Panel I of a Hearing of the House Agriculture Committee - The Role of Credit Derivatives in the U.S. Economy

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REP. JIM COSTA (D-CA): Mr. Duffy, I'm concerned about the issue that was raised earlier with potential conflicts of interest if, in fact, you're providing clearinghouse functions and, at the same time, the dealer banks, in fact, have the largest positions on some of these default swaps. What can you tell me that's going to convince me otherwise?

MR. DUFFY: The same thing that we have in our core business today, sir. Some of the largest dealers in the world have some of the largest positions on the CME Group. And we have obviously everything put in place today internally and operationally to make certain that there is no conflicts of interest.

If we had conflicts of interest, we would not have a core business today. We wouldn't be able to become a public company or any of that. So I think the same assurances that we have on our core business today, sir, are the same assurances that you could have on our credit default swaps offering for the future.

REP. COSTA: And I assume Mr. Stewart (sic) have a similar answer?

MR. DUFFY: Yes, it's a matter of having the right governance. The only additional point I would make is that many of the larger dealers are now bank holding companies or have foreign offices or even if they're foreign -- have domestic offices that are subject to Fed regulation. Having that direct Fed into their operations -- into their balance sheets I think is particularly helpful in terms of managing risk.

REP. COSTA: Aren't -- I mean, aren't you concerned that there is a -- not only a lack of credibility among the general public as it relates to everything that's taken place over the last several months as it relates to the whole CDS issue and the lack of knowledge that the general public really has about what has taken place and what level of exposure is out there. And it just seems to me that the -- and members of Congress, that we've got to figure out a better way to do things. I wouldn't suggest at this point in time that you have a high level of credibility, would you?

MR. DUFFY: I think the CME group has a very high level of credibility, sir. We've been in the business for 160 years, we've had zero default, we've never had a customer lose a penny of funds due to a default of one of our clearing member firms. I don't think there's too many business in the United States or abroad that can say that they've had that type of credibility in its history as a company. So you know, I think that when you look at the credibility of credit default swaps themselves, I think they're widely misunderstood because they're very complicated products, but I would not say that the company of CME Group is not credible because of the things that I outlined, sir.

REP. COSTA: So you're on record as supporting a regulatory scheme and you're in the process of pursuing the efforts you've explained to us, but if the Congress agrees in the next year to put together such a scheme you'll follow that lead?

MR. DUFFY: We've been a regulated exchange since our existence, sir, and we have no interest of being anything other than a highly regulated entity to protect the interests of the participants of our marketplace.

REP. COSTA: With all that history that you just stated, do you believe it's possible that we can come together with our friends in Europe and elsewhere and set up a standardization and a transparency, a protocol that will allow the marketplace to work and at the same time provide a level playing field?

MR. DUFFY: As I said earlier I think it's imperative that we work hard with our European friends to come up with a standard that we can all abide by. The world has gotten smaller and I think it's a global marketplace so I think it's essential.

At the same time, sir, I think it's essential for the United States to give approval for exchanges such as ours that are neutral parties to go ahead and start to execute and facilitate this business to eliminate some of the systemic risks that have already been in the system.

REP. COSTA: My time's getting short, but Mr. O'Neill and Mr. Book, my sense is that there's a different view from the folks in a European exchange or clearinghouse and what currently is taking place in London. Do you see as eventually multiple clearing houses?

MR. O'NEILL: Certainly. I think the statements of the European Commission is to support one or more European CCPs so they'd like to see those brought into existence. However I think absolutely our policy as I said is that there is no regulatory arbitrage that European or U.S. solutions compete according to their merits. So I think in that respect we're very much aligned with the sentiments expressed here today.

REP. COSTA: Mr. Book?

MR. BOOK: I think in general we're very much would support to have competition in this field rather than a monopoly, so competing providers that would provide for innovation also for high standards in the services that are offered, I think that is key. And the requirement for having those multiple providers is to have a level playing field for those in offering their services on a global basis.

REP. COSTA: With your indulgence Mr. Chairman, my time's expired but one other question I wanted to raise.

Mr. Duffy, I have a concern as I look across -- and we haven't raised the subject here today -- but the potential exposure and risk involved in the area of the monolying efforts that have participated in this, we have municipalities throughout the country, some have filed sadly bankruptcy and are in significant risk. I don't know if this is an area you have expertise in, but would you care to comment?

MR. DUFFY: I think, Congressman, there's not actually an area that I have expertise in as far as municipalities and the viability of those municipalities --

REP. COSTA: I'm talking about as it relates to the monolying underwriting on their bonds.

MR. DUFFY: Well, I mean, their bonds have gone down in value as hass everyone's. And so, you know, in all honesty sir I am not expert on the municipality of bonds so I would not comment.

REP. COSTA: Any of you other three gentlemen care to comment?

MR. SHORT: I'm afraid I'm not an expert either.

REP. COSTA: Okay. We'll find someone who is.

Thank you very much, Mr. Chairman.

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