensures more efficient interest rate pricing for all participants. Estimates show the basis trade-related holdings have increased by 317 billion since the first quarter of 2022, totaling $1 trillion in notional value of Treasury futures today.
▶ 0:16:52These interconnected activities demonstrate the enormous importance of the Treasury futures market, not only for the market makers and holders of Treasury securities, but also for the citizens of the United States who heavily heavily rely on this market whether they trade it or not.
▶ 0:17:10Treasury futures are a vital point of price discovery and liquidity, enabling participants to manage risk of all Furthermore, Treasury futures enable a more efficient Treasury market, which in turn lowers the cost for the government to finance its expenditures and is crucial to US financial financial CME's central clearing services provides approximately 85 billion each and every day in efficiencies to participants in our markets.
▶ 0:17:40This includes 27 billion in savings in our interest rate asset class With the growing contribution to those savings from our cross-margining program with the Fixed Income Clearing Corporation or FICC.
▶ 0:17:55As the SEC central clearing requirements for cash Treasuries and repo approach, we are expanding our program, as you heard from the ranking member, with FICC to provide cross-margining access for our end user clients, which the CFTC and SEC recently approved.
▶ 0:18:13Cross-margining between swaps, options, futures, and cash cleared products within CME's clearing solutions will provide a unique opportunity for managing interest rate risks with maximum risk sensitivity efficiencies. The Basel III endgame re-proposal issued in March 2026 by US banking regulators is crucial step toward ensuring capital is allocated efficiently and appropriately based on risk.
▶ 0:18:42In conclusion, given the critical nature of the US Treasury market, I want to point out a concern I have about the risk of allowing a non-US regulator to oversee any portion of this FMX, a US exchange, self-certified last year with the CFTC to trade US Treasury futures cleared by a London-based clearinghouse that is regulated and supervised by the UK's Bank of England.
▶ 0:19:08While the clearinghouse is also registered with the CFTC, its dual registration with the US and UK does not impact the fact that its ultimate guarantor is the Bank of England. Under UK law, the Bank of England's primary mandate is the stability of the British financial system, not the United States In the event of a systemic crisis like a massive liquidity crunch in both gilts and or US Treasuries, the Bank of England is legally obligated to prioritize
▶ 0:19:39the gilt market and British pound over all other markets, including the US Treasury market. If the UK-based clearinghouse faced a capital short, for the Bank of England could use its early resolution authority, which we've seen before, to intervene and haircut or tear up US Treasury contracts. This could trigger a default chain in the United States, spiking borrowing cost for US government, and destabilizing the US Treasury market.
▶ 0:20:08I've been raising this issue for well over a year at the highest levels of government, including the Secretary of Treasury, the Chairman of the SEC, the Chairman of the CFTC, other regulators, and members of Congress. Allowing [clears throat] the UK government to have this regulatory power over such a critical component of the US Treasury market is a significant risk.
▶ 0:20:30I hope this task force will take this very seriously and mandate that US futures be treated the same as cash Treasuries, of which cash Treasuries can be only, and I want to emphasize it, only overseen by a US regulator. I want to thank you for your time and attention today, and I apologize for going over. Thank you. Give us your thoughts, Mr. Cranston. You're recognized for 5 minutes for your oral comments. Chairman Ranking Member and members of the committee, thank you for the opportunity to testify today.
▶ 0:21:00My name is Jeff Cranston, and I represent Optiver, a global market maker providing liquidity across all major asset classes, including on the run US Treasuries and Treasury and SOFR My testimony focuses on how derivatives Treasury market or I'm sorry, my testimony focuses on how derivatives support Treasury market liquidity, and highlights key structural considerations in implementing the SEC's Treasury and repo clearing mandate.
▶ 0:21:30The US Treasury market is central to government financing and serves as a global benchmark for safe and liquid Maintaining a resilient and liquid Treasury market is critical to economic stability and the US dollar's role as the world's reserve currency. Derivatives play a central role in supporting liquidity, enabling risk transfer, and promoting efficient price discovery in the cash market.
▶ 0:21:54Treasury futures, which trade nearly around the clock, are often the first place where economic data or shifts in market sentiment are reflected. Treasury options play an important role in managing volatility by allowing participants to hedge non-linear risks without needing to transact directly in the underlying cash market.
▶ 0:22:15SOFR derivatives, including interest rate swaps, are also an important part of this ecosystem, providing tools to hedge Treasury funding exposures and express views on interest rates and the yield curve. Taken together, these markets form a highly interconnected system where activity across instruments reinforces liquidity and price formation.
▶ 0:22:38With respect to the clearing mandate, central clearing provides important including reduced counterparty credit risk, the ability to net exposures across multiple counterparties, a more structured approach to managing risks and defaults, and provides the opportunity to develop central limit order books that support broad all-to-all participation. As the deadline approaches, market participants are working together to prepare for the transition.
▶ 0:23:07Some of the key areas of industry focus include development of clearing access models to support done-away trading, where participants can execute with one counterparty and clear with another, as well as margin efficiency, with cross margining helping ensure risk is properly reflected across related Recent approval of customer level cross margining between CME Treasury futures and FICC cleared Treasury positions is a meaningful step forward.
▶ 0:23:37Clearing repo transactions adds an additional layer of complexity. Repo involves not just trading, but also funding and collateral management. Extending clearing to repo requires infrastructure that works for a broader range of participants, including hedge funds, asset managers, and cash lenders. And ensuring efficient clearing access across these participants remains an important area the market is continuing to address.
