UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 GLOBAL MARKETS ADVISORY COMMITTEE MEETING

 Washington, D.C.

 Thursday, October 9, 2014
 2

 1 PARTICIPANTS:

 2 Commission Members:

 3 CHAIRMAN TED SERAFINI

 4 COMMISSIONER MARK WETJEN

 5 CHAIRMAN TIM MASSAD

 6 COMMISSIONER SHARON BOWEN

 7 COMMISSIONER CHRISTOPHER GIANCARLO

 8 For CFTC:

 9 BRIAN O'KEEFE

 Deputy Director, Division of Clearing and Risk

 10

 DAVID BAILEY

 11 Director, Financial Market Infrastructure

 Bank of England

 12

 RODRIGO BUENAVENTURA

 13 European Securities and Markets Authority

 14 DAVID VAN WAGNER

 Chief Counsel, Division of Market Oversight

 15

 THOMAS LEAHY

 16 Associate Director, Division of Market Oversight

 17 JERRY BRITO

 Executive Director, Coin Center

 18

 HOUMAN SHADAB

 19 Professor of Law, New York Law School

 20 TIM BYUN

 Chief Compliance Officer, BitPay

 21

 LEONARD NUARA

 22 President and Co-Founder, TeraExchange

 Division of Market Oversight
 3

 1 PARTICIPANTS (CONT'D):

 2 Other Participants:

 3 CHRIS ALLEN, Barclays

 4 STEVEN CHO, Kings Peat Asset Management, LP

 5 CLIVE CHRISTISON, BP

 6 SAMARA COHEN, Goldman Sachs

 7 ADAM COOPER, Citadel

 8 MICHAEL DAWLEY, Futures Industry Association

 9 DAVID DOWNEY, OneChicago

 10 DAVID GOONE, International Exchange

 11 PAUL HAMIL, UBS

 12 GEORGE HARINGTON, Bloomberg, LP

 13 DOUG HEPWORTH, Gresham Investment Management LLC

 14 SUNIL HIRANI, trueEX

 15 RICHARD KERSCHNER, EBS

 16 ROBERT KLEIN, Citigroup Global Market, Inc.

 17 CAITLIN KLINE, Better Market

 18 DINO KOS, CLS Group

 19 MIKE LESAGE, Cargill Risk Management

 20 CLINTON LIVELY, RBC

 21 RAJ MAHAJAN, Allston Holdings

 22 LAURENT PAULHAC, ICAP/SEF
 4

 1 PARTICIPANTS (CONT'D):

 2 EMILY PORTNEY, J.P. Morgan Chase & Co.

 3 MUTHUKRISHNAN RAMASWAMI, Singapore Exchange

 4 TROY ROHRBAUGH, J.P. Morgan

 5 DAN ROTH, National Futures Association

 6 JILL SIGELBAUM, Triana

 7 YASUSHI TAKAYAMA, Nomura Securities

 8 KIM TAYLOR, CME Group

 9 LARRY THOMPSON, DTCC

 10 SUPURNA VEDBRAT, BlackRoc

 11 JASON VITALE, Deutsche Bank

 12 PHIL WEISBERG, FXall

 13 GAVIN WELLS, LCH Clearnet

 14

 15

 16 * * * * *

 17

 18

 19

 20

 21

 22
 5

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

 2 (1:38 p.m.)

 3 CHARIMAN SERAFINI: I am the Designated

 4 Federal Officer and Temporary Chair of this

 5 Committee, it's my pleasure to call to order the

 6 17th Meeting of the GMAC.

 7 Thank you, everyone, for coming today.

 8 As a quick reminder I know we have a lot of

 9 veterans here at these meetings, and we have some

 10 new faces, just remember when you want to talk

 11 into the mic to press the red button. Talk into

 12 the mic, and then press the red button to turn it

 13 off when you are done speaking. I want to also

 14 remind you, this is being webcast and recorded, so

 15 just and FYI there. With that, I'll turn it over

 16 to Commissioner Wetjen, the Sponsor of the GMAC.

 17 COMMISSIONER WETJEN: Thank you, Ted.

 18 Thanks, everyone, for being here today. It should

 19 be an interesting meeting; we've got a couple of

 20 good topics today, the unifying theme being

 21 currency. The first instance, the more

 22 traditional bond issue, related to more
 6

 1 traditional fiat currencies, and then on a second

 2 topic, something a little more novel, related to

 3 some developments in the derivative space,

 4 reaction, what's been going on in the crypto

 5 currency space; so, looking forward to the second

 6 Panel, as well as the first Panel, as we dive into

 7 this.

 8 I also have a full, written statement

 9 that will be on the website shortly, and I don't

 10 want to read that here, but I just want to say

 11 real quickly before we turn it over to the other

 12 Commissioners and the Chairman; Chairman Massad, I

 13 want thank our special guests from abroad, from

 14 both ESMA and the Bank of England. We've got

 15 Rodrigo here with us, so it's a real pleasure to

 16 have you, and we have David Bailey, from the Bank

 17 of England.

 18 David and I were joking earlier, this is

 19 his third GMAC Meeting, so he's going three for

 20 three this year, so we are about to make him an

 21 Honorary Member. But we appreciate, as always,

 22 his contributions, and glad he could be with us
 7

 1 today.

 2 I want to thank Chairman Massad for his

 3 help on developing the agenda for today. I want

 4 to thank him for being here, and I want to thank

 5 Commissioner Bowen for being here as well; both of

 6 their first GMAC meetings. And with that I will

 7 turn it over to Chairman Massad, and look forward

 8 to the discussions. Thanks.

 9 CHAIRMAN MASSAD: Thank you very much,

 10 Mark. And I want to thank you and all of your

 11 staff as well as all of our professional staff,

 12 for the tremendous amount of work that goes into a

 13 meeting like this. One often doesn't see it from

 14 the outside, but I know how much it takes to pull

 15 something like this together, and you've done it

 16 in very short order. And I also want to thank all

 17 of the participants, your presence and input is

 18 very much valued, as well as all of our special

 19 guests, and all of the members of the public who

 20 are here.

 21 Our Advisory Committee has provided a

 22 valuable forum for discussion of complex and
 8

 1 evolving market issues, that are relevant to our

 2 work here, and it is very, very valuable to us to

 3 listen to a broad variety of viewpoints as we

 4 consider these. The advisory committees of course

 5 are only one way that we get input, but they are a

 6 very important way.

 7 The topics that we will discuss today

 8 are both timely and important. The first session

 9 on non-deliverable forward, should be very helpful

 10 to us as we consider whether to propose mandatory

 11 clearing for NDFs. Now, as probably most of you

 12 know, under the law, pertaining to swaps clearing,

 13 the Commission must consider several factors to

 14 determine whether it should mandate clearing for a

 15 swap. And those include, whether there is

 16 sufficient liquidity to support clearing, whether

 17 the necessary rules and infrastructure are in

 18 place, and what are the effects on the mitigation

 19 of systemic risk, and on competition?

 20 Now, the meeting we are having today is

 21 not a formal process to do consider those factors,

 22 it's really just an opportunity for us to learn
 9

 1 more about the NDF market, so that we can consider

 2 whether to go forward with the rule. If we decide

 3 to propose a rule, then of course there will be

 4 opportunity for everyone in the public to give

 5 their views.

 6 Considering whether to propose a rule

 7 for further clearing mandates, just also

 8 underscores the importance of working out the

 9 cross-border issues on clearinghouse recognition

 10 -- regulation and supervision. And I also welcome

 11 our colleagues from ESMA and others who are here.

 12 Europe has not yet recognized our clearinghouses

 13 as equivalent. I believe they should because our

 14 clearinghouses meet international standards.

 15 They believe, and they've asked that we

 16 look at whether we can make some changes to our

 17 regulatory approach to clearinghouses that are

 18 located in Europe, but also are registered with

 19 the U.S. To my mind the existing dual

 20 registration regime has worked very well for

 21 years, and I kind of believe this is the situation

 22 of, if ain't broke don't fix it, but we have
 10

 1 agreed to look at whether there are ways that we

 2 can further harmonize our rules, and our

 3 regulatory approach. That is a complicated

 4 undertaking, it takes a little time, but I think

 5 we are both working on it in good faith.

 6 And I'm also very pleased that I believe

 7 that they've decided to postpone the imposition of

 8 higher capital charges on European banks

 9 participating in clearinghouses that aren't yet

 10 recognized, that pertains not only clearinghouses

 11 in the U.S. but elsewhere. I think that was

 12 threatening to create fragmentation in the

 13 markets, and so it's a good thing that that's been

 14 postponed. My own view is dual registration has

 15 actually been source of the growth of the global

 16 markets. It's been a foundation on which we've

 17 grown these markets for many years.

 18 The second topic pertains to Bitcoin,

 19 and while the development of digital payment

 20 systems raises many issues outside our

 21 jurisdiction, on area within our responsibility is

 22 derivative contracts traded on our designated
 11

 1 markets or SEFs that are based on Bitcoin. And

 2 today we have an opportunity to hear about that

 3 and related issues.

 4 And I kind of approach this subject in

 5 the following way. You know, innovation is a very

 6 vital part of our markets, and our regulatory

 7 framework is designed to encourage it. At the

 8 same time, our regulatory framework is intended to

 9 prevent manipulation and fraud, and to make sure

 10 our markets operate with transparency and

 11 integrity. And our responsibilities at the

 12 Commission are ongoing in that regard. The fact

 13 that a contract may be traded on a market does not

 14 mean that we have endorsed it, as the staff will

 15 explain more, later today.

 16 And as with all new developments we must

 17 remain vigilant, and we'll continue to evaluate

 18 contracts and trading activity over time. And we

 19 will, of course, coordinate with our colleagues

 20 and other regulatory authorities as appropriate.

 21 So I think it's helpful to keep all that in mind

 22 as we talk about these issues.
 12

 1 So, again, thank you all for being here.

 2 Thank you, again, Commissioner Wetjen, and we look

 3 forward to a productive discussion.

 4 COMMISSIONER WETJEN: Commissioner

 5 Bowen?

 6 COMMISSIONER BOWEN: Great. Thank you;

 7 and good afternoon, everyone. First I'd like to

 8 commend Commissioner Wetjen and GMAC members for

 9 the time and thought that you devoted for today's

 10 timely discussion, and of NFDs and Bitcoin. I

 11 look forward to hearing the Committee's views

 12 about the Commission's jurisdiction over Bitcoin,

 13 the clearing of NDFs, and the risk involved that

 14 the Commission should consider. Clearing is a

 15 central piece of financial reform.

 16 As I listen today, my focus will be

 17 mainly on two things; taking a commonsense,

 18 practical approach to ensure that American

 19 businesses remain competitive in a global

 20 marketplace, or also assuring that we analyze risk

 21 thoughtfully in order to protect the American

 22 public. Thank you all for attending today, and I
 13

 1 look forward to meeting most of you.

 2 COMMISSIONER WETJEN: Thank you,

 3 Commissioner Bowen. Commissioner Giancarlo I

 4 believe is on his way. I received an email from

 5 him earlier; he's in-transit, so hopefully he'll

 6 arrive in time for the -- before the meeting ends.

 7 One other thing, by was way of introduction, I

 8 should have said this earlier, we have with us

 9 today, some new Sub- Committee Members. After

 10 consultation with some of the other GMAC members,

 11 and recognizing that both GMAC and the Commission

 12 could probably benefit from additional specific

 13 expertise in foreign exchange, we decided it would

 14 be sensible to form a sub-committee of FX experts.

 15 And so we have those folks with us

 16 today, and as we work through the questions during

 17 this first session, I think we'll direct a lot of

 18 them, at least initially, to those Subcommittee

 19 Members so they can rely on their expertise, and

 20 help us work through these issues today, as well

 21 as after today.

 22 The other thing I would mention is that
 14

 1 I've asked the Sub-Committee in consultation with

 2 Chairman Massad, I've asked the Sub-Committee to

 3 produce a written recommendation. I think,

 4 technically, it goes to the GMAC, but obviously it

 5 will be something referred to by the Commission,

 6 and we are asking them to provide a recommendation

 7 in response to some of the key questions that

 8 we've included in the agenda today, and look

 9 forward to having the results of that work, and as

 10 I said, I expect it will be guided by it quite

 11 significantly.

 12 So, looking forward to continue the

 13 dialogues after today, but for now, I think we

 14 should get started on the first session, the NDF

 15 Clearing Mandate. We don't have a specific

 16 recommendation in front of us, but I think it's a

 17 terribly-kept secret that there has been some

 18 staff work done on this, and so, without going

 19 into all the details of the recommendation,

 20 because it's subject to change, I think one of the

 21 first questions we have to think about with this

 22 mandate, is which currency pairs should we be
 15

 1 focusing on?

 2 There are a number of -- there's a

 3 number of trading activity in a variety of

 4 different pairs, but the liquidity characteristics

 5 are different depending on the pair; and also

 6 depending on the tenure. But starting first with

 7 the -- with the topic of -- what the appropriate

 8 currency pair is going to be, maybe that's

 9 something that we can tee up as the first

 10 question.

 11 But before that, Ted is reminding me, we

 12 should probably hear from The CFTC Staff who has a

 13 presentation to deliver to us. Brian, do you want

 14 to start?

 15 MR. O'KEEFE: Good. Thank you. And

 16 thank you to all the GMAC members who are here

 17 today, is sort of a unique opportunity for staff

 18 to get your feedback, as we think about, perhaps,

 19 you know, putting a proposal together for a new

 20 asset class. So this is -- this is certainly a

 21 unique opportunity and we very much value that

 22 feedback. And I guess the other thing is we are
 16

 1 thinking about creating a clearing requirement in

 2 this new asset class to also think back, what's

 3 some of the issues may have been with regard to

 4 the implementation of interest rates, or CDS and,

 5 you know, how do we avoid some of those issues as

 6 we think about putting this proposal together.

 7 So, very much look forward to your feedback.

 8 COMMISSIONER WETJEN: Thank you, Brian.

 9 MR. O'KEEFE: Here we go. I just -- I

 10 have a very brief presentation to just run

 11 through, you know, sort of, what we are thinking

 12 about and why we are thinking about it at this

 13 point. So, NDF's foreign exchange, forward

 14 contracts, unlike physically sell the FX forwards,

 15 the parties don't actually exchange or deliver the

 16 two currencies. Instead, these are cash-settled

 17 contracts, generally, done in U.S. dollars by

 18 comparing the exchange rate that was established

 19 on the date of the contract, with the spot rate on

 20 the fixing date, and then you have a cash- settled

 21 payment, as I said, generally in U.S. dollars.

 22 These contracts can be used to hedge or
 17

 1 speculate risks, and they are generally done on

 2 currencies that for -- that have restrictions that

 3 do not allow for the offshore delivery of these

 4 currencies. NDFs are explicitly included within

 5 the Commission swap definition. Unlike the FX

 6 swaps, and FX forwards that were subject to the

 7 Treasury exemption, NDFs remain part of our swap

 8 definition.

 9 The Chairman touched upon, you know, how

 10 our analysis works, and 2H of the Commodity

 11 Exchange Act, sets forth the five factors that we

 12 need to look at when we are considering a

 13 determination for mandatory clearing. Those

 14 included outstanding notional amounts, the trading

 15 liquidity, makes sure that there's adequate

 16 pricing data. Do the DCOs have a rule framework,

 17 capacity and the operational expertise to clear

 18 these products? What the effect on the mitigation

 19 of systemic risk would be? The effect of

 20 competition, to the extent we would define these

 21 products to be subject to a mandatory clearing

 22 requirement, and then legal certainty with regard
 18

 1 to the insolvency of either the DCO or a clearing

 2 member.

 3 So to give you an idea, our CFTC

 4 regulations require DCOs that want to clear new

 5 swaps to file a 39.5B Filing with us, indicating

 6 the swaps that they would like to clear, and they

 7 discuss those five factors. This chart that I'm

 8 presenting here; shows clearinghouses which have

 9 presented 39.5 Filings to us, and the various

 10 currency pairs which they have provided

 11 information on.

 12 The boxes that are -- the Xs that

 13 highlighted in yellow show ones where we currently

 14 see clearing activity. With regard to the ones

 15 that are not highlighted in yellow, the capacity,

 16 the operational framework is all there, they are

 17 just not actively clearing these swaps at this

 18 point.

 19 How the proposal, as we are thinking

 20 about it now, would work? Would be sort of

 21 similar to the way, I guess, the prior clearing

 22 requirements work, but it's good to think about,
 19

 1 sort of the interest rate clearing requirement, I

 2 guess. Essentially the proposed class would have

 3 12 reference currencies, and those 12 represent

 4 the ones that have been submitted to us. And they

 5 have been submitted to us, the settlement currency

 6 would be U.S. dollars and the tenure would be

 7 three years -- three days to two years.

 8 Again, that represents what was proposed

 9 to us, you know, I think there are issues and we

 10 are doing our analysis with regard to the

 11 liquidity around that, but that's what has been

 12 submitted to us, and I think that sort of forms

 13 the basis for a proposal to try and get some

 14 feedback on that.

 15 And I guess, to the extent -- and I draw

 16 the link to the interest rate clearing, I think

 17 our view is, to the extent these are standardized

 18 contracts, excepted for clearing at a clearing

 19 house, then those would be subject to the clearing

 20 requirement, to the extent you had a situation

 21 where there was some sort of non-standard term

 22 included in the contract, and it could not be
 20

 1 cleared for that reason, well then, you would have

 2 a situation where it's -- it's not subject to the

 3 clearing requirements.

 4 So the swap has to be accepted for

 5 clearing at the clearinghouse. So, it would -- it

 6 should eliminate any non- standard bespoke terms

 7 that a clearinghouse can't handle. We did an

 8 initial analysis using the part 33 real time

 9 reporting data at the end of '13 and to the spring

 10 of 2014, that showed us that there was

 11 approximately 7.4 trillion in NDF activity among

 12 the 12 currencies that we are considering here.

 13 One of the striking facts that, you

 14 know, we need to address is that 99 percent of

 15 that is unclear transactions. So, you know,

 16 that's one of the things in terms of the five

 17 factors, is making sure we are comfortable with

 18 the capacity, to the extent you were to include

 19 the clearing requirement, the ability of the

 20 clearinghouses to take on that additional volumes.

 21 The next set of slides there talks to

 22 LCH -- can you just go back one? Yeah, to the LCH
 21

 1 slide? So we note there that LCH has filed some

 2 supplemented data, speaking about the number of

 3 transactions that they cleared, their original

 4 filing have been some time ago, so they

 5 supplemented that to indicate the number of new

 6 trades that they have cleared through the

 7 beginning of this year. I supposed Gavin can talk

 8 to the volumes that LCH has seen more currently.

 9 The most recent data from the swap

 10 execution facility is the FIA SEF Tracker has

 11 shown over the course of a month, a 61 percent

 12 increase in the clearing of NDFs, so we are seeing

 13 growth with regard to the activity on the SEFs.

 14 I think it's important to highlight two

 15 things, these last two slides here, Commission

 16 Regulation 50.25 sets forth an implementation

 17 schedule that we can use. The rule itself

 18 indicates that the implementation schedule is

 19 discretionary. I think to the extent that we are,

 20 you know, considering a new asset class, I think

 21 staff would very much support using the

 22 implementation schedule that we have. And if
 22

 1 people don't recall how that works, it's category

 2 one entities would need to begin clearing within

 3 90 days. Those are swap dealers, major swap

 4 participants and active funds, those active funds

 5 are funds that have more than 200 swap trades per

 6 month.

 7 Category two entities are, generally

 8 speaking, all other financial entities with the

 9 exclusion of ERISA plans and certain third-party

 10 sub accounts. And then all other entities fall

 11 into the 270-day window for implementation.

