1

             1          UNITED STATES SECURITIES AND EXCHANGE COMMISSION

             2

             3

             4

             5

             6                     JOINT SEC-CFTC ROUNDTABLE

             7              TO DISCUSS SWAP EXECUTION FACILITIES AND

             8              SECURITY-BASED SWAP EXECUTION FACILITIES

             9

            10

            11                   Wednesday, September 15, 2010

            12                             9:00 a.m.

            13

            14

            15

            16

            17                 Securities and Exchange Commission

            18                        100 F. Street, N.E.

            19                          Washington, D.C.

            20

            21

            22

            23

            24                Diversified Reporting Services, Inc.

            25                           (202) 467-9200




                                                                             2

             1   PARTICIPANTS:

             2   Scott Bauguess, SEC

             3   James Brigagliano, SEC

             4   Nancy Burke-Sanow, SEC

             5   Robert Cook, SEC

             6   Jon DeBord, CFTC

             7   Thomas Eady, SEC

             8   Mauricio Melara, CFTC

             9   Dhaval Patel, CFTC

            10   Gregory Price, CFTC

            11   Richard Shilts, CFTC

            12   Sebastian Pujol Schott, CFTC

            13   Heather Seidel, SEC

            14	 Riva Spear Adriance, CFTC

	    15

            16   PANEL ONE:

            17   William De Leon

            18        Global Head of Portfolio Risk Management, PIMCO

            19   Yves P. Denize

            20        Director & Associate General Counsel, TIAA-CREF

            21   Andrew Downes

            22        Managing Director, UBS Securities, LLC

            23   Richard DuFour

            24        Executive Vice President, Chicago Board Options Exchange

            25




                                                                             3

             1   PANEL ONE (cont.):

             2   Julian Harding 

             3        Executive Director, Tradition Brokerage, Chairman, 

             4   Wholesale Markets Brokers Association Americas

             5   John J. Jeffers

             6        Senior Vice President and General Counsel, 

             7        OTC Global Holdings

             8   Ben MacDonald

             9        Global Head of Trading, Bloomberg, L.P.

            10   Lee Olesky

            11        Chief Executive Officer and Co-founder, Tradeweb

            12   Stephen Semlitz (via video)

            13        Managing Director, HESS 

            14   Heather Slavkin

            15        Senior Legal Policy Advisor for the Office of 

            16        Investment, AFL-CIO

            17   Jeff Sprecher

            18        Chairman and Chief Executive Officer

            19        IntercontinentalExchange, Inc.

            20   S. "Vish" Viswanathan

            21        Professor, Fuqua School of Business, Duke University

            22

            23

            24

            25




                                                                             4

             1   PANEL TWO:

             2   Athanassios Diplas

             3        Managing Director and Global Head of Counterparty

             4        Management Group, Deutsche Bank

             5   William De Leon

             6        Global Head of Portfolio Risk Management, PIMCO

             7   Yves P. Denize

             8        Director and Associate General Counsel, TIAA-CREF

             9   Bryan T. Durkin

            10        Chief Operating Officer and Managing Director,

            11        Products and Services, CME Group

            12   Julian Harding 

            13        Executive Director, Tradition Brokerage, Chairman, 

            14   Wholesale Markets Brokers Association Americas

            15   Edward S. Knight

            16        Executive Vice President and General Counsel, the 

            17        NASDAQ OMX Group, Inc.

            18   Michael Masters

            19        President, Masters Capital Management, Americans

            20        for Financial Reform

            21   Richard McVey

            22        Chief Executive Officer, MarketAxess

            23   Stephen Semlitz (via video)

            24        Managing Director, HESS 

            25




                                                                             5

             1   PANEL TWO (cont.):

             2   S. "Vish" Viswanathan

             3        Professor, Fuqua School of Business, Duke University

             4   Philip Weisberg

             5        Chief Executive Officer, Fxall

             6   Brian S. Yelvington

             7        Director - Strategy, Knight Capital Group 

             8        

             9

            10

            11

            12

            13

            14

            15

            16

            17

            18

            19

            20

            21

            22

            23

            24

            25




                                                                             6

             1                          C O N T E N T S

             2                                                            PAGE

             3   Opening Remarks by SEC and CFTC Staff

             4

             5   Robert Cook, Director

             6        Division of Trading and Markets, SEC                   8

             7   Richard Shilts, Director, 

             8        Division of Market Oversight, CFTC                    10

             9

            10   Panel One

            11   Swap Execution Facilities ("SEFs") and 

            12   Security-Based Swap Execution Facilities ("SB SEFs")

            13        - Definition and scope of SEFs/SB SEFs                14

            14        - Scope of exception from mandatory 

            15            trading requirement                               53

            16

            17   Panel Two

            18

            19   Compliance with Core Principles for SEFs and SB SEFs

            20        - Block trades                                        79

            21        - Surveillance, investigation, and enforcement

            22            of SEF/SB SEF rules                               97

            23        - Cross-market issues                                113

            24        - Obligation of SEFs/SB SEFs to provide 

            25            impartial access                                 122




                                                                             7

             1                       P R O C E E D I N G S

             2             MR. COOK:  Good morning.  I think we would like to

             3   get underway here.  My name is Robert Cook.  I'm the director

             4   of Trading and Markets at the SEC and on behalf of the staff

             5   of the SEC and the CFTC, it's my pleasure to welcome you this

             6   morning to this third in a series of joint staff roundtables

             7   on the implementation of the Dodd-Frank Wall Street Reform

             8   and Customer -- Consumer Protection Act.

             9             To my right is my colleague from the CFTC, Rick

            10   Shilts, director of the Division of Market Oversight at the

            11   CFTC.  It is a great pleasure to be collaborating with Rick

            12   and the rest of the CFTC staff on this initiative, and I

            13   would like to thank the staff of the CFTC and the SEC for all

            14   of their very hard work in putting this roundtable together 

            15   and their ongoing close cooperation on the implementation of 

            16   the Dodd-Frank Act.

            17             I need to read a mandatory announcement related to

            18   the use of this room.  So if you'll bear with me, but listen. 

            19   In the unlikely event we must evacuate the building, please

            20   exit the multipurpose room, make a right to reach the main

            21   staircase to the main lobby and exit the building on F

            22   Street.  Once out of the building, please follow SEC

            23   employees or SEC guards to the assembly area at 3rd and G

            24   Streets.  If you're unable to easily use stairs, please

            25   notify an SEC employee or guard.  In the event we must




                                                                             8

             1   shelter in place because of an incident occurring outside the

             2   building, we ask that you remain in the multipurpose room --

             3   that's the room we're in -- and await further instructions. 

             4   Thank you.  Back to our regularly scheduled program here.

             5             The Dodd-Frank Act tasked the SEC and the CFTC with

             6   bringing greater transparency and oversight to the OTC

             7   derivatives markets.  At our roundtable yesterday, we

             8   discussed the reporting and public dissemination of

             9   transaction information regarding swaps.  

            10             The purpose of today's roundtable is to provide a

            11   forum for discussing the implementation of the Dodd-Frank Act

            12   with respect to the trading of OTC derivatives.  In

            13   particular, we'll be focusing on transitioning that trading

            14   onto regulated markets and issues regarding the creation and

            15   regulation of a new type of market called a swap execution

            16   facility or SEF.  

            17             Under the Act, the agencies are directed to

            18   establish a registration framework for SEFs and to set the

            19   regulatory standards for swaps to move from an unregulated

            20   trading environment to these new trading venues.  In

            21   addition, the Act requires that with respect to swaps that

            22   are required to be cleared, the counterparties must execute

            23   the transaction on an exchange,designated contract market or

            24   a SEF unless no exchange, DCM or SEF makes a swap available

            25   to trade.  The Act also requires that in order to maintain




                                                                             9

             1   registration, a SEF must comply with certain core principles

             2   established in the Act, as well as any other requirements

             3   that the CFTC or the SEC may impose by rule or regulation.

             4             Today we'll be focusing on our respective

             5   rulemakings regarding SEFs, including the definition of a SEF

             6   and its scope and activities, the mandatory trade execution

             7   requirement, the creation of a registration framework for

             8   SEFs and the SEF's compliance with and enforcement of its core

             9   principles.

            10             We are very pleased to welcome to this discussion

            11   two panels of experts who have kindly agreed to join us today

            12   and share their insights, advice and recommendations.  These

            13   panelists represent investors, end users, dealers, academia, 

            14   exchanges and potential SEFs.  We are grateful for your time 

            15   and participation and we expect that your comments will be 

            16   very valuable to the staffs as we develop proposals for a

            17   regulatory framework applicable to SEFs.

            18             I would like to note that today's roundtable is not

            19   the only opportunity for interested parties to share their

            20   views on SEFs with us.  Each agency has open mailboxes into

            21   which you may send comments on all of our OTC derivatives

            22   rulemakings.  Then, of course, the types of rules that we are

            23   discussing here today will be formally published for public

            24   comment before they are adopted.

            25             I need to make clear that the remarks, questions or




                                                                            10

             1   lines of inquiry that you may hear from me or other SEC staff

             2   today represent only our respective views and not necessarily

             3   the views of the Commission, the individual commissioners, or

             4   our colleagues on the Commission staff.  I should also make

             5   everyone aware that this meeting is being webcast and your

             6   remarks will be recorded. 

             7             With that, let me give Rick an opportunity to offer

             8   any introductory comments.

             9             MR. SHILTS:  Thank you, Robert.  I also want to

            10   welcome all -- everyone here today, especially all the

            11   panelists for taking times out of their busy schedule to come

            12   here and give us their views on these important topics.  Also

            13   to express my thanks both to Robert and the SEC staff, as

            14   well as the CFTC staff, in arranging for this roundtable, as

            15   well as all the other roundtables.  It's a lot of work.

            16             We're looking for a great discussion today and

            17   these are some of the most important topics that we're

            18   addressing with respect to these rulemakings and with respect

            19   to the definitions and responsibilities associated with swap

            20   execution facilities.

            21             As Robert mentioned, the comments that I make or

            22   other CFTC staff, similarly we're not speaking for the

            23   Commission at the CFTC or the CFTC in general, and also to

            24   note that, again, this is not the only opportunity for

            25   interested parties to comment.  We have a site on our -- a




                                                                            11

             1   box on our website where traders and others can submit

             2   interested comments.  And also, we're looking forward to the

             3   comments as the rulemakings come out, which we'll take into

             4   account over the next couple of months after we do publish

             5   them.  So with that, we're looking forward to a great

             6   discussion today, and I'll turn it back to Robert.  Thank

             7   you.

             8             MR. COOK:  Thanks, Rick.

             9             So with that, let me welcome our first panel.  And

            10   again, thank you for your participation today, and we're

            11   looking forward to your contribution to this discussion. 

            12   Just as a way to kick it off, if I could ask that we just go

            13   down the line and if each of you could give us your name and

            14   state your affiliation please.  

            15             MR. SPRECHER:  Hi.  I'm Jeff Sprecher, chairman and

            16   CEO of IntercontinentalExchange.

            17             MS. SLAVKIN:  Heather Slavkin, AFL-CIO.

            18             MR. OLESKY:  Lee Olesky, Tradeweb.

            19             MR. MacDONALD:  Ben MacDonald, Bloomberg.

            20             MR. JEFFERS:  John Jeffers, OTC Global Holdings.

            21             MR. HARDING:  Julian Harding from the Tradition

            22   Group representing the Wholesale Markets Brokers Association.

            23             MR. DuFOUR:  Richard DuFour, Chicago Board Options

            24   Exchange.

            25             MR. DOWNES:  Andrew Downes, UBS.




                                                                            12

             1             MR. DENIZE:  Yves Denize, TIAA-CREF.

             2             MR. DE LEON:  Bill De Leon, PIMCO.

             3             MR. COOK:  Thank you.  And on the screen, Steve?

             4             MR. SEMLITZ:  Steve Semlitz from HESS Energy

             5   Company.

             6             MR. COOK:  Great.  Thank you.  And then we have

             7   staff from the CFTC and the SEC bookending the panel here. 

             8   Maybe we could just quickly go down and you could introduce

             9   yourself and your division, please.

            10             MR. DeBORD:  Jon DeBord, DCIO.

            11             MR. PRICE:  Greg Price, DMO.

            12             MS. PATEL:  Dhaval Patel, Office of General

            13   Counsel.

            14             MR. BRIGAGLIANO:  Jamie Brigagliano, SEC Trading

            15   and Markets.

            16             MR. EADY:  Tom Eady, SEC Trading and Markets.

            17             MR. BAUGUESS:  Scott Bauguess, Division of Risk

            18   Strategy and Financial Innovation.

            19             MR. SCHOTT:  Sebastian Pujol, CFTC, Division of

            20   Market Oversight.

            21             MR. MELARA:  Mauricio Melara, Division of Market

            22   Oversight, CFTC.

            23             MS. ADRIANCE:  Riva Adriance, Division of Market

            24   Oversight, CFTC.

            25             MS. SEIDEL:  Heather Seidel, Division of Trading




                                                                            13

             1   and Markets, SEC.

             2             MS. BURKE-SANOW:  Nancy Burke-Sanow, Division of

             3   Trading and Markets, SEC.

             4             MR. COOK:  Thank you.  So the format today is that

             5   the staff from the CFTC and the SEC will ask questions and

             6   throw it out there.  Anyone will be free to jump in and

             7   answer.  When you speak, if you could please try to remember

             8   to begin with your name so that those who may not have a

             9   clear line of sight to you will know who is speaking.

            10             Also, in the category of information that would

            11   have been useful to have had earlier, just make sure you push

            12   the button when you want to speak and it will be helpful if

            13   you push it again when you're done so that we don't have

            14   unnecessary feedback.

            15             We have a -- this panel is going to run from --

            16   until a break at 10:45.  So we have a lot to cover, we have a

            17   lot of panelists and we have, I think, a lot to say about these

            18   issues.  And so, we just ask that when you make your remarks,

            19   if you could limit your air time as appropriate to give

            20   everyone a chance to weigh in.  And we may need to move the

            21   discussion along from time to time, too, because of a number of

            22   topics we would like to make sure we get the benefit of your

            23   thinking on.  So bear with us if it comes to that.

            24             So with that, we'll begin the first panel.  There

            25   are two main topics that we want to talk about on this panel. 




                                                                            14

             1   One is the definition and scope of a SEF, and the second is

             2   the scope of the exception from the mandatory trading

             3   requirement for SEFs.  And with that, let's begin with our

             4   first question.

             5             MR. BRIGAGLIANO:  Yeah.  I'm going to ask for your

             6   indulgence while I engage in a sometimes tedious exercise of

             7   reading a definition, but it's so important.  It's the

             8   cornerstone of our discussion today.  And that's the

             9   definition of swap execution facility in the legislation. So

            10   it's defined as, "A trading system or a platform in which

            11   multiple participants have the ability to execute or trade

            12   security-based swaps, or swaps, by accepting bids and offers

            13   made by multiple participants in a facility or system through

            14   any means of interstate commerce, including any trading

            15   facility that (a) facilitates the execution of swaps between

            16   persons and (b) is not a national securities exchange."

            17             So, I would like to hear what the panelists' views

            18   are on the type of trading that would meet this definition. 

            19   Do the goals of impartial access and pre-trade price

            20   transparency dictate a model such as a fully displayed

            21   electronic limit order book for a SEF?  Are there swaps that

            22   currently have enough liquidity to trade on this type of

            23   market?  And I invite the panelists to jump in and give their

            24   thoughts.

            25             MR. OLESKY:  I'm happy to start.  It's Lee Olesky




                                                                            15

             1   from Tradeweb.

             2             To start off with, we -- getting to the definition of

             3   SEF -- our view is that a SEF should not be interpreted merely

             4   as a central order book.  And the starting point for that, I

             5   guess, is the fact that there is such a definition or a word

             6   in the law - SEF - and that's separate from a DCM.  So we would

             7   have to say that there is an assumption that this SEF is

             8   something other than DCM, otherwise it would be redundant to

             9   have both.

            10             So our starting point is that this is something

            11   separate and that there should be an opportunity to have

            12   flexible trading models and protocols in order to support

            13   that model so long as you, you know, you're fitting within

            14   the core principles and you're achieving the policy

            15   objectives of what the legislation is about.  

            16             So that's pre-trade transparency.  You know, we

            17   would argue things like electronic trading are great

            18   indications of that pre-trade transparency, the ability to

            19   execute a transaction at a price that you see on a screen,

            20   and to have multiple participants.  And when we get into the

            21   multiple participant point, we think that means there should

            22   be multiple participants providing liquidity and multiple

            23   participants being able to access the liquidity.

            24             MR. HARDING:  Julian Harding.  There are two

            25   components, I guess, in the statute that you've carefully read




                                                                            16

             1   that are significant.  The first being the multiple to

             2   multiple issue, which I think intended to drive at creating

             3   forces in a SEF environment, a genuine marketplace. 

             4   Multiple to multiple insistence implies a marketplace that,

             5   in fact, the inter-dealer brokers for some 50 years or so 

             6   have generally operated and chestrated a great dynamic system 

             7   where each participant is a market maker and market taker in 

             8   the same breath.  That is a different thing to the central order 

             9   book system that Lee is referring to and as you asked about.

            10             The second component is the injection of the

            11   language by "any means of interstate commerce," which is an

            12   important element for us and for, I think, for the marketplace

            13   in that it preserves the ability to transact an organized

            14   transactions not just in electronic format, which one would

            15   contend allows for a better chance of optimizing liquidity in

            16   an institutional setting than just having been constrained to

            17   an electronic format.

            18             MR. DuFOUR:  I would add that, you know, although

            19   some products traded in the over-the-counter market may have

            20   sufficient liquidity to where they -- there might be a

            21   populated order book, that I would think in most cases, or in

            22   many cases, it would -- a typical SEF would be more like a

            23   request for a quote system where you might put up a trade you

            24   want to do, but there is not necessarily going to be bids

            25   and offers sitting in a book.




                                                                            17

             1             MR. DOWNES:  Andrew Downes.  I think as you look at

             2   the definition or the rulemaking in terms of defining a SEF,

             3   I think you need to take account of the liquidity of the

             4   market that we're talking about.  And I'd say, you know,

             5   if you think that currently the markets that trade on

             6   exchanges, the order of volume in terms of those exchanges is

             7   in the hundreds of thousands, or at least tens of thousands

             8   or thousands.  I think if we look at data for, say, the

             9   interest rate swap market, the most liquid point is the

            10   10-year U.S. dollar interest rate swap.  I think that trades,

            11   if we look at June and say 508 times a day, then that gives

            12   you a sense of the liquidity in that market.

            13             If you look at the CDS market and take, for

            14   example, the most liquid name in the investment grade index,

            15   I think that's G.E.  And that trades about 15 times a day. 

            16   So I think, obviously, there's an exercise to define what

            17   should be SEF traded.  And no matter where you draw that

            18   line, there will be a spectrum of liquidity of that which

            19   needs to be SEF traded.  And therefore, the definition of

            20   what is a SEF needs to encompass a plurality of models

            21   because at one extreme, say if you look at certain most

            22   liquid on-the-run indices, one might think that's susceptible

            23   to a central order book approach, but at the other extreme, 

            24   if you've got something that's only trading 15 or so times

            25   a day, that would probably be better traded through an RFQ




                                                                            18

             1   model, providing it meets the requirements in terms of

             2   multiple participants, et cetera, et cetera.

             3             So I think it's important to, for the definition to

             4   encompass multiple models.  I think that's the key.  And

             5   obviously to the extent that you encompass multiple models

             6   that allows for innovation, creativity and competition and

             7   that will drive liquidity to the best place depending on the

             8   spectrum of the product that we're talking about.

             9             MR. MacDONALD:  Ben MacDonald, Bloomberg.  I would

            10   agree with a lot of the points that are being made.  I think

            11   one of the interesting things about the derivatives market is

            12   that even looking at the benchmark space, there is ways to

            13   trade around the benchmarks, and not everything is -- can

            14   really be classified as just a pure benchmark or a

            15   benchmark trade.  

            16             I think that really goes to the point that there

            17   are multiple models that exist within the potential SEF

            18   space.  RFQs are very favorable, for instance, in certain

            19   instances, but there are other models that intermediate by

            20   buyers and sellers.  And I think it's important, especially

            21   in the early days of the rulemaking, to allow for all of

            22   those models, as long as they meet the principles, to coexist

            23   together.  And I think that will drive, you know, that will

            24   drive a lot of innovation and liquidity in the market.

            25             MR. SHILTS:  Could I just -- as you're responding




                                                                            19

             1   to the questions here, I'm just interested in you talking about

             2   the RFQ models, whether people think that the existing RFQ

             3   models would comply with the multiple to multiple requirement

             4   in the definition.

             5             MR. DuFOUR:  Richard DuFour.  You know, CBOE has an

             6   existing RFQ model, which we call FLEX, which actually the

             7   other options exchanges have something similar too, and there

             8   are some roughly 200 trading firms that are qualified and use

             9   that.  It doesn't mean you get 200 quotes every time you, you

            10   know, put in a request, but people monitor it on a full-time

            11   basis.  So I think it would meet your definition of multiple

            12   participants.

            13             MR. SCHOTT:  If I could follow up to that.  When

            14   you say that up to 200 people could see the request, is that

            15   only on one side or is that both the buy side and sell side

            16   we would be able to see?

            17             MR. DuFOUR:  You can -- when you put in a request

            18   for a quote, it can be -- you can put in a request to buy or

            19   sell or you can just ask for a quote on a particular product

            20   without indicating whether you're a buyer or a seller. 