▶ 0:24:03The introduction of additional clearing agencies like CME and ICE can support innovation and resilience, but also raise potential for market In the interdealer market, if multiple clearing agencies lead to distinct central limit order books, this could have a potentially negative impact on The transition to central clearing also raises important questions around clearing capacity.
▶ 0:24:29Market participants rely on futures commission merchants and prime brokers to access clearing and finance And these institutions, who are primarily large banks, provide the balance sheet and capital required to support client clearing activity. Recent updates to bank capital rules are a positive step and should help ease some constraints.
▶ 0:24:50However, as clearing expands, it will be important to monitor whether clearing capacity keeps pace as implementation on full unfolds alongside prudential In closing, derivatives markets play a central role in supporting Treasury market liquidity, and with continued progress towards implementation, central clearing has the opportunity to further strengthen the Thank you, and I look forward to your
▶ 0:25:16Thank you. Professor, you're recognized for 5 minutes for your oral Just one. Chairman Lucas, Ranking Member Vargas, members of the committee, thank you so very much for the honor and privilege I come before you today. The US Treasury market is our national Uh from around $5 trillion outstanding in 2008 to approximately 31. something trillion dollars today, this is a market that has helped us to weather an extraordinary slate of events both domestically as well as geopolitically.
▶ 0:25:46Uh this is a market that anchors our financial market stability and solvency. It is the uncontested global safe haven. In short, the US Treasury market is the envy of the world. It promises zero default risk, unlimited maximum liquidity. This is a market whose prices benchmark the prices of pretty much every financial asset around the world. Derivatives are essential parts of the US Treasury market success story.
▶ 0:26:11Treasury-linked derivatives like futures and swaps uh ensure that market participants everywhere can can hedge their risk interest rate risks longer term. Uh this is a market that infuses information into Treasuries prices, helping them fulfill their all-important benchmarking function. Uh this is a market that helps increase liquidity in the cash as well as in the repo market.
▶ 0:26:36Um on a good day, uh derivative examples like the cash basis trade can interlink with the Treasury market to provide liquidity and risk management. As the example of the FICC-CME cross margining proposal shows, these interlinkages are only set to deepen and to deepen super fast. But even though Treasury markets and Treasuries even though Treasuries might be risk-free, uh the markets in which they and related contracts trade are not.
▶ 0:27:05Um and uh shockingly, uh the oversight structure for this consolidated market for the Treasury as well as related markets does not provide the holistic oversight to be able to spot the risks and then to be able to coordinate to address them in a timely fashion, meaning that the potential for excess leverage and spillover effects into the Treasury market and its all-important functions are a real and present danger.
▶ 0:27:32Members of the task force, I want to make three points here to illustrate that our oversight structure for Treasuries today is broken, inadequate, and dated. First of all, we lack real-time information into the consolidated workings of the Treasury and related markets. Some areas of opacity here are well known. The repo market, the bilateral repo market, is a space where we do not know what kind of exposures are being taken at what scale and by whom.
▶ 0:28:00In certain cases, Treasuries can collateralize multiple debts at the same time. Zero haircuts are remarkably common in this market. In 2024, the OFR approved a rule that would increase transparency and reporting in this market, but the state of implementation of that rule remains uncertain. In the secondary market secondary market trade secondary market reporting in Treasuries remains patchy.
▶ 0:28:27In 2017, a rule was passed, but this only applies to FINRA-regulated broker-dealers. This means that entities that are not broker-dealers like hedge funds are not subject to direct reporting, meaning that we have to understand their workings by looking at regulated broker-dealers and their interactions with hedge funds, sponsoring banks, as well as the platforms on which they are trading. In addition, of course, we have regular well-known problems with spot with swaps reporting.
▶ 0:28:58In the case of swaps, for example, there are well-known issues right now with respect to how to deal with ever fixing errors in the swap reporting system, trying to reconcile data across multiple swaps data repositories, trying to report data to the CFTC in a in a in a timely way. Second of all, our regulatory structure today is just not capable of of remedying these gaps.
▶ 0:29:23Uh the Treasury market is subject to oversight by five separate federal regulators, none of whom have primary authority here. Arrangements need to be put in place in order to allow for information sharing. This is simply not being done in time. Even though we have a cross margining proposal at present, the CFTC and the SEC do not have data sharing arrangements. This means that CCPs are very much on the front line of managing risk on this market, but what this means is that for Treasuries, they're subject to a specific bind.
▶ 0:29:54US clearing houses rely overwhelmingly on Treasuries as the chosen form of collateral, but when they need this collateral, when they need to liquidate Treasuries, that is the exact moment when Treasuries are likely to be under stress. This means that what we're seeing here is the Treasury play the role that it does, the complex role that it does both as an asset that is traded as well as the choices form of collateral in today's marketplace.
▶ 0:30:19Members of this task force, our Treasury market is extraordinary, and yet it does not have the institutional oversight structure to help make it as safe as it possibly can be. I would urge this market to ensure that our Treasury market, our derivatives market can maintain the envy of the world status that they currently have, and work to the maximum good of the American people and the American economy. Thank you very much.
▶ 0:30:47The chair would note the task force members and the panelists that we have begun a series of two votes on the floor. First is a previous question followed by a rule for consideration of a number of bills. I would ask indulgence of the panelists and of the task force members. Let's go promptly, vote on previous question, and as soon as we cast our votes on the rule, return here immediately, and we'll proceed with our questions. So, the committee stands at ease.
▶ 0:31:13Pursuant to the order of the chair, the chair declares the committee in recess subject to the call of the chair. Committee stands in recess.