 12 The last slide, is just to mention that

 13 our expectation -- they are not expectation, but

 14 the fact of the matter is, is that, you know, the

 15 exemptions and exceptions that have been put out

 16 by the Commission would apply to this. So whether

 17 it's the exceptions under the CEA for end users

 18 and captive finance entities, they would certainly

 19 apply. And then the exemptions really created by

 20 the Commission in other instances for an -- in our

 21 affiliates collapse, treasury affiliates, and

 22 then, you know, to the extent sovereign nations,
 23

 1 certain Federal Government Agencies, international

 2 financial institutions have been found to, you

 3 know, not be subject clearing, that would all

 4 apply in this case as well.

 5 So, you know, in terms of implementation

 6 and in terms of exceptions and exemptions, very

 7 similar to what we are seeing right now, with

 8 regard to, you know, interest rate and CDS.

 9 That's all. Thank you.

 10 COMMISSIONER WETJEN: Thank you, Brian.

 11 And next we'll turn to Rodrigo, as a presentation.

 12 MR. BUENAVENTURA: Yes. Good afternoon.

 13 First let me thank the CFTC, and especially

 14 Commissioner Wetjen for the invitation to be here

 15 with you. I'm going to present, maximum in 10

 16 minutes, the approach that we have taken in the

 17 European Union for clearing off NDFs. You cannot

 18 hear me well?

 19 And that's a -- this is the third

 20 clearing mandate that we could use. The approach

 21 in the EU for the clearing obligation is, in most

 22 cases, what we call the bottom-up approach, which
 24

 1 is, it starts, or it's triggered by the

 2 notification that a certain CCP has been

 3 authorized to clear a particular class of

 4 derivatives, that notification needs to be

 5 transmitted to ESMA, and ESMA has six months to

 6 decided whether or not to propose mandatory

 7 clearing for that type of derivative.

 8 The first clearing mandate that we

 9 should -- was the one on interest rate

 10 derivatives; that was sent to the European

 11 Commission on the 1st of October. The second

 12 clearing mandate is the one on CDSs, that is

 13 currently ongoing, and we expect to deliver that

 14 around the end of November, by the end of

 15 November. And the third, clearing mandate is this

 16 one that we are discussing today, the one on NDFs.

 17 In the process for the determination of

 18 the clearing obligation, as I said, starts with

 19 the notification of the authorization of a CCP,

 20 and that's what we call an Article 5 notification;

 21 I think that is similar to the submissions that

 22 you can receive from clearinghouses under the CEA.
 25

 1 I'm not going to comment on the part related to

 2 the authorization process of the CCP, and how the

 3 risk management is conducted at each CCP, and is

 4 supervised, because there is a competence of the

 5 National Competent Authorities. In this case, for

 6 LCH, it's the Bank of England that will -- David

 7 will deal with a bit later.

 8 So I'm going to concentrate only my

 9 comments on the analysis as to whether the

 10 particular class should, or should not be subject

 11 to compulsory clearing. So we have six months to

 12 do what is on the top right part that slide which

 13 is the analysis of the derivative class, the cost

 14 benefit analysis; the launch of a consultation

 15 paper, analysis of responses and then, final rules

 16 to be submitted to the European Commission. ESMA

 17 drafts the rule, and that is, you can find in the

 18 public consultation that we have published on the

 19 1st of October, and that we'll be open until the

 20 6th of November.

 21 You can find a proposed regulation,

 22 European Regulation in draft form. But then the
 26

 1 Commission is the one that has the power to

 2 endorse that technical standard and convert that

 3 into EU law. And there is also, that's signaled

 4 as point number eight, a non-objection period for

 5 the European Parliament and the Council to decide

 6 eventually, to object to the rule, if that could

 7 contravene the level 1 regulation, in this case,

 8 EMEA. That has not happened so far in the last

 9 three years, but that's a possibility, and it's a

 10 period that we need to respect.

 11 And then you have the dates for when the

 12 obligation applies to the different participants.

 13 We, in Europe have defined four categories, which

 14 is clearing members, large financials, smaller

 15 financials, and non- financials, with different

 16 dates of application of that obligation.

 17 In terms of the currencies that we are

 18 consulting on, it's 11 currencies. I think it's

 19 all the -- that Brian mentioned before, except, if

 20 I'm not wrong, the Peruvian nuevo sol, yes. They

 21 are all -- the currency pressure all against the

 22 U.S. dollar which, as you know, is 94 percent of
 27

 1 the NDF market. And the maturities that we are

 2 proposing to subject to the clearing obligation,

 3 are between three days and two years.

 4 In terms of the criteria of the

 5 products, we need to assess three elements, which

 6 is standardization, availability of pricing and

 7 liquidity. And when it comes to standardization,

 8 what we found is that the level of standardization

 9 of NDFs is very high and comparable to credit and

 10 interest rate swaps. This is thanks to industry

 11 initiative, not thanks to regulations in the case

 12 of this market. But the level of -- or the

 13 percentage of transactions eligible for the

 14 electronic processing, is close to 100 percent,

 15 it's above 94-95 percent, which gives a good proof

 16 of the level of standardization. In terms of

 17 liquidity, we have volumes between 5 and 17

 18 billion per currency per day exchanged.

 19 Probably the peculiarity of this market

 20 is that the clear volumes are low comparative to

 21 the traded volumes, as Brian was saying before.

 22 They go between 0.5 and 4 percent of the traded
 28

 1 volume, in the case of the CCP, that is authorized

 2 in Europe, which is LCH Limited, for clearing

 3 these products. And that's one of the elements

 4 that we are watching more closely in terms of the

 5 availability of clearing offer, and also of

 6 clearing members.

 7 Currently there are 20 clearing members

 8 of which, if I'm not wrong, two offer client

 9 clearing at this stage. And that's also an

 10 element that we are watching closely because it's

 11 related to how easy will be the access to the CCP

 12 when the clearing obligation is mandated.

 13 There are some peculiarities also of the

 14 NDFs which is the maturity of most maturities are

 15 -- most trades are below three months, which is a

 16 very short-term market, 90 percent is below three

 17 months, 30 percent below 30 days, and 10 percent

 18 with maturities of less than 7 days. And it's

 19 also true that in these markets, the offering of

 20 the clearing was much more recent than on interest

 21 rate swaps and CDSs. And you can see the

 22 percentages of cleared values according to BIS and
 29

 1 ISDA data, it really makes a difference in terms

 2 of the other two classes that configured the first

 3 two clearing determinations in the case of the

 4 European Union.

 5 Just to conclude, we think that the main

 6 three factors that are required to be assessed by

 7 ESMA on assessing the clearing mandate are met in

 8 terms of standardization liquidity, and

 9 availability of pricing. We are assessing

 10 closely, as I said, the number of CCPs that are

 11 authorized. We expect to have more CCPs

 12 authorized in European Union, by the time then

 13 clearing obligation date arrives, and hopefully,

 14 following the works of Chairman Massad, there are

 15 also more internationally-recognized CCPs, which

 16 would add, of course, to the robustness of the

 17 network.

 18 We are -- yet to see the results and the

 19 comments of the public consultation that is

 20 running for five weeks, and to check whether the

 21 ESMA approach is the right one or not. And of

 22 course we are fully committed to continue to
 30

 1 liaise with the CFTC at staff level as we have

 2 done in the commitments for mutual consultation

 3 that we have put into place every time that a

 4 clearing obligation is proposed. Thank you very

 5 much.

 6 COMMISSIONER WETJEN: Thank you,

 7 Rodrigo. David?

 8 MR. BAILEY: Thank you. Chairman,

 9 Commissioners, Committee Members, thank you very

 10 much for inviting me to participate into today's

 11 discussion. Chairman Wetjen was -- sorry --

 12 Commissioner Wetjen was very kind to mention that

 13 this is not the first time that I've spoken to the

 14 Committee, and I've always valued the open and

 15 frank dialogue that we've had at previous

 16 meetings. And I hope today's discussion will be

 17 of a similar nature.

 18 We've already benefited from the

 19 insightful presentations of both Brian and

 20 Rodrigo, and from a European perspective Rodrigo

 21 has given a very thorough overview of the process

 22 and considerations that ESMA follow when
 31

 1 determining whether a clearing mandate is merited

 2 in the EU in order to further the G20 goal of

 3 reducing systemic risks.

 4 Whilst I share that goal of reducing

 5 systemic risk, and therefore have a strong

 6 interest in ESMA's work, I've learned from past

 7 experiences, speaking after Rodrigo, that he

 8 always steals the important points, and therefore

 9 I thought I'd -- it would probably be helpful if I

 10 offered the Committee a slightly different

 11 perspective, which is the perspective of the

 12 supervisor of the clearinghouses clearing the

 13 products, on which a mandate is being considered.

 14 So from that supervisory perspective,

 15 when considering a clearing mandate, focuses

 16 predominantly on the capacity of the CCP to manage

 17 the expected volumes that may come into clearing,

 18 which is largely a question of operational

 19 capacity. And importantly, the ability of the

 20 clearinghouse to manage defaults of clearing

 21 members, should they occur.

 22 Now, was that something we obviously
 32

 1 consider when authorizing a CCP to clear a

 2 product? I think it's very important that we

 3 refresh our analysis when a clearing mandate is

 4 being considered, especially if, as referred from

 5 the preceding presentations, with NDFs the bulk of

 6 the market is currently un-cleared and may result

 7 in a major change to the way a specific market

 8 worked if we therefore implement a clearing

 9 mandate.

 10 So from a CCP, supervisory perspective,

 11 specifically we think about issues such as the

 12 size and scale of positions that exist in the

 13 market, and therefore may need to be closed out,

 14 in the case of a member default. We asses that by

 15 looking at factors such as the profile of

 16 positions, market wide net -- net positions, for

 17 example.

 18 We also think about the liquidity

 19 available within the market which might be needed

 20 if a position needs to be closed out, and you can

 21 -- we assess that by looking at factors such as

 22 average daily volumes, the number of active
 33

 1 dealers in the market, and position

 2 concentrations. And we also think about the

 3 potential loss that could be incurred if a

 4 significant position is being liquidated or wound

 5 down. And the cost for doing that might be

 6 incurred by market moves, or it might incurred by

 7 transaction costs.

 8 So we are looking at the NDF market, as

 9 Rodrigo has already mentioned, from a European

 10 perspective we are thinking about 11 currency

 11 pairs, and opposed to the 12 that Brian put on the

 12 screen from a CFTC perspective. And one thing I

 13 would note about the NDF market, is that the data

 14 available is not as extensive currently, as with

 15 other asset classes we've looked previously, like

 16 the interest rates and CDS asset classes.

 17 And in looking at this, we've relied

 18 primarily on data from treasury repositories from

 19 a European perspective. So when we've -- when

 20 we've looked at those factors, what has our

 21 analysis indicated to date? Well, I think as a

 22 broad point from our perspective, the market
 34

 1 conditions and the structure are broadly

 2 supportive of considering clearing mandates across

 3 all of the 11 currency pairs that Rodrigo

 4 mentioned. But also, as Rodrigo mentioned, the

 5 indicators become less strong as the maturities

 6 extend. So whilst all currency pairs have

 7 liquidity and volume with shorter maturities, this

 8 begins to drop off in other currency pairs, as you

 9 move out in maturity terms.

 10 And that varies on a currency pair by

 11 currency pair basis. So notably you'll see in

 12 some currency pairs, such as the dollar against

 13 the Columbian peso, or the Indonesian rupiah, the

 14 drop-off in liquidity is quicker and more marked

 15 to shorter maturities. So just to give some

 16 examples; and here I'm very much generalizing

 17 across the currency pairs; most of the currency

 18 pairs we are discussing see several thousand

 19 trades a day -- the maturity is up to -- the

 20 maturity is up to three months, but this drops off

 21 as you move out, and when you get out to

 22 maturities greater than a year, often you can see
 35

 1 less than 100 trades a day taking place. And in

 2 some currencies the average daily volumes can be

 3 measured in single digits. Positions in these

 4 markets are more concentrated in longer maturities

 5 than in shorter ones. And bid-offer spreads,

 6 typically, for the longer maturities, can be

 7 multiples of what they are for the short

 8 maturities.

 9 So these are all factors you need to

 10 think about if you are considering a clearing

 11 mandate and you are looking at it from a

 12 perspective of a supervisor of the CCPs. They

 13 might make the task of the clearinghouse closing

 14 out positions at longer maturities more

 15 complicated, but on the flip side, I would note

 16 that the outstanding positions are typically

 17 smaller at the longer maturities, potentially

 18 making it easier to close out.

 19 And I also accept that if a clearing

 20 mandate is placed on shorter maturities then

 21 market participants might choose to clear longer

 22 maturities on the basis that they want to benefit
 36

 1 from netting sets from their positions within the

 2 clearinghouse. So I'm deliberately not drawing

 3 conclusions at this stage about exactly what the

 4 clearing mandate should look like. From a

 5 European perspective, we want to see what the

 6 results of the consultation that Rodrigo mentioned

 7 yield, but very much from the perspective of a

 8 clearinghouse supervisor, especially in the

 9 product where the majority of volumes are

 10 currently not being cleared. I would highlight

 11 that we need to think very carefully about the

 12 implications of mandatory clearing from a

 13 clearinghouse perspective.

 14 To that end, I very much support the

 15 thoughtful approach that both ESMA and the CFTC

 16 are looking to follow in this regard. So that's

 17 what I wanted to highlight to the Committee, and I

 18 very much look forward to questions in the

 19 discussion that follows.

 20 COMMISSIONER WETJEN: Thank you very

 21 much, David. Very helpful. With that, I think we

 22 can start opening up questions to the rest of the
 37

 1 membership here today. It might be worth,

 2 although it's addressed in some ways, by going

 3 through the different factors, under a statute for

 4 a clearing mandate, but I wondered if any of the

 5 participants might be willing to speak to what

 6 some of the general benefits might be of imposing

 7 a mandate. Apart from the technicalities about

 8 whether it would fit within the statute, it be

 9 just useful to review for the benefit of the

 10 public, if nothing else, why a clearing mandate

 11 will be considered in the first instance?

 12 So what is it about clearing that's a

 13 positive, as far as the public is concerned, and

 14 as far as then financial markets, more generally,

 15 are concerned, and how does the mandate fit into

 16 that for NDFs? I don't know if any of the new

 17 Sub-Committee members might be willing to speak to

 18 that, it might be helpful.

 19 MR. WELLS: Commissioner, I am Gavin

 20 Wells, from LCH Clearnet. It would seem rather

 21 odd if I didn't take that question as the

 22 Clearinghouse. So, thank you to my fellow
 38

 1 Sub-Committee members for avoiding it.

 2 In the summer of '08, the clearinghouse

 3 was approached by a group of members to look at

 4 providing a clearing service for the FX forwards

 5 product. We looked at this in 2003 and at the

 6 time the focus of FX Markets had been less on the

 7 mitigation of counterparty risk, and more on the

 8 mitigation of settlement risk. And thus the

 9 settlement service CLS, was born around that time,

 10 and the clearinghouse stopped it's analysis of FX

 11 clearing. It was asked to relook at it in '08,

 12 that's why the clearinghouse hired me, I've been

 13 working at Citigroup in the currency markets, and

 14 two months later, September '08 came, and we are

 15 familiar with the events of that.

 16 So, the market asked us to looking at

 17 clearing effects because they wanted counterparty

 18 credit risk mitigation, and they also say, look at

 19 the biggest asset class first. What is now a $2.5

 20 trillion a day market, the FX forwards are swaps.

 21 With the advent of the Dodd-Frank Act in 2009, in

 22 August, we moved our attention from swaps and
 39

 1 forwards as the market believed, and they may not

 2 be included within the mandate. Two options, and

 3 we built an FX options service.

 4 Throughout 2009, 2010, right up until

 5 the beginning of 2011, when the truly systemic

 6 importance of the FX asset class became clear to

 7 all, indeed there is a -- it is used for payments,

 8 it is the liquidity of all the markets, and for

 9 the product sets that, contrary to how Brian

 10 described NDFs earlier, for the rest of the

 11 products to have a transfer of notional at

 12 settlement, a full transfer which included

 13 options, it was decided that that warranted much

 14 greater, more robust analysis, before any

 15 clearinghouse should look to clear those.

 16 And thus, the members of the

 17 clearinghouse asked us to look at developing a

 18 service for NDFs, the product which they still

 19 felt would fall within the mandate. So, there was

 20 a perception that counterparty credit risk

 21 mitigation was needed, we've built a service for

 22 NDFs. Now that perception has changed a little,
 40

 1 whilst there is still a feeling that the

 2 clearinghouse offers security in removing that

 3 counterparty risk, it offers some operational

 4 efficiency, and certainly the benefits of

 5 multilateral versus bilateral netting.

 6 The other benefit that's being seen by

 7 the members and clients of the clearinghouse, is

 8 the impact that capital will have on many market

 9 participants starting from December 2015, but

 10 margin is to be posted on unclear derivatives.

 11 And that's added impetus, not only to the clearing

 12 of NDFs, one has seen in the press recently that

 13 the volumes of NDFs both in the clearinghouse and

 14 on SEFs has increased, but also that impetus has

 15 added to the development of solutions to allow the

 16 clearing of other FX products, because the

 17 clearinghouse will be commercially more

 18 advantageous after those capital rules are passed

 19 in December 15, for market users.

 20 So, to summarize, the market wanted

 21 counterparty credit risk mitigation that's been

 22 delivered for the asset class that we can
 41

 1 currently clear, the one that is cash- settled

 2 only, NDFs, and with capital looming in December

 3 of 2015, we are working with the existing

 4 infrastructure of the market to understand how to

 5 manage intraday liquidity risks, and thus deliver

 6 a clearing service for the other FX product, FX

 7 options, in time or that deadline in some 14

 8 months' time.

 9 COMMISSIONER WETJEN: Without

 10 disagreeing with soon-to-be very sensible points,

 11 I'm just wondering, based on the presentations,

 12 there still remains a very small share of the

 13 market that's clear, so it might be helpful that

 14 if you could explain why that might be the case.

 15 MR. WELLS: As an ex banker, I'm

 16 familiar with seeking efficiency. And I think

 17 that until a mandate is passed, the reason one

 18 clears early, in this instance, is to prove the

 19 operational readiness. So our members have done

 20 that to some degree, not all 20, but about 10 of

 21 them. And a number of them, have prepared those

 22 operational pipes for their clients, but beyond
 42

 1 the 20 members we currently have, we have a

 2 further four, who are ready in all aspects to

 3 clear less for their default fund contributions

 4 because they are waiting for the mandate.

 5 So until the mandate comes, until they

 6 can see that they need to clear, there is no

 7 impetus for them to clear, because the capital,

 8 the commercial impetus doesn't arrive for another

 9 14 months. So whether it's the mandate or the

 10 capital, it will be by December of next year, that

 11 clearing -- that that FX, NDFs move into the CCPs.

 12 COMMISSIONER WETJEN: Any other members

 13 willing to add to that?

 14 MR. VITALE: Sure.

 15 COMMISSIONER WETJEN: Agree with that,

 16 or disagree with that?

 17 MR. VITALE: Yeah. I think, to your

 18 question, of why hasn't the market started to

 19 clear faster? I think there's a different dynamic

 20 here, that we need to be cognizant of in NDFs

 21 that, in some ways didn't present itself through

 22 both the rates and credit in our implementation of
 43

 1 central clearing. And before I go into that, I

 2 think you'll find from the industry, over the

 3 last, what is now five years, considerable amount

 4 of effort has been put into, be prepared for

 5 centralized clearing.

 6 A considerable amount of effort has been

 7 put into self-execution both here and in Europe,

 8 but as you suggested, small amounts are being

 9 cleared, it also is -- it's also related that NDFs

 10 represent a very small portion of the overall FX

 11 market, roughly 2.5 percent based on most data

 12 points. And there's a reason why. Because inside

 13 the micro structure of the NDF market, and when we

 14 look at our -- you know, our client business as an

 15 industry, a different phenomenon that persists,

 16 and it's what is in rates and credit, in that

 17 roughly 70 percent of underlying client flow

 18 happens -- in terms of price creation -- happens

 19 outside of the two jurisdictions that we are

 20 referring here today. And that's both the U.S.

