UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 SECURITIES AND EXCHANGE COMMISSION 

 JOINT CFTC-SEC STAFF ROUNDTABLE ON IMPLEMENTATION 

 PHASING FOR FINAL RULES FOR SWAPS AND 

 SECURITY-BASED SWAPS UNDER TITLE VII OF THE 

 DODD-FRANK WALL STREET REFORM AND CONSUMER 

 PROTECTION ACT 

 Washington, D.C. 

 Tuesday, May 3, 2011 
 2 

 1 A G E N D A 

 2 Panel One: Implementation of Clearing Mandates 

 3 KIM ALLEN 

 SEC 

 4 

 JOHN RAMSAY 

 5 SEC 

 6 EILEEN DONOVAN 

 CFTC 

 7 

 JOHN LAWTON 

 8 CFTC 

 9 MARK COX 

 CME Group 

 10 

 CHRIS EDMONDS 

 11 ICE Trust 

 12 DAN MAGUIRE 

 LCH.Clearnet 

 13 

 WILLIAM "BILL" DeLEON 

 14 PIMCO 

 15 JOSEPH BUTHORN 

 BNP Paribas 

 16 

 DARCY BRADBURY 

 17 D.E. Shaw & Co. 

 18 JOHN NICHOLAS 

 Newedge USA 

 19 

 SAM PETERSON 

 20 Chatham Financial 

 21 MICHAEL GREENBERGER 

 University of Maryland School of Law 

 22 
 3 

 1 A G E N D A 

 2 SHARON BROWN-HRUSKA 

 NERA Economic Consulting 

 3 

 GARY O'CONNOR 

 4 International Derivatives Clearing Group 

 5 Panel Two: Transaction Processing for Swaps and 

 Security-Based Swaps 

 6 

 GREGG BERMAN 

 7 SEC 

 8 CATHERINE MOORE 

 SEC 

 9 

 RICK SHILTS 

 10 CFTC 

 11 JOHN LAWTON 

 CFTC 

 12 

 RICK McVEY 

 13 MarketAxess 

 14 GEORGE HARRINGTON 

 Bloomberg, LP 

 15 

 HENRY HUNTER 

 16 MarkitSERV 

 17 JOHN OMAHEN 

 SunGard 

 18 

 YVES DENIZE 

 19 TIAA-CREF 

 20 MARTY CHAVEZ 

 Goldman Sachs 

 21 

 SHAWN BERNARDO 

 22 Tullett Prebon Americas 
 4 

 1 A G E N D A 

 2 JAMIE CAWLEY 

 Javelin Capital Markets, LLC 

 3 

 PAUL CUSENZA 

 4 Nodal Exchange 

 5 GARRY O'CONNOR 

 International Derivatives 

 6 

 Panel Three: Implementation of Data Reporting and 

 7 Dissemination Rules 

 8 MICHAEL GAW 

 SEC 

 9 

 TOM EADY 

 10 SEC 

 11 DAVID TAYLOR 

 CFTC 

 12 

 RICK SHILTS 

 13 CFTC 

 14 MARISOL COLLAZO 

 DTCC 

 15 

 JEFF GOOCH 

 16 MarkitSERV 

 17 RAF PRITCHARD 

 TriOptima North America 

 18 

 R.J. CUMMINGS 

 19 ICE Trust 

 20 JIRO OKOCHI 

 Reval 

 21 

 BILL THUM 

 22 The Vanguard Group 
 5 

 1 A G E N D A 

 2 MERRITT THOMAS 

 Barclays Capital 

 3 

 JIM MORAN 

 4 CME Group 

 5 STEVE JOACHIM 

 FINRA 

 6 

 SHAWN BERNARDO 

 7 Tullet Prebon 

 8 WALLY TURBEVILLE 

 Better Markets 

 9 

 KARLA McKENNA 

 10 International Organization for 

 Standardization 

 11 

 Panel Four: Considerations with Regard to End 

 12 Users 

 13 JOHN LAWTON 

 CFTC 

 14 

 RICK SHILTS 

 15 CFTC 

 16 GREG BERMAN 

 SEC 

 17 

 PETER CURLEY 

 18 SEC 

 19 PETER SHAPIRO 

 Swap Financial Group 

 20 

 WILLIAM DONOVAN 

 21 U.S. Steel Pension Fund 

 22 HEATHER SLAVKIN 

 AFL-CIO 
 6 

 1 

 2 

 3 

 4 

 5 

 6 

 7 

 8 

 9 

 10 

 11 

 12 

 13 

 14 

 15 

 16 

 17 

 18 

 19 

 20 

 21 

 22 
 7 

 1 A G E N D A 

 2 WALLY TURBEVILLE 

 Better Markets, Inc. 

 3 

 RUSSELL WASSON 

 4 National Rural Electric Cooperative 

 Association 

 5 

 JOSEPH GLACE 