            21   Anyone that's monitoring the system will see whatever you put

            22   in.

            23             There's typically then a time established by the 

            24   person putting in the request, a maximum, I think, of five

            25   minutes, but generally much shorter, in which people then




                                                                            20

             1   respond.  So and then at the end of the response, you have

             2   the choice of doing nothing or going ahead and trading or you

             3   could, you know, you could be a firm and you could actually

             4   better the quote yourself and facilitate a customer.

             5             MS. ADRIANCE:  And just to follow up on that,

             6   when -- once -- you said like 200 people see this bid offer,

             7   just to -- either side with both -- you know, where they're

             8   requesting both and 200 people see it, 200 people can

             9   respond.  What happens when there is a response?  Is it

            10   limited -- is the ability to transact at that -- with -- on

            11   the response limited to the person who initiated the RFQ or is

            12   others in the market able to also join in?

            13             MR. DuFOUR:  I believe it's limited to the person

            14   that put in the request.

            15             MR. OLESKY:  This is Lee Olesky.  We have a market

            16   in the U.S. treasury market, government bond market, we trade

            17   about 25 billion a day on average in the treasury market. 

            18   And our RFQ system, the way it works in the U.S. treasury

            19   market, is you do have a request, prices come back from a

            20   group of banks.  That's part of the session is a private

            21   session between the banks and the customer, but after the

            22   trade occurs, we flash the price so that the entire market

            23   sees what the price was for a transaction.

            24             So in terms of, you know, sort of policy standard,

            25   what are you trying to accomplish there, well, you have the




                                                                            21

             1   pre-trade price transparency you're after and you actually have

             2   post-trade price transparency for the market to observe, but

             3   you don't have a situation, at least in the treasury market,

             4   where you have the risk of interference between that

             5   privately negotiated transaction between two institutional

             6   participants.  And that seems to have worked fairly well in a

             7   number of fixed income markets.

             8             MS. ADRIANCE:  If I could just ask one more

             9   question, to go back before we move on, because right before

            10   we started talking about the question about the RFQ and what

            11   does that mean, there was, I have it down that, I think it

            12   was -- I'm sorry, Bloomberg -- I'm going to mess up your

            13   name -- Ben MacDonald.  Yeah.  You said that -- you referred

            14   to the fact that there is different -- you know, some

            15   instances in an RFQ model might be the appropriate model to

            16   execute in that particular swap, but then there may be other

            17   instances where another model would be appropriate, could you

            18   talk more about what is the other models that you're talking

            19   about.  

            20             Are you talking about central limit order book or

            21   are you also thinking of third or fourth in time, you know,

            22   to other models besides central limit order book and RFQs

            23   because so far we've talked about those two.  And it has been

            24   mentioned like but there is voice brokers -- but I wasn't 

            25   sure what you were referring to.




                                                                            22

             1             MR. MacDONALD:  Sure.  At Bloomberg we actually

             2   operate two models for trading.  One is a traditional RFQ

             3   model where participants go out and launch an inquiry to

             4   multiple dealers and then execute by inquiry.  We also

             5   operate a model, which we call single dealer franchise.  And

             6   essentially what we do is that we allow all of the liquidity

             7   makers to use Bloomberg as a distribution mechanism to

             8   display over a page on Bloomberg the -- you know, where they

             9   might have an ask, for instance, or where, you know, the

            10   markets that they're interested in, obviously low liquid

            11   stuff, is available in that market.

            12             Our customers can look at as many pages as they

            13   want over the system, which means that they get, on the one

            14   hand, the price transparency and discoverability of looking at

            15   multiple quotes, but at the same time when they get to the

            16   actual executing part of the transaction, it allows them to

            17   execute on a one-to-one basis, which is important in many

            18   cases, you know, for both the buyer and the seller of the

            19   transaction who have both got concerns about that, you know,

            20   trade.  So, you kind of get both of those models.

            21             If you draw -- you know, in the treasury market and

            22   the cash markets where that model is a lot further along

            23   because there's a lot more electronic trading in those

            24   markets, you know, you can go as far as looking at people to

            25   display firm pricing in those markets in a very liquid space,




                                                                            23

             1   which allows people to essentially, you know, achieve the

             2   same, you know, very fast level of liquidity.

             3             MR. OLESKY:  If I could just tag onto what Ben said

             4   because we have similar concepts, and the variations in

             5   different models, which I think was your question, we equally

             6   have a model that's similar to what Ben described, but is yet

             7   slightly different in that we call it streaming prices.  So

             8   we have a different terminology for it, but in the interest

             9   rate swap market in Euro denominated swaps, a client can come

            10   in and request a stream of live prices from the bid side and

            11   offer side from a particular bank and have a live market in

            12   front of them to click to trade.  Is that really an RFQ? 

            13             I think you do start to get into these definitional

            14   issues of what's an RFQ, what's a request for stream,

            15   what's -- but fundamentally what we're talking about here is,

            16   you know, access to these live markets, real good pre-trade

            17   transparency, post-trade transparency, and fundamentally an

            18   ability for the market and the buy side customers and the

            19   liquidity providers to be able to transact, which has been

            20   evolving, you know, in the last 12 years we've been in

            21   business from a more standardized type of business and fixed

            22   income such as U.S. treasuries out to other products and now

            23   into the derivative space.  

            24             But we think it's that flexibility that is so

            25   critical so that you can have the innovation to accomplish




                                                                            24

             1   what the market needs are so long as it's fitting within the

             2   policy objectives that have been laid out by the legislation

             3   in the core principles.

             4             MR. VISWANATHAN:  Vish Viswanathan from Duke.  I

             5   guess one of the things that concerns me about this RFQ

             6   model, if I'm an end user and I'm going to two different

             7   platforms, I literally have to request a quote from both

             8   platforms.  I can't actually compare prices.  There is no way

             9   to aggregate as there would be in stock markets.  

            10             So the question then is, from an end user

            11   perspective, is this the most efficient way or is there a way

            12   to kind of induce more cross-market competition.  If there

            13   are a multiple of these entities that are created, how do you

            14   induce them to compete because the whole idea is to have

            15   innovation and competition and so how can you do comparison

            16   shopping in this context is the big issue.

            17             MR. HARDING:  Julian Harding.  It strikes me that

            18   there is a trenchant change in the air and all different forms 

            19   of execution that exist now will have to adapt in some form. 

            20   I think we should be under no illusion about that.  And as an

            21   interdealer broker, as an interdealer broker myself and as

            22   representing the association, we are under no illusion at all

            23   that we're going to have to adapt in certain areas to meet

            24   the regular fee standards and policy standards that are

            25   coming out over the last year.  And in the same way, it seems




                                                                            25

             1   to me that probably an RFQ system, given it's a single

             2   requestor, will have to make some adaptations as well.

             3             MR. DE LEON:  Bill De Leon, PIMCO.  I think it's

             4   important to differentiate because as we've seen through the

             5   evolution of the stock market where there have been multiple

             6   sources of prices and central order books, that both the

             7   order books themselves, as well as the end users, have spent

             8   an enormous amount of time, energy and their own money to

             9   come up with systems to pull and pull that information

            10   together so that they can look at multiple sources of

            11   information.

            12             It's very analogous to what goes on now in the OTC

            13   market, especially in fixed income, where as an executor of a

            14   trade, you need to do price discovery talking to multiple

            15   dealers to get that information and/or looking at other price

            16   sources.  Not to show favoritism, but a few of the people

            17   here who have talked have some very good SEF-like models already.  

            18   I've traded on them, as many people in this room probably have, 

            19   and there are pluses and minuses to them.  And they're a 

            20   combination of RFQ, streaming quotes, central order books.  

            21   And they provide a lot of pre and post-trade transparency.

            22             What SEFs in our view will not provide is

            23   continuous price making because there is no central market

            24   maker, per se.  And that's something we should focus on.  In

            25   addition, as we move into the derivative market and you move




                                                                            26

             1   away less from the widget market, and not to pick on anything

             2   in particular, if you take a stock, it's very nice because it

             3   is a defined widget.

             4             IBM, for example, is a single stock name.  There is

             5   one piece of information: it's traded, how many shares trade,

             6   or are perceived to have traded at what sets of prices.  And as

             7   you move away from that and you move to derivative markets,

             8   you wind up with a lot more bespoke characteristics.  So

             9   getting that information and tracking it becomes much more

            10   difficult.  And that's a plus and a minus.  It allows

            11   standardization of things to be moved away to customization

            12   to meet different product needs for different end users.

            13             It also has the stigma of as you move away from the

            14   widget effect to a customized event, the footprint left by

            15   those using it becomes much more known.  For example, certain

            16   people trade certain instruments.  It will be known that only

            17   certain people do that.  If everyone sees that information

            18   and it's not aggregated, you're going to know who is playing

            19   and if they are a large player or there is a small player,

            20   that information is given away.  

            21             So, you lose that concept of anonymity, which I think is

            22   an important function of the market, because while people have

            23   a right to know what is out there and where the fair level of

            24   a trade may be prior to a trade, not everyone has the right

            25   or ability to know every single trade in every detail because




                                                                            27

             1   there are things that are not standardized and is a function

             2   of market liquidity and need.

             3             So I think that any SEF model or SB SEF model will

             4   have to take that into account and allow certain

             5   flexibilities because otherwise, you'll wind up with people

             6   not wanting to use it and as we've just alluded -- we have

             7   some very good statistics here -- there are a lot of things

             8   that trade -- that don't trade that actively especially in

             9   the standard form.  

            10             Ten-year swaps.  A lot of players use 10-year

            11   swaps.  They look at that quote every day.  There aren't that

            12   many trades that occur every day.  And the reality is when a

            13   10-year swap does trade, most end users don't trade the

            14   10-year swap.  They will trade something that is around a

            15   10-year swap.  They may trade something that's 10 years and a

            16   quarter, they may trade something that's 9 years.  The coupon

            17   will be different, the dates will be different, there are

            18   all these unique functions.  

            19             So to the extent that you're forcing things to be

            20   on an SEF and all that information needs to be given up,

            21   you're going to be telling an awful lot of people a lot of

            22   customized information about the end user which will hurt

            23   them and not help them.  In addition, it will make using SEFs

            24   harder because to track and display that information will

            25   sort of be a player's curse.  I'm sorry for taking so much




                                                                            28

             1   time.

             2             MS. SLAVKIN:  Heather Slavkin.  I understand the

             3   concerns about accommodating a lot of different business

             4   models.  I'm not sure I agree with the argument he just

             5   made, however, because the legislation envisions that the SEFs

             6   and the trading requirement will apply to products that have

             7   to clear.  And the clearing requirement applies to liquid

             8   products.  Standardized and customized transactions are not

             9   going to be required to clear.  So I don't think that we

            10   should take customization into account when determining what

            11   types of information should be disclosed to SEFs or how SEFs

            12   should operate.

            13             MR. COOK:  Let me sort of ask that -- sort of --

            14   and Bill or Yves, you can pick up on this.  Sort of one line of

            15   reasoning that I think we're hearing is that it's a diverse

            16   market.  Lot of different types of products, lot of different

            17   type of platforms need to take that into account in order to

            18   accommodate the status quo to some extent.  One could also

            19   argue that the statutes require the agencies to think about a

            20   new market, a new paradigm for how swaps are being traded and

            21   which would have the effect that some of the existing models

            22   might not work with that new paradigm.  

            23             And I would be interested in getting, you know,

            24   also particularly from the end user perspective, in the first

            25   instance, but everyone's perspectives, on how we weigh those




                                                                            29

             1   concerns.  And if the idea is that we really are meant to be

             2   moving to a new market structure, how do we get there?  Is it

             3   a one time leap or is it a transitional exercise?  

             4             MR. OLESKY:  This is Lee Olesky, Robert.  The

             5   interesting thing is -- 

             6             MR. COOK:  If -- 

             7             MR. OLESKY:  Oh, I'm sorry.

             8             MR. COOK:  If you could Yves go after.  Go ahead,

             9   but -- 

            10             MR. OLESKY:  I just want to make a quick comment,

            11   which is the derivative markets right now are not there yet. 

            12   If you look at the percentage of the trades electronically on

            13   vehicles such as Tradeweb, Bloomberg, any of these other 

            14   entities, the market is not there yet. It's a small percentage 

            15   of the market relative to the total size of the market.  So 

            16   in terms of change and structural change here, you would have

            17   significant structural change if there was a mandated

            18   requirement to take most of these standardized transactions

            19   and run them through a SEF because that's not happening

            20   today.

            21             So first and foremost, establishing the mandatory

            22   nature of this that's in the law and defining what's standard

            23   is going to create some significant change in the

            24   marketplace.  That's how we look at it relative to other cash

            25   markets.  This is still a market that's evolving towards




                                                                            30

             1   electronic and it's still only a small percentage of the

             2   market.

             3             MR. SEMLITZ:  Steve Semlitz from HESS Co.  In the

             4   energy markets, I think we have just the opposite occurring

             5   where everything was OTC many years ago and now an inordinate

             6   number of products do trade in a derivative form.  The energy

             7   market probably has the largest amount of customized types of

             8   trades.  Many of those trade OTC and then get cleared, but

             9   overall, there are tremendous numbers of derivatives trading

            10   in forums like ICE, that trade and clear.  There is no --

            11   you're not requesting quotes.  

            12             And the real issue for everyone is can you attract

            13   enough eyeballs and enough people to look at the screens and

            14   figure out where there is an opportunity to trade because

            15   it's an infinite universe of trades that can occur.  The

            16   definition of what a trade that has to be on a SEF will

            17   be -- that's where the -- 

            18             (Interruption to video call.)

            19             MR. SEMLITZ:  -- because in the energy markets,

            20   there are just millions of types of customizable trades that

            21   occur.  And you get quotes by going to a market maker and

            22   saying please spend the time to think about how to quote this

            23   product and then quote it.  The question I would have is when

            24   you go to a request for a quote type of system and people

            25   aren't quoting their best customer and their high volume




                                                                            31

             1   customer, whatever it is, whether -- 

             2             (Interruption to video call.)

             3             MR. SEMLITZ:  -- for anyone to continuously go

             4   through all the requests for quotes that you might need.  So

             5   where you draw that definition is going to be the key.

             6             MR. DENIZE:  I just wanted to underline -- this is

             7   Yves Denize -- from the end user perspective, wanting to

             8   underline the difficulty in standardization.  As you look at

             9   the end users in the various industries now, for instance,

            10   our life insurer, for instance, has very specific needs and

            11   comes to the derivatives market for very specific risk   

            12   mitigation needs. And it can't be overstated that defining  

            13   that standardization process in a way that can be freely 

            14   traded where you won't need a phone call and a discussion 

            15   about those terms is going to be very difficult.  

            16             And that process that will determine what should be

            17   traded on a mandatory basis, should not be -- should be an

            18   organic process that really reflects the growth in the market 

            19   and the growth of these trading facilities.  And it should be 

            20   done in an organized manner, a centralized manner, so that we 

            21   have - are able to settle our expectations as end users when 

            22   and how the types of derivatives that we are used to being 

            23   able to access are going to be forced onto a trading system 

            24   that may change our model as to how we're mitigating risk.

            25             MR. DE LEON:  Bill De Leon.  Yeah, I think it's




                                                                            32

             1   important to separate a few things here, which we've sort of

             2   not brought up and I know it came up in some of the previous

             3   panels.  So I apologize for revisiting.  The important things

             4   in our view is to reduce systemic risk in the system and

             5   ensure that people have access to decent price information so

             6   that they're transacting approximately where the market is. 

             7   And the things to achieve that are not necessarily driven by

             8   standardization of everything down to the widget level. 

             9   Clearly, the more widget-like something is, the easier it is

            10   to turn it into a central order book.  

            11             If you look at futures, which they're a great

            12   example, farm contracts, S&P futures, we can talk about many

            13   different things.  They're very standardized instruments. 

            14   You know what all the details are.  And they lend themselves

            15   very easily to being traded on an exchange.  Everyone knows

            16   exactly what it is.  You don't have to stand behind and

            17   figure out customized things.  They've lent some issues to

            18   it, however, because they don't necessarily meet end user

            19   hedging abilities, especially FAS-133 and cash flow hedging. 

            20   And that's something.  But you've achieved a widget thing

            21   which allows a lot of people to look at a lot of information 

            22   and trade and transact.

            23             The nice thing about a SEF or the concept of it, in

            24   our view, is that it allows multiple participants to access

            25   and trade with anonymity.  That's the important thing because




                                                                            33

             1   if you take that away, you're just creating sort of a

             2   marketplace for people to sort of share information and try

             3   to get things done.  The point is, and I know this is on a

             4   later panel, a SEF needs to ensure that people who

             5   participate in it get the information they want or can

             6   provide it to trade.  And then when they do a trade, it gets

             7   given up and cleared so that it goes through and reduces

             8   systemic risk and you're not worried about who you traded

             9   with.

            10             Our clients don't want us, necessarily, trading

            11   with the guy who is making a market in derivatives sitting in

            12   his, you know, basement.  That's not what we want, right? 

            13   The SEF concept would allow clearing and it would take it

            14   away.  So if the guy in a basement was doing it, he would be

            15   doing it via clearing mechanisms.  Some would be providing

            16   capital and we would reduce risk.  So if he wanted to provide

            17   the best price, we would be happy.  So I think we need to

            18   focus on these aspects, and I think maybe that's getting to

            19   what you're talking about.

            20             So we need to sort of not lose sight of what we're

            21   trying to achieve through the SEF, which is allowing multiple

            22   people to come together, provide prices, provide information,

            23   allowing more people to transact and not having sort of an

            24   oligopolist situation where only dealers provide prices. 

            25   We're very much in favor of that, but it has to be done in a




                                                                            34

             1   way realizing that when there are lots of unique things, it's

             2   more difficult to get that information, as well as by the

             3   nature of unique information, it tells you a lot about who is

             4   playing so as you move away from that.

             5             And one other thing which I think is very important

             6   and I think we shouldn't lose sight of, and I'll stop taking

             7   so much time.  And I apologize.  Is that there is a huge

             8   legacy set of positions that exist and the ultimate goal to

             9   reduce systemic risk is to move those positions over to a CCP

            10   like framework.  How do you handle those positions so that

            11   they can be traded in a liquid manner where the end user --

            12   and the important thing to remember -- end user is mom and

            13   pop because institutions frequently represent very small

            14   investors that just pool their money with a large investment

            15   fund -- that this is sort of the view. And you don't want them

            16   paying high bid ask or information fees to make that happen.

            17             MR. EADY:  So it sounds like the panelists believe

            18   that there are some desirable characteristics of the RFQ

            19   model that they would like to preserve.  One of the things

            20   that we're focused on, obviously, is pre-trade price

            21   transparency, and we talked about it a little bit here.  The

            22   question I would have for the panelists is do you believe

            23   that there is adequate pre-trade price transparency with the

            24   RFQ models that exist today or if not, what would you suggest

            25   as improvements to pre-trade price transparency to help us




                                                                            35

             1   better meet that policy goal.

             2             MR. DuFOUR:  Richard DuFour.  I can only speak to,

             3   you know, what we do today, which is not really a SEF, but

             4   the FLEX system I mentioned before, which is targeted at the

             5   over the counter market kind of draw from that impact.  The

             6   last two or three years has -- the volume has increased

             7   substantially, I think, because of what's been going on.  And

             8   I would argue that there is, you know, adequate transparency 

             9   in that. And the key thing, you know, in responding to a quote 

            10   is to know the terms of the trade, which you can vary, and, 

            11   you know, price and size.  And I think those elements are all

            12   met.  And I suspect in some of these other systems, but I

            13   won't speak for them.

            14             MR. OLESKY:  I guess I would just reflect what I

            15   was saying a little bit before, which is the state of the

            16   market right now with derivatives trading through what we

            17   envision to be SEF like entities, such as some of the

            18   entities that are on this panel, is still in its early days.  

            19   And as a result, you don't have a lot of activity, not nearly 

            20   the same activity that you have in the other market.

            21             So what should happen here naturally, as more

            22   activity moves to these vehicles, you're going to have

            23   enhanced transparency in terms of more participants joining

            24   in, more prices coming in, more competition because for the

            25   first time, this is going to be a mandatory process.  And if




                                                                            36

             1   that market today, and let's just, you know, lump together

             2   credit and rates, is less than 5 percent through these kinds

             3   of vehicles, if you envision a world where there is 75 percent

             4   of the activity going through those vehicles, you're going to

             5   have a lot more transparency.

             6             MR. MacDONALD:  I would agree with a lot of the points

             7   that are being made on the SEF.  Ben MacDonald from Bloomberg.  

             8   I think that the derivatives market is relatively early in its

             9   stages.  I think we will draw comparisons in the cash market

            10   where the RFQ process is very prevalent, as are some of the

            11   other things that we're talking about here.  And I think

            12   that, you know, the important thing from a kind of rulemaking

            13   standpoint is really going to be allowing multiple models to

            14   exist because I think that's ultimately going to promote

            15   liquidity.

            16             I think that the buyers -- the takers and makers

            17   of liquidity, will end up, you know, in the place which is

            18   the most efficient and suits their needs.  And I think if you

            19   look -- if you draw the analogy today in the cash base, there

            20   are multiple models and people use those models for different

            21   reasons.  But there is a vast majority of trading that

            22   happens over, you know, the RFQ model over the streaming

            23   model, you know, as well as other end users as well.  And I

            24   think the really important thing today is to allow that

            25   market to continue to grow.  And I think the risk we're




                                                                            37

             1   just -- we're then posing, one model is that it will achieve

             2   the opposite to that.