 21 markets and European markets.

 22 Why? For the most part, in the NDF
 44

 1 market you have a handful of currency pairs,

 2 predominantly China, India, and Korea, where the

 3 actual price creation is made, and the price

 4 creation is made from exporters and importers

 5 there locally, or individuals investing into those

 6 respective -- those respective countries. And so

 7 you have the phenomenon where price creation is

 8 made there. And by starting a clearing mandate

 9 here, we need to be cognizant for U.S. investors,

 10 that the most important thing for them to access

 11 that liquidity pool, is that they can actually go

 12 out and access that Asia liquidity pool in some

 13 sort of meaningful way.

 14 And from the numbers that we see, and

 15 again, this is industry trying a number of

 16 different surveys, the U.S. Represents about 10

 17 percent of clients for NDFs. So you have probably

 18 some apprehension, there's a number of clients

 19 here today, who would be concerned to make sure

 20 that the liquidity that they are seeing now on a

 21 global basis, where the foreign exchange market

 22 has been for the last 20 years, a global business,
 45

 1 if they can make sure they are accessing that

 2 liquidity once you move you into a cleared world.

 3 And so I don't suggest, as I lay out

 4 that challenge, that I'm suggesting that we debate

 5 whether a clearing mandate is needed, I'm

 6 suggesting when we think about implementation, we

 7 ensure that U.S.-based investors are able to

 8 access that liquidity from day one. And that can

 9 come by way of finding a convenient way that the

 10 clearing mandate is at least in line with other

 11 jurisdictions in terms of timing, relative

 12 timings. Or, we can make sure that at least the

 13 currency pairs that we are discussing are globally

 14 consistent.

 15 COMMISSIONER WETJEN: Kim?

 16 MS. TAYLOR: I think one thing to

 17 potentially add to the discussion is select --

 18 deciding to clear has to be driven by something.

 19 It can be driven by regulatory mandate, it can be

 20 driven by customer demand, it can be driven by

 21 commercial realities of capital cost or risk

 22 management concerns. And in the case of the FX, I
 46

 1 think it probably also contributes to the lack of

 2 significant adaption on a voluntary basis, the

 3 fact that the clearing offerings that are

 4 available are only servicing a portion of the risk

 5 pool as opposed to a broader set of the risk pool.

 6 So, it can actually be risk-increasing,

 7 or margin, or capital increasing to split up a

 8 portfolio, and only clear a part of it. And so I

 9 think I think that is probably also contributing

 10 to the lack of voluntary adoption ahead of any

 11 mandate.

 12 COMMISSIONER WETJEN: So to avoid that,

 13 is the solution or answer just to marry up the

 14 implementation schedules assuming both

 15 jurisdictions want to go forward with the clearing

 16 mandate?

 17 MS. TAYLOR: I think there certainly are

 18 benefits to having the jurisdictions, the major

 19 jurisdictions move in a closer time alignment than

 20 has been the case so far. But I think probably

 21 even more important than creating a lock step on

 22 the timing of a clearing mandate would probably be
 47

 1 not imposing a trading mandate in one jurisdiction

 2 as opposed to another jurisdiction because that

 3 seems to have been the piece of the U.S. mandate

 4 that has been -- that had the most impact on the

 5 market's ability to access liquidity in all of the

 6 ways that they normally could.

 7 So I think there's probably more

 8 sensitivity to the timing of any trading mandate

 9 than there is to the lock- step timing of any

 10 clearing mandate.

 11 MR. VITALE: I would, you know, further

 12 to my previous points, I think, you know, it is

 13 something that probably should be, you know,

 14 considered. When you think about the

 15 implementation timelines that both the CFTC would

 16 potentially now then turn to, and what our

 17 colleagues in Europe have proposed by way of their

 18 consultation, we are not too far away from each

 19 other, and from at least the beginnings of that,

 20 so if in any thoughtful we could find a way to do

 21 so, would be very prudent.

 22 You know, further to that, I mentioned
 48

 1 the 10 percent of U.S. client flow -- you know,

 2 NDF flow comes from clients from what we can see,

 3 there's a really key -- you know, point of that

 4 that I probably didn't mention, which was, you

 5 know, for the most part, clients tend to be price

 6 takers in this market -- U.S. investors, excuse

 7 me, and it's a slightly different phenomenon that

 8 we saw with the rates mandate where, you know,

 9 Asia in, or Europe in, into the dollar rates

 10 market was there as, you know, having to enter

 11 that market for price-taking.

 12 Here it's, slightly skewed the other

 13 way, and you know, as I said, it would be

 14 extremely important that we make sure that the

 15 U.S., you know, entities are able to access from a

 16 price-taking perspective as much liquidity as

 17 possible.

 18 MR. WEISBERG: I have one comment to add

 19 on just the liquidity function while --

 20 CHARIMAN SERAFINI: Move closer to the

 21 mic.

 22 MR. WEISBERG: I'm sorry -- while there
 49

 1 can be concerns that the liquidity might be

 2 bifurcated, the Commission should also consider

 3 the fact of -- the potential benefits, so when the

 4 markets become clear there may be additional

 5 markets makers who -- or currently find it

 6 difficult to participate in the market, that would

 7 be able to participate if clearing did take place.

 8 And one of the areas that you may want to consider

 9 researching is, NDFs aren't necessarily a primary

 10 market where risk is exchanged. So in a lot of

 11 cases the NDF market is exporting liquidity from

 12 other primary markets, and I would note several of

 13 the primary markets that may be inaccessible to

 14 foreign participants are themselves cleared.

 15 So, you know, if you look at the

 16 underlying price function for dollar Brazil, a lot

 17 of that is taking place on the BM&F and there are

 18 other currencies in the list. The ruble where you

 19 have Molex is a very successful vertically

 20 integrated clearing and execution system, so while

 21 we are talking about an export function that makes

 22 these markets accessible, some of the underlying
 50

 1 markets that are driving them are, themselves,

 2 cleared.

 3 CHARIMAN SERAFINI: Chris?

 4 MR. ALLEN: Thank you. Just to

 5 supplement some of the points that have already

 6 been made, I think the very short date in nature

 7 of this market, is one of the reasons why you

 8 haven't seen, to date, the same kind of alignments

 9 of the capital incentive to my migrate to a

 10 cleared market that you would see in, say, rates

 11 or credit. Particularly where you -- when you

 12 bear in mind that if you've got entities, for

 13 example, trading in option product, and then

 14 hedging some delta NDF, the inefficiency of some

 15 of that going into clearing; and another part of

 16 it, not -- is potentially, unattractive.

 17 And the capital efficiency derived from

 18 the position nonetheless being cleared, has not,

 19 as I say, been comparable to the one you would see

 20 as an incentive for rates and credit products. So

 21 I think the comments ought to be made that that is

 22 going to change over the course of the next year,
 51

 1 18 months, particularly as we move into an

 2 environment of mandatory non-cleared margin, and

 3 so on and so forth, so the economics of the status

 4 quo are not set to continue. But I do think it's

 5 just an observation as to one of the factors that

 6 probably sits behind the relative low level of

 7 clearing that we see today.

 8 I think that point which I've mentioned

 9 in terms of potentially how the NDF market could

 10 be used a hedge in respect of alternative product

 11 sets, which people are trading, is going to be

 12 more important, I think, in the context of

 13 mandatory execution obligations around the SEF.

 14 Perhaps more so than it will be ultimately in

 15 terms of where we land with clearing.

 16 CHARIMAN SERAFINI: Adam?

 17 MR. COOPER: Thank you. Thank you,

 18 Commissioner Wetjen for convening this; and thank

 19 you Chairman Massad and Commissioner Bowen. I'll

 20 just add, I guess, my voice to support for the

 21 implementation along, you know, parallel lines.

 22 I think -- there was a lot of talk about
 52

 1 alignment and harmonization across different

 2 jurisdictions. I think one of Chairman Massad's

 3 most important points in the intro was, we are

 4 here to facilitate competition, and innovation.

 5 We have an opportunity now to implement a mandate

 6 in parallel between two jurisdictions, which I

 7 think would facilitate. One, it would avoid

 8 splitting liquidity in the product, and I think it

 9 would very, powerfully, facilitate competition

 10 that would go ultimately to the benefit of the

 11 development of the market, and the development of

 12 liquidity, that we are all recognizing is key to

 13 success.

 14 COMMISSIONER WETJEN: Lets move on to

 15 some -- to some of the next questions. And I'm

 16 just working from -- largely working from the

 17 agenda, but are there any views about whether the

 18 NDF class has been sufficiently defined as laid

 19 out by Brian, or even by Rodrigo for that matter;

 20 have the right pairs been chosen?

 21 MR. WELLS: I can understand, as with

 22 the interest rate and credit asset classes, that
 53

 1 there is a -- one could say that to ease into the

 2 obligation to start with a smaller group of

 3 currencies and then extend it, is one way,

 4 certainly, to approach a mandate. One of the

 5 benefits, in clearing FX, is the portfolio

 6 correlation; the benefits that are achieved by

 7 bringing different currencies together within one

 8 risk management framework. And the benefits are

 9 two-fold. The user of the market has the margins

 10 they post, reduced with the increased number of

 11 currencies, because of the correlation between and

 12 within the portfolio.

 13 And from a risk management perspective,

 14 the clearinghouse is better able to manage its

 15 risk because it has that correlation between the

 16 different currencies, and so concentrations in one

 17 are offset by another. So on a purely risk

 18 management, and efficiency of margin, then I would

 19 suggest that both the proposal that's here today,

 20 and that from ESMA would be correct in including

 21 the 11 or 12, as it may be, currencies.

 22 MR. WEISBERG: Ah, yes. One of the
 54

 1 things that we'd like to comment on is, we've

 2 already gone through a process where, you know,

 3 the clearinghouses themselves have selected which

 4 ones that they believe should be eligible and have

 5 authorizations for them, and it seems arbitrary

 6 to, you know, bifurcate that list to us. One of

 7 the things that could be examined is the very

 8 small differences between, let's say, the sixth

 9 currency on the list, and the seventh or eighth

 10 currency on the list, they seem to us to be, you

 11 know, very, very similar in terms of liquidity

 12 characteristics.

 13 And the nature of this market is that

 14 the liquidity in each of these currencies is, you

 15 know, subject to change, over time, depending on

 16 what the market conditions are; so we think

 17 picking a much narrower subset of the currencies,

 18 it might be tough for that to be an objective

 19 determination, especially in light of a moving

 20 liquidity target.

 21 COMMISSIONER WETJEN: Jason, any views

 22 on that?
 55

 1 MR.VITALE: I would further both

 2 comments; and I have a slightly different

 3 reasoning. I think getting back to the size of

 4 this market and that, again, it's roughly 2.5

 5 percent of global FX volumes, limiting the scope

 6 from day one, given the centralizing of risk into,

 7 you know, let's say a handful of CCPs. And the

 8 fact of the underlying products themselves, or

 9 emerging markets, hence, you know, open to higher

 10 volatility than you would expect, and an element

 11 that we should touch on today which is, how do we

 12 deal with disruption events in those particular

 13 markets.

 14 It would mean if you started with a

 15 smaller number of currencies, we are just as an

 16 industry and as an ecosystem, we are setting our

 17 risk even further. So, you know, you can make a

 18 statement there, that if we don't have core size

 19 to this market in a relative sense, then you are

 20 really starting, the classic swapping,

 21 counterparty risk mitigation for increased

 22 liquidity risk. And so I would encourage that if
 56

 1 -- again, if the conversation is, how do we

 2 implement, as opposed to should we, then I would

 3 encourage more initially to ensure that this is

 4 stable.

 5 CHAIRMAN MASSAD: Can I follow up on a

 6 couple points that have been made? Maybe I'll ask

 7 Adam, and any others to comment. Adam, you talked

 8 about the advantages of having mandates that

 9 essentially kick in concurrently. What happens if

 10 that doesn't occur, if the European mandate takes

 11 effect and we are not there yet, and particularly,

 12 you know, thinking about -- well, let me ask you

 13 that first, and then I'll ask Phil.

 14 MR. COOPER: It's conjecture, but I

 15 think, as I say, that the driver is the

 16 competition between the competing CCPs in the

 17 different venues. When there is a mandate and

 18 they are both competing for the same pool of

 19 trades of transactions. I think it's ultimately

 20 beneficial. It gives me more choices, it

 21 provides, I think, more impetus, you know, for the

 22 marketplace to find the -- you know, best -- the
 57

 1 best solution. That's not so say that where they

 2 don't come into place at the same time, that

 3 there's a huge disparity, because certainly that

 4 competitive incentive would still be there for the

 5 one who is not subject to the mandate, but I just

 6 think I'm unbalanced --

 7 CHAIRMAN MASSAD: Is there any -- is

 8 there a market fracturing risk in terms of?

 9 MR. COOPER: I don't think so.

 10 CHAIRMAN MASSAD: Okay. I mean, even if

 11 we are -- later, for whatever reason?

 12 MR. COOPER: In theory, possibly.

 13 CHAIRMAN MASSAD: Yeah.

 14 MR. COOPER: But I don't necessarily

 15 think so.

 16 CHAIRMAN MASSAD: How about, take it the

 17 other way then, and let's say we go forward,

 18 pretty much on the same time table, or not long

 19 behind them, but recognizing that then, under our

 20 trading mandate, there could easily be a MAT

 21 determination, European trading mandates don't

 22 kick in for a while, then what happens?
 58

 1 MR. COOPER: Well, I mean, then you have

 2 the mandate here and not there is what you are

 3 saying?

 4 CHAIRMAN MASSAD: Right.

 5 MR. COOPER: Yeah. But then I -- you

 6 know, then, it potentially creates a little bit of

 7 a liquidity risk, a little bit of a fragmentation,

 8 but I mean, I think right now, if everybody

 9 preceded in parallel, we are going to be -- if

 10 CFTC would have the mandate in place, if again we

 11 assume that there is a mandate, much quicker, and

 12 --

 13 CHAIRMAN MASSAD: But does it create a

 14 risk that business, you know, moves so -- where

 15 there isn't a trading mandate. You know, we both

 16 have clearing mandates but only one of us has a

 17 trading mandate?

 18 MR. COOPER: Oh, so a trading mandate?

 19 CHAIRMAN MASSAD: Yeah. If we have

 20 both.

 21 MR. COOPER: I'm sorry, I thought that

 22 was (inaudible).
 59

 1 CHAIRMAN MASSAD: In other words, if we

 2 do the clearing mandate, then there is --

 3 MR. COOPER: I think that's certainly a

 4 possibility, that's certainly a possibility. And

 5 it's something to be avoided, I think.

 6 CHAIRMAN MASSAD: Yeah.

 7 MR. ROHRBAUGH: Hi. I'm Troy Rohrbaugh,

 8 from J.P. Morgan. So, to answer your question

 9 from my perspective, I think the clearing mandate,

 10 while certainly ideal to be joint, I think is much

 11 --

 12 CHAIRMAN MASSAD: Could you speak up, I

 13 can't hear.

 14 MR. ROHRBAUGH: Sure. I think while

 15 obviously the clearing mandate, would be ideal to

 16 do in a similar timeframe, I think it would be

 17 less disruptive from that perspective, if it

 18 wasn't the exact timing. I think the key is your

 19 question around the trading mandate and while,

 20 obviously, no one would know, and maybe Phil is

 21 right that, you know, the clearing mandate would

 22 bring in new market participants, that would be,
 60

 1 in my opinion, a medium- to long-term outcome. I

 2 think in the very short term, to Jason's view,

 3 that you could have a bifurcation on liquidity

 4 which would definitely be adverse to U.S.-based

 5 investors.

 6 And I do believe that would be

 7 disruptive, and I think in the short term we are

 8 clearly not sure on the exact outcome, but it

 9 would be highly probably to assume that if there

 10 was a bifurcation on liquidity on the beginning

 11 and that would be challenging for some market

 12 participants.

 13 CHAIRMAN MASSAD: Sorry. Just to make

 14 sure I understood you, there will be a bifurcation

 15 in the event that we have both a clearing and a

 16 trading mandate?

 17 MR. ROHRBAUGH: Correct. And there's

 18 only --

 19 CHAIRMAN MASSAD: And a clearing mandate

 20 for a while in Europe?

 21 MR. ROHRBAUGH: Exactly.

 22 CHAIRMAN MASSAD: Right.
 61

 1 COMMISSIONER WETJEN: Chris?

 2 MR. ALLEN: My point was going to be

 3 very similar to the one that's just been made

 4 actually, which is, I think, that the risk here,

 5 if we want to call it that, is when you get MAT

 6 determination following the introduction of

 7 clearing. If you bear in mind as well, the

 8 phasing approach to clearing you could conceivably

 9 have the added complication that you've got

 10 certain participants in the market required to

 11 clear, but not others, and MAT determination being

 12 made in the context of that phasing.

 13 And therefore certain participants in

 14 the market are required not just to be subject to

 15 the obligation's trade on SEF and (inaudible), but

 16 a situation even within the context of U.S.

 17 markets, where that obligation's trade on venue is

 18 not uniformly applied because of the phasing of

 19 the clearing side of the dimension. So I think

 20 the fragmentation risk is a real one, and I think

 21 it's more to do with the introduction of the MAT

 22 determination of the back more so than the
 62

 1 clearing.

 2 COMMISSIONER WETJEN: Just to follow up

 3 on that, so there's a variety of things we can do

 4 in response to that concern, to the degree the

 5 Commission believed it was a -- was a concern that

 6 had to be responded to. One option, obviously,

 7 would be just to delay the clearing mandate. The

 8 second option would be to somehow, prevent, if you

 9 would, a trading executing mandate from going into

 10 effect. Or I suppose, even revisiting the trading

 11 mandate policy of the Commission.

 12 So, just sticking with those two very

 13 basic options, in a way that some of the benefits

 14 that could come from a clearing mandate as

 15 articulated earlier, interested in the views of

 16 anyone who thinks, either one of those options

 17 might be preferred. Your placards up, so --

 18 SPEAKER: I think David Goone has been

 19 wanting to get in for a second, and then David

 20 Bailey.

 21 MR. GOONE: So, it's an interesting

 22 discussion, I mean, to address the mandatory
 63

 1 trading issue. I think capital becomes an

 2 interesting observation here, because in the U.S.,

 3 depending on how you mandate your clearing, what

 4 happened to us in the energy industry is when

 5 Dodd-Frank came into effect as you -- many of you

 6 know, we ended up converting all our cleared

 7 products to futures. A lot of that was due to

 8 capital issues from the end users pushing it here.

 9 So an interesting by-product of

 10 potentially moving mandatory trading and clearing

 11 in the U.S. might be that it moves towards futures

 12 market. I mean, actually NDFs really just

 13 cash-settled contracts, which changes like

 14 ourselves, and the CME have been doing for 30

 15 years, I guess, or more. So these aren't new

 16 notions. I think the issue will be, if you are

 17 going to bring in new participants, they'll

 18 probably move potentially more on a mandated

 19 environment towards more of a futures type

 20 environment, potentially.

 21 I do think that depending on the holding

 22 period, we look at two or five-day -- one, two or
 64

 1 five-day, I guess, in case of all the

 2 jurisdictions, may have also a driving function on

 3 whether these go. I would also just want to

 4 comment earlier, which I wanted to add, was I'm

 5 doing the products that I do tend to agree you

 6 should do a wider breadth of products, not a

 7 narrowing breadth. I think the liquidity issues

 8 in the other markets we've looked at, we've seen a

 9 lot less liquid markets go towards the mandated

 10 clearing, and not have much of an issue. So, in

 11 comparison to the NDFs, I think, under discussion.