 6 Exelon Corporation 

 7 SEAN COTA 

 Cota & Cota 

 8 

 JIRO OKOCHI 

 9 Reval 

 10 VERETT MIMS 

 The Boeing Company 

 11 

 SAM PETERSON 

 12 Chatham Financial 

 13 Also Present: 

 14 CHAIRMAN GARY GENSLER 

 CFTC 

 15 

 16 * * * * * 

 17 

 18 

 19 

 20 

 21 

 22 
 8 

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

 2 (9:35 a.m.) 

 3 MR. LAWTON: Good morning. Welcome to 

 4 day two of the Roundtable on Implementation 

 5 Phasing for Rulemakings under Title VII of the 

 6 Dodd-Frank Act. 

 7 I'm John Lawton of the Division of 

 8 Clearing Intermediary Oversight of the CFTC. I 

 9 want thank again all of the panelists for 

 10 participating, as well as thanking my colleagues 

 11 from the SEC. 

 12 Before we get started, I should repeat a 

 13 couple of points that were made yesterday for 

 14 those of you who weren't here yesterday. 

 15 First, the purpose of this roundtable is 

 16 to address issues regarding the sequencing of 

 17 implementation. It's not to discuss the merits of 

 18 any individual proposal. Staff in both agencies 

 19 have been reviewing and will continue to review 

 20 all the comments on the substantive issues related 

 21 to each of the proposed rulemakings. 

 22 Second, I also want to point out that 
 9 

 1 this roundtable is not the only opportunity to 

 2 comment on implementation issues. The agencies 

 3 welcome written comments on these matters from the 

 4 members of the public. 

 5 Finally, I should just address quickly a 

 6 couple of housekeeping items. Please note that 

 7 this meeting is being recorded and a transcript 

 8 will be made public. Before speaking, please 

 9 press the button on the microphone and a red light 

 10 will come on. When you finish, please press the 

 11 button again to turn the microphone off. 

 12 Okay, now I'd like to turn it over to my 

 13 colleague, John Ramsay from the SEC, for a few 

 14 opening remarks. 

 15 MR. RAMSAY: Thanks, John. I don't have 

 16 much to say; I just, first of all, also want to 

 17 express my thanks to the staff of both agencies 

 18 for helping you put this together, including Kim 

 19 Allen, my colleague from the Division of Trading 

 20 and Markets to my left. We look at the clearing 

 21 mandate as at that heart of Title VII reforms, and 

 22 we recognize how important it is to the benefits 
 10 

 1 of central clearing that the mandatory clearing 

 2 determination in particular is introduced in a way 

 3 that appropriately takes account of the needs of 

 4 end-users, the capacity and capabilities of 

 5 clearing agencies, and the general market 

 6 environment as it evolves over time. It's really 

 7 a terrific group of analysts here, I'm very 

 8 impressed by the group we've assembled, and I look 

 9 forward to hearing what they have to say. 

 10 MR. LAWTON: Okay, let's get started 

 11 simply by going around the table and having 

 12 everyone introduce themselves. 