             3             MR. DOWNES:  Andrew Downes, UBS.  I would say that

             4   if -- even with an RFQ model, if that's encompassed in the

             5   SEF definition, should provide more transparency than

             6   currently exists because you need a trigger for the

             7   discussion and that trigger will be a price around the

             8   benchmark tenors or trades.  And having that will

             9   obviously provide more transparency.

            10             MR. DuFOUR:  I would also add that this is really 

            11   on the issue of the customization, that I believe a great 

            12   deal of the customization that's done, I would even say, you 

            13   know, the majority of it, can be done in a standardized form 

            14   and that one of the challenges for you as regulators is to make 

            15   sure that customization doesn't become a loophole for avoiding 

            16   the exposure and clearing it.

            17             MR. HARDING:  Julian Harding.  Moving slightly away

            18   from the RFQ concept and talking a little more of the existing

            19   interdealer, the broker venue, the existing structure is a 

            20   little bit -- is not talked about very much, which is that there

            21   is a sort of an outer area of end user participants and there

            22   is an inner area of banking or dealing participants and there

            23   is a third inner area in which sit the interdealer, the brokers.

            24             In terms of the transparency issue, I think a lot

            25   of this will be attended to by the fact that in the new




                                                                            38

             1   imagined environment, there will be introduced a great deal

             2   more different sorts of participants by the mandated areas

             3   that Lee just alluded to.  First off, the fact that clearable

             4   trades now will be mandated through SEFs and DCMs will do

             5   something.  Secondly, a whole new batch of players

             6   determined -- yet to be fully decided upon, but certainly in

             7   amongst the legislation, will be forced to go through SEFs as

             8   well.  Brand new entrants to that marketplace to be -- what I

             9   would say the previous marketplace, the one we described as a

            10   SEF.  

            11             So, that is quite a dramatic change in and of

            12   itself and the transparency might even be contended -- the

            13   transparency desires may come from primarily a lot of those

            14   participants who, in fact, now will be fully participating in

            15   those marketplaces, which is rather a large change.  I think

            16   it's the same theme, but extending the theme that Lee was

            17   mentioning.

            18             MR. COOK:  I want to make sure we get, you know,

            19   all the staff's questions in there.

            20             MR. BRIGAGLIANO:  Can I ask the panelists whether

            21   they believe there should be a firm quote requirement for

            22   swaps and if so, should that depend on a liquidity threshold?

            23             MR. DE LEON:  Bill De Leon.  I think you've seen

            24   the market adapt to that concept already, that people put out

            25   quotes on many things in the OTC market, and that's how a lot




                                                                            39

             1   of people get transparency.  And the understanding is that

             2   people who put quotes out, understand that there's going to

             3   be some minimum size that they will transact on.  Sometimes

             4   the quote information has that price information as well as a

             5   quote size or there is some indication.  

             6             We've found that dealers who send us information

             7   who don't include size and/or when you go and say I want to

             8   trade on one side of your market.  And they say, oh, no, that

             9   was just an indication; we're not willing to trade.  You tend

            10   not to get a lot of repeats.

            11             So, I would agree that having a quote without some

            12   concept of size and maybe it displayed or maybe there is an

            13   understood rule and obviously depending on the product, the

            14   size needs to be different, I think that makes sense because

            15   people flashing prices on screens not standing behind them

            16   I think gives -- lends to manipulation and/or misleading

            17   information.  And it doesn't help anyone to have that, to say

            18   I'll buy it here at 25.  Oh, okay.  I'll sell it to you at

            19   25.  Oh, no-no.  That's only not good for any real size or I

            20   take it away.  I think that hurts the market in liquidity in

            21   any process.  

            22             So, I think the concept of a firm size is good

            23   because it enforces that when you see this price there, well,

            24   it may not be all the size you want to do.  At least you know

            25   you can do a transaction and it's not getting you to waste




                                                                            40

             1   your time because otherwise, you're going to give away

             2   information to somebody.

             3             MR. DOWNES:  Andrew Downes.  I think in answer to

             4   the second part of your question, I think that definitely

             5   does have to be a liquidity requirement for firm quotes if

             6   there were to be that requirement at all.  Obviously, there

             7   is a lot of disparate standardized contracts that trade, and

             8   some in very small volumes, and I think it's obviously

             9   difficult to maintain prices across, you know, a number of

            10   tenors and hundreds of names all at once.  That's just not

            11   feasible from a market making perspective. 

            12             So, I think you need to have a liquidity requirement

            13   and obviously, to the extent you were going to require firm

            14   prices, that should really just be around the benchmark and

            15   then obviously the benchmark price that is shown can be a

            16   trigger for a discussion if someone wants something other

            17   than the benchmark.

            18             MR. OLESKY:  Hi.  It's Lee Olesky.  One of the

            19   beauties of the way the market works right now, and this is

            20   following up on the two previous comments, is because it's

            21   fully disclosed, you know who is putting out the price.  You

            22   know who you're asking for the price for.  And I think we

            23   heard from Bill, if you are putting out prices and you're not

            24   standing behind them, you're not going to be asked for prices

            25   in the future.  




                                                                            41

             1             And so we see that all the time.  If you're not

             2   going to stand behind your prices, you know who it is, and

             3   this is the key to the anonymity of the relationship between

             4   the user and the liquidity provider, you're not going to go

             5   back to them.  So, there's a self-enforcing mechanism

             6   that works quite well in terms of standing behind your

             7   prices.  And, you know, we've experienced that in the last 12

             8   years.  If you're putting out prices and you're not standing

             9   behind them, you're not going to get that inquiry in the

            10   future.

            11             MR. SEMLITZ:  I want to grab a question because it

            12   really goes to futures and derivatives and there is an entire

            13   industry that grew up around trading futures and those firms

            14   are canceling inordinate amounts of their orders, maybe up to

            15   97 percent of their orders.  So, their orders aren't there to

            16   provide liquidity and many of their orders aren't there to

            17   really execute they're there to paint the market.  We've got

            18   rules already in place to regulate this.  And that's the

            19   current state of the market.  So the question I have is why

            20   are we -- you know, why are we so concerned with request for

            21   quote and whether people will be firm on their quotes, but

            22   we're not doing anything about the futures markets.

            23             MR. MacDONALD:  Ben MacDonald, Bloomberg.  Just to

            24   kind of follow up on a lot of the comments.  I think this

            25   goes back to the point of having, you know, different types




                                                                            42

             1   of SEFs and to draw -- I mean, you know, I think one of the

             2   issues here is because the derivatives market is so new in

             3   the electronic trading space, I think we all draw comparisons

             4   with how we saw the cash space evolve.  Natural evolution in

             5   the cash space was firm pricing and, you know, you've got to a

             6   point now where you can access hundreds of quotes on a

             7   system.  And the way the liquidity providers differentiate

             8   themselves, one of the ways, is by firm quotes and, you know,

             9   people stand up to larger sizes from depending on what their

            10   appetite is. 

            11             So I think, you know, it's one of the reasons why

            12   it's very important to allow different models to exist

            13   because I think you'll naturally get this evolution, which

            14   we've seen in the cash space, across, you know, both the rates

            15   and the credit market.

            16             MR. OLESKY:  Just to make another point on that is

            17   the -- in a sense, anonymity allows for backing away.  I

            18   mean, I'm not going to be critical of the futures market;

            19   that's not my area, but I think when you have anonymity, it's

            20   easier to back away.  When you don't have anonymity, when it's 

            21   a privately negotiated structure or deal, you can't back away

            22   or you won't do that business in the future.

            23             MR. DE LEON:  One of the things, though, to sort of

            24   go back to that is as you -- you know, you look at your

            25   model, which works very well, people put up a quote and you




                                                                            43

             1   know which dealer it is.  Conversely, when you look at the

             2   futures market, this whole concept is that it's anonymous. 

             3   Whatever goes on, though, what you do know is if someone puts

             4   up a price and a size, they may be painting the screens as

             5   sort of the example that was laid out, but you do have the

             6   ability to do that trade.  And there are times when people

             7   paint the screens and the market comes out and they don't

             8   pull their level quickly enough and they're held to that

             9   trade.  

            10             And also you tend to know when people paint

            11   screens, that is to say, well, if the market is $1 at $2, and

            12   they put a level out at $6, but they're willing to sell an

            13   awful lot of it, well, they know, and everyone knows, well,

            14   they're just painting the screen because it's so far off the

            15   market, you're not going to look at it and you know it's

            16   someone playing a game.  Unfortunately we've not seen that,

            17   and that's just gamesmanship and it's -- I'm not a fan of it 

            18   or in favor of it, but if that person puts out a large block

            19   instead of at $2, at $2.02 and it's a large block, well, you

            20   might lift them on that offer because you may go, you know

            21   what?  That's not painting the screen.  That's them asking a

            22   little bit of bid-ask for a large block.  So I think you need

            23   to differentiate the two.

            24             And the market does self-reinforce because people

            25   tend to look at it and go, these guys are constantly showing




                                                                            44

             1   blocks off the market and I'm not going to look at it.  So I

             2   do think that people self-correct for that even though it's

             3   anonymous.  What I just want to get back to is the concept

             4   that if you're going to have a SEF model, the concept -- and

             5   it's going to be cleared, the concept is people having access

             6   need to be anonymous and be able to do things.  

             7             So, I think some of the points that have been made

             8   here is clearly there would be less customization over time,

             9   which I think is a natural outcome of the market, but we have

            10   this huge outstanding book of business that still needs to be

            11   traded and managed and eventually possibly cleared to reduce

            12   systemic risk to the system, which is the ultimate good.  And

            13   how do you do that if you force the new model not to

            14   incorporate the existing body of positions.

            15             MR. VISWANATHAN:  I just want to follow up on this. 

            16   I guess to me one of the presumptions of the Act is clearing

            17   itself will induce innovation.  The fact you clear will lead

            18   to more standardization over time and hopefully it will

            19   mold - instead of just a request for a quote more actual 

            20   quote-setting behavior, but it might be that the regulators 

            21   need to set thresholds that if you meet certain volume hurdles,

            22   you're a big enough market that you want to prod more quote

            23   behavior because posting quotes, I think, makes a big

            24   difference to end users.  

            25             It goes from a negotiation relationship, which is




                                                                            45

             1   kind of person to person -- RFQ model each person is getting

             2   a separate set of quotes.  I'm seeing prices, but I'm not

             3   seeing the quotes that somebody else gets.  But the posting

             4   quote model, it's completely different.  I know the quotes

             5   that other customers have got for some standardized product. 

             6   So it changes the nature of the game in essence.

             7             MR. COOK:  So you think if an RFQ model had a

             8   certain volume, then maybe you would say it needs to

             9   transition to a full disclosure model.  

            10             MR. VISWANATHAN:  Yeah.  I would say that that

            11   would be part of the regulatory kind of rule-making or

            12   decision-making.

            13             MS. ADRIANCE:  That actually leads very nicely into

            14   my question, which is there have been several people who have 

            15   talked about RFQ models, the versions that have streaming 

            16   quotes, you know, whatever you want to call them.  From what 

            17   we've heard before and today, the different versions of these 

            18   models, you know, have differed.  There is many different 

            19   systems that's been mentioned.  In fact, several people are 

            20   saying we need to have different models.  

            21             And I'm really curious, if, you know, if we as

            22   regulators, in addition, you know, we say everybody knows the

            23   control limit order book.  We know how that works.  We know

            24   that it has certain advantages.  What I think is being said

            25   is that there are certain instances where a central order




                                                                            46

             1   book just isn't going to work, like liquidity or whatever has

             2   been mentioned.  

             3             So, in addition to a central limit order book, 

             4   several people have mentioned other models.  What I'm trying 

             5   to get more information on is if we could actually -- I 

             6   realize that a number of you already have models in place.  

             7   But if we were going to design a new model, if as regulators 

             8   we were going to say, well, what is the best additional model 

             9   in addition to a central limit order book that we want to .  

            10   encourage. Separate from where we are today, where do we want  

            11   to get to to deal with situations where there is the, you say, 

            12   the less liquid slots.  

            13             What would that model be that would provide 

            14   in a sense, the regulatory goals of the Dodd-Frank Act,

            15   you know, pre-trade price transparency, yet there is, as it

            16   has been mentioned, anonymity, you know, that there is this

            17   marketplace because many of the RFQ models, people have said,

            18   well, they're multiple to multiple because you have multiple 

            19   people sending out requests for quotes and you have multiple 

            20   people that can respond to that individual person.

            21             Is there something between that RFQ model -- I know

            22   there's been -- streaming quotes have been mentioned.  That's

            23   something that can go to a lot of people who can react.  But

            24   is there something else that is either out there that you're

            25   aware of, something between central limit order book and 




                                                                            47

             1   RFQs, that is a beefed up version of an

             2   RFQ model or some other model that is either out there or

             3   that you can envision being a practical step if we're trying

             4   to evolve, you know, certainly as we've mentioned, as certain

             5   swaps become more liquid, if there is some and we have some

             6   kind of standard that we say, okay, if it reaches a certain

             7   liquidity it needs to move up the gradation of, in terms of

             8   models, is there something between this RFQ model, and the

             9   central limit order book.  

            10             One thing that was mentioned was streaming quotes,

            11   but that's not something that you can transact or

            12   that you can expect to necessarily transact I think.  So I'm

            13   curious about what is -- what else might be in the middle

            14   between RFQs and central limit order book that's either out 

            15   there or that you can envision being a useful thing to have 

            16   out there.

            17             MR. SPRECHER:  This is Jeff Sprecher from ICE. 

            18   What exists in the futures market for exactly that need,

            19   particularly in the options on futures market, is the

            20   requirement that there can be pre-trade conversation,

            21   arranging of somewhat customized deals.  But when the moment

            22   comes to actually cross the trade, it is advertised, for some

            23   period of time, to a broad market before it's crossed. 

            24             So in other words, if the buyer and the seller have

            25   already found each other, one person puts up their bid or




                                                                            48

             1   their offer, counts to three, and then the other one can

             2   cross it.  That allows for a price improvement capability

             3   inside that bid and offer.

             4             Let me make one other point while we're on that. 

             5   And one of the issues that we have at ICE, as an operator of

             6   futures exchanges, many to many OTC markets, dealer to

             7   client OTC markets and inter-dealer OTC markets.  So really

             8   covering across all trading types.  One of the concerns we

             9   have is that in both Commissions requirements, to institute

            10   the core principles, as well as the aspirations of pre-trade

            11   price transparency and some of the other aspirational aspects

            12   of the bill, that we not try to go through market type by

            13   market type or market by market and somehow give a broad

            14   set of exemptions.  

            15             It seems like that, however, those core principles

            16   are implemented, they ought to be consistent across all

            17   models, and then if the Commissions want to allow various

            18   trading models to exist, they shouldn't exist because of some

            19   kind of regulatory arbitrage differences between the way the

            20   core principles are implemented.

            21             MR. HARDING:  Julian Harding.  We seem to have

            22   stuck with, a little bit, the RFQ model, which as I 

            23   cautioned before, could -- I think needs to adapt a little to

            24   adhere to the strict definition that was read out at the

            25   beginning.  The -- I would offer the inter-dealer broker 




                                                                            49

             1   over-the-counter market places do offer what you've been

             2   suggesting might be a middle road between a central order

             3   book and an RFQ.

             4             The over-the-counter markets to date generate

             5   liquidity when compared pari passu to any other venue for a

             6   similar product area in an overwhelmingly greater manner.  And

             7   if we agree that liquidity generation or liquidity

             8   preservation and improvement is a central tenet of safety

             9   and certainly is of the ability to clear trades and therefore

            10   create further levels of safety, then the inter-dealer broker

            11   model, the over-the-counter existing models can offer a lot

            12   of what you want in that we are looking at multiple parties

            13   transacting with multiple parties, accepting bids and offers

            14   from multiple parties, in a very dynamic environment where

            15   each player in that marketplace can be, at any one time, and

            16   even simultaneously, a market taker and a market maker.

            17             MR. EADY:  So let's expand on that a little bit

            18   because my understanding is that the inter-dealer market is a

            19   market among dealers and not others.  So when we get to the

            20   other policy goal of impartial access, are you suggesting

            21   that we open the inter-dealer market up to other participants

            22   who want to be involved for the benefits that you just

            23   described?

            24             MR. HARDING:  Yes, and I said in my previous

            25   comment, that the new environment clearly envisages, by




                                                                            50

             1   virtue of mandating certain existing parties to go through

             2   the SEF or the DCM and furthermore, mandates extra new

             3   parties that previously were not, possibly due to the fact of

             4   counterparty credit issues, were not having easy access or

             5   any access to those marketplaces.  In the new environment, in

             6   newly cleared products, the counterparty credit issue is

             7   removed and those same newly mandated participants are going

             8   to have free access to those same marketplaces.  So yes,

             9   indeed.  The answer is yes.

            10             MR. MacDONALD:  I think there is -- this is Ben

            11   MacDonald from Bloomberg.  I think one of the things that's

            12   getting a little bit lost in the debate, perhaps, is that,

            13   you know, a large part of the derivatives market is what I'll

            14   call semi-standardized and by that, you know, the benchmark

            15   is where everybody is going to be basically looking as a

            16   reference but the reality is that a lot of the way trading is 

            17   done on these standardized products is the cash flows and 

            18   models slightly outside of, you know, the point which is made, 

            19   you might want to do a 10-year swap with, you know, three months

            20   forward, or something like that.

            21             And so, the risk is, it just becomes very, very 

            22   cumbersome, from a technology perspective, to be able to, you 

            23   know, if you change the model from an RFQ model, or don't have 

            24   that in your RFQ model, the RFQ model is actually the most 

            25   efficient model that we see today because it allows, you know,




                                                                            51

             1   people to go out with this kind of semi-customized trade and 

             2   dealers can quote it or the price makers can quote that  

             3   transaction and come back, come back with a price.  

             4             It's just -- I think it becomes very, very

             5   complicated, you know, the more kind of -- the more you

             6   change that model and the more you get into the kind of

             7   semi-standardized space, I think those models become very

             8   complicated to maintain.  So I'm just trying to kind of

             9   understand the thoughts around that.

            10             MR. OLESKY:  Yeah.  One comment I would like to

            11   make is I think what happens here, again, as we're trying to

            12   anticipate the effect of these rules on the marketplace, and

            13   I'll go back to that point.  With the establishment of SEF,

            14   as more and more activity goes through SEF, I think you're

            15   going to start to see potentially more volume occurring,

            16   which will drive business into different types of trading

            17   models.  And it will be driven, to a large extent, I think by

            18   market participants.

            19             If there were thousands of participants, as there

            20   are in exchange models, who wanted to participate in a

            21   10-year swap, then I think you would have an order book real

            22   quick because I'm pretty sure, you know, all of us would want

            23   to open up our markets to an exchange type environment if

            24   there are enough participants and enough liquidity to support

            25   that kind of model.  




                                                                            52

             1             And I do think we will see an evolution, and we've

             2   seen this evolution in other products where, for example, you

             3   have the treasury market, you have other markets.  As they've

             4   gone electronic, they become more liquid, they pull in more

             5   participants, and you have more of an order book type of

             6   model occurring, whether it's in IDBs or, you know, through

             7   Tradeweb or Bloomberg or wherever.  I think you're going to

             8   see an evolution in certain products where they will move to,

             9   naturally move to different types of trading protocols.

            10             MS. SLAVKIN:  I have a concern that the

            11   conversation about maintaining the RFQ model is the status

            12   quo that you mentioned earlier.  And it seems to me that the

            13   legislation envisioned, and what we should be trying to

            14   aspire to, is something as close to an order book as

            15   possible.  As soon as we start adding the human element in,

            16   you invite the possibility for manipulation.  

            17             So, I also think that this can be, you know, made

            18   electronic and have as many participants as possible who are

            19   interested in participating in the process to have access to

            20   it.  That should be the goal of this process and to move as

            21   much of the market onto that type of model as possible.

            22             MR. COOK:  Okay.  Thanks.  I want to make sure we

            23   have time for our other topic we want to get to on this

            24   panel, then we can circle back in the end, which is the 

            25   exception to the mandatory trading requirement.  Why 




                                                                            53

             1   don't we start with a line of questioning on that.

             2             MS. ADRIANCE:  We've just been talking about what

             3   is this -- the model that have -- the different versions of

             4   the models that have the pre-trade price transparency, et

             5   cetera.  We know that there is language in the Dodd-Frank Act

             6   that refers to, for instance, block trades.  There is a

             7   possibility of some other language that might allow other

             8   situations, which might not be -- which might be trades done

             9   without a pre-trade price transparency.  And we're trying to

            10   understand what that means.  

            11             What -- your views of under the Dodd-Frank, is

            12   there something in addition to block trades that should

            13   have -- that can be a method that trades can be executed 

            14   without requiring pre-trade price transparency and, you know, 

            15   what might those methods be and as well as under what

            16   circumstances would it be appropriate to allow, you know, as

            17   regulators we're supposed to be sorting out well, when and

            18   under which circumstances are block trades allowed?  Can they

            19   be accepted as just block trades?  Is it an adjunct to these

            20   other markets that have the, as it was discussed, central 

            21   limit order books, RFQs or these other models in between. 

            22   Where does this fit in, these exceptions to this rule of 

            23   pre-trade price transparency.

            24             MR. DE LEON:  I would like to -- sorry.  You know,

            25   block trading and post-trade transparency is something I




                                                                            54

             1   think that offers very different information than pre-trade. 