 12 COMMISSIONER WETJEN: David Bailey?

 13 MR. BAILEY: Thank you. Just two quick

 14 points; I think in answer to the question on

 15 trading mandates versus clearing mandates, I think

 16 trading mandates do introduce new considerations

 17 and perhaps the MAT determinations we've already

 18 got in place, are instructive in some of the

 19 markets where trading mandates are already in

 20 place. We do see, based on feedback we get from

 21 market participants, I'd be interested in thoughts

 22 around the table, we have seen a fragmentation of
 65

 1 liquidity between different -- between different

 2 markets and that's something to consider.

 3 My second point is, liquidity

 4 fragmentation, looking at it from a systemic risk

 5 and market resilience perspective, liquidity

 6 fragmentation has some detrimental consequences

 7 if, in times of crisis, liquidity is fragmented,

 8 it will not be as resilient. So I think there are

 9 a separate set of considerations around the

 10 trading mandate that we do need to think about, if

 11 that is to be question that follows on after a

 12 clearing mandate.

 13 MR. KLEIN: I want to agree with that,

 14 and I think it's -- I think it's -- you are asking

 15 the right questions, Commissioner Wetjen. You are

 16 asking the right questions, because I think given

 17 the way the Commission's rules are structured,

 18 it's sort of difficult to talk about a clearing

 19 mandate with also -- without also talking about

 20 the potential for a nearly simultaneous MAT

 21 determination, at least that's the feasibility,

 22 and I think -- I think the mandatory trading
 66

 1 raises a lot more issues, potentially than the

 2 mandatory clearing.

 3 And I also want to hearken back to the

 4 Chairman's opening remarks. I think moving NDFs

 5 into a mandatorily cleared -- mandatorily SEF

 6 trading environment, also is going to have the

 7 effect of highlighting some of the fissures and

 8 unresolved issues around some of the other

 9 Commission rules, particularly the cross-border

 10 guidance. I do think that given the way the

 11 cross-border guidance has been applied and is

 12 functioning, there's a very real possibility for

 13 fragmenting liquidity if there is a mandatory

 14 trading determination.

 15 I think, you know, we've seen that in

 16 rates and credits, and given the existing

 17 structure of the NDF market, I would think that it

 18 would be even more susceptible to that kind of

 19 fragmentation. One other thing I wanted to note

 20 in comment -- in response to some of the earlier

 21 discussion is, you've asked about the right NDFs,

 22 whether they were looking at the right pairs. And
 67

 1 there's a sub-issue to that, in that as the ESMA

 2 consultation paper that was released on October

 3 1st notes, the reason the OTC NDF market is highly

 4 standardized, it's because the market has largely

 5 adopted empty terms and empty templates, but when

 6 you look at the product definitions and rules of

 7 the relevant DCOs, and even more particularly the

 8 SEFs that are currently trading NDFs, you'll find

 9 that there hasn't been harmonization of their

 10 product definitions with empty standards, or even

 11 with the standards of each other.

 12 So you've got disconnects between each

 13 DCOs definitions, and how they've incorporated the

 14 empty standards, and you've got disconnects

 15 between SEFs and DCOs and across SEFs, and unless

 16 all of those kind of details are worked out, I

 17 think you've got as very real possibility for

 18 creating basis risk and the potential for

 19 counterparty disputes over what's actually being

 20 transacted and cleared.

 21 COMMISSIONER WETJEN: Doug?

 22 MR. HEPWORTH: I think that these
 68

 1 markets are not going to be price discovery

 2 markets, once -- even when they are clear, they

 3 are not going to be price discovery markets, they

 4 are effectively going to be slave markets, much as

 5 the CME, FX, futures are now. That's not

 6 necessarily a bad thing, then clearing will

 7 increase participation and the clearing will also

 8 increase price transparency.

 9 The addition of mandatory trading, just

 10 adds an extra element to veer out the participants

 11 what will be there, will be their acts. Will they

 12 have a tendency to be more long, or a tendency to

 13 be more short, this is resolvable by arbitrage,

 14 but we would just need to make sure that the

 15 process of the arbitrage is straightforward and we

 16 know who is going to make the money from the

 17 arbitrage.

 18 COMMISSIONER WETJEN: Supurna?

 19 MS. VEDBRAT: You know, sir, I think

 20 that, you know, we discussed the currency pairs,

 21 you know, so what we would like to see actually is

 22 the more liquid currency pairs being the first
 69

 1 phase of. You know, some of the currency pairs

 2 there are concerns about, you know, will there be

 3 sufficient liquidity? That being said, a clearing

 4 -- a clearinghouse can offer them on a voluntary

 5 basis. And I think, you know, Jason mentioned

 6 from an infrastructure perspective we have to

 7 ensure that we have the ability to trade, you

 8 know, some of these currency pairs, in the time

 9 zone and the region in which they are the most

 10 liquid.

 11 That's one of the lessons we learned

 12 actually with the -- with rates and credit in the

 13 initial phases. There was non-availability to

 14 trade and clear some of those contracts, so if you

 15 were in the Non-U.S. time zone. So you know, that

 16 was a little bit of a concern for us. You know,

 17 from a voluntary clearing perspective, or trading

 18 perspective, the driver for NDFs has been the

 19 mandate or the potential of the mandate. You

 20 know, I recognize all the benefits that we have

 21 from clearing, but given, you know, the size of

 22 book as well as -- the size of the market as well
 70

 1 as all the other mandates that you have.

 2 You know, what our experience has been

 3 that (inaudible) allocation is driven more by, you

 4 know, when is the potential mandate going to take

 5 effect? Versus like any other benefit that anyone

 6 may see in the NDF market. And you know I -- you

 7 know, when we think about SEF trading and

 8 clearing, I'd like to think of SEF trading more as

 9 electronic trading, and we would actually like to

 10 see the ability for the SEFs to allow us to trade

 11 NDFs electronically, closely aligned with the time

 12 the clearing mandate, you know, comes into effect.

 13 Just because otherwise you are working

 14 out a completely different workflow, for a short

 15 period of time, and it also helps, to some extent,

 16 you know, the NDF market traded a lot more

 17 electronically before the SEF mandate. It

 18 actually allows us to go back to trading at a lot

 19 -- a lot more electronically. So we don't

 20 necessarily have to have a trading mandate, but

 21 some encouragement that the SEFs are -- you know,

 22 are working towards electronic trading solution.
 71

 1 COMMISSIONER WETJEN: Rodrigo, you've

 2 had your placard up for a while.

 3 MR. BUENAVENTURA: Thank you. Just an

 4 element of the information to make things a bit

 5 more complicated, because I fully see the easy

 6 issue of the timing, and the alignment of the

 7 timing of the trading obligation, but as somebody

 8 said before, there are some constraints in the

 9 regulatory regime, both here and in Europe. And

 10 our constraint is that, ESMA needs to -- ESMA has

 11 a limited time which is six months for determining

 12 the trading obligation, after then adoption of the

 13 clearing obligation.

 14 So let's assume that we deliver the NDF

 15 clearing proposal by the end of this year, and the

 16 Commission adopts around March, that means that by

 17 September next year, we have to decide whether to

 18 propose or not, the trading obligation on NDFs.

 19 Now, we could decide not to propose it, but if we

 20 decide to propose it, it would not be effective

 21 before January 2017, which is the earliest date

 22 that the trading obligation can take place.
 72

 1 Which, from a purely year perspective

 2 makes sense because it would be also exactly the

 3 same date in which all counterparties would have

 4 to be clearing already by then, early 2017. So

 5 even the small financials in the phasing, but

 6 that, I guess, adds to the complexity of the

 7 synchronization.

 8 COMMISSIONER WETJEN: So no case before

 9 2017, you said, Rodrigo, would receive the

 10 mandate?

 11 MR. BUENAVENTURA: For the trading

 12 obligation, we will have to propose a trading

 13 obligation, or not, but by let's say fall next

 14 year, the date of effectiveness of applicability

 15 of that obligation would be January 2017,although

 16 it would be written in the official journal, you

 17 know, a year-and-a-half before.

 18 COMMISSIONER WETJEN: Kim.

 19 MS. TAYLOR: The other issue that I just

 20 want to bring out attention back to briefly is the

 21 regulatory landscape issue. If there is a

 22 clearing mandate in the U.S. That requires U.S.
 73

 1 parties to clear transactions, and we've had a lot

 2 of discussion about how fragmentation of liquidity

 3 associated with that is a bad thing, so you want

 4 the U.S. Participants to be able to continue to

 5 access all available liquidity in the market. But

 6 if European persons are not allowed to clear at

 7 third country CCPs, then that is a further risk, I

 8 think, in having a clearing mandate that goes into

 9 effect before there has been a determination

 10 around equivalents, even in the absence of a

 11 mistimed trading mandate.

 12 COMMISSIONER WETJEN: Jason?

 13 MR. VITALE: So I found it interesting,

 14 Supurna's comments regarding the incentives, and I

 15 tied that to David's comments around capital, and

 16 it would be remiss that I didn't mention, leading

 17 up to this, this day, we had a number of different

 18 clients asking, you know, a number of us to

 19 provide feedback, and again, I think there's two

 20 main concerns.

 21 Yes, one is liquidity being a U.S.

 22 person, clients tend to do know that as far as
 74

 1 executing with a U.S. person, when you run your

 2 order book from an execution perspective, we tend

 3 to have to work a lot of those orders into Asia

 4 hours, and you working that even into European

 5 hours, because that's where liquidity is most

 6 available. To that end, I would probably,

 7 personally, deemphasize the importance of the

 8 execution mandate relative to getting core

 9 liquidity, so I'll leave it at that.

 10 The second one, to David's comment, I

 11 think, David, you probably are referring to a

 12 beneficial capital from listed by way of

 13 margining, but the other one that I know a number

 14 of clients, and to be frank, a number of providers

 15 here, are very concerned with, and it's not

 16 obviously the jurisdiction of CFTC directly, but

 17 the treatment of derivatives exposure under Basel

 18 III, and the amount of then, capital we have to

 19 hold against that exposure, is a concern.

 20 And it's a concern from clients, and

 21 it's a concern for providers in that there aren't

 22 benefits, to Supurna's suggestion; there are no
 75

 1 benefits, per se, to clear relative to holding

 2 exposure bilaterally. And this is in the leverage

 3 ratio, calculation of exposure. So you add the

 4 potential for U.S. having a liquidity crunch, and

 5 I hate to use that word, lack of another word.

 6 Yes, there are higher transaction costs which the

 7 industry can get comfortable with over time to pay

 8 for that credit provision, but the reality is, the

 9 amount capital we have to hold against this

 10 business is ever growing, and the benefits of

 11 netting are falling apart.

 12 So that comes back to the size of this

 13 part of the market is relatively small, and it

 14 wouldn't be clear to me, as the -- you know, costs

 15 across the board go up, what the actually

 16 inevitable situation will be, (a) as someone

 17 suggested, potentially look to list it, but in

 18 some ways, I think you can make a case that some

 19 of these markets would just become too expensive

 20 for people to transact.

 21 COMMISSIONER WETJEN: Phil?

 22 MR. WEISBERG: One of the things that I
 76

 1 think people should consider is the distance in

 2 time if we go all the way out till January 17,

 3 between when there was a mandate for SEFs to

 4 register, which happened last October, and when

 5 people would be obligated to use the SEFs. So,

 6 you know, if things play as being discussed, that

 7 would be three-plus years, and I think, the

 8 original intent was to have clearing all sorted

 9 out before obligating people to trade with

 10 particular execution rules.

 11 So right now we have a situation where

 12 no one has to trade on SEFs on this particular

 13 asset class, but if you want to offer a

 14 multilateral, you know, trading ability to the

 15 clients, you have to do that as a SEF, but no one

 16 has to use a SEF. And I think, you know, back to

 17 cost, I mean the cost of SEFs providing the

 18 services are, you know, pretty high, and I don't

 19 really see it possible for them to, you know,

 20 break even on providing those services until we

 21 get to the point where at least it's clear in

 22 people's heads, that they are going to have to use
 77

 1 them.

 2 COMMISSIONER WETJEN: What are you

 3 suggesting, Phil?

 4 MR. WEISBERG: Well, I guess what I'm

 5 suggesting is somehow we reconcile the rule -- the

 6 Footnote 88, which last summer -- or two summers

 7 ago, surprised everybody with any kind of delay in

 8 made available -- potential, being made available

 9 for trading until January 17. It's just -- it

 10 just seems like it's incongruent with, you know,

 11 how this was all supposed to have taken place.

 12 COMMISSIONER WETJEN: Anyone else?

 13 Turning to the next topic; so, again, referring to

 14 the agenda, give us a handle -- the give the

 15 Commission a handle on what kinds of packaged

 16 transaction is involved in an NDF contract. And

 17 some suggestions, or at least some issues that

 18 you'd like to identify, that we need to be aware

 19 of. Thanks, Jason.

 20 MR. VITALE: As it relaters to NDFs I

 21 don't see that being an issue day one. Of course

 22 we'll have logistical challenges around adding
 78

 1 bunch orders or blocks, but packaged trades,

 2 essentially, aren't an issue here. Should -- we

 3 start to tackle FX options, and if non-

 4 deliverable options are included, I think that

 5 that is something as a group here, we would tackle

 6 down the road. But I can't foresee packages being

 7 relevant in the initial go-live for NDFs.

 8 MR. WEISBERG: I was just going to say

 9 there might be a risk if there's a mandate for the

 10 hedge, and not the NDO. So we may want to have

 11 relief in that area, and then --

 12 COMMISSIONER WETJEN: Can you speak up?

 13 MR. WEISBERG: Sure. NDOs are

 14 frequently traded with delta hedges, so if the

 15 delta has to be cleared in the NDO, it doesn't

 16 have to be cleared, that that could potentially be

 17 a problem. And I think when -- as you select the

 18 optimal tenors, you want to make sure that there

 19 is a healthy NDF swap market. Because in a lot of

 20 these currencies, people want to move their fixing

 21 risk out, so we want to make sure that you are

 22 going to be able to include the shortest date NDFs
 79

 1 within the mandate.

 2 And, you know, where you draw the line,

 3 obviously, if people are trying to roll trades

 4 from something near the end of the mandate -- near

 5 the end of the time period, further, those would

 6 all be potential package issues for the Commission

 7 to consider.

 8 COMMISSIONER WETJEN: Yasushi?

 9 MR. TAKAYAMA: You know, what we see in

 10 the -- what we see at Nomura, example the Pakistan

 11 election, is a kind of option, that Nomura sells

 12 to the counterparty in emerging currencies, and

 13 the other hedging in the (inaudible), and enters

 14 with that very counterparty through NDF, to offset

 15 some of the risk associated with the option that

 16 first I described. And we show to the clients,

 17 the kind of bounder of the price, for both

 18 products. So, actually this is a reality, and I

 19 with a packaged transaction.

 20 So, if the trading mandate is following

 21 the clearing mandate, then we will have, you know,

 22 a kind of difficult situation that, you know,
 80

 1 options side, does not have to be that, you know,

 2 going through the sales, but NDF side, that has to

 3 go through the SEFs. Not really our issue, I

 4 think. Thank you.

 5 COMMISSIONER WETJEN: I think Chris

 6 wanted to weigh in.

 7 MR. ALLEN: For the second time this

 8 happened, that the previous speaker just made the

 9 point I was going to make which is, that I think

 10 that the -- not so much thinking of the package

 11 transaction as such but just going back to the

 12 option that may well have NDF delta hedge, to the

 13 extent that we roll forward, and you have the

 14 potential for made available straight to

 15 termination, which would apply just to the NDF,

 16 and not the option. That's, potentially, a fairly

 17 challenging situation we have to deal with.

 18 COMMISSIONER WETJEN: Sami?

 19 MS. COHEN: So, call me an optimist, but

 20 I'm of the hope that by the time the trading --

 21 the execution mandate attaches to NDFs, the

 22 package issue for options without the hedges will
 81

 1 be solved, because certainly that's something that

 2 we need for the interest rate market by November

 3 15th. And I think that the -- some of the

 4 solutions that the industry has been talking about

 5 with the Commission, such as treating the MAT leg

 6 of a packaged trade, and a permitted -- or a

 7 blocked transactions, for example. That's one of

 8 them, there are others, but I think that that this

 9 option on a MAT product, plus delta hedge package

 10 issue, is a broad one that applies to many

 11 products including NDFs, and I'm certainly hopeful

 12 that we can solve that long before this mandate

 13 attaches.

 14 COMMISSIONER WETJEN: Bob?

 15 MR. KLEIN: Yeah, I just wanted to know

 16 that we do see some packages that involve emerging

 17 market bonds and associated NDFs, and that's just

 18 another type of package that we'll have to work

 19 through.

 20 COMMISSIONER WETJEN: Sorry about that,

 21 I didn't catch that, can you --

 22 MR. KLEIN: It was packages involving
 82

 1 emerging market bonds and NDFs and the associated

 2 currency?

 3 COMMISSIONER WETJEN: Gavin?

 4 MR. WELLS: We have the great good

 5 fortune to speak to 12 of the world's largest NDF

 6 market makers, the reason we don't clear NDOs in

 7 the clearinghouse is that they are about a tenth

 8 of the volume of NDFs. There aren't that many

 9 banks who make NDA prices, or as many clients who

 10 would like to clear them, but the volumes are very

 11 small.

 12 It's entirely appropriate that NDFs

 13 should be used as a delta hedge to NDO and I do

 14 not doubt that there is the ability within the

 15 regulation to recognize that, to keep that risk

 16 package together. With regards to other packages,

 17 the estimate of our members is at around 97

 18 percent of the market are not packages but the

 19 ones that are or are not standardized, are

 20 typically the G10 currencies crossed with the

 21 NDFs, so the euro against a Korean NDF.

 22 But that these are predominantly used
 83

 1 with non- financials, not in the inter-dealer

 2 market, or with other financial entities. So I

 3 hear the comments about wishing to manage risk

 4 appropriately on the trading desk, and fully

 5 support those, but the issue is of relatively

 6 small scale compared to the total volume of the

 7 NDF market.

 8 COMMISSIONER WETJEN: Going to the next

 9 topic. Is there anything unique about the NDF

 10 space that would make the reporting obligations go

 11 along with clearing especially difficult, or

 12 uniquely difficult?

 13 MS. SIGELBAUM: I can respond to that.

 14 So we've been working with the industry for a

 15 couple of years to prepare --

 16 COMMISSIONER WETJEN: Jill, since you

 17 are also new, why don't you introduce yourself?

 18 MS. SIGELBAUM: Oh, sorry. I run

 19 foreign exchange for Triana. Triana is a big part

 20 of the infrastructure for foreign exchange today.

 21 We are connected to all of the top banks and prime

 22 brokers and FCMs, and so we are the pipes that,
 84

 1 say, behind the scenes that the banks use to move

 2 trades from institution to institution. We are --

 3 we've spent the last tow years working with the

 4 banks and the clearinghouses to certify

 5 connectivity, so we are technically ready, and I

 6 believe that the top -- the top percentage of the

 7 industry is also technically ready, so I don't

 8 think reporting from an infrastructure perspective

 9 is the issue.

 10 There may be some issues down the road,

 11 with some of the regional banks, but nothing that

 12 can't be accommodated in a short period of time.

 13 COMMISSIONER WETJEN: Anything else for

 14 reporting; Sub-Committee members? Oh, Mike?

 15 MR. LESAGE: I'd have to disagree with

 16 that last comment. I don't think that the

 17 infrastructure is ready. I do feel it's important

 18 for the Commission to realize that there are

 19 market structure issues that exist with both rates

 20 and credit that need to be sorted, you know,

 21 there's a lot of unfinished business, that needs

 22 to be addressed, and we should be very thoughtful
 85

 1 about adding any additional asset classes. You

 2 can take Rule 173 as a starting point, that's

 3 something that has got issues, that still exists,

 4 it makes the process unworkable and block trade,

 5 so I think you need to take that into account.

