UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 GLOBAL MARKETS ADVISORY COMMITTEE MEETING 

 Washington, D.C. 

 Tuesday, July 15, 2008 

 ANDERSON COURT REPORTING 

 706 Duke Street, Suite 100 

 Alexandria, VA 22314 

 Phone (703) 519-7180 Fax (703) 519-7190 
 2 

 1 C O N T E N T S 

 2 Welcome and Introductions: 

 3 COMMISSIONER JILL SOMMERS 

 3 Commodity Futures Trading Commission 

 4 

 4 Opening Remarks: 

 5 

 5 WALTER L. LUKKEN, Acting Chairman 

 6 Commodity Futures Trading Commission 

 6 

 7 COMMISSIONER MICHAEL V. DUNN 

 7 

 8 COMMISSIONER BART CHILTON 

 8 Committee Member 

 9 

 9 Introductions Presentation by: 

 10 

 10 JACQUELINE MESA 

 11 Director Office of International Affairs 

 11 

 12 Current International Initiatives: 

 12 

 13 ROBERT ROSENFELD 

 13 Office of International Affairs 

 14 

 14 Update on the IOSCO Direct Market Access Project: 

 15 

 15 ANANDA RADHAKRISHNAN, Director 

 16 Clearing and Intermediary Oversight 

 16 

 17 Risks of Direct Market Access: 

 17 

 18 KIM TAYLOR 

 18 CME Clearinghouse 

 19 

 19 Direct Market Access Business Profile: 

 20 

 20 PETER REITZ 

 21 Eurex Frankfurt AG 

 21 

 22 

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 1 Clearing Member Risk in Direct Market Access: 

 1 

 2 R.J. CUMMINGS 

 2 IntercontinentalExchange 

 3 

 3 Development of Real-time Risk Systems: 

 4 

 4 YVONNE DOWNS, Newedge 

 5 

 5 Risks in Automated Order Routing: 

 6 

 6 MATTHEW ANDRESEN 

 7 Citadel Derivatives Group 

 7 

 8 WILLIAM BRODSKY 

 8 Chicago Board Options Exchange 

 9 

 9 R.J. CUMMINGS 

 10 IntercontinentalExchange 

 10 

 11 GEORGE CRAPPLE 

 11 The Millburn Corporation 

 12 

 12 KEVIN DAVIS 

 13 MF Global 

 13 

 14 MICHAEL C. DAWLEY 

 14 Goldman Sachs & Co. 

 15 

 15 CRAIG DONOHUE 

 16 CME Group 

 16 

 17 DAVID DOWNEY 

 17 OneChicago 

 18 

 18 YVONNE DOWNS 

 19 Newedge 

 19 

 20 KEN FORD 

 20 Futures Industry Association 

 21 

 21 ARTHUR HAHN 

 22 Katten Muchin Rosenman, LLP 

 22 

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 1 ROGER LIDDELL 

 1 London Clearing House 

 2 

 2 BONNIE LITT 

 3 Goldman Sachs & Co. 

 3 

 4 JOANNE MEDERO 

 4 Barclays 

 5 

 5 JAMES NEWSOME 

 6 New York Mercantile Exchange 

 6 

 7 PETER REITZ 

 7 Eurex Frankfurt AG 

 8 

 8 DAN ROTH 

 9 National Futures Association 

 9 

 10 JEFFREY SPRECHER 

 10 IntercontinentalExchange 

 11 

 11 KIM TAYLOR 

 12 CME Clearinghouse 

 12 

 13 ERIC VINCENT 

 13 Osprey Management 

 14 

 15 * * * * * 

 16 

 17 

 18 

 19 

 20 

 21 

 22 

 ANDERSON COURT REPORTING 

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

 2 (1:30 p.m.) 

 3 COMMISSIONER SOMMERS: We're going to 

 4 started, if everybody can take their seats. Good 

 5 afternoon and welcome to this meeting of the 

 6 Global Markets Advisory Committee. This is my 

 7 first time to chair a meeting of this committee 

 8 and I'm very much looking forward to the dialogue 

 9 regarding issues of importance to global futures 

 10 markets. We have a number of members here with us 

 11 today who are continuing as members of GMAC and 

 12 several new members as well. We really appreciate 

 13 all of you taking time out of your busy schedules 

 14 to be with us today because we rely on your input. 

 15 Let me take a minute to recognize Acting 

 16 Chairman Walt Lukken for his outstanding service 

 17 to GMAC. Walt served as chairman of this 

 18 committee from October 2003, to early February of 

 19 this year, a period of nearly 4-1/2 years. Under 

 20 his leadership the committee worked on an array of 

 21 issues including MiFID, cross-border clearing, 

 22 bankruptcy issues related to segregated and 

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 1 secured funds, as well as international regulatory 

 2 coordination, and I value his guidance on these 

 3 international market issues. 

 4 The GMAC was established by the 

 5 Commission in 1998 to seek industry input on 

 6 matters that impact the global derivatives 

 7 marketplace. Today's discussion certainly falls 

 8 within that category. After an update on current 

 9 international initiatives, we will discuss the 

 10 implications of various legislative proposals that 

 11 have recently been introduced in Congress 

 12 concerning foreign boards of trade that provide 

 13 access to U.S. customers without registering as a 

 14 U.S. exchange. The issue of U.S. Access to 

 15 foreign exchanges has been debated by this 

 16 committee before. In fact, the agenda for the 

 17 very first meeting of GMAC held on May 14, 1998, 

 18 included, "Placement of U.S. exchange terminals 

 19 abroad and foreign exchange terminals in the U.S." 

 20 At that time, U.S. exchanges were concerned that 

 21 foreign exchanges with trading terminals in the 

 22 U.S. might gain a competitive advantage over U.S. 

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 1 Exchanges due to less-burdensome home regulatory 

 2 structures and the Commission was grappling with 

 3 what it meant to be located outside of the United 

 4 States as that phrase is used in Section 4(a) of 

 5 the Commodity Exchange Act. 

 6 The global landscape has changed 

 7 tremendously since that time. U.S. exchanges now 

 8 operate around the world and the Commission has 

 9 issued no-action letters to 18 foreign exchanges 

 10 permitting access to U.S. customers. Advances in 

 11 technology and innovative business plans have 

 12 opened markets and spurred competition in a way 

 13 that has benefited economies worldwide providing 

 14 risk-management tools where they didn't exist 

 15 before. 

 16 While the global landscape has changed, 

 17 questions surrounding the Commission's no-action 

 18 process and whether it provides both the 

 19 regulatory tools necessary for proper oversight of 

 20 cross-border business and a level regulatory 

 21 playing field have persisted. In 2006 the 

 22 Commission reaffirmed the no-action process as 

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 1 providing the most flexible method of ensuring 

 2 that appropriate conditions are put in place to 

 3 address the specific factual circumstances of a 

 4 given market as demonstrated most recently by the 

 5 enhanced conditions added to the no-action relief 

 6 for ICE Futures Europe and the Dubai Mercantile 

 7 Exchange, but as I mentioned, questions still 

 8 persist. Jackie Mesa, our Director of 

 9 International Affairs, will summarize the 

 10 different categories of pending legislation which 

 11 will lead us into what I hope will be a productive 

 12 discussion of the implications of these various 

 13 proposals. 

 14 Futures exchanges and the means to 

 15 access them are evolving in an era that is 

 16 increasingly dominated by electronic trading. 

 17 Sophisticated customers often want more control 

 18 over trade execution, more direct access to the 

 19 markets, and less intervention by their brokers. 

 20 There are different terms for this trend, but most 

 21 widely used is direct market access or DMA, our 

 22 second topic for discussion today. We will have 

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 1 an update on IOSCO efforts from Robert Rosenfeld 

 2 who is our Deputy Director of International 

 3 Affairs. Ananda Radhakrishnan, our Director of 

 4 Clearing and Intermediary Oversight, will speak to 

 5 us on the potential risks of DMA. And finally, 

 6 we'll hear from Peter Reitz from Eurex, R.J. 

 7 Cummings from the IntercontinentalExchange, Kim 

 8 Taylor from the CME Clearing House, and Yvonne 

 9 Downs from Newedge. 

 10 There are two main types of DMA. 

 11 Traditional DMA provides centralized order routing 

 12 where the customer inputs an order and relies on 

 13 the futures commission merchant to route this 

 14 order directly to the exchange of their choice. 

 15 When this introduced some years ago it was a huge 

 16 advance compared to the preautomated trading that 

 17 preceded it. Pure DMA which is newer than 

 18 traditional DMA allows customers to connect 

 19 directly to the exchange instead of going through 

 20 a futures commission merchant's traditional 

 21 infrastructure. It is increasingly popular 

 22 particularly with high-volume traders. Going 

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 1 directly to an exchange can reduce latency or time 

 2 delay on routing orders. DMA has improved trading 

 3 efficiency and generally offers traders more 

 4 safeguards via the clear audit trail it provides, 

 5 but the emphasis on speed is challenging 

 6 traditional approaches to risk management. 

 7 Clearing firms traditionally accessed risk and 

 8 pretrade controls as trades passed through the 

 9 firm's order routing infrastructure and before 

 10 they reached the exchange. Some traders whose 

 11 trading strategies depend on high-speed access to 

 12 exchanges want to avoid delays caused by such 

 13 pretrade risk filters. Clearing firms are 

 14 cautious about this kind of business but 

 15 competitive pressures make it hard to turn away 

 16 such traders. This has meant that risk assessment 

 17 for pure DMA clients is often done after the trade 

 18 is executed on a posttrade basis. 

 19 Today's meeting of the committee gives 

 20 us an excellent opportunity to discuss the risks 

 21 and benefits of DMA including the challenges to 

 22 risk management, how exchanges and the 

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 1 intermediaries have responded to these risks, and 

 2 whether there is a need for industry-wide 

 3 guidance. 

 4 Before we begin I'd like to go around 

 5 the room and have everybody introduce themselves 

 6 and tell us what industry, association, or firm 

 7 you are with. And for logistical purposes, to let 

 8 you know the mikes that we are using today are 

 9 push to talk so after you are doing speaking, if 

 10 you could push to turn them off as well. And if 

 11 everybody could put their cell phones or 

 12 BlackBerrys on vibrate, sometimes they can 

 13 interfere with our audio feed. And finally, just 

 14 one other thing, if you'd like to be recognized to 

 15 participate in the discussion, just turn your 

 16 placard up. Let me turn things over to my fellow 

 17 Commissioners for any comments they have and I'll 

 18 go to our former Chair of GMAC Acting Chair Walk 

 19 Lukken. 

 20 CHAIRMAN LUKKEN: Thank you very much, 

 21 Jill. It's a pleasure to be here. I think it was 

 22 last October the last GMAC meeting we held and 

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 1 which I chaired, so there have been a lot of 

 2 important changes since then, most importantly, 

 3 Jill has taken over the leadership of this 

 4 committee. It seems like an eternity ago, October 

 5 of last year. I've lost some weight and some hair 

 6 since then, but anyway I commend her for setting 

 7 an important agenda here today on issues that are 

 8 very relevant to policymakers here as well as in 

 9 Congress. These are obviously, and this is an 

 10 understatement, busy times for us here at the 

 11 Commission, so the GMAC convenes at an important 

 12 time here and hopefully can influence the 

 13 discussion by policymakers. 

 14 Certainly with the increase of 

 15 electronic trading in global markets around the 

 16 world, we've had to evolve as an agency here and 

 17 we're trying to evolve at lightning speed. We've 

 18 been a long-time international leader over our 

 19 history and we should not shy away from that. For 

 20 20 years we were one of the first to develop a 

 21 mutual recognition system for firms and 10 years 

 22 ago for exchanges. So that is something that as 

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 1 an agency we've been a leader on around the world. 

 2 One area that has developed recently is 

 3 the increased use of cross-border-linked products. 

 4 It's something we first tackled in June 2006 when 

 5 the Commission held a public hearing on this issue 

 6 and put out comment in the Federal Register what 

 7 is a foreign border trade located outside the 

 8 United States. And the Commission in October 

 9 unanimously issued a policy statement affirming 

 10 the no- action process and the next month signed 

 11 with FSA an agreement to share information. But 

 12 in doing so we recognized that there was a chance 

 13 for wrongdoing between the markets and we wanted 

 14 to make sure there were not regulatory gaps and so 

 15 we were always looking to try to improve the 

 16 program, and certainly recently we've made 

 17 improvements to the program with additional 

 18 information sharing from the FSA as well as the 

 19 imposition of position limits in this area. 

 20 Congress is keenly interested in this area, but 

 21 I'm interested in hearing from this group that 

 22 works on these issues every day to hear whether 

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 1 the program is working, how it's working, are 

 2 improvements necessary, and help us to frame as 

 3 policymakers so we can advise the lawmakers on 

 4 what they may have to do over the coming weeks and 

 5 months. So that's very important. 

 6 And obviously direct market access is an 

 7 issue that's around the bend for us. We're trying 

 8 to deal with it now so we don't have to be dealing 

 9 with a crisis months from now. It's helpful to 

 10 understand all the risks that surround this issue 

 11 and so I'm looking forward to a lot of listening 

 12 today and learning about this issue and how as 

 13 regulators we need to be addressing this and 

 14 whether there are solutions that could be at hand 

 15 for us. Thank you so much for coming here, and I 

 16 commend Commissioner Sommers for the agenda that 

 17 she put forward today. 

 18 COMMISSIONER SOMMERS: Mike, do you have 

 19 an opening statement? 

 20 COMMISSIONER DUNN: Thank you, Chairman 

 21 Sommers, for leading today's meeting. I commend 

 22 you for your work in this area and I look forward 

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 1 to hearing from the international experts that 

 2 you've gathered here to speak about direct 

 3 marketing access and foreign boards of trade. 

 4 Since the last GMAC meeting, interest in 

 5 commodities have continued to grow here in the 

 6 United States as well as around the world. 

 7 Whether the discussion is international oil 

 8 markets or global food supplies, markets in these 

 9 commodities are at the forefront of everyone's 

 10 thoughts. As these are worldwide markets, 

 11 solutions to concerns and problems can be 

 12 addressed in settings such as these where 

 13 international experts gather to talk about 

 14 significant developments from a variety of 

 15 perspectives. Today we discuss direct access 

 16 issues. It's important to remember that in the 

 17 electronic environment ourselves, a board of trade 

 18 location becomes less and less concrete as 

 19 exchange models evolve. Managing risks associated 

 20 with exchange activities become more complex as 

 21 new trading relationships develop. Additionally, 

 22 with legislators considering whether to revise the 

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 1 Commission's current policy for allowing foreign 

 2 boards of trades direct access to customers here 

 3 in the United States, it will undoubtedly be 

 4 helpful to hear from the industry's views on the 

 5 current process and any possible revisions. 

 6 I look forward to hearing from everyone 

 7 gathered here today and would like to thank all 

 8 the Advisory Committee members for participating. 

 9 COMMISSIONER SOMMERS: Thanks. Bart, do 

 10 you have a statement? 

 11 COMMISSIONER CHILTON: Thank you for 

 12 doing all this work, Commissioner Sommers, and to 

 13 your staff for doing it. 

 14 Walter Lippman had this quote which I 

 15 thought was neat and it was, "Where we all think 

 16 alike, no one thinks much." That's why it's great 

 17 to have this sort of group here who can think and 

 18 offer different opinions to what may be the common 

 19 convention. As Commissioner Dunn said, a lot has 

 20 changed, and I won't go into all the details, but 

 21 the technology is obviously a big, huge deal. No 

 22 longer do you have terminals that are located in 

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 1 one country and directly tied to another exchange, 

 2 and we ought to get used to that as regulators. 

 3 That's going to be around for as far as we can see 

 4 in the future. And figuring out how you deal, how 

 5 Jackie helps us deal, with international 

 6 regulators as we move down that road is going to 

 7 be increasingly important. Likewise, the number 

 8 of products have changed and they've become 

 9 interesting, and as Mr. Sprecher knows, 

 10 challenging for us in dealing particularly with 

 11 look-alike contracts. And I just can't think ICE 

 12 and Mr. Sprecher more for providing the 

 13 information that Acting Chairman Lukken requested 

 14 that provides transparency. Here you're an 

 15 innovator in this industry and you must just feel 

 16 like you can't win for losing when you've got more 

 17 than one regulator to deal with and you've done it 

 18 gracefully, and this information I think is 

 19 important for us to have and important for 

 20 American consumers, and so thank you for that. 

 21 And I also want to thank FSA for being helpful in 

 22 part of this information-gathering request and 

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 1 transmittal process. 

