UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 GLOBAL MARKETS ADVISORY COMMITTEE MEETING 

 Washington, D.C. 

 Tuesday, October 2, 2007 

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 1 PARTICIPANTS: 

 2 CTFC Commissioners: 

 3 WALTER L. LUKKEN, Acting Chairman 

 4 JILL SOMMERS 

 5 MICHAEL V. DUNN 

 6 BART CHILTON 

 7 Panel Members: 

 8 DAVID WRIGHT 

 Director for Financial Markets in the 

 9 International Market Directorate European 

 Commission 

 10 

 MARIO NAVA 

 11 Director of the Office of Financial Markets 

 Infrastructure European Commission 

 12 

 JACQUELINE MESA 

 13 Director of the Office of International 

 Affairs, CFTC 

 14 

 ANTHONY BELCHAMBERS 

 15 Executive Director, Futures and Options 

 Association 

 16 

 RICHARD BERLIAND 

 17 Chairman, Futures Industry Association 

 Managing Director, Global Head of Futures and 

 18 Options, J.P. Morgan Securities Limited 

 19 ADAM COOPER 

 General Counsel, Citadel Investment Group, LLC 

 20 

 GEORGE CRAPPLE 

 21 Co-Chairman, Millburn Ridgefield Corporation 

 22 

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 1 PARTICIPANTS (CONT'D): 

 2 MICHAEL DAWLEY 

 Managing Director, Futures Product Head 

 3 Goldman, Sachs and Company 

 4 CRAIG DONOHUE 

 Chief Executive Officer and Director, CME 

 5 Group 

 6 DE'ANA DOW 

 Vice President and Counsel, Regulatory Affairs 

 7 New York Mercantile Exchange 

 8 ARUTHUR HAHN 

 Partner, Katten Muchin Zavis Rosenman 

 9 

 ROBERT KLEIN 

 10 Director and Associate General Counsel 

 Citigroup Global Markets, Inc. 

 11 

 ROGER LIDDELL 

 12 Chief Executive Officer, LCH.Clearnet Group 

 Limited 

 13 

 BONNIE LITT 

 14 Managing Director, Associate General Counsel 

 Goldman, Sachs and Company 

 15 

 BARBARA MATTHEWS 

 16 Financial Attaché to the European Union 

 United States Treasury Department 

 17 

 BOB PICKEL 

 18 Executive Director and Chief Executive Officer 

 International Swaps and Derivatives 

 19 Association 

 20 DAN ROTH 

 President and Chief Executive Officer, 

 21 National Futures Association 

 22 JOHNATHAN SHORT 

 General Counsel, Intercontinental Exchange 

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

 2 (1:06 p.m.) 

 3 CHAIRMAN LUKKEN: (in progress) 

 4 traveling from abroad and nearby actually to come 

 5 to our meeting at GMAC. As those participants 

 6 know, we try to have these meetings once or twice 

 7 a year if we can. But we're very fortunate today 

 8 to have the presenters that have come before us 

 9 this afternoon. 

 10 As you know, I'm acting chairman of the 

 11 CFTC as well as chairman of the Global Market 

 12 Advisory Committee. And this committee was formed 

 13 for the express purpose of seeking industry input 

 14 on matters that impact the global derivatives 

 15 marketplace, and today's discussion certainly 

 16 falls within that category. 

 17 Our meeting will focus on two 

 18 significant developments coming out of Europe: 

 19 The Markets in Financial Instruments Directive or 

 20 MiFID and the European Clearing Code of Conduct. 

 21 These are both timely and important developments 

 22 in the global marketplace that not only affect our 

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 1 European colleagues but also impact our 

 2 interrelated U.S. markets. 

 3 Today you will hear such familiar 

 4 concepts as regulatory recognition and 

 5 passporting, tiered regulation for trading venues 

 6 and participants, and clearing competition. I 

 7 anticipate we'll enjoy a lively discussion on 

 8 these matters and marvel at the similarities of 

 9 these policies with our own developments here on 

 10 this side of the Atlantic. 

 11 Two weeks ago, as many of you know, the 

 12 CFTC held a public hearing on the U.S. regulation 

 13 of exempt commercial markets. Today we will learn 

 14 what the Europeans are doing in this area for 

 15 similar markets. 

 16 In this time of globalization, it is 

 17 particularly important that we understand and, 

 18 when possible, coordinate regulatory approaches in 

 19 major market jurisdictions, such as the EU and 

 20 U.S. This meeting is a wonderful opportunity for 

 21 our industry both to learn and to share our 

 22 thoughts on these important matters. 

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 1 Before we get started, though, I would 

 2 like to begin by welcoming our two new 

 3 commissioners to their first advisory committee 

 4 meeting. Commissioners Jill Sommers and Bart 

 5 Chilton, welcome. 

 6 Both Jill and Bart are no strangers to 

 7 our industry or international affairs, and I'm 

 8 sure you'll find that they bring a fresh and 

 9 unique viewpoint to the commission, and I'm 

 10 delighted by their presence today. 

 11 Turning to our agenda, we are very 

 12 fortunate to have David Wright, the European 

 13 Commission's Director of Financial Markets in 

 14 their International Market Directorate. David and 

 15 Mario are both on a whirlwind tour of Washington, 

 16 D.C. From meeting to meeting; we're very, very 

 17 fortunate to squeeze them in today to give us 

 18 their viewpoints. 

 19 David comes with 30 years of public 

 20 service experience at the European Commission, and 

 21 he's one of the key individuals at the epicenter 

 22 of MiFID's development. He will share with us his 

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 1 views on (off mike) which is becoming a model of 

 2 global regulatory regime for all of our markets. 

 3 It's certainly a Herculean effort, and I'm pleased 

 4 David is here with us today to provide his 

 5 insights, especially as it pertains to their 

 6 derivatives and commodities regulation. 

 7 Next on the agenda is Mario Nava, 

 8 Director of the Office of Financial Markets 

 9 Infrastructure for the European Commission. 

 10 Professor Nava heads up the commission's efforts 

 11 to implement the European Code of Conduct and 

 12 Settlements, and we are fortunate to have him 

 13 present for us an overview of the code as well as 

 14 the next step and possibly extending it from 

 15 securities to derivatives. 

 16 Given the interconnection of the U.S. 

 17 and European markets as well as the likelihood of 

 18 cross-Atlantic clearing linkages, it's important 

 19 to understand how the Code of Conduct will impact 

 20 U.S. markets and their participants and whether 

 21 similar concepts could benefit the U.S. 

 22 marketplace. 

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 1 However, first on the agenda today is 

 2 our own Jackie Mesa, Director of the Commission's 

 3 Office of International Affairs, with an update on 

 4 the Commission's efforts in this area. The past 

 5 year has been an exciting time in the 

 6 international arena, given the greater acceptance 

 7 among the global regulatory community of the 

 8 mutual recognition concept that the CFTC pioneered 

 9 20 years ago, as well as the commission's recent 

 10 technical assistance to emerging markets in India, 

 11 Egypt, and China. 

 12 I would now like to turn to my fellow 

 13 commissioners and ask whether they have additional 

 14 comments or remarks. 

 15 Commissioner Dunn? 

 16 COMMISSIONER DUNN: Thank you, Mr. 

 17 Chairman. I commend you for having this meeting 

 18 today on such a timely matter and having such 

 19 great panelists on here. This is absolutely a 

 20 treat for us all. 

 21 In my tenure here at the CFTC, between 

 22 electronic trading and globalization, I think 

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 1 there's been as much of a change in the 

 2 derivatives markets as there as been in all the 

 3 time preceding that. And so, I really do look 

 4 forward to hearing from our counterparts in what's 

 5 going on in their arenas. 

 6 CHAIRMAN LUKKEN: Thank you very much. 

 7 Commissioner Sommers? 

 8 COMMISSIONER SOMMERS: Thank you all. 

 9 Although this is not my first GMAC hearing, this 

 10 is the first time I've ever been at the table. 

 11 So, I appreciate the opportunity to listen and 

 12 learn today about these very important subjects. 

 13 And it's a pleasure to be here with my 

 14 fellow commissioners and Chairman Lukken and 

 15 welcome Mr. Wright and Professor Nava and Mr. 

 16 Belchambers. Thanks for being here. 

 17 CHAIRMAN LUKKEN: Mr. Chilton? 

 18 COMMISSIONER CHILTON: Thanks, Mr. 

 19 Chairman. And thank you all for being here 

 20 really, for coming from so far away and spending 

 21 the time with us. It's a great education process 

 22 for us. And this is a real time, all-the-time 

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 1 industry as we all know and a truly global 

 2 industry. And we've got so many similarities that 

 3 outweigh the differences, you know, keeping 

 4 markets competitive and free from fraud, abuse, 

 5 and manipulation and making sure that they are 

 6 viable, efficient, and effective tools, not just 

 7 for market participants but for consumers as well. 

 8 And at the hearing that the chairman 

 9 talked about two weeks ago in this room, I said 

 10 that I thought it was really a matter not of if 

 11 something should be down with regard to energy 

 12 markets, electronic energy markets that aren't 

 13 regulated, but how and when. 

 14 And the EU has already answered part of 

 15 the question. The "when" is coming up in what, a 

 16 month or so, and so, I'd like to delve deeper into 

 17 the depth and dimension and the texture of the 

 18 "how." And I think that depth, dimension, and 

 19 texture is something that in the give and take we 

 20 can all learn from as we go forward in this 

 21 important global market. 

 22 Thank you. 

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 1 CHAIRMAN LUKKEN: I would like to 

 2 recognize before we begin Anthony Belchambers, who 

 3 is going to provide a European financial services 

 4 viewpoint, on MiFID and how it's being implemented 

 5 as well as the clearing code. 

 6 And I know you've been very involved in 

 7 both those efforts, and we welcome you here today, 

 8 and we're glad you could participate. 

 9 Before we begin, though, I would like to 

 10 go around the room and have everybody introduce 

 11 themselves, your name as well as what industry, 

 12 association or firm you're with. 

 13 And also for logistical purposes, the 

 14 mikes we're using today are wireless. You need to 

 15 push the button in order to talk, but only three 

 16 mikes work at a time, so remember to turn them off 

 17 after you speak. Always having issues with 

 18 microphones here at the CFTC, so if you could 

 19 remember that, that would help our discussion. 

 20 So, we'll start with Bonnie. 

 21 MS. LITT: Bonnie Litt. I am an 

 22 attorney at Goldman Sachs. 

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 1 MR. SHORT: Johnathan Short -- oh, 

 2 Johnathan Short. I'm the general counsel of 

 3 Intercontinental Exchange. 

 4 MR. KLEIN: Bob Klein and I'm an 

 5 attorney at Citigroup. 

 6 MR. LIDDELL: Roger Liddell, London 

 7 Clearing House. 

 8 MR. DONOHUE: Craig Donohue, CEO CME 

 9 Group. 

 10 MR. COOPER: Adam Cooper, general 

 11 counsel, Citadel Investment Group. 

 12 MS. MESA: Jackie Mesa, Director of the 

 13 Office of International Affairs. 

 14 MR. WRIGHT: David Wright. I'm the 

 15 Director of Financial Services, Financial Policy 

 16 in the European Commission in Brussels. 

 17 MR. NAVA: Mario Nava. I'm the head of 

 18 Division of Financial Market Infrastructures. 

 19 MR. BELCHAMBERS: Anthony Belchambers, 

 20 Chief Executive, Futures and Options Association. 

 21 MR. CRAPPLE: George Crapple, Co-CEO of 

 22 Millburn Ridgefield, CTA and CPO. 

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 1 MR. ROTH: Dan Roth, National Futures 

 2 Association. 

 3 MR. FILLER: Ron Filler, Managing 

 4 Director, Lingham Brothers. 

 5 MR. HAHN: Arthur Hahn with Katten. 

 6 Sorry. Arthur Hahn with Katten Muchin on behalf 

 7 of the Life Exchange. 

 8 MR. PICKEL: Bob Pickel with HSDA. 

 9 MR. BERLIAND: Richard Berliand. I run 

 10 the cash equities and futures business at J.P. 

 11 Morgan and chairman of the FOA. 

 12 MS. DOW: I'm De'Ana Dow. I'm vice 

 13 president and counsel for the New York Mercantile 

 14 Exchange. 

 15 CHAIRMAN LUKKEN: Great. With no 

 16 further ado, I'll turn this over to David. Thank 

 17 you, David. 

 18 Oh, I apologize for getting out of order 

 19 here. We'll start with Jackie. 

 20 MS. MESA: He hears from me all the 

 21 time, so. Well, thank you, Chairman Lukken and 

 22 Commissioners, for giving me this opportunity to 

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 1 highlight what's going on in the Office of 

 2 International Affairs at the CFTC. 

 3 Before I kind of give you a brief 

 4 summary of what's happened in the last year in our 

 5 office, I wanted to ask for your help actually. 

 6 We chair a number of technical assistance programs 

 7 in various countries, which I'll highlight a 

 8 little bit later, and we also participate in 

 9 Treasury-led dialogues with other financial 

 10 regulators. 

 11 These happen about once or twice a year, 

 12 but before they happen, we're always calling 

 13 around to our industry asking what do you see are 

 14 the major issues happening in these countries. 

 15 And we have sort of the normal people we go to, 

 16 but we'd like to expand that group to get a 

 17 broader base of people. 

 18 So, I'm passing around sign up sheets 

 19 and begging for your participation. I have them 

 20 by country. If you're interested in us contacting 

 21 you by email, we won't bug you too much, then 

 22 we'll just send out an email or you want to assign 

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 1 somebody in your organization, better yet, this is 

 2 your opportunity. 

 3 So, I'll start here with Adam. Thanks, 

 4 Adam. So, just to give you a brief overview of 

 5 what our office does, we assist the commission and 

 6 the CFTC staff in international policy matters, 

 7 coordinate with foreign regulatory authorities, 

 8 provide technical assistance when requested, and 

 9 participate in international regulatory 

 10 organizations. I want to take each of these in 

 11 turn and briefly talk about what we've done. 

 12 One matter that I'll start with is 

 13 something that's coming out of our division of 

 14 clearing and intermediary oversight. They've been 

 15 reviewing an application by the CME. And Craig, 

 16 if you want to jump in here and describe it in any 

 17 more detail, please do. But CME and the China 

 18 Foreign Exchange Trade System, which I'll call for 

 19 short CFETS, for certain exemptive relief under 

 20 the act, specifically, the CME and CFETS requested 

 21 that CFETS and/or its members clear foreign 

 22 currency and interest rate futures transactions at 

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 1 the CME for customers domiciled in China. 

 2 CFETS is an affiliate of the People's 

 3 Bank of China and operates an electronic trading 

 4 system in the inner bank foreign exchange market 

 5 in China. If the request is granted -- which I 

 6 want to make clear it's not granted yet. There is 

 7 a release that we've put out of the federal 

 8 register. CFETS and its members would be exempted 

 9 from registration as an FCM but would be required 

 10 to meet certain financial requirements, large 

 11 trader reporting, and monthly reporting and 

 12 recording keeping. 

 13 But, because CFETS will not be 

 14 registered as an FCM, it will need to meet 

 15 alternative minimum capital requirements that are 

 16 intended to parallel what we would require from 

 17 one of our registrants. So, there is a federal 

 18 register release. We are requesting comment. The 

 19 comments were due by August 23rd, but we have 

 20 given a two-week extension period, and we would 

 21 just request that members, such as yourselves, 

 22 perhaps write a comment if you're interested in 

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 1 this. 

 2 Now, I want to get into our technical 

 3 assistance and dialogues we've been carrying out 

 4 on a country-by-country basis. First is China. 

 5 Last year we sent a team over to the CSRC to 

 6 conduct training for over 100 individuals that 

 7 included the exchanges in China and regulators. 

 8 It was a great training. They're going to 

 9 continue this ongoing bilateral training and send 

 10 people over to the CFTC next month. 

 11 And we also plan to host for the first 

 12 time a secondment from the CSRC starting in 

 13 January 2008. We already do host people from 

 14 Korea and Japan and we have for a number of years. 

 15 Also, with China, we participate in a 

 16 Treasury-led dialogue. And I think I can just say 

 17 that China has made remarkable progress. And I 

 18 won't credit the dialogue for all of that, but I 

 19 will say that I think it has helped. China has 

 20 announced that they'll no longer prohibit 

 21 qualified foreign institutional investors to 

 22 purchase stock index futures, which I think is a 

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 1 good step. 

 2 But now let me give you the reverse, 

 3 which is the bad side of this. They don't 

 4 currently allow stock index futures trading in 

 5 China, but that will happen on the Shanghai 

 6 Financial Futures Exchange, which we keep hearing 

 7 will open. And I know you've been reading about 

 8 this as well, that last year they announced it was 

 9 going to open, and then it's been delayed and 

 10 delayed and delayed. 

 11 And our understanding is that this is 

 12 due to the fact that they want certain laws in 

 13 place before they open the exchange, and due to 

 14 recent volatility, they don't want actually added 

 15 volatility in their markets. But, be watching for 

 16 this because I think this is a good progress. 

 17 Also, CSRC has expanded their outbound 

 18 trading that they allow Chinese to participate in, 

 19 their institutional investors. It used to be you 

 20 could only participate in our markets or other 

 21 international markets for your own business 

 22 purpose, for commercial purpose only, for hedging 

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 1 purposes. And now, that's been expanded to 

 2 include banks, and asset management companies can 

 3 participate for hedging purposes in foreign 

 4 markets. 

 5 One thing that we keep hearing from our 

 6 own exchange is, and we're going to keep pressing 

 7 them on it, is that there has been a ban on 

 8 futures exchanges opening representative offices 

 9 in China. This same ban does not exist for 

 10 equity. So, for instance, New York Stock Exchange 

 11 and NASD have authority to open up representative 

 12 offices. So, we will keep pressing this, and you 

 13 can keep pressing this at your levels as well. 

 14 In India -- in June we provided trading 

 15 in India for over 50 people, exchanges, Central 

 16 Bank of India, exchanges, et cetera. They are 

 17 particularly concerned about physical delivery in 

 18 the ad markets. And we talked about that and 

 19 consumer fraud. And I know that you know this, 

 20 but there's a general misunderstanding there, I 

 21 think, about the speculation and how that raises 

 22 prices on essential commodities in India. And 

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 1 they've actually banned certain trading in 

 2 essential commodities in India saying that the 

 3 futures trading has increased these prices. We're 

 4 working with the government to explain how these 

 5 markets function. 

 6 Also, foreign firms have been forbidden 

 7 membership in exchanges is our understanding and 

 8 we're working on that. They still prohibit 

 9 omnibus accounts in India. And finally, there is 

 10 limited hedge fund participation in India. I 

 11 think there's a requirement that they know who the 

 12 ultimate customer is, for one thing. And also, 

 13 they can't qualify as an institutional investor 

 14 for trading. 

 15 So, I won't go on too much about what we 

 16 do with the European Union because they're sitting 

 17 right here and you can ask them yourselves. But I 

 18 will tell you that most of our work takes place 

 19 through the Committee of European Security 

 20 Commission and that's -- or regulators, rather, 

 21 CESR. And we plan to coordinate, and Anthony can 

 22 talk about this a little bit, our efforts with FIA 

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 1 and FOA on their Transatlantic report within the 

 2 context of our dialogue with CESR and try to pick 

 3 out a few things that would be useful to this 

 4 industry to take forward on a bilateral basis. 

 5 We've discussed a couple of things with 

 6 CESR including a common portal for registration. 

 7 If you want to see who is registered in Europe, 

 8 maybe you can go to one stop shop -- stop 

 9 shopping, plug in the name or the firm, and then 

 10 be directed to different European countries to see 

 11 if they're registered and their registration 

 12 status. I think that would help people around the 

 13 table. You can tell me if that's true. And also 

 14 develop a common risk disclosure that you can use 

 15 in Europe and in the U.S. 

 16 And yesterday, we participated in a 

 17 Treasury-led EU dialogue, but again, you're going 

 18 to hear from the people themselves, so I won't go 

 19 into detail. 