 6 You know, speaking from the FCM side, I

 7 think there's a whole host of other issues that

 8 you need to think about, one of which is the

 9 current capital issues that FCMs are facing, right

 10 now due to the Basel Rules and some of the SLR

 11 requirements, FCMs are having to post a lot of

 12 capital, and if you add another asset class into

 13 that mix, it could -- it could cause some

 14 additional problems.

 15 So until those issues are sorted out, I

 16 think we should be very cautious about adding

 17 additional products that could drive further -- or

 18 accelerate further consolidation amongst FCMs. So

 19 as far as being ready, our clients aren't ready,

 20 and a lot of the FCMs aren't ready, so I think

 21 it's important to define ready.

 22 COMMISSIONER WETJEN: Would anyone else
 86

 1 like to speak to that? Whether it's reporting, or

 2 other connectivity issues, any other reactions

 3 from both Mike's and Jill's comments?

 4 MR. KLEIN: I'd like to follow up on

 5 Mike's comments about FCM connectivity and 1.73 in

 6 particular. Without commenting on clearing, per

 7 se, if you go back to the issue of the potential

 8 for a very rapid MAT determination, I think the

 9 current state of affairs is that none of the SEFs

 10 that currently offer NDF trading, currently have

 11 the ability to connect to FCMs versus, a central

 12 limit hub. And some of them don't offer any limit

 13 checking capability whatsoever. So that's

 14 something that would have to be addressed in the

 15 context of SEF trading.

 16 COMMISSIONER WETJEN: George?

 17 MR. HARRINGTON: So I think, to Jill's

 18 comment, I absolutely agree on that. Right now we

 19 are -- hence the SEFs are offering NDF trading,

 20 the FCMs are not generally set up for clearing

 21 even though we've seen a few clear trades go

 22 through the NDF space. But you do have this
 87

 1 timing mismatch, where we had this sort of longer

 2 runway with rates and credits, where first we went

 3 to clearing, then we got to October 2nd, and then

 4 you the MATs come in, in February and March, so

 5 there was actually -- there was some time to allow

 6 four people to get set up with their FCMs than

 7 (inaudible) for SEF to get turned on, and get

 8 ready to go. If you had a clearing mandate let's,

 9 you know, call it, sometime in the first quarter,

 10 and then there was an immediate MAT right on top

 11 of it, I think that creates a real squeeze point.

 12 And obviously, you guys were thinking about it,

 13 but you need some separation of those two, just

 14 because people won't be able to move that quickly,

 15 I would think.

 16 COMMISSIONER WETJEN: Based on your

 17 experience, George, what would be a reasonable

 18 amount of time, between the mandate becoming

 19 effective and a trading mandate?

 20 MR. HARRINGTON: I think -- I mean, I

 21 think 12 to months of separation between the two,

 22 to really get set up, I think is fair. I'm like,
 88

 1 you know, to Jill's point, the trial is playing a

 2 sort of essential role in that credit checking

 3 facility, and that's not what's set up right now,

 4 because there's no credit mandate. So, yes, you

 5 have to trade them on SEFs, but you are still

 6 settling OTC under ISDA contracts, and you are not

 7 doing any of the things that are happening in

 8 credit rates. My estimate would be 12 to 18

 9 months.

 10 COMMISSIONER WETJEN: Paul?

 11 MR. HAMIL: Thanks. It was just groovy

 12 to follow through on the theme of the unfinished

 13 business, on the rates and credit side. I think

 14 there's been a lot of focus on access and customer

 15 access, and fragmentation, and I think we are in

 16 danger here of talking about SEFs as is if they

 17 are a mature thing, and we can just apply them to

 18 different products in particular.

 19 I mean, what we see is, there remains

 20 meaningful non-compliance by the SEFs, or many

 21 SEFs, with the rules, which in the area of access

 22 for customers, and if we are truly concerned about
 89

 1 complexity there and fragmentation, then I think

 2 there needs to be some real focus on resolving the

 3 fragmentation that exist just within the SEF

 4 world, as a result of the way that some SEFs have

 5 chosen to apply their impartial access standards.

 6 COMMISSIONER WETJEN: Kim?

 7 MR. DAWLEY: A couple more comments.

 8 You know, one of the most frustrating -- one of

 9 the most frustrating things, I think, both we and

 10 our clients have experienced, is really the lack

 11 of clarity around the mandate. You know, I just

 12 -- I need folks to appreciate --

 13 COMMISSIONER WETJEN: Mike, we are

 14 having trouble hearing you. I'm sorry.

 15 MR. DAWLEY: I need the Commission and

 16 staff and all the regulators to appreciate the

 17 fact that the build out for an FCM to connect all

 18 these CCPs out there is a pretty big deal,

 19 assuring that margining methodologies work, and

 20 that risk management procedures are sound, and

 21 that default procedures are sound, and you have to

 22 understand that we are dealing with a
 90

 1 resource-draining tsunami right now.

 2 With Australia, and Germany, and the

 3 U.K., and the U.S., and Japan, it's a lot of work

 4 right now to get ready to connect to these

 5 clearinghouses, so I think we just need to be

 6 thoughtful around the timing of all this, and

 7 that's from the FMC perspective. Our clients are

 8 facing the same thing, they have tech build outs

 9 and infrastructure changes that they need to make

 10 also, and I just really can't stress enough how

 11 important it is to try and help clarify the

 12 timing, so people can plan out how they are going

 13 to build out to all these changes.

 14 And the other thing, I just want to

 15 stress one more time, is the fact that there is a

 16 lot of unfinished business out there, and I think

 17 we've got to deal with some of these huge issues

 18 that relate to client clearing. One being 173,

 19 and the other being the capital issues that really

 20 affect the client's ability to clear. They are

 21 just limited FCMs left out there, and if any of

 22 these start to get out of the business, it can
 91

 1 just create a chain reaction where you could

 2 really add to systemic risk, so.

 3 COMMISSIONER WETJEN: Kim?

 4 MS. TAYLOR: I wanted to follow up on

 5 some of Mike's comments around the capital

 6 requirements. I do hear a lot these days about

 7 the impact of the supplemental leverage ratio, the

 8 SLR, and the way that it imposes higher

 9 requirements on trades that are cleared versus

 10 trades that are not cleared, and higher

 11 requirements on trades that have collateral held

 12 against the exposures, versus trades that don't

 13 have collateral held against the exposure.

 14 So I do think there are some serious

 15 inconsistencies in the way that those requirements

 16 have emerged, and the way that they are being

 17 imposed in the U.S., in particular, with higher,

 18 kind of percentage coverage standards, higher

 19 ratios, that are working against the benefits of

 20 clearing from a capital perspective, so I can't

 21 agree more with what Mike is saying in that

 22 regard.
 92

 1 COMMISSIONER WETJEN: Supurna?

 2 MS. VEDBRAT: I just want to, you know,

 3 second what Michael said on the readiness. You

 4 know, we wanted to be able to voluntarily stop to

 5 clear NDFs in the January timeframe, probably

 6 because of -- in anticipation that bilateral

 7 trades may become much more expensive, because if

 8 the capital requirements for the dealers, you

 9 know, but our observation has been that they are

 10 very, very FCMs that are willing to -- or are

 11 ready to be able to clear NDFs and, you know, from

 12 a client's perspective it's very difficult for us

 13 to like, clear a few trades, and not look at our

 14 entire book of business.

 15 And then just, you know, one point that

 16 hasn't been raised, is around determination of

 17 your positions, I think, you know, David had

 18 highlighted, like the need to be able to have

 19 orderly online, currently, you know, my

 20 understanding from NDF, or clearly NDFs is that if

 21 you want to terminate a position, you know, prior

 22 to maturity, your line items actually don't
 93

 1 disappear. So if you had a situation where, for

 2 some reason, an underlying client wanted to, you

 3 know, liquidate the position, either like, you

 4 know, move to another asset manager, or what have

 5 you, those positions would continue to exist.

 6 You could mitigate the risk, but you

 7 can't actually eliminate the trades, so that to

 8 us, you know, is a little bit concerning, but we'd

 9 like -- especially if you have time, we'd like

 10 that resolved ahead of a mandate.

 11 COMMISSIONER WETJEN: Gavin?

 12 MR. WELLS: Thank you. I heard

 13 Supurna's comments. As you can appreciate having

 14 run an FX NDF clearinghouse for two-and-a-half

 15 years, funds are tight to develop new things.

 16 Many end users can be very helpful in defining

 17 what they need for compression, and that is ready

 18 and easy to build, we've learnt that with the

 19 interest rates swaps market, and we know how to do

 20 it in the NDF market. So there were an awful lot

 21 of people watching today and the coming weeks to

 22 decide whether money should be spent to develop
 94

 1 those things, but it is a short delivery timeline.

 2 With regards to connectivity for the end

 3 users, I also heard Supurna's concerns about the

 4 choice and ability of clients to access the CCPs.

 5 I think a lot of FCMs hide their light under a

 6 bushel, we have three FCMs live, as Rodrigo

 7 alluded to earlier, a forth FCM goes live next

 8 week. We have two FCMs who are live but haven't

 9 posted yet a full fund contribution, and thus

 10 don't show on our website. So that's six.

 11 We have eight members in testing, of

 12 which three are FCMs, that takes it to nine, and

 13 we have seven members with letters of intent, of

 14 which are four are FCMs, taking it to 30. The

 15 view from them is -- or it used to be, we are

 16 waiting for the mandate after the 1st of October,

 17 and the 9th of October, they are sort of waiting

 18 to see the outcome, to see whether they should

 19 step out and show their light from their bushel,

 20 post the full funds and provide the full choice to

 21 the end user.

 22 So I'm confident that in a very short
 95

 1 space of time, the functionality for packages and

 2 compression, and the breadth and depth of choice

 3 required by the end user to access the CCPs will

 4 be in place, certainly before the end of Q1 next

 5 year.

 6 COMMISSIONER WETJEN: Anyone else? Mr.

 7 Chairman, you are on.

 8 CHAIRMAN MASSAD: We are close to the

 9 end of the scheduled -- end of the first session,

 10 if there are no other questions, around NDFs, let

 11 me just maybe circle back to any of Brian or

 12 David, or Rodrigo, having heard all this, you

 13 know, have any further, you all want to add, or

 14 advise us on.

 15 MR. O'KEEFE: You know, I think from

 16 staff's perspective here at the CFTC as I said,

 17 this is sort of a unique opportunity for staff, to

 18 understand these issues as we are trying to

 19 formulate our proposal. You know, anything that

 20 I've mentioned here, this is purely what staff is

 21 thinking at this point, putting together a

 22 proposal that makes sense, and being able to get
 96

 1 this feedback today has been extremely useful, so

 2 we very much appreciate it.

 3 MR. BAILEY: Just two points from my

 4 perspective, first I'm very interested in

 5 Supurna's last comment actually about the

 6 complexities of unwinding positions, and something

 7 that I think it should be teased out a little bit

 8 more. And the second point is, I guess one point

 9 we haven't really discussed is the appropriate

 10 maturity to which to apply clearing mandates, and

 11 that's something very interested in not --

 12 encourage as there are public consultations, I

 13 know Rodrigo loves fan mail, so please get some

 14 consultation responses in, that talk to the

 15 appropriate maturities, because I definitely think

 16 we need to get that right, and therefore we need

 17 to some evidence to back up the maturities that

 18 are subject to the mandate.

 19 COMMISSIONER WETJEN: Rodrigo?

 20 MR. BUENAVENTURA: Oh. Nothing much to

 21 add; it was a very illustrative for me the

 22 discussion I picked up a couple of points that I
 97

 1 think we should also follow up like one -- about

 2 defamiliarization of product definition that was

 3 mentioned before, and I'm interested on learning a

 4 bit more about that, but it was a very useful and

 5 interesting discussion for us. Yeah.

 6 COMMISSIONER WETJEN: Okay. Well, thank

 7 you very much. And once again, thank you to both

 8 Rodrigo and David, as well as the new FX

 9 Sub-Committee Members, very helpful to have you

 10 here. And looking forward to continue discussions

 11 with the Sub-Committee, and also looking forward

 12 to the work product that we mentioned before. So,

 13 Ted?

 14 CHARIMAN SERAFINI: Yeah. I guess we

 15 are going to adjourn now for the break and we'll

 16 reconvene at 3:34 for the Bitcoin discussion.

 17 (Recess)

 18 CHARIMAN SERAFINI: I'd like to call the

 19 GMAC Meeting back to order, and turn to

 20 Commissioner Wetjen to introduce the speaker that

 21 we have here today to talk about Bitcoin and the

 22 derivatives market.
 98

 1 COMMISSIONER WETJEN: Thank you, Ted. I

 2 think we'll just wait a few more seconds; we've

 3 people still sitting down.

 4 CHARIMAN MASSAD: While we are waiting,

 5 I just want to say thanks to the folks who are

 6 going to be participating in the next Panel.

 7 Unfortunately I'm going to have to go in about 10

 8 minutes, but really appreciate everyone's

 9 participation on this issue, and I look forward to

 10 hearing what I can hear today, and getting

 11 informed later, as to what was said, thanks. And

 12 thanks, again, Commissioner Wetjen, for organizing

 13 this.

 14 COMMISSIONER WETJEN: Thank you, Mr.

 15 Chairman. We have our next panel here to discuss

 16 the topic of crypto- currency derivatives, and

 17 here to help us with that we have Jerry Brito from

 18 the Coin Center, the newly traded Coin Center, I

 19 believe. Professor Houman Shadab -- I hope I'm

 20 saying that right -- from New York Law School; Tim

 21 Byun from BitPay; and Leonard Nuara from

 22 TeraExchange; and Thomas Leahy from the CFTC
 99

 1 Staff.

 2 So welcome to each of you. Thanks again

 3 for coming today, and I think we'll start with Tom

 4 who can go through some of the new and novel

 5 issues or challenges that have been raised by the

 6 filing, by TeraExchange, as well as through

 7 discussions with other platforms who appear to be

 8 poised to also try and submit a contract for

 9 listing. So, Tom?

 10 MR. LEAHY: Thank you, Commissioner

 11 Wetjen. The agenda says I'm going to discuss the

 12 process for self- certifying --

 13 CHAIRMAN MASSAD: Tom, can you speak up?

 14 And can I ask every -- it may just be me that's

 15 hard of hearing, but I'd appreciate if everyone

 16 can speak up.

 17 COMMISSIONER WETJEN: It's not.

 18 MR. LEAHY: Okay. So the agenda says

 19 I'm going to be speaking about the process for

 20 self-certifying Bitcoin derivatives, and I'm going

 21 to use our experience with TeraExchange as a case

 22 study, if you wish. So TeraExchange had
 100

 1 self-certified a Bitcoin non-deliverable forward

 2 contract, subsequently listed that contract for

 3 trading on the following business day, in

 4 accordance with the self- certification procedures

 5 of Commission Regulation 40.2. It should be noted

 6 that any contracted listed, that is self-

 7 certified and listed for trading, pursuant to 40.2

 8 has not been approved by the Commission.

 9 Normally, staff conducts an in-depth

 10 review of a new contract after receiving the

 11 self-certification filing, to verify compliance

 12 with the Commodity Exchange Act. However, given

 13 the limited review time for a new product

 14 certification provided by the Commodity Exchange

 15 Act, Commission staff generally encourages DCMs

 16 and SEFs to send draft filings for innovative

 17 contracts prior to self- certification. This

 18 allows staff to raise issues or express concerns,

 19 to ask questions before the contract is listed for

 20 trading. TeraExchange provided the draft filings

 21 to Commission staff.

 22 With any new contract, staff assesses
 101

 1 the contract terms and conditions to determine its

 2 compliance with core principle three, that is, is

 3 the contract not readily susceptible to

 4 manipulation. Appendix C to Part 38 of the

 5 Commission's regulations is referenced as an

 6 acceptable practice for core principle three.

 7 For cash settled contracts such as the

 8 Bitcoin's swap, self-certified and listed by

 9 TeraExchange, the cash settlement price should be

 10 not readily susceptible to manipulation, it should

 11 be reflective of the underlying market for that

 12 commodity. In addition, it should be a reliable

 13 indicator of the cash market price, and acceptable

 14 for hedging.

 15 Staff raised questions about the Bitcoin

 16 index that TeraExchange initially proposed to use,

 17 to cash settle its contract. In this respect,

 18 there are very few prices used to calculate that

 19 index, and the calculation methodology might

 20 result in an index that is not robust. So

 21 TeraExchange responded to staff's questions by

 22 developing a proprietary index that addressed
 102

 1 those questions. TeraExchange -- the Tera Index

 2 uses inputs from several Bitcoin exchanges, and it

 3 is calculated using a volume- weighted methodology

 4 that also trends outliers.

 5 Back testing of the index showed that

 6 the index consistently reflected prevailing

 7 Bitcoin prices, and that the index was not

 8 influenced by outlier prices. Staff also raised

 9 questions with respect to core principles 4 and 5,

 10 which are, monitoring of trading, and the ability

 11 to obtain information respectively.

 12 Core principle 4 requires for SEF to be

 13 able to monitor for price abnormalities in the

 14 index, and requires methodologies to resolve the

 15 threat of manipulation or distortion. Core

 16 principle 5 requires of SEF to have the capacity

 17 to carry out international information sharing

 18 agreements that the Commission may require; so

 19 TeraExchange provided a demonstration to

 20 Commission staff concerning how they would monitor

 21 trading activity in the Bitcoin market, and that

 22 they had contracted with the -- a third party for
 103

 1 regulatory services including market surveillance.

 2 In addition, TeraExchange entered into

 3 an information sharing agreement with each Bitcoin

 4 exchange that provides prices for the calculation

 5 of the Tera Bitcoin Index. And Tera made signing

 6 information -- and information sharing agreement a

 7 precondition for inclusion in the Tera Index.

 8 Having largely addressed staff questions during

 9 the draft review process, Tera Exchange

 10 self-certified their Bitcoin non-deliverable

 11 forward swap contract, and is currently listed for

 12 trading. Thank you.

 13 COMMISSIONER WETJEN: Thank you, Tom.

 14 We are going to go a little bit outside of the

 15 order of the agenda, I think it might be more

 16 natural to have Lenny speak next, just because he

 17 represents TeraExchange, who obviously is listed,

 18 and designed a contract. So, Lenny, do you want

 19 to go with your presentation?

 20 MR. NUARA: Sure. Thank you,

 21 Commissioner. I'm Lenny Nuara from TeraExchange.

 22 I just want to first thank Commissioner Wetjen for
 104

 1 this opportunity to speak. It's been a number of

 2 months that we've been working with the staff

 3 here, and as Tom just spoke about. We originally

 4 started this back in March, and it's been a great

 5 process, that involves a lot of people, and we'd

 6 like to recognize the staff for the amount of time

 7 that they gave us in working through this. So

 8 today --

 9 COMMISSIONER WETJEN: Lenny, a little

 10 closer to the mic, please?

 11 MR. NUARA: Sure. Today we are going to

 12 speak about the demand for this instrument, why we

 13 created it, the process, the self-certify I'll

 14 touch on briefly because, Tom Leahy just did a

 15 great job at that. I'll talk about how the

 16 contract actually operates, and then how it's

 17 traded on TeraExchange, so we can just go to those

 18 four things, and then we can get off to the other

 19 speakers.

 20 So we have some slide that they might

 21 want to turn on. Look at that. Thank you, in the

 22 backroom. So first off, the demand for the U.S.
 105

 1 dollar Bitcoin nondeliverble forward. The Bitcoin

 2 community which you are going to hear a little bit

 3 about from my fellow speakers here, is much large

 4 and much broader than most people realize, there

 5 are merchants accepting bitcoin as a method of

 6 payment. There are payment processors, one of

 7 which is here today, that has 40,000 merchants

 8 worldwide accepting payments in bitcoin.