 2 But these are extraordinary times and if 

 3 you look at what's going on on Capitol Hill, there 

 4 are close to 20 bills now on market manipulation, 

 5 et cetera, and they all tout themselves as good 

 6 government bills. Huey Long said Louisiana is 

 7 some day going to get good government and they 

 8 ain't going to like it. There's a lot that people 

 9 don't like about these 20 bills. Mr. Brodsky was 

 10 in my office earlier and I turned down a James 

 11 Taylor concert. Do you know his encore song? He 

 12 plays that Steamroller song? There's a line in 

 13 there about a demolition derby and I thought 

 14 that's almost like all these 20 bills that are 

 15 sort of competing, and we certainly don't want to 

 16 have the Commodity Exchange Act full of a hefty 

 17 hunk of steaming junk, and so I think whatever we 

 18 do or whatever Congress does needs to be targeted, 

 19 it needs to be surgical as opposed to some big 

 20 sledgehammer. And I think the Durban- Levin Bill 

 21 that really codifies this no-action process and 

 22 the transparency that we're now getting from ICE 

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 1 is really such a process and really such a bill 

 2 that can help and I hope that whatever other 

 3 proposals may come down the pike in Congress that 

 4 they are similarly as surgical and targeted and as 

 5 thoughtful, because as you all know more than 

 6 anybody in the world, these are incredibly 

 7 sensitive markets and they're incredibly important 

 8 markets for consumers. So I look forward to 

 9 hearing from all you great thinkers. Thanks. 

 10 COMMISSIONER SOMMERS: Thanks, Bart. 

 11 I'm now going to turn it over to Jackie Mesa who 

 12 is our Director of the Office of International 

 13 Affairs for her overview. 

 14 MS. MESA: I wanted to go around the 

 15 table and have everybody introduce themselves. 

 16 I'll start with Eric. 

 17 MR. VINCENT: I'm Chairman of the 

 18 Managed Funds Association which represents the 

 19 alternative investment industry. I'm also present 

 20 of Osprey Management, a New York based investment 

 21 management firm. 

 22 MR. DONOHUE: I'm Craig Donohue, CEO of 

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 1 CME Group. 

 2 MR. DOWNEY: I'm David Downey with 

 3 OneChicago. 

 4 MR. HAHN: I'm Arthur Hahn with the 

 5 Katten Muchin law firm and I represent Euronext 

 6 Life. 

 7 MR. DAVIS: Kevin Davis with MF Global. 

 8 MS. MEDERO: Joanne Medero. I lobby for 

 9 Barclays wholesale businesses. 

 10 MR. CRAPPLE: George Crapple. I'm 

 11 Co-CEO of Millburn Corporation. We're a CTA and 

 12 CPO. I'm on the board of the NFA and the FIA. 

 13 MR. SPRECHER: I'm Jeff Sprecher. I'm 

 14 the CEO of IntercontinentalExchange. 

 15 MR. REITZ: I'm Peter Reitz. I'm a 

 16 member of the board of the Eurex Exchanges. 

 17 MR. CUMMINGS: R.J. Cummings, Vice 

 18 President of Product Development and Design at 

 19 IntercontinentalExchange. 

 20 MS. TAYLOR: Kim Taylor, CME Clearing. 

 21 MR. LIDDELL: Roger Liddell, London 

 22 Clearing House. 

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 1 MR. ANDRESEN: Matt Andresen. I'm the 

 2 Co-CEO of Citadel Derivatives Group. 

 3 MR. ROTH: Dan Roth, National Futures 

 4 Association. 

 5 MR. BRODSKY: Bill Brodsky, Chairman and 

 6 CEO, Chicago Board Options Exchange. 

 7 MS. LITT: Bonnie Litt, Goldman Sachs. 

 8 MR. FORD: Ken Ford, I'm currently 

 9 Chairman of the FIA. In my day job I'm head of 

 10 listed derivatives at Credit Suisse. 

 11 MR. DAWLEY: Mike Dawley, Goldman Sachs. 

 12 MS. DOWNS: Yvonne Downs, Newedge. 

 13 MR. NEWSOME: Jim Newsome, President and 

 14 CEO of NYMEX Holdings and I think for this meeting 

 15 a member of the board of the Dubai Mercantile 

 16 Exchange. 

 17 COMMISSIONER SOMMERS: Now I'm going to 

 18 turn it over to Jackie. 

 19 MS. MESA: Thank you, Commissioner 

 20 Sommers, for allowing me to present some of the 

 21 issues that are on the Office of International 

 22 Affairs plate, and I can't take entire credit, I 

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 1 think the entire Commission is working on a few of 

 2 these issues that I'm going to talk about today. 

 3 I wanted to provide updates in three 

 4 areas. First, studies that other countries or 

 5 international organizations have done or are doing 

 6 regarding rapid increases in prices and 

 7 commodities in futures markets including some 

 8 studies in speculation. I'll also briefly discuss 

 9 the CFTC's recent amendments to two foreign board 

 10 of trade no-action letters for direct access, 

 11 although I think most of you probably could recite 

 12 back to me what I'm going to tell you in a few 

 13 moments. Then finally, many of the bills proposed 

 14 in the U.S. Congress deal with foreign boards of 

 15 trade and so I wanted to broadly summarize those 

 16 bills into general categories without going into 

 17 specifics, and I'll do that at the end. 

 18 As you know because so many of you 

 19 around the table have testified, or at least a few 

 20 or you repeatedly, Congress and others are 

 21 concerned that the run-up in commodity prices 

 22 might be caused in part by what is characterized 

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 1 now as excessive speculation. A number of foreign 

 2 countries are doing work in this area and we try 

 3 to monitor these developments from my office and 

 4 cooperate or coordinate with the foreign 

 5 authorities or international organizations were 

 6 appropriate. So I'm going to through a few of 

 7 these organizations and what they're doing. 

 8 In June, the G-8 finance ministers 

 9 released a statement requesting national 

 10 authorities to examine the functioning of 

 11 commodity futures markets and take appropriate 

 12 measures. The G-8 also calls on the IMF to work 

 13 with national authorities to analyze real and 

 14 financial factors behind the increase in oil and 

 15 other commodities. They also require the IMF to 

 16 deliver a report to the G-8 finance ministers. So 

 17 consistent with the G-8 calls for national 

 18 authorities to work with the IMF, we recently met 

 19 with the Fund to discuss their ongoing work. They 

 20 typically always put out two reports a year every 

 21 6 months, the Global Financial Stability Report, 

 22 and the World Economic Outlook. Both of these 

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 1 always touch on commodities in some way, but 

 2 they've told us that the reports will largely 

 3 focus on the commodity price increases and deal 

 4 with speculation and their studies regarding if 

 5 speculation is a factor. These reports will be 

 6 out for the public in October and we are going to 

 7 try to work with the IMF as much as possible as 

 8 they develop these reports. 

 9 The European Commission is also 

 10 preparing a paper which will be out in December. 

 11 They also are going to publish an interim report 

 12 in mid-September on recent market developments in 

 13 oil and food including the possible role of 

 14 financial speculation in the increases, and we're 

 15 communicating of course with the European 

 16 Commission as they start this study. A country 

 17 that's already one a report which I find really 

 18 interesting is India, because some of you know 

 19 they banned trading in four food commodities 

 20 including wheat a rice. So the parliament 

 21 commissioned a body to study what was going on 

 22 with the high increases of these four food prices 

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 1 and whether it was speculation. There was a 

 2 report on April 30 by the SEN Committee, and they 

 3 found that futures trading had no impact on these 

 4 commodities, but the report did not actually 

 5 recommend a lifting of the ban. In fact, as of 

 6 today a ban still exists in India on these four 

 7 food commodities. The Japanese Ministry of 

 8 Economy and Trade and Industry also issued a paper 

 9 in 2007. The difference here is that they did 

 10 look at the price of oil specifically. They 

 11 looked at it when it was $90 a barrel. They found 

 12 in their report that $30 was due to speculation or 

 13 something other than supply and demand. We met 

 14 with METI, the group that put this out, and asked 

 15 for the data to back that up. We don't have it, 

 16 but we'll keep asking them for that. 

 17 In June the U.K. Treasury released a 

 18 report analyzing the trends and drivers in 

 19 commodity markets that have led to recent price 

 20 increases. That's a good report. I don't think 

 21 it specifically addresses speculation but focuses 

 22 a lot on supply-and-demand factors and why we are 

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 1 where we are today. I thought you'd find it 

 2 interesting too that the U.S. agencies aren't the 

 3 only ones being called to testify. Just this 

 4 morning the UKFSA testified before the House of 

 5 Commons on regulation of the U.K. Energy markets 

 6 and I think ICE also participated in that. 

 7 MR. SPRECHER: We received the 

 8 invitation. 

 9 MS. MESA: You received the invitation? 

 10 So we're starting to get reports on what went on 

 11 this morning. 

 12 Now I'd like to turn to recent 

 13 amendments on our foreign screen no-action 

 14 process. By way of background, as Acting Chairman 

 15 Lukken also mentioned and Commissioner Sommers, 

 16 we've had since 1996 a foreign exchange direct 

 17 access staff no action in process in place that's 

 18 worked very well. Eighteen foreign markets have 

 19 received permission to provide direct access to 

 20 U.S. customers through this process based on a 

 21 review of the foreign board of trade and the home 

 22 regulator and conditioned on certain things like 

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 1 books and records and information sharing. We 

 2 again examined this policy and process in 2006 

 3 when ICE Futures Europe listed the West Texas 

 4 intermediate crude contract that settled off the 

 5 NYMEX settlement prices for the WTI, what our 

 6 surveillance staff calls creating effectively one 

 7 market. That listing was unique from a regulatory 

 8 point of view because it was the first listing of 

 9 a foreign board of trade contract that settled off 

 10 an existing U.S. exchange contract. After a 

 11 public hearing and a public comment period, the 

 12 Commission issued a policy statement reaffirming 

 13 the foreign board of trade no-action process. But 

 14 our staff see an issue regarding the one market 

 15 and it was really that the U.S. regulators were 

 16 not able to observe the entirety of one trader's 

 17 position on both markets. Pursuant to that 

 18 concern, the CFTC entered into an 

 19 information-sharing arrangement with the UKFSA to 

 20 receive large trader data, and in late May of this 

 21 year we announced that we were enhancing that 

 22 arrangement, and I'll just go through the steps of 

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 1 where we are enhancing that. 

 2 We were getting large trader reports but 

 3 on a weekly basis, and in the settlement -- daily 

 4 large trader reports. Now we get them daily 

 5 instead of weekly and expansion of the trader 

 6 information to all months out instead of the two 

 7 nearby months. In some cases we weren't getting 

 8 the end user of each large trader and now we will. 

 9 Also we're improving the formatting of how that 

 10 information is coming in. The way it's going to 

 11 come in now is it will be seamlessly integrated 

 12 into our surveillance system just like our own 

 13 large trader data. And we will integrate that 

 14 data that we're receiving into our commitments of 

 15 trader report. 

 16 A second enhancement and condition of 

 17 the no action that we made a couple weeks later is 

 18 in June we amended the no-action letter to include 

 19 adoption of equivalent U.S. position and 

 20 accountability levels on the WTI crude oil 

 21 contract and on other similarly linked contracts. 

 22 We are allowing the foreign board of trade to 

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 1 adopt similar hedge exemption requirements and 

 2 they are going to report violations to the 

 3 Commission when an exemption or a spec limit is 

 4 violated and ICE Futures has 120 days to comply 

 5 with those provisions. We put the exact same 

 6 similar conditions on the Dubai Mercantile 

 7 Exchange and issued that letter on July 7. The 

 8 Commission has announced that Commission staff 

 9 will apply these new conditions to any future 

 10 request for direct access where the contract 

 11 listed on the foreign exchange is cash settled 

 12 against those listed against those listed on the 

 13 U.S. Exchange. 

 14 Finally I want to turn briefly to 

 15 discussion of various bills that are out there 

 16 pending in Congress that could impact the CFTC's 

 17 international program. Commissioner Chilton, you 

 18 said there are about 20 bills, there are actually 

 19 more than that, and only 26 deal with 

 20 international. So there's even more than that 

 21 that deal with the CFTC. It's just amazing to 

 22 keep track of, and as of today I should add that 

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 1 -- increase that number. But instead of boring 

 2 you and discussing each one, I'm just going to 

 3 bulk them into general categories. A lot of them 

 4 generally codify what I just went through on how 

 5 we conditioned the DME and Ice Future's no-action 

 6 letter. There are some core differences. Many of 

 7 the bills or most of the bills say that this 

 8 should apply to contracts that are physically 

 9 delivered in the United States. So if a foreign 

 10 board of trade is trading a contract that 

 11 physically delivers in the U.S., then these 

 12 conditions should apply. Some of them further 

 13 qualify that and say on energy contracts that 

 14 physically deliver in the U.S., then the CFTC 

 15 should condition these no actions. Lieberman has 

 16 I think maybe one of the bills out there that 

 17 actually deals with linkage by settlement price, 

 18 but otherwise I think most of them talk about 

 19 physical delivery. 

 20 There are also a number of bills that 

 21 amend Section 4 of the Commodity Exchange Act to 

 22 extend the Commission's authority over U.S. 

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 1 persons trading on a foreign board of trade. They 

 2 require the U.S. person to limit or reduce or 

 3 liquidate any position or apply recordkeeping 

 4 requirements to individuals trading on foreign 

 5 boards of trade as the CFTC deems necessary. So 

 6 it really goes less to the foreign board of trade 

 7 and more to the U.S. persons trading on the 

 8 foreign board of trade. 

 9 Finally, and I'm going to go to the 

 10 other extreme, some bills require full 

 11 registration of a foreign board of trade that has 

 12 an affiliate in the U.S. It's interesting too 

 13 because there's one bills that goes into a lot of 

 14 different ors, so if you have an affiliate you 

 15 have to register, if you trade a commodity 

 16 physically settled in the U.S. you have to 

 17 register, or if you trade a significant price 

 18 discovery contract, it doesn't like it to anything 

 19 in the U.S., just if there's a significant price 

 20 discovery contract you have to register. Another 

 21 bill puts all these together and says if the 

 22 foreign board of trade has an affiliate or trading 

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 1 infrastructure, an undefined term, or trading 

 2 infrastructure in the U.S., the foreign board of 

 3 trade trades energy commodities that perform a 

 4 price discovery function, then you have to 

 5 register as a DCM. So that gives the unique bills 

 6 that are out there in broad categories. We're 

 7 busy, but so is the rest of the Commission. While 

 8 the CFTC has no formal position on any of the 

 9 legislation, we have been working with Congress 

 10 and relevant staff when asked to provide technical 

 11 assistance on some of these bills. This concludes 

 12 the broad update and I'm happy to answer any 

 13 questions and turn it back over to you. 

 14 COMMISSIONER SOMMERS: Thank you. Does 

 15 anybody have any questions for Jackie on her 

 16 international initiatives or dialogue in the 

 17 international areas? 

 18 MR. VINCENT: Jackie, one question if 

 19 you could share with us, in your conversations 

 20 with the FSA about information sharing. I 

 21 understand that you reached an agreement, but was 

 22 there any resistance by the FSA in terms of the 

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 1 level of information sharing and the imposition of 

 2 position and accountability levels? And do you 

 3 anticipate those issues in the future if requests 

 4 are made for further information? 

 5 MS. MESA: It's interesting how this is 

 6 getting spun a little bit in the press. As you 

 7 know or may not know, the FSA has something called 

 8 the Balls amendment which allows the UKFSA to veto 

 9 a rule on one of their exchanges if it imposes a 

 10 burden on the exchange that is excessive or more 

 11 than what the FSA would normally impose. So they 

 12 have said in response to what we have done that 

 13 they haven't seen the rule that has to be placed 

 14 on the exchange in order to do the speculative 

 15 limits and until they see that rule, they reserve 

 16 the right to apply the Balls amendment and to look 

 17 at this closer and decide if it's excessive. So 

 18 that's a fact and that's what they've stated to 

 19 the press. We of course have been in discussions 

 20 with them on information sharing and on the 

 21 speculative limits. There has been a lot of back 

 22 and forth. In fact, I talk to the FSA almost 

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 1 daily. It's pretty interesting what's been 

 2 happening. We always talked about weekly, but now 

 3 it's daily. On the information sharing, 

 4 absolutely no resistance. I think they recognize 

 5 the world we're in and why it's necessary to be as 

 6 transparent as possible. 