 20 Ethiopia is starting a cash market, and 

 21 they have established -- they're in the works of 

 22 establishing the law. And actually, it has passed 

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 1 very quickly. I think we provided technical 

 2 assistance over the phone and then the next week, 

 3 it was passed. They're also going to try to 

 4 upstart a futures exchange at the same time. Just 

 5 this morning, we found out, just appointed 

 6 commissioners. And they will send their 

 7 commissioners here in two weeks to talk to the 

 8 CFTC, and they will appoint staff. And we'll do 

 9 an intensive training in Ethiopia in January 2008. 

 10 Indonesia, we've sent some of our market 

 11 folks to Indonesia. They have a problem with 

 12 their law in that the law has to specify which 

 13 products they trade. So, of course, innovation is 

 14 slightly slowed down there in Indonesia. 

 15 Egypt, we've provided some great 

 16 technical assistance to Egypt this summer. Egypt 

 17 is working on draft legislation, which should be 

 18 done by the end of the year. And they are also 

 19 going to start a market. 

 20 So, there are some exciting things 

 21 happening in the developing markets, and we'll 

 22 keep tabs on that let you know as things develop. 

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 1 I also want to just highlight -- and I 

 2 think almost everyone around this table knows that 

 3 we provide training to large delegation I Chicago 

 4 every year. And the reason I think you all know 

 5 is that everyone around this table has probably 

 6 participated or had their staff participate at one 

 7 time. And I appreciate your help with training 

 8 these people. We usually get 60 to 70 people from 

 9 all around the world and emerging and more 

 10 developed markets. 

 11 And finally, I'm going to highlight a 

 12 few projects happening in the International 

 13 Organization of Security Commissions, our -- the 

 14 international body that deals with securities 

 15 because I think these -- this is a time for you to 

 16 comment. These papers always go out for comment 

 17 from the industry and it's time to see your input. 

 18 If you don't like the way IOSCO is going 

 19 on a certain principle that's going to govern 

 20 security regulators across the board, we should 

 21 know before it goes out and becomes final. So, 

 22 let me highlight these in a big picture way. 

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 1 There's a mandate taking place right now 

 2 on direct electronic access to the markets 

 3 committee of IOSCO. There was enough concerns, 

 4 you know, participants are in a rush to get to the 

 5 market. Of course, milliseconds count. And 

 6 there's not maybe enough filters on what's going 

 7 through directly to the market. So, there's a 

 8 survey going out that the committee is putting out 

 9 and has put out actually to exchanges to talk 

 10 about what exchanges are doing with rules and 

 11 policies that govern direct electronic access to 

 12 exchanges. And we're going to look at what's 

 13 happening all over the world, take those, and see 

 14 what we can do to streamline or approach. 

 15 But we also understand and recognize, at 

 16 least from the CFTC, that is not only an exchange 

 17 issue but an intermediary issue. So, what are 

 18 intermediaries doing for risk management of direct 

 19 electronic access? And this is going to be taken, 

 20 I think, either by IOSCO and definitely by this 

 21 commission. 

 22 Another group within IOSCO is examining 

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 1 what regulators should now be doing with 

 2 electronic record keeping. I think if you look at 

 3 our act, you'll see that our act was developed 

 4 around the notion that everything was -- would be 

 5 kept by paper, and that's how it was written. And 

 6 now that everything is kept electronically, should 

 7 regulators around the world be changing what we 

 8 request and what we require to be kept? 

 9 So, I'm going to ask you to volunteer 

 10 one more time. You see a theme here. The IOSCO 

 11 is holding panels around the world. They've 

 12 already had one public panel in Asia. They had 

 13 one in Europe. And now we're going to have one in 

 14 the Americas, in Miami. And we're looking for one 

 15 from our FCM community to participate on the panel 

 16 to talk about how you're keeping your records, 

 17 what form -- how you deal with and communicate 

 18 with electronic service providers. So, see me 

 19 after the meeting if you have a particular 

 20 interest in this. 

 21 And finally, in another interesting 

 22 report -- there's a lot more going on, but I'm 

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 1 trying to just highlight the big points -- 

 2 evaluation of hedge funds. A final report will 

 3 come out in November by IOSCO. It has already 

 4 been out for industry comment. Industry comment 

 5 was taken and to tell you the truth, we didn't get 

 6 a ton of industry comment. So either you thought 

 7 everything was great or you didn't -- it wasn't 

 8 brought to your attention, so I'm trying to bring 

 9 these things to your attention. But it will come 

 10 out final in November. 

 11 And then finally, I just want to talk 

 12 about two big things that are going on in IOSCO 

 13 that are continuing to happen and have been 

 14 happening for a long time. One is the IOSCO 

 15 multilateral MOU. It raises standards across the 

 16 board for information sharing among foreign 

 17 regulators. IOSCO has made a statement that by 

 18 2010, they want all IOSCO members to have applied 

 19 to be an IOSCO multilateral MOU. 

 20 And if you don't meet the standards -- 

 21 it's a very tough review process. If you're not 

 22 meeting the standard for information sharing as a 

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 1 regulator, you at least have to pride your 

 2 intention to change your laws to be able to get 

 3 there. So, jurisdictions such as Bermuda, Dubai, 

 4 China, Sri Lanka have all signed on, and this 

 5 helps the CFTC greatly. 

 6 And then, the last thing that's an 

 7 ongoing project of IOSCO is the principles. There 

 8 are 30 principles for key -- for regulators that 

 9 they must meet. And we're encouraging 

 10 jurisdictions to go through a self assessment. In 

 11 other words, look at these principles and see if 

 12 they're meeting them. I gave a speech last week 

 13 for regulators from the Americas trying to 

 14 encourage them to look at their laws and see if 

 15 they're meeting the standards that IOSCO has put 

 16 out. 

 17 So, in a nutshell, that's what's been 

 18 happening the last year. And I just have to end 

 19 with saying I really thank my own staff. We're 

 20 mean and lean and at least lean and not so mean 

 21 here at the CFTC. 

 22 And I can talk and showcase what we're 

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 1 doing here in the Office of International Affairs, 

 2 but it's really -- the work is done by my staff. 

 3 So, I appreciate this opportunity. 

 4 CHAIRMAN LUKKEN: Well, we're very 

 5 fortunate to have Jackie heading up our 

 6 international effort here at the CFTC and her 

 7 staff who do an excellent job. And you get a feel 

 8 for how important international issues are. It 

 9 used to be, I think, two separate worlds, but now 

 10 all these things are so important to the daily 

 11 functioning of our business. And that's what 

 12 we're here to talk about today. 

 13 So, with that, I will introduce our 

 14 guest, Mr. David Wright. Thank you, David. 

 15 MR. WRIGHT: Acting Chairman Lukken, 

 16 Commissioners from the CFTC, distinguished guests, 

 17 I'm very honored to be here, and we feel extremely 

 18 privileged, Mario and myself, to have the 

 19 opportunity to talk to you today about two major 

 20 securities industry projects underway, one of them 

 21 near completion in the European Union. 

 22 We greatly welcome this openness and 

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 1 your friendliness to us. We're here to share 

 2 views and listen to your perceptions. And I think 

 3 we have a lot in common, a lot of issues in 

 4 common. And I think we'll discover that over the 

 5 next few hours or so. 

 6 I think this is a good example of the 

 7 sort of cooperation that we value in the European 

 8 Union between ourselves and the United States. We 

 9 encompass that through what we call a financial 

 10 markets regulatory dialogue where we talk with our 

 11 counterparts in the Treasury, the CFTC, the FED, 

 12 NAIC, and so forth to try and understand where we 

 13 have problems and to try and resolve issues. 

 14 So, the more we understand each other it 

 15 seems to me, the more capital markets will grow 

 16 and be stronger and the more we will influence the 

 17 emerging markets that Jackie has just been talking 

 18 about. And I'd like to thank her for her very 

 19 efficient help in bringing us here today. 

 20 I'd like to over the next 20 minutes or 

 21 so outline what is known as MiFID, the Markets in 

 22 Financial Instruments Directive, a little bit 

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 1 clumsy the terminology. I want to outline the key 

 2 political issues here, the choices we have to 

 3 make, and I'd like to certainly concentrate on 

 4 some of the commodity and energy derivative issues 

 5 that are obviously of major interest to the CFTC. 

 6 If you look at this extraordinary 

 7 diagram, and I start with a quotation because my 

 8 commissioner, who is Commissioner McCreevy from 

 9 Ireland, has described MiFID as not, I repeat, 

 10 "Not some fearsome man-eating plant. It is simply 

 11 shorthand for the Markets in Financial Instruments 

 12 Directive." 

 13 Now, this diagram, I can't make it out 

 14 myself. My staff produced it for me. I don't 

 15 know whether that's a skull or -- at the top. I 

 16 don't know whether this is sort of modern art, 

 17 some sort of Tracey Urman thing that's worth a 

 18 fortune, but MiFID is actually quite a good 

 19 acronym when you compare it to some of our other 

 20 directives, one of which is known as MAD, m-a-d, 

 21 the Market Abuse Directive, which has come into 

 22 the news recently because the governor of the Bank 

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 1 of England claimed erroneously that it prevented 

 2 him from providing assistance to Northern Iraq. 

 3 So, MiFID is actually much more simple than I hope 

 4 the title implies. 

 5 Now, where are we in terms of procedure 

 6 before we get to some of the substance. But it's 

 7 taken us in Europe and the European Commission and 

 8 among the member states, it's taken us about four 

 9 years to get to the main directive, which was 

 10 eventually agreed after some -- a lot of political 

 11 turbulence at one stage. Eventually, we got 

 12 everybody to agree, all our 27 member states and 

 13 the European Parliament. We have a co-decision 

 14 process. And I'll come back to that. 

 15 So, the basic rules were agreed in 2004. 

 16 We then had to flesh out the detail. And that 

 17 took us another two years or so and further 

 18 complex negotiations with all our constituents, 

 19 market participants, member states, the European 

 20 Parliament, and also we've got a lot of important 

 21 advice from our regulators, which we call CESR, 

 22 the Committee of the European Securities 

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 1 Regulators. 

 2 And now our method enters into force 

 3 very shortly on the first of November, 2007, so 

 4 your meeting today, Chairman, is extremely timely. 

 5 MiFID is the centerpiece of our 

 6 financial integration process in Europe and the 

 7 key issue for us now in political terms is to get 

 8 this thing implemented across all our member 

 9 states and across all markets. 

 10 Now, in spite of what is sometimes 

 11 referred to in the press as a poor record so far, 

 12 we believe that some 23 of our member states will 

 13 be on time by the first of November. That's not 

 14 so bad out of 27. Of course, those who are late 

 15 will be subject to what we have as our 

 16 disciplinary procedures. We can take the member 

 17 states to the Court of Justice. And what is worse 

 18 for those late comers is that their firms will not 

 19 be able to benefit from the passport regime, but 

 20 they will not be able to stop new inward flows of 

 21 business, so actually it doesn't make the 

 22 slightest bit of sense to be late, and we 

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 1 constantly remind member states of that. 

 2 Now, as I said, MiFID is a comprehensive 

 3 regulatory regime governing financial trading and 

 4 intermediation in Europe. It's the centerpiece of 

 5 our regulatory effort to integrate the capital 

 6 markets in Europe. We believe that the evidence 

 7 is suggesting that the capital markets in Europe, 

 8 all things considered, are getting stronger. 

 9 Markets are growing well. And we believe MiFID 

 10 will encourage those forces further. And I will 

 11 certainly give you some evidence on those grounds. 

 12 Why do we bother in the first place? 

 13 Well, we had some problems with the old rule. And 

 14 the problems with the old rule were that there was 

 15 a lack of harmonization of some aspects. There 

 16 were public good clauses or let-outs, which 

 17 allowed certain member states in certain 

 18 conditions to block types of cross-border 

 19 business, and basically, financial markets between 

 20 1993 and 2004 had undergone a profound revolution 

 21 in terms of both trading and in terms of service 

 22 provision. So, the 1993 directive was simply not 

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 1 fit for purpose. 

 2 The second area that we felt really 

 3 needed changing was an old rule which was called 

 4 the Concentration Rule, which basically allowed 

 5 member states to channel all trading to regulated 

 6 markets. And some member states indeed did that, 

 7 France for one, Italy for another and so forth. 

 8 Now, we felt that that was not 

 9 competitive. We needed to open up trading, more 

 10 competitive trading, drive down the cost of 

 11 capital. And we did a lot of economic work to 

 12 show that if we could do that, if we could capture 

 13 those basic points in reducing the cost of 

 14 capital, European GDP would strengthen. And we 

 15 believe we're seeing the signs of that now. And 

 16 those numbers are important, extremely important, 

 17 and I believe that the numbers will increase in 

 18 intensity, positive benefits as we go forward. 

 19 One of -- another type of weakness we 

 20 had before was that there was inconsistent 

 21 reporting of trading, and some member states, for 

 22 example, there was no trading whatsoever reporting 

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 1 of OTC trades, which meant you never really -- 

 2 investors never really got a full picture of the 

 3 market. 

 4 So, as I said, MiFID is at the center of 

 5 this integration process. It's part of a suite of 

 6 directives, a suite of proposals, all of which 

 7 have now been agreed, including a Simplified and 

 8 Harmonized Prospectus Regime, the Market Abuse 

 9 Regime, which I've referred to that's called MAD, 

 10 as you'll recall, transparency obligations, 

 11 company law reform, auditing, and accounting. And 

 12 accounting, the International Accounting Standards 

 13 System, you're aware Europe took, I think, a very 

 14 bold move to introduce that throughout the 

 15 European Union. And now we're at this challenging 

 16 moment where we want to converge U.S. gap with IAS 

 17 and make it even easier for companies to do 

 18 transatlantic business without reconciling and 

 19 spending a lot of money on reconciling accounts. 

 20 The philosophy of MiFID I think is very 

 21 important to understand. It is a principles-based 

 22 approach. And a principles-based approach is 

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 1 something we think is absolutely critical in 

 2 Europe to any regulatory problem. We do not think 

 3 that we can regulate every nook and cranny of 

 4 financial markets, because by the time you have 

 5 done that, markets have moved on. We think it's 

 6 much more important to concentrate on basic 

 7 principles. 

 8 Now, the judgment of what is a principle 

 9 and what is a rule is never easy. And of course, 

 10 principles require a very important coordination 

 11 of regulators to ensure that those principles are 

 12 broadly implemented on the ground in a consistent 

 13 way. So, we've had a lot of discussion about 

 14 whether are rules are not principles-based enough, 

 15 too principles-based, and so forth. So, there's 

 16 always a fine level of judgment here. 

 17 The second issue of great importance in 

 18 MiFID is the level and high level of investor 

 19 protection. In Europe, we have basically two 

 20 schools of regulatory philosophy. I simplify to 

 21 make the point. We have one school which I would 

 22 describe as the caveat impetor let. Consumers, 

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 1 investors have -- should get proper information 

 2 and then take their responsibility. 

 3 But we have another school which is -- 

 4 fears that that is not enough, that fears that 

 5 this will lead perhaps to scandals in the market 

 6 and have some evidence to back that up. And so 

 7 here, you have a school of philosophy and perhaps 

 8 one could say led by France, Italy, and others 

 9 which wants very deep levels of investor 

 10 protection, very strong levels of harmonized 

 11 rules. So, that again has been an area where 

 12 compromises have to be found. 

 13 We don't rely on massive levels of 

 14 disclosure in MiFID, but we do rely on strong 

 15 rules for inducements, conflicts of interest, and 

 16 best execution. And best execution was an area 

 17 where we spent a long time deciding what is best 

 18 execution, what are the variables that should be 

 19 included in the best execution basket, does it 

 20 include, for example, the commissioned charges of 

 21 firms. In the end, we decided it would. 

 22 And the fourth principle that we've 

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 1 tried to apply and I think successfully is we 

 2 tried to calibrate MiFID according to the 

 3 different types of business. So, if you're a 

 4 professional firm, the rules are lighter. If you 

 5 are a retail investor, the applied rules are much 

 6 more developed. 

 7 So, we have in effect three levels. We 

 8 have the retail, we have professional, and we have 

 9 eligible counter-party. And if it's an eligible 

 10 counter-party -- eligible counter-party 

 11 transaction, much of the conduct of business 

 12 rules, for example, are waived. Light touch, a 

 13 light touch approach to professional markets, and 

 14 we believe that's the right approach with 

 15 professional markets taking their responsibility. 

 16 We've also tried, and I don't know 

 17 whether you have this problem in the United 

 18 States, to limit what we call add-ons or gold 

 19 plating. Gold plating is when a member state 

 20 takes the agreed rules of the European Union level 

 21 and just tweaks them a bit or adds a bit or puts 

 22 some more detail in. 

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 1 There's one famous example of a ten page 

 2 insurance mediation directive which ended up with 

 3 900 pages of guidance. Well, we don't like that. 

 4 We think that's inefficient. We think it creates 

 5 fragmentation. So, what we have tried to do very 

 6 hard with MiFID is to limit gold plating to the 

 7 absolute minimum. And here, for example, and my 

 8 good friends in the UK, of which one is on the 

 9 left here, the UK does have a tendency to slightly 

 10 add in new rules on top of European rules. So, 

 11 we've tried to narrow down the possibility to do 

 12 that. 

 13 We've also tried to use what we call a 

 14 regulation, a rule which is directly applicable in 

 15 member states wherever possible, as opposed to a 

 16 directive, where there is latitude for our member 

 17 states to add additional explanation. 

 18 How have we -- I beg your pardon. How 

 19 have we decided all of this? We've decided this 

 20 through what we call the Lamfalussy Process. And 

 21 I won't go into great detail here, but this is a 

 22 quite evolutionary approach to the decision making 

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 1 in Europe on financial services. And it's called 

 2 Lamfalussy after a report which was drafted under 

 3 his chairmanship in the year 2000, which I 

 4 participated in. And it has helped dynamize and 

 5 unblock blockages in the political process which 

 6 have allowed us to move forward. 

 7 It's based on four levels. And the 

 8 first level is classic decision making in the 

 9 European Union whereby my institution, the 

 10 commission, proposes to the council and the 

 11 European Parliament a proposal and it is agreed in 

 12 co-decision between those two parties, the Council 

 13 of Ministers, if you like, of the member states 

 14 and the European Parliament, the director -- 

 15 directly elected members of Parliament from each 

 16 of the member states. So, that is the first 

 17 level. 

 18 After the -- after the first level, we 

 19 have level two. And level two is all about the 

 20 implementing rules. Those are the rules that the 

 21 commission, my institution, can adopt having got 

 22 the agreement of our member states through what is 

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 1 called the European Securities Committee. 

 2 And what we've done here is because 

 3 these rules are very technical, we've asked our 

 4 regulators, which is CESR, you remember the name 

 5 CESR, to provide us with all the technical details 

 6 that we've needed. And that is the real novelty 

 7 of the Lamfalussy process because this ahs allowed 

 8 us to network our regulators together, to force 

 9 them to work together, to advise the commission, 

 10 and to come out with what we believe to be good 

 11 rules. 

 12 The third level of Lamfalussy is about 

 13 strengthening the cooperation between the 

 14 regulators themselves. Having got our rules 

 15 through level one and level two, we've got to make 

 16 sure that they're adopted on the ground in a 

 17 consistent way. That's what level three is about, 

 18 the day to day regulatory cooperation between the 

 19 FSA in London, the AMF in France, or Levarthian in 

 20 Germany. 

 21 And the final part of Lamfalussy is 

 22 strengthened enforcement of the law. And that 

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 1 means by the commission. It means by member 

 2 states. It means being extremely active in 

 3 pursuing any breech of community law. And again, 

 4 there are a lot of technical measures we've done 

 5 to try to accelerate and deepen our efforts here. 

 6 What are the key deals? What are the 

 7 political deals of MiFID that have been so 

 8 important? I think the first that we have to 

 9 mention here is that the strengthening of the 

 10 strengthened single passport for investment firms 

 11 on the basis of home country control. In other 

 12 words, a firm goes to its home regulator, says I 

 13 want to deliver investment services, whether 

 14 they're commodity business or whatever, throughout 

 15 the European Union and gets a single passport from 

 16 the member state. And that is absolutely critical 

 17 for the freed provision of services and for 

 18 efficient markets. That is at the heart of MiFID 

 19 and it's extremely critical. 