▶ 1:25:35The committee will now come to order following our recess. I apologize to our witnesses, but it is a complicated world out on the floor these days. So, with that I now turn to my to uh turn to members' questions, and I recognize myself for 5 minutes. Mr. McPartland, let's begin with you. Would you expand on your testimony? How do derivatives support deeper markets, more efficient price discovery, increased liquidity in the cash market, and reduce bid-ask spreads?
▶ 1:26:05What is the connection between Treasury derivatives and lower borrowing cost for taxpayers, the things the folks back home care about? Uh great, thank you for that question. Um so, a few a few important points. So, uh futures markets in particular they're concentrate trading and liquidity among a few important points on the interest rate curve. Right? So, that brings all of those buyers and sellers together. That's uh an all-to-all market. So, it could be investors, retail institutions, uh banks, market makers, everybody comes together.
▶ 1:26:36Um those prices in those markets um are a big input to how Treasury dealers then go ahead and price uh the Treasury bonds they trade. Right? So, that that is an important input that deep uh data on that very broad market. Uh and then I think almost more importantly is hedging, right? Which was uh already discussed a little bit this So, the hedging that futures and swaps provide, it does allow dealers and investors to maintain larger positions.
▶ 1:27:07If they can be sure uh that they are properly hedged among uh hedged against uh unexpected market movements, they're going to be more apt to hold on to those positions even when markets get volatile, right? Which we want. Uh it also allows dealers uh futures also allow dealers to quote better prices.
▶ 1:27:26Again, if they under if they know that they are hedged against unexpected um market dislocations, that'll allow them to uh quote tighter bid-ask spreads because they know if the market moves against them, um those futures are protecting them, right? They have that hedge in place. So, even if the market goes against them, their downside risk is minimized.
▶ 1:27:46Um all of that put together then ensures uh the most effective marketplace, that the price you're seeing in the bond market is the price that is based on all of the market inputs, which ultimately then allows the US government to borrow uh at the best rate it possibly can. Thank you. Mr. Duffy, we have 8 months until the SEC clearing rule is in effect for cash transactions, and there's been a and been meaningful progress in getting the industry ready for this monumental task.
▶ 1:28:16How would you characterize the state of readiness? There are outstanding issues in the interaffiliate exemption and other exemption self-release applications. How is the transition going from your vantage point? You know, thank you, Mr. Chairman. I think from our position it's going quite well. As you know, this has been a multi-year process as we're trying to get to the end of this year so we can have clearing of these products and to create the efficiencies that I referenced in my earlier remarks.
▶ 1:28:45Today just alone $25 billion a day in rate savings and part of that is with FICC or Fixed Income Clearing Corp. I think the interdealer uh some of the trades that are yet to be decided who has to participate and who doesn't is really an argument that I think FICC and its clients has to come to a resolution on, but I think economics will dictate that resolution.
▶ 1:29:09I think they'll get to a final outcome, so I'm very encouraged that we will move uh with the due date, and people will figure out if the affiliates need to clear those trades or not. Right now, there's an exemption in place for some of the affiliates, but I do believe the benefits will outweigh any exemption. Mr. Cranston, can you discuss how the SEC's clearing rule will improve systematic risk monitoring? Uh will increase transparency through clearing these transactions give regulators more insight into the health of the market?
▶ 1:29:39Thank you. Uh I think today regulators have uh good visibility into individual transactions in the cash market, but that data, as was referenced earlier today, is extremely fragmented and doesn't give uh regulators a full picture of the complete uh exposure in the market. So, I think central clearing will obviously uh help that.
▶ 1:30:01It'll consolidate that information, provide regulators with more standardized position level and risk-based data, as well as including margin and exposure information uh across that the clearing house level. So, I think it'll improve monitoring, you know, ensuring what amount of leverage is in the market and what stress could potentially be in the market.
▶ 1:30:23And I think, you know, while not the entire market will not be cleared, it's not a perfect solution, but it certainly is a uh is an improvement And Mr. Cranston, I'm about out of time, but I would like you to respond in writing to the following question. Our derivatives markets are the gold standard and the envy of the world. Portfolio efficiencies and risk managements associated with central clearing are certainly part of that. Are you concerned about clearing capacity with the increased demand we expect at the end of the year?
▶ 1:30:53And my time's expiring and I look forward to your response in writing. With that, I yield back. The chair now recognizes the ranking member, Mr. Vargas, for 5 minutes for his questions. Thank you very much, Mr. Chairman. Again, I thank you for this hearing and I thank all the witnesses and again apologize to you um for our small delay. We had to go vote. Um Mr. Duffy, um you went significantly over your time and I thought it was a good thing.
▶ 1:31:19Uh you didn't they didn't give you the bum's rush that we normally give people here and I I was glad they didn't. You spoke very highly of a very beloved member, one of our colleagues here, and that's one. And and secondly, um I think you brought up something that's very important there at the end and and I don't know that you had full time that you needed to explain it. Again, uh you you spoke I don't want to say ill of the Bank of England, but you certainly exposed it a little bit. Could you speak a little bit more about it cuz I was intrigued with your testimony. And again, I thank the chairman. I'm glad he let you go go over.
▶ 1:31:49I think it was the right thing to do.
▶ 1:31:50Appreciate the chairman, appreciate the question, ranking member, and again, appreciate your colleague. Um what I was referring to, just to to sum it up, the Bank of England does not have a bankruptcy regime like we do here in the United States. So, the Bank of England is the backstop for all financial products that are cleared through the London Clearing House in London.
▶ 1:32:14So, the Bank of the London Clearing House is now clearing US foreign debt as the US Treasury market through another entity. Their their reason is that they're supposedly duly registered. That means absolutely nothing if the you know what hits the fan, they have the ability to make decisions unilaterally on the US foreign sovereign debt. That's $30 trillion outstanding of debt.