 9 There are miners, these are miners not

 10 with hats and picks, but nonetheless that's the

 11 phrase in the marketplace. For those that are

 12 generating the bitcoins, and there will be a

 13 little technical conversation about how that

 14 happens. There are wallets, places that store

 15 your digital commodity, you'll hear that phrase in

 16 a little while as well from some of my colleagues.

 17 And there are investors in the bitcoin industry

 18 itself, that are investing in the infrastructure

 19 of bitcoin technology, as well as those that are

 20 investing in the bitcoin themselves, similar to

 21 investing in gold, or platinum or silver.

 22 The point to be made here is that
 106

 1 trading of bitcoin, I mean, there are various

 2 exchanges that TeraExchange connects to, and is

 3 rather volatile. There is that volatile

 4 calculation of 3.57, if you fancy that or you can

 5 say that bitcoin, on average can -- the trading

 6 can be 3 percent difference every day; 3 percent

 7 market change on a daily basis, sometimes more

 8 sometimes less.

 9 Because of that, because it is being

 10 accepted widely, because it is being used by the

 11 diversity of players that you spoke about; because

 12 it is a payment mechanism, again, that Jerry and

 13 Houman will speak to, our payment mechanism, it

 14 doesn't have the same friction that, let's say,

 15 using regular banking channels or otherwise,

 16 there's a greater acceptance for electronic and

 17 e-commerce platforms.

 18 There's a great demand for some regulate

 19 type of risk transfer solution, namely swaps or

 20 other futures products, or otherwise, and

 21 regulated because institutions are utilizing these

 22 products. This is not a platform or a product --
 107

 1 TeraExchange is not a platform or a product for

 2 the trading by retail customers, it is an

 3 institutional- level swap, execution platform.

 4 Institutions are the user of the product, and

 5 institutions are looking for a way to hedge the

 6 volatility that currently exists, or take a view

 7 of -- with regard to the direction of where

 8 bitcoin price is going.

 9 So the process that Tom so neatly just

 10 described, for us started back in March. We did

 11 provide drafts; is the phrase that Tom mentioned,

 12 and we've had numerous discussions with the staff

 13 over the ensuing months from March until this,

 14 September 11th. And the key features of those

 15 conversations were to make sure that TeraExchange,

 16 the product, the underlying or otherwise met all

 17 the core principles that a swap execution facility

 18 must satisfy. In particular the reference rate

 19 which is the rate that Tera Bitcoin price index is

 20 not readily susceptible to manipulation.

 21 And in particular, neither is our swap

 22 market, so both need ongoing oversight and
 108

 1 surveillance. We utilize the NFA for some of

 2 those services. We utilize the information

 3 sharing Agreement that Tom mentioned with our

 4 contributing execution -- excuse me -- Bitcoin

 5 execution venues to provide us information. We

 6 self-certified on September 11th, which was not

 7 that long ago. And our first trades actually were

 8 yesterday. The market is going to lift off slowly

 9 as most new markets do.

 10 We are on boarding customers and clients

 11 daily, as we speak, that want to start to trade in

 12 the space. The contract itself is a bilateral,

 13 non-cleared, different from this morning, so it's

 14 not -- not an issue of clearing, but it's a

 15 bilateral, an un-cleared trade that has credit

 16 support, annex to support the collateral, of

 17 delivery by either side to support the trade.

 18 It's non-deliverable.

 19 Now Bitcoin Exchange, this is U.S. cash

 20 settled forward. The forward contract is executed

 21 in initial amount, similar to as described this

 22 morning, and it follows the track of what would
 109

 1 ordinarily be a non-deliverable forward or another

 2 type of forward contract. Dollars are exchanged,

 3 the contract maturity to settle the difference

 4 between the contract forwarded rate, and then

 5 ultimately the settlement rate which is determined

 6 by the Tera Bitcoin Price Index, which I described

 7 earlier, and I'll provide a little bit more detail

 8 in a minute.

 9 So it follows or tracks traditional non-

 10 deliverable forward. Again, this one is a

 11 non-cleared instrument. The Bitcoin Price Index,

 12 the Tera Bitcoin Price Index is something that,

 13 well, we spent a lot of time working with the

 14 staff here, to firm up. We originally had some

 15 ideas back in March, and they were not as firm and

 16 as robust as they could have been, and so we

 17 proceeded to build our own. And we proceeded to

 18 connect to the variety of venues worldwide that

 19 are trading bitcoin (inaudible) the underlying,

 20 and we started to build a tool that would pull

 21 that data in, and normalize that data to

 22 essentially neutralize anomalous data or outliers.
 110

 1 And also to limit the influence of divergent

 2 numbers -- divergent prices coming through from

 3 other Bitcoin Exchanges, mainly to mute the

 4 possibility that there could be manipulation in

 5 another exchange, and that manipulation

 6 essentially affecting the index, which will in

 7 turn, affect the contracts on our marketplace.

 8 That took quite some time, and including

 9 back testing numerous times, in both internally,

 10 and also submission of that back-testing data to

 11 the CFTC. And the staff has the full data to

 12 analyze that. The index ultimately becomes, what

 13 is the fair value of Bitcoin's spot price without

 14 having specific reliance on one exchange or

 15 another, where essentially is a composite. And it

 16 leads to a mark-to-market price, and it leads to

 17 the ability of the Escrow agents and the

 18 custodians as well as others, to have that number

 19 for margin and collateral purposes on the trades.

 20 And then finally, how is it traded?

 21 Because this is a bilateral contract it's traded

 22 as a request for quote with the option for
 111

 1 liquidity providers to provide indications of

 2 interest, so that would light up the screen,

 3 obviously none of you can read this from a

 4 distance, that it currently is, but on the screen

 5 there will be prices posted by liquidity

 6 providers, and when someone hits one of those

 7 prices, it essentially turns up a request for

 8 quote to the counterparty, because there's

 9 counterparties involved there's a risk transfer

 10 issue there. That's show the collateral comes

 11 into place.

 12 There are pre-trade credit similar

 13 what's required the clearing we adopted that

 14 concept, and there credit checks based upon the

 15 amount of deposit that the participant has for

 16 their margin account. Tenors range from one day

 17 all the way out to two years, that's not different

 18 that's what in normal NDFs. And then settlement

 19 at maturity uses the index that I just spoke

 20 before, and in the CME, it's actually the SDR, for

 21 the SDR reporting. So actually the trades that

 22 happened yesterday were reported to the CME after
 112

 1 the trades were completed, and ultimately the

 2 files are dumped over to the NFA for their

 3 constant surveillance.

 4 And so that's a quick summary of where

 5 we sit, and there's more slides by another

 6 presenter, I just don't know who is next. So,

 7 thank very much for the time, Mark.

 8 COMMISSIONER WETJEN: Thanks, Lenny.

 9 Jerry?

 10 MS. BRITO: Thank you, Commissioner

 11 Wetjen, for having me here today; and thank you to

 12 members of the GMAC. My name is Jerry Brito, and

 13 I'm the Executive Director of Coin Center, a

 14 recently-launched nonprofit research and advocacy

 15 center, that's focused on the public policy issues

 16 facing digital currencies. I would like to

 17 provide some background on the technology that we

 18 are discussing, explain some of the demand for the

 19 derivative products, and answer any technical

 20 questions that you might have.

 21 So bitcoin is frequently described as a

 22 digital currency and, you know, while the
 113

 1 description is accurate, it can be misleading

 2 because it's at once too broad and too narrow.

 3 It's too broad because bitcoin is a very

 4 particular kind of digital currency, it's a

 5 cryptography-based currency. Indeed it's the

 6 first of its kind. The description is also too

 7 narrow, because although currency is one aspect of

 8 the Bitcoin system, Bitcoin is more broadly an

 9 Internet protocol with many applications beyond

 10 payment or money transfer.

 11 You can think of it like email or the

 12 Web, it's an open network to which anyone can

 13 connect without permission from a central

 14 authority. Anyone can send a message to anyone

 15 else, and on top of it, you can freely build any

 16 number of different kinds of applications, and so

 17 in that way it's like the Web, it's like email.

 18 Online virtual currencies are nothing

 19 new. They have existed for decades, from World of

 20 Warcraft Gold, to Facebook Credits, they've been

 21 around for a long time, and neither are online

 22 payment systems new. We've had PayPal, Visa,
 114

 1 Western Union Pay for a long time. So what is it

 2 about bitcoin and similar cryptography-based

 3 currencies that makes them unique?

 4 Well, bitcoin is the world's first

 5 completely decentralized digital currency, and

 6 it's the decentralized part that makes it unique.

 7 Prior to Bitcoin's invention in 2009, online

 8 currency or payment systems had to be managed by a

 9 central authority. So for example, you could have

 10 had Facebook issuing Facebook points, or you could

 11 have PayPal ensuring that transactions between

 12 customers are reconciled. They provided that

 13 central authority. However, by solving a

 14 long-standing conundrum in computer science known

 15 as double- spending bitcoin, for the first time,

 16 makes possible transactions online that are

 17 person-to-person, without the need for

 18 intermediary between them. Just like cash.

 19 Comparing bitcoin to traditional

 20 payments and money transfer systems, helps explain

 21 the distinction. So, before bitcoin, all

 22 transactions always require third-party
 115

 1 intermediary. For example, if Alice wanted to

 2 send $100 to Bob over the Internet, she would have

 3 had to rely on a third-party service like PayPal

 4 or Bank of America. Intermediaries like PayPal,

 5 essentially, they keep ledger of account holders

 6 balances, when Alice sends Bob $100 PayPal deducts

 7 the amount from her account and adds to Bob's

 8 account.

 9 Without such intermediaries digital

 10 money could be spent twice, right? Alice could

 11 send $100 to Bob by attaching a money file to a

 12 message, but just like with email, sending an

 13 attachment does not remove it from one's computer.

 14 Right, Alice would retain a perfect copy of that

 15 money file, after she had sent it, so she could

 16 have easily spent it a second time, sending it --

 17 the same $100 to Charlie.

 18 So Bitcoin's invention is revolutionary,

 19 because for the first time, the double-spending

 20 problem can be solved without the need for a third

 21 party. Bitcoin does this by distributing the

 22 necessary ledger, among all the users of the
 116

 1 system via a peer-to-peer network. Every

 2 transaction that occurs in the Bitcoin network, is

 3 registered in the distributed public ledger, which

 4 is called the block chain. New transactions are

 5 checked against the block chain to ensure that the

 6 same bitcoins have not been previously spent; thus

 7 eliminating this double-spending problem.

 8 The global peer-to-peer network composed

 9 of thousands of users takes the place of the

 10 intermediary. Alice and Bob can now transact

 11 online without a third-party intermediary. And so

 12 how is this possible? Well, with bitcoin

 13 transactions are verified and double spending is

 14 prevented through the clever use of public key

 15 cryptography. Public key cryptography requires

 16 that each user be assigned two keys. One private

 17 key, that's kept secret like a password, and one

 18 public key that can be shared with the world.

 19 When Alice decides to transfer bitcoins

 20 to Bob, she creates a message, and it's called a

 21 transaction, which contains Bob's public key, and

 22 how many coins she is sending. She then signs it,
 117

 1 with her private key, and broadcasts this message

 2 over the entire network. By looking at Alice's

 3 public key, anyone can verify that the transaction

 4 was indeed signed with her private key, that is an

 5 authentic exchange, and that Bob is the new owner

 6 of the funds.

 7 The transaction, and thus the transfer

 8 of ownership of the bitcoins is recorded,

 9 time-stamped, and displayed in one block of the

 10 block chain. Public key cryptography ensures that

 11 all computers in the network have a constantly

 12 updated and verified record of all transactions

 13 within the Bitcoin network, which prevents double

 14 spending and fraud. Out of technical necessity,

 15 transactions on the Bitcoin network are

 16 denominated -- are not denominated in dollars or

 17 euros or yen as they are on PayPal, but are

 18 instead denominated in bitcoins.

 19 This makes bitcoin a virtual currency in

 20 addition to a decentralized ledger. The value of

 21 the currency is not arrived from gold or

 22 government fiat, but from the value that people
 118

 1 assign to it. The dollar value of bitcoin is

 2 determined on open market, just as the exchange

 3 rate between two different world currencies. The

 4 total number of bitcoins that will ever be issued,

 5 as well as the rate at which they are

 6 algorithmically released into the ecosystem is not

 7 determined by any person, company or central bank.

 8 But has, instead, been predetermined at a time the

 9 protocol was established.

 10 To date, bitcoins have represented money

 11 out of floating exchange rate, and the Bitcoin

 12 network has been employed as a fast and

 13 inexpensive means of money transfer or payments.

 14 But there is no reason why particular bitcoins

 15 could not represent something besides money. If

 16 we conceive of bitcoins simply as tokens, then

 17 other applications become apparent. For example,

 18 we could agree that a particular bitcoin, or

 19 indeed an infinitesimally small fraction of a

 20 bitcoin so as to allow for many tokens. We could,

 21 you know, we could all agree that a particular

 22 bitcoin represents a house, a car, a share of
 119

 1 stock, a futures contract, or an ounce of gold.

 2 Conceived of in this way, the bitcoin block chain

 3 then becomes more than just a payment system.

 4 It can be a completely decentralized and

 5 perfectly reconciled property registry. Bitcoin

 6 is therefore an open platform for innovation, just

 7 like the internet itself. In fact, Bitcoin looks

 8 today very much like the Internet did in 1995.

 9 Some dismissed the Internet then at a curiosity,

 10 but many could see that such an open platform for

 11 innovation would allow for world-changing

 12 applications to be built on top of it. Few in

 13 1995 could have foreseen Facebook or Skype or

 14 Netflix, but they could see that all the building

 15 blocks were there for some amazing innovations.

 16 Bitcoin is like that today. We can't

 17 conceive yet what will be the killer applications,

 18 but it's pretty obvious that they will come.

 19 Bitcoin faces some challenges however, and chief

 20 among them is regulatory uncertainty, if we think

 21 back again to the early Internet, it was not until

 22 the government made it clear that it would pursue
 120

 1 a light- touch regulatory approach, that Internet

 2 innovation really took off. Bitcoin today is in

 3 need of similar commitment from government. In

 4 the case of financial regulations specifically,

 5 bitcoin would benefit from the development of

 6 hedging instruments.

 7 As I explained earlier, bitcoin's values

 8 are determined on open market, that market is

 9 still developing, and it's not very liquid, and as

 10 a result it has been historically volatile.

 11 Merchants and merchant process and services,

 12 exchanges, and many other businesses and

 13 institutions who want to build on top of the

 14 Bitcoin platform are in search of good hedging

 15 instruments. Additionally, as Bitcoin matures,

 16 it's root technology, a cryptographically,

 17 verifiable distributed ledge system, could be

 18 employed as a clearing mechanism in financial

 19 markets and other applications.

 20 While unprecedented, such a use of the

 21 technology could lead to important new

 22 efficiencies and innovations. As regulators begin
 121

 1 to consider these developments, they should do so

 2 with an open mind, and avoid undue restrictions

 3 that could have unintended consequences, including

 4 limiting innovation. So, thank you for your time,

 5 and I look forward to your questions.

 6 COMMISSIONER WETJEN: Thank you, Jerry.

 7 Houman?

 8 MR. SHADAB: Okay. Thank you so much

 9 for having me here, Commissioner Wetjen. It's

 10 really a pleasure and an honor to be with all the

 11 panelists and the guests in this room. And thanks

 12 to GMAC for organizing this hearing as well.

 13 So my name is Houman Shadab, I'm

 14 Professor of Law, in New York Law School, and my

 15 research happens to focus primarily on

 16 derivatives, and more recently crypto coins such

 17 as -- crypto currencies such as bitcoins. So it's

 18 so serendipitous to be here today.

 19 I as asked to speak about the regulatory

 20 challenges from CFTC's perspective, facing

 21 Bitcoin. Basically I see them as three, one sort

 22 of, what is Bitcoin from the Commission's
 122

 1 perspective. What's the nature of it? Second of

 2 all, what is -- how do we apply the traditional

 3 distinction between futures and forwards to

 4 Bitcoin derivatives, where in cases where it could

 5 be ambiguous? And finally, how do we regulate,

 6 not derivatives that reference Bitcoin, but

 7 derivatives that are executed and cleared and

 8 traded, and settled and so forth, through the

 9 block chain, through the Bitcoin network or

 10 protocol.

 11 So the first point I want to make is

 12 that, Bitcoin is best understood, not actually as

 13 digital currency, but as a digital commodity.

 14 Okay, certainly the primary application or use

 15 right now of bitcoins, perhaps besides investment

 16 or speculative purposes, that only needing itself,

 17 are for payments and there are a growing number of

 18 merchants that accept Bitcoin, and that certainly

 19 is an important aspect of what it's used for.

 20 But Bitcoin fundamentally, as a Jerry

 21 Brito just noted, is the method of transmitting

 22 messages over a block chain just to -- what's also
 123

 1 called a distributed ledger network. And because

 2 of that, many software developers right now are

 3 currently developing applications that go beyond

 4 payments, including things that are called sort of

 5 smart contracts, which essentially allow two

 6 parties to trade in an automated fashion, which is

 7 also decentralized, secure, and sort of basically,

 8 publicly verifiable, through the block chain.

 9 So, because of all that, I think that

 10 it's best to view bitcoins as essentially an

 11 exempt commodity, more like gold and silver, and

 12 less like excluded commodities under the Commodity

 13 Exchange Act, such currencies or other financial

 14 interests. I think to think of bitcoin as just a

 15 currency would be to think of the Internet just

 16 like a network for sending email. It's true, but

 17 it's just too narrow, and perhaps --

 18 COMMISSIONER WETJEN: Houman, I don't

 19 mean to throw you off, but you made that

 20 distinction between excluded versus exempt, help

 21 understand a little bit more why that might

 22 matter.
 124

 1 MR. SHADAB: Yeah. I think it might

 2 matter from the perspective of regulators because,

 3 first of all, it wouldn't bring into the equation

 4 sort of regulators, including banking regulators,

 5 and monetary authorities that may be more

 6 concerned about currency type issues. Second of

 7 all for the more nitty-gritty details with respect

 8 to the Commodity Exchange Act, being an exempt

 9 commodity pretty much means that bitcoin would

 10 fall and look more like a intangible commodity

 11 that can be physically delivered, as opposed to,

 12 let's say, a currency.

 13 So we wouldn't think -- when we think

 14 about regulating many bitcoin swaps, or bitcoin's

 15 futures versus forwards, I think what we think

 16 about are the deliverability aspects of it, and

 17 not so much whether, for example, a bitcoin swap

 18 falls under something that looks like the NDF

 19 classification. Or something that looks like the

 20 Treasury exemptions for physically-delivered FX --

 21 certain FX futures and forwards.

 22 So, it's subtle, at the end of the day
 125

 1 it might not matter too much for how the

 2 regulatory structure wraps around it -- wraps

 3 around Bitcoin, but I think that for a

 4 bigger-picture idea, it is sort of important to

 5 classify. I think you should get that conception

 6 right about what exactly Bitcoin looks like from

 7 your Commission's perspective.

 8 And so given that's the case, the sort

 9 of second challenge is, how do we apply that

 10 traditional distinction between futures and

 11 forwards, to this digital commodity, Bitcoin, and

 12 often we'd distinguish our (inaudible), and the

 13 Commission distinguishes between futures and

 14 forwards based upon whether or not they are

 15 deliverable, physically deliverable or cash

 16 settled. Whether or not the contracts were

 17 standardized, whether or not the platform is a

 18 source of a central counterparty, and whether or

 19 not maybe the contracts are fungible as well.