 20 But in order to do that, the quid pro 

 21 quo has been extremely high standards of investor 

 22 protection to compensate this, if you like, 

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 1 delegation of power from one member state to 

 2 another. So, that has been a critical, if you 

 3 like, political deal at the heart of MiFID. 

 4 And the second of them is one I've 

 5 mentioned already, has been the abolition of the 

 6 concentration rule. We've got rid of this rule 

 7 which required all trading to be done on regulated 

 8 markets. What we've now done is to allow 

 9 competition, competition between stock exchanges, 

 10 multilateral trading platforms, systematic 

 11 internalizers, in other words, firms like Goldman, 

 12 Sachs or Morgan Stanley who want to run their own 

 13 electronic systems. So, we're now opening up into 

 14 a much more pro competitive way for trading 

 15 financial instruments and shares. 

 16 What is the quid pro quo for that? 

 17 Well, the deal for that was more pre and post 

 18 trade transparency for regulated markets, for 

 19 multilateral trading platforms, and particularly 

 20 for systematic internalizers, you have to pose 

 21 under certain conditions their pre-trade numbers 

 22 on the screens for everybody to see and trade. 

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 1 Transaction reporting too has been a 

 2 major innovation, and I'm going to come to that in 

 3 a minute. 

 4 The requirements for firms are 

 5 important. I don't think they're over onerous. 

 6 They're organizational. They require requirements 

 7 related to risk management, audit, compliance, 

 8 personnel dealing, limitations on personal dealing 

 9 by employees. We've got rules that say that you 

 10 can outsource portfolio management to third 

 11 countries, for example, but you've got to take 

 12 great care. And the outsource company has to be 

 13 regulated in the third country. 

 14 There are very strong provisions in 

 15 MiFID about conflicts of interest. We do not want 

 16 to have a system which is riddled with conflicts 

 17 of interest throughout the whole system. Likewise 

 18 in MiFID, there are extremely important conduct of 

 19 business rules. For example, information to 

 20 clients must be fair, clear, and not misleading, 

 21 but we don't go into endless detail about what 

 22 that should be. That is a principle. 

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 1 Investment advice and portfolio 

 2 management must be suitable, suitable for the 

 3 investor's level of experience, risk appetite, and 

 4 investment objectives. Suitability then 

 5 absolutely at the heart of the relationship 

 6 between an investment firm and a client. And 

 7 other services, other services outside that scope 

 8 must be appropriate, key issue here 

 9 appropriateness to the investor's knowledge and 

 10 again, as a knocked out here, there is an 

 11 exception which allows execution only to be 

 12 outside the scope of those disciplines. 

 13 Firms must provide best execution when 

 14 executing orders on behalf of clients. And as I 

 15 said earlier, we spent a long time regulating and 

 16 trying to find the right balance here. 

 17 There is strong regulation of 

 18 inducements. The payments from firms -- from -- 

 19 to and from firms in relation to investment 

 20 services must be justified and fully disclosed and 

 21 must be in the interest of clients. And as usual 

 22 and quite predictably, there are important record 

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 1 keeping obligations and requirements for client 

 2 agreements for retail clients. 

 3 We avoided what I think would have been 

 4 a big mistake, which is something our regulators, 

 5 for example, were in favor of, which was to draw 

 6 up a standard contract. We in the commission 

 7 looked carefully at that advice and said no. We 

 8 thought that was too much, and the results, I 

 9 think, would have saved firms a great deal of 

 10 money because they would have had to redo every 

 11 single client contract. So, we avoided 

 12 harmonizing in every single area. 

 13 Let me move on now to an important area 

 14 which was transaction reporting. And I'm moving 

 15 closer perhaps to your areas of major interest. 

 16 Now here we have a serious of disciplines, which 

 17 are extremely important and at the top -- at the 

 18 heart of our MiFID regime. 

 19 Transaction reporting to local competent 

 20 authorities of all -- for buy and sell 

 21 transactions must be carried out in all financial 

 22 instruments admitted to trading on a regulated 

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 1 market. We want -- we then had provisions which 

 2 requires the sharing of data between competent 

 3 authorities to ensure that the competent authority 

 4 of the home firm knows exactly what the position 

 5 is on such and such a stock, but we do have 

 6 carve-outs from those obligations for primary 

 7 market transactions, securities financing, and for 

 8 certain options. So, transactions reporting here 

 9 absolutely critical, post-trade transaction 

 10 reporting. 

 11 For commodity derivatives, regulators 

 12 have adopted an exchange centric approach since 

 13 there is no OTC trading of exchange admitted 

 14 instruments. So here, for example, the exchange 

 15 provides the feed to local regulators. We have a 

 16 system -- we've introduced a flexible system in 

 17 order to code those various products. And the 

 18 home competent authorities of remote members can 

 19 request data from exchanges -- from the exchange's 

 20 local regulators in order to make sure we 

 21 overburden the system here with too much 

 22 automaticity and too much cost. 

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 1 Now, the transparency -- the detailed 

 2 transparency provisions apply to shares only. 

 3 They apply to all trading venues. They apply to 

 4 firms subject to post-trade obligations for OTC 

 5 trades. You remember earlier, that was not the 

 6 case in certain markets. We've now made that 

 7 obligatory in order to get the full picture of 

 8 trading of all instruments covered by MiFID. 

 9 There are exemptions for crossing 

 10 networks, and there are importantly, and this was 

 11 another long discussion, delayed publication for 

 12 post-trade information for large trades on under a 

 13 sliding scale. Some of the big United States 

 14 investment firms were very concerned that for big 

 15 block trades, sufficient time was needed in order 

 16 to divest big trades and not to prejudice market 

 17 trading. 

 18 We've had carve outs here for primary 

 19 market transactions, stock lending and repos, 

 20 options and warrants. The reporting is required 

 21 within three minutes except for portfolio trades 

 22 and out of hours trades. And there's a 

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 1 requirement of course for organization and conduct 

 2 of regulated markets. So, you can see here a very 

 3 extensive and complete reporting set of 

 4 requirements under MiFID. 

 5 Now, concerning the issue of 

 6 commodities, what commodities and what products 

 7 are covered? And this is an important slide which 

 8 I think we should concentrate briefly on. 

 9 Basically, what you have in this matrix in the 

 10 second row down is that MiFID covers options and 

 11 futures only if it's cash settled or on the 

 12 standardized basis and for which types of firms, 

 13 banks and primarily investment firms. Not all 

 14 investment firms, investment firms -- not all 

 15 investment firms are covered if there are -- there 

 16 are exceptions as you can see here where firms are 

 17 dealing on own account, otherwise then as a market 

 18 maker or off market liquidity provider. 

 19 So, we are talking here in MiFID at the 

 20 moment, the scope is covering options and futures, 

 21 covering the types of firms, banks and investment 

 22 firms for cash settled or standardized options and 

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 1 futures trading. We do not cover either 

 2 non-financial groups. That is, for example, BP. 

 3 Trading energy products, that is outside the scope 

 4 or indeed their subsidiaries. One of the issues 

 5 now is this the right picture. And we've been 

 6 required under the rules to start out with a major 

 7 -- a review of whether the current scope and the 

 8 current application of MiFID is appropriate. 

 9 And what we're doing here is to carryout 

 10 a very detailed consultation process on the basis 

 11 of three legal requirements. The first of them 

 12 requires us to look at the scope. Under Article 

 13 65 of MiFID, there are questions of scope as to -- 

 14 as well as of conduct -- as well as of content of 

 15 financial regulation in relation to persons active 

 16 in commodity derivatives and exotic derivatives. 

 17 So, the question is here what is the right scope 

 18 for MiFID, and we are required now to carry that 

 19 review and we were doing that. 

 20 The second is to look and this is a 

 21 requirement under Article 40 of MiFID. We are 

 22 required to reexamine the provisions relating to 

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 1 the criteria for determining which OTC derivative 

 2 contracts relating to commodities and exotic 

 3 derivatives are to be treated as financial 

 4 instruments for the purposes of MiFID. So, that 

 5 is the second hook on which we have to work. 

 6 And the third hook requires us to look 

 7 at whether the capital requirements under the CRD, 

 8 the Capital Requirements Directive are 

 9 appropriate. Because in certain cases, firms do 

 10 not have capital requirements for carrying out 

 11 commodities derivatives business and in certain 

 12 cases, they do. So, the question is here what is 

 13 the right balance. Well, how do we get to a level 

 14 playing field? So, we are now looking at those 

 15 issues as well. 

 16 Now, another issue that has just come up 

 17 very, very recently, and some of you here I know 

 18 are aware of it, is the commission wants to open 

 19 up and create much more dynamic energy markets in 

 20 the European Union. And that means looking at the 

 21 structure of energy, looking at unbundling of 

 22 supply from the -- ownership of the 

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 1 infrastructures and so forth. 

 2 And just the last week or so big 

 3 proposals have emerged. And part of that proposal 

 4 has been a request to carryout some further work 

 5 whereby the regulators, CESR, will be requested 

 6 alongside our energy regulators to investigate 

 7 whether transactions in gas and electricity supply 

 8 contracts and derivatives should be a subject of 

 9 pre and post trade transparency requirements. So 

 10 again, the question is here what should be covered 

 11 by MiFID, what should not be covered by MiFID, and 

 12 what should be covered by the Capital Requirements 

 13 Directive. 

 14 Now, I don't want to anticipate in 

 15 anyway the outcomes of this work. We're very much 

 16 in the early stages of it. On the slide, you will 

 17 see that we intend to bring forward our final 

 18 report at the end of next year. We are certainly 

 19 seeking more evidence and more advice from people 

 20 like Anthony Belchambers but also from our 

 21 regulators on a number of complex issues. 

 22 And I think it would be foolish on 

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 1 behalf of the commission to try to do this work in 

 2 a hurry. I have a general principle, by the way, 

 3 that fast regulation and fast decisions are not 

 4 usually the right approach in financial markets. 

 5 You need to think very, very carefully about all 

 6 the impacts of different positions. 

 7 Another area that I should draw your 

 8 attention to where we're underway is whether there 

 9 should be more forced transparency, obligatory 

 10 transparency in the post trading area, notably for 

 11 the bond markets. And here the commission has 

 12 been carrying out a great deal of work again. 

 13 We've been getting an awful lot of advice. 

 14 The general view around is that there is 

 15 no market failure with respect to transparency and 

 16 wholesale markets. The general view around is 

 17 that nevertheless there are issues concerning 

 18 access to bond markets. We just had a big hearing 

 19 on all this in Brussels. We've exhaustively 

 20 discussed the issues. We're going to come forward 

 21 with our final report at the beginning of next 

 22 year. And I think we're encouraged by the fact 

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 1 that the industry itself is taking initiatives not 

 2 so bold as your trace system in the United States 

 3 but I think a first move to start making a much 

 4 more open retail size type transaction reporting 

 5 for all the most liquid bonds in Europe, and we 

 6 hope to see that start early next year. 

 7 So, looking and summarizing here, what 

 8 do we think MiFID is going to do? Well, we do 

 9 think it's going to capitalize significant market 

 10 change. We do certainly think it's going to 

 11 increase competition between trading venues and 

 12 investment firms. We think that will drive down 

 13 the cost of capital and the cost of trading. And 

 14 we believe that many market users will benefit. 

 15 We believe the competition across the border is 

 16 going to hot up. 

 17 You're all aware of enormous amounts of 

 18 trading -- changes in the structures of stock 

 19 exchanges, for example, in the European Union. 

 20 And that in our view, to some extent, has been 

 21 driven by MiFID. We believe that trading volumes 

 22 and financial information flows will improve. 

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 1 We're seeing a lot of innovation going on here. 

 2 We think over time and we think we have evidence 

 3 that our markets in Europe will be more 

 4 interconnected, deeper, and more liquid. And in 

 5 the end, the final investors will benefit. 

 6 And for example, here, we've seen a very 

 7 interesting project led by some of the world's 

 8 major investment banks called Project Turquoise. 

 9 This is a direct challenge to stock exchange. 

 10 It's going to try to capture all the flow and 

 11 trade extremely fast. We've seen other projects 

 12 such as Project Boat in the area of the provision 

 13 of financial information, Equiduct looking at 

 14 providing Pan European trading of stocks and 

 15 shares for the smaller banking community. 

 16 So, overall is it an export of the 

 17 European Union? I don't like to think too much in 

 18 terms of exporting, but I believe that here we 

 19 have a project, a model, which I think has a lot 

 20 of good policy in it. It has been absolutely 

 21 exhaustively discussed. It's a principles-based 

 22 approach. It gives passports to firms from their 

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 1 home base to do their business right across the 

 2 European Union. It harmonizes where we have to 

 3 harmonize, and it provides a much more open and 

 4 transparent system. And I don't think we would 

 5 have got there, Chairman, if we hadn't had our 

 6 renovated decision making structure called MiFID. 

 7 So, the jury is out, of course. As I 

 8 said earlier, we began on the first of November, a 

 9 few more days to countdown. But I hope if I'm 

 10 ever asked back, I hope I'll be able to report a 

 11 really exciting and developing and innovative 

 12 capital market in Europe, where at the end, all 

 13 our investors and our economies benefit. 

 14 Thank you very much. 

 15 CHAIRMAN LUKKEN: Thank you very much, 

 16 David. That was a very interesting overview of 

 17 MiFID to do in that amount of time. I know 

 18 there's a lot to chew on there for us. And many 

 19 of these folks, I think, are going to have 

 20 interest in the commodities section in particular. 

 21 So, I figured it might be appropriate 

 22 just to ask Anthony, somebody who has been very 

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 1 involved from the industry point of view on MiFID, 

 2 to give an industry prospective from Europe and -- 

 3 well, you can kick it off, but others, feel free 

 4 with your name cards to put them on their side 

 5 when you have a question or have a comment, 

 6 including commissioners. And we will get to those 

 7 in order. 

 8 But let's start out with Anthony. I 

 9 think that would be appropriate. 

 10 MR. BELCHAMBERS: Just a few 

 11 observations, if I may, first on what David is 

 12 saying. He's absolutely right, and I would 

 13 commend the commission for trying to get 27 member 

 14 states with very different structures, trading 

 15 structures, very different regulatory authorities, 

 16 very different regulatory functions to actually 

 17 agree a common directive is, I think, a remarkable 

 18 achievement, even if we didn't always like some of 

 19 the results. It's nevertheless a huge 

 20 achievement. 

 21 Having said that, I think one of the big 

 22 lessons that we need to learn and I think we have 

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 1 not yet learned is the credibility of these big 

 2 projects turns on the ability of firms to deliver 

 3 on the ground. And it turns on the ability of the 

 4 firms to implement efficiently and effectively. 

 5 And I still think sometimes they are the 

 6 Taylor and Charlies in the process. The 

 7 legislators have a bite. The regulators have a 

 8 bite. And very often it's left to the firms to 

 9 pick up the pieces in quite a short time table. 

 10 So, there's usually a scramble and a mad rush by 

 11 compliance to try to get in on time. I think 

 12 sometimes we just don't reflect enough sympathy 

 13 for that position. 

 14 All of that said, I think it's also 

 15 inevitable that we will have some member states 

 16 who are stragglers in the process. They have 

 17 different legislative procedures. This directive 

 18 will impact very differently on some member states 

 19 to others, and so you're bound to get a staggered 

 20 approach towards getting in on time. But again, I 

 21 think it's going to turn out to be a very good 

 22 achievement at the end of the day. 

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 1 I think it principles great supervision, 

 2 which is what David touched on. I think it's 

 3 interesting. It isn't the time to go through it 

 4 now, but basically, as I read it, what it means is 

 5 the regulator will set the rules, will set the 

 6 targets, will enforce those rules, but the firms 

 7 will have freedom to implement as they see fit. 

 8 And what is critically important is that 

 9 if this is -- if this is to genuinely move from a 

 10 supervisory approach that says comply or explain, 

 11 it's important that the supervisors understand 

 12 what that means as well as the compliance 

 13 departments and officers within the firms 

 14 themselves and the senior managers. They all have 

 15 to grow into this new, dare I say it, mature way 

 16 of regulating. 

 17 And I'm a great buyer of the idea, but I 

 18 think the regulatory authorities as well as the 

 19 compliance have to deliver on this new way of 

 20 regulating. And I think that's critically 

 21 important. Otherwise, we'll probably end up in 

 22 tears. There will be a misunderstanding about 

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 1 what the process means by one side or the other. 

 2 If I just touch on one other thing and 

 3 that is -- and I think personally when David 

 4 mentioned key deals, I think principles-based 

 5 supervision is a key deal. I think it's the third 

 6 key deal out of this. But there's something else 

 7 we mustn't lose sight of. And this that for the 

 8 very small firms or domestically oriented firms 

 9 who have no real aspirations to do cross border 

 10 business, this is regulatory cost -- this is huge 

 11 cost to them without a lot of direct benefits, 

 12 strategic benefits. And I think sometimes we -- 

 13 there's a risk that we might just lose sight of 

 14 that. 

 15 General observations, in terms of 

 16 commodities, I think we all know who we mean. 

 17 It's essentially non-bank, non-investment 

 18 corporates whose main underlying business 

 19 essentially is trading in commodities. And the 

 20 breeding space that they have got which we 

 21 particularly want to make sure the regulatory 

 22 structure is proportionate, is it not -- the 

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 1 industry is not making a case of no regulation 

 2 here. It's a plea to say what we would like to 

 3 make sure is we've got proportionate regulation 

 4 that actually takes account of a number of 

 5 fundamental differences that exist between banks 

 6 and investment firms on the one hand and these 

 7 corporates on the other, so that in effect, we end 

 8 up with tailored regulation, if I can use that 

 9 description. 

 10 I won't go through all the differences, 

 11 what I would say is if I may just finish on a 

 12 quick summary of what the industry position is and 

 13 in this context, we're working very closely with 

 14 ISDA and an organization called EPHED, which 

 15 really represents the sort of physical, more 

 16 physical side of the industry. And essentially 

 17 our position is quite straightforward. 

 18 The first thing we're saying is we like 

 19 the definitions as they are at the moment. We 

 20 thoroughly approve of those and don't want to see 

 21 any change in them. The second thing is that we 

 22 think prudential regulation is best built around 

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 1 these types of firms, where it's founded on for 

 2 example, systems and controls, more pillar two 

 3 than pillar one. 

 4 We also think that because of the nature 

 5 of the business, retail protection doesn't sit in 

 6 the market. It sits in the high street. There 

 7 are physical regulations, price regulators who 

 8 will be looking after the interests of consumers 

 9 in the high street, rather than the concept of 

 10 investors. So, I think there again, there is a 

 11 fundamental difference that sits over these 

 12 markets. 

 13 And it's worthwhile remembering that 

 14 these markets are also subject to very often dual 

 15 regulation because you have physical regulators 

 16 who will be looking after the physical side of the 

 17 business. And I think that's important. 

 18 The systemic risk argument is probably 

 19 critically important in all of this. And that is, 

 20 I think -- it's a little bit of a sort of unfair 

 21 comparison, but I'll make it anyway, which is 

 22 Northern Iraq when compared with Enron. And that 

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 1 gives you an example of where the public 

 2 perception and the systemic risk lies in the 

 3 difference between these two groups, if I may put 

 4 it that way. And I think that's quite a graphic 

 5 example of that. 

 6 So, I would argue that the systemic 

 7 risk, the risk that's posed to the system because 

 8 they're not involved in payment systems of these 

 9 type of organizations is less. And that needs to 

 10 be taken into account. If we say we have a 

 11 risk-based regulatory structure, then that has to 

 12 be taken into account when we decide what is the 

 13 appropriate level of regulation. 

 14 I've probably gone on for too long, so 

 15 I'll pause there just as a sort of kicker and 

 16 quick response. 

 17 CHAIRMAN LUKKEN: Craig, did you have a 

 18 comment? 

 19 MR. DONOHUE: I just had a question -- 

 20 CHAIRMAN LUKKEN: Go ahead. 

 21 MR. DONOHUE: -- for David. Thank you 

 22 very much. David, the question -- I had a couple 

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 1 questions. One was what are the metrics that you 

 2 plan to use to measure success or failure of 

 3 MiFID. 

 4 MR. WRIGHT: Well, the first metric is 

 5 -- I would argue is what happens to the markets. 