 7 On the speculative limits, it's not what 

 8 they do. They have a risk-based management 

 9 system. If they see something that's bigger for a 

 10 normal size of a trader then they'll inquire and 

 11 ask them to get down. We have in our foreign 

 12 board of trade no-action process found their 

 13 system comparable so we already earlier judged 

 14 that what they did at the FSA was comparable. But 

 15 in this situation they recognize that these linked 

 16 contracts are unique and in this limited situation 

 17 they understand that there was concerns that 

 18 traders may be going to ICE Futures Europe to 

 19 exceed what we weren't allowing them to do in the 

 20 U.S. and with ICE Futures Europe and UKFSA all 

 21 understood that this was going to be a condition 

 22 of the CFTC's no action. But it wasn't as if this 

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 1 was a negotiated agreement, this was a condition 

 2 that we put on the no action. I hope that answers 

 3 your question on where we are with them. 

 4 MR. VINCENT: Yes. Thanks. 

 5 COMMISSIONER SOMMERS: Are there any 

 6 other questions? I'll ask everybody if they can 

 7 identify themselves and the organization that 

 8 you're with before you ask a question so we can 

 9 get that on the record. 

 10 If there's nothing further, I think that 

 11 it's clear from Jackie's summary of these 

 12 legislate proposals that there may be implications 

 13 to these proposals for you, your business, and 

 14 certainly for this industry. I know that there 

 15 are a lot of people around the table who want to 

 16 engage in this discussion. I'll turn it over to 

 17 Craig Donohue with the CME Group. 

 18 MR. DONOHUE: Thank you, Jill. I would 

 19 just start by saying that I think the CFTC really 

 20 should be commended for the no-action process that 

 21 it has implemented and operated for Jackie I think 

 22 you said a dozen years now and it certainly has I 

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 1 think everyone would agree promoted tremendous 

 2 growth in the marketplace. It has helped 

 3 globalize all of our activity, expanded investor 

 4 choice, and I think generally worked very, very 

 5 well. And I think it's worth pointing out as well 

 6 that when we talk about enhancing our competitive 

 7 position in the global marketplace and the regime 

 8 that we have on the futures side of the market in 

 9 the U.S. that it compares very favorably to what 

 10 exists on the securities market side, so there's 

 11 no doubt that this has worked incredibly well for 

 12 us as an industry. And while I respect the 

 13 changes that have been made in the no-action 

 14 process, I think it has gone probably as far as it 

 15 should. In terms of the legislation, it's 

 16 difficult to comment on the various bills that 

 17 you've talked about but I think for the most part 

 18 they're all lacking in effectiveness in different 

 19 ways and it's probably not possible to get into 

 20 the details of why that will likely not be 

 21 effective from a legislative perspective. But I 

 22 think it's important to preserve the flexibility 

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 1 of the CFTC to do the kinds of things that were 

 2 done here which I do think are effective, but 

 3 don't throw the baby out with the bath water. 

 4 As you can imagine, we operate ourselves 

 5 in more than 85 countries and we think that what's 

 6 been done, again it's a double-edged sword. It 

 7 opens up access to this market but at the same 

 8 time it also provides a level playing field for 

 9 large enterprises like CME Group to do business on 

 10 a global basis in a way that we can live with the 

 11 existing regulatory structure that we have in the 

 12 United States. 

 13 We ourselves have listed foreign 

 14 contracts with foreign delivery points in the 

 15 past, in the soybean market for example with 

 16 delivery points in Brazil, and as we continue to 

 17 globalize our own business by partnering with 

 18 other exchanges around the world including most 

 19 recently again Brazil, we anticipate developing 

 20 more products with foreign delivery points that do 

 21 serve a price discovery function. So at least 

 22 from CME Group's perspective we would hope that 

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 1 what's been done is as far as it will go. I think 

 2 that it's not helpful to have legislation that 

 3 encumbers the good decision making of the CFTC and 

 4 I think that the ability to do what you've done on 

 5 a collaborative or a cooperative basis versus 

 6 imposing your will on foreign regulators or 

 7 foreign boards of trade that are doing business 

 8 here not only will put us all at a competitive 

 9 disadvantage and likely limit our growth 

 10 opportunities, but I think will also result in 

 11 similar practices being adopted over the course of 

 12 time that make it much more difficult for us to 

 13 navigate the global regulatory environment. 

 14 COMMISSIONER SOMMERS: Thanks, Craig. 

 15 Art, I know you have been involved in this process 

 16 with this Commission probably since we started 

 17 issuing these no- action letters so I'd like to 

 18 hear your views. 

 19 MR. HAHN: I indeed was. I remember 

 20 walking on the beach with Andrea Cochran at Boca 

 21 one year and saying why is a screen different than 

 22 a telephone call to put in an order and she held 

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 1 fast and said somehow it was different. I think 

 2 the history probably is relevant a little bit here 

 3 and what I would commend to everybody when they 

 4 begin working on this subject matter is go look at 

 5 the Commission's release in November 2006 after 

 6 the last round of roundtables on the no-action 

 7 process. The Commission pulled together a 

 8 wonderful history of it and why the decisions were 

 9 taken and how we got to where we are today. It 

 10 has not been a straight line, it's been a 

 11 complicated process, and it's worth in the middle 

 12 of the storm going back and understanding how we 

 13 got here. 

 14 As Craig says and as Walt has said, the 

 15 hallmark of the Commission has been to solve the 

 16 problem of globalization and the way you do that 

 17 is this magic word comparability. You make a 

 18 judgment that the foreign regulatory regime is 

 19 comparable, that it fulfills the same goals as the 

 20 Commission's goals. If you try to be exact, you 

 21 cannot be global and that will hurt U.S. industry 

 22 here, it will deny access by U.S. market 

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 1 participants to foreign markets, because simply 

 2 stated, just as we in the United States and at the 

 3 Commission and at the SEC would not stand for some 

 4 foreign regulatory coming in and saying here's 

 5 what your rules are, foreign regulators are of 

 6 like mind and know to a certainty that they are 

 7 watching what is happening now. 

 8 Jackie mentioned the Balls clause. That 

 9 was a blatant statement, we in Europe are worried 

 10 about in that case it was the export of 

 11 Sarbanes-Oxley. We don't want our public 

 12 companies to have to live in the Sarbanes world 

 13 and NASDAQ might buy the London Stock Exchange, we 

 14 don't want U.S. exported here and we'll stop it. 

 15 We'll close it down. Close to my home in the NYSE 

 16 Euronext world, when that merger was being 

 17 negotiated, the European regulators were 

 18 extraordinarily sensitive about the export of U.S. 

 19 and the impact not only in European exchanges but 

 20 members of European exchanges. 

 21 So what kind of burdens are we going to 

 22 put on them? Larger trading reporting and other 

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 1 kinds of restrictions. I see Peter nodding his 

 2 head. He knows how the Germans would react to 

 3 that. I think if America is to have its 

 4 institutions access the rest of the world, we 

 5 cannot get caught up in a herd mentality that puts 

 6 up a wall. It's going to hurt U.S. companies. It 

 7 will hurt U.S. consumers who won't have access to 

 8 these markets. We do live in a global economy and 

 9 we have to be sensitive to it. 

 10 A final comment is that I think the 

 11 no-action process is an extraordinary one. I 

 12 don't know if we really conceived of it when it 

 13 all started, but it has today shown the 

 14 flexibility to deal with the energy issue as Ben 

 15 articulated here. I think we're going to come in 

 16 to challenges in the future. I lived again 

 17 through the process when the Commission tried to 

 18 do rule making in this space. It was Chairman 

 19 Born's regime. There was a strong to push to make 

 20 rule making and they suspended no action. It 

 21 didn't work well at that time. Rule making tends 

 22 to be hard and fast. It lets my crowd the lawyers 

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 1 get at it in a way to go and find a way to get 

 2 around it. It teases out some hard, inflexible 

 3 positions. What I would counsel us as we go 

 4 forward here is do exactly what we have been doing 

 5 which is pay very good attention to the no-action 

 6 regime. Turn that screw tighter is good judgment 

 7 dictates that that be done. Loosen it if you need 

 8 to. You've got a wonderful, flexible machine that 

 9 can deal with the challenges of globalization and 

 10 technology and everything the markets can invent. 

 11 If you hard wire it you will lose that flexibility 

 12 and I would caution against that either at a 

 13 legislative level on the Hill or, candidly, by 

 14 rule making a Commission level. So those are some 

 15 thoughts. 

 16 COMMISSIONER SOMMERS: Thanks, Art. I 

 17 know this has certainly been something that has 

 18 hit close to home for you, Jeff. I was wondering 

 19 if you'd share some of your thoughts. 

 20 MR. SPRECHER: Where do I start? 

 21 Generally speaking we think that the no-action 

 22 process is the right process to deal with these 

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 1 issues and I think we might want to consider 

 2 renaming that process because it isn't no action. 

 3 Right? It is a flexible action. The reason that 

 4 we think it's the right process is that none of 

 5 this can work unless regulators work together and 

 6 unless all of you have a dialogue and not just 

 7 information sharing but a policy-making sharing 

 8 relationship with your global peers and then the 

 9 industry will not globalize. We actually have a 

 10 very good working relationship with this 

 11 Commission and with the staff and we've watched 

 12 the no-action process change with respect to our 

 13 business as it's changed and at the end of the day 

 14 it's the best process that we can think of that's 

 15 out there. 

 16 We are not advocating any of the 

 17 legislation on the Hill right now because a lot of 

 18 it is simply just trying to codify what you 

 19 already have done here as a Commission, and you 

 20 feel you need that, that's great and we would be 

 21 supportive of it. I guess our view as being a 

 22 regulated entity is we haven't seen that you've 

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 1 needed it. You've obviously been able to adapt 

 2 and take action as our business has changed. But 

 3 if you did say you need it or if you are 

 4 advocating for more personnel, more systems and 

 5 what have you, certainly we would be an advocate 

 6 for you on the Hill on those because we do think 

 7 the process works. 

 8 Commenting a little bit on Jacqueline's 

 9 opening statement, we did have a hearing today 

 10 with the Treasury in the U.K. One of the side 

 11 comments that was made up there is this a reverse 

 12 Boston Tea Party where we're having regulation 

 13 without reputation? So there is a view in the 

 14 U.K. that this should be a two-way dialogue and 

 15 they are not necessarily getting that from Capitol 

 16 Hill. I know they do get it from the Commission. 

 17 So it increasingly is why we think that this is 

 18 the right venue for that kind of global discussion 

 19 and debate. 

 20 On the Balls Amendment which Art 

 21 correctly mentioned was adopted in the U.K. to 

 22 spread the Sarbanes- Oxley, part of why we think 

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 1 that this no-action process will work is that in 

 2 order for ICE Futures Europe to put on position 

 3 limits, accountability limits, information 

 4 dissemination, we have to adopt exchange rules and 

 5 in order to adopt an exchange rule we have to have 

 6 the oversight of the FSA and the FSA technically 

 7 could theoretically block the adopt of our rules 

 8 even if we as an exchange wanted to take such a 

 9 rule because they're held to their own regulatory 

 10 standard that the markets that they operate must 

 11 be free and fair and it's incumbent on us how to 

 12 demonstrate that these actions that you're taking 

 13 in the no-action process keep the markets free and 

 14 fair, and we do believe that that is the case. 

 15 We've messaged that to not just the FSA but many 

 16 people in government in Europe that we think that 

 17 on balance these are the right things to do and 

 18 that it will continue to protect the markets and 

 19 they'll flourish. 

 20 So the balance of you all as a 

 21 Commission here is as you're promulgating rules, 

 22 other regulators have to come to believe that what 

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 1 you're doing helps the integrity of markets, and 

 2 while we at the exchanges can help to be a 

 3 messenger in that regard, ultimately it's going to 

 4 be your common dialogue, goodwill, and 

 5 interoperability globally that will actually allow 

 6 the no-action process to continue and I'm sure 

 7 will continue to evolve as the business evolves. 

 8 COMMISSIONER SOMMERS: Thanks, Jeff. 

 9 Ken, I know that the FIA has some views regarding 

 10 some of the legislative proposals that are out 

 11 there. If you could share with us -- 

 12 MR. FORD: We agree with all our 

 13 exchange partners. I think, and it sounds like we 

 14 are pretty much in agreement with a lot of what's 

 15 been said here, we are happy to codify what the 

 16 relationship has been between the CFTC and the FSA 

 17 in regards to ICE Europe. We think that works 

 18 real well. It gives the clarity I think that the 

 19 market needs. But I think our concern is and I 

 20 think Commissioner Chilton alluded to this, you 

 21 got to be really careful how to put the language 

 22 in the legislation to make sure that there are not 

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 1 unintended consequences because we've looked at a 

 2 lot of the different bills that are out there and 

 3 I think Craig said that you don't want to throw 

 4 the baby out with the bathwater. There are a lot 

 5 of things in there that could have a lot of 

 6 untended consequences where you may force of the 

 7 USFCMs to move their business to their foreign 

 8 FCMs which obviously is counter to what the CFTC 

 9 and the U.S. is looking for in terms of clarity. 

 10 So I think we can support a lot of this, but again 

 11 it comes down to exactly what the language is that 

 12 is used. We just have to be real careful, and 

 13 we're very happy again always to work with the 

 14 CFTC and everybody to help craft that language so 

 15 that it is very carefully done. I guess that 

 16 would be our point. 

 17 COMMISSIONER SOMMERS: Thanks, Ken. 

 18 Does the board member from the Dubai Mercantile 

 19 Exchange have a thought? 

 20 MR. NEWSOME: I do, but first I want to 

 21 say that I agree 100 percent with the viewpoints 

 22 of my soon to be new boss Craig Donohue. 

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 1 A number of us have been working on the 

 2 Hill for the last month or 5 weeks and I think 

 3 it's time to get past generalities and for us as a 

 4 group to really start drilling down and circling 

 5 around language that we think we can support. I 

 6 have become convinced over the last 2 weeks that 

 7 there's a 100-percent possibility that something 

 8 is going to be passed and we've got an opportunity 

 9 to try and shape what that becomes. All of you 

 10 know that there is language out there that we can 

 11 live with and then there's a lot of language out 

 12 there that we can't live with. Specifically, with 

 13 regard to foreign boards of trade, NYMEX supports 

 14 the no-action process unconditionally. It has 

 15 been a great process. It's the kind of 

 16 flexibility that's needed. Obviously there is no 

 17 one who could have more incentive to throw Jeff 

 18 under the bus than NYMEX. Hopefully Jeff will 

 19 agree with me that we have not done that. 

 20 MR. SPRECHER: Not for lack of trying. 

 21 (Laughter) 

 22 MR. NEWSOME: I don't want to have to 

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 1 throw you in the Greenberger category now. 

 2 Obviously we have supported the Commission's 

 3 conditioning of the no-action letter with the two 

 4 primary components. A lot of members of Congress 

 5 have wanted to go much further than that. We have 

 6 opposed that at every step of the way and will 

 7 continue to oppose that because we don't think 

 8 going further is good policy, and I think to take 

 9 the flexibility away from the Commission in 

 10 dealing with what can be very intricate, 

 11 complicated situations would be a huge mistake. 

 12 But I think in drilling down on the process a bit, 

 13 certainly I don't think anyone around this table 

 14 is concerned about the CFTC and the decisions that 

 15 the CFTC will make as we move forward because you 

 16 guys do understand this marketplace and you do 

 17 understand the real fear of unintended 

 18 consequences and damage to markets and moving 

 19 markets offshore. But again I think as an 

 20 industry we've got to get more specific. And I'll 

 21 just throw out there from our standpoint that we 

 22 love the Durbin language. There have been 

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 1 attempts in the House to use the Durbin language 

 2 as a core to other pieces of legislation. We 

 3 think that is the appropriate approach to take. 

 4 Senator Durbin codifies basically what the CFTC 

 5 has done. I think everyone around this room would 

 6 probably recognize that the most beneficial 

 7 component of most pieces of legislation is to 

 8 generate more resources for the CFTC. We all 

 9 recognize that that is sorely needed. But whether 

 10 it's Durbin or something close to Durbin, I would 

 11 simply encourage everyone to get engaged on it and 

 12 to start supporting some specific language because 

 13 the horse is out of the barn and he's running very 

 14 quickly and the more that we can all gather around 

 15 similar language I think the better off we're 

 16 going to be. 