 20 And that's important, of course, with

 21 respect to futures and forwards, because forwards

 22 are basically not -- do not fall within the
 126

 1 jurisdiction of the CFTC, certainly not like

 2 futures contracts; and if you look at some of the

 3 platforms that are currently being developed with

 4 respect to trading bitcoin derivatives, some of

 5 them sort of fall in between, and it's hard to

 6 determine, I think whether or not certain

 7 contracts are futures for bitcoin, or maybe

 8 forwards.

 9 And for example, so maybe one case study

 10 here, setting jurisdictional questions aside, is

 11 that ICBIT, or ICBIT platform, which calls itself

 12 a futures exchange, which says it's selling

 13 bitcoin futures, and under that -- and the

 14 contracts are relatively fungible, but basically

 15 one, two, three months standardized futures

 16 contracts, of everything bitcoin. On the other

 17 hand, the platform doesn't serve as a central

 18 counterparty and it entails physical delivery.

 19 So maybe that kind of contract -- that

 20 kind of platform, again, setting aside

 21 jurisdictional issues, it may or may not fall

 22 under the scope of jurisdiction of the Commission.
 127

 1 And something to think a little bit more deeply

 2 about, recognizing though that even though Bitcoin

 3 is digital, and to that extent may be intangible,

 4 it can still be physically delivered just for the

 5 same reason that the Commission recognizes

 6 physical delivery in a sense of other intangible

 7 commodities, such as pollution rights, for

 8 example.

 9 So, that is my second general,

 10 regulatory challenge. And finally, all the

 11 foregoing that I've talked about really applies to

 12 derivatives written on bitcoin; whether it's a

 13 bitcoin futures, or bitcoin swaps, or bitcoin

 14 forwards or option, but there's another type of --

 15 sort of, bitcoin derivative, and that's really a

 16 smart contract. A derivative that's enabled and

 17 basically that goes through the Bitcoin block

 18 chain system.

 19 And what's interesting about these

 20 contracts is that, like many other aspects the

 21 financial markets are sort of programmable ahead

 22 of time. So maybe if you had a bitcoin -- or
 128

 1 excuse me, a block chain futures, or a smart

 2 futures contract, you could program, because the

 3 futures are already sort of by definition, sort of

 4 standardized, all of the terms of the agreement

 5 except for the price, so the quantity of the

 6 maturity and so forth, and then maybe the

 7 international processes, of the software

 8 application that applies to the block chain, could

 9 help determine the price.

 10 And although many of these smart

 11 contracts, platforms and applications are

 12 currently works in progress, many companies,

 13 organizations are developing underlying codes to

 14 implement these types of agreements. Two, sort

 15 of, aspects of these, or two or three aspects of

 16 these that are -- that programmers or developers

 17 are starting to identify as being important are

 18 one, multi-signature authentication. Just sort of

 19 verify and authenticate different aspects of the

 20 agreement, or different types of their performance

 21 as the contract proceeds.

 22 Escrow services as well, to sort of
 129

 1 segregate and safeguard the party's capital or

 2 other assets, and sort of -- and Oracle -- what's

 3 called an Oracle, which is basically a part of the

 4 application or a separate one, that sort of

 5 interacts with the outside world to essentially

 6 incorporate or provide the data feed to the

 7 agreement, so that it sort of operates properly.

 8 And certainly in the financial instrument space we

 9 could see how interacting with the outside world,

 10 including prices and so forth would be important

 11 to execute that.

 12 Certainly the derivatives markets are

 13 very -- already use a lot of software and are very

 14 tech-enabled to begin with, but nonetheless I do

 15 think that the Bitcoin block chain could provide

 16 sort of unique functionality, unique advantages

 17 that currently are not fully being utilized or

 18 even available through traditional, technological

 19 means if that's not a bit of a oxymoron. One is

 20 maybe because the block chain doesn't use

 21 intermediaries, maybe fewer intermediaries, at

 22 least, the transactions could be traded, cleared
 130

 1 and settled much quicker, and maybe at a cheaper

 2 cost as well.

 3 Furthermore, you could probably build

 4 in, let's say, the 23 core principles that Futures

 5 Exchanges are required to abide by into the very

 6 code itself. And if you embed those types of

 7 rules into the agreement ahead of time, one

 8 question is, well, maybe that these types of

 9 transactions should qualify for an exemption under

 10 traditional rules that would, otherwise be

 11 applicable to a contract that essentially provided

 12 for, say, future delivery of a commodity, whether

 13 it's actually physically-delivered or cash.

 14 Finally another potential advantage of a

 15 bitcoin futures -- of block chain futures is that

 16 it could actually allow for integration with other

 17 markets better than current futures markets too,

 18 in the sense that if there is sort of one

 19 universal block chain, or block chains interact

 20 with each other on a global basis, it can allow

 21 for futures markets to be more intricate with,

 22 lets say, securities markets, and even for futures
 131

 1 markets maybe be more integrated with commercial

 2 markets, and you can imagine at some point that a

 3 producer -- a physical producer of agriculture,

 4 would automatically purchase, in a sense, or be

 5 entered into, in order for a futures agreement, if

 6 the projected price of the commodity goes below a

 7 certain point in the future.

 8 So, my last sort of just conclusion here

 9 is that given that it may be possible, and

 10 certainly many of these concepts are, sort of

 11 potentials and projections about what technology

 12 may look like in the future which is always sort

 13 inherently difficult to doo. But given that it

 14 may be possible for regulatory policy objectives

 15 to be achieved through the block chain, to be

 16 achieved through software, through code, and

 17 embedded into the contract rules themselves, the

 18 Commission may want to think about or consider

 19 exempting these types of agreements from the full

 20 scope of the regulations to sort of balance

 21 consumer protection from market stability and

 22 systemic risk with innovation and progress.
 132

 1 So thank you so much for hearing my

 2 remarks, and I really look forward to the

 3 discussion.

 4 COMMISSIONER WETJEN: Thank you,

 5 Professor. Tim?

 6 MR. BYUN:: Yes. Good afternoon,

 7 everyone. Thank you for inviting me. My name is

 8 Tim Byun, Chief Compliance Officer of BitPay.

 9 Thank you, Commissioner, and members of GMAC for

 10 this opportunity.

 11 I have just maybe five minutes of a

 12 prepared comments, and also to address your two

 13 initial questions, but I would love to address any

 14 further questions that you may have, and I think

 15 based on your look, with the distinguished

 16 panelists here, there's going to be quite a few

 17 questions.

 18 But let me please start off with the

 19 next slide, please. I just wanted to give you a

 20 short introduction of myself, because you know, I

 21 think I'm very fortunate to be sharing some

 22 remarks to you today. As I mentioned, I serve as
 133

 1 the Chief Compliance Officer, but I also spent

 2 five years at Visa Inc., as their Anti-Money

 3 Laundering Officer, and Head of Credit Settlement

 4 Risk. Publicly disclosed under 10-Q, Visa has

 5 about $50 billion of credit risks on any given

 6 day. Prior to that, I was a regulator for the

 7 Federal Reserve Bank, and the FDIC for about 15

 8 years plus. I also worked for a commercial bank

 9 in their Credit Corporate Underwriting Department.

 10 So I hope my background can shed a little more

 11 light, specifically on the next slide.

 12 I want to get into your first question

 13 of, how is the adoption of bitcoins going in the

 14 marketplace. And we have some visibility of that

 15 because we are a merchant processor out there. In

 16 short, as on the next slide, as a merchant

 17 processor, I want to let you know that we were

 18 founded in May 2011. Bitcoins were, the

 19 whitepaper was conceived in 2008, bitcoins or the

 20 first version, or first block of bitcoins came out

 21 in 2009, so by that standard we are actually a

 22 veteran out there, but we are a very small
 134

 1 startup. We have 40,000 merchants worldwide, on

 2 the next slide we have about $32 million of

 3 investment capital from our venture capitalist,

 4 and we have just a few of those names out there

 5 that you can see.

 6 Index Ventures from the U.K., Founders

 7 Fund led by Peter Thiel. Horizons Ventures

 8 supported by Li Ka-Shing; RRE associated with

 9 prior CEO of American Express and Felicis

 10 Ventures. We have about 75 employees worldwide,

 11 BitPay is headquartered in Atlanta, and we have

 12 colleagues all over world as you can see.

 13 On the next slide, is the adoption

 14 slide. Here is a glimpse of, as up-to-date to

 15 August 2014, how many transactions we do per

 16 month, and as you can see we've been hovering

 17 about 40,000 but from a year ago, it has

 18 significantly or exponentially increased. And so

 19 we see adoption from our point of view being very

 20 robust.

 21 I want to also present you this public

 22 chart from Block chain where they measure or
 135

 1 provide charts on the entire Bitcoin system, and

 2 you could see the total transactions there

 3 steadily increasing over time. This is a two-year

 4 look-back chart. So I think the adoption is

 5 great. Is it in the Main Street? No. Is it in

 6 Wall Street? It will get there, but currently,

 7 no. So it is very experimental currently, I think

 8 you are seeing significant start-up capital being

 9 invested in the marketplace.

 10 I believe year-to-date 2014, there is

 11 about $300 million dedicated or invested in

 12 Bitcoin ecosystem startups such as ourselves. And

 13 so it is progressing very nicely, or very

 14 robustly. Your second question asked to start,

 15 what is the possible use of derivatives or Bitcoin

 16 instruments? And I see it in kind of three

 17 categories, for Wall Street, for your market

 18 makers, or even ecosystem exchangers that need to

 19 build the infrastructure and idea of how to use

 20 bitcoins. And I think they will build up the

 21 ecosystem.

 22 It could also be used by -- in Wall
 136

 1 Street for trading purposes. As a principle or an

 2 agent, it could be used as an alternative asset

 3 class for your money managers on the buy side.

 4 Corporations such a BitPay could use to hedge our

 5 Treasury operations, as we need to pay on the

 6 merchant side, or settle their transactions which

 7 we see every day.

 8 For individual or sophisticated

 9 investors, they could diversity their holdings or

 10 even speculate, on bitcoins -- the prices itself.

 11 So I'm sure, especially in this conference room,

 12 you have a better perspective of what's possible

 13 on a derivative scale. And with that, I'll leave

 14 it up to -- open for Q&A.

 15 COMMISSIONER WETJEN: Thank you very

 16 much, Tim. We are now joined by Commissioner

 17 Giancarlo. I don't know, Chris, whether you would

 18 like to make a few remarks at this point?

 19 COMMISSIONERGIANCARLO: (Inaudible).

 20 COMMISSIONER WETJEN: Okay. First of

 21 all I open up to the group, I don't know whether

 22 any of the members have questions of panelists.
 137

 1 We could start there. I have a couple of my own.

 2 Mike?

 3 MR. LESAGE: I just had a question, as

 4 far as, you know, and we had some pre-read that

 5 was from George Mason University, and the

 6 reference that was all, it kept referring to, it

 7 is a digital currency, and so I'm trying to get my

 8 head around, and it kind of made sense, I think it

 9 was a digital currency, but then as you were

 10 discussing -- looking at it, as opposed to swap,

 11 and changing that, the nuances around that.

 12 So what I could see is, you know, a

 13 digital currency in how the valuation and using it

 14 to purchase goods, linked in there, but I -- if

 15 you could speak a little bit more, because it

 16 wasn't clear to me, you know, as you referred to

 17 it being a digital commodity instead.

 18 MR. BRITO: Well, let me answer first,

 19 and I'm sure Houman would address that. So, it's

 20 obviously a digital currency in the sense that you

 21 know, there are things that are denominated either

 22 in Bitcoin prices or more likely, it's going to be
 138

 1 denominated in dollars and thence can have a

 2 conversion, and you can use it to pay, and the

 3 first mostly-widely-used application of Bitcoin is

 4 payments. And so it definitely is a digital

 5 currency.

 6 I think you can't stop but thinking of

 7 it as a digital currency. At the end of the day

 8 it's a token. You can use this token as currency,

 9 but there's no reason why you couldn't use that

 10 token as something else. You could use it to

 11 represent any number of things. And I think what

 12 Houman was getting at, and you can confirm this or

 13 not, it's that, because it is digital, these

 14 tokens are digital, this currency is digital, is

 15 programmable. So we could have a chance to --

 16 normally, if I give you a $100, I just take the

 17 $100-bill give it to you, now you have it, now I

 18 don't.

 19 With Bitcoin we can accomplish that for

 20 the first time online. I can now think of bitcoin

 21 without an intermediary between us, I give it to

 22 you, now you have it, now I don't. But we can
 139

 1 introduce complexity into that kind of

 2 transaction, so it's not a simple transfer, we can

 3 do something that says, give this bitcoin to Mike

 4 only if the price of Google is over X tomorrow.

 5 And only if that happens does it get transferred.

 6 So that's a possibility that is available to

 7 Bitcoin.

 8 MR. SHADAB: And just to elaborate, it

 9 certainly, it is a digital currency which is a lot

 10 more, and this is no doubt unique -- bitcoin is

 11 unique, it's hard to classify whether it's under a

 12 particular body of regulations, or just maybe be

 13 conceptually. But certainly in commercial

 14 transactions, financial transactions, I think that

 15 like any sort of software-enable transaction it

 16 can be used to sort of automate a lot of the

 17 processes, but what I think the block chain has,

 18 is that it makes the messages themselves be a type

 19 of contract performance. So lets say you take a

 20 loan through the block chain, then the borrower's

 21 funds could be sort of be automatically deducted

 22 from their account; whether it's monthly or
 140

 1 annually or quarterly, or whatever it is.

 2 At the same time, if the borrower were

 3 to say breaches a financial or a loan covenant,

 4 but the loan could be immediately accelerated

 5 which lenders typically have the right to do. In

 6 addition, lets say, the interest rate can change

 7 into a sort of performance pricing contract,

 8 again, sort of automatically, without the parties

 9 to engage in sort of active monitoring of

 10 contracts, legal enforcement, or sort of do any

 11 additional conduct, such as borrowers telling

 12 their lenders, hey, by the way, I just breached a

 13 loan covenant, and what are we going to do about

 14 it.

 15 Now, there is a downside to that. I

 16 don't think contract automation in every case, and

 17 all the way through is the best thing for markets.

 18 Certainly software providers already scale back

 19 and pull back an automation which is even further

 20 possible because human intervention and manual

 21 overrides are -- sometimes are often, in certain

 22 context, better than a completely automated sort
 141

 1 of contracts which pre-commit parties to arrange

 2 the scenarios that they may or may not know about

 3 ahead of time. But just to go back to that

 4 question, it's just -- it seems like the block

 5 chain name was more applications or functionality

 6 than transferring payments.

 7 COMMISSIONER WETJEN: Lenny.

 8 MR. NUARA: Thank you. So Mike, just on

 9 a more basic level as it relates to a swap. The

 10 swap here, or the swap can be pegged to an asset,

 11 and in our instance, the asset is Bitcoin. It's

 12 the Bitcoin that is -- we are getting the pricing

 13 data from a variety of exchanges worldwide, and we

 14 are establishing an index value to that, and so

 15 you could do a forward contract. You are doing

 16 the swap which instance is a forward, a

 17 non-deliverable forward based off that index value

 18 of the bitcoin. So you and I can agree today that

 19 -- you know, Bitcoin is trading today at 3.75, and

 20 you want to lock in at 3.50 because you -- you

 21 know, you have a large contract and you need to

 22 buy -- use a lot of it.
 142

 1 So you and I can lock in at 3.50 and

 2 then in a week, a month, or whatever, we look at

 3 the index, and thankfully the price is at 3.20.

 4 Well, then, you get the benefit of that, and I'll

 5 pay you the difference. Or if it's at 400, well

 6 then you are ahead and so you would just pay me

 7 back the difference. So it operates just like a

 8 regular NDF, but in this instance, the asset is

 9 that thing that we call bitcoin, it's the

 10 underlying asset. And in our application, 40.2,

 11 we labeled it just an asset.

 12 It's, a digital asset is one way of

 13 calling it, or -- but the point is that it's an

 14 asset that we use the index to establish what the

 15 price is. And that, we put up swap -- structure

 16 around that, and it's in the very simplest way.

 17 COMMISSIONER WETJEN: Okay. That's

 18 helpful. Dan?

 19 MR. ROTH: One of the issues discussed

 20 in the paper involves the degree of anonymity

 21 available in the Bitcoin Exchanges themselves, and

 22 the corresponding potential for money laundering
 143

 1 resulting from that. And I was just wondering if

 2 you could explain further the response in the

 3 paper to that concern. It didn't -- I wasn't sure

 4 that it was entirely satisfactory. I was just

 5 wondering what your thoughts are on that.

 6 MR. BRITO: Sure. So on the Bitcoin --

 7 so on the Bitcoin block chain, payments are

 8 pseudonyms, they are neither identified nor

 9 anonymous. Let me give you an example of that.

 10 So if you think about a cash transaction, a cash

 11 transaction is completely anonymous, alright. So,

 12 you and I can meet at Union Station and I give you

 13 $100, you give me a bicycle, we part our separate

 14 ways. I don't know your name, you don't know my

 15 name, there's no record of that transaction ever

 16 happening, and the time and place and amount,

 17 completely anonymous, that's cash.

 18 Then you have a credit card transaction

 19 that's completely identified. The credit card

 20 issuers know your name, my name, and there's a

 21 record kept of the amount and the date and the

 22 time, sometimes even the purpose of the
 144

 1 transaction, perfectly identified. Bitcoin

 2 transactions are in the middle, are between the

 3 two. So every Bitcoin transaction is recorded,

 4 the time, the amounts, and the two Bitcoin

 5 addresses from which, you know, payment went from

 6 address to the other. And that is recorded in the

 7 public ledger known as the block chain, and it's

 8 public.

 9 Anybody at any moment can go online and

 10 see all transactions that are happening right now,

 11 that have ever happened, and there's a perfect

 12 record of all transactions, available to you, to

 13 me, to law enforcement, to anybody. Now, these

 14 addresses are simply random -- essentially random

 15 strings of letters and numbers; are basically like

 16 an account number. So it's from account number X,

 17 Y, Z, 1, 2, 3, this amount at this time, to this

 18 other account number.

 19 So you have a perfect record, but it's

 20 not tied, necessarily to a particular identity.

 21 Now, you have exchanges, so if I want to acquire

 22 Bitcoin, I have dollars in my bank account, I need
 145

 1 to acquire -- I want to acquire Bitcoin so I can

 2 use something of one of BitPay's merchants. What

 3 I'll do, is I'll go to an exchange. I happen to

 4 use something called Coinbase, it's a very popular

 5 service. Coinbase complies with Finsense

 6 Regulations, and so do they AML and KYC so they

 7 identify who I am.

 8 At that moment I am tied, my identity is

 9 tied to an address. And so it's actually -- there

 10 are some other folks I could refer you to in the

 11 computer sciences, who are looking at how easy or

 12 difficult it is to de-anonymize Bitcoin

 13 transactions, as it turns out, it's a lot easier

 14 than some folks think it is.

 15 MR. BYUN:: Could I add a few comments

 16 to that, and hopefully shed some light. Yes,

 17 Bitcoin transactions are synonymous, or in your

 18 words, anonymous, but it's really, what you are

 19 really seeing is real time, almost like a ticker

 20 that goes across the NYSE ticker. You see IBM

 21 getting crossed 100 shares at $104, but you don't

 22 see on the ticker who is buying or selling that.
 146

 1 When you eventually pull that record and find the

 2 broker-dealer you can see who the broker dealer

 3 was.