▶ 1:32:38If that was to migrate or if that was to have a problem because of the way they risk manage in the UK. I wasn't speaking ill of my Brit my British friends. Especially especially since the king is
▶ 1:32:50He's gone now. He's in New York, so we'll speak bad now. Anyway, the the the problem is there's a great example, sir. Now, I will try to briefly say it. There was a trade called nickel done at the London Metals Exchange and there was a default on the contract. And the way the Bank of England dealt with that default is they absolutely tore up trades and said there's no longer a default. So, that's how they dealt with it. So, if you were on the the proper side of that trade and you were hedging on that side of the trade,
▶ 1:33:19Mhm. you [clears throat] actually lost money because they tore up the winning trade to offset the losers. That's not risk management. Now, they want to do that with the US Treasuries. Nobody allows foreign sovereign debt to be cleared outside of their country except the United States of America, which is unbelievable, to say the least, sir. So, that was what I was referring to with the $30 trillion market. If it ever came to that, it would be a biblical disaster for this country. It's a real issue. I mean, yeah.
▶ 1:33:48Yeah, I'm glad you brought it up and I'm glad again, Mr. Chairman, I'm glad you gave the opportunity for Mr. Duffy to talk about that. Okay, I do want to talk about the basis trade. Um Professor Yadav, following the tariff announcement by the president in April of 2025, there was an increased discussion about the basis trade and its implications for the Treasury market.
▶ 1:34:09Do you mind explaining the fundamentals of how the basis trade works, one, and what are the pros and cons of the basis trade and having hedge funds and other increasingly others increasingly involved in the Treasury market? Sure. Uh thank you so much, ranking member. It's a great question. If I might just be a professor here, um and explain this in super basic terms.
▶ 1:34:28Now, if you have two essentially similar or the same asset, and one asset trades in one market slightly cheaper and more expensively in the other market, I think all of us would buy the cheap asset and then sell it in the more expensive market. Now, in this case, the asset is a Treasury bond. So, what we have is buying the Treasury bond cheap and then selling it in a slightly more premium market, which is the market for futures, delivering that bond um in a year or 2 years' time, and it's a slightly more premium market.
▶ 1:34:57Now, what hedge funds do is take advantage of the difference between the cheap bond today, like the the cheap bond, and then the more expensive future short that then they're able to able to sell uh into the into the market. Now, the difference in price tends to be pretty small, so you make money by doing it at high volume. And in order to be able to pay for these trades, hedge funds borrow in the repo market. They use the Treasuries as collateral and get the cash then buy these bonds.
▶ 1:35:25So, uh this is on a good day a trade that works super well. Um it goes uh in a way that allows the funding to be cheap. They are selling futures to asset managers like pension funds and and insurance companies and others who don't want to buy that bond today.
▶ 1:35:42You're going to have to land the plane, Professor. You got 20
▶ 1:35:45to land the plane straight away. But, there are risks in this market. In other words, when the repo financing market becomes tight, then the market can spiral and it's very difficult to control the risk. And that is the problem with this market. Thank you. Gentleman's time has expired. The chair now recognizes the vice chairman of the full committee, Mr. Huizenga of Michigan, for 5 minutes. Uh thank you, Mr. Chairman, and uh sorry uh to our witnesses for this kind of day. Welcome to Washington, right?
▶ 1:36:13Where it's uh hurry up, wait, get to the floor, wait, get back, wait. So, we appreciate your time and your effort here. Uh Mr. Duffy, I'm going to uh start with you. You've testified that derivatives lower the government's cost of borrowing. I know that was a little bit of a conversation here. Uh does that ultimately show up in lower mortgage rates and financing costs for American
▶ 1:36:33There's no question about it, Congressman. As you know, most of the debt in the United States is based around the 10-year, which is most of where the mortgages are at, the car loans, and other uh meaningful commercial or personal loans are being held at. So, lowering and making the uh of those products for the individuals who are issuing the debt more cost-effective, it allows the consumer to participate at a much lower rate.
▶ 1:36:59So, without having a futures market, which is basically giving a forward market where the cash market does not have a forward market, it allows the banks and others to hedge that risk in order to so the per consumers can participate at a much higher lower level, including student loans and the like. So, it's really important.
▶ 1:37:17So, so a liquid centrally cleared derivatives market helps US finances.
▶ 1:37:22There's no question. And and it also our debt situation as well. I mean, it's is that possibly lowering
▶ 1:37:27know but it doesn't help our debt situation, as you know. So, we're at 39 trillion, probably going to 50 trillion at this pace right now. So, I don't think it helps the debt. The one thing I would say that is if in fact the debt continues to rise, as long as we do responsible things in this country, we probably still can have lower not maybe lower rates than we are at today, but not higher rates either. So, as long as we continue to do the right things in this country, we are still the envy of the world, especially with our our debt markets and our rest of our market. And we want to keep it that way.
▶ 1:37:55Yeah, I uh that's one of the reasons, frankly, that concern for the debt, that one of the reasons why I uh helped found and am now co-chair of the Bipartisan Fiscal Forum because we have to wrestle this uh this debt to the ground here. Um uh that's Mr. Mick uh Mick Portland.
▶ 1:38:13Southwest Michigan is home to the headquarters facilities and even uh just operations of many major real economy consumer-facing companies from uh brand names and food and automakers, uh medical devices, airlines, gas stations, all kind of everything is there.