 17 COMMISSIONER SOMMERS: Thank you, Jim. 

 18 Do any of my fellow Commissioners have questions? 

 19 CHAIRMAN LUKKEN: I talked quite a bit 

 20 with lawmakers about this issue, in particular 

 21 foreign boards of trade, and there is a lot of, as 

 22 Jeff said, it's unfortunate that it's called a 

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 1 no-action letter because I think there is 

 2 misunderstanding about the process in which we 

 3 engage here at the Commission to allow this type 

 4 of access. Certainly for many of you involved in 

 5 writing no- action letters to the agency and us 

 6 approving them, these are 40- to 50-page documents 

 7 where we go through analysis of regulatory 

 8 regimes, improving these, and what the exchanges 

 9 are doing and making sure that there are 

 10 comparable objectives. And certainly the 

 11 Commission sees every no-action letter that comes 

 12 through this agency and we have the ability as a 

 13 Commission to object to those no- action letters 

 14 that are occurring, so there is proper oversight. 

 15 I think the other point I would say 

 16 where there is a lot of misunderstanding is our 

 17 limitations in law about what we can do with 

 18 regard to foreign boards of trade. There are 

 19 prohibitions in our Act that limit how we can 

 20 recognize these foreign boards of trade and what 

 21 they can do and we've been subject to those 

 22 limitations over the last 10 years in trying to 

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 1 craft this no-action process. But often, and I'd 

 2 be interested in comments from people on this, 

 3 there seems to be a gut feel among some that these 

 4 some of these products are U.S. products, that 

 5 this crude oil product, maybe because it has West 

 6 Texas in its name, is a U.S. product and they cite 

 7 how much is traded where in regard to ICE Futures 

 8 and because it's a U.S. product and even though 

 9 it's cash settled, and I think actually a majority 

 10 of the traders are not located here in the United 

 11 States -- 

 12 MR. SPRECHER: And it's exacerbated by 

 13 this phenomena of algorithmic trading and they 

 14 will be wherever we are in our view wherever the 

 15 matching engine is. 

 16 CHAIRMAN LUKKEN: But there seems to be 

 17 a desire among congressional members to try to 

 18 define what is a U.S. Product and that to be a 

 19 trigger for legislation, and I'd just ask the 

 20 group whether this a futile exercise given the 

 21 current market environments. We have NYSC Life 

 22 with the possibility of listing products from 

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 1 anywhere. We have LIBOR contracts with 

 2 Eurodollars, we have foreign currency products 

 3 where anybody's foreign currency can be influenced 

 4 by what we're doing here in the United States. I 

 5 think the beauty of the no-action process it it's 

 6 a nimble process, but it also allows us to get the 

 7 information we need immediately and instead of 

 8 worrying about triggers we just go ahead and say 

 9 we want the information and we want these controls 

 10 in place and we can do it. 

 11 Should we care about what is a U.S. 

 12 product or not? Is this relevant to the debate? 

 13 Or should we just try to do what we've been doing 

 14 I think which is try to develop these no-action 

 15 letters. Maybe that's a loaded question. Do you 

 16 have any thoughts on how we might be able to -- 

 17 MR. DONAHUE: Walt, I'll just make a 

 18 brief comment which is I think it's a great 

 19 question. We have right now a concentration of 

 20 liquidity in certain kinds of instruments where I 

 21 think in the commodity, and maybe Jim and Jeff 

 22 would agree, on the energy market. People do tend 

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 1 to think in domestic terms because the delivery 

 2 point might be located in the U.S., but the 

 3 reality is that people are using these for global 

 4 hedging purposes with significant basis risk but 

 5 they're using it because the liquidity is 

 6 available say for example in the board of trade's 

 7 corner soybean contracts and so it's hard for us 

 8 in the business to think about it as a domestic 

 9 U.S. contract that we have a particular superior 

 10 interest in than people who are using that very 

 11 same product for hedging and risk-transfer 

 12 purposes even though their production and 

 13 exportation or their risks might be in Brazil or 

 14 between Brail and China for example on soybeans. 

 15 But I think there's a real gap in the political 

 16 realm how people think about these markets on the 

 17 commodity and energy sides versus how they're 

 18 willing to think about it in the financial 

 19 derivative side where I think they more easily 

 20 recognize that it's true that these are just sort 

 21 of global markets and global financial instruments 

 22 used by global customers for any range of purposes 

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 1 in the market and I think that's a huge education 

 2 effort that we have, but it isn't useful to think 

 3 about these things as just domestic products that 

 4 we have some kind of localized superior interest 

 5 in. 

 6 COMMISSIONER SOMMERS: Does anybody else 

 7 want to comment on that? Mike, do you have any 

 8 questions for the group? 

 9 COMMISSIONER DUNN: No. 

 10 COMMISSIONER SOMMERS: Bart, do you have 

 11 any questions? 

 12 COMMISSIONER CHILTON: No, thank you. 

 13 COMMISSIONER SOMMERS: If there are no 

 14 further comments on this subject matter, we'll 

 15 take about a 10- minute break and come back and 

 16 discuss the DMA issues. 

 17 (Recess) 

 18 COMMISSIONER SOMMERS: I'm going to go 

 19 ahead and get started with this portion of the 

 20 meeting dealing with the direct market access 

 21 issues and we're going to turn now to our Deputy 

 22 Director of International Affairs Robert Rosenfeld 

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 1 for an overview on the IOSCO efforts. 

 2 MR. ROSENFELD: During this segment I'd 

 3 like to review with you some of the issues that 

 4 we're studying within a project on direct 

 5 electronic access that has been initiated by the 

 6 Technical Committee of the International 

 7 Organization of Securities Commissions. I think 

 8 in highlighting these issues we'll help frame some 

 9 of your discussions this afternoon. 

 10 The scope of the project is addressing 

 11 the two basic models of electronic access, 

 12 intermediated access which is the automated order 

 13 routing system, and sponsored access which are 

 14 arrangements based on the intermediary's access 

 15 rights, and the nonintermediated access which is 

 16 simply access by exchange member who is neither an 

 17 intermediary nor a clearing member. It's known in 

 18 the United States as direct market access or DMA. 

 19 We've tried to look at the different access models 

 20 from a functional basis, there's a great diversity 

 21 of language internationally, but I think one 

 22 distinguishing characteristic is the direct market 

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 1 access which is outside the firm's infrastructure. 

 2 The actual status of the study is that 

 3 the information collection stages have been 

 4 completed and we're currently reviewing the 

 5 information and writing a report. The work 

 6 involves two separate technical committee working 

 7 groups, one on exchanges and the other on 

 8 intermediaries in which a colleague Warren 

 9 Gorelick from OIA participates. IOSCO works 

 10 slowly and it's a consensus organization and the 

 11 final report probably won't be issued until early 

 12 next year. 

 13 In the rest of my discussion I'd like to 

 14 highlight some of the issues that we've heard from 

 15 exchanges and intermediaries during the course of 

 16 this inquiry. The challenges of direct electronic 

 17 access really flow primarily from the potential 

 18 diminution of control by responsible 

 19 intermediaries when the orders go outside of their 

 20 order execution system. You have a diverse class 

 21 of geographically dispersed traders who can 

 22 electronically access the exchange and who can 

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 1 execute trades timed in milliseconds. Each of 

 2 those characteristics result in some regulatory 

 3 challenges. Some of those are any time you have 

 4 access to the exchange trading system outside of 

 5 the intermediary's control, that challenge is 

 6 their traditional risk management approaches. DEA 

 7 creates incentives for traders to gain execution 

 8 advantages based on the type and geographic 

 9 location of their connections raising concerns 

 10 with regard to equality of response time. It 

 11 facilitates access to markets beyond the 

 12 traditional class of regulated users which 

 13 introduces issues of rule compliance, monitoring 

 14 and the ability of the exchange to sanction 

 15 nonexchange members. It facilitates algorithmic 

 16 trading which raises issues of system capacity and 

 17 the potential need for rationing bandwidth. And 

 18 it raises the probability of and magnifies the 

 19 effect of potential system failure such as an 

 20 order stuck in the loop. I remember Mr. Sprecher 

 21 at the Chicago Expo last year warning that it's 

 22 only a matter of time before something like this 

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 1 blows up. 

 2 In the second bullet point I don't want 

 3 to imply that international regulators believe 

 4 that there is a major problem with respect to 

 5 differences in response time based on the type and 

 6 geographic location of their connectivity 

 7 arrangements. In fact, in the 1990 IOSCO 

 8 principles for the oversight of screen based 

 9 trading systems which was developed by a working 

 10 group headed by the CFTC, that issue was addressed 

 11 and it recognized that differences in response 

 12 time will be inherent in the means to connect to 

 13 an exchange. I guess that it would be the 

 14 difference between DSL and dialup internet. What 

 15 was decided in those principles was that 

 16 differences in response time was not inherently 

 17 unfair but was a matter of disclosure and equality 

 18 of access to those types of connections. 

 19 One of the major concerns of direct 

 20 market access has been on risk management. The 

 21 speed of execution narrows the timing in which 

 22 firms can carry out their traditional pretrade 

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 1 risk-management controls and this is particularly 

 2 a problem with direct market access outside of the 

 3 intermediary's system architecture or control. 

 4 Intermediaries have traditionally carried out a 

 5 gatekeeping risk management function, and during 

 6 the course of the IOSCO study firms have reported 

 7 however that they do not always receive system 

 8 tools or timely data to enable firms to implement 

 9 real-time pretrade risk-management controls. 

 10 During the period of the study we've seen the 

 11 major exchanges and clearinghouses make 

 12 significant system enhancements providing the 

 13 risk-management tools that I think respond to a 

 14 firm's concern such as providing real- time 

 15 monitoring of trades, building in various alerts 

 16 and stop functions and pretrade filters. I 

 17 believe you'll learn about these in the 

 18 presentations that are planned and I think they 

 19 illustrate what can fairly be called state-of- 

 20 the-art risk-management tools. 

 21 Other risk-management concerns that have 

 22 been raised during this study have been concern 

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 1 about the algorithmic traders who are seeking 

 2 millisecond reduction in execution times have 

 3 pressured firms and exchanges to trade without 

 4 preexecution filters. Interestingly, one exchange 

 5 that appeared before the group said that they were 

 6 under pressure from some algorithmic traders to 

 7 disconnect the pretrade filters not only out of a 

 8 concern for latency, but they were concerned that 

 9 the carrying broker would back engineer the 

 10 trader's trading strategies and potentially trade 

 11 against them. So I guess it's tough being a firm 

 12 when one of our best clients doesn't trust you. 

 13 But it was very interesting to hear that this is a 

 14 very real concern that has been confronted. 

 15 When you have regulators look at a 

 16 problems -- we're going to identify issues and 

 17 there has certainly been a great deal of 

 18 discussion on the risk-management implications of 

 19 DMA and there's been an emphasis on the 

 20 availability of pretrade system tools. There's 

 21 always a danger when you focus on the risks that 

 22 it becomes one- dimensional, but the exchanges and 

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 1 clearinghousing firms that we've been hearing from 

 2 have all pretty uniformly emphasized that risk 

 3 management should not be viewed as one-dimensional 

 4 and that the three legs of risk management, know 

 5 your customer, pretrade and posttrade controls, 

 6 can be applied appropriately in varying degrees 

 7 depending on the characteristics of the client and 

 8 they've cautioned that IOSCO should not endorse 

 9 any one-size-fits-all approaches to risk 

 10 management. Again regulators look at an issue, so 

 11 we're obviously identifying risk, but it's 

 12 important not to overlook the fact that direct 

 13 electronic access has brought some very real 

 14 benefits across the board. Clients get global 

 15 market access and best executions, firms can 

 16 provide better client service, and it facilitates 

 17 rule compliance from exchanges, it's obviously a 

 18 larger global base and it increases liquidity, 

 19 regulators and clearinghouses produce an accurate 

 20 audit trail, the enhanced liquidity fosters better 

 21 price transparency, and has resulted in 

 22 development of better risk-management tools. 

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 1 In conclusion, the IOSCO project I think 

 2 will provide transparency in identifying issues 

 3 and suggesting potential nonprescriptive 

 4 approaches. Again during the year and a half of 

 5 this study as it has gone on we have seen rapid 

 6 advances in technology that appear to address many 

 7 firm risk-management concerns. I know the CME and 

 8 Eurex in particular that I'm aware of have gone 

 9 through several iterations of risk-management 

 10 enhancement. 

 11 There is a continuing concern that has 

 12 been articulated regarding whether uniform 

 13 approaches should be mandated, for example, in the 

 14 use of filters, but in the end IOSCO recognizes 

 15 that it is up to the local regulatory authorities 

 16 to craft the specific regulatory response, and in 

 17 this regard, your discussions today will help in 

 18 that regard. Thank you. 

 19 COMMISSIONER SOMMERS: Does anybody have 

 20 any questions for Robert on the IOSCO project? If 

 21 not, we'll move forward to Ananda Radhakrishnan 

 22 who is our Director of Clearing and Intermediary 

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 1 Oversight to talk about the risks that may be 

 2 associated with direct market access. 

 3 MR. RADHAKRISHNAN: Thank you, 

 4 Commissioner Sommers. What I'd like to talk about 

 5 in the next few minutes is to highlight some of 

 6 the concerns that I have and the division that I 

 7 work with has with respect to direct market 

 8 access. I'm glad that I can do this in this 

 9 context because we have sitting around this table 

 10 representatives from market participants, people 

 11 who are traders, people who are the 

 12 intermediaries, and the exchanges and the 

 13 clearinghouses. So I'm suggest to you my view of 

 14 what's happening out there and I'm wrong, you 

 15 should tell me that I'm wrong, but if I'm right, I 

 16 would like to know why it is that I'm right, and 

 17 I'll explain what I mean by that. 

 18 I first got to know about the problems 

 19 surrounding direct market access 2 years ago. The 

 20 FIA had a conference call update and there was a 

 21 panel called Challenges in Direct Market Access. 

 22 The one issue that seemed to concern me was that 

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 1 it appeared that the intermediaries who were 

 2 clearing for the traders had no ability to do 

 3 preexecution risk management. Everybody was 

 4 alarmed at this, but it seemed to me very strange 

 5 for any intermediary to accept the fact that you 

 6 could guarantee a transaction for somebody and not 

 7 do risk management before the trade is executed. 

 8 It just doesn't compute to me because nobody is 

 9 putting a gun to your head to take that customer 

 10 on, so I didn't understand it then. As I 

 11 investigated it further, what I found is or what 

 12 I've been told us that the exchanges are going 

 13 directly to the traders to say, You know what, we 

 14 have a better way of trading, I'll give you direct 

 15 access. And the exchanges and the traders or the 

 16 traders themselves are going to the firms and 

 17 saying, I want direct access because this exchange 

 18 is promising me all these wonderful things. So 

 19 again I'm given to understand that the firms are 

 20 saying that they have no choice but to accept 

 21 this. I don't understand that. You do have a 

 22 choice because it seems to me unless I'm wrong 

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 1 that before a customer can get direct access, 

 2 there has to be an agreement among the customer, 

 3 the exchange, and the trader that somebody will 

 4 get direct access. So providing an explanation 

 5 that you have no choice but to grade direct access 

 6 doesn't make a lot of sense to me, but as I said, 

 7 I could be wrong. 

 8 I think what's happening is as Robert 

 9 has pointed out, people want to trade very fast, 

 10 in milliseconds. I didn't know that a human being 

 11 can process something in milliseconds, but I guess 

 12 I didn't account for algorithmic trading where 

 13 human beings are not involved in trading decisions 

 14 but, rather, some sort of computer program sends 

 15 trades to matching engine. So it seems to me that 

 16 there are three groups of people who have 

 17 responsibilities to do risk management. One is 

 18 the traders themselves because it appears to me 

 19 that you need to understand what it is you're 

 20 doing. I hope you understand what it is you're 

 21 doing, but if you are not sure, then I'd ask you 

 22 to look into your organizations to make sure that 

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 1 you know what it is you're doing. And when I look 

 2 at you I'm not looking at you because I'm blaming 

 3 you, I'm just looking around. 

 4 Number two is the intermediary. Without 

 5 our permission, my understanding is direct access 

 6 doesn't happen, so if you cannot do preexecution 

 7 risk management and you think that is important, 

 8 why are you letting people get access through your 

 9 firm? 

 10 Number three is the exchanges or 

 11 clearinghouses. You have a role to play as well 

 12 because if as I've been told you are marketing 

 13 direct access to customers then you have a 

 14 responsibility to make sure that the customers 

 15 understand what it is they're doing, that your 

 16 intermediaries understand what is they're doing 

 17 and are exercising sound risk-management 

 18 practices, and you yourself do not abdicate your 

 19 responsibility. 