             2   And there are different social aspects to it, in terms of

             3   information, information flow and who benefits from that

             4   information.  And I think it's important to separate those

             5   out.

             6             What I think, and I think that most people agree

             7   on, pre-trade transparency is incredibly important to make

             8   sure that as many people have access to (a) get the best

             9   price information out there, (b) be allowed to trade and

            10   offer liquidity, and (c) when they transact, get that best

            11   price.  That's a common good, I think, because you want

            12   people to trade and get the best levels and not be forced to

            13   pay a substantially higher bid ask price.

            14             What happens post-trade, however, is what

            15   information gets given out and how it is given out and who

            16   gets it.  Post-trade is now a transaction barring a central

            17   limit order book where there is a trade done where that size

            18   then gets done.  But what information gets given out

            19   afterwards and at what rate.

            20             You very quickly run into a situation where if you

            21   don't have a central limit order book where it's clear that

            22   there were willing buyers and sellers to offset each other,

            23   and that was the clearing price, where the market starts to

            24   move.  If I want to buy a lot of something and the central

            25   order limit book isn't deep enough, I'll move the price up. 




                                                                            55

             1   If I want to buy something, the central limit order book is

             2   big enough, actually it can trade through me.

             3             When you do something, a block trade, which is now

             4   off central order and it's occurred, what information do you

             5   give out and when and why.  I think it's really important

             6   because you create the situation of the buyer's curse and

             7   the, you know, or the winner's curse.  And you need to

             8   prevent that because that's not a social good.  Because that

             9   means that the two people transacting are taking extra risk

            10   on both sides and everyone else who doesn't take part in that

            11   transaction gets a lot of free information that they can then

            12   use against both people transacting.

            13             For example, if I want to buy a lot of something

            14   and I call someone and I ask, well, where can I buy it. 

            15   Well, if the typical order size is one car and I want to buy

            16   five thousand cars, well, the price for that is going to be

            17   very different.  You have to produce 5,000 cars, where are 

            18   they available.  There is a uniqueness factor for it.  And 

            19   if the person who sells me them doesn't have the inventory 

            20   and needs to work out of it, everyone is going to know he is 

            21   short them so they can run the price up on that person.  

            22             So there is a real disincentive for that

            23   information to get out.  What is important is that that trade

            24   did occur, people should know a large trade occurred, but how

            25   large and exactly what details should be protected because




                                                                            56

             1   otherwise, everyone else in the room, or everyone else in the

             2   market, will have an unfair advantage.  So the person who

             3   sold the car is going to want to protect themselves and

             4   charge a higher price.  The person who buys them will pay a

             5   higher price.  And conversely if I wanted to buy more cars

             6   after that first block, it's going to be more difficult.  So

             7   I think when we talk about block trading, we have to

             8   understand the social implications and who is benefitting,

             9   versus who is getting hurt and what is the information.

            10             MR. COOK:  I would like to steer us away, maybe --

            11   thanks for those comments -- from yesterday's topic of

            12   transparency and reporting and maybe back a little bit to the

            13   mandatory clearing requirement.  Because what the statute

            14   says is that if a swap is subject to the clearing

            15   requirement, then it must be traded on an exchange or SEF

            16   unless no SEF or exchange makes the swap available for

            17   trading.  

            18             So, I think what would be helpful is to get your

            19   thoughts on how we should be interpreting the words

            20   "available for trading" when we're defining the scope of this

            21   exception from the mandatory trading requirement.

            22             MR. HARDING:  Julian Harding.  Robert, this might

            23   point to the big differences between an exchange or DCM

            24   situation and a SEF situation.  It is -- whilst it is

            25   possible to conceive that a newly clearable swap may be




                                                                            57

             1   turned down because of structural concerns of some kind or

             2   something else within an exchange environment, as being able

             3   to be listed for whatever reason, it is similarly almost

             4   inconceivable that a SEF that one might imagine with a

             5   different sort of structure, would ever turn down the chance

             6   to operate a market to trade a newly cleared swap.  

             7             So it doesn't point to the differences.  And it's a

             8   common thread in the discussions over many, many months now

             9   that the word "listing" often comes up in terms of SEFs as

            10   well and if SEFs reflect the marketplaces that I believe they

            11   do, the listing concept is not correct and, in fact, the

            12   SEF will quickly and effectively create a marketplace or

            13   operate a marketplace for that newly created swap.  So the

            14   exception, to me, never made that much sense.

            15             MR. COOK:  So you would interpret it very narrowly

            16   and so that if it's available to be traded, then the

            17   exception would not be -- would not apply.

            18             MR. HARDING:  Yes.  For the SEF?  Yes.

            19             MR. COOK:  Yeah.  Okay.

            20             MR. DuFOUR:  Richard DuFour.  I think the real key

            21   isn't going to be at the SEF level, but at the clearing

            22   level, that if a clearing -- there is a clearing entity out

            23   there that believes they can clear the contract with whatever

            24   the specifications are, then a SEF will be happy to act as

            25   the, you know, the place to match buyer and seller.




                                                                            58

             1             MR. SPRECHER:  This is Jeff Sprecher from ICE. 

             2   Just to follow up on that comment.  As probably one of the

             3   largest, if not the largest, operator of the OTC

             4   clearinghouses, the reason that we've become successful in

             5   doing that is that we've made arrangements with the industry

             6   to give us price transparency because the remedy in a

             7   clearinghouse on a default is to liquidate the position.  And

             8   so by default, we need to know at all times where the market

             9   price is, which means we need price transparency.  So

            10   clearing will follow markets where there is price

            11   transparency.  Not the opposite.

            12             And also, let me just expand my comments to say,

            13   again, as an operator of futures exchanges, we recognize

            14   there are contracts that are large size that are parts of a

            15   tailored risk profiles and the like that are arranged off

            16   exchange and are given to us as blocks.  We try to maintain 

            17   that at a reasonable amount of quantity, usually in our 

            18   futures exchanges, it's under 10 percent of our volume, and 

            19   we try to influence that by the pricing that we charge to 

            20   accept blocks, the rules that we put in place to force 

            21   advertising of trades, and the like.

            22             In ICE's OTC energy markets, which are probably the

            23   most liquid two-way bid offer, OTC markets that exist today,

            24   97 percent of all the trades that go across our platform are

            25   cleared and about 15 percent of the volume that comes into




                                                                            59

             1   our OTC market or 15 percent of the number of trades that

             2   come in are done away.  Those are typically, again, large

             3   size, customized deals, and so on and so forth.  So I think

             4   that the market can develop around a price transparent market

             5   and still accommodate some customization for both clearing

             6   and trading.

             7             MR. DOWNES:  Andrew Downes.  With respect to the

             8   available to trade, meaning I think that has to have,

             9   implicit in it the level of liquidity that's necessary for

            10   trading actually to occur; i.e., that someone can come in and

            11   there is trading available.  I don't think it's a matter of

            12   build it and it's mandatory to come.  I think it's more build

            13   it.  They may come.  Then if they come, it should be

            14   mandatory to come.  That's the way I would understand the

            15   legislation.

            16             And I think, you know, if you're looking at

            17   liquidity, which is back to the sort of plurality of models

            18   to be encompassed in the SEF definition, as I said and people

            19   have said earlier, there will be a large range of liquidity. 

            20   So I think you need to think about, in each case, what is

            21   available to trade based on, you know, the frequency of

            22   trading of the instrument.  

            23             You know, in some cases, if there's only X amount

            24   of, say, 10 trades a day, that's not really going to lend

            25   itself to a central order book because there just won't be




                                                                            60

             1   bids and offers seeking each other in order to clear.  So I

             2   would say liquidity is absolutely key.

             3             MR. MacDONALD:  I think -- Ben MacDonald from

             4   Bloomberg.  One of the -- just thinking about the debate a

             5   little bit, one of the models which does exist today is the

             6   single dealer franchises that we spoke about which allow people

             7   to look in multiple offerings simultaneously.  The beauty of

             8   that model is it actually allows the market to start becoming

             9   more electronic and people to post new products out there. 

            10   And I think, you know, just kind of I guess thinking out

            11   loud, the question is whether, you know, that -- if you have

            12   that kind of forum, what happens, you eventually reach a

            13   critical mass in terms of liquidity which then allows you to

            14   kind of, you know, hit that point.  

            15             So, I think what you're encouraging, by having that

            16   kind of model, is people to post liquidity and it gives you a

            17   mechanism to understand at what point those products actually

            18   do become liquid and then should, you know, I make a decision

            19   as to whether I should -- whether you belong, you know, in a

            20   clearing house.

            21             MR. DENIZE:  Again, just a note.  This is Yves

            22   Denize.  A note to encourage a process in place that provides

            23   us with some subtle expectations as to how that would

            24   transition into a mandatory trading environment.  You know,

            25   simply having a SEF raise its hand and say I'm prepared to




                                                                            61

             1   list or prepared to provide a trading venue may not be the

             2   right process to have a trade go into mandatory trading.  And

             3   I think there was some discussion about that over the course

             4   of the legislation when we talked about mandatory clearing 

             5   and how the agencies would be involved and having something 

             6   be designated for mandatory clearing.  A similar process 

             7   would be at least logical here when you talk about mandatory

             8   trading and whether you're looking at liquidity volumes, et

             9   cetera, would be welcome.

            10             MR. MacDONALD:  I think -- actually which raises a

            11   very, very good point.  I think one of the things which, you

            12   know, which we have to think about, and I know this is part

            13   of the second discussion is, you know, the mechanisms by

            14   which, you know, you can ensure that all of the SEFs kind

            15   of, you know, have the same rules and there is clear

            16   understanding as to, you know, what belongs in which forum,

            17   which, you know, does raise the question as to, you know, to

            18   what extent should there be some form of central utility or

            19   something like that which is responsible for some of these

            20   activities around defining what's available and, you know,

            21   where the products should be going.

            22             MS. SLAVKIN:  I think this language should be read

            23   relatively narrowly and that the requirement should flow from

            24   the clearing requirement.  I think what we're seeing here is

            25   a preference that was reflected throughout the Dodd-Frank Act




                                                                            62

             1   on the part of Congress to avoid mandating private market 

             2   actors to do pretty much anything, but allow the regulators 

             3   to make the determinations as necessary.  And so I think it 

             4   would be a mistake to put too much emphasis on this language.

             5             MR. VISWANATHAN:  I would also kind of say you 

             6   probably want a narrow interpretation simply because it could 

             7   be that, you know, the 10 year T-bond is traded and I'm

             8   customizing the 9 1/2 year, the 9 1/2 year may not be traded, 

             9   but for all practical purposes, you know, I'm pricing it off

            10   something that's out there.  

            11             So if you're going to make exemptions, you're kind

            12   of worried that if you make too many exemptions, people will

            13   use the exemptions to -- the 9 1/2 year's exempt and maybe I

            14   don't want to disclose.  I simply trade the 9 1/2 year

            15   instead of the 10 year.  So you have to worry a little about

            16   in the rule-making process, you start inducing regulatory

            17   arbitrage.  So my view is that exceptions should be narrow

            18   and the rules should be very clear on when transitions occur.

            19             MR. DOWNES:  Andrew Downes. I would just say in 

            20   terms of the requirement to clear compared to the, you know, 

            21   the requirement to SEF trade, I think when you look at 

            22   available to trade and take into account liquidity, the 

            23   liquidity measure or standard is different from that which I 

            24   would say is relevant for clearing.  If you're looking at 

            25   clearing, what you want is enough price transparency in 




                                                                            63

             1   order to have safety for the clearer to be able to calculate 

             2   the exposures and get the margins.  

             3             And you can get that with respect to trades, which

             4   actually aren't trading on a daily basis in the market

             5   because people clearing members will have those trades on 

             6   their books and they will be marking them on a daily basis.

             7   And the risk that you take where people aren't seeing those

             8   markets is mitigated to the extent that you can require

             9   additional margin and additional safety factors.

            10             If you distinguish that from liquidity in the

            11   context of trading, it may be that people have trades on

            12   their books, as I mentioned, for clearing, but there's no

            13   trading going on and no bids and offers to find each other on

            14   a daily basis.  So I think you need to look at liquidity in

            15   different ways for each of the two exercises, clearing and

            16   execution.

            17             MR. MELARA:  If I could follow up on liquidity

            18   measures, we heard frequency of trading referenced.  Could the

            19   panel expand, to the extent they can, as to what other

            20   factors we should be looking at when considering this

            21   particular issue.

            22             MR. DOWNES:  I would say other factors that would

            23   be relevant, aside from frequency of trading, is the amount

            24   of market makers or people that are involved in the market. 

            25   I think if you've got, you know, only a couple of people that




                                                                            64

             1   are making markets, that's clearly less of the market than if

             2   you've got, you know, 16 market makers all participating on a

             3   daily basis.  So I think that's another key aspect.

             4             I think you also need in different, depending on

             5   the product, you need to look across the curves, sort of

             6   tenor points and find out, you know, what proportion of the

             7   contract is trading at which points because there will be

             8   some names that we would regard as relatively liquid, but

             9   they'll only be liquid, say, at one point, as opposed to the

            10   other points.  So I think those are some of the key things

            11   that people need to consider.

            12             MR. OLESKY:  I would agree, Andrew.  I think in 

            13   addition to the velocity of trading and the frequency of 

            14   trading, it would really be the breadth of the market, is 

            15   critical component here, how many participants are there 

            16   willing to take on that risk.  If you're talking about a 

            17   principal market, it's almost as important as the velocity 

            18   and the frequency with which things trade because that really 

            19   does establish. If you only have two folks making those markets, 

            20   I would say that's a little bit less liquid instrument.

            21             MR. DuFOUR:  I think there is -- Richard DuFour.  I

            22   think there is a couple of other measures you can also look

            23   at.  Some of it would just be in a -- well, if you had

            24   something that was traded in an order book, you know, it's

            25   kind of the depth of the book; if it's a request for quotes,




                                                                            65

             1   you would look at, you know, how many people had responded

             2   and the sizes for the responses.  And you also can look at

             3   the open interest in the particular series or contract that's

             4   been created.  Typically greater open interest will indicate,

             5   you know, greater liquidity.

             6             MR. HARDING:  Julian Harding.  I think also

             7   following from Andrew's point that certainly the number of

             8   participants is a crucial measure.  But broadly, there are --

             9   there is a -- there are two forms of liquidity, retail

            10   liquidity which could be characterized by an equity

            11   marketplace where there are 100 pieces of 100 lots on each

            12   side of the bid offer spread.  And then there is

            13   institutional liquidity where that same bid offer spread may

            14   be populated by one market maker in an average size.  But

            15   right behind that, maybe one tick away on both sides, there

            16   is a vast amount of size that can be transacted.  And that

            17   sort of liquidity, I think, is a very important element to

            18   preserve in any debates we have about liquidity.

            19             MR. OLESKY:  Arguably, a definition of liquidity is

            20   can you do -- how much size can you do relative to moving the

            21   market is one definition.  If you can do a lot of size,

            22   there's a lot of liquidity.  If you can't do a lot of size,

            23   there is not so much liquidity.

            24             MR. VISWANATHAN:  I would agree with that.  I think

            25   in the end, it has to come with measuring your price impact. 




                                                                            66

             1   If every trade moves prices a lot, then you have to say the

             2   market -- you would have to measure, somehow, the size and

             3   the depth of the market of something.

             4             MR. COOK:  If a product goes through the process of

             5   being qualified to clear, so you have a clearing agency who

             6   thinks there's enough price transparency or modeling

             7   capability around that product field to accept it, how likely

             8   is it that product wouldn't be available in -- for trading in

             9   some facility that would qualify as a SEF?  I mean, how big

            10   an issue do you think this will be as a real world manner once 

            11   it makes it through the -- over the threshold of being clearable 

            12   then why wouldn't it normally be tradeable in a liquid market?

            13             MR. MacDONALD:  I think it's unlikely that anything

            14   which is accepted by the clearinghouse wouldn't be

            15   immediately available on the SEF.  I think that, you know,

            16   especially if you've got multiple SEFs, there will be a, you

            17   know, competitive aspect to being first to market with anything

            18   which is made available on the clearinghouse.

            19             MR. DE LEON:  I'm not sure that you'll see that

            20   because as we've seen, there are multiple security --

            21   multiple things that trade or are cleared or are clearing 

            22   eligible and especially if you look at the CDS market where 

            23   there is the big bang and small bang, so there's been a lot of

            24   standardization already, but a lot of smaller names don't

            25   trade that actively.  




                                                                            67

             1             So, I would say that it's in the public good to have

             2   these CDS cleared and margined and marked on a daily basis,

             3   but it's not necessarily clear that they will be trading very

             4   frequently.  They trade once or twice a week as is.  So --

             5   and that's only by a limited number of players and dealers. 

             6   So given that, I don't foresee a pickup in that dramatically

             7   as it is SEF eligible.  It will obviously help over time, but

             8   there are things that are not that liquidly traded as is.  So

             9   just by definition, it doesn't mean there will now be a full

            10   deep market in it.

            11             MS. ADRIANCE:  In terms of that, you mentioned

            12   that, you know, just because it's determined to be clearable,

            13   it does not necessarily mean that it will trade frequently. 

            14   The question that we began on was what does "makes available

            15   for trading" mean.  If it's determined clearable, but it's not

            16   trading frequently, is that available for trading because

            17   it's being offered by some SEFs and so therefore there is

            18   mandatory trading or are you suggesting that there is -- it's

            19   not being really made available.  I'm not sure really what

            20   you're saying.

            21             MR. DE LEON:  I just -- 

            22             MR. DOWNES:  I would say if you look at what's

            23   clearing, you know, there's obviously -- say you look at the

            24   less frequently traded single names, which should be the

            25   constituents of the investment grade index, I think on




                                                                            68

             1   average across all of the constituent names, they trade four

             2   times a day.  That is not very frequent.  So, what I would say

             3   is whilst all those names or most of those names will clear and

             4   many of them already clear, it would be unlikely, at least

             5   for some subset, that they may trade in a SEF depending on

             6   the model for the SEF.  

             7             So if one were to prescribe that a SEF should be a 

             8   central order book, I don't think those names would trade on a 

             9   central order book because there's not enough bids and offers 

            10   seeking each other.  But to the extent that the SEF definition 

            11   is wider and can encompass more models, then there's more

            12   likelihood that some names can be picked up and traded in a

            13   different model.

            14             MR. OLESKY:  I wanted to go back to your question,

            15   Robert and I think yours as well Riva.  One of the things,

            16   and Ben made this point, I think if it's clearable, a SEF is

            17   going to want to have it on their system.  What might stop

            18   that from happening is if there is not equal access to that

            19   central counterparty and clearing so that it's not economic for

            20   that SEF to actually be able to do that business.  So this

            21   gets back to what might stop an organization from actually

            22   making something available.  Well, if we can't be competitive

            23   in the marketplace, vis-a-vis the customer base, that would

            24   be a hindrance.

            25             MR. MacDONALD:  I think in a funny way -- 




                                                                            69

             1             MR. SEMLITZ:  I'm sorry.  Go ahead.

             2             MR. MacDONALD:  I was going to say I think it also

             3   goes back -- I think there is two issues, there is

             4   availability and liquidity, which is ultimately going to

             5   drive what's on the screen.  I think it does kind of go a 

             6   little bit back to the RFQ model as well because the relevance 

             7   of that model is that it allows you to trade illiquid products 

             8   by sending out a quote rather than actually only being able to 

             9   trade if that product is available on the screen.  So, I think 

            10   that remains a very important part especially as this market 

            11   continues to grow.

            12             MR. SEMLITZ:  You know, it's one thing to say

            13   something is available to be traded on a screen, but it's not

            14   trading, and if the purpose -- unless you want to exclude end

            15   users or people who need semi-customizable products from

            16   trading and executing what they need, if you don't

            17   differentiate between clearing and available to be traded,

            18   you're going to end up constraining trade by not permitting

            19   people to execute trades because there are no quotes on a

            20   particular SEF.  So you're going to have to separate the two.

            21             MR. DuFOUR:  What I would visualize happening is

            22   you would have the relationship between a SEF and a clearing

            23   entity and this concept of a product being listed I think

            24   isn't quite the right way to think about it, but rather, and

            25   I'm thinking of a request for quote model, I would come in




                                                                            70

             1   and request for a quote for a product, you know,

             2   specifications, and the listing, if you will, would be

             3   created as a function of the trade as long as it was within

             4   some parameters that had previously been agreed upon with the

             5   clearing corporation and we can clear the following things.

             6             You can vary the following, you know, aspects of

             7   the contract, then the product would become listed or

             8   available because a trade took place and now there would be

             9   open interest carried in that particular product and, you

            10   know, someone else could come in and request quotes for

            11   order.

            12             MR. HARDING:  Julian Harding.  Just picking up on

            13   what Lee was just saying, which needs emphasis, I think,

            14   again.  It is in the statute that there is full and open and

            15   non-discriminatory access from a competing SEF to a DCO and

            16   it's important, and it's an important proviso.  I think it's

            17   important to preserve the ability of competing SEFs to have

            18   this non-discriminatory access, which has to be complete. 

            19   There can't be subtle or nuanced or discreet ways to

            20   discriminate against the access that SEF has.  

            21             This point is well taken that there is -- one could

            22   possibly imagine a situation where a SEF's desire and ability 

            23   to organize trading markets in that cleared product,

            24   may be in some ways stifled or stultified by a

            25   disadvantageous access to that DCO.