 6 Do the markets develop? Do costs come down? And 

 7 what are the -- what is the macroeconomic and 

 8 microeconomic impact? We're very strongly of the 

 9 view that if that happens, the European economy is 

 10 sustainably stronger. And if that happens, we 

 11 think we have the balance then to look at that 

 12 benefit against what Anthony has just been talking 

 13 about, the costs of implementation. 

 14 Now, there have been all sorts of wild 

 15 estimates about the costs of all this. And it's 

 16 not an easy thing to measure, not an easy thing to 

 17 measure at all. But, I think some of them 

 18 certainly of the estimates I've seen require a 

 19 good dose of sorts. The FSA has done a good piece 

 20 of economic work looking at the benefits and the 

 21 costs. And under a reasonable scenario, they 

 22 would say payback time is three to four years, of 

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 1 that order. And perhaps, I'm not being entirely 

 2 -- but of that order. 

 3 However, that does not take into account 

 4 the dynamic, innovative effects in the market, 

 5 which are very difficult to capture. So, I don't 

 6 think you can judge MiFID for two or three years 

 7 out, but I think it's precisely those types of 

 8 metrics, as you describe them, that you want to 

 9 look at. 

 10 And the other point here is that if we 

 11 see that such and such provision, whether it's in 

 12 the commodity derivative space or transaction 

 13 reporting, whatever it is, is not working, we now 

 14 have the decision making processes inside the 

 15 European Union to make changes. 

 16 And where there are what we call 

 17 delegated powers to my institution to make those 

 18 changes and specifically in the technical areas, 

 19 we can do that quickly or we can do that in a 

 20 reasonable time frame. So, I think we've got a 

 21 flexible system, and the cost and benefits here 

 22 will be very important. 

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 1 Now, you know, I -- when I look at the 

 2 evidence over the last, let's say, five years 

 3 about what's happened in Europe in the derivatives 

 4 markets, in the trading and IPOs and the way the 

 5 bonds markets have developed, and in many venture 

 6 capital as well and risk and private equity hedge 

 7 fund development, you know, I do see a dynamic 

 8 space which was not there before. 

 9 The other thing I would be looking for 

 10 just to (off mike) is of course, from our 

 11 perspective, we would like to see the markets join 

 12 up, and Mario will talk about how we want to see 

 13 that in the settlement areas. So, we would like 

 14 to see these benefits widely spread, widely 

 15 spread. And again, looking forward, If MiFID 

 16 drives down the cost of capital, improves the 

 17 returns on investment funds, pension funds, 

 18 insurance funds, and so forth, those are the sorts 

 19 of things that we will judge to -- we will use to 

 20 judge whether we've got it right. 

 21 A final comment, you know, you never -- 

 22 and I'm sure my colleagues from the CFTC, you 

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 1 never satisfy everybody with a piece of work like 

 2 this. But the volume of discontent that has 

 3 decreased dramatically. And I think, again, it's 

 4 been a result of the way we have tried to work 

 5 with the industry, with Anthony, his colleagues, 

 6 and many others to get the calibration right, with 

 7 investment firms on how to deal with block 

 8 trading. 

 9 So, this has been a long, long process. 

 10 So, there's a lot of things here. I can only 

 11 point to empirical evidence, some fragmentary 

 12 empirical evidence today and I hope much stronger 

 13 evidence in the future. 

 14 MR. DONOHUE: Just as a follow-up, the 

 15 costs that you speak of, are they the costs of 

 16 brokerage commissions or exchange fees or the cost 

 17 imposed by clearing settlement and custody 

 18 providers or are you looking at the total cost of 

 19 liquidity or transaction costs in the aggregate 

 20 for end users of the market? And if it's the 

 21 later, how will you measure that given the 

 22 fragmentation of liquidity across a multitude of 

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 1 different types of execution venues? Do you have 

 2 the capability to do that and is that your -- 

 3 MR. WRIGHT: Well, we would, in those 

 4 conditions -- I mean, in this sort of area, what 

 5 we would typically do in my institution would be 

 6 to outsource external work. We would say that we 

 7 want to measure the costs and benefits of MiFID. 

 8 We would provide a budget, and we would seek 

 9 academic and advisory services to do some of this 

 10 work. 

 11 Now, the first -- the first cost is the 

 12 cost to firms, the cost of implementation to the 

 13 firms. And that is what we would be looking very 

 14 much on the cost side. All the other things 

 15 you've been talking about, if, for example, 

 16 liquidity was to decrease or if markets were to 

 17 shrink, we would obviously include those on the 

 18 cost side of the balance sheet. And I'm being 

 19 optimistic. I don't think that's going to happen. 

 20 But clearly, what you have to separate 

 21 here is are all the costs of MiFID in terms of the 

 22 implementation costs as opposed to the overall 

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 1 economic benefits to financial markets as a whole. 

 2 Now, it's not an easy task. I don't pretend to 

 3 say it is. And I don't -- I know that the FSA, 

 4 for example, who is the most advanced, I must say 

 5 in terms of doing this type of cost benefit work, 

 6 there is -- there are margins of error and margins 

 7 of uncertainty, which I don't think any brilliant 

 8 set of economists in the world would completely 

 9 agree on. 

 10 So, you know, you've got to look at the 

 11 holistic picture here. You can't just look at one 

 12 piece of it. 

 13 CHAIRMAN LUKKEN: Anybody else? 

 14 COMMISSIONER CHILTON: I have a 

 15 question. 

 16 CHAIRMAN LUKKEN: Yeah. Bart? 

 17 COMMISSIONER CHILTON: Well, first of 

 18 all, I just want to thank you, Mr. Wright. That 

 19 was a great presentation and real educational, 

 20 particularly to somebody who hadn't looked at 

 21 these things before, so thank you so much. 

 22 And while I take your point about not 

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 1 making sort of a seat of the pants judgment, 

 2 principles-based also has the added benefit of 

 3 making it be a little bit nimble and the ability 

 4 to sort of look around the corner and anticipate 

 5 changes. 

 6 And I'm wondering with specific regard 

 7 to electronic trading and energy. You know, in 

 8 the U.S., we've seen what some people contend are 

 9 for sure problems; others will debate it. 

 10 But, you know, if MiFID is not going to 

 11 get done for another year and a half or so, is 

 12 there something that you might be doing on that 

 13 issue or is there at least -- if you're not going 

 14 to full out regulate these things, is there 

 15 something you might be doing to at least add 

 16 transparency to these issues so that you could 

 17 potentially stop a problem before it begins? 

 18 MR. WRIGHT: Well, we think the right 

 19 approach here -- let's be clear about the timing. 

 20 MiFID enters into force the first of November. 

 21 Our commodities review will be completed by the 

 22 end of next year. 

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 1 Now, you can go fast, and as I said, I 

 2 think you -- we should take -- as policy makers, 

 3 we should take great care. I don't believe 

 4 evidence from anywhere around the world of fast 

 5 policy making has resulted in particularly good 

 6 policy making in financial markets over the last 

 7 few years, but so, we wanted to look at this 

 8 question completely properly. The issue is 

 9 extremely complex. It covers both pre-trading, 

 10 post- trading. 

 11 We have to look at the consequences 

 12 across MiFID as a whole. We have to consider what 

 13 Anthony is saying about the links with the capital 

 14 requirements. And I think that is the right 

 15 approach. Now, do we have such an urgent problem 

 16 today that would force us to move faster? And 

 17 here, of course, what I'm referring to is the gas 

 18 and electricity supply contracts and their 

 19 derivatives. 

 20 Well, I'm not sure it's of -- I'm not 

 21 sure it's a sort of emergency situation. So, we 

 22 have something in Europe called the Better 

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 1 Regulation Agenda, and that is a genuine political 

 2 effort by the European institutions develop policy 

 3 in a coherent way, bottom up, evidence from the 

 4 market, evidence from regulators, hearings, 

 5 consultations, and then options, looking at the 

 6 costs and benefits and in the end, deciding on the 

 7 way to act. 

 8 And I don't want to move out of that 

 9 cadre. I don't want to move out of that 

 10 framework. It's extremely exhausting framework. 

 11 It's exhausting for Anthony and his members, but 

 12 in the end of the day, we think we eliminate -- we 

 13 eliminate major mistakes, can't guarantee that, 

 14 but I think that the more open the policy making 

 15 we have, the better the outcomes are. 

 16 There's an awful lot of people around 

 17 this table whose views on commodity derivatives or 

 18 energy trading or whatever the subject are a value 

 19 to my institution. I want to hear them, and I 

 20 can't do that in five minutes or five months. 

 21 I've got to take my time, and then I think we'll 

 22 get to a good and -- a good outcome, which, by the 

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 1 way, has got to end up in a situation where we 

 2 have a level playing field for all market 

 3 participants. 

 4 We cannot avoid -- we cannot have a 

 5 situation where some parts of the industry, some 

 6 parts of the market are favored over the others. 

 7 So, again, that's another thing, the calibration 

 8 of this is extremely difficult. And therefore, 

 9 again, I plead for a little time to do the job 

 10 properly. 

 11 COMMISSIONER CHILTON: Yeah. And I 

 12 appreciate your response -- and I'm sorry, 

 13 Richard, just real quick follow up -- and I take 

 14 your point also about things being -- decisions 

 15 being made too rapidly. And I think that's the 

 16 reason in the U.S. why we're here to begin with on 

 17 these energy markets. And we didn't have the full 

 18 debate, and it wasn't in public. And so, that's 

 19 why some of us are concerned about trying to fix 

 20 it, and we don't want to go too far. 

 21 What we hear from the other side that is 

 22 concerned about these issues is we're going to be 

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 1 anticompetitive, we're going to shoot business 

 2 someplace else. And so, we've got a double edged 

 3 sword that we're working with too. You know, some 

 4 believe there is a problem, and it's just a 

 5 question of how rapidly can we do it but doing it 

 6 right. So, I guess it's a matter of degree, but I 

 7 didn't want you to think I didn't take your point 

 8 about getting right. That's why we're here, 

 9 because we didn't do it right the first time, so 

 10 thank you. 

 11 MR. WRIGHT: And if I may add to -- I 

 12 don't want to enter into the domestic situation in 

 13 the U.S., of course, but I think what's very 

 14 important is -- far from it -- what's very 

 15 important too is that, of course, we have here the 

 16 confluence of different regulators. The financial 

 17 markets in our case, we just set up a bringing 

 18 together the European Union's energy regulators 

 19 together in a network. 

 20 So, we really want -- we need to get 

 21 this advice from these people first and then work 

 22 out what is the appropriate policy response, if 

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 1 anything, because we don't want to start from a 

 2 position that you do have to do something. We 

 3 want to look at the evidence in a totally unbiased 

 4 way. 

 5 CHAIRMAN LUKKEN: I'm going to turn to 

 6 Richard. Before I do that, I wanted to recognize 

 7 Barbara Matthews, who joins us at the table. 

 8 Barbara is our Financial Attaché from the U.S. 

 9 Department of the Treasury and is really our eyes 

 10 in ears in Europe and for the European Commission. 

 11 We welcome you. She's normally, in Brussels but 

 12 we lucked out that she was here in Washington 

 13 during our meeting. So, welcome and please join 

 14 the discussion. 

 15 But I'll go ahead and turn to Richard. 

 16 I know he has a comment or a question. 

 17 MR. BERLIAND: Yeah. I've got one thing 

 18 I just would like to add to the points that 

 19 Anthony has said, which is really an observation 

 20 around how MiFID is affecting the futures markets. 

 21 As we have discussed many times in the past, I 

 22 think the regulatory structure in Europe allows a 

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 1 lot more fluidity of influence from what goes on 

 2 in one asset class into another. 

 3 And as I think a lot of the bias and the 

 4 concentration around MiFID has been cash equity 

 5 generative. It is very interesting to note how a 

 6 lot of the innovative initiatives that have come 

 7 in the cash equities world as a result of MiFID 

 8 are starting to influence the futures world. 

 9 You could argue MiFID itself is not 

 10 forcing the futures world to change in any 

 11 material way. But it is the innovation that has 

 12 come cash equities that is starting to spill over. 

 13 And I think we will see a lot more competition in 

 14 systematic internalizers and so on in futures, 

 15 which perhaps wouldn't have occurred if this 

 16 hadn't been driven by the MiFID initiative. 

 17 And it goes back to the same point, if 

 18 you look at the sort of market structure 

 19 differences today in securities in North America 

 20 compared to futures in North America, where there 

 21 has been, I would argue, a much more sort of firm 

 22 wall that prevents the (off mike) and vice versa. 

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 1 So, I fully endorse his comment about 

 2 innovation. I definitely think it will have 

 3 influence way beyond the sort of immediate areas 

 4 of cash, which is where much of the trading side 

 5 has influence. And indeed, when we talk about the 

 6 code of conduct, again, a lot of the initial focus 

 7 is around equities rather than around fixed income 

 8 or around (off mike). So, I fully endorse the 

 9 comments there and I think it's been a great 

 10 initiative to drive change. 

 11 Thanks, Chairman Lukken. 

 12 CHAIRMAN LUKKEN: David, obviously, the 

 13 concept of transparency comes up in a lot of 

 14 different respects. That's obvious from your 

 15 presentation. It's obvious. 

 16 Without going into a whole lot of detail 

 17 or repeating some of the aspects of the 

 18 presentation, could you just touch upon, you know, 

 19 the concepts that the commission has of 

 20 transparency, in other words, its pre-trade, 

 21 post-trade issue? 

 22 And also, I think a lot of times 

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 1 transparency gets portrayed as a black or white 

 2 kind of thing. It's either transparent or it's 

 3 not. And I think, what we've often tried to argue 

 4 is that there's a range of transparency depending 

 5 on the type of instrument, the type of market, the 

 6 type of market participant. And I think MiFID has 

 7 been sensitive to some of those differences and 

 8 perhaps you can elaborate on that. 

 9 MR. WRIGHT: Well, this has been one of 

 10 the very right at the center, as I said, of the 

 11 MiFID deal and getting the right calibration both 

 12 of pre-trade and post-trade reporting. If you 

 13 look at the pre-trades base, of course, regulated 

 14 markets, MTFs are posting their prices. And the 

 15 question here was a political one, whether by 

 16 opening up and allowing big investment firms and 

 17 other institutions to come in and compete for 

 18 order flow and business, whether they should be 

 19 subject to similar pre-trade transparency 

 20 obligations. 

 21 And there was a ferocious rattle about 

 22 it. Let's be quite honest. A lot of firms, big 

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 1 investment firms were extremely worried about 

 2 those provisions. And in the first rounds of the 

 3 political discussions, feathers flew and people 

 4 were worried, particularly in London, about some 

 5 of the emerging compromises. 

 6 But in the end, the imposed pre-trade 

 7 obligations on systematic internalizers, i.e. big 

 8 investment banks -- let's just -- I'm giving an 

 9 example here. But the big investment banks want 

 10 to trade and compete for securities order flow. 

 11 We required them to post prices but in a specific 

 12 category where retail business primarily would be 

 13 carried out. In other words, anything that was of 

 14 a bigger size or block trading would not be 

 15 required to pre-trade -- posting pre-trade prices. 

 16 And the deal really focused about what was the 

 17 segment that the internalizers should post. 

 18 On the post-trading side, I would say 

 19 this was less difficult. All reporting of our 

 20 financial instruments required on regulated 

 21 markets and so forth two regulators, exchange of 

 22 information among regulators to ensure that home 

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 1 state regulator has the full picture. The less 

 2 controversial the area that held us up 

 3 considerably here was the determination of what I 

 4 said earlier, of what constitutes block trading, 

 5 in other words, how much time should be allowed 

 6 before disclosing block trades to the market or 

 7 different segments of higher volume trades to the 

 8 market. That was a technical issue, but it was an 

 9 important one for a lot of firms and for some 

 10 member states. 

 11 I should also say that one of the 

 12 critical things that we had to decide was what was 

 13 a liquid market. We had to come to decisions 

 14 about how do we define liquid markets because the 

 15 pre-trade obligations and systematic internalizers 

 16 affected those trades in liquid markets, not in 

 17 e-liquid markets and small trades of small stocks. 

 18 Obviously that would be not sensible. So, again, 

 19 a lot of technical work here about calibrating and 

 20 trying to find out. 

 21 We've ended up with a reasonable 

 22 compromise. I think clearly there will be people 

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 1 who say that these disciplines should be extended 

 2 beyond classic equities and instruments on 

 3 regulated markets, so trading on regulated markets 

 4 onto -- into the wider bond trading, for example, 

 5 that I mentioned at the end. 

 6 And here, again, we've looked at this 

 7 carefully and we don't think that there's a 

 8 compelling case at this stage. I think that's 

 9 certainly our view to impose very costly demanding 

 10 obligations on that part of the market. 

 11 However -- however, we are encouraging 

 12 the industry to take initiatives to provide the 

 13 information to clear for retail and for liquid 

 14 bonds. And this is something that may well 

 15 develop over time. So, that's where -- that's how 

 16 we've gone about -- gone about the job. There's 

 17 been fears that the transaction reporting system 

 18 will lead to fragmentation and the data sets won't 

 19 be brought together. We don't believe that for 

 20 one minute. We think there will be plenty of 

 21 operators out there, I'm already seeing that, who 

 22 will consolidate the tapes and bring the complete 

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 1 picture to the market. 

 2 So, again, this is a question going back 

 3 to the first question I had from my right here 

 4 where we'll have to judge the outcome in a few 

 5 years time. But we're reasonably confident we've 

 6 got it about right. 

 7 CHAIRMAN LUKKEN: Turn to Commissioner 

 8 Dunn, then Barbara, Adam, and George. 

 9 COMMISSIONER DUNN: David, this is more 

 10 of an elementary question to help me understand 

 11 your presentation a bit. Could you elaborate a 

 12 little bit on the definition of the home competent 

 13 authorities and that of the exchange local 

 14 regulator and the relationship between the two? 

 15 MR. WRIGHT: Well, the home competent 

 16 authority is -- I'm trying to look very quickly 

 17 for the definition here. But the home competent 

 18 authority is the authority of where the investment 

 19 firm is based, where it's legally, if you like, 

 20 established. 

 21 So, if it was a firm established in 

 22 London, the home regulator would be the FSA. The 

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 1 passport would be given by the FSA, and upon the 

 2 basis of that passport -- upon the basis of a 

 3 control of the firm, what it wants to do, what 

 4 services it wants to provide, whether the 

 5 personnel are fit and proper, whether the firm is 

 6 organized correctly and so forth according to the 

 7 rules that are in the directive. But that is the 

 8 home competent authority. 

 9 Once that passport is given, that firm 

 10 can sell its services around the European Union 

 11 without any further impediment. It's what we 

 12 would call the free provision of services under 

 13 our treaties. 

 14 Now, there has been a lot of discussion 

 15 about the relationship between the home country 

 16 and the host. Where the host has a host country, 

 17 let's say it's the UK is regulating a firm but 

 18 that firm has branches in another member state, 

 19 what role does that branch have -- what role does 

 20 that host country have to regulate part or parts 

 21 of the business? 

 22 And there's been a long discussion about 

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 1 the calibration here of whether the host 

 2 regulator, let's say the UK based firm is selling 

 3 services to Paris, should the Paris regulator, the 

 4 French regulators have any sort of role in 

 5 checking about what's going on? And we've had a 

 6 long discussion here and not an easy discussion, 

 7 but the text does give responsibilities to the 

 8 host country in the cases of branches to carryout 

 9 analysis and making sure that, for example, the 

 10 conduct of business is being correctly carried 

 11 out. 

 12 Now, interestingly here, the country 

 13 that was extremely insistent on these provisions 

 14 was, of course, the UK because the UK has an awful 

 15 lot of branches of firms doing business in London. 

 16 So, the FSA in this particular case, the UK 

 17 Government, are negotiating on behalf of the UK, 

 18 wanted to have some possibility of looking at, 

 19 let's say, a big bank, Deutsche Bank, branching 

 20 doing all its wholesale business in London. So, 

 21 there's -- again, there's some fine detail here, 

 22 which is calibrated in the text. 