 13 MR. COX: Hi, my name is Mark Cox. I 

 14 work in the CME Clearinghouse and I run the 

 15 Clearing Solutions Group in New York. 

 16 MR. EDMONDS: Chris Edmonds, president 

 17 of ICE Trust. 

 18 MR. MAGUIRE: Danny Maguire, 

 19 LCH.Clearnet. 

 20 MR. DeLEON: Bill DeLeon, global head of 

 21 Portfolio Risk Management, PIMCO. 

 22 MR. BUTHORN: Joseph Buthorn, head of FX 
 11 

 1 Prime Brokerage, BNP Paribas. 

 2 MS. BRADBURY: I'm Darcy Bradbury from 

 3 the D.E. Shaw Group. 

 4 MR. O'CONNOR: I'm Garry O'Connor, IDCG. 

 5 MS. BROWN-HRUSKA: Sharon Brown-Hruska, 

 6 National Economic Research Associates. 

 7 MR. GREENBERGER: Michael Greenberger, 

 8 University of Maryland School of Law. 

 9 MR. PETERSON: Sam Peterson, Chatham 

 10 Financial. 

 11 MR. NICHOLAS: John Nicholas, Newedge, 

 12 USA. 

 13 MS. DONOVAN: Eileen Donovan, CFTC. 

 14 MR. LAWTON: Thanks, everyone. Okay, 

 15 yesterday's discussion basically focused on 

 16 infrastructure and market participants. Today's 

 17 focus is on transaction compliance. CFTC did hand 

 18 out a brief concept paper which identifies six 

 19 aspects of transaction compliance: The clearing 

 20 requirement, the trading requirement, real-time 

 21 public reporting, reporting to data repositories, 

 22 and swap dealer requirements, such as 
 12 

 1 documentation confirmation evaluation and position 

 2 limits. A theme that we like to see in today's 

 3 discussion would be the extent to which these 

 4 topics can be addressed in parallel with 

 5 sequencing within each group. 

 6 Okay, let's start out with a question, 

 7 basically sort of a broad question. What types of 

 8 sequencing makes sense for application of a 

 9 clearing mandate? For example, within a group of 

 10 swaps, should a mandate be phased in by the type 

 11 of market participant? 

 12 MR. DeLEON: Hi, this is Bill DeLeon. I 

 13 think it makes sense to have phase in of 

 14 sequencing by product type by both the products 

 15 that are being cleared, as well as the 

 16 participants. They're going to be various 

 17 different roadblocks associated with clearing in 

 18 terms of setting things up and infrastructure, and 

 19 it's important to realize that the ability of 

 20 different players in the market to achieve these 

 21 setup and infrastructure issues will proceed at 

 22 different paces. In addition to that, it's 
 13 

 1 important to note that one of the goals of 

 2 Dodd-Frank is to reduce systemic risk and by 

 3 starting with the larger players, who are more 

 4 capable, I think you'll get more risk reduction 

 5 and kinks out of the system. 

 6 So, starting with swap dealers then 

 7 major swap participants and then moving to 

 8 end-users, either high-risk or low-risk because 

 9 you'd find them in your rulings, would be the most 

 10 beneficial sequencing in terms of getting things 

 11 working and running. I think it's also important 

 12 to note though that you don't want to have too 

 13 much of a big bang effect where everyone is forced 

 14 to go on a certain date given some of the 

 15 implementation issues in terms of building the 

 16 pipes, getting accounts approved, and the 

 17 bottlenecks because if you think about how the 

 18 system works, if you look at the dealers, there's 

 19 a small, limited number relative to the number of 

 20 accounts in the system. 

 21 If you look at major swap participants, 

 22 we expect that to be a small number, and then 
 14 

 1 everybody else would be quite big. The issues 

 2 that are going to arise are if you try to funnel 

 3 all of the end-users in at once through the 

 4 clearing brokers and then through the CCPs, you'll 

 5 have massive bottlenecks and contention problems. 