                                                                            71

             1             MR. SPRECHER:  This is Jeff Sprecher from ICE.  I

             2   just want to make the point again, that again as the operator 

             3   of a leading CDS clearinghouse, one of the most complicated

             4   derivatives, we can't clear a product unless there is a

             5   liquid market.  And not only does there have to be a liquid

             6   market, we need pre-trade price transparency, which means it

             7   will be very difficult for market operators like us to clear

             8   contracts that simply exist through a request for quote, for

             9   example.

            10             The reason I say that is that if a market is an

            11   illiquid market and let's say it's 20 bid at 50, which

            12   means there is somebody willing to buy at 20 and sell at 50,

            13   if somebody trades and does a trade at 50 and we receive it

            14   at the clearinghouse, we can't mark our positions to market

            15   at 50.  If we have to sell, we're going to have to sell at

            16   20.  

            17             So, we need to know the bid-offer spread and we

            18   need -- and then in other words, we need the pre-trade price

            19   transparency in order to properly mark to market unless we

            20   want to margin somebody at a hundred percent, which is the

            21   only other -- in other words, everybody prepays for all their

            22   business, which I think probably is self-defeating in the

            23   marketplace.

            24             As Julian mentioned, the single name CDS market is

            25   relatively illiquid as it has existed; however, the reason




                                                                            72

             1   that we're able to clear that, is we run a separate market

             2   with market participants where we run a daily auction to give

             3   us pre-trade and post-trade price transparency.  And it's

             4   only because we have found market participants willing to

             5   accept that daily risk and with products that can trade on a

             6   daily basis that we're able to clear the portfolio that we

             7   clear right now.

             8             MR. SCHOTT:  I would like to follow up on that and

             9   also bring it back to a question that I think Tom has asked

            10   some time ago emphasizing that pre-trade price transparency

            11   was one of the goals we were trying to achieve here.  When

            12   the different answers that came across this question talked

            13   about different potential SEF models, but I'm not sure we

            14   squarely addressed pre-trade price transparency.  We talked

            15   about central limit order books and RFQs and so forth.  

            16             Is there any reason why, regardless of the model or

            17   models that the Commissions may adopt, why the models could

            18   not include pre-trade transparency as part of how the

            19   SEF operates, so that even if it's an RFQ, you can see all

            20   responses, all participants can see the responses to the

            21   quotes.

            22             MR. DE LEON:  I think, and I'll let some of my

            23   other colleagues who actually run sort of flex type models is

            24   that when you do put an RFQ out to these things, when it

            25   comes back, it's sort of public information and everyone has




                                                                            73

             1   access to see that information.  Whether or not you can trade

             2   on it is a function of whether or not you're a member or

             3   you're clearing through a member to that exchange.  And

             4   that's a different discussion.  But assuming one of those two

             5   things is the case, you would see that RFQ and you could

             6   then go back and either transact on it or counter back with

             7   another level.  Please correct me if I missed something.

             8             MR. DuFOUR:  That's correct.

             9             MR. OLESKY:  I would just say a slight variation. 

            10   I think one of the RFQ models that we run has actually --

            11   does not have a feature where the whole market sees the

            12   inquiry that's coming in from a buy side customer.  And the

            13   reason for that is to protect that buy side customer from --

            14   and give the confidence to those providing liquidity that

            15   they can actually do the transaction before it becomes

            16   public, and potentially, that information could be used

            17   against each of those market participants.  That's kind of

            18   how the voice market has functioned for years.  

            19          And the risks there, in terms of the tradeoffs, are

            20   transparency, immediate transparency for the whole world

            21   versus the liquidity and price formation.  And if you make it

            22   immediately obvious to the whole world that someone wants to

            23   do a trade for a billion five-year U.S. treasuries, it's

            24   going to be very hard for any liquidity provider to step up

            25   and say I'm going to provide you with that liquidity because




                                                                            74

             1   they're going to be concerned about how they're going to

             2   hedge that risk and get out of that risk.  

             3             And in a principal market like for example just to

             4   use the U.S. treasury market, in the U.S. treasury market, it

             5   would be very difficult for primary dealers to extend the

             6   kind of liquidity they do instantaneously over TradeWeb and

             7   other platforms if they didn't have that protected section

             8   when the RFQ is going on.  And I think what would be the

             9   result is if you open that up so that everyone can see it,

            10   you're going to have less willing participants in terms of

            11   opening up there and taking on that risk that they're

            12   providing to a customer when they're making a market, for

            13   example, in the U.S. treasury market.

            14             MS. ADRIANCE:  And just to follow up on that, what

            15   you've just mentioned was, in a sense, a large block trade

            16   that another party may not want to take on the risk of a

            17   large block if it's a fully transparent marketplace.  But

            18   what you've just described is a large block, which is clearly

            19   mentioned in the Act, under Dodd-Frank.  And in that sense,

            20   there is, like for instance, to use the model that we have in

            21   the futures world, you can have a centralized marketplace and

            22   you can still have exceptions to the rule; for instance for

            23   blocks or U fees or whatever.  

            24             I guess part of our question here is, is there

            25   something -- while there may be situations that are




                                                                            75

             1   appropriate that there is a block trade with a large notional

             2   amount, or whatever, what should be the rule, the basic

             3   marketplace, what variations of models.  I think Sebastian

             4   was asking if the variations of models that are appropriate

             5   for the overall marketplace, can all those different flavors

             6   of models somehow offer pre-trade price transparency as

             7   separate from those situations, those -- the exceptions to

             8   the rule, the block trades, that wouldn't offer that.  

             9             So if we can get any thoughts as to back to,

            10   in a sense, the basic rule, what is this -- the usual model,

            11   whether it's central limit order book, RFQ's, streaming

            12   quotes, these other versions that we've been talking about,

            13   can all of those be -- either have now or be adapted to

            14   provide pre-trade price transparency for that basic

            15   marketplace.  And we'll view that as the -- as not the

            16   exceptions, but the basic model.

            17             MR. DE LEON:  I think you're sort of alluding to

            18   something we already see in the market now, which is the

            19   concept of people do pre-trade transparency either because

            20   things are electronically available or they pick up the phone

            21   and call and ask five people where do you see the following

            22   or show me a two-way on the following to get information

            23   back.  And then once they've done that, when they want to do

            24   a block trade, they'll pick one or maybe two people and then

            25   show it to them on the block size because as -- not to delve




                                                                            76

             1   into the other thing, I apologize for that earlier, but when

             2   you do do a block trade, obviously you want to be careful

             3   about what information you show and how.

             4             So, to the extent that you can do an upstairs block

             5   trade, but you've gone through some of the other methods to

             6   get pre-trade information, either through RFQs, looking at

             7   central order book, et cetera, streaming levels, you have an

             8   idea of where to trade and what to trade and then you can do

             9   your block trade.

            10             And another thing to sort of incorporate, depending

            11   on how these SEFs work, there are some issues, in terms of

            12   going to the treasury model, just to dwell on it -- there are 

            13   compliance and other legal issues because some accounts can't 

            14   trade with certain people.  And it's not a credit quality thing, 

            15   it's sort of a structural thing.  So, there are certain rules, 

            16   and especially in Tradeweb, where you may not choose to show

            17   prices to a specific set of dealers because you're 

            18   legally not allowed to trade with them due to compliance or

            19   legal or client guidelines.  So that's sort of just an

            20   adjunct.

            21             But I do think that there are plenty of ways to do

            22   pre-trade transparency that would work in the sort of

            23   SEF model and then post that, you would then do either an RFQ

            24   or you would do an upstairs block trade where you don't

            25   necessarily show out to the universe what you want to do and




                                                                            77

             1   advertise it up-front.

             2             MR. COOK:  Thanks. So we're coming to the end of  

             3   our time. I just want to give anyone that wants to get in on 

             4   this question a final opportunity to do so, keeping comments 

             5   very brief.  And let me ask Steve, do you have anything you 

             6   want to add before we wrap up?

             7             MR. SEMLITZ:  No, nothing here.

             8             MR. COOK:  Okay.  Thanks.  Anyone else?

             9             MR. OLESKY:  I just wanted to reiterate a point I

            10   made earlier, which is I think as we -- this is such a big

            11   change.  If you move derivatives markets into a

            12   SEF environment, which is largely electronic, I think one of

            13   the outcomes is you're going to have more participation,

            14   you're going to have more prices coming in, and you're going

            15   to have more pre-trade price transparency.  And it's hard to

            16   talk about each of these bits of the legislation in piecemeal

            17   because I think they are all interrelated.  The block rules

            18   are tied to the RFQ, which is tied to liquidity issues, which

            19   is tied to pre-trade price transparency.  They all kind of

            20   need to be viewed, I think, holistically.

            21             MR. HARDING:  Julian Harding.  I would just like to

            22   almost endorse what Lee has said before, that the new SEF

            23   environment should be required of it a level of transparency

            24   that does not hamper liquidity.  That for me should be the

            25   statement we should make, that liquidity maintenance or




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             1   preservation is of paramount importance and we should

             2   offer -- we should construct marketplaces that insist upon

             3   the level of transparency -- the highest level of

             4   transparency that does not hamper liquidity.

             5             MR. DuFOUR:  Richard DuFour.  I would add to -- I

             6   would agree with both of them, and I would add to that the

             7   importance of -- it came up earlier, the issue of a firm quote,

             8   that if I'm going to be able to trade anonymously, in these

             9   systems and I put in a quote, I have to be held to it, you

            10   know, for a period of time.

            11             MR. COOK:  Very good.  Well, thank you very much

            12   for your participation on this panel.  It's been very helpful

            13   and we appreciate your time and your contributions.  We will

            14   be taking a 15 minute break and we'll reconvene at 11:00 for

            15   our second panel.  Thank you.

            16             (A brief recess was taken.)

            17             MR. COOK:  Well, welcome back to our second panel

            18   of the day on SEFs.  This panel will focus on the compliance

            19   with core principles for SEFs.  There are four key subtopics 

            20   that we would hope to touch on, one is block trades, the second

            21   is surveillance, investigation and enforcement of SEF rules,

            22   the third is cross-market issues, and the fourth is the

            23   obligation of SEFs to provide impartial access.  

            24             So the format for the panel will be the same as the

            25   last, but why don't we again start by asking if folks could




                                                                            79

             1   please kind of go down the line and say your name and your

             2   affiliation please.

             3             MR. VISWANATHAN:  Vish Viswanathan, Duke

             4   University.

             5             MR. YELVINGTON:  Brian Yelvington, Knight Capital

             6   Group.

             7             MR. WEISBERG:  Philip Weisberg, FXall.

             8             MR. McVEY:  Rick McVey, Market Axess.

             9             MR. KNIGHT:  Ed Knight, NASDAQ.

            10             MR. DURKIN:  Bryan Durkin, COO, CME Group.

            11             MR. DIPLAS:  Athanassios Diplas, Deutsche Bank.

            12             MR. DENIZE:  Yves Denize, TIAA-CREF.

            13             MR. DE LEON:  Bill De Leon, PIMCO.

            14             MR. HARDING:  Julian Harding, Tradition,

            15   representing the Wholesale Market Brokers' Association.

            16             MR. COOK:  And we may be joined by Michael Masters

            17   momentarily.  

            18             So again, the format will be the same.  We'll start

            19   with the staff asking questions and anyone is free to jump

            20   in, and we'll ask again that you'll just bear in mind the

            21   number of panelists, the interest in the topics and the short

            22   time that we have to get through this material.  So with

            23   that, let's start with the first question.

            24             MR. MELARA:  Thank you.  The first topic is block

            25   trades. And as Director Cook indicated, this regards compliance




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             1   with core principles.  So, with respect to the core principles,

             2   Section 733 of Dodd-Frank, core principle 2 reads that, it

             3   says that, "A swap execution facility shall establish rules

             4   governing the operation of the facility, including rules

             5   specifying trading procedures to be used in entering and

             6   executing orders traded or posted on the facility, including

             7   block trades."

             8             Now the first panel spoke at length and on

             9   various -- in answers to various questions about block

            10   trades.  So I would like to get a sense from this new panel

            11   as to your views regarding block trades and how they impact

            12   your various businesses or your perspectives, the perspectives

            13   that you represent here today.

            14             MR. McVEY:  Rick McVey with Market Axess.  Happy

            15   to jump in and start there.  We run an electronic trading

            16   network primarily active in institutional credit markets

            17   today.  We primarily utilize an RFQ protocol, although there

            18   are a variety of different trading protocols available on the

            19   system, and we compete with many entities that have

            20   alternative models.

            21             With respect to block trades, what we have found in

            22   our 10 year history is that the larger the trade size

            23   becomes, the more likely it is that both the buyer and seller

            24   have interest in bilateral transactions or in narrowing the

            25   audience for an RFQ or an auction process.  In our opinion,




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             1   those trades can take place electronically in an RFQ model

             2   through anything from a bilateral transaction to an inquiry

             3   they might want to share only with two or three key

             4   counterparties at a time.

             5             So in our opinion, block trades can be accommodated

             6   electronically and meet the market objectives of sourcing

             7   liquidity without exposing an excess amount of market risk

             8   that may lead to front running in the marketplace.  We also

             9   are fans of the compromises that have been made around price

            10   reporting for block trades with TRACE, wherein corporate

            11   bonds, there are size thresholds above which a trade is

            12   reported as only having taken place above that size

            13   threshold.  

            14             So for instance, for high grade corporate bonds,

            15   the transaction is reported as 5 million plus irrespective of

            16   the block trading size.  In high yield, which is an even less

            17   liquid market, TRACE reports at 1 million plus.  I think

            18   those are sensible compromises that have been made between

            19   the regulators and the industry that could be applied

            20   successfully in the OTC derivative space.

            21             MR. MELARA:  Thank you.  Anyone else?

            22             MR. DE LEON:  Yeah, hi.  Bill De Leon.  We tend to

            23   agree with that view, that it is incredibly important that

            24   while the public has information to be achieved that you want

            25   the trade to occur on a SEF, it is important that you




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             1   bifurcate sort of what information goes out there.  Because

             2   as the trade size increases or it becomes customized, it 

             3   tends to be more bilateral in nature and you want to limit 

             4   what information is given out.  

             5             And we think the TRACE-style compromise of treating

             6   it as above a certain amount accomplishes that.  It lets

             7   people know a block trade occurred.  It doesn't tell them

             8   exactly how much, which insulates the players, and it allows

             9   the bilateral conversation to occur in a way such that both

            10   the buyer and the seller are not giving away too much

            11   information, which leads to the free rider problem and sort

            12   of the loser's curse.  So, I do echo those points and I think

            13   they were said more eloquently than I just did there.

            14             MR. DURKIN:  Bryan Durkin from the CME Group. 

            15   Clearly, as part of our model, block trades has a relevance

            16   and has a place in the markets and the determination of

            17   what's appropriate, in the context of thresholds, one needs

            18   to take into consideration liquidity of the product and the

            19   platform in which the product is available.

            20             And then, you know, lastly, you know, I think in

            21   considering thresholds, one has to consider equivalent

            22   products or equivalent markets.  And so if there is an

            23   equivalent product or market to benchmark off of, those

            24   thresholds need to be taken into consideration so as not to

            25   take away from the transparency or the liquidity of a




                                                                            83

             1   centralized market in which block thresholds have been

             2   established for some period of time.

             3             MR. DIPLAS:  Hi.  Athanassios Diplas.  I would

             4   agree with some of the comments that Bill De Leon over here

             5   made.  One of the primary objectives or policy objectives

             6   obviously has been to ensure that the clients get to transact

             7   their desired size in the best possible price.  And

             8   transparency obviously is one of the means in achieving that

             9   goal, but obviously there is a limit to how far we can take

            10   that when the transaction size gets large.  And that is why I

            11   think it is these combination of places you have a lot of

            12   transparency for the smaller type transactions combined with

            13   the ability to share the protected transacting parties for

            14   larger size transactions is a very smart way to go about it.

            15             As people have said before, we have seen examples

            16   of how TRACE can set thresholds.  Also we have seen now in

            17   the current legislation and proposals how they have also set

            18   thresholds that take into account the liquidity aspects of

            19   the underlying product.  In doing that analysis, obviously,

            20   we need to -- I think we need to base it on facts, rather

            21   than obviously our own beliefs, and all of us come from

            22   different angles, so the beliefs are going to be multiple. 

            23   And in that respect, you know, I urge you to look, obviously,

            24   at the data in the underlying markets.

            25             What we have done, as part of market participants,




                                                                            84

             1   the different dealers along with the large buy side clients,

             2   as part of the commitments to the international regulators,

             3   we have done a study on transparency and we have delivered 

             4   now a three month slice of data for credit rates and equities,

             5   along with credit rates quotes that are associated with those

             6   instruments, and that is, I think, an extremely valuable

             7   piece of information that's going to allow the supervisors to

             8   make those determinations in terms of what constitutes a

             9   large market size moving transaction, based on actual data. 

            10   What you will see there, obviously, is that the market, the

            11   OTC market, is much more diverse than something like a futures

            12   market, which tends to focus on very high concentrated

            13   widgets.  

            14             The breadth of the market is managed here and I

            15   think it is so for a reason in that it tries to accommodate

            16   client needs.  And you will see that basically a lot of

            17   transactions happen in the benchmarks and those would be then

            18   accommodated very easily in the SEF, in the standard

            19   SEF example, but some of the others that are either smaller,

            20   still clearable, because they have been admitted to a

            21   clearinghouse because either they were older or they have

            22   naturally aged, but they don't naturally trade, those need to

            23   be subject to the block trading requirement.

            24             MR. WEISBERG:  Phil Weisberg from FXall.  When we

            25   were originally starting our electronic market, we had a lot




                                                                            85

             1   of discussions with market participants about how we would

             2   have to set it up to enable them to do most, if not all, of

             3   their trading on our platform and what was important to the 

             4   end users, that we have transacting, the market participants 

             5   that  are very diverse, was choices.  So the ability to  

             6   transfer the whole risk in a block in one immediate activity 

             7   or the ability, if it was available, to take more execution 

             8   risk and break that, you know, trade up over time.

             9             So, they initially asked us, 'can you make sure that

            10   your trade protocol has the ability to let a market maker

            11   know if I'm asking just them or I'm asking everybody,' because

            12   they felt it would impact the price that they would, you

            13   know, receive.  So, we just would encourage the regulators to

            14   draft the regulations in a way that would maximize the amount

            15   of trades that could occur on a SEF, allow blocks to happen 

            16   on a SEF if possible and with respect to the reporting of 

            17   block trade information, we would agree with Mr. McVey's 

            18   comments that TRACE-like distribution mechanisms, where 

            19   people were informed of trades and slightly larger trades 

            20   have a little bit of a delay and are reported as large trades 

            21   as opposed to the exact size would be the best compromise to 

            22   achieve the objectives.

            23             MR. DENIZE:  Just a quick note -- Yves Denize --

            24   because of our discussion in the last panel about how

            25   different types of transactions will have vastly different




                                                                            86

             1   liquidities, one size limit probably won't fit all.  So, I

             2   think the example used was 5 million plus, for instance, but

             3   clearly as you look at different types of trades, there will

             4   be different types of limits applicable for the block trade.

             5             MR. MELARA:  If I may follow up along the same line

             6   of questioning as the liquidity measures question in the last

             7   panel, if there are these factors that you would like to share 

             8   with respect to looking at block trades, depending on the 

             9   asset class and/or the market that trades them, I think that 

            10   would be useful.

            11             MR. DE LEON:  I think it's very important to, as

            12   Yves pointed out and was initially brought up, different

            13   asset classes and products will have different thresholds for

            14   what's considered a block trade.  So, if you take the generic

            15   interest rate market or treasury market, clearly trading a

            16   hundred million dollars of long bonds is a very different

            17   trade than trading a hundred million dollars of two year

            18   treasury notes.  The duration and market impact there is very

            19   different between those two, even though they're both about

            20   the same notional and the same market value.  And I'm just

            21   using that as an example.  I'm not giving guidance on where I

            22   think the threshold should be.

            23             So, I think as you go through the market, you need

            24   to take into account not only the size of the trade, but the

            25   type of market and the market risk that's associated with




                                                                            87

             1   it, so as well as what are the market conditions at the time. 

             2   So, for example, doing a hundred million dollar trade in U.S.

             3   long government bonds at 10 o'clock eastern time is a very

             4   different liquidity stress, and I would say it's relatively

             5   low, than if I were to try to do that in Asia time or if I

             6   were to try to do that after an economic event occurred, you

             7   know, non-farm payroll comes out at 8:30 New York time, but

             8   try to do a large trade at 8:31, what's considered a block

             9   trade would be different.

            10             So, I think you need to scale market conditions, as

            11   well as products, into that factor, so to get a better feeling

            12   because it's definitively not a one-stop fits all type

            13   approach in terms of what a block trade is.

            14             MS. ADRIANCE:  It sounds like what you're

            15   suggesting is that rather than a number be determined to be an

            16   appropriate threshold, that you're talking about some process

            17   or some algorithm or some calculation through which we, or

            18   somebody, should be going through to determine what's the

            19   appropriate size.  Is that correct?

            20             MR. DE LEON:  Yes, that's what I was implying. 

            21   Some concept of risk is best -- and I apologize for

            22   being technical, but the risk associated with something in

            23   terms of -- I think this came out in one of the earlier

            24   panels.  What is the liquidity cost of doing a large trade

            25   might be your standard.  So, for something that, you know, a




                                                                            88

             1   $5 million trade has the ability to move the market X amount

             2   where in another market, you can do a $500 million trade

             3   without moving the market -- with moving the market the same

             4   amount.  That would get you a similar sort of concept there

             5   where liquidity and price discovery equate what a block is.