 20 In this respect, I will highlight a 

 21 white paper that the FIA did in 2007. Right at 

 22 the end I'll read something to you. It says, 

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 1 Ideally firms would like to have preexecution risk 

 2 controls on client accounts. When that is not 

 3 possible, the more real time the information a 

 4 firm receives from the exchange the better it will 

 5 be able to monitor and control risk. The question 

 6 I have is why isn't that ideal possible? I 

 7 realize the benefits of getting trade execution 

 8 information as soon as the trade is executed, but 

 9 the question I have is why isn't that ideal 

 10 possible. If somebody could explain it to me. 

 11 There are two other issues that I want 

 12 to talk about. So far the conversation has been 

 13 on direct access by customers. I also think that 

 14 the intermediaries need to understand what their 

 15 proprietary traders are doing as well because they 

 16 also have direct access. The presumption is that 

 17 since they're trading house money, there are 

 18 appropriate risk controls in place, but I would 

 19 urge all intermediaries to make sure that that is 

 20 so. The third element is electronic give-ups. 

 21 When I was told about electronic give-ups, I 

 22 didn't understand. I thought an electronic 

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 1 give-up was an oxymoron, but I guess it is not. 

 2 And the issue here is the firm that's being given 

 3 up to doesn't know what it's going to get until 

 4 after execution. So the question is who is doing 

 5 the risk management, who is exercising control? 

 6 Is it the executing firm? I've been told no. So 

 7 how can the firm that's being given up exercise 

 8 any sort of risk management if it doesn't know 

 9 what it's going to get? 

 10 Ladies and gentlemen, I don't think it 

 11 is our job to tell you how to do your jobs. It is 

 12 not the government's job I don't think to stop you 

 13 from losing money. However, there will be a point 

 14 in time, and I mentioned this at another occasion 

 15 where the amount of money that you lose will have 

 16 an impact on the market, will have an impact on 

 17 other firms, it will have an impact on possibly 

 18 the clearinghouse, there's where our concern is, 

 19 and I don't know where that line is for each firm 

 20 and that is the concern that I have. Thank you. 

 21 COMMISSIONER SOMMERS: Thank you, 

 22 Ananda. Does anybody have any questions or 

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 1 comments for Ananda? Kevin? 

 2 MR. DAVIS: Kevin Davis from MF Global. 

 3 Hi, Ananda. 

 4 MR. RADHAKRISHNAN: Hi. 

 5 MR. DAVIS: Speaking as someone who has 

 6 issues to deal with when it comes to direct market 

 7 access, I think the key issue is that if a firm 

 8 puts on premarket controls and in our case almost 

 9 every single trade that goes through does have 

 10 premarket controls, they are definitely at a 

 11 disadvantage or the client who goes through those 

 12 controls are definitely at a disadvantage to a 

 13 company that doesn't have those controls. And 

 14 because as you say you can't possibly know or be 

 15 certain what everybody's risk-control systems are, 

 16 what their structures are, how they're enforcing 

 17 their policies or not enforcing their policies, in 

 18 my view the only effective way to absolutely 

 19 guarantee that the market remains orderly is that 

 20 it should be mandatory that every direct market 

 21 access client has some form of pretrade control. 

 22 That way the playing field is leveled. 

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 1 Algorithmic traders as we all know trade in the 

 2 milliseconds and if an algorithmic is trading 

 3 without controls he has a slight advantage to the 

 4 guy who has been trading with controls. So the 

 5 only way to make that problem go away is to 

 6 mandate that everybody has pretrade risk controls. 

 7 You could put a time limit on it and say 1 second 

 8 or that everyone has to have a second of latency 

 9 in order to achieve that risk control. For me 

 10 that's the only way to absolutely assure that 

 11 there aren't problems of the type you just 

 12 suggested that could bring the whole market into 

 13 disrepute. 

 14 MS. DOWNS: May I just comment? If 

 15 you're going to say everybody, you mean globally 

 16 because you could not do this on any one market or 

 17 any once place. Customers trade on multiple 

 18 markets at the same time -- the differences 

 19 between those markets, you'd have to have a 

 20 defined latency across all markets globally, and 

 21 if everybody thinks that can happen, that would be 

 22 one thing, but you would have to make it a latency 

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 1 long enough that somebody can then make the 

 2 judgment call which is the other half of the 

 3 equation that that's acceptable. 

 4 MR. DAVIS: I would assume that first of 

 5 all you obviously would do it market by market and 

 6 it's clearly not possible for the CFTC to mandate 

 7 that -- for example would have to have such 

 8 controls on their systems, but they certainly can 

 9 insist that every U.S. market has some form of 

 10 control. It's not a human decision that needs to 

 11 take place. These deals can be done I'm sure at 

 12 your shop as are ours electronically so you're not 

 13 talking about the amount of time it takes for 

 14 somebody to sort of leap through a margin -- 

 15 you're talking about 1 second or 2 seconds or 

 16 1-1/2 seconds or whatever the appropriate amount 

 17 of time should be, but if everybody is on the same 

 18 page, you've solved the problem. The problem is 

 19 that when you have people on different pages some 

 20 with controls, some without controls, and that's 

 21 when the pressures build up. I understand what 

 22 Ananda says, absolutely you can say no, but we're 

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 1 not helped by exchanges going directly to our 

 2 customers, offering them DMA access or suggesting 

 3 DMA access to them. That makes our job that much 

 4 harder. But it doesn't have to be universal. 

 5 We're only concerned about U.S. markets here. 

 6 MS. DOWNS: I disagree. Our customers 

 7 don't trade -- we're members of 70 markets. We 

 8 have customers who go across all those 70 and to 

 9 do that they can't have a dislocation between the 

 10 pricing on the same commodity economically that's 

 11 occurring in Dubai as it is in the United States. 

 12 If there's that difference then those markets 

 13 don't perform the function of price discovery or 

 14 anything else so you couldn't do this -- because 

 15 of the linkages and the nature of the global 

 16 markets that we're in, you could not do this on 

 17 any one market or just in the United States and 

 18 make it work. 

 19 MR. DAVIS: We'll agree to disagree. 

 20 MS. TAYLOR: Actually, I think there's 

 21 another alternative to what Kevin is suggesting. 

 22 The approach that we've taken in building out 

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 1 centralized position-based credit controls which 

 2 will be coming out later this year or very early 

 3 next year in our system is to approach the problem 

 4 with latency as a constraint. So we are 

 5 approaching it with a no latency -- we challenged 

 6 our technology guys with a no latency outcome and 

 7 what they came up with is actually very creative. 

 8 It does not stop the current trade but it reduces 

 9 the size of the next trade and it stops the next 

 10 trade. So if anyone has a customer that they are 

 11 uncomfortable with one trade that they might make, 

 12 you probably don't want to give that customer 

 13 direct electronic access and we probably should 

 14 all be asking questions if you are, but in the 

 15 type of customer base that is typically given 

 16 direct electronic access, we feel that this is a 

 17 very good means for encouraging firms to be able 

 18 to use credit controls and basically the latency 

 19 is -- I suppose it's not fair to say it's no 

 20 latency because there is a point where every order 

 21 is checked to see if there's a credit control 

 22 applying to it. That's the only latency and every 

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 1 order is subjected to that whether or not there 

 2 actually is a credit limit put on that order or 

 3 not. So for the CME's markets, that addresses the 

 4 issue. It does not address the issue that Yvonne 

 5 is talking about in terms of if other people 

 6 approach the problem differently, markets could 

 7 still get out of line. 

 8 COMMISSIONER SOMMERS: Bill? 

 9 MR. BRODSKY: This is Bill Brodsky. I 

 10 usually the CFTC as an example of why the SEC 

 11 should be doing something more quickly or more 

 12 affirmatively, but it's interesting, for the last 

 13 12 months or so the SEC has allowed something like 

 14 this in our markets and they called it sponsored 

 15 users or sponsored access. And although I'd say 

 16 it's still in a pretty embryonic state, the day 

 17 it's dealt with on the securities side is that 

 18 there's an instant drop copy to the clearing firm 

 19 so they have the ability, albeit right after the 

 20 trade, but immediately after the trade, to run 

 21 that through their risk system and let the red 

 22 flags go off which I think probably deals with 

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 1 what Yvonne is talking about, and that is it's 

 2 very hard to inhibit something that could be 

 3 technologically dealt with in terms of the speed 

 4 that the computers are going to allow because the 

 5 users are demanding it, it's all about latency, 

 6 and it may be instructive to get some experience 

 7 or get the benefits of some of the work that's 

 8 been done on the securities side as to what the 

 9 experience has been. What it does not allow is 

 10 for customers who are from outside the U.S. to 

 11 have that kind of access at this point because, 

 12 again, even though it's not technically a pilot, 

 13 it's being kind of rolled out in a slow way and I 

 14 think it's more the issue that there is more 

 15 jurisdiction over customers in the U.S. than there 

 16 is from without. So I think that in your work as 

 17 you study this that it would be probably useful to 

 18 find out what's going on on the securities side. 

 19 COMMISSIONER SOMMERS: Thank you. With 

 20 that I think I'll turn to Kim for her presentation 

 21 from CME Clearinghouse. 

 22 MS. TAYLOR: Thank you, Commissioner. 

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 1 Thanks for giving us the opportunity to talk here 

 2 today. I want to talk briefly about a business 

 3 overview of DMA, and that's been talked about a 

 4 little bit here, so I will be quick there, CME's 

 5 risk-management philosophy, the risk management 

 6 that applies to DMAs in our markets, and then the 

 7 next steps that are coming. 

 8 As far as the DMA business profile, I 

 9 think the one thing that I can say about DMA 

 10 access is that I definitely think DMA is here to 

 11 stay. The type of trader that uses this has 

 12 become a very important type of trader in all of 

 13 our markets. I think that the use of this access 

 14 is facilitated for people who would be 

 15 high-frequency proprietary trading shops, look at 

 16 them as the new liquidity providers. They also I 

 17 think engage in arbitrage in ways that they 

 18 arbitrage markets where there are nonobvious 

 19 arbitrage opportunities to the rest of us because 

 20 they have very sophisticated models in order to do 

 21 that and I think that all of that activity 

 22 facilitates better price discovery, more efficient 

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 1 markets, and better liquidity for everyone who is 

 2 participating in the market. So I think it's not 

 3 only something that I'm not sure we could stop, 

 4 but I don't see why we would want to stop it as a 

 5 type of business. 

 6 I think that clearing members report 

 7 increasing demand for this type of activity. 

 8 There are some differences in risk management and 

 9 compliance perspective at clearing members that 

 10 make them vary in their willingness to facilitate 

 11 this type of business or the breadth of the 

 12 customer set for which they will facilitate this 

 13 business and personally I think that that is okay. 

 14 Risk management of customers is a clear member 

 15 business decision and always has been. I think it 

 16 needs to continue to be. I do think there's a 

 17 role for the central providers to provide some 

 18 improved risk-management monitoring features or 

 19 access to data, and I'll talk about that a little 

 20 bit later. 

 21 Our philosophy for account level risk 

 22 management, I guess I almost stated on the prior 

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 1 slide, the clear member is in the best position to 

 2 provide the risk management at the account level. 

 3 They know the customer, they know what the 

 4 customer is doing, and actually providing too 

 5 tight a set of preexecution credit controls that 

 6 apply narrowly to one market could actually 

 7 increase risk as opposed to decrease risk overall 

 8 because the Globex, our system, doesn't know what 

 9 the customer is doing in any other market and the 

 10 action we might be stopping might be actually a 

 11 risk-reducing action and that would be unwise for 

 12 us to stop. So the clearing member really is in 

 13 the best position to take the global look at the 

 14 customer's exposure and to manage that. And we do 

 15 require that clearing members acknowledge when 

 16 they give a DMA that they're on the hook for the 

 17 risk management and we do require that they 

 18 acknowledge that they either have the ability to 

 19 put pretrade risk controls or cut the customer's 

 20 access off or that they can ask for a waiver of 

 21 those requirements by explaining to us what kind 

 22 of posttrade risk management and customer up-front 

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 1 credit review they have in place. Actually that's 

 2 one of the things that Ananda talked about that I 

 3 would I think challenge a little bit, that risk 

 4 management of electronic access is not a 

 5 one-legged stool, it's a three-legged stool. You 

 6 need to know your customer, you need to have 

 7 appropriate pretrade risk controls to your 

 8 business and your knowledge of that customer, and 

 9 then you need to have an appropriate posttrade 

 10 risk management trading environment. And looking 

 11 at the clear member's mix of those three aspects 

 12 of risk management is something that we do when we 

 13 perform risk reviews with the clearing member and 

 14 also that the risk management that they're doing 

 15 is appropriate to the type and size of the 

 16 customer base that they're doing business with. 

 17 In terms of our philosophy on centrally 

 18 provided risk-management functionality, one of our 

 19 customers actually gave me I think what is the 

 20 best line about this that I've heard, to take 

 21 infinity risk off the table. We cam provide some 

 22 high-level protections many of which we provide 

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 1 now, many of which many markets provide now, and I 

 2 think there are refinements that are underway 

 3 coming from a number of different systems. But to 

 4 give you some examples, some of the tools that we 

 5 provide are real-time access to the trade 

 6 information, the price information, the 

 7 mark-to-market information, the position level 

 8 information, so that the clearing members will be 

 9 able to load that immediately into their posttrade 

 10 systems and be able to use it right away. We also 

 11 provide certain types of high-level protections 

 12 like fat-finger protections, maximum order size, 

 13 we have all the trade bust and trade adjust 

 14 policies to correct for very obvious error trades 

 15 that I think is well received by the marketplace. 

 16 We have some protections in case of connectivity 

 17 failure so that you don't get left in the market 

 18 with orders and you're not able to monitor if 

 19 they're being executed or not. And then I think 

 20 it is not inappropriate for a central provider to 

 21 provide high-level types of execution limits and 

 22 alerts about abnormal activity and certain 

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 1 monitoring tools. 

 2 In terms of the way that electronic 

 3 trading in general and probably DMA in particular 

 4 have impacted the clearing-level risk management 

 5 that we perform, everything has become much more 

 6 real time, but the beauty of electronic trading is 

 7 all of the data is also available much more real 

 8 time, so in many ways electronic trading has 

 9 improved I think the risk-management culture and 

 10 the industry very significantly. 

 11 Some of the things that we're focused on 

 12 more now than perhaps we were historically is 

 13 looking at separate thresholds of activity and 

 14 behavior for clearing members and actually some 

 15 large account-level thresholds as well for day 

 16 trading and P&L activity because with the high- 

 17 velocity trading there can be a lot of trading 

 18 activity relative to the level of trading activity 

 19 that we would have been accustomed to in the past. 

 20 We also have a very broad interpretation of risk 

 21 management I think at CME. We have a 

 22 risk-management unit within the clearinghouse 

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 1 division but our risk-management team across the 

 2 company includes certainly our market operations 

 3 folks in our Globex control center. They are the 

 4 know-your-customer leg of our risk-management 

 5 stool on an execution basis, they're very familiar 

 6 with what happens in the markets, and they're very 

 7 familiar with when activity is abnormal and they 

 8 can raise concerns and reach out to the customer 

 9 and reach out to our technology folks. I think 

 10 that the monitoring that our technology folks do 

 11 of the activity levels and the order activity 

 12 that's coming in on our systems and the latencies 

 13 that the system is experiencing is also a risk- 

 14 management function because when we find something 

 15 that seems odd, we escalate it and try and resolve 

 16 it with the customer. Then our market regulation 

 17 team as well performs as part of the 

 18 risk-management function. We also have increased 

 19 our focus on the way we look at the real-time 

 20 nature of clearing member risk management 

 21 particularly with respect to cases of the less 

 22 global clearing member base, certainly what they 

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 1 do in their overnight risk management. 

 2 Our risk-management policy, Ananda 

 3 alluded to some of this, does require that 

 4 clearing members have to authorize a DMA 

 5 connection so no customer gets access directly to 

 6 the system without the clearing member authorizing 

 7 that and signing off on the fact that they're 

 8 responsible for the risk management, that they're 

 9 responsible for the guarantee, and that they have 

 10 the proper controls in place either preexecution 

 11 or they can ask for a waiver in that regard and 

 12 use postexecution credit controls. 