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 1 And we've had not an easy discussion 

 2 about how the home and host have to collaborate 

 3 here. You don't want two sets of rules. You 

 4 don't want two sets of regulators. So, in the 

 5 end, we've worked out a system where the two 

 6 regulators cooperate together. And again, we'll 

 7 have to see if that functions in public. 

 8 Sorry. Your second question? 

 9 COMMISSIONER DUNN: I was asking about 

 10 the exchange local regulator, the relationship 

 11 between that and the home competent authority. 

 12 MR. WRIGHT: Yeah, which is the point 

 13 that I've -- which I've been dealing with here. 

 14 And again, I mean, MiFID -- MiFID -- at the heart 

 15 of MiFID, you know, it requires regulators to 

 16 cooperate on the transmission of transaction 

 17 reporting. So, the home country that would have 

 18 the monopoly of trading in a particular stock, if 

 19 the trading was carried out in another market, we 

 20 want to make sure that those reports, those 

 21 transaction reports can be codified and collected 

 22 in (off mike), so there's a requirement to 

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 1 exchange transaction reports. There's a 

 2 requirement to help each other in terms of market 

 3 abuse. 

 4 So, there, again, through this directive 

 5 and other directives, we are encouraging our 

 6 regulators to work much more closely together. 

 7 And at the end of the day, if this is to all work 

 8 on the ground where it matters, we must have 

 9 cooperation among regulators, and we must have 

 10 consistent implementation as the point I made 

 11 earlier. 

 12 We can't have a particular provision 

 13 being implemented in a scattered way. That is 

 14 why, for example, we are very keen and we 

 15 encourage regulators to work together and where 

 16 necessary come to some agreements about what such 

 17 and such provision means. 

 18 So, all of this is quite a cooperative 

 19 effort, right down from the political 

 20 determination of the main axes of this proposal 

 21 down to the day to day implementation of it. And 

 22 I'm not going to tell you today that everything is 

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 1 going to be hunky-dory and smooth from day one, of 

 2 course not, but things will smooth out. And then, 

 3 in a few months time, I think the markets will 

 4 settle, regulators will get used to it, and I 

 5 think that the benefits that I talked about 

 6 earlier will start to flow. 

 7 CHAIRMAN LUKKEN: Barbara? 

 8 MS. MATTHEWS: Thank you very much. And 

 9 first, let me thank you for the invitation because 

 10 it's nice to be home, even if it's only for a few 

 11 days but also to see my friends who I see more 

 12 regularly in Brussels. 

 13 I have mostly an observation and a 

 14 congratulation as well to the CFTC. This is an 

 15 organization that for a long time, for as long as 

 16 it's been around actually has been innovative in 

 17 the US regulatory space, in part because the 

 18 markets demand it. And it's also been very global 

 19 in its outlook from the beginning. 

 20 And so, I think it's extremely important 

 21 that you've organized this session to go through 

 22 and sum up with Europe is thinking about because 

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 1 frankly, it's not just an internal debate. The 

 2 internal processes, the internal standards that 

 3 the European Union has developed for itself, 

 4 either with respect to the balance of power 

 5 between home and host regulators or understandings 

 6 about transparency will have global implications. 

 7 And it's very good that we understand 

 8 that here in the United States because it will 

 9 spill over into the global discussion. And I 

 10 encourage everyone in particular to think about 

 11 the transparency issues because transparency can 

 12 vary depending on who the audience might be for 

 13 the transparency. And in the commodities context, 

 14 that can mean one thing. It can mean quite a 

 15 different thing in the equities context. I know 

 16 that you're struggling with those issues in the 

 17 commission now, and those are issues that have 

 18 long been part of the debate -- the regulatory 

 19 debate here in the states. 

 20 So, I encourage you to think about the 

 21 -- not to view this solely as an internal European 

 22 exercise but think about how it implicates how we 

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 1 do our business in the United States and 

 2 conversely, what views we may have for how things 

 3 are going in Europe. 

 4 Thank you. 

 5 CHAIRMAN LUKKEN: Well, thank you very 

 6 much. I think, Adam, you're next in the queue. 

 7 MR. COOPER: Thank you, Mr. Chairman. 

 8 I'll be quick. Mr. Dunn really addressed the 

 9 question I wanted to ask. First, is it November 

 10 5th for the trade reporting? I had understood 

 11 that the trade reporting was just a few days 

 12 later. Dates matter. 

 13 MR. BELCHAMBERS: Slightly tricky issue, 

 14 this one. But I think we're allowing a weekend. 

 15 MR. COOPER: Thank you. 

 16 MR. BELCHAMBERS: Sorry about that, 

 17 David. 

 18 MR. WRIGHT: (off mike). 

 19 MR. COOPER: I wanted to pick up on 

 20 Commissioner Dunn's point -- 

 21 MR. WRIGHT: (off mike). 

 22 MR. COOPER: Understood. On the 

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 1 consistency of implementation and the 

 2 harmonization of cross border, you've explained 

 3 sort of the mechanism. Is there an intervention 

 4 mechanism or a trigger or a lever that you have 

 5 available to you to intermediate and intervene, if 

 6 you will, if there are terribly inconsistent 

 7 implementation mechanism? Because markets will 

 8 over time adjust, but I think, you know, time is 

 9 of the essence at the outset, particularly as it 

 10 pertains to costs, efficiencies, firms 

 11 accommodating, you know, the structures. 

 12 MR. WRIGHT: Well, the implementation of 

 13 this directive, like any directive or rule is 

 14 absolutely fundamental. And, as I pointed out, of 

 15 the complexity of this -- of these rules, the 

 16 complexity of this -- the magnitude of this 

 17 project means that it's particularly important 

 18 that our regulators work together. 

 19 So, let us assume we have really 

 20 serious problem that an investment service 

 21 provider, let us say from the UK, was unable to 

 22 provide a service having been duly authorized to 

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 1 country B. Well, what's the first thing that 

 2 should happen? The first thing that should happen 

 3 is that country A and country B should try to 

 4 resolve the particular problem. If that can't be 

 5 the case, the matter should be quickly taken up 

 6 within the context of the European Securities 

 7 regulators and also, we should be notified. 

 8 If we think that there is no 

 9 justification whatsoever for that practice, the 

 10 commission could immediately call in and would, I 

 11 think, in such a circumstance if it was of 

 12 sufficient gravity, would call in the regulators 

 13 and the member states in question and say, you 

 14 know, what the hell is going on here, please 

 15 resolve this quickly having probably got the 

 16 advice of our regulators, the commission of the 

 17 European Securities Regulators. 

 18 However, if the -- if that particular 

 19 member state said look, I'm very sorry, my 

 20 interpretation is this, and I disagree with you, 

 21 the commission, me, we are in a -- we are in a 

 22 potentially conflictual situation. There is a 

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 1 mediation mechanism, by the way, which CESR has to 

 2 try and bring the parties together and resolve 

 3 exactly that type of problem. But let's assume 

 4 that didn't work either. 

 5 Well, the first thing the commission can 

 6 do legally and quickly would be to send out a 

 7 letter, a formal or legal letter saying that we 

 8 want an immediate explanation of what's going on 

 9 here. We would receive comment from the member 

 10 state, saying we think what we're doing is 

 11 perfectly legal. We would have to contest that if 

 12 we disagreed. And at the end of the day -- and 

 13 this process can be quite quick. At the end of 

 14 the day, we would say, please, you know, dismantle 

 15 this immediately or else we will take you to 

 16 court, the Court of Justice. 

 17 Of course, that's a last resort. That 

 18 isn't -- that can be quick if it's particularly 

 19 urgent, but it sometimes is not, like any supreme 

 20 court, immediately available. But, at the end of 

 21 the day, if we do that, we win the cases, by and 

 22 large. Our record is extremely good. I think 

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 1 between 80 to 90 percent of the cases we take, we 

 2 win. 

 3 And of course, that member state or that 

 4 regulator that has blocked that business from 

 5 flowing open him or herself up to if they lose the 

 6 case, serious liability damages or the potential 

 7 of it. So, it's not a thing to be taken lightly. 

 8 So, there is a formal, legal procedure 

 9 for the commission to act. You hope, of course, 

 10 that good sense will prevail, that mediation would 

 11 work, that the offending regulator would back down 

 12 and allow that business to flow. But at the end 

 13 of the day, we don't roll the tanks across the 

 14 lawns. We go to a court of law. And that is the 

 15 right way to approach any difference or dispute of 

 16 that form. 

 17 Can it be quick? It can be in certain 

 18 cases. Mario, you'll correct me, but I think 

 19 there are means of obtaining injunctions pretty 

 20 quickly for urgent cases. So, last resort, the 

 21 legal procedures are there. 

 22 CHAIRMAN LUKKEN: I'd like to turn to 

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 1 George and De'Ana and maybe one last question 

 2 after that, and then we'll have to get going on 

 3 clearing codes. 

 4 MR. CRAPPLE: My question is related to 

 5 Adam Cooper's question, only with respect to the 

 6 application of a principles regime to the firms, 

 7 rather than between the jurisdictions. How will 

 8 the application of the principles to the specific 

 9 factual cases be elaborated? Would it be through 

 10 enforcement actions or private litigation or 

 11 pronouncements by MiFID? 

 12 MR. WRIGHT: I think as Anthony was 

 13 saying -- he might want to comment on it. But as 

 14 Anthony was saying earlier that, you know, 

 15 principle -- principles- based approach to 

 16 regulation is in theory quite different from a 

 17 rule based. A rule is a rule and you apply the 

 18 rule, and if it doesn't say it in the rule, you 

 19 can do it. 

 20 Now, we think that principles put the 

 21 emphasis, as Anthony right said, on firms to adopt 

 22 a right approach to the intent of the law and the 

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 1 intent of the provision. And if firms are unclear 

 2 about the intent of a provision, they should ask 

 3 their regulators. And their regulators, we would 

 4 hope and we will certainly intend to insist, will 

 5 give evidence and guidance to that firm on a 

 6 consistent basis. 

 7 And that is why, for example, we have 

 8 set up a database where we've been asked all sorts 

 9 of questions about MiFID and we've given 

 10 non-binding guidance as to how we think such and 

 11 such a principle, such and such a provision should 

 12 be interpreted. So, at the end of the day, the 

 13 emphasis is on the firms, but also at the end of 

 14 the day, on regulators to apply those principles 

 15 in a consistent way. 

 16 And again, if there's -- if nobody 

 17 agrees, if there is a difference -- a profound 

 18 difference of view, the matter could be referred 

 19 back to my institution. We could engage in 

 20 discussions with the industry, all interested 

 21 parties, and if necessary, as I said earlier, we 

 22 could provide clarifications, whether that would 

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 1 be in the form of a statement by the commission or 

 2 even eventually if some thing is so ambiguous and 

 3 unclear with further clarification of the law. 

 4 That would be a last resort. 

 5 But at the end of the day, I think that 

 6 we just do not see in modern capital markets the 

 7 possibility of doing anything but providing broad 

 8 principles, broad intents of showing what the 

 9 intent of those principles are and making firms 

 10 responsible for those actions, subject of course 

 11 to proper supervision. 

 12 So, it is a difference of emphasis on 

 13 firms and not all firms feel comfortable with 

 14 that. But I think it gets you around the problem 

 15 that if you make a rule in this sort of space, 

 16 it'll be out of date by the time it's even got 

 17 into print. 

 18 CHAIRMAN LUKKEN: De'Ana? 

 19 MS. DOW: Mr. Chairman, I'll be brief. 

 20 I was here at the commission when principles-based 

 21 approach to regulation was adopted, and we 

 22 struggled with a lot of the same issues that 

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 1 you're dealing with now, including, you know, the 

 2 reporting of these large trades. The options 

 3 range anywhere from five minutes to eight hours in 

 4 terms of what was the right approach. 

 5 So, you know, it's intriguing to see 

 6 that these same issues are still being bantered 

 7 about -- 

 8 (Off mike comments) 

 9 MS. DOW: Yeah, absolutely. And I also 

 10 have an observation. As these principles-based 

 11 regulations stay in effect for several years, I 

 12 see that there is often the temptation to go back 

 13 and adopt guidance and other clarifications and 

 14 put prescriptive acceptable practices around these 

 15 core principles that, you know, are at risk of 

 16 taking you back to where you started. 

 17 So, you know, that's something that I 

 18 think we all should be careful about because 

 19 obviously the core principles -- the 

 20 principles-based approach has been a phenomenal 

 21 success as you can see by the growth in the 

 22 futures markets here in the U.S. 

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 1 And then I did have one question. In 

 2 terms of your best practices rule, I was just 

 3 wondering how that -- I mean, not best practices, 

 4 best execution rule. 

 5 MR. WRIGHT: Yeah. 

 6 MS. DOW: How would that work? For 

 7 example, would a firm be required to send his 

 8 customer's order to the exchange where the best 

 9 price is located? For example, would it be a 

 10 choice between a WTI Ice futures contract or WTI 

 11 Nimex futures contract? 

 12 MR. WRIGHT: Okay. On the first point, 

 13 I think you make a very good point, that there is 

 14 a natural tendency -- a natural, if you say, a 

 15 tendency or propensity to add clarifying details, 

 16 interpretive guidance, and so forth. And in the 

 17 end, you can -- you can slip back to perhaps more 

 18 prescription than you wanted through the 

 19 principle. 

 20 So, I think that's a very good point. 

 21 That is precisely why we have been so keen to 

 22 limit the possibilities of member states to add in 

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 1 further guidance, rules, interpretations, what we 

 2 call the gold plating brigade. We've always said 

 3 that we prefer to keep the gold-platers in the 

 4 jewelry shop. 

 5 Now, the point is here that some member 

 6 states still feel that their own rule book is the 

 7 best. They naturally don't want to change bits of 

 8 it. And sometimes the markets don't want to 

 9 abolish practices either. But, again, there's a 

 10 fine balance here. At the end of the day, Europe 

 11 has to move forward with 27 member states. I need 

 12 to find a majority, a qualified majority of my 

 13 member states. So, there's always a -- in any 

 14 public policy making, there are elements of 

 15 compromise. 

 16 And so, we tried to keep this natural 

 17 bureaucratic tendency to add more detail to the 

 18 minimum. I would much prefer, much prefer to 

 19 amend actually than to have a proliferation of 

 20 loose, non-binding guidance, which in the end 

 21 might provide more confusion than clarity. 

 22 The second point you make about best 

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 1 execution, as I said, was one of the critical 

 2 provisions of MiFID. Requirements of best 

 3 execution, those requirements of course are 

 4 particularly prominent for retail customers and 

 5 less required obviously in the professional 

 6 markets where professional business can look after 

 7 itself. 

 8 Now, you'll see in MiFID a whole lot of 

 9 provisions about what firms should do. And firms 

 10 have to lay out their best execution. Policy 

 11 doesn't mean they have to survey every single 

 12 market trading opportunity in Europe, but they 

 13 have to very clearly declare what their policy is. 

 14 They have to show that they have got the best 

 15 price including commission, including commission, 

 16 including in other words, what we call total 

 17 consideration, price plus clearing and trading -- 

 18 clearing and settlement fees plus commission. 

 19 They have to show and be able to show to 

 20 regulators that on a consistent basis they have 

 21 done that. 

 22 Now, I think it's absolutely 

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 1 unreasonable to expect in every single 

 2 circumstances that to be the case, but they have 

 3 to show that they have followed the policy that 

 4 they have outlined and that consumers have been 

 5 treated properly and fairly. And there's whole 

 6 lot of disciplines in MiFID which explain exactly 

 7 what those provisions are. 

 8 CHAIRMAN LUKKEN: We have time for one 

 9 quick last question. I think, Johnathan, you're 

 10 next. 

 11 MR. SHORT: Thank you. I just wanted to 

 12 make a brief statement and agree with Mr. 

 13 Wright's, I guess, suggestion that there needs to 

 14 be care in obviously assessing the level of 

 15 regulation in any market. At ICE, we have the 

 16 benefit of being on, it seems like, every side of 

 17 every issue given our regulatory structure, so 

 18 I'll be careful on what I say here lest I be hung 

 19 out to dry by my colleagues. 

 20 We do obviously applaud the efforts that 

 21 have gone into MiFID and I would just, I guess, 

 22 put one other point on the table in a minor 

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 1 rebuttal, with all due respect, to Commissioner 

 2 Chilton's statement about whether the CFTC 

 3 actually got the level of regulation right. 

 4 Echoing something that Mr. Donohue said, I think 

 5 it's very important to look at metrics and I -- 

 6 (Off mike comments). 

 7 MR. SHORT: The only point I wanted to 

 8 put on the table in minor rebuttal to one of the 

 9 statements that Commissioner Chilton made was I 

 10 think the CFTC and congress largely did get it 

 11 right on the front-end with the CFMA and interview 

 12 markets. When you look at those markets at the 

 13 time and the benefits that have been derived from 

 14 both product innovation and the competition and 

 15 the transparency that ICE has brought to the 

 16 markets, I -- and the resulting benefit from the 

 17 competition offered by Nimex, who is our -- 

 18 obviously our competitor, I think there are very 

 19 real benefits to the marketplace that are often 

 20 overlooked. 

 21 And I think getting back to this issue 

 22 of metrics and how you judge a piece of 

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 1 legislation, I think it's very important to look 

 2 at all metrics and all benefits to the 

 3 marketplace. And when you look at some of the 

 4 tighter markets that have developed through 

 5 electronic trading and the introduction of 

 6 clearing to OTC markets and the benefits that 

 7 that's brought about to the marketplace, there are 

 8 very real dollar savings that have gone into the 

 9 pockets of U.S. and foreign companies as a result 

 10 of that. 

 11 So, I think before anything is judged, I 

 12 think you need to look at all of the metrics. And 

 13 that's not to say that there isn't room for 

 14 refinement in deference to what Commissioner 

 15 Chilton said, but I think there are some very real 

 16 benefits that have been overlooked. 

 17 CHAIRMAN LUKKEN: Well, we're going to 

 18 have to cut off debate on the first part of our 

 19 topic today, but as you all know and I have a list 

 20 of questions we never got to, these are important 

 21 matters for all of us to consider as we go 

 22 forward. Because I think Barbara is correct that 

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 1 we are -- and we're losing Barbara. Thank you for 

 2 stopping. 

 3 MS. MATTHEWS: Duty calls and I have to 

 4 go. 

 5 CHAIRMAN LUKKEN: Okay. But these 

 6 matters are going to impact us all. And we have 

 7 to be engaged. So, I encourage you, when you do 

 8 get to Brussels, to look up David and follow up on 

 9 some of these matters with him because I think we 

 10 have a unique perspective from the futures markets 

 11 here in the United States that we can offer the 

 12 Europeans as we go forward. 

 13 So, with that, we thank David. We'll 

 14 save our thanks to the end. But I would like to 

 15 turn it over to his colleague, Professor Mario 

 16 Nava, to give us an overview of the clearing code 

 17 of conduct. 

 18 MR. BELCHAMBERS: Chairman, I wonder if 

 19 I could just front run Mario for a few seconds? 

 20 CHAIRMAN LUKKEN: Oh, I apologize. 

 21 MR. BELCHAMBERS: The only reason I say 

 22 that is I've got to rush and catch a flight rather 

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 1 like Barbara has just had to go. So -- 

 2 CHAIRMAN LUKKEN: That is perfectly fine 

 3 with me. We'll front load you, Anthony. 

 4 MR. BELCHAMBERS: It will literally only 

 5 be a few minutes. And it was really just, as they 

 6 say, putting the cart a bit before the horse, 

 7 because the code of conduct, as I think Mario will 

 8 be telling you in some detail is really focusing 

 9 on those little roadmap targets of 

 10 interoperability, access, choice, unbundling of 

 11 services, transparency, prices, separate 

 12 accounting, and so forth. 

 13 And all I really was going to say in 

 14 response to what he was going to say was the 

 15 question about at the moment it's restricted to 

 16 the asset class of cash equities. There's clearly 

 17 a view I think on the part of the commission that 

 18 given that it is capable of running efficiently, 

 19 they would like to see it extended to cover other 

 20 asset classes. 