▶ 1:38:31Uh when these companies can hedge risk efficiently using derivatives, uh what does that do to uh to their investment and more likelihood to invest or expand and and hire people in my district than in others? Right. I mean, what we want corporations to focus on is is building those products and services and making them accessible and as affordable as they can giving the input costs. And so, what derivatives allows them to do is focus on that, right?
▶ 1:38:57To focus on the product and the consumer and growing uh without as much having to worry about fluctuations in whether it be financial markets or agriculture or energy markets. Um this is uh arguably, or maybe not arguably, why the derivatives market was created. I My My Terry will know better than I, but when the derivatives market was created over 100 years ago, really was
▶ 1:39:21not implying, Mr. Duffy, you was around for that creation. I think he was a part of It sounded like it. I I don't know. I'll let you two work that out.
▶ 1:39:28Congressman's words, not mine. Um Uh but this really was the the basis for the derivatives market, and I think we want that to continue, and we want
▶ 1:39:37needed a way to to to to smooth out the fluctuations, right? Right. Right. We don't want a a producer of children's toys to have to worry too much about interest rate fluctuations in the and the the cost of oil because they need that to create plastic, right? We want them to focus on product development uh and getting that to consumers. Um And And what are the risks to that ability right now? I mean, what what's looming out there that could limit that ability to do something?
▶ 1:40:02Well, we we really want to incentivize um banks to participate in these markets um to keep these markets liquid. Um That is part of what the And there's really a difference between hedging that risk and using a derivatives versus just out speculating, right? Uh There There is, although I think it's always important to note, right? We need You need two sides to every trade, right? So, we need somebody to take the other side. You need somebody with an opposing viewpoint.
▶ 1:40:30Um if everybody is expecting the same outcome, there's not going to be somebody to help you there, and that is where, and I know that sort of term speculator gets demonized, but like that is what we need. The market needs the other side of that trade, and often speculators play that role. Well, and my experience in talking to a lot of those companies, they're hedging on both Uh so, there that's it's a way to just make kind of make sure that they can lock in costs. Is that Is that your view, too? Uh Yeah, absolutely. You need a floor and a ceiling, right?
▶ 1:40:57Nobody knows what's what's to come next, and so they want to make sure at least they they can uh understand what their future um costs might be, uh and they can do that by again putting a floor and a ceiling on those costs by using derivatives. Right. My time has expired. So, I appreciate your patience and sticking with us all, and uh great to see you again. So, appreciate your time. Thank you, and I yield back. Gentleman yields back. The chair recognizes the gentleman from California, Mr. Sherman, for 5 minutes. Mr. Chair, I think it's wise that we're having this hearing.
▶ 1:41:25Treasuries are valued at 29.3 trillion, in just 1 day, you can have not only $4 trillion of trades, but you have derivatives, etc. This is a market that dwarfs the size of what's being of of the asset being purchased or sold. There are at least a couple of risks here.
▶ 1:41:49One is the huge trade deficit that we have that creates 29.3 trillion dollars worth of borrowing by the federal government. Another is the crypto industry, which has announced that it wishes to displace the dollar's very critical important role.
▶ 1:42:11Professor uh I'm concerned that the SEC could grant exemptive relief for crypto companies who want to tokenize Treasury securities without full compliance with existing securities Looser rules than the broker-dealers and exchanges and clearing agencies have long been subject to.
▶ 1:42:39Um For example, they could create a dollar sign Treasury coin that is supposed to mirror uh that of a 2-year, 5-year, 10-year T-note or but in fact has no reserves. Uh the coin would not be actually backed by reserves, but would claim to be uh to to mirror the price.
▶ 1:43:03Uh This could be freely traded, perhaps on foreign platforms, or perhaps on unregulated anonymous platforms uh through uh the blockchain. Purchasers might believe uh that they're getting um all the stability of a US government debt instrument, when in fact they're simply getting pro- a promise from who knows who. Uh Does this uh pose a risk to investors and to the securities market?
▶ 1:43:31Um Thank you so much, Representative Sherman. Um In terms of the SEC's um willingness to do something like that, I think it's incredibly important to make sure that our regulatory system for Treasuries is robust, and I do not believe that even in the context of normal securities regulation that our that our system for Treasuries is robust. There are a couple of issues here. One, um as Mr. Cranston mentioned, reporting here is not foolproof. We have many many gaps here.
▶ 1:43:59In addition, we have launched a cross-margining uh relief for CME and FICC, um but there's no data sharing between the SEC and the CFTC. So, before we actually start to talk about the fancy things like tokenization or uh thinking about those issues, we have to get the regulation of Treasuries right, and we're very far away from that at present. Got you. Uh the two big disasters involving Treasuries that I'm aware of are AIG and Silicon Valley Bank.
▶ 1:44:29Uh With Silicon Valley Bank, uh they sold $11 billion of dollars of interest rate swaps, which was basically an insurance company against their portfolio declining in value. So, they sold the fire insurance, and then the house burned down.
▶ 1:44:45Um We need [clears throat] to uh require, and Basel's moving in this direction somewhat, um that uh uh we recognize for capital uh purposes the losses that banks have incurred on uh uh uh on on held for secure held for sale debt, and frankly, I think even held to maturity uh debt as well.
▶ 1:45:12The other problem we saw was AIG, which had a dozen insurance-regulated subsidiaries, and in spite of management's effort to raid them all, they all survived. Then they had one that said it wasn't in the insurance business. It was in the credit default Now, it occurred to me that if I wanted to evade insurance regulation, I'd sell you a fire insurance policy, but say, "If your house burns down, I won't write you a check.