 13 Some of the types of tools that we 

 14 provide either historically, recently, or in the 

 15 near term are listed here, are our Firmsoft and 

 16 Telestat functions, are adjuncts to the Globex 

 17 system that allow either the clearing member or in 

 18 the case of Telestat it also allows the customer 

 19 himself to monitor order execution activity, what 

 20 his position looks like, and to cancel orders. We 

 21 have real- time back-office confirms with the 

 22 ability for the clearing member to choose to drop 

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 1 more than one copy of those to another 

 2 risk-management location. Some drop their 

 3 overnight ones to Europe. We also let them drop 

 4 them directly to the customer if they chose to do 

 5 that, and that's all at the clearing member's 

 6 discretion. We've had real-time posting of 

 7 positions for 15 years, and online access to 

 8 clearing-level mark-to-market is also available. 

 9 Recent new functionality I'll talk about a little 

 10 bit more on the next couple of pages, cancel on 

 11 disconnect and drop copy, and then also the 

 12 near-term changes that are coming. 

 13 The cancel on disconnect, one of the 

 14 things that becomes very important when you're 

 15 doing high-velocity trading or when you're putting 

 16 a lot of orders out into the book is that you need 

 17 to know that you will be executed on things 

 18 without knowledge if you're disconnected and so 

 19 this feature is an opt-in feature. The clearing 

 20 members have to sign off on their customers opting 

 21 into it, and if the connection is lost then all 

 22 market orders are automatically cancelled so you 

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 1 won't get filled on something while you're having 

 2 a connectivity problem, the orders that are out 

 3 there that would tend to be customer-ordered desk 

 4 orders by clearing members more so than order 

 5 activity by the velocity trading community that 

 6 are good until cancelled or good for the day, good 

 7 until a certain date, those are left open in the 

 8 system, and that was launched in March 2008. 

 9 Drop copy, I guess we stole the name 

 10 from the securities side, this is our feature that 

 11 came out in May of this year that allows clearing 

 12 members or trading participants, a DMA connection 

 13 can get this directly or a clearing member can get 

 14 it for any of their activity, let's you get a 

 15 simultaneous copy of all orders that come into the 

 16 system. So you don't get just a copy of the 

 17 trades as they're executed, you get a copy of all 

 18 the order activity so that you could rebuild the 

 19 worst-case scenario in your own risk-management 

 20 systems and it is a simultaneous process so again 

 21 it doesn't inject any latency into the customer's 

 22 experience of using the markets, yet it improves 

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 1 the risk-management facility that the firm has in 

 2 place or the customer has in place. We've 

 3 actually had a number of trading firms, some have 

 4 gone live and some are testing, adding this as an 

 5 independent risk-management reconciliation of 

 6 their books within their own firms as well as 

 7 having clearing members use it. The credit 

 8 controls that I mentioned earlier are under 

 9 development. It allows real-time active 

 10 monitoring of the positions without an impact on 

 11 trading latency. The way that it does that is the 

 12 current order goes into the system, also a copy 

 13 goes off to the side and is evaluated against the 

 14 risk controls. If the customer approaches the 

 15 risk control that the clearing member has set for 

 16 the customer, I believe the default level is 80 

 17 percent, so if you're at 80 percent of your limit, 

 18 then your order quantity on our next order that 

 19 comes in will be limited, it will be reduced. So 

 20 as you approach your limit, the size of any next 

 21 order that comes in is reduced by the system so 

 22 you're less likely to have the next order take you 

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 1 over your limit in some extreme way. And it also 

 2 provides the ability for the clearing member to 

 3 get alerts because the most important thing 

 4 besides not having latency is also not having 

 5 false positives. You don't want to turn off 

 6 customer's access to the markets again primarily 

 7 because they might be trying to execute what is a 

 8 risk-reducing trade to their overall position and 

 9 you don't want to disadvantage them in that way, 

 10 so the system allows for clearing members to get 

 11 real- time notifications as customers approach 

 12 their limits so if the clearing member knows that 

 13 the customer is doing other activity in other 

 14 markets they can adjust the limit in order to keep 

 15 the customer trading and keep the risk management 

 16 intact as well. 

 17 One of the things that some people 

 18 didn't like about this that I actually think is 

 19 one of the beauties of it is that is fairly crude. 

 20 It is a single dollar limit for futures and 

 21 options that is based on kind of a margin basis. 

 22 So the products are evaluated on the risks that 

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 1 they pose in terms of margin, it's added up to a 

 2 dollar limit, so it's not a very fine-tuned, 

 3 precision risk management, but I don't think 

 4 that's the appropriate job for the central 

 5 infrastructure providers anyway, that's a job more 

 6 appropriately done by the clearing members who 

 7 have all of the information about what is going on 

 8 with the customer. 

 9 The position-based credit controls are 

 10 coming out in two phases. The clip size or the 

 11 order size limits will be available the third 

 12 quarter of this year. The maximum dollar exposure 

 13 controls are either going to be very late this 

 14 year, mostly likely early first quarter of 2009. 

 15 Then we have a third release planned that will 

 16 allow clearing members the ability to set what we 

 17 would call nonbinding alerts on any accounts. Our 

 18 expectation is that clearing members will use 

 19 probably both drop copy and the position- based 

 20 credit controls that are centrally provided 

 21 primarily for accounts that don't go through their 

 22 infrastructure. But the ability to set nonbinding 

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 1 alerts would also allow them to have something 

 2 that is a little bit of a backstop to their own 

 3 infrastructure and then set a limit that they 

 4 could get notified if the customer is approaching 

 5 it. 

 6 I would agree with some of what has been 

 7 said here about this being a cooperative effort. 

 8 Risk management in the industry is a cooperative 

 9 effort between the trading participants, the 

 10 intermediaries, and the central infrastructure 

 11 providers and I think that that is going to 

 12 continue, and we've worked a lot with particularly 

 13 the intermediary community on the functionality 

 14 that was important to them and workable for them 

 15 in the systems that we're putting out. 

 16 COMMISSIONER SOMMERS: Thanks, Kim. 

 17 Does anybody have any questions about the CME 

 18 system? 

 19 MR. DOWNEY: Kim, the CME Clearinghouse 

 20 doesn't take any financial responsibility for any 

 21 of the trading. Right? Still the onus is on the 

 22 clearing member whose fund protects the community? 

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 1 MS. TAYLOR: Each individual clearing 

 2 member is responsible for all the trades that 

 3 clear through them and the Clearinghouse would 

 4 only have financial responsibility directly if a 

 5 clearing member defaulted and then we would have 

 6 the financial responsibility. So we do guarantee 

 7 all the trades but that only kicks in if there 

 8 were a clearing member default. 

 9 MR. DOWNEY: So if your controls fail by 

 10 1,000 percent, it's unreasonable that it would, 

 11 but in the unlikely scenario, who is going to pay 

 12 all that margin for those trades that go back and 

 13 that firm that goes down? The members, right? 

 14 MS. TAYLOR: There are various tiers of 

 15 the default protections. The first tier is any 

 16 resources we have from the defaulting firm, the 

 17 tier is CME capital, and then the third tier 

 18 includes contributions from other surviving 

 19 clearing members. That's correct. 

 20 MR. DOWNEY: It just seems to me that a 

 21 small FCM with a little piece of the pie who is 

 22 going to get called on for a capital charge if 

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 1 somebody goes down would be interested in knowing 

 2 what Goldman's credit controls they've put on 

 3 their direct market access or Morgan Stanley's and 

 4 exactly what types of control they have over their 

 5 customer. I think it's a reasonable thing. These 

 6 milliseconds count. These people, if your systems 

 7 are not set up to provide for this quick access, 

 8 trust me, the difference between 4 milliseconds 

 9 and 5 milliseconds are a profit and the people who 

 10 are at 5 are not going to make the money and the 

 11 people who are at 4 will and there's a floor, 

 12 there's zero. Right? It's not going to be 

 13 reached, but the problem is that everybody is 

 14 stuck at the clearinghouse level. If the clearing 

 15 members want to provide their customers with this 

 16 access and they're going to take the credit, I 

 17 think it's great. But all the other clearing 

 18 members have to recognize that if something 

 19 happens at their one firm, everybody is on the 

 20 hook at the end of the day, and the rest of the 

 21 firms don't have control over one member's 

 22 decisions. 

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 1 MS. TAYLOR: I think in addition to any 

 2 kind of electronic preexecution credit controls, 

 3 the general risk- management monitoring function 

 4 that a clearinghouse provides has always addressed 

 5 the types of risks that you're talking about in 

 6 terms of one clearing member potentially being 

 7 exposed to the bad actions of another. It's part 

 8 of a clearing provider's role to help ensure that 

 9 clearing members have risk-management controls 

 10 that are appropriate to their business. 

 11 COMMISSIONER SOMMERS: Ananda? 

 12 MR. RADHAKRISHNAN: Kim, does your drop 

 13 copy functionality allow a clearing firm to stop 

 14 access? Because you're getting a simultaneous 

 15 look at what orders are coming in and if you're 

 16 not happy can you stop? 

 17 MS. TAYLOR: The clearing members 

 18 already have the ability to stop the access so 

 19 that it's not coming out with the drop copy that 

 20 they have. 

 21 COMMISSIONER SOMMERS: Does anybody else 

 22 have any questions for Kim? 

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 1 CHAIRMAN LUKKEN: Just a real quick 

 2 question. The opt-in provisions, why opt in 

 3 versus opt out? It seems inherent in the 

 4 interests of the Clearinghouse to want people to 

 5 -- you wouldn't have developed these tools if you 

 6 didn't think they were inherently helpful. 

 7 MS. TAYLOR: That is correct. The issue 

 8 with the drop copy is for many clearing members, 

 9 they probably have to do some work in order to be 

 10 able to use the order messages that would be 

 11 coming through and so it doesn't make sense to 

 12 overwhelm their capacity with a bunch of messages 

 13 that they have no use for. So I think it's very 

 14 likely that clearing members and trading member 

 15 firms will embrace drop copy over time for 

 16 activity that doesn't go through the clearing 

 17 member's infrastructure and they're unlikely to 

 18 want to get a drop copy of all the order activity 

 19 for the messages that do come through their 

 20 infrastructure and I think capacity is not 

 21 terribly expensive now, but it's not free either 

 22 and our assumption is that clearing members will 

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 1 want to focus and target their scrutiny to the 

 2 places where it matters. 

 3 MR. DAVIS: One problem I foresee, Kim, 

 4 is if some firms opt in to better risk control and 

 5 others don't, the ones that don't opt in have 

 6 better latency potentially so more and more 

 7 business is going to go to the firms with the 

 8 fewer risk controls or less risk control and in 

 9 the end it's going to have to become mandatory 

 10 that everybody has pretrade risk controls. We can 

 11 talk about -- global issues that you referred to, 

 12 we are also members of probably the same 70 as you 

 13 are. In the end the only way to properly control 

 14 this is to insist that everyone has pretrade risk 

 15 controls and you'll have to level out the playing 

 16 field. 

 17 MS. TAYLOR: You reminded me of one 

 18 feature that I forgot to mention and that is the 

 19 feature for the position-based credit controls we 

 20 also have the capacity for the Clearinghouse to 

 21 set a control over a particular account or over a 

 22 particular clearing member if the clearing member 

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 1 isn't using controls and we feel that it would be 

 2 warranted, so we have the ability to do that. The 

 3 other point I would stress is that we built this 

 4 to be no latency in the first place and every 

 5 order is subjected to the same check to see if 

 6 there's a credit control and that's the only 

 7 latency and I think they figure it's going to be 

 8 not even measurable. So we have accomplished I 

 9 think what you're talking about in terms of 

 10 leveling the playing field that way. We don't 

 11 really feel it's appropriate for us to mandate, I 

 12 think we would probably not be in favor of the 

 13 CFTC mandating either, that everybody had to put a 

 14 certain type of risk control over their customer 

 15 base because I really do think that it's more 

 16 appropriate to be a firm's decision. We're trying 

 17 to make it an easy decision for the firms to put 

 18 the credit controls on by making it indifferent in 

 19 terms of the latency that it creates. 

 20 COMMISSIONER SOMMERS: Ananda? 

 21 MR. RADHAKRISHNAN: Just for the record, 

 22 we know what Kim's position is on a mandate. Who 

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 1 would you like, Kevin, the mandate to come from? 

 2 The exchanges or the CFTC? 

 3 MR. DAVIS: I think given that the 

 4 exchanges, wonderful partners and tremendous 

 5 friends that they are, they are commercial 

 6 enterprises, I think in the end it's going to have 

 7 to come from the CFTC. And one other thing, 

 8 Ananda, you made a point about giving acceptance. 

 9 A lot of the rules and regulations that are 

 10 revolving around accepting give-ins actually 

 11 emanate from the old days when these were all 

 12 floor-based markets. There are some exchanges 

 13 present here today where the convention is that if 

 14 you have always accepted give-ins from an 

 15 executing broker for a clearing account of yours, 

 16 unless you give them 24 hours notice that you 

 17 won't accept give-ins, you're not allowed to not 

 18 accept that trade. So there's work that needs to 

 19 be done to look at that part of it because some of 

 20 these rules are really rooted in the past. 

 21 COMMISSIONER SOMMERS: Mike? 

 22 MR. DAWLEY: Just a couple comments. 

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 1 First of all, I agree with Kim. I think the CME's 

 2 approach is a good approach. I don't necessarily 

 3 agree with my good friend Kevin on some regulation 

 4 being put in place. This is a period of evolution 

 5 I feel and we need innovation in risk-management 

 6 techniques and unfortunate incidents like Kevin's 

 7 makes us all better at risk management. I also 

 8 commend Ananda for pressuring us to keep thinking 

 9 about this. This is a really important issue, but 

 10 pretrade risk controls I think is a real abused 

 11 term. We have to decide what is a pretrade check. 

 12 Is it something versus initial margin? Is it a 

 13 contract limit? There are all kinds of 

 14 definitions you could put on pretrade risk 

 15 controls. The bottom line is everybody is focused 

 16 on latency. So what pretrade risk control is 

 17 going to affect the speed to market? These are 

 18 the things we need to talk about. Putting in 

 19 regulation in or mandating that the entire 

 20 industry have some sort of pretrade risk control 

 21 is going to get way too complicated. Yvonne 

 22 pointed out how it's just really hard to do 

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 1 globally. So I think we should really promote and 

 2 work with our exchange partners, and I think a lot 

 3 of exchanges, the CME, Eurex, all the exchanges 

 4 here, have done a good job at getting us the data 

 5 we need to be able to innovate and create better 

 6 risk controls and I think we should just continue 

 7 down that path. 

 8 COMMISSIONER SOMMERS: Ken? 

 9 MR. FORD: I would just comment that the 

 10 FIA has been working on a study with the FOA and 

 11 all our major exchanges around this issue and 

 12 other issues as well around risk and it's been a 

 13 good partnership, and hopefully we'll have 

 14 something meaningful coming out of that, whether 

 15 it's best practices or something, or something 

 16 meaningful come out of that in the next few months 

 17 or so. 

 18 COMMISSIONER SOMMERS: Thanks, Ken. I 

 19 think Mike's comments on pretrade protection are 

 20 an excellent segue to Peter Reitz's presentation 

 21 from Eurex. Thank you. 

 22 MR. REITZ: Thank you very much. Maybe 

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 1 what I'll talk about will sound very similar to 

 2 what you heard before because we're working on the 

 3 same issues in the same environment. But maybe 

 4 Eurex is also in an unique position in some 

 5 regards because having been an electronic market 

 6 from day one and having had the concept of 

 7 clearing members and nonclearing members as 

 8 trading members from day one, we have had this 

 9 issue of direct market access from our very first 

 10 day. Obviously the reason why we are focusing on 

 11 this now has a lot to do with the changes in 

 12 trading style that we've seen. A lot of this has 

 13 been addressed before. We're all aware of the 

 14 automatic trading systems that are out there and 

 15 the need for new trading strategies. And 

 16 obviously just to put this particular aspect of 

 17 risk management into perspective, I think what 

 18 we're looking at is not just latency and the 

 19 requirements that that creates for exchanges in 

 20 terms of through put and speed of the matching 

 21 engine, it also creates a lot of additional 

 22 requirements for broadcasting of information in 

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 1 general and just reducing round-trip times, 

 2 real-time information on the whole depth of the 

 3 order book which is now available. Eurex for 

 4 example will distribute every change to the order 

 5 book to the whole depth of the book in real time. 

 6 Obviously that creates a lot of need for 

 7 additional bandwidth so you have to create new 

 8 options on how members can get access, how they 

 9 can connect to the exchange with very broad 

 10 bandwidth solutions, and to address all of this. 