 21 And I would just -- if I may, just add 

 22 one or two cautions to that, which is, although 

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 1 these headline targets look extremely attractive 

 2 at the face of them, clearly, on the other hand, 

 3 this is designed for cash equities. We have not 

 4 yet had a chance to look at the small print of any 

 5 form of extension and therein often lies, as well 

 6 as know, the devil, so to speak. 

 7 So, in a sense, because derivatives are 

 8 so fundamentally different to cash equities, it's 

 9 terribly important that we actually take a 

 10 measured view about this. I'd make that point. I 

 11 think it's critically important. And you will 

 12 hear from different sides of the industry 

 13 different views being expressed about this. The 

 14 exchanges will have one view. Some of the 

 15 clearing houses will have a view. The firms will 

 16 clearly have a view. 

 17 And I think, therefore, what I would say 

 18 is let's engage in a debate about this, but let's 

 19 not make too many assumptions about it at this 

 20 early stage. And I think that is very much the 

 21 commission's approach too. So, I would just -- a 

 22 little bit of caution about falling for the 

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 1 headline bits and pieces that sit there, which I 

 2 think are very welcome but we need to take a very 

 3 careful measured view about it. 

 4 I won't say anymore because I've got to 

 5 go get a plane. 

 6 CHAIRMAN LUKKEN: Thanks very much. 

 7 Yeah, you've teed it up great for Mario, so thank 

 8 you. 

 9 MR. NAVA: Thank you very much. 

 10 Chairman, Commissioners, Jackie, and all guys, 

 11 thank you very much for the invitation. 

 12 I really would like to join in David in 

 13 his initial comments at least in two respects. 

 14 One, of course, is the thanks and the feeling of 

 15 privilege that we have of being here today to be 

 16 able to discuss with you and to get your feedback 

 17 on this. And the other is the sentiment that 

 18 there is a commonality of issues. I mean, that's 

 19 very clear to us whenever we go around in this 

 20 town and whenever you come around in Brussels and 

 21 whenever we discuss. It's quite obvious that we 

 22 are very much discussing the same thing. 

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 1 The code of conduct is in many respects 

 2 a novelty. I would say it is an innovation in the 

 3 regulatory armamentaria of the commission in many, 

 4 many respects. For a start, it does not have an 

 5 acronym to joke with because if you did, it would 

 6 be COCO or something of that kind, so probably 

 7 would be worse. So, for start, I opposed with all 

 8 my forces for any acronym for the code. 

 9 But apart from that and apart from any 

 10 joke, it's truly an experiment because basically 

 11 what we did in the code is that we extended some 

 12 credit to the industry of they being able to do 

 13 this in exchange of what did we take as a 

 14 collateral. As a collateral, we took essentially 

 15 their credibility, I would say and their 

 16 reputation. 

 17 So, that is a major -- is a major 

 18 novelty. Of course, the approach is not without 

 19 risk as we all know it, but as you teach me, I 

 20 mean, no risk, essentially no return. So, we have 

 21 taken these (off mike). Time will tell us whether 

 22 we were right or wrong. But we are saying in this 

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 1 new part well knowing that we were going down a 

 2 risky road. 

 3 The -- what I want to do with you today 

 4 is essentially to look at two things. One is the 

 5 content of the code and the other is the procedure 

 6 through which we have got the code and the 

 7 learnings we have got from the code at least until 

 8 now. 

 9 The -- let me not spend too much time. 

 10 It was quite obvious is that thanks to the FSAP, 

 11 another of these acronyms cleverly engineered by 

 12 David, the European markets has boomed in the last 

 13 five or six years, physically getting up to a 

 14 level not so different from the American market. 

 15 But what we realized, of course, is the 

 16 more the markets were growing, the more evident 

 17 were coming the points where the inefficiencies 

 18 were greater and greater. And there is no doubt 

 19 that frustrating was essentially and surely one of 

 20 the points where there was a major inefficiency. 

 21 Major inefficiency in which sense? In 

 22 the sense that the domestic level -- domestic in 

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 1 Europe means Germany on Germany, France on France. 

 2 The domestic level, it work well, but at the cross 

 3 border level, France on Germany, Italy on Germany, 

 4 it worked much less well. And we, of course -- 

 5 there has been various estimations of cost, but 

 6 essentially up to six times across border, so 

 7 France and Germany business, with respect to a 

 8 domestic business, Germany on Germany. 

 9 Of course, six times is far too much. 

 10 That led to simply the nonexistence of some 

 11 markets, typically the retail market for cross 

 12 border equity in high street banks simply did not 

 13 exist -- not a investor or a saver -- no saver in 

 14 his or her right mind would enter in a bank in 

 15 Milan and ask to buy a share 500 kilometers north 

 16 in Concorde because it costs simply too much. 

 17 So, the nonexistence of a market is 

 18 probably the most obvious market failure you can 

 19 prove. We did some analysis, as you know, the EU 

 20 way of doing legislation is based on two pillars. 

 21 Pillar number one is the so-called impact 

 22 assessment, where we have to study the issue and 

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 1 to come up with some numbers normally related to 

 2 GDP because that is what politicians understand 

 3 fast and best. 

 4 And the second pillar is stakeholders' 

 5 consultation. That means talking and talking as 

 6 David said until exhaustion with the different 

 7 stakeholders. 

 8 What the impact analysis told us -- 

 9 well, what the impact analysis told us is -- a 

 10 model like this graph is that if we were able to 

 11 get a reduction in trading costs in the order of 

 12 10 to 20 percent, that means passing from 6 times 

 13 more expensive to 5 times more expensive, so not a 

 14 great deal, one would say, but if we were able to 

 15 kick in that type of reduction in costs, the 

 16 potential for the reduction in GDP would be 

 17 measured in billions, essentially. 

 18 What matters in this graph is not the 

 19 dotted line you see but the small dotted line that 

 20 you hardly see, because those are the borders of 

 21 the estimation and basically tells you that, for 

 22 example, for a 15 percent reduction, you may have 

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 1 benefits with a confidence interval of 95 percent 

 2 or you may have benefits which go from 20 to 60 

 3 billions, so quite an important amount of money to 

 4 deal with. 

 5 But the second most important thing is 

 6 that when it came to stakeholders' consultation 

 7 and we did it a lot extensively. I remember a 

 8 meeting, for example, in Brussels with the CEO of 

 9 many of the companies represented here. 

 10 The industry -- the stakeholders gave us 

 11 a very clear message. The message they gave us 

 12 was that they wanted to progress. They were 

 13 unhappy and unsatisfied with the situation as it 

 14 was and they really wanted to progress, and they 

 15 were ready to put their resources to that, which 

 16 makes the task for us much easier because 

 17 basically it convinced us of the fact that the no 

 18 policy option was not an option at all apparently, 

 19 because we as commission, we were convinced that 

 20 something was needed but because also the industry 

 21 was obviously in favor of something to be done. 

 22 Leaving aside the structure 

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 1 intervention, which would have meant creating a 

 2 novel -- a single clearing or a single CSD in 

 3 Europe for which a commission does not have the 

 4 power and neither presumed the case at this 

 5 juncture, we were left essentially either with the 

 6 very standard route, the one that might have been 

 7 followed in 99 --95 percent at least of the cases, 

 8 which is community legislation or trying for 

 9 something more a novelty, which is exactly the 

 10 quote. 

 11 What is the trade off between those two? 

 12 If you want the community legislation, it's a much 

 13 "safer" option because the community legislation 

 14 delivers legal certainty as a start, because the 

 15 community legislation allows by the process that 

 16 David has described, allows to try to take into 

 17 account all the possible issues, allow for 

 18 strengthened enforcements, strengthened 

 19 cooperation, and on and on. 

 20 But the community legislation has a huge 

 21 but, which his of course time. And time is 

 22 essence here in these issues. And time would have 

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 1 probably been measured in terms of years if we had 

 2 gone through the route of community legislation. 

 3 So, basically, we offered to the 

 4 infrastructures, we offered the deal. We spoke 

 5 already about a key dealer and here is where we 

 6 offered the deal. And the deal was essentially 

 7 time against credibility, against commitment. So, 

 8 we said to the infrastructure on the 7/11, on the 

 9 11th of July, we said to the infrastructure, we 

 10 plan to go down a code, but you need to deliver 

 11 fast. 

 12 The infrastructure on the 11/7, so on 

 13 the 7th of November, four months later with two 

 14 months of summer, that as you know in Europe tends 

 15 to be rather important period of the year where we 

 16 like to relax and take our time off, so including 

 17 the two months of the summer, we managed to in 

 18 four months -- or rather, they managed, because 

 19 the industry should be credited for this, they 

 20 managed in four months to come up with a code that 

 21 we thought was very robust. 

 22 So, that was the major tradeoff 

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 1 essentially, was self-regulation in exchange of 

 2 serious commitment. What are these serious 

 3 commitment? What did the industry committed to? 

 4 The industry commit to essentially four areas. 

 5 One is price transparency. So, the 

 6 industry committed to deliver price transparency 

 7 by the 31st of December of 2006, so of last year. 

 8 Then the industry committed to deliver 

 9 interoperability and access by the 30th of June, 

 10 2007, so a couple of months ago. And the industry 

 11 has also committed to deliver unbundling of 

 12 services among the different layers, trading, 

 13 clearing, and settlement and within settlement, 

 14 between five different services, and accounting 

 15 separations, again, between the various layers by 

 16 the 1st of January 2008, which means starting with 

 17 the accounts of 2008. 

 18 And also, quite interestingly, the 

 19 industry committed to a serious monitoring process 

 20 because of course, we said okay, we have a soft 

 21 law but we are not going to have a soft 

 22 monitoring, we said, soft law but quite serious 

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 1 and credible monitoring, mostly because behind all 

 2 of this, of course, there were many, many people, 

 3 probably the Parliament, who would have liked a 

 4 hard instrument, would have liked much more a hard 

 5 legislation than a self -regulation or than a soft 

 6 law, probably because the role of the Parliament 

 7 in soft law is less clear, so to speak, than the 

 8 role of the Parliament in legislation. 

 9 So, to get the Parliament to buy in, we 

 10 need to make sure that the Parliament is satisfied 

 11 of the level of monitoring which is put into this 

 12 process. Anthony introduced one of the crucial 

 13 points, which is that the code at present does not 

 14 extend to the all space but it stops at cash 

 15 equities and it does not extend to bond and 

 16 derivatives. True, absolutely true. 

 17 Essentially, the reason for that was 

 18 essentially a negotiating reason. When we sat 

 19 down with the industry to negotiate that, it was 

 20 quite clear that we could strike a deal well and 

 21 quickly on cash equities but that a deal on bonds 

 22 would have required longer time and it probably 

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 1 would have required on the side of some 

 2 infrastructure more time to accept it. 

 3 I said some because actually this is 

 4 probably one of the few areas where the industry 

 5 was divided. The proof is that some of the 

 6 infrastructures have decided unilaterally to 

 7 extend the code from the very beginning to bonds 

 8 and derivatives. So, this is an area where we 

 9 take -- we of course acknowledge that the code is 

 10 right now only to cash equities. Next week on 

 11 Wednesday, we will have the first discussion on 

 12 the possibility to extend the code to bonds and 

 13 derivatives. 

 14 What Anthony said is absolutely true and 

 15 it goes without saying that nobody of ours will go 

 16 to any infrastructure with the code as it is and 

 17 say sign it for bonds and derivatives. That's 

 18 obvious. What we will be doing is exactly what we 

 19 have done until now, which is to engage in the 

 20 talk with the infrastructure on the basis of the 

 21 existing code and engage with them and say to them 

 22 how can we work together to extend this to bonds 

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 1 and derivatives. 

 2 So, the point of Anthony, I think, is 

 3 very clear. I would say it's merely a trivial 

 4 point. It goes without saying that that is 

 5 exactly what we intend to do. 

 6 To whom the code applies, the code 

 7 applies to all those who have signed it. The code 

 8 is not a piece of law, so it does not apply in 

 9 general. It applies to those who have signed it. 

 10 Interestingly enough, the code is a voluntary act, 

 11 of course. Nobody could force anybody to sign it. 

 12 Once you have signed it, as I said, is a credit 

 13 extension and the collateral we have in the end is 

 14 the reputation, so once you have signed -- all 

 15 those who have signed are serious enough to 

 16 respect it, of course. But interestingly enough, 

 17 everybody has signed. 

 18 All the infrastructure of Europe has 

 19 decided, I repeat voluntarily, to sign up to the 

 20 code and even beyond Europe. We have the Swiss 

 21 signing the code. We have had the Balkans signing 

 22 the code. And not later than last week, we have 

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 1 had a press release from Norway saying, you know, 

 2 the relationship between Norway and the EU is very 

 3 good, but Norway for twice has decided that they 

 4 didn't want to join the EU, but they look at the 

 5 document very carefully, and they said that they 

 6 really like it and they decided to sign the code 

 7 and to extend it immediately and unilaterally to 

 8 bonds and derivatives, which is quite interesting 

 9 that we have someone outside of Europe, look at 

 10 the code and decided it was managing an extension 

 11 immediately to bonds and derivative. 

 12 Of course, the code is complemented by 

 13 competition policy, and we will see it in a second 

 14 when we look at the monitoring. What is the 

 15 monitoring of the code? I mean, in my -- in the 

 16 initial part of my presentation, I put some 

 17 emphasis on that. The monitoring of the code is 

 18 made at least at three levels. 

 19 The first level is the monitoring group, 

 20 which is chaired by us, by the G market and 

 21 particularly by David. He is the chair of the 

 22 monitoring group. To that monitoring group, there 

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 1 are -- there are crucial actors. There is the G 

 2 competition and that shows to you the 

 3 interrelation between the G market and the G 

 4 competition. There is of course the G of economic 

 5 affairs. And there are the two other actors that 

 6 we have been talking about this morning, CESR, 

 7 which is the Committee of the European Security 

 8 Regulators or the national regulators and the ECB. 

 9 So, this is -- the monitoring group, I 

 10 would say is very comprehensive. How does the 

 11 monitoring group works? The monitoring group has 

 12 meeting every quarter. As I said, next one will 

 13 be in a week time. And at this meeting, we have 

 14 in front of us about 70 or 80 people, participant 

 15 all from the signatories, of course, but also and 

 16 most importantly from the users of the markets, so 

 17 those who are supposed to benefit from the code. 

 18 And they all sit in front of us and we have, I 

 19 would say, a frank discussion about how the code 

 20 is doing, about how the different phases of the 

 21 code are being implement. 

 22 There are therefore then two other 

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 1 levels. One is the level of the external 

 2 auditors, for which we are in the process of 

 3 drafting the (off mike). But basically the idea 

 4 there is that every infrastructure should go 

 5 through a self assessment phase, so a kind of 

 6 comply or explain, and then the external auditors 

 7 will comment on the self assessment phase. 

 8 And then, there is the role of the 

 9 national regulators, which is of course an 

 10 explicit role because they will receive all the 

 11 accounts of the infrastructures but is also an 

 12 implicit role because of course the national 

 13 regulators have a stake, quite an important one 

 14 actually in the evolution of the market structure. 

 15 What are the three areas the code 

 16 focuses on? The first one is price transparency. 

 17 And within price transparency, we have five areas, 

 18 which essentially tend to cover the totality of 

 19 price transparency, which is publication of fees, 

 20 publication of discount schemes, (off mike) 

 21 discount schemes, publication of rebate schemes, 

 22 billing reconcilability. 

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 1 That's quite a future victory, I would 

 2 think to say of the users when we discuss the code 

 3 with them. The users made clear to us that very 

 4 often they were receiving bills and being the 

 5 bills high or low doesn't matter, but they had 

 6 difficulty to understand the bill and especially 

 7 to reconcile the bills with the tariff that they 

 8 were published or with the price they thought they 

 9 would have paid. So, we obtained that at request 

 10 every user can ask a billing reconcilability to 

 11 the infrastructure and can ask to the 

 12 infrastructure how that particular bill was made 

 13 up and then, of course, price comparability. 

 14 I would say that the results on price 

 15 transparency are quite telling. I didn't put here 

 16 a slide with (off mike), but we are on the range 

 17 of 90 percent, so we believe that about 90 percent 

 18 of the commitments have been delivered. And that 

 19 is both our assessment but also and very 

 20 interestingly, the assessment of the users. The 

 21 users themselves have done this analysis. They 

 22 have presented to the MOG and they have -- the 

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 1 users have a knowledge that basically all 

 2 infrastructures are following the guidelines quite 

 3 carefully for price transparency. 

 4 We come therefore to the core of the 

 5 code. The core of the code is the access and 

 6 interoperability issue. That was probably where 

 7 people would have -- or let's say those who did 

 8 not like the code would have expected the code to 

 9 fail because with the access and interoperability 

 10 guidelines to is essentially they open up the 

 11 market. And they do it in a very simple way, 

 12 which is a bit reminiscent of what European Union 

 13 did in other areas and most particularly, I would 

 14 say in the telecom areas. 

 15 The telecom area was probably one of the 

 16 greatest success in Europe of opening up market. 

 17 How did we manage to open up market in the telecom 

 18 area? Essentially, forcing -- there was a 

 19 directive essentially forcing interoperability and 

 20 making clear that there could be challenger in 

 21 every single market and not all incumbents. And 

 22 so that if you wanted to do a phone call from 

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 1 Brussels to Paris, you didn't need necessarily to 

 2 go through Belgacom or France Telecom, but you 

 3 could use a third provider, a challenger which had 

 4 all the rights to be linked to the other two 

 5 incumbents. 

 6 And the very same logic was -- is 

 7 applied here, and we have gone through a work of 

 8 definitions to define what is access, what is 

 9 standard access, what is customized access, what 

 10 is interoperability, and on and on. Standard 

 11 access is a right, an undisputed right, an 

 12 unconditional right. 

 13 Interoperability is a conditional right 

 14 where conditional means that the parties have to 

 15 discuss the process together, and they have to 

 16 look at the ways of doing it. They have to look 

 17 at how they are going to share costs, but it is 

 18 very clearly said in the code that business 

 19 considerations or loss of market share on the part 

 20 of the incumbent cannot be used as an excuse not 

 21 to become interoperable with a challenger. 

 22 So, basically what the code does is to 

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 1 fix a transparent process for handling all these 

 2 requests, so there is a process in terms of days, 

 3 weeks, that needs to pass, when -- when a request 

 4 is there. And if all this fails, if the process 

 5 fails, we have a mediation mechanism, mediation 

 6 mechanism that the industry sets up at the very 

 7 beginning where the commission may or may not 

 8 participate depending on the needs. 

 9 What is the assessment of the 

 10 guidelines? As I said, the guidelines are very 

 11 fresh, very new. They were signed up on the 28th 

 12 of June. We have had two months, again summer, to 

 13 test them. Well, our assessment was very 

 14 positive. Immediately, the 10th of July, we had a 

 15 meeting of the monitoring group and we welcomed 

 16 the guideline. We thought that the major comments 

 17 we made were taken on board. We thought that 

 18 there was some minor comments and some minor 

 19 issues remaining that should have been taken on 

 20 board but hopefully will be taken on board at the 

 21 first possible revision of the code. 

 22 But most importantly, it is not our 

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 1 assessment but the assessment of the market. And 

 2 the assessment of the market on access and 

 3 interoperability has been overwhelming, I would 

 4 say. There has been an explosion of link requests 

 5 in these three months, of which are summers, I 

 6 repeat that they've elapsed since the signature of 

 7 the guidelines. 

 8 Before, for example, you had a single 

 9 market or a single provider for LSE trades, LCH 

 10 Clearnet (off mike). And since then, we had four 

 11 requests for clearing the LSE trade. And it is 

 12 not only London which has seen that. It is for 

 13 example the same for virt-x trades, is for example 

 14 the same for Borsa Italiana. It's for example the 

 15 same for the Frankfort Stock Exchange. So, I 

 16 mean, the market has in a way, if you want, voted 

 17 with its feet, in the sense that it has really 

 18 shown that they were believing in these guidelines 

 19 and they have all been very much busy over July 

 20 and August in sending letters to each other and 

 21 asking request -- interoperability requests to 

 22 each other. 