▶ 1:45:40I just You can trade your house that doesn't exist anymore for a basket of Treasuries and call that a credit default swap." Do we need to uh especially for those who issue derivatives not on an exchange to require that they be regulated by as insurance companies? Absolutely. I mean, as insurance companies are I mean, we have a system for OTC derivatives uh regulation that has to be as robust as possible.
▶ 1:46:08One of the things that we're lacking in the OTC market even after the rules is good information. For example, uh information with respect to swaps comes in delayed. There's, you know, several issues in relation to that that continue despite Dodd-Frank being passed in 2010. Thank you. Gentleman's time has expired. The chair recognizes the chair of our subcommittee on financial institutions, Mr. Barr of Kentucky, for 5 minutes. Mr.
▶ 1:46:31Chairman, thank you for holding this important hearing, and given the size and scope of US sovereign debt, uh the liquidity and uh functionality of our uh Treasury market is vitally important. So, So, Mr. McPartland, let me start with you, and I'm going to ask you to um just communicate to the American people, to my constituents, um kind of a derivatives 101.
▶ 1:46:58And can you Can you explain to um my constituents and to me um what the benefits of uh what benefits do uh financial institutions and the Treasury market itself receive when using central Sure. Thank you so much.
▶ 1:47:19Uh So, think of a derivatives contract as the ability uh to buy or sell uh anything, but in this case, a US Treasury at some point in the future at a specified price. That allows you to know exactly what that price will be. And the way that can get then get applied, right? It's to help uh to help to manage the risk in your portfolio of actual bonds. So, if that price was to move wildly, you're still then able to buy or sell at that price you've predefined.
▶ 1:47:45Sometimes that goes against you, sometimes that goes for you, but at least you know what to expect, right? And that is really the core of how the derivatives market Uh And because of that, banks now can hold those positions. Um they can make markets in those positions because again, they can quantify their risk, and they can put that capital to work uh feeling safe. Uh Very very good. And can you explain how the original or previous Basel III endgame proposal disadvantaged central clearing?
▶ 1:48:16So, there were a few issues, or there are still a few issues, right? We do, as I said earlier, we want to incentivize banks to hold Treasuries and to make markets. Um Thankfully, we've seen an uptick in bank holdings of US Treasuries. That's a a great advancement, and that's what we want. That is what those primary dealers are there for. Um But the previous or existing rules uh in some ways penalized banks for those holdings. They didn't recognize the true risk, right? So, offsetting the derivatives with the bonds, right? Really, that neutralizes a lot of that risk.
▶ 1:48:47And let me ask uh Mr. Duffy uh similar question, but a little different. How did the the 2023 uh Michael Barr uh Basel III endgame proposal uh fail to recognize the risk-reducing benefits of derivatives? You know, it's really [clears throat] strange, especially after Dodd-Frank, how they didn't take into account how central clearing actually works today through the clearinghouse mechanisms.
▶ 1:49:14They were double counting and putting burden extra burden of charges on the biggest dealers in the world and by recognizing that that capital was already accounted for through central clearing, I think they have finally understood that they were asking for twice the amount of capital where they did not need it. That hurts the banks from deploying capital in other parts of our economy.
▶ 1:49:34So, I think recognizing that now under the the new proposal will uh alleviate what Michael Barr and others were trying to put forward because what they were doing is just trying to put so much capital into the system that it was overkill to say the least. It was already being accounted for through the clearing mechanism. And And is it fair to say that that would have by uh it would have destroyed the futures Which which would in turn uh jeopardize risk management.
▶ 1:50:01The the the the cash market, as I said earlier, does not have a forward market associated with it. So, when the gentleman asked about SVB Bank, if SVB Bank when they loaned all their money out at 2% because they thought the rates weren't going higher, if they would have hedged that into the futures market, we wouldn't be talking about SVB Bank because they could have hedged that risk in the futures market. They did not do so.
▶ 1:50:20Yes, it's critically important that that re-map of the uh particular uh venue is changed now to benefit the participants. Well, in the remaining any of you all can can answer the the last question, which is what changes have been made in this re-proposal, this Mickey Bowman re-proposal, uh that will help promote uh both central clearing uh and if you want to add what improvements could be made to that
▶ 1:50:50re-proposal uh to continue to uh enhance the functionality of the Yeah, I think as as Mr. Duffy mentioned, I think the the re-proposal is basically going to allow for additional capacity or at least not prevent capacity from being made available for not only the futures and derivatives market that is already centrally cleared, but also for uh the demand that we'll see from the SEC
▶ 1:51:20clearing mandate on both uh cash and repo. I think to his point, as far as some of the other potential enhancements, I think SIFMA put out some some thoughts on that. I think there was a really thoughtful hearing yesterday on that Basel re-proposal and what could be improved. I think there is still additional room to recognize those uh product netting and cross-margining benefits uh that will further reduce pressure on balance sheet. Thank you. I yield back. Gentleman yields back.
▶ 1:51:50The chair, unfortunately, must stand for a brief recess. I appreciate the patience of the panel. There are many moving parts. I'll explain to you. We stand in recess for a few moments.
▶ 1:54:15tokenizing them. And not all of those chains that will be used for tokenization are uh interoperable. So, I think yes, there's definitely concerns.
▶ 1:54:42I would start with the more cautious approach of focusing on utility of tokenization versus replacing the trading market.
▶ 1:54:48Okay. Um you you raised equity, so I want to shift to Mr. Duffy. The SEC has been very clear um that a tokenized equity is a derivative of an equity product and is therefore SEC The Clarity Act that passed this committee says that if you're raising million or less, that a tokenized equity is subject to CFTC jurisdiction. As somebody managing a market that deals with both, should we be concerned about split jurisdiction?