 11 So I'm thinking of this as we're building our 

 12 Formula One car and we're building in the Ferrari 

 13 engine to address the need of speed that seems to 

 14 be out there, and at the same time we have to make 

 15 sure we have the brakes as well and that's the 

 16 risk-management part. So if you're going at 200 

 17 miles an hour on the German Autobahn, you have to 

 18 make sure that if there's a truck that moves 

 19 you'll be able to stop in time and that's the 

 20 risk-management part of what we're developing in 

 21 our system. 

 22 As Kim said before, this can only be 

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 1 done as a collaborative approach between the 

 2 clearinghouse and the clearing members. So we 

 3 have created work groups together with our 

 4 clearing members to see which are the issues that 

 5 we should focus on, what are the tools that we can 

 6 provide to help them do better risk management to 

 7 protect the clearing members. We have obviously a 

 8 level of responsibility ourselves to protect the 

 9 clearinghouse, but that's a whole nother topic 

 10 that we can talk about here. But I'll focus on 

 11 the risk of direct market access that occurs on 

 12 the level of the clearing member. 

 13 As I said earlier, the key to all of 

 14 this is information distribution. So not only do 

 15 we obviously distribute real-time trade 

 16 confirmations, we also distribute real-time order 

 17 confirmations and we have worked on real-time 

 18 margining and that's something I'll go into more 

 19 detail about a little bit later. But that's 

 20 something that we have started in our intra-day 

 21 margin process many years ago and that's something 

 22 we're improving. 

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 1 The second thing that I'll talk about a 

 2 bit more in detail is how we enable our clearing 

 3 members to stop any trading activities of a 

 4 nonclearing member and how we're going to develop 

 5 that further. The first slide here just gives an 

 6 overview on where we've come from, where we are 

 7 today, and what are going to be the future 

 8 developments, and I'm going to talk about the main 

 9 points of each of these in a bit more detail. 

 10 As I said, we've had intra-day risk 

 11 management for many, many years and it was based 

 12 on a batch-driven margin system that calculates 

 13 all the positions and the margin requirements 

 14 every 15 minutes and sends out that information to 

 15 all the clearing members and then triggers 

 16 intra-day margin calls if any position is not 

 17 covered by the margin and the collateral that has 

 18 been provided. With the recent release rolled out 

 19 in November of last year, we enhanced that by 

 20 introducing those pretrade limits, and I'll talk 

 21 about in a minute what level we have and what are 

 22 the parameters that can be set by each of the 

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 1 clearing members, and also introduced this stop 

 2 button where a clearing member can basically with 

 3 the push of one button disconnect a trading 

 4 member. We also invested in reducing those batch 

 5 cycles for the risk position limit calculation and 

 6 the margin calculation to 10 minutes. What we're 

 7 going to roll out in November of this year will be 

 8 the next generation of this risk infrastructure 

 9 and that will allow us to do even a margin 

 10 calculation real time because it will be based on 

 11 any change in position or any change in price even 

 12 of the collateral that is pledged to the 

 13 clearinghouse to allow a clearing member to see 

 14 its risk position in real time. 

 15 Let me go into a little bit more detail 

 16 of the pretrade risk measures. What we offer our 

 17 clearing members is different levels of those, one 

 18 on a particular order, the size of the order, you 

 19 can set a maximum order quantity on every single 

 20 order. Then obviously a risk can not only exist 

 21 in adding a new order, but adding many new orders 

 22 into the order book at the same time, so there's a 

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 1 limit on order frequency that can be put in place 

 2 for every trading member. And of course the 

 3 aggregate position within the order book of orders 

 4 that have not been filled is also a way to address 

 5 the risk and so we have a limit on those working 

 6 orders in the order book that can be set 

 7 individually for each trading member. 

 8 The second thing is the stop button as I 

 9 said earlier. That's something that we had in 

 10 place also for many years. It's a process that 

 11 was in place where we as an exchange or as a 

 12 clearinghouse could obviously stop someone from 

 13 trading and we could also do that on behalf of a 

 14 clearing member if they decided that they don't 

 15 want to guarantee any more trades that are coming 

 16 in from a particular member. That process has 

 17 just been automated so that the clearing member 

 18 himself can do that with the push of a button just 

 19 to address the real-time need for that kind of 

 20 functionality as well. 

 21 With the upcoming release this November, 

 22 that will be expanded to the level of the trading 

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 1 member itself where they can basically stop 

 2 activity down to the individual trader level, and 

 3 remember that trader may not be a person, but a 

 4 computer, and they will have a stop button to also 

 5 control for example an algorithmic trading- based 

 6 computer that just has gone wild for example and 

 7 then they can stop that immediately not on the 

 8 clearing level but also on the trading member 

 9 level. 

 10 The second thing that we will introduce 

 11 as I mentioned the real-time risk calculation. If 

 12 you want to do this for the absolute level of real 

 13 time, it's a pretty complex issue. What we have 

 14 done is we have analyzed all the parameters that 

 15 go into the risk calculation and have all of these 

 16 calculated real time and that includes obviously 

 17 the collateral that is pledged so there's a real- 

 18 time valuation of the collateral, there's an 

 19 intra-day posting and release of collateral so 

 20 that is all calculated in real time, and that 

 21 information is then pushed out to the clearing 

 22 member and the trading member at the same time. 

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 1 On top of that information we will also provide a 

 2 toolbox that will allow the clearing member to 

 3 create their own alerts, so I think what you 

 4 called the flexible alerts, that's the same thing 

 5 here. The alert system can be defined by the 

 6 clearing member for each individual trading 

 7 members based on their risk characteristics. So 

 8 that's sort of the future of risk management. 

 9 Again we're just in the situation where on this 

 10 level of risk we've providing the best possible 

 11 tools for the clearing members to monitor the 

 12 risk, to set parameters on a pretrade level how 

 13 they want to accept trades and where they want to 

 14 stop accepting trades from their trading members. 

 15 That's sort of the quick overview. Thank you. 

 16 COMMISSIONER SOMMERS: Thank you, Peter. 

 17 Does anybody have any questions specific to 

 18 Eurex's presentation? If not I'll turn it to R.J. 

 19 Cummings with the IntercontinentalExchange for 

 20 their presentation. 

 21 MR. CUMMINGS: Thank you, Ms. Sommers. 

 22 Ms. Taylor and Mr. Reitz are going to be a tough 

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 1 act to follow. Rather than going through a third 

 2 version of risk controls, I'd like to echo that 

 3 the collaborative approach with clearing members 

 4 and the exchange to develop real-time risk systems 

 5 is what ICE has tried to embrace and promote in 

 6 not only our exchange design but in our approach 

 7 to risk systems. Our approach has really been 

 8 that the clearing members are probably in the best 

 9 position to manage their risk systems, their 

 10 position and their control, whether it be 

 11 pretrade, posttrade, or within the matching engine 

 12 and what we've tried to do is develop technology 

 13 to accommodate their needs in conjunction with the 

 14 members. 

 15 That technology really comes in three 

 16 broad categories. One is reduction in response 

 17 times which has been brought up from several folks 

 18 of the panel here regarding latency, trip time, 

 19 bandwidth usage, connectivity. The second which 

 20 Ms. Taylor talked about is matching engine level 

 21 checks, the execution checks. ICE has developed 

 22 matching engine level checks which I will also 

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 1 echo are a very blunt instrument. They're not 

 2 precision guided tools that the clearing members 

 3 hand over to the exchange to use it for 

 4 controlling risk so we offer pretrade, posttrade, 

 5 and some netting algorithms that provide a blunt 

 6 check for single order, long position, short 

 7 position, or round-trip counts. These allow 

 8 automatic cutoffs of inbound orders and when 

 9 position levels have been reached. 

 10 Then the last is the drop copy that has 

 11 also been spoken of several times. Getting drop 

 12 copy trades to the clearing member in a real-time, 

 13 low-latency process is important for them to take 

 14 those trades that are executed on the exchange and 

 15 compare them with positions that were done T plus 

 16 1, T plus 2 basis and in turn wrap their 

 17 procedures around to the front end for some of the 

 18 other access means through the exchange. 

 19 I'm going to move through a couple of my 

 20 initial slides here pretty quickly. I'm sure 

 21 you're familiar with ICE's unique position in the 

 22 futures market undoubtedly from Mr. Sprecher's 

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 1 work on the Hill recently, so I'll leave it at 

 2 that. 

 3 Going through the benefit and risk 

 4 factors of direct market access, ICE's unique 

 5 position within the futures markets has allowed us 

 6 to meet the demands of a diverse and emerging 

 7 market users with an eye for flexible market 

 8 design. Rather than viewing technology as a risk 

 9 that direct market access presents to 

 10 intermediaries and members alike, ICE has rapidly 

 11 designed, developed, and deployed technology as an 

 12 enabler to allow intermediaries and clearing 

 13 members to take full advantage of what technology 

 14 has to offer to continue the growth of our 

 15 markets. To adjust the risks brought by each type 

 16 of market participants, ICE has created a number 

 17 of unique features that help to avoid or mitigate 

 18 those risks. For example, in the case of 

 19 commercial users where many of ICE's business is 

 20 conducted, many firms do not allow traders from 

 21 the same company to cross with each other. While 

 22 that's not necessarily a direct market access 

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 1 risk, it is a compliance risk and we have designed 

 2 internal mechanisms to prevent this type of 

 3 transaction as well as other types of 

 4 transactions. As this category of users has 

 5 expanded, the sophistication of the market 

 6 monitoring and prevention transaction and 

 7 connectivity risks to this user group has also 

 8 risen. 

 9 The three most common risks that ICE 

 10 faces in regard to this are incompatible client 

 11 software, their conformance with they write to our 

 12 API, overuse of connection bandwidth, and the 

 13 ability of the exchange to respond to intra-day 

 14 spikes in volume. In each case we've isolated the 

 15 key detection and feedback tools to monitor each 

 16 case around the clock; our API conformance team 

 17 where client software is tested before being 

 18 approved for the live production run rigorous 

 19 testing programs to ensure compatibility and 

 20 understanding of exchange-specific guidelines; 

 21 user input message traffic from direct market 

 22 access users is consistently monitored throughout 

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 1 the trading day to search for cases of unexpected 

 2 increases or decreases in order traffic. This 

 3 feedback loop is critical to the exchange in that 

 4 it keeps our operations group close to the 

 5 customer and their activities. ICE's operations 

 6 teams monitor system capacity and performance 

 7 statistics throughout the day on a 

 8 customer-by-customer basis to ensure that market 

 9 conditions and our customers' response to them 

 10 falls within expected parameters. Behind the 

 11 scenes ICE continues a rigorous capacity and 

 12 infrastructure build-out to ensure peak 

 13 performance for future demand as access to the 

 14 exchange, reduced latency, and volumes continue to 

 15 increase. 

 16 ICE's direct market access is premised 

 17 on the fact that a given user is only allowed onto 

 18 the system when guaranteed by a clearing member of 

 19 the exchange. This distinction applies to those 

 20 users who directly or indirectly pass through a 

 21 firm's own infrastructure en route to the 

 22 exchange. While the direct access to the clearing 

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 1 member -- binds the customer to certain 

 2 jurisdictional rules and disciplinary guidelines, 

 3 the burden of supporting facilities for clearing 

 4 members to actively monitor and take action on the 

 5 exchange if warranted is shared with the exchange. 

 6 In short, the clearing members are our partners in 

 7 building our business. 

 8 Firms writing directly to the exchange 

 9 API must adhere to strict conformance standards 

 10 and processes to ensure that their software is 

 11 compatible. To ensure this conformance, we 

 12 maintain a highly skilled and experienced market 

 13 supervision team equipped with tool sets to react 

 14 to emergency situations, conduct investigations, 

 15 as well as enforce exchange policies with regard 

 16 to access. In addition to this supervision, the 

 17 trading platform also has built-in risk-management 

 18 functionality such as matching engine level, 

 19 pretrade, trade, and spread netting checks 

 20 assignable by the clearing member for each user 

 21 they guarantee. All ICE markets are managed on a 

 22 FIFO basis and provide full depth of market to 

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 1 users. This single matching algorithm eases the 

 2 transition for flood-based exchanges to the 

 3 electronic world. The ICE platform has a variety 

 4 of built-in features that are intended to ensure 

 5 that clients can only retrieve data related to 

 6 their accounts with zero interference from other 

 7 market participants. Also the same security that 

 8 grants authorized access captures unique order 

 9 routing information that identifies the user 

 10 connecting to the platform for downstream 

 11 risk-management systems. Trade delivery is 

 12 available in a near real-time basis to facilitate 

 13 risk management and clearing member pre- and 

 14 posttrade systems with additional controls 

 15 provided by the exchange to guarantee that 

 16 clearing members can cut off access to their 

 17 clients at any time throughout the trading day. 

 18 The challenges in risk-management issues 

 19 related to direct market access, I think we've 

 20 already gone over a lot of these. On this side 

 21 just in short I wanted to summarize some of the 

 22 key issues facing the exchanges and I think they 

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 1 demonstrate why technology is a core competency of 

 2 exchanges today. We believe this will be 

 3 increasingly the case in the future. As products 

 4 and customers increase in sophistication and 

 5 markets become more global and connected, the 

 6 ability to innovate while providing sound 

 7 risk-management goals to facilitate the seamless 

 8 and secure operation of markets is going to be 

 9 more important than ever. This importance lies 

 10 not only with the exchange but with our partners 

 11 and the clearing members. 

 12 Continued investment by ICE in its 

 13 network of trading architectures to outpace demand 

 14 has not abated. With the growth in volume 

 15 expected to increase, so does the demand for 

 16 additional functional and technical capabilities 

 17 by our customers. At ICE we keep focus on the 

 18 horizon of where markets are going through lead 

 19 times in planning, development, testing, and 

 20 launching new initiatives. In terms of risk 

 21 management, this is probably one of the areas of 

 22 greatest opportunities for exchanges. Keep in 

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 1 mind that many of our markets and some today are 

 2 fully -- 

 3 ICE spends a good amount of time in 

 4 research and development trying to innovate and 

 5 develop new technology for its members. In this 

 6 slide it's important to understand in that it 

 7 demonstrates ICE's commitment to system 

 8 performance in an environment of dramatically 

 9 increasing demand for trading and market data. 

 10 System performance is not just speed. It's all 

 11 the features and functionality that we've 

 12 developed to complement existing FCM 

 13 risk-management systems. Our technologies are at 

 14 the foundation of our markets because it's how we 

 15 connect to our customers. Round-trip trades can 

 16 now be executed in as few as 3 milliseconds in our 

 17 commodity futures business. This is down from 

 18 more than 30 milliseconds in early 2007. 

 19 Impressively, our technologists are now measuring 

 20 our performance in microseconds rather than 

 21 milliseconds, and we do all this with the 

 22 industry-leading pretrade risk- management 

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 1 functionality built in at the matching engine 

 2 level. The rapid response times of trade 

 3 execution, order response, and capture by clearing 

 4 members via the exchange drop copy allows them to 

 5 assess a customer's position in near real time and 

 6 take appropriate action to either limit that 

 7 client's activity through the firm's own 

 8 infrastructure or alternatively directly on the 

 9 ICE platform. In addition, the ICE proprietary 

 10 front end supports a parent company concept that 

 11 aggregates and displays real-time working orders 

 12 of clients to clearing members to selectively 

 13 cancel and revise for smaller FCMs. 

 14 The ICE operations team closely monitors 

 15 volume ratio, that is orders to number of trades, 

 16 to proactively set message throttle controls for 

 17 futures and options traders. These are either for 

 18 size of orders, number of executions within a 

 19 limited timeframe, or number of executions as an 

 20 aggregate. This facility allows ICE to provide 

 21 yet another level of protection to both our 

 22 customers and the markets as a whole. The recent 

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 1 rollout of our new ICE risk platform provides 

 2 customers and traders with a real-time intra-day 

 3 risk management package to track their trading 

 4 activities as well as conduct real-time what- if 

 5 analysis based on hypothetical market conditions. 

 6 Finally, we're one of only a few 

 7 exchanges to provide our own widely used front end 

 8 as well as multiple ways for customers, 

 9 intermediaries, and data vendors to connect to our 

 10 platform, including collocation through a 

 11 traditional exchange telecom hub or over the 

 12 internet. This modern and flexible technology has 

 13 truly contributed to our ability to scale our 

 14 business and to continue providing risk-management 

 15 services to our members. 