             6             MR. DIPLAS:  I think to get it started along those

             7   lines, I mean, you can see right now in the market if you

             8   look at the pre-trade quotes that are available -- and there

             9   is a big database of those that we have accumulated -- you

            10   can see, for example, what the market participants and dealers

            11   in particular are willing to quote as a standard transaction. 

            12   So, you're looking at an on-the-run index someone is willing

            13   to quote, you know, 200 million two ways and are sending --

            14   blasting that to everyone.  Clearly that someone doesn't

            15   think that as a market moving transaction are willing to send

            16   that out to everyone.  And that would not constitute the

            17   block. 

            18             I think if you go three times that amount, it

            19   definitely -- it will have a market moving impact.  So, to

            20   the extent that you have that space to get all those numbers

            21   out, the same thing for single names, a low beta name,

            22   meaning a name that doesn't move that much, is often quoted,

            23   you know, at 20 million two ways, but the high beta name is

            24   quoted at 10 million this way.  You go to high yield, the

            25   number drops a lot of times to two by two.  So, that is - at




                                                                            89

             1   least gives you the basis from which to start because I think

             2   obviously you turn to an algorithm, such a huge number of

             3   names is going to be a very impossible task for you.  So, at

             4   least you need to start with something simpler.

             5             MR. EADY:  Athanassios, when you said this in a

             6   database somewhere, I mean, what are you talking about?

             7             MR. DIPLAS:  Yeah.  The numbers -- the way the

             8   market is communicating this level right now is actually by

             9   blasting out Bloomberg messages to everybody.  So, clients

            10   actually have the problem of getting way too much

            11   information.  Vendors have stepped in and actually have taken

            12   all the information and started sharing it in a way that

            13   actually becomes useable for market participants and they -- 

            14   given the fact that they have stock in a best bid offer.

            15             Now these vendors have kept all that information

            16   and as part of the study I mentioned earlier, we gave a

            17   three-month slice of that information to regulators so they can

            18   actually see how -- what kind of quotes were actually given

            19   out and how the market was trading.  At the same time, you

            20   can see where actual trades occurred.  So, you see if the --

            21   how well correlated basically the trade was to the actual

            22   quote.  So, if the trade was done at five times the size, you

            23   would see a difference.

            24             MR. YELVINGTON:  Additionally, just to kind of echo

            25   the comments that Bill made earlier, you know, you have to




                                                                            90

             1   take into account not only the time at which the transactions

             2   occurred, acknowledged that for various instruments that may

             3   be a little bit more granular, I was thinking here possibly

             4   in the area of credit derivatives, it changes through time. 

             5   A particular event such as, you know, a corporate disaster of

             6   some sort may increase the trading activity of particular

             7   name in such a rapid fashion that what would have been a

             8   block trade before is no longer a block trade.  And that can

             9   happen in a matter of a day.

            10             MR. McVEY:  Go ahead.

            11             MR. VISWANATHAN:  The only thing I want to caution

            12   is it's hard for me to imagine regulators running through a

            13   complicated process every day trying to figure out what the

            14   depth of every market is to determine what the threshold is. 

            15   It doesn't seem to be -- I mean, clearly, there has to be

            16   some mechanism to take the volume, the price impact, perhaps,

            17   over the last six months.  But beyond that, perhaps another

            18   approach is simply to say all trades are disclosed.  But if

            19   you're over this threshold, because it's impulse like, you get

            20   a delay of one day or something and leave it at that.  

            21             So, all trades are eventually disclosed.  Some are

            22   disclosed with a threshold.  You know, for this market, it's

            23   1 percent of volume.  So, a hundred, you know, a hundred

            24   million, or whatever it is.  But if a day later you're told,

            25   without being told exactly that it was that trade, they had a




                                                                            91

             1   trade of, you know, maybe 300 million occurred at that price. 

             2   And that might be a compromise that might work rather than

             3   requiring the regulators to collect, you know, information

             4   that it may be difficult to actually do.

             5             MR. McVEY:  Yeah, I would agree with that.  I think

             6   simple is better with respect to block trading rules. 

             7   Fortunately for all of us there is more and more data

             8   available on OTC trading activity through the growth in

             9   central clearing and also the DTCC warehouse.  And I think

            10   it's instructive, in terms of which instruments have

            11   different levels of liquidity and what block trading rules

            12   might apply to, say, a CDS index versus an inactively traded

            13   single name.  

            14             But I think it's important to keep the rules

            15   simple.  I think TRACE has worked and it's generally simple. 

            16   The only caveat to that is what's liquid today may not be

            17   liquid in six months.  So, I don't think you could do this one

            18   time and forget about it.  I think it requires some regular

            19   monitoring, but I think simple rules would be better.

            20             MR. DURKIN:  Just to echo Bill's comments, though,

            21   earlier, and also to compliment your comments, yes, simple is

            22   better in the context of the users' need to understand what

            23   the rules and the requirements are to be able to accomplish

            24   these block provisions; however, there definitely is

            25   something to be said for the differences in liquidity based




                                                                            92

             1   on time zones.  And there are levers that you can put in

             2   place, as Bill has suggested, to accomplish that to deal with

             3   those market idiosyncrasies based upon time zone.

             4             MR. MASTERS:  Just to make one point that I made

             5   yesterday in the block panel, I mean, there is a key

             6   difference here between pre-trade transparency and reporting

             7   and post-trade.  I mean, clearly, the post-trade regime is

             8   much narrower than the pre-trade period where people are

             9   going to, you know, Alltax or -- I'm dating myself here --

            10   but, you know, other vendors to try to discover what the

            11   price should be.

            12             The post-trade regime, as a general rule, should be

            13   much tighter.  You know, the public needs to see the trade 

            14   ASAP and I understand the dealer has to hedge, but in many of

            15   these markets, as we all know, these over the counter trades

            16   can be broken out into, you know, the least common denominators. 

            17   And it doesn't take long to -- not as long as maybe some would

            18   like to postulate, to actually get your hedge done. 

            19             So, there is an offsetting public interest here in

            20   the sense of we would like to see the data as soon as

            21   possible, including market participants, regulators, but we

            22   would also like to see it in a standardized format.  We would 

            23   like to see the data in a universal way, so that we can all 

            24   comprehend the data.  

            25             So, if we're doing, you know, a billion dollar




                                                                            93

             1   interest rates swap-- the trader on the other side of that

             2   swap knows how to break that down into its component parts

             3   because he has got to do his own hedge.  And so, I would like

             4   to see it, in terms of a delta equivalent, to its nearest

             5   listed equivalent, if possible, so that we can compare apples

             6   to apples.  And that's critical not only for regulators to be

             7   able to do things like position limits and so forth, but it's

             8   also critical for market participants to be able to be

             9   involved in these markets because if you want more liquidity,

            10   we have got to see prints.  

            11             We've got to see those prints and see where things

            12   happen and that stimulates activity.  If we don't see the 

            13   prints, the post-trade prints, on a quick basis, then the 

            14   market -- some of these markets are going to be what they 

            15   are now, in many cases, which is sort of back waters.

            16             MR. KNIGHT:  I would like to echo that point.  Ed

            17   Knight, NASDAQ.  We certainly believe that the statute seeks

            18   to accommodate block trades.  We think our own model, public

            19   exchanges, are not as efficient in handling block trades. 

            20   There needs to be an alternative.  But what you're talking

            21   about is creating private markets and tolerating private

            22   markets.  And the question is, how much of one do you want. 

            23             And so, it comes down to the definitions.  And to

            24   some degree, if the private market becomes so large, you're

            25   going to destroy the ability to have a public market with




                                                                            94

             1   transparent price discovery.  So, you've got to balance a

             2   number of factors.

             3             MR. McVEY:  I would just, you know, add to that

             4   with respect to our electronic trading experience and the

             5   speed of price reporting.  And I think it does go back to the

             6   benefits of electronic trading, even if the transaction is

             7   done bilaterally, which it can be done in an RFQ model.  On

             8   average, for a trade that's completed on MarketAxess through

             9   the APIs that we have that facilitate straight through

            10   processing, the trade leaves our system, goes to a dealers

            11   trade capture system, is immediately sent onto FINRA for

            12   trade reporting, and is back and available publicly within

            13   one minute.  

            14             So, I think in a market that we're talking about

            15   where most instruments trade relatively infrequently, that's

            16   a great example of how e-trading reporting facilitates

            17   immediate and real time transaction price reporting for the

            18   overall market.

            19             MR. DE LEON:  I would like to separate sort of a

            20   couple of concepts because I'm not sure I agree with some of

            21   this line of thought.  I think that the public good is to

            22   reduce counterparty exposure, to reduce systemic risk, and to

            23   have pre-trade price transparency for things.  I do not think

            24   that everyone has a right to know what everyone else

            25   does.  




                                                                            95

             1             And so, I sort of disagree with that.  And I think

             2   TRACE does an incredibly good job of providing good real time

             3   information about what has traded in terms of a block, in

             4   terms of sizing, and coming up with a meaningful mechanism

             5   for it, but every single transaction that gets done creates 

             6   several issues.  It creates the free rider problem, it

             7   creates the winner's curse, and it also takes the incentive 

             8   to do people's own research away, because when someone does 

             9   a trade, it means that they have done economic work, they've 

            10   done financial work, they've got an investment guideline 

            11   they're trying to achieve on behalf of their investors, many

            12   of which who are small investors who have pooled their 

            13   assets, possibly.  

            14             And that information and research, by doing a

            15   transaction, is signaling information.  And everyone doesn't

            16   have to have that information for free.  And that sort of

            17   defeats the purpose.  The purpose here is to make sure that

            18   when people transact, that they get the best price possible,

            19   not that they know what everyone else in the market is doing. 

            20   And I think we need to separate that.  And TRACE has done an

            21   incredibly good job of sort of mitigating that issue.  And

            22   it's a very good compromise.  

            23             And if you look at the equity markets, to get around

            24   size and block trading, there are people who spend millions

            25   upon millions of dollars to come up with algorithmic models to




                                                                            96

             1   hide what they're doing electronically.  So, they break up

             2   block trades into small little pieces.  So, I think that the

             3   market will go out of its way to avoid this.  And it will

             4   cost money, it will cost investors money, it will hide

             5   information.

             6             MR. COOK:  If we could just finish -- wrap this up

             7   quickly.  So please go ahead, but I want to move onto some --

             8

             9             MR. DIPLAS:  Yeah, I'll do that quickly. 

            10   Athanassios Diplas.  

            11             I think TRACE is a good example.  And we have seen

            12   TRACE has affected behavior.  That -- it doesn't have to be

            13   good or bad, but it changes behavior.  And where we set those

            14   limits is what dictates the behavior of the counterparty.  So,

            15   in the example that Bill mentioned that the large trade is

            16   broken into smaller pieces in order to be actually liquidated

            17   in the market, that means that the risk has moved from the

            18   dealer that normally would take it in a large chunk to his

            19   counterparty that actually has to take that risk.  So, that is

            20   something we need to be cognizant of.  And where we set that

            21   limit is going to dictate that behavior.

            22         And the last part is that I agree with Bill, there is no 

            23   inalienable right for everyone in the market to know where

            24   every single trade has occurred.  The point of transparency

            25   is to enable the participants to do their transactions in the




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             1   best possible price.  But if that comes at the detriment of

             2   the two transacting parties, clearly we moved too fast. 

             3   So, it's an issue about achieving that fine balance.

             4             MR. COOK:  Okay.  Thank you.  Why don't we move on

             5   to the -- some of the other core principles we want to

             6   explore.  Heather, do you want to ask the next question?

             7             MS. SEIDEL:   The Dodd-Frank Act, under

             8   the Dodd-Frank Act, SEFs, swap execution facilities, have an

             9   obligation to monitor trading on their markets and also to

            10   enforce the rules that they put in place with respect to

            11   trading on their markets.

            12             I guess if we could get the panelists' views on sort

            13   of in this new world where you have markets that have

            14   obligations that they might not have now, how would that

            15   work?  You know, what do the markets think about how they

            16   might go about carrying out their obligations, market

            17   participants that would be subject to those obligations,

            18   views on, you know, sort of how this would work in the new

            19   structure where there are sort of regulatory obligations on

            20   the SEFs.

            21             MR. HARDING:  Julian Harding.  Just as a slight

            22   preamble, the Wholesale Market Brokers' Association gamely

            23   attempted to send off a discussion draft on the core

            24   principles for SEFs, as soon as it was able, to both the

            25   agencies here.  And I hope everyone knows that.  I have a




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             1   copy here if anyone needs one.  As we know, the core

             2   principles for SEF were born of something very similar for a

             3   DCM and we've attempted to be flexible and adjust some of the

             4   core principles to reflect a more competitive SEF market that

             5   we might imagine for the future.

             6             But on the specific point, you're asking, Heather,

             7   the -- our view on the SRO type of issue.  We endorse the

             8   idea of an independent SRO populated, hopefully, by

             9   practitioners who understand, at least a large body of which

            10   will understand, the swap marketplaces, which is not the case

            11   right now, probably in existing possible entities that could

            12   fulfill the function.  And we would also like to imagine a

            13   situation where there is one unifying SRO for all SEFs, so as

            14   to avoid any sort of imagined regulatory arbitrage where one

            15   SRO allied to a single SEF might interpret its obligations

            16   differently.

            17             MR. KNIGHT:  I would like to make a comment just on

            18   the statute and how we view it.  I think, from the

            19   perspective of a stock exchange and subject to exchange-like

            20   regulation, our first question was what did Congress intend

            21   here.  And to me, the most revealing language is in the

            22   Senate report where the report states trading more

            23   derivatives on regulated exchanges should be encouraged,

            24   because it will result in more price transparency, efficiency

            25   and liquidity.  In order to allow the OTC market to adapt to




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             1   more exchange trading, the legislation provides for what was

             2   then called alternative swap execution facility.

             3             To me, they're equating the regulation in this area

             4   to something very much like an exchange.  Then when you look

             5   at the language of the statute, the key responsibilities of

             6   an exchange is the ability to enforce its rules against

             7   members.  Its responsibility to do that, its obligation to

             8   take disciplinary actions and to investigate.  Those verbs

             9   are all found in the core principles here.

            10             So, and I think there is some logic to this because

            11   given the history of the financial crisis, given how the

            12   markets operated, I think the system of regulation of

            13   futures markets, the cash equities markets, seem to work.  And

            14   Congress noticed that and wanted something like that in this

            15   space.  I mean, we complain, at times, about the level of

            16   regulation, but it works.  And I think the record is there. 

            17   Those markets did not shut down.  They continued to operate. 

            18   The taxpayer did not have to step in and fund them to keep

            19   them going.  People did not necessarily like the prices they

            20   were getting, but they were continuously operating in a

            21   well-regulated manner.

            22             So, I think that system of regulation, which

            23   Congress did not make any major changes to in this latest

            24   round of reform, is what they were looking to hear from this

            25   language as a legal matter.  Now, the self-regulatory




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             1   organization model, we use it.  We outsource to a fully

             2   independent, what we believe, the gold standard of regulation

             3   to FINRA.  We think that opportunity is helpful to the market

             4   overall.  It provides us with a degree of independence that I

             5   think is irrefutable in how we, in particularly, enforce our

             6   rules against our members, so that there is no question about

             7   impartiality.  But I think strictly from looking at the

             8   statute and the history of the statute, what the Congress

             9   appears to be asking for is something much like the way an

            10   exchange is regulated.

            11             MR. SCHOTT:  Julian and Ed, you guys both in your

            12   answers sort of raised two distant concepts.  One is who is

            13   doing the regulation, and you mentioned the SRO model.  And I

            14   think we definitely need to talk about that, but I want to

            15   just sort of go a step back and go to the first part of your

            16   answers.  And that is what ought they be doing.  

            17             So Julian, you mentioned the SEF core principles

            18   sort of born of the DCM core principles.  And we have certain

            19   expectations around what appropriate trading practices are in

            20   a DCM and what practices are of concern and so forth.  When

            21   investigations are conducted, violations are found, there are

            22   disciplinary actions.  There is a structure in place.  And

            23   it's fairly standard across the DCM.  

            24             So, I'm sort of wondering what the opinions around

            25   the panel are in terms of what are the sorts of conduct




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             1   that -- whether it's the SEF itself or third party SRO, ought

             2   to be looking for.  What is a prohibited trading practice on

             3   a SEF?  How does it differ from a DCM?  And once those

             4   practices are found, what sort of standards ought to be put 

             5   in place around sanctioning the conduct?  

             6             And as you answer that, think about, you know, are

             7   some of the concepts, at a big picture level, relevant in the

             8   SEF context as they are in the DCM context.  We have a lot of

             9   rules in the DCM context that revolve around the

            10   intermediation of customer trade.  And so you are protecting

            11   the customer.  Are those sorts of concepts relevant in the

            12   SEF world?

            13             MR. KNIGHT:  One comment, which is, be careful if

            14   you're thinking about setting standards that are different

            15   based upon the instrument standards and behavior.  I think we

            16   are seeing more and more, and I guess that's another topic

            17   here, how these markets are interconnected.  We do not want

            18   regulatory arbitrage between them.  And again, you have a

            19   long record of certain principles that I would have to think

            20   you believe work and you've got a statute where, you know,

            21   I've been asked does this create a national market.  

            22             I -- and looking at the SEC language in the 1970's,

            23   I think this goes well beyond that where the SEC was given

            24   the authority to do it without a lot of, frankly, guidance

            25   from Congress.  Congress has gone a step further in giving




                                                                           102

             1   you explicit guidance about a market that it wants structured

             2   for the whole nation.  It doesn't say this only applies in

             3   the lower 48.  This is a national market with national

             4   standards and you've got a broad ground of authority to write

             5   rules here.

             6             MR. MASTERS:  I would just say that there is -- you

             7   know, in terms of what you were saying with regard to

             8   conflicts of interest, there is a lot of issues here in terms

             9   of, you know, what, I think, Congress intended, you know, in

            10   terms of, you know, when you look at SEFs versus DCOs, for

            11   instance, and you talk about, you know, compensation for

            12   referring business.  

            13             I mean, there is a lot of real tricky conflicts of

            14   interest here that I don't think the public wants to see. 

            15   You know, clearing and matching, you know, really need to be

            16   separate businesses.  I mean, someone that clears ought to

            17   have different alternatives.  There is an issue, you know,

            18   the old, you know, payment for order flow kinds of issues 

            19   that we've seen in the exchanges.  I mean, there are some 

            20   things that we've dealt with that didn't work so well at  

            21   equities that we would like not to see in this sort of pro  

            22   forma regime that you're setting up.  

            23             But there's -- I think there is, as far as I'm

            24   concerned, there is going to be a very severe look at the

            25   whole notion of conflicts of interest in many different forms




                                                                           103

             1   and how entities relate to each other and whatnot.  And

             2   moreover, if those situations are anti-competitive.  We want

             3   a broad, diverse group of participants involved, but we don't

             4   want levels set that prohibit one group at the expense of

             5   another group.

             6             MR. HARDING:  Julian Harding.  I guess the most

             7   important difference between the SEF and the DCM situation is

             8   that the SEFs in the future, as the IDBs are now, are

             9   competitive entities.  And I think that there is a lot of

            10   questions of quality in the future of the surveillance or

            11   monitoring that will be undertaken by SEFs.  It's just that

            12   they can only really do it in the -- within the confines of

            13   their own execution facility.  So, they can -- as has been

            14   coined before, they can see what's going in their own

            15   classroom, but they can't see what's going on in the overall

            16   school or the playground.  So, I think that's a primary

            17   difference as to what they're quoted as seeing.

            18             MR. WEISBERG:  I think the regulators need to be

            19   mindful that often these markets that they're writing rules

            20   for are global markets.  So, I would say even though the rules

            21   may apply nationally, the marketplaces themselves are global. 

            22   Our clients are global.  We are in a currency market, which

            23   is global.  And that really transcends all of the rules that

            24   people are writing.  

            25             So, there is no open and close for a foreign




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             1   exchange market.  It's a continuous market.  But there are

             2   liquidity differences during times of the day and as an

             3   unregulated market, it performed quite well through the

             4   prices customers were always able to transact.  So, I think

             5   the regulators have to make sure that continues to be the

             6   case after the introduction of rules that I think we all feel

             7   could be beneficial for the entire industry.  

             8             With respect to, you know, compliance, we -- in

             9   order to create a competitive SEF market, we think it's

            10   important that SEFs are able to outsource or delegate the

            11   surveillance function to third parties, appropriate

            12   third-party providers.  We think the enforcement needs to be

            13   simple and not necessarily cumbersome and involve

            14   extraordinary expenses for the SEFs.  And we think a

            15   suspension or revocation of trading privileges on a SEF,

            16   is oftentimes a very effective mechanism to ensure that

            17   people comply with the rules.

            18             MR. DIPLAS:  Okay.  Athanassios Diplas.  In terms

            19   of the exchange model versus not, I think it is clear, and

            20   the drafters were very clear, that they did not want just the

            21   exchange model.  That's why they wanted to be able to define

            22   the SEF.  And they did that in recognition of the complexity

            23   of the market, of the derivatives market, that meets

            24   something more expansive.  

            25             So, that creates certain problems and also, you




                                                                           105

             1   know, certain challenges, basically, in that for example, we

             2   would have multiple facilities for the instruments traded.  