▶ 1:55:18Is there any ambiguity as to whether a tokenized equity is is actually still subject to SEC jurisdiction in your mind? Uh Congressman, I believe it should be. I think it's an equity is an equity. So, if it's tokenized or not should be irrelevant in the situation. The question is is the amount uh that they are falling below the threshold that they don't have regulatory obligations to meet below the threshold of 200 to 250 million dollars, whatever it is.
▶ 1:55:46I I have certain concerns with a lot of this stuff because how does it not go into other products, including treasuries, besides equities? So, I don't think that we should be moving things from a regulator just because of the size of it. I'd like to see products be regulated because I think good, smart, credible regulation is what's in the best interest of the United States to grow all of its capital markets, including equities, treasuries, and the like. So, I am a bit concerned about that in the Clarity Act and uh I'm hopeful that they re-evaluate it.
▶ 1:56:14And as far as the tokenized treasury market, you have to also remember that 24/7 won't allow unless you pre-fund on a Friday, even if it's tokenized. So, to think that we could trade 24/7 on any product is not tokenization is going to help that. You still have to fund it, whether it's tokenized or whether it's cash, cuz we still rely on the banking system for those dollars cuz those tokens are tied to the dollar.
▶ 1:56:36Um shifting and I have to we have a lot of weird synonyms, but I want to move to gambling or prediction markets or bilateral options, whatever we want to refer to them all, they're all synonyms. You've now at CME has dipped the toe into that water. If you're offering a bilateral option on an earnings [snorts] forecast for a publicly traded company, that does that also start to feel like a like a security or is that is that a commodity?
▶ 1:57:04I mean, I'm very confused on what the CFTC is actually ruling on
▶ 1:57:07On predictions? Yeah, like a prediction market that's essentially betting on something that's going to inform the pricing of an equity. Right. So, first of all, we only list certain prediction markets. We have a partner in FanDuel. It was a distribution uh participation for their clients to trade in our marketplace. We think it's a good, smart thing. They got a little caught off guard, I believe, as it relates to some of the prediction markets on sports. And I think that that has to be determined if predictions on sports are gambling or are they swaps?
▶ 1:57:36And I don't believe that answer has been fully baked, and I think that'll end up in the Supreme Court for a decision. And I think it's really important that we have that distinction. Well, I'd love I I know we're out of time, but I would welcome your thoughts and maybe we can follow up in in meetings towards on on the whole self-certification process as well to make sure that Totally abused. I I appreciate it. Okay. Thank you very much. Yield back. Gentleman yields back.
▶ 1:57:58I now recognize myself for 5 minutes for Uh the subject of derivatives is exceedingly important to the market overall and specifically for the state that I represent, Nebraska, which is a very large ag state. A strong futures market ensures that there even if there are price swings between when an elevator purchases corn from a producer and when the elevator sells that corn to a feed mill, the elevator can hedge to protect themselves from those price fluctuations.
▶ 1:58:25In a commodities market that can fluctuate day-to-day, derivatives can be used as a tool that provides some must much needed stability. This question is for both Mr. Duffy and Mr. McPartland. What are the downstream effects of a well-functioning futures market that would be visible for an ag producer? Uh as we discussed a bit earlier, and thank you for the question, uh the founding of the derivatives market was truly to help farmers, and that is still true to this day.
▶ 1:58:54Um so, you explained it quite well. We need a derivatives market to help uh to help those producers, those agriculture producers, to be able to manage that risk, to be able to manage those costs. Markets are impacted by so many factors. The world is getting all the more complicated, but to be able to know their prices, to be able to know what they will be able to sell at at the at the harvest time is critical and that's what the derivatives markets offer.
▶ 1:59:21I think it's critically important, sir, that the commercial and producer have the characteristics of the futures contract. Futures contracts were never designed for speculators. Speculators are embraced into futures markets, but they're not made for speculators. They're made for the commercials and producers and that's a critical component. And I think we've lost a little bit of our sight going forward on that part.
▶ 1:59:43So, I'm a big proponent of speculation in markets because I think it helps create liquidity for the because if a commercial wants this price and a producer wants that price, we need somebody to fill that in. I think for the great people in Nebraska and for the people this world that need food that comes out of Nebraska and other great Midwestern states, we need to make sure it's efficient and we need all the ecosystem to work properly.
▶ 2:00:03So, I would hope that this Congress would recognize the importance of all the ecosystem that goes in to allowing people to risk manage that the food that we consume in this country and we ship across the world. So, I think it's massively important, sir. One concern right now is the cost of fertilizer. Mr. Duffy, can you speak to what you're seeing in the market with the cost of fertilizer and how it's affecting producers?
▶ 2:00:27Absolutely and there's many things that are affecting producers and users of farm equipment not not only you know, it's plastics, it's fertilizer. It's all got oil components to it. We have 20 to 30% whatever the number is coming out of the Strait of Hormuz today that's being impacted that is going to have when you have the price of oil escalating, it's going to have an impact on some of these other derivatives of the oil product itself including fertilizer and plastics and other components. So, it is concerning.
▶ 2:00:56I know that some of the farm community that I've spoken to is switching to less fertilizer products such as nitrogen and things of that to grow their products. I don't think they should be having to do that. I think that we we need to make sure that oil becomes a component that they can continue to use the fertilizer to create all the different farm products that they have. But fertilizer is a big deal and I don't think people are taking that into consideration what it does as far as the production of our crops. Mr.