 6 So, you'll need to have time for people to get 

 7 everything set up before you flip the switch and 

 8 say you need to clear. So, I think it does make 

 9 sense to sequence that, as well, in terms of 

 10 giving people at time to do that from that 

 11 standpoint, but it does make sense to answer your 

 12 question to sequence the different groups. 

 13 MR. EDMONDS: I would add to that and 

 14 agree most everything offered up. I would think 

 15 if you look at it not only from the legislative 

 16 intent but from the rule set, if we were to attack 

 17 this from the standpoint of what was most 

 18 systemically important first, I think that 

 19 encompasses what Bill put out as those who are 

 20 most prepared for it today based on size and 

 21 scope, then have a volunteer period for those who 

 22 want to be early adopters of that that are not 
 15 

 1 captured in that systemic realm that you made a 

 2 find in the rule set, and then finally end up with 

 3 the final mandate that everyone needs to meet at 

 4 some point in time. But I think the lessons we 

 5 learn not only by getting the biggest total 

 6 systemic risk into the solution first and then 

 7 those who volunteer to come along the way will 

 8 give us the right roadmap for any tweaks that 

 9 might be necessary as we move forward. 

 10 MR. NICHOLAS: I think one overriding 

 11 concern or issue that I think the agencies should 

 12 keep in mind when discussing sequencing and 

 13 particularly phasing in sequencing by market 

 14 participant is to be careful not to advantage or 

 15 disadvantage any particular types of participants. 

 16 I mean, I think to the extent that certain 

 17 participants or categories are permitted to get 

 18 into the mix earlier, customers will most likely 

 19 gravitate towards those type of entities. So, I 

 20 think it's important to keep the competitive 

 21 landscape in mind. 

 22 MR. MAGUIRE: Hi, Dan. Agree with both 
 16 

 1 Bill and Chris there on the participant side. 

 2 Talking more about the product side of 

 3 things in terms of how we see sequence or propose 

 4 the sequence mandating there, I think again, so, 

 5 yes, they were broken into sort of four different 

 6 kind of areas. 

 7 One is making our product distinction 

 8 one size doesn't fit all. So, you have to move 

 9 the credit markets where the trades were more 

 10 standard, maturity standard coupon so they're a 

 11 little bit more standardized, interest rate swap 

 12 market is a lot more idiosyncratic, so less 

 13 standard. So, I think the Commission has got a 

 14 tremendous job ahead of it in terms of defining 

 15 what is actually going to be mandated, and I think 

 16 over-prescription will allow for loopholes and 

 17 equally under-prescription may allow for 

 18 loopholes, as well. So, we need to be careful how 

 19 we define that. 

 20 Giving an example, we have probably over 

 21 50 percent of the local interest rate swap markets 

 22 for our system, and we've done some analysis 
 17 

 1 around that, and using just 9 standard fields on 

 2 there, an interest rate swap, we find that only 5 

 3 percent of those trades actually match all these 

 4 same economic fields. If we take more of those 

 5 standard fields that the further up the scope you 

 6 go, the less match you get. So, it's true that 

 7 the interest rate swap market is not standardized 

 8 in terms of what we see existing today. 

 9 In terms of the other aspects, we've 

 10 also got to consider, I think, the higher liquid, 

 11 higher volume type products first in terms of 

 12 reducing systemic risk, so liquidity and 

 13 participants are really a key part of that, and I 

 14 guess similar to the points made yesterday by 

 15 myself and others, we think it's important that we 

 16 tie in with a lot of the broader international 

 17 jurisdictions here to have a level playing field. 

 18 CPSS-IOSCO and I are coming up with legislation 

 19 rules, and we think as an organization it would be 

 20 a good thing if we're aligned across the different 

 21 jurisdictions to ensure that similar products are 

 22 offered in similar jurisdictions. 
 18 

 1 And then I guess, finally, we don't 

 2 necessarily want to -- I think there was another 

 3 point made yesterday, as well, around going as 

 4 fast as the slowest person. We think competition 

 5 and innovation in clearing should be welcomed to 

 6 get more onto the clearing platform. So, we want 

 7 to make sure that there are enough incentives to 

 8 all of the participants, ICMs, clients, DCOs that 

 9 as they bring new products safely to the market 

 10 for clearing that they're not stymied by maybe 

 11 being the only people that do that. 