 4 If you examine the broker dealer you

 5 could see who the ultimate party is. Similarly,

 6 when Jerry buys something at a merchant, BitPay,

 7 as a merchant processor, conducts the KYC on the

 8 merchant, our customer. So we want to know what

 9 do they sell, who owns the shop, what's their tax

 10 ID number, so we conduct a KYC on that.

 11 Coinbase is a money transmitter defined

 12 by Finsense Virtual Currency Guidelines that came

 13 out in March 2013, as a money service business,

 14 Coinbase as well as other money services

 15 businesses, the more traditional ones being

 16 Western Union, MoneyGram, must conduct KYC on

 17 their customer, which is the consumer or shopper

 18 in this case, Jerry.

 19 So I think it's a bit of a misnomer that

 20 it's completely anonymous, but I want to make sure

 21 that the ticker going across that is on the block

 22 chain, that is in real time, you don't know who is
 147

 1 on the underling -- who is making that

 2 transaction, underlining it.

 3 MR. NUARA: One last point on that, Tom

 4 Leahy mentioned earlier that Tera has to have an

 5 information sharing agreement with every exchange

 6 that provides pricing information to us, to

 7 establish index. Every one of those exchanges in

 8 that agreement has agreed to provide us the

 9 details and they all do AML, KYC on all of the

 10 people trading on each exchange. Exchanges that

 11 do not provide that information to us, cannot feed

 12 us information. So, we are not ascribing to

 13 anonymous trades that are happening out in the

 14 market place.

 15 COMMISSIONER WETJEN: Supurna?

 16 MS. VEDBRAT: I have just, you know, a

 17 basic question on the mining component of Bitcoin.

 18 Like, you know, if you could just, like, explain a

 19 little bit like what happens there, because it

 20 seems like from the pre- reading, you know,

 21 there's a limited number of bitcoins there, and

 22 then over the next like, you know, 120-odd years,
 148

 1 you know, they'll get unlocked based on computing

 2 power. Or, you know, for whatever transaction

 3 verification. So, I was interested to hear like,

 4 is there -- is that public information? And are

 5 you taking on variability of like -- you know,

 6 your bitcoin currency being devalued or diluted,

 7 unexpectedly? Because it's somewhat random, at

 8 least in the paper, that it's basically driven --

 9 you know, it's incentive-driven, so how many

 10 people are going to be, you know, trying to unlock

 11 these bitcoins.

 12 MR. BRITO: That's a great question.

 13 So, it's sort of a -- there's this idea that the

 14 processing power necessary to mine bitcoin is ever

 15 increasing. That's not actually the case, it's

 16 variable. And I'll tell you what the variability

 17 is. The Bitcoin network essentially looks to see

 18 how many bitcoins are being issued in a given time

 19 period. Usually it's two weeks. Every two weeks

 20 it looks, and this is -- when say it, it's very

 21 difficult because there's no central servers, it

 22 is all of the machines, collectively, connected
 149

 1 following a protocol.

 2 They look to see how many bitcoins have

 3 been issued. If it's more than should have been

 4 issued, the math problem that must be solved

 5 becomes harder. If less bitcoins have been issued

 6 than should, the math problem gets easier. But

 7 what ends up happening is that on average, a new

 8 block is mined every 10 minutes, and every 10

 9 minutes 25 new bitcoins are introduced into the

 10 money supply. And that is predictable.

 11 And so it's algorithmically

 12 self-regulated. You could -- if you had many more

 13 miners come in to the ecosystem, maybe for a few

 14 days you might get a bit more bitcoins than you --

 15 than average, but it would soon revert to 25

 16 bitcoins every 10 minutes. So it's

 17 self-regulating in that way. And if miners leave

 18 the space, the problem will get easier and, again,

 19 it would always revert to that predetermined

 20 algorithmic grade.

 21 MS. VEDBRAT: So who owns that protocol?

 22 MR. BRITO: It's open source, so it is
 150

 1 -- nobody owns it, it's an open source protocol

 2 anybody can use. I know, it's --

 3 MS. VEDBRAT: I mean, it just seems

 4 like, you know, you mentioned that, you know,

 5 there's a dependency of everyone being -- all

 6 these, you know, bitcoins being -- in a sense is

 7 being connected via this protocol, so just like I

 8 was trying to understand like somebody could join,

 9 how is that regulated?

 10 MR. BRITO: Yes.

 11 MS. VEDBRAT: If it's all open source,

 12 and nobody owns it.

 13 MR. BRITO: Great question, so --

 14 MS. VEDBRAT: And you kind of need some

 15 -- you know, some sort of validation or

 16 verification before you can join in.

 17 MR. BRITO: Very good question. So it

 18 is consensus-based, so if I try to join the

 19 network, and I set my -- I rewrite -- since it's

 20 open source, I can rewrite it say, I'm going to

 21 generate a bitcoin a minute. You know, a lot of

 22 bitcoins, and I join the network. The first thing
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 1 that -- so it's a peer-to-peer network, you join,

 2 first one pair next to you, one-to-one then you

 3 join other pairs; the first pair I join is going

 4 to shake my hand, look at me, look at -- that I am

 5 trying to do that, and is going to reject me.

 6 And so it's consensus-based. If you are

 7 not following the rules, the first thing that a

 8 Bitcoin client does, is look at the pair it's

 9 connecting to and see, are they following the same

 10 rules I am, if not, it's rejected. If they are

 11 following the same rules, you get to join in the

 12 peer-to-peer fashion.

 13 COMMISSIONER WETJEN: Doug?

 14 MR. HEPWORTH: Two questions. The first

 15 is, how do you know there is no fraud or back

 16 doors built into the initial code? And then the

 17 second is, if all the goody is coming from the

 18 block chain, why not just put dollars on the block

 19 chain?

 20 MR. BYUN:: Good questions. So how do

 21 you know that there isn't some secret back door?

 22 You know that the way -- so I presume that many of
 152

 1 these TVs that we are using here to day, and this

 2 projector, run on open source software, they run

 3 on Linux probably. So how do we know that Linux

 4 doesn't have a back door? The answer is, that all

 5 open source software by definition is open and

 6 public to scrutiny and review by anybody who wants

 7 to look at them.

 8 So, there are a couple ways that you

 9 could do this. In a completely trustless manner,

 10 what you do is, download the source code yourself,

 11 review it and verify for yourself there are no

 12 back doors. Now I'm not a computer programmer, I

 13 have to trust some of the world's, you know,

 14 foremost cryptographers who have looked at it, and

 15 have given it a thumbs up. But essentially it's

 16 open, and verifiable to anybody, so that's how you

 17 can -- it's actually probably -- I trust it more

 18 than I would trust a proprietary software systems,

 19 where you have to trust the company; that is the

 20 (inaudible), and there's no way to peek inside.

 21 Your question is, why not dollars? I

 22 would sort of turn it around and say, how would
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 1 you do that with dollars? You can imagine -- so

 2 you have to have a token that can be transferred

 3 between two different parties, right? That token,

 4 we call it a bitcoin, because there's a limited

 5 amount of them, the value floats, relative to the

 6 dollar; you could imagine the U.S. Government

 7 pegging the dollar to bitcoin, I doubt that will

 8 happen. And so that's how you would accomplish

 9 it, but there's no technical way, really, that you

 10 could technically peg it to a dollar without

 11 having some third party be the guarantor of that

 12 peg.

 13 But I think that's an excellent

 14 question, and I think it is possible, and we have

 15 a live example of Ecuador starting to do that now.

 16 So they actually want to tie their national

 17 currency using the Bitcoin protocol, and the

 18 validation system, and as you know -- as you may

 19 know, the Federal Reserve is looking to modernize

 20 their financial system ACH Fedwire, and I think it

 21 could be very feasible.

 22 I see it as -- you know, just like
 154

 1 Bitcoin itself, we are in the experimental stage.

 2 The Fed could do a small experiment, tie a few

 3 U.S. Treasuries to the Bitcoin protocol, tie it as

 4 a U.S. Treasury, and let that be exchanged and

 5 validated; because the core of Bitcoin is really

 6 just a validation system. The real power of the

 7 Bitcoin is to say that I no longer have that one

 8 bitcoin, I sent it to you, and now you have it.

 9 And all the miners are putting their power, and

 10 it's actually not a peer-to-peer, I think it's a

 11 competitive peer mining ecosystem.

 12 They are all trying to first calculate

 13 the winning formula, or output so that they can

 14 get the 25 bitcoin reward. So there's a lot of

 15 losing miners out there, that spend a lot of

 16 expensive electricity, but they don't win that

 17 reward, and they hurry up and try and win the next

 18 reward. So, you know, as some are unsuccessful,

 19 they are going to drop out. Some are going to be

 20 more successful, because they have more computing

 21 power, maybe they set up shop in Seattle where the

 22 electricity is cheaper. You know, it's a very
 155

 1 open market. But I think your question is a

 2 possible future use of bitcoins.

 3 MR. HEPWORTH: I think I was just asking

 4 if -- it seems to like it's a -- it's just a

 5 distributed ledger that disintermediates.

 6 SPEAKER: That's right.

 7 MR. HEPWORTH: So if you can have a

 8 token that represents the bitcoin, couldn't you

 9 have a token that represents the dollar on yet a

 10 separate block chain.

 11 MR. BRITO: And that is what Ecuador is

 12 doing, yes.

 13 MR. HEPWORTH: Okay. But it's not -- it

 14 sounded to me like they were tying it to the

 15 bitcoin. Did I mistake that?

 16 MR. BRITO: No. There are --

 17 MR. HEPWORTH: It's just a separate --

 18 it's a separate block chain?

 19 MR. BRITO: Yes. It's a separate copied

 20 or mimicked Bitcoin protocol because it's a free

 21 source -- it's a free open source code out there.

 22 Yeah.
 156

 1 MR. HEPWORTH: Thank you.

 2 CHARIMAN SERAFINI: David?

 3 MR. WEISBROD: So, the material that we

 4 were reading distinguishes -- talks about the

 5 market being unregulated or subject to existing

 6 regulation. Where do you see this between those

 7 two, and what are the differences between the

 8 American perspective and that of Europe, or are

 9 there any differences?

 10 MR. BRITO: That's a good question. So

 11 I think there's a misconception that Bitcoin is

 12 unregulated. I think since its invention, since

 13 day one, it's been regulated because it's subject

 14 to existing money transmission regulations and

 15 other consumer protection regulations, et cetera.

 16 So, it's definitely regulated in many different

 17 ways. I could go into detail about money

 18 transmission or consumer protection; if you'd like

 19 me to; or I won't.

 20 Vis-à-vis other countries, it varies.

 21 There are some countries that are friendlier,

 22 there are some countries that are more hostile, so
 157

 1 take for example, Russia is -- seems to be -- have

 2 a law preceding through its process that might

 3 make digital currencies legal. And I think that's

 4 largely because you are concerned about their

 5 capital controls.

 6 You have other countries, such as -- I'm

 7 blanking now -- Amsterdam, that's the city -- The

 8 Netherlands, thank you very much, that have been

 9 especially friendly. The U.K. Recently, the

 10 Chancellor of the Exchequer, announced that he

 11 wants -- you know, he wants the U.K. and London to

 12 be the capital of Bitcoin Finance, and he wants to

 13 initiate the proceeding to figure out how to open

 14 up that regulatory space there. So there seems to

 15 be a bit of competition right now to attract the

 16 investment and attract that innovation.

 17 MR. SHADAB: And I also think that from

 18 a regulatory perspective you have to think about

 19 different U.S., or whatever country regulators are

 20 going to view Bitcoin from their own perspective,

 21 from their wheelhouse, and they'll look at things

 22 that they are concerned about, in particular. So
 158

 1 maybe the Consumer Financial Protection Bureau

 2 that thinks specifically about consumer issues,

 3 the Security Exchange Commission will think about

 4 investment issues.

 5 So certainly from the SEC's perspective,

 6 whether you raise capital with dollars or dog

 7 biscuits, or bitcoin, you still have to abide by

 8 Securities' regulation, and we've seen a couple of

 9 relatively prominent, sort of frauds and Ponzi

 10 schemes that happen with bitcoin. And so coming

 11 back to the sort the Commission here, I think

 12 that, you know, I think that bitcoin is

 13 (inaudible) in a good way, that can still achieve

 14 the policy objectives while fostering really

 15 important innovations, in the marketplace through

 16 contract structure, and market structure as well.

 17 And I think on some level that

 18 regulators need to let Bitcoin developers sort of

 19 put their money or their bit coins where their

 20 mouth is. And say, listen, if you think -- if

 21 there is a system that you think then can sort of

 22 revolutionize or open financed, by making
 159

 1 disintermediated and decentralized, and cheaper

 2 and so forth, and faster, you should try it and

 3 see what sort of policy objectives in terms of

 4 consumer and investor protection and market

 5 protection you can achieve as well.

 6 MR. NUARA: Just one more point on that,

 7 the question of regulate or not. It's usually

 8 with regard to the underlying activity, to say do

 9 you regulate Bitcoin is like saying do we regulate

 10 the internet. It's what you do on the internet,

 11 or how you use that for some process and

 12 procedures, some money transfer, some buying of an

 13 asset, some e-commerce or otherwise. They don't

 14 just regulate the Internet, no one does, and the

 15 Internet is a protocol. Most people probably

 16 don't know it, but it's TCP/IP, it's the transport

 17 control protocol or Internet protocol.

 18 It's a protocol. Nobody in the room

 19 really cares about analyzing what the protocol is

 20 or who wrote it or otherwise, but it's long

 21 existed from -- original developed with government

 22 research money, and it's used reliably for a very
 160

 1 long time. Well, Bitcoin is another protocol, and

 2 so what do you regulate? Well, you might regulate

 3 an activity utilizing the protocol called Bitcoin.

 4 And then if it's for money transfer, well then,

 5 Finsense gets involved, it's for something else.

 6 If it's for swaps, it's regulation that

 7 CFTC has of a swap that utilizes it as an index

 8 that has a Bitcoin asset beneath it. So you can't

 9 say regulate Bitcoin so much as you say regulate

 10 activity that touches utilize, or otherwise is

 11 involved in the use of that protocol.

 12 COMMISSIONER WETJEN: Commissioner

 13 Giancarlo?

 14 COMMISSIONER GIANCARLO: So from the

 15 perspective of this regulator, to what extent

 16 would markets and swaps for bitcoin be susceptible

 17 to manipulation?

 18 MR. NUARA: So with regard to what we've

 19 at least established in the filing that we

 20 presented to the CFTC, we built a swap, that swap

 21 relies on an index of a series of underlying

 22 markets. Those underlying markets could
 161

 1 potentially be susceptible to manipulation, what

 2 we had to establish with the staff and ultimately

 3 in our self- certification, was that the numbers

 4 that we are pulling from these various exchanges

 5 will ultimately be curated, filtered. Take out

 6 anonymous behavior to prevent somebody from,

 7 essentially attempting to manipulate; either

 8 attempting and essentially meeting the requirement

 9 that it's not susceptible to manipulation.

 10 At two levels. First, is our market

 11 susceptible to manipulation? Every participant in

 12 our market governed by CFTC Rules, and Tera

 13 Exchange Rules, and we have our own surveillance,

 14 and we also have the surveillance of the NFA, to

 15 back us up with regard to market participants. We

 16 also survey the underlying markets that feed the

 17 prices into the index, and as I mentioned before,

 18 we have information sharing agreements with each

 19 of those markets.

 20 Those locations that we pull data from

 21 provide us access to individual traders if

 22 necessary, in positions that those traders may
 162

 1 hold to determine whether there is going to be

 2 manipulation taking place. As a matter of fact,

 3 the exchanges that we connect to are proud of the

 4 fact that they are following AML and KYC, and want

 5 robust marketplaces to address the very question,

 6 the question that you are asking which is, is

 7 there manipulation happening?

 8 They want a sounder marketplace. They

 9 are actually achieving it in their marketplaces,

 10 and then we can take that data and build the swaps

 11 off of that.

 12 COMMISSIONER WETJEN: So you have these

 13 information sharing agreements between the SEF,

 14 TeraExchange and the cash markets, that are

 15 feeding the prices?

 16 MR. NUARA: Correct.

 17 COMMISSIONER WETJEN: But what other

 18 surveillance- type functions do you, the SEF,

 19 actually perform? So you are getting reported

 20 information, you are getting a right of access of

 21 some sort, but how, otherwise, are you surveilling

 22 these individual cash markets around the globe?
 163

 1 MR. NUARA: We surveille those feeds and

 2 then watch the prices on the feeds, we use

 3 technology to watch the price action, and when we

 4 find anonymous behavior it's filtered out in the

 5 index automatically, but it also prompts the phone

 6 call for us to make inquiries. During the

 7 analysis period between March and when we

 8 ultimately filed, there was activity on one of the

 9 exchanges, for example, that essentially looked

 10 like someone could be doing something. It

 11 triggered flares -- you know, flags on our system,

 12 to advise us, hey, lookout, go look at this

 13 behavior, which we did. We made the phone calls,

 14 spoke to the technology personnel and also spoke

 15 to the underlying controllers of the accounts.

 16 They said, no, this is -- you know, we

 17 know these players, there's nobody moving the

 18 market in a particular way, there's no wash

 19 trades, no this, no that, so we have that

 20 information at our disposal so that we can

 21 constantly monitor.

 22 COMMISSIONER WETJEN: Commissioner
 164

 1 Giancarlo, anything else? I think that's going to

 2 bring the meeting to a close. We've gone over

 3 time. Thank you, again, very, very much. Just

 4 one last point I'd like to make on Bitcoin.

 5 Obviously there's relevancy here in taking up this

 6 topic today, in light of TeraExchange's filing as

 7 you mentioned before, we expect that we are going

 8 to receive other filings from other platforms as

 9 well, in the very, very near future.

 10 I was interested to hear in some of the

 11 -- interested to hear some of the remarks by the

 12 Professor about these applications, that could be

 13 made of this technology, in a way that's actually

 14 useful to our space, the derivatives space. And

 15 it just seems like based on what I've learned some

 16 of those applications could be so compelling that,

 17 you know, it would be a real mistake for us as a

 18 Commission to not make sure we are staying on top

 19 of these developments.

 20 Not because we want to do other things

 21 -- anything than understand the developments,

 22 because it seems like this protocol, the Bitcoin
 165

 1 protocol or something like it, is very, very

 2 likely here to stay. So, the more information and

 3 education we can do on this now, in trying to stay

 4 somewhere, an appropriate spot on the curve, the

 5 learning curve, it seems to be -- seems to be a

 6 very sensible thing to do.

 7 So I thank all the Panelists for being

 8 here today; very, very helpful, very useful. Tom,

 9 thank you for representing the CFTC Staff; and

 10 I'll turn it back over to Ted.

 11 CHARIMAN SERAFINI: No. I think we are

 12 good. I want to thank everybody for coming. I

 13 want to give a special thanks to our staff, Margie

 14 Yates and her team, for doing all this work that

 15 goes on behind the scenes. It's a big lift for

 16 us, but I appreciate everyone coming today, and as

 17 the DFO and Temporary Chair, I now adjourn the

 18 meeting.

 19 (Whereupon, at 5:05 p.m., the

 20 PROCEEDINGS were adjourned.)

 21 CERTIFICATE OF NOTARY PUBLIC

 22 DISTRICT OF COLUMBIA
 166

 1 I, Stephen K. Garland, notary public in

 2 and for the District of Columbia, do hereby certify

 3 that the forgoing PROCEEDING was duly recorded and

 4 thereafter reduced to print under my direction;

 5 that the witnesses were sworn to tell the truth

 6 under penalty of perjury; that said transcript is a

 7 true record of the testimony given by witnesses;

 8 that I am neither counsel for, related to, nor

 9 employed by any of the parties to the action in

 10 which this proceeding was called; and, furthermore,

 11 that I am not a relative or employee of any

 12 attorney or counsel employed by the parties hereto,

 13 nor financially or otherwise interested in the

 14 outcome of this action.

 15

 16

 17 (Signature and Seal on File)

 18 -----------------------------------

 19 Notary Public, in and for the District of Columbia

 20 My Commission Expires: May 31, 2018

 21

 22