             3   We also have multiple venues in which instruments clear.  

             4   And therefore, as we discussed in the swap data report, 

             5   sometimes you will be able to look for enforcement of the 

             6   principles in the actual SEFs and then you might have to 

             7   go wider as in the data report so we can get a better slice  

             8   of the whole market. So, I think we need to take a step back 

             9   and go for a little bit more open model.

            10             I don't have strong views of the outsourcing of

            11   the -- some of these functions or not, but the point is the

            12   market is much more complex than a single silo market that is

            13   containing one exchange.

            14             MR. SCHOTT:  Just one last question on this.  Oh,

            15   no, please, go ahead.

            16             MR. DE LEON:  No, I just -- to reiterate some

            17   points.  I think it's very important that -- I'm agreeing

            18   with Athanassios in terms of not being overly burdensome in

            19   terms of the regulatory things, so it's not meant to replace a

            20   DCM.  However, it is very important to keep in mind that as

            21   regulations are written and rules are determined, that this

            22   is a global marketplace and we want to be careful to avoid

            23   regulatory arbitrage or a preferential market treatment.  
 

            24             And to the extent that we've seen this now already,

            25   a few people on this panel constantly are competing with




                                                                           106

             1   overseas based markets in terms of clearing futures and their

             2   offerings, which I think is a good thing in terms of

             3   competition is good in this market as long as the right

             4   safeguards are in place for futures.  We're going to see

             5   something similar for clearing of derivatives as well as for

             6   SEFs.  

             7             We want to make sure that whatever rules are

             8   created don't give an outright advantage to an overseas or

             9   one exchange versus another due to location, because you'll

            10   wind up losing control or having less impact where things go

            11   and you'll have both the ability to arbitrage by doing trades

            12   similar in nature on one exchange versus -- one SEF versus

            13   another.  And more importantly, there will be a preferential

            14   treatment to where you want to clear your business, which may

            15   not be here if it's too onerous.  

            16             MR. COOK:  Thank you. I just want to follow up on 

            17   this, pick up certain aspects of the conversation here, where, 

            18   Ed, you mentioned the national market system, and other people 

            19   have drawn analogies to the equity markets and this question 

            20   of arbitrage and different rules resonates a little bit with

            21   some of the debate that is happening in the equity market now

            22   where there has been a mandate to develop a national market

            23   system.  And there is, has been an effort to balance

            24   competition of orders with competition of trading venues. 

            25   And, you know, that's constantly the issue is to get the




                                                                           107

             1   right balance there.

             2             So, the question I would ask is when we're talking

             3   about the rules that SEFs will impose on their members, how

             4   uniform should we expect those to be.  How much -- what's the

             5   cost of allowing SEFs, each SEF to develop its own rules. 

             6   What's the benefit of allowing each SEF to develop its own

             7   rules.  If you're an investor trying to trade in these

             8   markets, how important is it to you to have a uniform set of

             9   rules that you can follow, so you have certainty, regardless

            10   of which platform you're trading on, as to what the rules of

            11   the game are, how much will imposing a requirement like that

            12   restrict the innovation of models that some people have

            13   argued on this panel and the last panel is important to the

            14   development of this market.

            15             MR. McVEY:  I would tend to favor a uniform set of

            16   rules for all SEFs.  And I agree with the comments earlier

            17   that being able to discharge someone -- not discharge, but

            18   share some of those responsibilities with a third party that

            19   may run a business in supervisory oversight of SEFs would be

            20   important from a cost standpoint.

            21             I think historically, electronic trading venues

            22   have successfully competed along the lines of technology,

            23   liquidity and price, and I do think that you can enhance

            24   competition in this space while at the same time, having

            25   consistency and efficiency in the rule process.




                                                                           108

             1             MR. VISWANATHAN:  I would tend to agree.  You

             2   probably want to standardize clearing rules.  The last thing

             3   you want to do is to find that you could clear across

             4   different SEFs in different ways.  And you probably want to

             5   standardize some transparency rules and reporting rules.  But

             6   within that, you want to allow -- from the equity markets,

             7   we've learned that allowing some degree of competition, kind

             8   of shakes the status quo in positive ways because it can lead

             9   to other outcomes as we've seen with stock pools of

            10   liquidity.  But if you can get the right innovations and not

            11   restricted, I think that would actually be socially

            12   beneficial.

            13             MR. MASTERS:  I would just -- this is Mike Masters. 

            14   I would just say that, you know, I think the key focus here

            15   for the regulator is to prevent a race to the bottom in the

            16   sense of, you know, establish a uniform set of rules. 

            17   Innovation is great except when it concerns regulatory

            18   arbitrage.  And if you don't have a standard of rules that

            19   people across the board are -- have to comply with, then

            20   you're going to get a race to the bottom because, you

            21   know, one person has a -- you know, you have an easier time

            22   doing business here than there and people won't actually go

            23   there and then you're defeating your purpose as a regulator.

            24             So, I think it absolutely has to have -- there needs

            25   to be standard rules.  It has to come from the regulator. 




                                                                           109

             1   And I think the competition and stuff will take care of

             2   itself once people know what the playing field is.

             3             MR. SEMLITZ:  Don't you think that there's going to 

             4   be issue with international versus domestic.  That, even if

             5   you have standardized rules in the United States, that

             6   overseas you're going to have a different set of rules that

             7   already exist today.  And it will be just compounded as we

             8   go forward.  So, then how are you going to deal with the fact

             9   that U.S. rules, even if they are standard, are then offshore

            10   rules?

            11             MR. MASTERS:  I think that in 2010, fiduciaries in

            12   general want more regulation, not less, as a matter of

            13   precept, in terms of where they're trading and where they're

            14   clearing.  You know, there is -- you know, quite frankly,

            15   there's -- I'm not sure there is that much you can do about

            16   overseas other than linking -- trying to link regulatory

            17   groups together around the world.  And I think that's

            18   something that needs to be done proactively by regulators.

            19             But clearly, I mean, someone has to come up with a

            20   standard.  And I actually think if a market is known for

            21   being the one with the most integrity, the one with the best

            22   chance of having the most fiduciaries and institutional

            23   investors around the world where there is the most trust in

            24   that market, I think that's going to naturally attract

            25   business.  And again, maybe you can get, instead of a race to




                                                                           110

             1   the bottom, you can get a race to the top.

             2             MR. KNIGHT:  I mean, what we've observed in Europe

             3   is that the regulators there are watching very closely what

             4   the U.S. is doing and often waiting to see what they do and

             5   follow what they do.  And I think some of them are pretty

             6   open about that and other countries the same way.  So, I think

             7   to say don't do that because people won't follow I'm not sure

             8   is correct.

             9             In terms of uniform rules across market centers, I

            10   think there is the factor of, of course, different market

            11   structures and we would need -- if a SEF had a floor, a

            12   different set of rules and additional principles and all the

            13   electronics, but I think it should be core principles that

            14   apply across the various venues to promote competition.

            15             MR. DURKIN:  I agree with that last comment.  I was

            16   a little concerned that, you know, not every organization or

            17   market is exactly the same, that there should be core

            18   principles that need to be followed across a sector, but you

            19   must allow for some level of flexibility on the innovation

            20   side of things.  So, you know, the rules of the game, you

            21   know, should be very consistent across the industry, but

            22   there should be capabilities there for a market to be able to

            23   innovate.

            24             MR. DENIZE:  Again, as an end user, I think we

            25   certainly are supportive of measures and processes that would




                                                                           111

             1   lead to supporting competition, but our traders don't want to

             2   have to figure out the arbitrage among, you know, 20 SEFs and

             3   what rules they might be applying to themselves and so forth. 

             4   So, the uniform set of rules makes our decision-making a lot

             5   more streamlined and we can focus on the true issues that

             6   we're focused on for our products and for our participants,

             7   which would be the elements of the economic products and the

             8   economic risk mitigants that we're seeking.

             9             One of the issues, as you do set up the uniform set

            10   of rules, that we are concerned about, is to be -- to ensure

            11   that the governance process certainly includes the voice of

            12   the end users from the outset and throughout the process. 

            13   One of the clear observations of the OTC derivatives market,

            14   prior to the crisis, was its lack of transparency and lack of

            15   openness.  

            16             As we move to a regulated environment, the end

            17   users have a strong voice that need to be heard throughout

            18   that process.  Even though we may not own the clearinghouses,

            19   we may not own the trading systems and we don't necessarily

            20   need to do that, although we should be, perhaps, members or we

            21   should be participating in the advisory committees and the

            22   rules and governance committees that are applying these

            23   uniform sets of rules.

            24             MR. DIPLAS:  I would agree with some of these

            25   comments with respect to the end users.  I think if you have




                                                                           112

             1   seen something encouraging over the last couple of years is

             2   that the governance structure in the market has changed to

             3   include the end users, and I think this is going to continue. 

             4   The same thing goes for the CCPs and, as you've mentioned,

             5   the advisory committees, including the end users, and this is

             6   going to continue.

             7             The second thing that's also encouraging is that I

             8   think we have good evidence right now of international

             9   regulatory cooperation.  We have the global supervisors

            10   forum, which now includes, what, 30 or 40 participants, more

            11   or less.  And I think that that -- they're taking that job

            12   pretty seriously.  So, in order to kind of -- it's a balance 

            13   of trying to ensure that we can have innovation and at the 

            14   same time have actually a well regulating environment we need 

            15   to, I think perhaps, look at the more hybrid system.  

            16             We start at the top with the core principles. 

            17   Perhaps we have some kind of set of super rules that actually

            18   apply to everybody and then you have a certain lower set of

            19   rules which actually are more flexible.  But there are the

            20   different steps to operate, because they deal with

            21   different products and they need that flexibility.  It allows

            22   the new participants to come in and offer something better. 

            23   So, that would be a bit more flexible and balanced approach,

            24   I think.

            25             MR. YELVINGTON:  I think also having, at the very




                                                                           113

             1   least, a core set of rules around the regulation there really

             2   might engender quite a bit of innovation, because it takes

             3   away a lot of the business risk for somebody looking up to

             4   set up a SEF.  It actually helps them know their boundaries

             5   at least on a minimum basis.  The same could be said with the

             6   conversation earlier this morning when people were

             7   discussing, you know, a standard for RFQ versus central limit

             8   order book.

             9             If you define the minimum and provide a, you know,

            10   a metric by which the market can evolve itself, then we'll

            11   get a better answer as to what's preferred by the market for

            12   different instruments, and I think that you'll probably end

            13   up seeing, not only on the regulatory side, but on the market

            14   structure side, different instruments will trade in different

            15   markets just because they trade better there.

            16             MR. COOK:  So let's move onto the cross-market

            17   portion.  

            18             MR. SCHOTT:  I think we've already touched on a lot

            19   of these issues, but, you know, one of the things that we're

            20   struggling with is how do you appropriately regulate a market

            21   where a product can be trading across so many different

            22   platforms.  Someone mentioned the schoolyard model.  What

            23   happens in a classroom model?  Who regulates the schoolyard? 

            24   We can say the SEFs can regulate what's happening in their

            25   own market.  That leaves a gap.




                                                                           114

             1             People have suggested a super SRO.  I was wondering

             2   if just the panels could give their opinions a little bit as

             3   to who that entity might be, what sort of a relationship

             4   between the SEF and the SRO, what role the SEFs should still

             5   have, you know, either in terms of overseeing the services

             6   being provided for them.  If there are super rules versus

             7   some local rules for SEF, does each SEF oversee its

             8   particular rules and leave the sort of the master rule book

             9   to the overall SRO.  This is an area where we're just giving

            10   a lot of thought to.  So your opinions would be welcome.

            11             MR. DE LEON:  Hi.  This is Bill De Leon.  I think

            12   it's important to think about the roles that SEFs play in

            13   terms of the overall connectivity and the whole process.  And

            14   that will sort of give you some guiding principles.  I agree

            15   with the comments here that there should be some set of

            16   minimum standards for SEFs in terms of what they report, how

            17   they regulate requirements in terms of trading information,

            18   but there should be innovation.

            19             The two important things regarding that that I see

            20   is once a transaction is done on a SEF, it has to be given up

            21   into a CCP.  So, you need to know that there is a process and

            22   capital behind the trade that's done on a SEF, so that it

            23   winds up in a CCP and is matched.  And that's an incredibly

            24   important thing.  To the extent you're trading directly on

            25   the CCP -- so, if I were to use ICE and then give up into ICE




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             1   or I trade on the CME and give up into the CME, it's one

             2   unit.  I have a lot less risk.  But if I trade on some other

             3   third party vendor and then it gets given up into ICE or CME,

             4   or whoever it may be, I need to know that the process between

             5   the transaction and it getting there is going to be highly

             6   monitored and there is going to be capital there.

             7             So, just like all of us do detailed counterparty

             8   exposure management and credit review of any CCP we're going

             9   to use, because we want to make sure that the CCP stands

            10   behind it and whoever we are using to clear our trades are

            11   sufficient, when I do a transaction with a SEF, I need to

            12   know that they need some minimum standards that I have 

            13   incredibly high degree of confidence that that trade winds up

            14   in the CCP.  

            15             It would be analogous to what we see when we trade

            16   equities.  I can trade equities on multiple venues and then

            17   it gets given up into my actual clearing account.  The beauty

            18   of most of the equity markets in the U.S., and probably all,

            19   is that I do a trade and very few people worry about where I

            20   did that trade and it getting cleared and me taking

            21   counterparty risks.  Obviously I take credit risk or equity

            22   risk by doing that trade, but that component is taken out.

            23             Whatever regulatory environment, whatever rules are

            24   set, I would argue you need to make sure that the three legs

            25   here are similar, that the -- when I do the trade, who I use




                                                                           116

             1   to do my SEF execution is going to stand behind the

             2   transaction, the SEF itself will stand behind it, and then it

             3   will wind up in my CCP.  And that connectivity and the credit

             4   risk there is limited or removed as much as possible and

             5   there is an overriding set of principles and rules, so that I

             6   can sleep at night, about the counterparty exposure, the

             7   clearing, the connectivity.

             8             MR. SCHOTT:  Do other panelists have thoughts just

             9   around some of the more practical elements of establishing

            10   this SRO and sort of the legal relationships between the SEFs

            11   and the SROs, the financing of the SRO?

            12             MR. SEMLITZ:  To have a consistency in

            13   regulatory.  It would seem to me that the CFTC ought to be

            14   regulating all SEFs that relate to commodities, and the SEC

            15   ought to be regulating all SEFs that relate to securities and

            16   apply the same standards you're using today across all

            17   markets.  Therefore, it takes out the regulatory arbitrage. 

            18   You've got counsel at every firm who is used to dealing with

            19   the regulators who are regulating them already and that

            20   creates a tremendous amount of consistency across existing

            21   markets today and the markets that are going to exist

            22   tomorrow.

            23             MR. SCHOTT:  Speaking of markets existing tomorrow,

            24   we have, I forget what count we're at now, 330 some days

            25   before sort of this goes live.  If that third entity isn't




                                                                           117

             1   set up yet, what's the interim solution?  Any ideas will be

             2   accepted.

             3             MR. KNIGHT:  I think if the demand is there, and I

             4   believe the demand will be there, there will be offerings

             5   here and I -- you know, you look again at the FINRA example,

             6   both the New York Stock Exchange and NASDAQ use them, and

             7   they facilitated the entry of many other competitors in the

             8   space.  So, I don't think you can no longer say that

             9   regulation is a hurdle to competition in our space.  I can't

            10   see why a similar model wouldn't work.

            11             MR. DURKIN:  And I think there is something to be

            12   said for the template that, you know, you've already

            13   established in terms of the respective agency's oversight

            14   into the centralized markets as they exist today and, you

            15   know, the establishment of, you know, rules, criteria,

            16   capital requirements, you know, a lot of the things that

            17   Bill, you know, had expressed, you know, the need and desire

            18   to have in place.  So, there is that confidence for this

            19   central counterparty risk management capabilities.  I mean

            20   there is a very solid template out there that can be built

            21   upon to adapt to this new evolution.

            22             MS. ADRIANCE:  Thanks.  In terms -- I mean,

            23   we've -- there was a little silence there when it came to

            24   suggestions for a possible third party, except there has been

            25   one or two suggestions.  But in terms of this -- to get back




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             1   to what was mentioned earlier, the interaction between the

             2   individual SEF, well, I should say derivative SEFs, and if

             3   there is this third party that is out there in the shadows

             4   that we do not yet know who exactly it's going to be and it

             5   may be more than one, or maybe it's one, it would -- so there

             6   are several questions there.

             7             One is what, you know, what is the -- what

             8   responsibility -- it is one that Sebastian asked earlier. 

             9   What is responsibility that you see being given up as

            10   compared to what is being retained.  It was mentioned

            11   earlier, for instance, that an appropriate step, if there has

            12   been a some kind of you've gone to the design process, there

            13   could be some kind of -- one appropriate step would be that a

            14   trader has lost access to that SEF.  Well, is it just to that

            15   SEF or is it across all SEFs.  And who does that?  

            16             Is it -- so if it's just one SEF, that SEF can just

            17   pull the plug.  But should it be -- you know, if something

            18   has happened on one SEF or has happened on multiple SEFs,

            19   should there be some coordination between what happens?  Is

            20   this third party, this mystical third party that is going

            21   to do this?  Should it be that each SEF has a responsibility

            22   to do its own after being notified by the CFTC, the SEC, some

            23   third party?  

            24             How is this interaction going to work when you've

            25   got -- you may have issues that are not going to be kept




                                                                           119

             1   to necessarily one SEF or in each SEF you -- if there

             2   are several parties who end up being SEFs, you may not

             3   know, on one hand, when you're seeing a problem, if it's

             4   happening on other SEFs.  What should happen?

             5             MR. KNIGHT:  Well, I mean, in the exchange space,

             6   there is some robust principles in this area.  There is the

             7   principle referring things to the appropriate regulator when

             8   you see a problem even if you have a suspicion of a problem. 

             9   So, it gets widely disseminated.  You have access rules that

            10   make it clear when you can deny access to someone for a

            11   regulatory problem.  And again, you have to share that

            12   information.

            13             And so, I think there are processes in place that

            14   you can borrow that are pretty well established.  You know,

            15   one is all stock exchanges -- and the SEFs I wouldn't see why

            16   you wouldn't do the same -- you are regulatory officers and

            17   you have an obligation to enforce the rules.  Even though you

            18   may be a salesman, if you see something, you have to report

            19   it.  You know, these basic principles, I think, serve us

            20   well.  

            21             The question of what you would outsource or not, I

            22   think it really depends on who the vendors and what the

            23   capabilities of the SEF are, but generally, the most awkward

            24   aspects of these, if you will, self-regulatory

            25   responsibilities are enforcing rules and disciplining and




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             1   investigating your own members who are also customers.  

             2             So, that is what we outsource to FINRA.  And, but 

             3   the real time surveillance of the market and issues related 

             4   to that we conduct internally.  The process of determining 

             5   what fits on our market or not we do internally through an 

             6   independent group that's again subject to oversight by the 

             7   SEC.  But, you know, the awkward piece is enforcing those 

             8   rules against people who your salesmen are visiting the day 

             9   before.  And that's where outsourcing works.

            10             MR. DURKIN:  Well, I would have to take a little

            11   issue just from our existing model, and I'm using the

            12   centralized market at the CME group.  I mean, we are, you

            13   know, a self-regulated organization.  We have very stringent

            14   rules and regulations.  We have a very aggressive market

            15   surveillance and trade practice surveillance program.  

            16             We do take actions and we do review all of our

            17   activity that occurs across all of our products every day. 

            18   And if we find trade practice abuses, we take appropriate

            19   action and it gets publicized to the CFTC as well who

            20   may also take action and decide to pick up the case.  So, I

            21   would just be, you know, very careful in saying the

            22   awkwardness of being able to monitor and regulate your own

            23   markets because that model has worked and it has been in

            24   place for many, many years.

            25             MR. KNIGHT:  Yeah.  I premised by saying if you




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             1   have the capability.  You all do it well and I wasn't in any 

             2   way criticizing your model, but I think the option of being 

             3   able to do that is healthy out there. I think. 

             4             MR. McVEY:  It was a multi-part question.  So I'll

             5   take a crack at a few pieces of that.  But FINRA has been

             6   mentioned several times on the panel today as a logical

             7   entity to provide some of the oversight services.  I think

             8   NFA is another logical entity that would be willing to

             9   compete for that business if it's made available.

            10             I personally think that any SEF has to be

            11   responsible for the fairness and safety and reliability of

            12   their own marketplace, but I would agree that when it comes

            13   to arbitration and enforcement of the rules and fines, that's

            14   an area where we think it would be logical to lean on a third

            15   party like FINRA and the NFA.  

            16             And I also think that since I believe you do want

            17   to encourage competition in the SEF space, a large trader

            18   reporting is another piece that could be handled better on an

            19   aggregate basis by one of those entities, as opposed to a

            20   variety of different SEFs.

            21             MR. DIPLAS:  I would agree with that part.  I

            22   think, to go back to Riva's initial question, you need that

            23   third party because you acknowledged that the market is a

            24   little wider than that one silo containing one SEF.  And so,

            25   the SEF can actually do on its own what it can see, but you




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             1   need that third party to deal with the stuff that that one

             2   SEF might not be able to see.

             3             I would be agnostic in terms of which entity, in

             4   particular, could actually carry out that task, but at the

             5   same time what I would want that entity to have as a

             6   qualification is the knowledge and experience in the

             7   underlying asset class.  The way SEFs are most likely going

             8   to be organized is along asset classes.  And so that

             9   expertise is, I think is going to be very important.  