 12 MR. O'CONNOR: I think with respect to 

 13 sequencing or fading in, I think it really, as 

 14 you've probably experienced with the discussions 

 15 that you've had with market participants over the 

 16 past 6 to 12 months that it's really the only 

 17 practical solution to getting this done. I think 

 18 that if we wait until we have the perfect solution 

 19 that covers all product for all people, we may 

 20 never get started because that's a very, very 

 21 heavy lift. So, I think it's sensible that we 

 22 think about phasing in. I think the phasing in by 
 19 

 1 product and phasing in by participant type make a 

 2 great deal of sense. I think that comments about 

 3 keeping competition open, I don't think there's 

 4 anything in your suggestion that would prevent 

 5 somebody from participating, whether they wanted 

 6 to be an early-adopter or not. So, I don't 

 7 necessarily see that as a risk with the phased-in 

 8 approach. 

 9 Now, we feel that within implementing 

 10 Title VII is a complex question, so nobody should 

 11 think that the answer wouldn't be complex, as 

 12 well, and I think that you need to be somewhat 

 13 nuanced with how you think about phasing in. So, 

 14 in addition to participant type and product type, 

 15 I think that it makes sense to give people hurdles 

 16 that they need to hit over time. So, in an 

 17 initial period, there's a certain floor in terms 

 18 of the percentage of your portfolio that you need 

 19 to contribute to clearing, and that grows over 

 20 time. I think that there are some significant 

 21 advantages in taking that approach in that we 

 22 heard yesterday that there is a lot of 
 20 

 1 infrastructure being built and there's a lot that 

 2 that infrastructure can do today, but as people 

 3 have already mentioned, there would be bottlenecks 

 4 if everybody tried to utilize that infrastructure 

 5 at once and that infrastructure is not yet at full 

 6 scale, despite the fact that many parts of it are 

 7 operationally ready. 

 8 So, if we begin by phasing in with a 

 9 percentage of people's portfolio, it allows us to 

 10 get started without stressing the current 

 11 infrastructure beyond its capability, and I think 

 12 it'll also give the industry the opportunity to 

 13 fully flesh out offerings. I think one of the 

 14 concerns about people with large portfolios of OTC 

 15 derivatives is the mandate and what it will 

 16 capture. So, you don't want to get into a 

 17 position where I have a large portfolio of OTC 

 18 derivatives, I mandated to clear a portion of 

 19 that, and the net result is that I have more 

 20 counterparty exposure at the end of it rather than 

 21 less. So, there are counterparty exposures 

 22 residual in my un-cleared portfolio that my clear 
 21 

 1 portfolio was previously offsetting. And I think 

 2 that if you phase in portions of portfolios, you 

 3 allow people to manage that process somewhat so 

 4 that they're not in position and you're giving the 

 5 industry to fully flesh out product offerings so 

 6 that when you do get to full mandate, more of 

 7 somebody's portfolio is available for clearing. 

 8 So, I think from our discussions, I 

 9 think there's industry support for that type of 

 10 approach, but, again, I think it's a complicated 

 11 problem that's going to be a complicated answer, 

 12 and we need to be phasing is definitely the only 

 13 way that the industry is going to be able to 

 14 achieve this on a timely basis, but I think we 

 15 need to be nuanced about how we approach. 

 16 MR. COX: I might use as a guide what 

 17 has already been cleared in an existing solution 

 18 for the major clearinghouses that credit clearing 

 19 for buy side and sell side has been in effect for 

 20 almost 18 months, interest rates are clearing 

 21 initiatives for major buy side participants and 

 22 sell side participants have been in effect since 
 22 

 1 October of last year, and both of those solutions 

 2 have been very deliberately and very thoughtfully 

 3 developed in collaboration with major participants 

 4 from both the sell side and the buy side. So, 

 5 maybe using that as a guide, you would meet 

 6 Garry's concerns about making sure that you keep 

 7 in mind competitive interest as you phase in the 

 8 mandate, but also making sure it's a deliberate 

 9 and thoughtful process about what's possible to 

 10 clear and what the impact would be. 