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 1 Most of these letter were replied by 

 2 saying yes, of course, we are very open to you and 

 3 by the way, we also would like to be linked to 

 4 you. So, one was asking interoperability to 

 5 another one and the other one was responding great 

 6 idea, let's do it in a reciprocal way. So, I 

 7 would say we are not at the moment where we can 

 8 claim that these interoperability links work 

 9 because we haven't been seeing -- we have not seen 

 10 them in action yet, but we are at the moment where 

 11 we can claim that the industry believes in this 

 12 interoperability -- these interoperability 

 13 guidelines to the letter. 

 14 And then there is the third part of the 

 15 code, which is on service unbundling and 

 16 accounting separation that will come in few months 

 17 time. Essentially, the issue there is to 

 18 unbundled among the different services and to -- 

 19 if you want to give full implementation to the 

 20 price transparency requirement and to make sure 

 21 that if someone wants to buy only one part of the 

 22 services, if it wants to buy only clearing but not 

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 1 settlement or only trading but not clearing and 

 2 settlement, it can do it. 

 3 We have -- for the time being, we have 

 4 no reason to think that these will be implemented 

 5 with delay. The other two deadlines were 

 6 respected with some days of other advance and we 

 7 have no reason to think that this will not be the 

 8 case now in the (off mike). What is the learning 

 9 of all of this? And then I come to the 

 10 conclusion. 

 11 The learning of all of this I would say 

 12 is essentially that this has been a tremendous 

 13 experiment but this has delivered already 

 14 tremendous results in terms of education. I mean, 

 15 I say that in the most frank way. I believe that 

 16 we, as the commission, we have benefit 

 17 dramatically of these last 15 months of intense 

 18 discussion, negotiations, sometimes tough 

 19 negotiations with industry for the drafting of the 

 20 code and for the drafting of the guidelines. 

 21 But I would say that in this period, we 

 22 have really learned a lot. If we were to do a 

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 1 directive today for any reason -- I don't think we 

 2 will be doing it, but if we were to do it today, 

 3 it would be a much better product than it could 

 4 have been 20 months ago, simply because we have 

 5 learned a lot from that. And I think this is, 

 6 again, to the merit of the industry, but this is 

 7 also to the benefit of the industry, of course, 

 8 because the industry knows that it can rely on a 

 9 much better regulation. 

 10 On the other side, of course, we have 

 11 also learned a lot about the industry. So, we 

 12 have learned very much what are the points to be 

 13 looked at, of course, and what are the issues 

 14 which are more crucial. And this has evolved over 

 15 time. I mean, the issues which are crucial today 

 16 may not be those that we thought were crucial some 

 17 times ago. 

 18 But the second aspect is probably one of 

 19 trust. I believe what is evident here in these 20 

 20 months is that we have established really lots of 

 21 trust. People -- the critics of the code often 

 22 say to me but if something goes wrong, what do you 

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 1 do? Can you go to court? And I have normally two 

 2 replies is that first, I don't believe anything 

 3 will go wrong. I don't believe that anything will 

 4 go wrong but for very good reasons, because I have 

 5 in the end the reputation of Roger Liddell, for 

 6 example. I have in the end the reputation of LCH 

 7 Clearnet. They signed up for the code. They made 

 8 it very public. 

 9 So, honestly the collateral we have is 

 10 an important one. I mean, this is not sub prime. 

 11 This is prime, prime, prime, prime market. We 

 12 have a great collateral in the end. 

 13 But the second thing is it's true we 

 14 cannot go to court because this is not a piece of 

 15 law; this is self-regulation. But, we can go to 

 16 the Financial Times because this was very public. 

 17 And of course, going to court is legal certainty, 

 18 but going to the Financial Times may also be 

 19 effective in some circumstances. 

 20 So, I would say the learning process we 

 21 have been through has been fantastic. And I would 

 22 say the code has now all the chances to work. As 

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 1 I said in the very beginning, it cannot work 

 2 alone. It need to be accompanied by many things, 

 3 one of which is MiFID. We could have never dreamt 

 4 to do the code without MiFID. That's very clear. 

 5 I mean, MiFID -- if you want, what MiFID did was 

 6 to put out the rights, the rights of being 

 7 interoperable one with the other. 

 8 And what the code did was to translate 

 9 those rights in practical guidelines, to say okay, 

 10 you want to exercise that right, fine. These are 

 11 the guidelines in order to exercise those rights. 

 12 So, it's clear that the code is there only because 

 13 there is MiFID before. It is also clear that the 

 14 code addressing only part of the problem, which is 

 15 essentially the competitive part of the problem. 

 16 It does not address other issues which are 

 17 essentially the legal and the tax barriers, so 

 18 they are the safety issues. And those are 

 19 addressed by the Giovanni barriers and by the 

 20 standards. And I will stop here. 

 21 CHAIRMAN LUKKEN: Great. That was a 

 22 great overview. Before we turn to Richard, I know 

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 1 he has a question, I want to take my chairman's 

 2 prerogative and ask a question as well. 

 3 A lot of the clearing code deals with 

 4 transparency for pricing. And being at the CFTC 

 5 over five years and our audits of clearing houses, 

 6 we know that not all clearing houses are created 

 7 equal. We see differences in the value that 

 8 clearing houses may add to the different 

 9 organizations. 

 10 How does the clearing code address these 

 11 differences -- the value structure of clearing? 

 12 There may be certain clearing houses that do 

 13 things better but cost more money versus others 

 14 that may be less costly but add less value. 

 15 Is there some transparency part of this 

 16 equation that I'm missing that talks about the 

 17 value proposition that clearing may bring to the 

 18 structure? 

 19 MR. NAVA: Thank you for that. This 

 20 was, of course, one of the crucial requirements. 

 21 I mean, we didn't want that we engage only in a 

 22 price competition. Of course, there is the issue 

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 1 (off mike). 

 2 And in that respect, I would say we have 

 3 responded at least in two ways. One is price 

 4 transparency accompanied by unbundling of 

 5 services, and therefore, by description of 

 6 services. So, it's clear the price you pay for 

 7 which type of service. And that we have made it 

 8 very clear from the beginning because as we said 

 9 many times this morning, Europe is 27 countries, a 

 10 number of clearing houses, a number of CSDs. And 

 11 what is, for example, clearing services for one is 

 12 not for the other. 

 13 So, we had first to go down and try to 

 14 clarify all of that. And then, we could move to 

 15 the price issue. So, that is taken to the point, 

 16 for example, that the settlement houses are now 

 17 doing quite an interesting exercise, which may 

 18 expand also to the clearing houses at a certain 

 19 moment, which is doing what they call convergence 

 20 tables. Convergence table is essentially an (off 

 21 mike), where you have all the -- on my column, you 

 22 have all the different services which are offered 

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 1 than by role, you have all the different 

 2 providers. 

 3 And what this convergence table tried to 

 4 do is exactly to explain what is the service which 

 5 is provided by everyone and how does it converge 

 6 to a general notion and without the differences 

 7 one with another. We have seen a first draft of 

 8 that which was very encouraging and we will see 

 9 the next draft next week. 

 10 That is quite an important experiment 

 11 and the point you make actually is the point that 

 12 the council always makes. I mean, in the council 

 13 conclusion of next week of the 9th of October, it 

 14 is likely that there is a mention to this issue 

 15 and there is a mention to the effect that we need 

 16 to be -- to have clearer and clearer price and 

 17 service compatibility. So, the point, I think, 

 18 it's very, very clear to us. 

 19 MR. BERLIAND: First of all, just if I 

 20 could highly commend the work that has been done 

 21 so far. I think it indeed is quite impressive by 

 22 European standards the speed with which this has 

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 1 been achieved is very commendable. I guess the 

 2 question I'd like to ask you is, as you rightly 

 3 pointed out, very strong emphasis on cash 

 4 equities. 

 5 I should declare an interest, as I said, 

 6 on the supervisory board of (off mike) and my 

 7 personal view is that I think most of the 

 8 infrastructure operators in Europe saw it as 

 9 inevitable that if they did not act on a voluntary 

 10 basis, it would be imposed. 

 11 I think as we move into the fixed income 

 12 and the derivative space, the emotions and the 

 13 stakes rise a lot. And I'd be interested to hear 

 14 your thoughts about what you think the big issues 

 15 are that are different in those two areas relative 

 16 to what's already been achieved in the cash 

 17 equities world. 

 18 And we're not asking you to predict the 

 19 outcome. I think that's not fair, but I'd like to 

 20 hear your view on the issues. 

 21 MR. NAVA: Well, I believe the main 

 22 issue is that, as you said, I mean, the -- on the 

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 1 cash equities was inevitable and there is no 

 2 doubt. But also, there is a convergence of views 

 3 by the firms. 

 4 On the bonds and derivatives space, 

 5 there was not a convergence of the views by the 

 6 firms. Some firms thought these is a great 

 7 opportunities and let me weigh how we see. We 

 8 think that firms should avail themselves the 

 9 opportunities, which are here to be taken if the 

 10 code is extended to bonds and derivatives. 

 11 But, I'd say the vast majority -- I hope 

 12 you don't disagree -- the vast majority of 

 13 infrastructure in Europe was in favor in moving it 

 14 to bonds and derivatives. Some, but important 

 15 markets was not in favor of moving to bonds and 

 16 derivatives. I think we do see the differences, 

 17 not I think, I'm sure. We do see the differences. 

 18 We do see the differences, and that's why I said 

 19 in my presentation that nobody was -- I mean, 

 20 David would never go to any of these firms with 

 21 the code and ask for signature. 

 22 But once again, I do hope that the firms 

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 1 will not lose the opportunity to come at the table 

 2 and discuss with us about a code for bonds and 

 3 derivatives. So, not maybe we should start 

 4 changing the language, so not about the extension 

 5 of these code, but a code based on this one, of 

 6 course, because I think there are many things that 

 7 can be extended, for example, the mediation 

 8 mechanism, for example, the transparency process 

 9 for handling requests, which is quite important. 

 10 I mean, imagine, let me just crack an 

 11 anecdote, but in the middle of July, 7th of July, 

 12 Roger Liddell sent a letter to Borsa Italiana. 

 13 Now, I am born in Milan, and I lived in Milan to 

 14 the age of 22. I never stayed in Milan the 7th of 

 15 August. I mean, I can tell you, the 7th of August 

 16 in Milan, there are three dogs, two cats, and 

 17 that's it. The town is empty. There is nobody 

 18 there, okay. Football teams are not playing, so 

 19 there is really no reason to go in town in August. 

 20 And the court says that within 15 days 

 21 you have to reply. Believe it or not, Roger got a 

 22 reply within the 15 days of August. I mean, that 

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 1 quite -- that's quite amazing, of course. 

 2 So, I think there are things there. The 

 3 process for the request, remediation, the 

 4 transparency issue, which of course, I agree with 

 5 you must be tailored to the different markets, the 

 6 access and interoperability, and that is for 

 7 example, when we say the commonality. I mean, in 

 8 this country there is nearly a (off mike) for 

 9 derivatives. And if we extend the code to 

 10 derivatives, of course, there will be the issue of 

 11 -- the competitive issue of in case of reciprocity 

 12 with the derivative infrastructure of this 

 13 country, how can we deal with it? 

 14 So, I think we should not foreclose 

 15 ourselves of the opportunities to discuss. I 

 16 mean, we -- what the commission will do is to 

 17 offer a table to the infrastructure for discussing 

 18 a code for bonds and derivatives. And the 

 19 commission is serious on that. I mean, the 

 20 commission in Madrid has made it very, very clear 

 21 from day one. When we proposed the code, we said 

 22 initially cash equity because those were the terms 

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 1 of the deals, but in time, we wanted moved also to 

 2 the other asset classes. 

 3 And I always like to recall that the 

 4 original speech says in time should be moved to 

 5 other asset classes, open bracket, so that 

 6 everybody understands derivatives, not bonds, 

 7 derivatives, so it's just mentioned there. 

 8 MR. BERLIAND: I think highly relevant 

 9 to this table inevitably is the debate that will 

 10 be occurring in Europe during the next 12 months, 

 11 which is around the energy space in particular, 

 12 where we actually now have a firm date set in 

 13 stone with respect to obviously ICE in Europe in 

 14 its intentions, which I think the user community 

 15 has now got highly focused upon. 

 16 I think probably you will find there is 

 17 a much more informed opinion now than there was 

 18 six months ago. I think this catalyst of the 

 19 notification of termination of contract with LCH 

 20 will, in my view, galvanize an opinion that just 

 21 was absent. 

 22 I think this is very timely and I hope 

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 1 that you will get a much more energetic opinion 

 2 around derivatives than you have before. 

 3 MR. DONOHUE: I have a few questions 

 4 also on the same topic of cost and how you 

 5 calculate costs. On your slide that shows the 

 6 sort of GDP impact of the improvements in trading 

 7 costs, you refer to them as trading costs. Do you 

 8 really mean trading costs or do you mean the costs 

 9 of post-trade services? 

 10 MR. NAVA: Well, we -- 

 11 MR. DONOHUE: I'm sorry. In other 

 12 words, are you netting out or how are you 

 13 factoring in -- how are you factoring in at least 

 14 the potential for degradation and transaction 

 15 costs themselves if you saw, for example, 

 16 fragmentation across a multitude of execution 

 17 venues where perhaps the liquidity was not as deep 

 18 or efficient? 

 19 Have you thought about that? Is that 

 20 part of your assessment? 

 21 MR. NAVA: Just the first question. You 

 22 said you had more? 

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 1 MR. DONOHUE: Yeah. Do you want them 

 2 all? 

 3 MR. NAVA: No. 

 4 MR. DONOHUE: I'm going to fly back to 

 5 Italy with you. 

 6 MR. NAVA: Fortunately, I am not flying 

 7 back to Italy, but how did we calculate the debt? 

 8 What we did was to look at the best proxies we had 

 9 for all the trading costs. As you know, 

 10 collecting numbers on post-trading costs is close 

 11 to impossible. I mean, we had something which we 

 12 used of course, so that is not particularly 

 13 reliable. 

 14 So, we used that little, but also we 

 15 used a lot the spreads. And using a lot the 

 16 spreads, we could see what was the impact of 

 17 increasing or reducing the spreads and in 

 18 particular, what is the impact of that on the 

 19 volumes and then the volumes on the cost of 

 20 capital and then the cost of capital on the GDP. 

 21 So, this is, if you want, is a system of 

 22 essentially three equations, which is embedded 

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 1 into the same -- is the big study to which David 

 2 referred in his presentation, which was the London 

 3 Economic Study about the FSAP. That study 

 4 concluded for a much higher figure, of course, of 

 5 the order of 1.1 percent of the GDP in case of 

 6 removal of most of the barriers. 

 7 And the idea was that five years down 

 8 the road, once the other barriers have been 

 9 removed and we are stuck with these barriers in 

 10 cross border terms, what is the impact of these 

 11 barriers in cross border terms? So, the minimum 

 12 was zero and the maximum was 1.1. And what we got 

 13 to was 0.3. 

 14 We, of course, do not think that the 

 15 fragmentation of the liquidity due to MiFID or due 

 16 to whatever will lead to any degradation of 

 17 liquidity whatsoever. Because as David said, the 

 18 quid pro quo for that is announced transparency, 

 19 of course and all the best execution mechanisms 

 20 which has been put in place. 

 21 MR. DONOHUE: That's a set of 

 22 assumptions that are based on empirical evidence? 

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 1 MR. NAVA: It is based on -- this is 

 2 based on numbers and this is based on numbers 

 3 collected between -- is the same data set of the 

 4 big studies. So, if I'm not wrong, it goes from 

 5 '98 to 2000 or 20001 or something like that. 

 6 So, we really wanted to use the same 

 7 database. This has been an option that we have 

 8 discussed a lot, especially when we tested this 

 9 with academics and was one of the first issues to 

 10 be brought to the floor. 

 11 We could have taken a new data set, but 

 12 then we would have lost the basic comparability 

 13 with the 1.1 or we could have taken the old data 

 14 set and be still compatible with the 1.1. So, it 

 15 is a choice that we made but of course is based 

 16 on little. 

 17 It's -- you can criticize that. We can, 

 18 as you know, two economies in a room make three 

 19 schools of thought, so we could discuss that. I 

 20 think at the end of the day we were quite happy of 

 21 this choice that was taken exactly because of its 

 22 comparability, comparability attitude. And 

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 1 actually, whatever that period you take is that 

 2 period. I mean, there's nothing to say. If you 

 3 take two years, there are always two years at any 

 4 point in time, so you can play and then in a 

 5 particular moment it goes up and another goes 

 6 down. The impact on volume to when it goes up or 

 7 down is not very clear. You may have moment that 

 8 it goes down and still you have a great impact on 

 9 volume as we have seen in recent (off mike). 

 10 So, we thought that to have a dataset 

 11 that has already been tested because the great 

 12 advantage of course was that that dataset had 

 13 already been tested, so it was quite clean in 

 14 economical terms. We thought that the advantages 

 15 prevailed over the disadvantages of the fact. It 

 16 was honestly two years and a half for the three 

 17 year (off mike). 

 18 MR. DONOHUE: The other question is had 

 19 is if you used U.S. settlement costs in securities 

 20 markets versus cross border settlement costs in 

 21 Europe as sort of the benchmark for how much cost 

 22 you would like to take out of the system and that 

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 1 defined the total addressable costs, you mentioned 

 2 that this is really intended to deal with the sort 

 3 of competitive aspects of it but doesn't deal with 

 4 the Giovinini factors that drive costs in cross 

 5 border settlement in Europe, I'm just curious, you 

 6 know, what percentage of the total addressable 

 7 cost do you think is related to the sort of 

 8 so-called competitive aspect versus the actual 

 9 cost drivers that have been well-evaluated and 

 10 well-substantiated in the Giovinini reports? Just 

 11 you know, what percentage breaks down, what of it 

 12 is Giovinini, and what of it is this potentially? 

 13 MR. NAVA: We discussed that issue 

 14 longly in this exam group, which is the group of 

 15 advisory and monitoring of the Giovinini barriers. 

 16 The sense we had around the table was that the 

 17 comparison with the U.S., just to take the U.S. 

 18 settlement costs and put it into the European one 

 19 was unfair, basically. 

 20 The infrastructure providers told us it 

 21 was genuinely unfair because there is nothing to 

 22 say that France and the UK speak two different 

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 1 languages, for example or because we have 

 2 different tax systems, different legal systems. 

 3 In many, many respects, I mean, the 

 4 legal differences are very subtle, for example, 

 5 one that they always like to mention, when it 

 6 comes to calling people to a general assembly, 

 7 which is one of the functions that the CSD should 

 8 do, there is one country that says at maximum, you 

 9 should call these people 15 days before. Because 

 10 if you call them three weeks before, they forget, 

 11 so, at maximum 15 days before. And there is 

 12 another country which is much more organized and 

 13 says at minimum 15 days before because they need 

 14 to pencil it in to their agenda, so if you wait 

 15 too long, they will not have time to go there. 

 16 So, what we were told basically is that 

 17 the differences there are very genuine and the 

 18 taking the U.S. comparison right away was 

 19 impossible. 

 20 Now, the question is how much of debt is 

 21 your percentage. 

 22 MR. DONOHUE: How would you define the 

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 1 universe of addressable costs whether -- 

 2 MR. NAVA: Exactly, how much of the 

 3 addressable cost you can define and how much you 

 4 can reduce them and how much is inevitable cost of 

 5 Europe because of the fact that we have 27 

 6 countries with 21 or 22 languages or something 

 7 like that? 

 8 The sense we have is that basically it's 

 9 half and half, which is an obvious reply to give 

 10 but this is the sense that the industry has given 

 11 us in the work of the Giovinini. For example, 

 12 there are things like the standard, the barrier 

 13 one, which is the barrier on the informatics 

 14 standard on messaging and so on, where many things 

 15 seems solvable and where probably at a certain 

 16 point will arrive to something extremely close to 

 17 United States with no more legal differences. 

 18 But there are other barriers, for 

 19 example, the fiscal one. Some countries have a 

 20 transaction tax and some others have not. And 

 21 it's very simple. Those countries who have a 

 22 transaction tax apply it on their own CSD, in a 

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 1 way, do not allow other CSDs to become 

 2 interoperable. So, there is the issue of link 

 3 between the two or unless -- unless they allow the 

 4 other CSD to raise the tax, which is a possibility 

 5 but is a mind change having a CSD, foreign CSD 

 6 raising the tax and what happens if the owner of 

 7 that CSD escapes with the cash in the pocket and 

 8 all these issues. 