 16 This slide is a little difficult to 

 17 read. I think you've got a copy. As I 

 18 highlighted before, ICE's trading platform design 

 19 accommodates ease of scalability, infrastructure 

 20 deployment by market independently to not only 

 21 meet continuous client demand for reduced response 

 22 times, but also allows clients to deploy their 

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 1 technology based on an individual market size and 

 2 performance characteristics. Over the past 18 

 3 months ICE's input requests and averaging 

 4 processing times have increased and decreased 

 5 respectively by several-hundred percent. You 

 6 might notice that the change in these figures are 

 7 roughly equivalent. The increase in message 

 8 traffic to the exchange is highly correlated to 

 9 the decrease in response times. As ICE continues 

 10 to be the industry leader in trading system 

 11 response time, our clients continue to make use of 

 12 it. By their logic, they don't have to wait as 

 13 long to make a decision to submit the next order. 

 14 Users of ICE front-end technology while 

 15 not as dependent upon subsecond response time as 

 16 algorithmic traders, are one of the net 

 17 beneficiaries of ICE's technology innovations. 

 18 These users get the same representation of the 

 19 market over the public internet with all the risk 

 20 protections that are afforded to the high- 

 21 velocity traders that can sometimes be 

 22 artificially delayed through intermediary systems 

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 1 or individual firm infrastructure. 

 2 Lastly, ICE is going to continue to work 

 3 in close cooperation with clearing members to 

 4 develop lightweight, fast technology for risk 

 5 management applications. By promoting these 

 6 initiatives, exchanges are in a unique position to 

 7 help firms reduce their risk from direct market 

 8 access. Again, adoption and expansion of industry 

 9 standards to new markets is going to be 

 10 increasingly important going forward. 

 11 COMMISSIONER SOMMERS: Thanks, R.J. 

 12 Does anyone have any questions specific to ICE's 

 13 platform? If not, I'm going to turn to one of 

 14 those important partners in risk management, 

 15 Yvonne Downs with Newedge. 

 16 MS. DOWNS: I promise to keep this 

 17 short. I know we've heard a lot of information 

 18 today. 

 19 I wanted to go through a couple items. 

 20 First, I wanted to go from a background 

 21 perspective and tell you that automated order 

 22 routing isn't a new phenomenon and I do think 

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 1 there's been a significant amount of evolution 

 2 that's occurred in this area. Back in 2000-2002, 

 3 and I know NFA was the one who first came out with 

 4 a whole set of supervision and responsibilities 

 5 and it addressed a variety of areas dealing with 

 6 automated order routing systems, everything from 

 7 the security, authentication, encryption and 

 8 firewalls, authorizations, things dealing with 

 9 making sure that we tested to make sure we've 

 10 addressed the risks of dealing in an automated 

 11 world, capacity issues, and obviously over time 

 12 that's gotten to be an easier issue to address, 

 13 but again it's another risk that we're dealing 

 14 with and one that FCMs have had to set up a 

 15 variety of procedures to handle. There's also 

 16 disaster recovery. What happens when all of this 

 17 fails, and obviously the different procedures that 

 18 intermediaries have put into effect to address the 

 19 risks. 

 20 In addition, obviously credit and risk 

 21 controls were a part of that initial effort and 

 22 again it deals with what's the nature of the 

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 1 clients who you're dealing with and that you need 

 2 to assess the risks and control based on the 

 3 nature of that client, everything from 

 4 preexecution controls, potentially for example if 

 5 you're dealing with retail risk which would be a 

 6 whole different level of risk than I think we're 

 7 sitting here dealing with right now and now we're 

 8 dealing with large execution, large-volume 

 9 traders. So the whole concept of what are we 

 10 doing to address the different sets of risks is 

 11 something that isn't new, but I do think 

 12 technology has continued to change and I think 

 13 that as you've certainly seen today, many of the 

 14 exchanges have changed the controls to assist in 

 15 that regard. It is the flow of information both 

 16 on a real time, slightly real time, as well as 

 17 coupled with what clearing firms do to look at our 

 18 customers right up front. I do think you do have 

 19 to look at the three-legged stool issue. I really 

 20 think that's key and something we haven't spent 

 21 enough time looking at today. On a three-legged 

 22 stool is what are we doing first take on that 

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 1 client? We don't accept every client. I don't 

 2 know about everybody else, but we actually vet 

 3 every client that we take on, make a judgment call 

 4 whether we're willing to take that risk on, assess 

 5 the risk, assess the services we're providing, the 

 6 nature of their trading, to make a judgment and 

 7 one, yes, that's ours to make whether we want that 

 8 client and how they're accessing the different 

 9 markets. 

 10 We are a member of 70 markets and I know 

 11 everybody's got lots of them. We're just trying 

 12 to tell you that there are lots of markets around 

 13 the world and to make that assessment is something 

 14 that we do right up front when we first take a 

 15 client on. We then ongoingly monitor that client, 

 16 obviously the nature of their trading activities, 

 17 whether it's OTC, whether it's listed, what is the 

 18 nature of their trading strategies, all go into 

 19 effect as to how we're going to set the risk. So, 

 20 yes, we partner with the exchanges and the 

 21 exchanges have done a great job of adding tools, 

 22 but it's only one aspect of everything that we do 

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 1 and it's kind of vital to how we're handling 

 2 automated order routing and something that with 

 3 the advent of technology continues to be an issue 

 4 and I'm here to tell you that I think we 

 5 appreciate everything the exchanges have done, but 

 6 we continue to talk to exchanges because we 

 7 continue to need advancements in all of the things 

 8 they do so that they can do our job and we can do 

 9 ours. 

 10 I wanted to explain direct market 

 11 access. Yes, it's high volume, generally people 

 12 who don't take positions on overnight trading. 

 13 Yes, they need lots of reduction in latency, that 

 14 is critical, but we won't take on one of them, and 

 15 I know many other firms won't, until we look at 

 16 their own risk-management tools, not just ours, 

 17 but we require that generally if we take on a 

 18 client that we have to see their own internal 

 19 systems of monitoring their own risk. Why is 

 20 that? Because as much as we want these clients to 

 21 only come 100-percent to us, we recognize that 

 22 clients don't. Clients actually trade through 

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 1 multiple firms. So as much as we'd love to see 

 2 all of their information and therefore have a 

 3 great picture of every bit of risk they're taking 

 4 on, that's not reality for us. So we ask them to 

 5 look at what their controls are and how they're 

 6 looking at them on a real-time basis, and they 

 7 actually have preexecution controls in place. 

 8 Then we do our assessment as well, and it's that 

 9 balance that's key. No matter what we're doing 

 10 here, I like to think of this as a pendulum, that 

 11 if you tighten too many risk controls on one side, 

 12 you're going to affect the business on the other 

 13 and vice versa. So it is a balance and it's one 

 14 that's critical to our ability to be an FCM and 

 15 intermediary in this business and for the markets 

 16 to work well. 

 17 So all of this discussion has been on 

 18 preexecution controls and I will go back to my 

 19 original statement that came when Kevin Davis 

 20 talked about the fact that he said everybody needs 

 21 preexecution controls. Yes, I think that 

 22 everybody would love to say that, but as I said, 

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 1 customers don't clear through only one firm. 

 2 We're not the only people who have risk here. And 

 3 I will tell you that our customers trace across 

 4 markets and I'd be very concerned about what 

 5 happens to the markets if we were to have 

 6 preexecution controls. If there is any kind of 

 7 dislocation then you're going to have price 

 8 discovery affected, you're going to have the 

 9 ability for customers to hedge, and then they're 

 10 going to go potentially to either overseas markets 

 11 where it's not occurring, OTC markets where it's 

 12 not occurring, so all you're doing is juggling 

 13 something that you really need to balance as we go 

 14 forward. So we'd hope that working together we 

 15 can work through best practices, come up with some 

 16 things as we continue forward, but I think rules 

 17 and regulations in the area of risk management 

 18 would be a little bit too far because as I said, 

 19 it's a balance, it's an art, it's not just solely 

 20 a science. I'll stop there since the hour is 

 21 long. Thanks. 

 22 COMMISSIONER SOMMERS: Thanks, Yvonne. 

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 1 Does anyone have any particular questions for 

 2 Yvonne? 

 3 MR. RADHAKRISHNAN: Forgive me, but I 

 4 have a hard time accepting the fact that we should 

 5 not have preexecution controls because if we did, 

 6 people would go to some other market. To me 

 7 that's not a reason not to have risk management. 

 8 And I don't understand what Yvonne is trying to 

 9 say about the fact that if we had preexecution 

 10 controls, and I agree with -- said that it's a 

 11 three-legged stool or a four-legged stool or 

 12 whatever it is, that if you had preexecution risk 

 13 controls that it would somehow affect prices. I 

 14 don't understand how that is. 

 15 MS. DOWNS: It's very simple. The price 

 16 discovery mechanism, the first person to that 

 17 market is what creates the price. If you set it 

 18 up so there's a dislocation, there's not going to 

 19 be a level playing field for people to discover 

 20 the price. 

 21 MS. LITT: I also think it's a 

 22 distraction. I think focusing too much on 

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 1 preexecution controls actually takes the debate to 

 2 a place where it doesn't belong because 

 3 preexecution controls are not realistic given the 

 4 way our clients trade and I think Goldman Sach's 

 5 business is very similar to Yvonne's. It's 

 6 global. I don't even know what a preexecution 

 7 control would be. Therefore, what you really want 

 8 as regulators is for us to be making sure that our 

 9 postexecution controls, that our risk-management 

 10 function, is working effectively and that's why 

 11 the things that Kim and Peter and R.J. talked 

 12 about and the information that we're getting from 

 13 exchanges that's so valuable in terms of 

 14 interpreting aberrational trading and outsized 

 15 trading that's inconsistent with the past, fat- 

 16 finger limits which are preexecution, those are 

 17 key. And then you want to make sure that we're 

 18 getting that real- time input, we're using it 

 19 effectively, we're getting the right people to see 

 20 the aberrations immediately, and that we're acting 

 21 on it. That's what you want to focus on. 

 22 Focusing on pretrade controls, most of 

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 1 them will be artificial and meaningless, and 

 2 that's what I hope that we can move you guys to, 

 3 that I think that you've asked this question a 

 4 number of times and it's very provocative and it's 

 5 good for you to ask it, I just think it's the 

 6 wrong question and I think we have to move to the 

 7 right question, and I think the exchanges have 

 8 gotten to the right question and they're helping 

 9 us deal with it in giving us the information we 

 10 need and I think all of us are in a place that's 

 11 much better than we were probably 6 months ago, 

 12 certainly 2 years ago, because of that 

 13 information. 

 14 MR. DOWNEY: There is only a limited 

 15 amount of people who really want that kind of 

 16 split-second access. What you're asking the firms 

 17 to do to put those risk controls in advance, 

 18 they're going to have to think in a system-wide 

 19 way and it's an expensive propositions. If the 

 20 exchanges are going to provide them with a service 

 21 at reasonable risk levels at a much cheaper cost 

 22 it's reasonable for them to consider it. These 

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 1 are big players we're talking about. It's the 

 2 traditional way that they have dealt with these 

 3 customers in the past and other markets on the 

 4 securities side and the credit side. It's 

 5 something that makes sense to them. What you're 

 6 asking for is that you put the controls in there 

 7 in advance, you control it, you're asking them to 

 8 spend an awful lot of money and it's not going to 

 9 work for them. 

 10 MS. LITT: I don't want to have this 

 11 debate, but I think it's much more than that. I 

 12 don't think it's just about money. I think it's 

 13 about the meaningfulness of what you develop and I 

 14 think that if you work on a posttrade basis you're 

 15 going to find something much more meaningful. 

 16 COMMISSIONER SOMMERS: Thank you, 

 17 Bonnie. Thanks, David. 

 18 I want to ask a group of market 

 19 participants who actually I think see a lot of 

 20 benefit in direct market access. Eric, if you 

 21 could share views from MFA. 

 22 MR. VINCENT: I don't have really 

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 1 anything specific to add to the discussion in that 

 2 I think it's been a pretty robust discussion and 

 3 I've learned a lot. But as a general matter, FMA 

 4 supports direct market access and believes that it 

 5 leads to more efficient markets. However, I think 

 6 we also recognize that it creates risk and as 

 7 Ananda points out, even potential systemic risk 

 8 that needs to be addressed. The challenge 

 9 obviously is determining what exactly those 

 10 pretrade risk controls should be and who should 

 11 implement them. We would share the view of Mike 

 12 Dawley and Yvonne that that should be a 

 13 collaborative process among various market 

 14 participants with input from the CFTC, but that 

 15 the CFTC shouldn't be imposing standards in this 

 16 area. I was extremely impressed with the 

 17 presentation from CME in terms of the steps that 

 18 they've taken to address this issue. I know that 

 19 they've solicited input from many of our members. 

 20 We want to continue to be an active participant in 

 21 that dialogue both specifically with exchanges and 

 22 clearing firms but also in terms of any 

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 1 industry-wide dialogue that's going on to ensure 

 2 that we strike the right balance in this 

 3 discussion. 

 4 COMMISSIONER SOMMERS: Thanks, Eric. Do 

 5 any of my fellow Commissioners have questions? 

 6 CHAIRMAN LUKKEN: Just real quick. 

 7 Something Yvonne mentioned is the idea of best 

 8 practices and something in our statute allows us 

 9 and the industry to develop best practices in this 

 10 area. It seems to me that there are core 

 11 principles for clearinghouses that require them to 

 12 manage risk in a certain way and the fact that 

 13 we're talking about this means that people are 

 14 looking for guidance in this area, and I'm just 

 15 wondering, we can certainly continue to facilitate 

 16 discussions about this, but whether either the 

 17 industry or the CFTC should try to help develop 

 18 not rules because this is obviously so complex 

 19 that I'm not sure we have the expertise to develop 

 20 specific rules in this area, but at least 

 21 principles or guidance or something to help lead 

 22 the industry in the right direction, and it seems 

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 1 to me they're already heading there, but with some 

 2 guidance from its regulator. I don't know if 

 3 anybody has thoughts about that. 

 4 MR. HAHN: Just quickly, I think it was 

 5 mentioned earlier, but the FIA I know is working 

 6 on a document that will speak a lot to that issue 

 7 in terms of guidance. The only comment I would 

 8 make, Ananda, is I think you have to put your 

 9 concern a little bit in to an historic context. 

 10 There were no controls on locals. They had direct 

 11 market access. There were no controls on brokers. 

 12 They had direct market access. The circumstance 

 13 that we have today where you have very close to 

 14 real-time information to the clearing firm of what 

 15 happened is a dramatic up-tick in terms of the 

 16 risk. I think the focus is maturing that piece of 

 17 the puzzle. There's a little work to be done. I 

 18 think there are great strides that have been 

 19 described by the exchanges getting the information 

 20 to the member firms, the member firms have to have 

 21 systems that they can take advantage of that 

 22 information uniformly. That's probably a best 

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 1 practice. But the world today around this issue 

 2 interestingly is better than it used to be because 

 3 of this technology. There's more to be done. It 

 4 has to be watched. But the give-in, give-up stuff 

 5 was much worse than it is today. 

 6 COMMISSIONER SOMMERS: If there is 

 7 nothing further, I think I will thank all of you 

 8 who are here for making time in your day to be 

 9 here and thank you for your input on these 

 10 important issues. I want to also thank my staff 

 11 for helping me put together this meeting. Andy 

 12 Morton, Marsha Blaze, and Sharon Floyd, did all 

 13 the work to put this meeting together. And also 

 14 the Commission staff, OMO staff and OITS staff, 

 15 for helping put this meeting together. Thanks 

 16 very much, and with that we are adjourned. Thank 

 17 you. 

 18 (Whereupon, at 4:30 p.m., the 

 19 PROCEEDINGS were adjourned.) 

 20 * * * * * 

 21 

 22 

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 1 CERTIFICATE OF NOTARY PUBLIC 

 2 I, Carleton J. Anderson, III do hereby certify 

 3 that the forgoing electronic file when originally 

 4 transmitted was reduced to text at my direction; 

 5 that said transcript is a true record of the 

 6 proceedings therein referenced; that I am neither 

 7 counsel for, related to, nor employed by any of 

 8 the parties to the action in which these 

 9 proceedings were taken; and, furthermore, that I 

 10 am neither a relative or employee of any attorney 

 11 or counsel employed by the parties hereto, nor 

 12 financially or otherwise interested in the outcome 

 13 of this action. 

 14 /s/Carleton J. Anderson, III 

 15 Notary Public # 351998 

 16 in and for the Commonwealth of Virginia 

 17 My Commission Expires: 

 18 November 30, 2008 

 19 

 20 

 21 

 22 

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