▶ 2:01:24Cranston, ag markets tend to move around discrete events like the release of USDA reports. How does your company adjust its liquidity provisioning around these moments? Thank you. So, as a market maker, our primary role is to continue to provide two-way pricing throughout normal market conditions as well as when new information is released to the market and how we basically manage that is you know, with risk management in mind, we will ahead of the event or
▶ 2:01:54the news information, we will adjust our quoting, we will adjust our position limits and then as the information is flowing into the market, we'll more actively manage our exposures to to reduce any potential exposure. And I think the other thing that we do is we spend a lot of time and resources in building out our pricing models to ensure that they're prepared for these types of event-driven conditions. And ultimately again, the the goal is to not have liquidity disappear during these events.
▶ 2:02:24It's to adapt to the change in the risk environment and continue to support the market. I'd be remiss if I point out the continued efforts of the congressional delegation in Nebraska to increase precision ag research. Speaks to use less water, less chemicals, be even more productive. We've come a long way since before the railroad and we have a long way to go to be even more efficient.
▶ 2:02:53So, that is my mission as a representative of the great state of Nebraska. With that, I yield back. The committee will take a very short break. Very short. It was a very short break. Um well, first of all, thank you to the witnesses for being here.
▶ 2:03:21Uh I now recognize myself for 5 minutes of questioning. Derivatives are an important tool which keeps the US Treasury market markets liquid and healthy and I'm glad that prudential regulators have acknowledged that with their new Basel proposal. And I'm going to start first with Mr.
▶ 2:03:43We've discussed today how the Basel re-proposal alleviates many challenges that were posed by the 2023 proposal for banks' use of use of derivatives. So, where could the current proposal improve to better support the derivatives Thank you.
▶ 2:04:01I would first just want to highlight again that um the Basel re-proposal is a significant step forward for central clearing and for the ability for FCMs and prime brokers to be able to support that increased demand as well as continue to support the entire derivatives landscape. So, I think significant progress has been made on that and look forward to continued process of prudential rule making.
▶ 2:04:29I think an additional area that could have further benefit for derivatives is recognizing the cross product netting within derivatives as well as the cross margining aspect and ensuring that those attributes are reflected properly in risk-based capital measures. Thank you. I'm going to move to Mr. Duffy here.
▶ 2:04:53The SEC recently approved the Intercontinental Exchange and Chicago Mercantile Exchange as Treasury clearing And before only the Fixed Income Clearing Corporation was an approved clearing house. So, can you explain why competition in the Treasury clearing house space is important? Well, I think competition is important no matter where it's at. And in my earlier comments when I was referring to the Treasuries being cleared in another country, I'm a big believer that they are cleared in the United States. I have no issue.
▶ 2:05:23But I just want to have everything on a level playing field. As it relates to clear clearing up cash Treasuries, my concern is always but I want I don't want to have to get ready the day the mandate kicks in. So, I I've been prepared to do this for several years now working with the SEC and my team to put forth an an option. I'll call it an option, Mr. Chairman, in order to make sure that if in fact the FICC is not prepared to do clearing of cash Treasuries, CME will be prepared. But right now, they are a partner of mine.
▶ 2:05:52We are extending benefits throughout the system. We want to continue to do so, but we will invest to make sure just in case that doesn't continue, we will be ready. What sort of efficiencies would you expect with this increase in competition? I don't know. The efficiencies are dramatic already. FICC today and CME's about 1.5 billion dollars of margin offsets that we share between our futures products and their cash.
▶ 2:06:19We think there'll be additional with the add-on of the client efficiencies going forward. Having another clearing house do replicate exactly what's going on today, I'm not sure if there's more efficiencies. I just think it gives users an opportunity to use different platforms and I think that's important.
▶ 2:06:35All right, thank you. I'm going to move to Mr. McPartland. In 2023, the SEC adopted rules which mandated that a larger portion of Treasury securities transactions be centrally cleared. And me as a small government conservative, I never like to see the word mandate. So, are government mandates in your opinion the right approach here? It's a great question and it is important to point out that the Treasury market has pretty impressive in a pretty impressive ways, right?
▶ 2:07:04So, we've moved from a phone-based market to a very electronic market that as I pointed out earlier handles routinely over a trillion dollars a day in transactions. So, I think that's an incredible step forward for a market that's sort of been allowed to flourish. That said, you know, this clearing mandate if implemented reasonably and with input of market participants, there are benefits there. We've talked about a lot of them today.
▶ 2:07:29I think it's just important that we take a common sense approach and we implement this in line with other markets where we've seen success and we know what works. Right. And Dodd-Frank mandated clearing and margin for most swap contracts. So, given that swaps can be an effective tool to hedge risk, can these mandates discourage the use of hedging as banks might be hesitant to take an increased cash flow risk?
▶ 2:07:53The the process to get to where we are now from back in 2008 was a long one as I'm sure you know and the ultimate rules, I think it's hard to argue that the interest rate swap market is not a better place or I should say it is a better place today than it was before. That said again, we don't want to go too far. We do not want to discourage hedging, of course. But where you know, banks will look look for the most efficient way to deploy their capital and manage their And briefly, what would the Treasury market look like without central clearing?
▶ 2:08:23The market does continue to function as I said quite well and continue to grow. That said, a lot of the discussion about risk offsets are really really important and we again, we want to encourage bank participation. So, there is a cost to mandated clearing. There's no question. But we do hope and expect that ultimately the benefits will outweigh those costs. Right. Thank you. I've run out of time here. So, I just want to say thank you to all the witnesses for their testimony today. I think this has been very productive.
▶ 2:08:53Without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response. And witnesses, if you could please respond no later than June 3rd, 2026. And on that, uh, this hearing is Thank you, Mr.