 9 So, the sense was that for some of the 

 10 barriers, we could really eliminate them and 

 11 basically for the other half was very difficult to 

 12 do it. And the half where it's difficult to do it 

 13 is essentially the legal and the tax. Though, I 

 14 must say on the tax, in a month's time, we are 

 15 having -- not actually a month, less than that. 

 16 In three weeks time, the 23rd of October, we will 

 17 be having in Brussels the presentation of the 

 18 final fiscal report, which will be a report giving 

 19 some ideas to member states on how to solve this. 

 20 And I don't want to anticipate anything 

 21 of that report of course, not to take out the 

 22 surprise of that, but the ideas we will be giving 

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 1 in our opinion should be about really to reduce a 

 2 bit of these costs. But there are inevitable 

 3 costs -- 

 4 MR. DONOHUE: Do you say half of the 

 5 barriers or half of the costs because each of the 

 6 barriers presents different costs? 

 7 MR. NAVA: This is another -- this is -- 

 8 MR. DONOHUE: Sorry. That's the last 

 9 question I'll ask. 

 10 MR. NAVA: No, no, no. I think your 

 11 question is very much correct. We are doing now 

 12 an exercise which is trying to account the 

 13 progress made in every barrier. And one of the 

 14 major discussion with that is should we evaluate 

 15 everybody at one or should we give weight to the 

 16 barriers. 

 17 We are in favor of giving weight to the 

 18 barriers and we are also in favor of giving 

 19 numbers to progress. Now, those who work at the 

 20 elimination of those barriers are a little bit 

 21 less keen. I mean, it is a bit like a school. We 

 22 want the number and they would like better 

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 1 judgment. It's good, could be better, you are on 

 2 the right way, these kind of things. 

 3 So, our view is that most probably we 

 4 should come to weight in the barriers. If we come 

 5 to weight the barriers, it's likely that the 

 6 industry barriers may matter a bit more at the end 

 7 of the day than the legal barriers and the tax 

 8 barriers. So, it is likely that the pictures gets 

 9 a bit more positive than now. 

 10 But we haven't yet come to the -- to 

 11 having a procedure that was agreed by the industry 

 12 to weight the barriers. We have proposed one idea 

 13 at the last exam. We are going to propose the 

 14 refinement of the next exam. And I hope that by 

 15 the first exam of 2008, probably we will have 

 16 fixed a methodology to give weight to everybody. 

 17 MR. PICKEL: I have a general question 

 18 which really is for either of you, but I think it 

 19 is particularly relevant in the clearing and 

 20 settlement area, and that is the role of the 

 21 European Central Bank, which Professor Nava 

 22 mentioned. 

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 1 And I realize they don't have a direct 

 2 regulatory role, but certainly, it's observed that 

 3 they don't have this data either publicly or 

 4 behind the scenes to weigh in on any number of 

 5 issues that you're addressing. 

 6 And I guess what exactly do you view as 

 7 the role that they play? And realizing you can't 

 8 speak for the Central Bank, what do you see as the 

 9 issues that they seem to take the most interest 

 10 in? 

 11 MR. NAVA: I must say -- I mean, the ECB 

 12 has been of -- has been always in our group. I 

 13 mean, from the very beginning has been in this 

 14 exam as an observer, has been in the MOG, and I 

 15 think it is the fact that we have worked together 

 16 that has brought the two of us to propose a 

 17 project at the very same time. 

 18 Of course, the ECB has a very direct 

 19 interest in what the article of the treaty says, 

 20 which is the stability of the financial system, of 

 21 course. And that is really the issue on which the 

 22 ECB is concentrating. 

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 1 And I think that the work the ECB has 

 2 been doing on the standard until now is a very 

 3 important work. I mean, we really regret that the 

 4 standards have not yet seen the light. In a way, 

 5 we hope that sooner or later we come out of that 

 6 situation and that we manage to have EU standards 

 7 like there are Yosco standards. We have tried to 

 8 have our EU formulation of those standards and for 

 9 some reasons, they were blocked, not at the ECB 

 10 level. The ECB was in favor. But the old ECB, 

 11 the old governors of the ECB but that the CESR we 

 12 have some blockage. 

 13 But obviously, I mean, the ECB is 

 14 crucial and is a partner that I don't think we 

 15 could even imagine a second not to have for all 

 16 the issues of safety and stability, which is what 

 17 the article of the treaty asks them to do. 

 18 MR. WRIGHT: I think I would add that if 

 19 you look at Target 2 securities, I think the ECB 

 20 thinking has evolved a lot from perhaps some 

 21 people thought rather over rigid approach to 

 22 something now which is much more in tune with 

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 1 working with the grain of the market and 

 2 encouraging to set up a really deeper set of 

 3 consultation and committees. We've got the 

 4 governance of the project right. 

 5 But we're encouraged by that project. 

 6 We see what Mario has been describing as clearing 

 7 and settlement space. We've got a four-pronged 

 8 strategy, as he said. We've got the Giovinini 

 9 barriers. We expect that on October the 9th that 

 10 there will be pressure building up from ministers 

 11 to put some time frame around some of the 

 12 remaining barriers, which is helpful because it 

 13 puts pressure on all those who've got to deliver 

 14 something to get on with it. 

 15 The second obviously is the code. The 

 16 third is the Target 2 securities, and fourth 

 17 strand is this -- these ECB CESR standards, which 

 18 we want to progress and again, hopefully, we'll 

 19 get some more momentum behind that. 

 20 So, we work extremely closely with the 

 21 ECB, and we think they've done a very good job 

 22 moving their project forward as part of this 

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 1 four-pronged strategy. 

 2 CHAIRMAN LUKKEN: Roger? 

 3 MR. LIDDELL: Thank you. If I can just 

 4 perhaps offer a few comments. First of all, we at 

 5 LCH, now fully support the code and are keen to 

 6 make it work. But that wasn't always the case. 

 7 Of the three different elements to it, we all were 

 8 strongly in favor and support of the right of 

 9 access, all were strongly in favor of and support 

 10 of price transparency. 

 11 We've had some significant problems with 

 12 the whole interoperability component of it for two 

 13 reasons frankly. First of all, that as a 

 14 technician embracing something that actually 

 15 increases complexity and increases cost just felt 

 16 fundamentally wrong initially. And secondly, we 

 17 had some real serious reservations about the 

 18 likelihood of the code being actually adopted by 

 19 exchanges who owned their own clearing houses and 

 20 felt that there was risk that this would be 

 21 something that would make us vulnerable but would 

 22 not give us anything in return. 

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 1 The reason we changed our mind was for a 

 2 couple of reasons, but the main reason was the one 

 3 that Mario mentioned near the end of his 

 4 presentation, which is the whole, you know, 

 5 visibility and publicity element of it. We now 

 6 feel much more optimistic than we did before that 

 7 individual countries or the infrastructure in 

 8 countries and particularly exchanges would be 

 9 unwilling to not facilitate the working of the 

 10 code of conduct. 

 11 We became convinced of that through 

 12 discussions with Mario and two of his colleagues 

 13 but also with other people in the industry and so, 

 14 now feel that even if it might not be necessarily 

 15 attractive in many cases for exchanges to embrace 

 16 the code, that they probably will. So, that was a 

 17 big difference. 

 18 And the second thing, I think which 

 19 speaks to one of the questions that Craig had 

 20 before is this whole thing -- the relativity 

 21 between price and cost. So, our view is that this 

 22 part of the code will actually increase costs but 

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 1 it will decrease price. And of course, one 

 2 month's price is another month's cost. 

 3 And the reality of the situation in 

 4 Europe and in the U.S. is that, you know, as 

 5 volumes of activity have gone up on all the 

 6 exchanges and all the other platforms that provide 

 7 transactions and as the costs remain reasonably or 

 8 relatively fixed, then the margins in providing 

 9 clearing services has actually gone up 

 10 dramatically. I mean, clearing now is a very 

 11 profitable business. So, there is a lot of margin 

 12 that I think will be eroded through the 

 13 interoperability and the competition that comes as 

 14 a consequence of it. 

 15 So, cost can go up, but price will still 

 16 come down is our view, and that's definitely true 

 17 in cash equities. It's particularly true in 

 18 derivatives, which of course, is why clearing 

 19 derivatives is becoming so financially attractive, 

 20 which obviously is one of the things that ICE is 

 21 concerned with. 

 22 So again, we're keen that it is made to 

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 1 work. It's not without reservations, because as I 

 2 say, there is something still a little bit 

 3 uncomfortable about increasing costs as a means of 

 4 bringing price down. But as a means to an end, 

 5 we think this is going to be helpful and look 

 6 forward to embracing it. 

 7 CHAIRMAN LUKKEN: Adam, do you have a 

 8 comment? 

 9 MR. COOPER: Just a quick question. 

 10 Should a user have any concern that the unbundling 

 11 might give rise to issues on the net ability of 

 12 the contracts across various link participants 

 13 that might not be there under the current regime 

 14 netting of contracts now, comparability of, you 

 15 know, contract? 

 16 MR. NAVA: The users did not raise this 

 17 issue yet. On the unbundling -- sorry. The users 

 18 did not raise this issue yet. On the unbundling, 

 19 what we did was both a vertical and horizontal 

 20 approach. The vertical approach is unbundled 

 21 between trading venues, CCPs, and CSDs. And the 

 22 horizontal approach is within CSDs, unbundled the 

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 1 five main services which are provided. 

 2 This is crucial for the price 

 3 transparency, of course. These links in with this 

 4 price transparency. Now, what you ask is whether, 

 5 for example, two CCPs which are linked or become 

 6 interoperable whether the contracts of one users 

 7 with the CCP would be in a way touched by the 

 8 interoperability of their CCP with another CCP. 

 9 That is, I'd say, a question that we 

 10 should probably discuss also with the CCPs, but at 

 11 present, no user has made that worry clear to us. 

 12 And actually, most of the users have told us that 

 13 these kind of picture, the one we are seeing here, 

 14 they like it. 

 15 Of course, they share lots of sympathy 

 16 with what Roger said. They said -- I mean, it's 

 17 not immediately clear if you pass from one to four 

 18 providers with the same trade flow, it would 

 19 immediately reduce prices. It is true it is not 

 20 immediately clear. There will be some competition 

 21 within them, probably because we'll go down and so 

 22 on and on. But on your legal question, I would 

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 1 say for the time being, nobody has raised the 

 2 issue. 

 3 MR. SHORT: We too look forward to the 

 4 debate. I'm sure it will be a robust one. I just 

 5 wanted to add that -- or really ask the question 

 6 about whether there have been any studies done on 

 7 product innovation and the potential impact on 

 8 product innovation of interoperability and 

 9 clearing. 

 10 One of the reasons that ICE is pursuing 

 11 its own clearing strategy is to bring more 

 12 products to the market more expeditiously, and we 

 13 view that as a benefit to the end customer in the 

 14 marketplace. And I was just wondering where that 

 15 fit into the mix. 

 16 MR. NAVA: In this particular area, we 

 17 have -- in this particular area, we haven't yet 

 18 made any study. But in the other area I was 

 19 referring to in telecom, that is quite interesting 

 20 because as a result of interoperability, we have 

 21 seen lots of product innovation which is also due 

 22 to technology, which is also due to many other 

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 1 different things. 

 2 But if you think of the typical 

 3 incumbent operator, which usually had this image 

 4 of being a bit (off mike), normally it was an 

 5 incumbent operator offering standard service with 

 6 no fantasy and anything at all. Well, that has 

 7 changed quite dramatically. I mean, Belgacom is 

 8 offering many, many things. 

 9 So, the interoperability and the 

 10 challenges that come from that seem to have acted 

 11 at least in the telecom areas as (off mike) for 

 12 other services, needless to say at very high value 

 13 added, because when Belgacom offers you the number 

 14 recognition or all the other services, they're all 

 15 very much value added services. 

 16 So, in the other markets, I would say 

 17 the reply is positive in the sense that there is a 

 18 correlation between interoperability, challenges 

 19 of the market, and innovation, which is what one 

 20 would tend to expect from theory. 

 21 In this market, we haven't yet any 

 22 proof, also because we haven't had an 

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 1 interoperability as such by now. The only thing 

 2 we have now are requests that we follow very, very 

 3 carefully on a regular basis. We phone to those 

 4 who have requested and to those who have been 

 5 requested, and we ask how we are proceeding with 

 6 that. 

 7 MR. SHORT: Thank you very much. I 

 8 would just add that, you know, one thing that 

 9 concerns ICE is really the different in, I guess, 

 10 the relative maturities of the markets. I mean, 

 11 obviously the cash equities markets have been 

 12 around for many years. And while derivatives have 

 13 been around for many years, I think we're right at 

 14 the forefront of, you know, significant expansion 

 15 in the derivatives markets and significant product 

 16 innovation. 

 17 And one concern we would have obviously 

 18 is an impact, you know, on that product innovation 

 19 and ultimately the -- you know, the impact on the 

 20 market and the end user of the market. 

 21 MR. NAVA: As I repeat, theoretically, 

 22 we don't have any -- I mean, the economic 

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 1 literature does not conclude against innovation in 

 2 case of increased competition, so there is no -- 

 3 there is no evidence, neither from the theory nor 

 4 from the empirics that if you have more 

 5 competition you hamper or you put obstacles to 

 6 innovation. 

 7 MR. SHORT: Well, I know presenters and 

 8 our participants have planes to catch. And we've 

 9 come to that hour where we're supposed to close. 

 10 I would like to ask one final question 

 11 on this issue. And it really deals with the 

 12 concept of mutual recognition and how in the 

 13 United States obviously there is a lot of cross 

 14 Atlantic business between our markets and your 

 15 markets. The mutual recognition is based on the 

 16 concept of broad comparability. 

 17 Is the clearing code of conduct going to 

 18 be part of that comparability analysis in the 

 19 future where if, you know, ICE has decided to 

 20 start a clearing house in Britain but they 

 21 certainly could have decided just to keep the one 

 22 they have here in the United States and link to 

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 1 that clearing house, would this be subject to the 

 2 clearing code of conduct? Is this something we 

 3 need to be thinking about as we look forward to 

 4 this mutual recognition idea between our two 

 5 bodies? 

 6 MR. WRIGHT: Well, Chairman, you're 

 7 thinking like a good chairman, way forward here, 

 8 if I may say so. And I think that, as you are 

 9 aware, there is a real interest in this country at 

 10 government level to seek -- to move forward the 

 11 mutual recognition of securities. And that's been 

 12 signaled in the G7 process and it's been signaled 

 13 in the context of our bilateral relationship 

 14 between the EU and the U.S. and what we call the 

 15 Merkel Initiative, the chancellor of Germany 

 16 having agreed a new transatlantic economic council 

 17 to integrate and to work towards the removal of 

 18 barriers to trade. 

 19 So, this is one of the big subjects of 

 20 the future. And I think we in the European 

 21 Commission in broad terms very much favor trying 

 22 to break down these barriers and mutually 

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 1 recognize each other. So, there's a very positive 

 2 spin and orientation from our side on the basic 

 3 principle of that. 

 4 The important thing is that we've got to 

 5 get the detail and the framework right. We're 

 6 discussing very intensely. We did so yesterday 

 7 with our colleagues from the SEC, who on the 

 8 securities side obviously were leading. You've 

 9 been, in a sense, doing this work for some time 

 10 with foreign jurisdictions. 

 11 So, I think the key issue here is how 

 12 are we going to make progress, what's the right 

 13 approach, what products should we concentrate on 

 14 first, should we, for example, concentrate on the 

 15 professional markets, broker dealers on the 

 16 professional side, stock exchanges, some people 

 17 say, and why not in the future carrying a 

 18 settlement, asset managers, and so forth. 

 19 So, you know, I think all of this is now 

 20 being thought through. I think the really 

 21 interesting thing is that this is -- it's really 

 22 coming on the agenda, the transatlantic agenda for 

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 1 the first time. If we're going to -- if this is 

 2 going to work, both sides -- and here I'm talking 

 3 bilaterally, but of course this is -- could be 

 4 plural lateral, global, everybody has got to feel 

 5 comfortable with the process; everybody has got to 

 6 understand the objectives. 

 7 It may well be that if we, you know, if 

 8 we try to sort of do a -- do this in a gradual 

 9 way, we might be more successful than trying to 

 10 take on everything including retail business in 

 11 the first thing. 

 12 So, all that is being very much thought 

 13 through. And your thought on the clearing and 

 14 settlements side is a very interesting one. And I 

 15 think, to be quite clear, we want to see real 

 16 progress next year. I mean, you know, once we get 

 17 the basic framework out there, the regulators have 

 18 got to get on and decide who should and should not 

 19 be able to mutually -- be mutually recognized, and 

 20 it will obviously be on a reciprocal basis. 

 21 I think our real concern -- and it's not 

 22 really a concern but our real -- the thing we want 

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 1 to get right is get the framework right. Once you 

 2 get the framework right, we understand each other, 

 3 then I think the technical details can follow. 

 4 So, a very interesting thought and 

 5 something that might bring us back for further 

 6 discussions, I think. 

 7 CHAIRMAN LUKKEN: One very quick comment 

 8 from Arthur. 

 9 MR. HAHN: Yeah. Thank you. I would 

 10 encourage you guys to pursue that agenda. I think 

 11 your good work on MiFID and the code, I think make 

 12 it much easier to interface with you as opposed to 

 13 dealing with half a dozen different countries and 

 14 different regimes. And this is an opportunity and 

 15 it needs to happen and look forward to your 

 16 pursuing that. 

 17 MR. WRIGHT: If I may, I thank you for 

 18 your encouragement and I think we entirely agree 

 19 with your sentiments. But let's also be -- keep 

 20 our feet on the ground here because political 

 21 aspirations are there. We share those. But the 

 22 devil is in the detail here. 

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 1 The legal systems of the United States 

 2 and the approaches in Europe are different. And 

 3 so, you know, we have to, for example, think 

 4 carefully about, you know, whose laws apply where, 

 5 whose -- who does the inspections. All those 

 6 sorts of difficult issues have got to be worked 

 7 through. 

 8 So, let's get the framework right and 

 9 then I think 2008 could be a real breakthrough. 

 10 MR. HAHN: Yeah. I mean, for whatever 

 11 it's worth, maybe just a closing comment. CFTC 

 12 has gotten that pretty right so far -- 

 13 MR. WRIGHT: Yes, yes. 

 14 MR. HAHN: -- and made some good 

 15 progress, so we would look for other agencies to 

 16 try. 

 17 MR. WRIGHT: I think you're -- I think 

 18 -- I fully agree with that. I think we're in 

 19 great admiration for the very smooth way the CFTC 

 20 has managed these sorts of arrangements. And 

 21 there's a lot to be learned. 

 22 But, you know, what is being talked 

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 1 about by some people in the industry is a big 

 2 agenda here, and it's ambitious. But let's go for 

 3 it. I think that's the view from Europe. 

 4 CHAIRMAN LUKKEN: Well, Commissioner 

 5 Chilton unfortunately had to catch a plane. 

 6 That's why he left a little earlier, but on his 

 7 behalf and that of my fellow commissioners, we 

 8 want to thank the presenters. You really gave us 

 9 a lot to chew on today, and we may have to do a 

 10 part two in the spring, to follow up on both these 

 11 issues with you. And we hope we can. 

 12 So, join me in thanking our presenters 

 13 today. 

 14 (Applause) 

 15 CHAIRMAN LUKKEN: With that, I do want 

 16 to offer a quick thanks to all the folks at the 

 17 CFTC that helped put this together, Jackie and her 

 18 shop as well as Erin Shaw, Trabue Bland. We 

 19 couldn't have done it without them and also our 

 20 administrative folks who are always very valued 

 21 here at the Commission. So, thank you. 

 22 And with that, we are adjourned. 

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 1 (Whereupon, at 4:08 p.m., the 

 2 PROCEEDINGS were adjourned.) 

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