            10             Now some SEFs might actually do multiple asset

            11   class in which case, in some ways, that third party could

            12   cover those or it could be a multiple of those.  But I think

            13   the expertise in that asset class has to be demonstrated and

            14   something that  we need to focus on to make sure they 

            15   understand that because what works in equity, doesn't work 

            16   in trading, et cetera.

            17             MR. COOK:  I want to make sure -- thank you.  I

            18   want to make sure we have time for our last topic, which is

            19   an important one, and it's standards for SEFs to fulfill

            20   their obligation to maintain impartial, open access.  So,

            21   why don't we begin the questions on that topic.

            22             MS. SEIDEL:  Well, I think the -- you know, as

            23   Robert noted, there are obligations on SEFs in the Act to

            24   ensure impartial access to their markets.  And so, we would --

            25   you know, sort of an open question as to how would SEFs go




                                                                           123

             1   about doing that and what types of entities, you know, would

             2   or should be allowed to have direct access to the markets.

             3             MR. McVEY:  I will take a crack at that since no

             4   one seems to be diving in in any hurry.  But I think the

             5   criteria for access have to be fair and impartial and, you

             6   know, ideally, publicly disclosed.  We have an institutional

             7   credit market and as a result, qualified broker-dealers are

             8   welcomed to make markets on the market access system and

             9   qualified institutional buyers are welcome as buy side

            10   participants.  So, I think if there are fair and impartial

            11   criteria and they're publicly disclosed, then I think the

            12   open access issue would be addressed.

            13             MR. DURKIN:  I would just say that every registered

            14   entity should have the ability to set the terms and

            15   conditions for their participation on their direct system. 

            16   And within that, there should be, then, impartial access. 

            17   But I do believe that, you know, every registered entity

            18   should have that flexibility to determine what those

            19   requirements are.

            20             MR. DE LEON:  Hi.  This is Bill De Leon.  Yeah, I

            21   think it's important that things be impartial, but there have

            22   to be minimum capital and/or regulatory standards for anyone

            23   to have access or to provide access to clients.  This is

            24   analogous to sort of the know your client and as well as sort

            25   of to become a member of an exchange, you would have to pass




                                                                           124

             1   certain minimums.  

             2             What those minimums are, I'm not referring, you

             3   know, someone should set, but there needs to be a uniform set

             4   that are not, you know, capriciously set or sort of too high

             5   to hit the bar for anyone joining.  But there obviously needs

             6   to be a bar set, because there is risk associated with the

             7   transaction being done that the person who does the

             8   transaction can't stand behind it or that even if they can,

             9   that the SEF needs the capital to make sure it gets all the

            10   way through.  

            11             So, you need to ensure that the SEFs themselves and

            12   the clients who use the SEFs on the way to having things

            13   cleared in a CCP are not creating systemic risk in the

            14   system.  So, there needs to be these minimums.

            15             MR. SHILTS:  Bryan, is that what you were pretty

            16   much referring to?

            17             MR. DURKIN:  That is, you know, that they need to

            18   equally enforced across the participants and that, you

            19   know, you have these types of minimums established, the main

            20   predicate of maintaining market integrity.

            21             MR. DIPLAS:  Athanassios Diplas.  I would agree

            22   with both Bryan and Bill in that respect that standards are

            23   needed, but those standards have to be objective and they

            24   have to be transparent.  But standards are needed, especially

            25   since we are actually linking the SEFs to clearing venues and




                                                                           125

             1   we need to ensure that actually the trades are -- actually

             2   are going to get where they're supposed to get and the

             3   participants have claimed, for example, that they can offer

             4   clearing services are indeed able to do so.

             5             MR. HARDING:  Julian Harding.  Yes.  It can't be

             6   emphasized enough the need for impartial non-discriminatory

             7   access to the DCOs from the SEFs.  The existing IDB, entity,

             8   the broker marketplace, as I said a little earlier today,

             9   will necessarily be expanded to include those entities that

            10   are mandated to now trade through a SEF or a DCM for a

            11   clearable swap.  And further to that, there will be an

            12   evolution, I think, the way the public policy is constructed

            13   towards further entities who are not mandated to be -- to

            14   trade through a SEF to be -- to trade through a SEF in the

            15   future.

            16             The constraint that has existed to date has been,

            17   as I mentioned before, difficult creditworthiness issues

            18   around the time of the trade, which now with clearable

            19   solutions being offered and mandated more broadly will be

            20   removed.  And that will open up the marketplace, the SEF

            21   marketplace to a greater -- a broader population for sure.

            22             MR. MASTERS:  I would just echo those comments.  I

            23   mean, there is a clear anti-competitive provision in the

            24   statute here that we're talking about.  I mean, there is --

            25   you know, especially with regard to SEFs.  And one of the




                                                                           126

             1   points I was making earlier with regard to conflicts of

             2   interest with SEFs and DCOs, is you don't want DCOs, you

             3   don't want a linkage there where there is anti-competitive 

             4   kind of behavior.  You want access from participants.  

             5             It's one thing to clear a trade, it's another

             6   thing, you know, with regard to a SEF.  I mean, trading and

             7   clearing, you know, we've got to make sure that there is --

             8   that the market is anti-competitive, that we allow a

             9   significant amount of participants to get involved in these

            10   markets, especially in the fact, because they are going to

            11   evolve.  They're going to move forward.  And I think that's

            12   the healthiest alternative.

            13             MR. KNIGHT:  Appropriately, there has been a lot of

            14   focus on the initial access to the market.  But I think, just

            15   from a regulatory perspective, there is this question of once

            16   you have access, you have a group of members, if you will,

            17   there are times when you have to, for regulatory purposes,

            18   remove someone.  And that has to be done also in a uniform

            19   manner.  You can't have ambiguity around that.

            20             MR. YELVINGTON:  I would also like -- you know, in

            21   the spirit of the legislation here, what you want to do is

            22   get some -- you know, the way I read it, you want to get more

            23   participants to help pricing, to help markets in troubled

            24   times.  And when you're thinking about crafting the actual

            25   regulatory framework around this, probably the best thing




                                                                           127

             1   that could be done would be to craft a framework that is

             2   extremely objective and not have a lot of opacity or

             3   subjective type of requirements.  And also make sure that

             4   there is an ability for a firm to transfer in, a firm that

             5   could grow and mature and become a SEF member or a CCP

             6   member.

             7             MR. DIPLAS:  I think this is a final

             8   clarification though.  I think that we're mixing up a little

             9   bit the access issues between access from SEF to

            10   clearing venues and access within the SEFs.  And these two

            11   are two distinct issues.  I agree that, first of all, all

            12   clearing venues should allow access to the various SEF as

            13   long as they actually fulfill their own criteria.  The topic

            14   here is, of course, access into the SEF itself.

            15             In that as well, we have to be clear that the advent 

            16   of clearing does not eliminate counterparty risk.  It greatly

            17   reduces it, but there are still aspects of the counterparty

            18   risk that are varying types of the performance of the

            19   clearing broker to actually get the trade there.  There is

            20   also sometimes exposure that someone gets within the same

            21   account with other clients, et cetera.  

            22             So, it's noticing that basically counterparty risk

            23   isn't basically being completely eliminated through the new

            24   system.  It has been reduced, but clients, again, will have

            25   to do their own homework to ensure that the counterparty




                                                                           128

             1   they're trading with is actually within their trading

             2   parameters.

             3             MR. YELVINGTON:  I agree on that point.  I would

             4   also point out that, you know, far from eliminating

             5   counterparty risk, what you've done here is neutralized it. 

             6   And, you know, in an act of neutralization, you should seek

             7   to, again, on an objective basis, kind of diversify those

             8   counterparty risks out in such a way that, you know, you've

             9   reduced the dependence on one individual or a small number

            10   of individual participants.  And whether we're talking about

            11   access to the SEF or access to the CCP, still maintain that

            12   the objective nature of things should be maintained.

            13             MR. HARDING:  Julian Harding.  Just a -- you're

            14   right to qualify what I said in terms of removing risk. 

            15   Absolutely.

            16             I would like to bring up the historical precedent

            17   of the energy markets going back seven or eight years.  In a

            18   post Enron crisis environment, there was a natural, dare one

            19   say, organic shift towards a clear solution that was offered

            20   by certain people around this table and the -- what might be

            21   SEFs in the future, but the IDBs at the time fully embraced

            22   that and, in fact, were definitely part and parcel of a

            23   broadening of the population that could avail themselves of

            24   the IDB markets and other markets by virtue of that move

            25   towards a cleared solution.  So it did work.  It has worked




                                                                           129

             1   very well, naturally, seven or eight years ago and to this

             2   day in the energy spectrum.

             3             MR. DE LEON:  Bill De Leon.  I just want to get

             4   back to what Athanassios was talking about on environment. 

             5   Neutralization in and of itself is a good concept, but if the

             6   entries into that neutralization pool bring down the overall

             7   quality of it, it actually is worse than having few

             8   participants.  So, you need to have a minimum standard.  It is

             9   not just having additional participants being good, you have

            10   to have the right people.  And there just has to be a minimum

            11   standard and they have to be enforced.  

            12             And that is why when you look at the futures market

            13   it has worked so incredibly well.  When you look at the

            14   equity markets, it has worked so incredibly well.  There are

            15   minimum standards in terms of becoming a clearing member,

            16   there is a minimum standard in terms of being able to execute

            17   trades and give things up and the rules in terms of

            18   segregation of assets and cash are very well defined for

            19   certain aspects of the market.

            20             So, you have to have the same concept apply.  Just

            21   because you're executing a trade the person who is doing it

            22   or the exchange you're using and who you're using to

            23   facilitate that needs to be able to stand behind it.  If they

            24   can't, they're going to dramatically weaken the confidence in

            25   the system and could possibly lead to people taking risks




                                                                           130

             1   that they're not aware of and/or making the system less

             2   stable, which we've seen during the crisis.  

             3             So, I would just want to reiterate that I agree with

             4   the concept of more participants diversifying things as long

             5   as they are the right participants.  And by that, I define

             6   the correct capital and the correct regulatory oversight

             7   meeting certain regime minimums.

             8             MS. ADRIANCE:  Just to, in terms of the, what has

             9   been talked about, okay, there was a -- mentioned impartial

            10   access to the SEFs and impartial access to the clearing,

            11   central clearing parties.  One thing that has not been

            12   mentioned -- it was mentioned that there should not be some

            13   tie between the SEFs and the clearinghouse that would not be

            14   partial access to the clearinghouse.  

            15             In terms of what the -- we need to just go a little

            16   bit further from just in addition to what standards of who

            17   can access the SEF, can the SEF -- is it impartial access if

            18   the SEF is saying, okay, here are my standards.  They're

            19   based on, you know, as mentioned, in terms of the financial

            20   standards, or whatever, that are real basic and they look

            21   really good, but get sent into us as the regulators and it

            22   looks good, can the SEF differentiate between what does

            23   access mean. 

            24             Is there a different bandwith that's provided?  Is

            25   there different pricing that's charged, depending on the




                                                                           131

             1   amount of trades?  What are -- what is impartial and what's

             2   not impartial when it comes to what the SEF can -- how the

             3   SEF can treat the traders separately from these overall

             4   basics? In a sense, if it's risk management kind of standards,

             5   what other kind of links can they put in?  

             6             Can it be that the SEF can offer certain extra, you

             7   know, they can offer more information if that trader also

             8   uses other services that particular SEF, you know, and

             9   affiliated businesses or if they use the particular -- you

            10   know, it's not that they don't offer the ability to link --

            11   to do trades and link to non-affiliated clearinghouses, but

            12   if you do do the trade on the system and you link to the

            13   affiliated clearinghouse, can they charge differently?  Can

            14   they treat you differently?  How does that play?  You know,

            15   does impartial access have some kind of impact on that?

            16             MR. VISWANATHAN:  Vish Viswanathan from Duke.  I

            17   guess you're kind of opening the can of worms that payment

            18   for order flow opened in equity markets if you start allowing

            19   me to bundle clearing and, you know, trading in some way.  You 

            20   say oh, if a clearinghouse access, if you trade through, you 

            21   know, this particular SEF, you know, I'm going to give you a 

            22   discount, I think that defeats the purpose of the -- you can't

            23   allow that kind of bundling.  Neither can I think you can 

            24   allow differentiation of information in some way.

            25             Now with any auxiliary services, I don't know.  It




                                                                           132

             1   seems to be very clear that all the participants in the SEF

             2   should receive from the SEF itself the same information. 

             3   There can't be these kind of inducements to kind of bundle

             4   clearing and trading.

             5             MR. HARDING:  Julian Harding.  I would echo that

             6   entirely.  The existing over the counter marketplaces and

             7   especially those operated by the IDBs do not have anything

             8   like you're mentioning to date.  The example I mentioned of

             9   the energy markets in the last seven or eight years having

            10   transitioned into a different sort of framework, there is no

            11   sign of that either.  So, there is new entrance that came in. 

            12   We're not -- I'm not in any way disadvantaged.  It's not

            13   something that would ever come up.

            14             And frankly, I think, in a proper genuine

            15   marketplace, the totality of market participants all expect

            16   certain standards to be met.  And they are uniform standards. 

            17   And I don't think, in a genuine multiple to multiple

            18   marketplace, you could have anything less than that.

            19             MR. DIPLAS:  I think that -- I would agree that in

            20   terms of the access to information, it's a business that's

            21   going to drive the fact that you cannot differentiate

            22   customers with different information.  Everybody would want

            23   to have that.  So, I think that takes care of itself. 

            24             In terms of pricing, I think we need to be flexible

            25   in terms of what people do with their pricing.  In the current




                                                                           133

             1   exchanges right now, I think most participants have different

             2   prices that they can negotiate depending on their volume. 

             3   And I think that the inter-dealer broker, it is definitely

             4   the case.  I mean, it will be -- I cannot think that there is

             5   anybody that has the same price with their broker than

             6   anybody else.  I don't even know what the other banks pay. 

             7   People negotiate these things individually.  So, I think to

             8   the extent that this is a private business, you should be

             9   able to negotiate these things.

            10             MR. HARDING:  Sorry.  I thought you were referring

            11   to within one SEF the notion that certain people have

            12   different access and certain have different information. 

            13   That's what I was referring to.  But between the SEFs, there

            14   is going to be -- it's a competitive marketplace, and there's

            15   going to be differences in approach and in pricing and

            16   various things, but -- 

            17             MR. DIPLAS:  Sorry.  Athanassios Diplas.  Just to

            18   clarify, perhaps I didn't understand you.  What I'm saying,

            19   if we go currently to, to a broker, let's say that

            20   that broker, just for argument sake, is a SEF itself. 

            21   Currently, I don't know, we pay totally different price than

            22   someone else does.  And I don't know how you determine that

            23   price.  Part of it is negotiation, part of it is the volume

            24   that you bring to the business, et cetera. 

            25             So, you don't have an environment right now that




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             1   we all pay the same price.  So, I don't see how in the SEF it

             2   might necessarily be the case.  It might be.  That could be

             3   the model that you choose.  I would prefer not to prescribe it

             4   to you that that is your only choice.

             5             MR. HARDING:  What I'm getting at, I guess is if

             6   you, as you say, for instance, go to two or three brokers,

             7   you're going to choose the best price to operate that.  I

             8   don't understand when you say I'm going to get the same price

             9   as someone else, you'll -- 

            10             MR. DIPLAS:  Perhaps I wasn't clear.  Within your

            11   own brokerage -- let's take an example.  I'm not picking on

            12   you.  Within your brokerage, I don't think all your clients

            13   get the exact same price for brokerage.  Most people -- from

            14   what I understand, most people have different prices.

            15             MR. HARDING:  Are you talking about commissions?

            16             MR. DIPLAS:  Yes.

            17             MR. HARDING:  Oh.

            18             MR. DIPLAS:  That's what I mean.  I mean, that's

            19   the price that -- the SEF charge.

            20             MR. HARDING:  I'm sorry, Riva.  Were you referring

            21   to commission schedules?  I didn't realize that at all.

            22             MS. ADRIANCE:  No.  Actually, I was referring to

            23   looking at one SEF, since we were talking about regulation of

            24   SEFs, can a SEF if, you know, since they have this

            25   responsibility to provide open, impartial access, can they




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             1   charge differently for different participants, can they

             2   provide different bandwidths for different participants, can

             3   they, in a sense, provide some different information.  

             4             If it can -- what does impartial access mean.  I'm

             5   trying to get down to besides its overall term, okay, we've

             6   got to have clear standards and let people in under clear

             7   standards, can they -- is there any kind of differentiation

             8   of how a SEF can treat the different traders on that SEF.

             9             MR. COOK:  Yes.  I think we're talking about

            10   commissions but by another name.  So differential fees

            11   for differential services even though once they meet some

            12   across the board objective access requirement.

            13             MR. WEISBERG:  To be economically viable, and I

            14   think everybody wants economically viable SEFs, I think they

            15   have a responsibility to set objective access criteria and

            16   disclose what those are.  So, that may mean they can't decide

            17   a particular person couldn't fall in that class, but once

            18   they define that objective criteria and say okay, if we want

            19   to have a class of participants that are market makers and

            20   they're going to uphold a responsibility to be on a price all

            21   the time, those people obviously have different bandwidth

            22   requirements than people who trade intermittently,

            23   infrequently.  

            24             And your economics are different.  People who buy a

            25   lot of things from you oftentimes get different prices than




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             1   people who buy occasionally just because the economics of

             2   serving them are different.  So, I think it should be okay 

             3   for a SEF to define those classes of participants so long as

             4   they're disclosed, and that they can objectively apply 

             5   those criteria uniformly across all of their clients.  

             6             And I think those criteria may be different from

             7   SEF to SEF because they may have slightly different economic

             8   models, slightly different operating models, slightly

             9   different market mechanisms.  In some cases, the information

            10   requirements could be different, but we shouldn't prohibit

            11   somebody from going from one class to another so long as they

            12   meet, you know, those criteria.  

            13             And I think it is super important for people to

            14   recognize there are likely to be many more SEFs than DCOs,

            15   that there is a lot more risk sitting in DCOs than are in

            16   SEFs.  The capital requirements could very well be different

            17   between a DCO and a SEF.  And what that's going to mean if

            18   you want to create a competitive SEF market with fewer DCOs,

            19   that, you know, you have to make sure that it's not just

            20   bundling of price access, but access to the APIs, access to

            21   technical environments, access to the quality assurance

            22   departments, those types of things, that all need to be

            23   opened up, so that any SEF could successfully send a trade to

            24   a DCO.

            25             MR. SCHOTT:  You mentioned different classes of




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             1   participants.  But within a class, assuming they are

             2   providing or receiving the same service, would you still

             3   allow different pricing?

             4             MR. WEISBERG:  I don't think that's an absolute

             5   requirement.  It is -- we try to make ours as uniform as

             6   possible and I think it would be possible for SEFs, to make

             7   them uniform.

             8             MR. SCHOTT:  I should have turned that the other

             9   way around.  Would you allow for diverting pricing.

            10             MR. WEISBERG:  I don't think it's a requirement

            11   that there is.

            12             MR. DE LEON:  You know, what Athanassios was

            13   alluding to and we've seen in the markets, different dealers

            14   for even something as generic as equities will charge

            15   different prices depending on your access point, what the

            16   type of trade is, whether it's voice, whether it's

            17   algorithmic driven, whether or not you're getting research. 

            18   Some people do soft dollars.  

            19             There are a whole host of things that are involved

            20   with the pricing of getting access to trading.  And the

            21   market bears what it bears and people negotiate and do those

            22   things.  But I think what the important thing is, that the

            23   market will drive prices to where they go for the thing, but

            24   everyone should have access to it as long as they meet the

            25   certain minimum standards required to show that they're




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             1   responsible traders.

             2             Just like you have KYWC, you have, you know, your

             3   client issues in terms of equity and opening an account or

             4   fixed income or anything, you'll have similar issues

             5   associated with SEFs and people have access to SEFs and to

             6   DCOs, the pricing or commissions, to be blunt, will be driven

             7   by what people think is fair and it will be competitive.  And

             8   I don't see a problem with that as long as it's not gouging.

             9             MR. YELVINGTON:  I agree with that.  I mean, having

            10   the ability for different SEFs to, you know, tailor their

            11   businesses to their clients is a good thing and, you

            12   know, although it's maddening sometimes, I think there are a

            13   lot of things that we all buy that we all pay different

            14   prices for, depending on who we are.  It helps the businesses

            15   to grow to have that ability.

            16             You have to, when you're setting this up, from a

            17   purely regulatory perspective, however, balance that with

            18   what does that do with your reporting lines and what are you

            19   not seeing.  What is being, you know, traded opaquely that

            20   you're not seeing the data on.  If certain benefits are given

            21   at two different prices, there is going to be a reason why. 

            22   And I think the businesses have the rights, SEFs have the 

            23   right to charge two different prices.  From a regulatory 

            24   perspective, however, you have to ask am I giving up some 

            25   information here and what am I not seeing.




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             1             MR. COOK:  Ok. Thank you. So we've reached the end 

             2   of our time. I think we should bring this to a close. Rick any 

             3   final comments you want to make? 

             4   	   MR. SHILTS:  I wish to thank everyone for the great 

             5   discussion.          

             6   	   MR. COOK:  I want to thank everyone for your 

             7   participation today.  I just remind everyone that we do have 

             8   open mailboxes on our website so anyone who has an interest 

             9   in these topics please submit your thoughts in writing.  We 

            10    would be -- look forward to reading them.  Thank you.         

            11   (Whereupon, at 12:30 p.m., the roundtable was concluded.) 

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