 11 MR. PETERSON: Just to follow-up maybe 

 12 on the concept of the competitive landscape and 

 13 how that ties into all of this, if people want to 

 14 offer any thoughts on dealing generally with the 

 15 issue of access, broader open access to clearing. 

 16 Both of our agencies in our various role proposals 

 17 to date have said a lot about, put a lot of 

 18 proposals relating to promotion of greater access, 

 19 and sometimes that's tied up with dealing with 

 20 potential conflicts of interest. 

 21 How do people see the connection between 

 22 a clearing mandate and the open access issue, or 
 23 

 1 to put it a different way, are there particular 

 2 markers or things that we should expect to see or 

 3 that the regulators should push the clearing 

 4 agencies to have in place before the clearing 

 5 mandate or clearing mandates begin? Does anybody 

 6 have any -- 

 7 MS. BRADBURY: Yes, I guess as I listen 

 8 to the conversation about mandating and how to 

 9 phase that in, I come at it more from the 

 10 perspective that you've raised, which is we really 

 11 like access to clearing. I know there are a lot 

 12 of people who are very concerned about being 

 13 forced to clear. I think we actually have kind of 

 14 the opposite perspective, which is that we would 

 15 like access to clearing. And I worry when you 

 16 talk about phasing in by types of customers, for 

 17 example, or types of entities, people who are 

 18 ready to clear today and who would like to have 

 19 access once the rules are all established may be 

 20 disadvantaged and not be able to do that. 

 21 I mean, at the end of the day, clearing 

 22 your liquid swaps has advantages for customers. I 
 24 

 1 mean, we'll be able to compress trades more 

 2 easily, we'll have less counterparty risk, we'll 

 3 have fewer operational headaches. I mean, there's 

 4 a lot of advantages to central clearing for the 

 5 buy side, and I think we lose sight of that 

 6 sometimes because we're so focused on what we have 

 7 to make people do at the open of an access issue 

 8 is extremely important to us, although buy side 

 9 clearing is sort of theoretically available now. 

 10 It's actually used very rarely. There 

 11 are very few contracts that are actually open to 

 12 buy side participants, and so, I think opening up 

 13 a broader range of contracts for buy side 

 14 participants, once the margin rules are all kind 

 15 of sorted out, and, obviously, I think market 

 16 participants need some certainty about those 

 17 things, that will be tremendous advantage to us 

 18 because we'll all understand the rules and how 

 19 they'll work. And then the rules of operation and 

 20 things like portability of trades, all of those 

 21 kind of technical things that have to happen that 

 22 will really make it much easier for buy side 
 25 

 1 participants to participate. And we understand 

 2 not everybody is going to want to do that day one, 

 3 but if you phase it in by type of client, you may 

 4 actually impede access for people who are ready. 

 5 MR. GREENBERGER: Yes, I think the 

 6 question you posed about that there is a 

 7 distinction between free and open access 

 8 requirements that come from conflict of interest 

 9 and ownership requirements and the phasing in 

 10 issue. First of all, I want to say, generally, 

 11 I'm supportive of phasing in. I think this is an 

 12 answer to a lot of the complaints that this is all 

 13 moving too fast and people won't be ready. The 

 14 statute contemplates phasing in and I think 

 15 phasing in is important, and I endorse your 

 16 emphasis on that in the concept paper. 

 17 Secondly, I am concerned. I think you 

 18 have a tightrope to walk in that if you just let 

 19 you pose it in terms of who has rulebooks, who 

 20 have processes in place, if you just on day one 

 21 say, okay, these institutions that are ready can 

 22 go and wait for everybody else, I think that will 
 26 

 1 have an adverse, competitive impact that is 

 2 unrelated to conflict of interest and ownership. 

 3 I think you do have to give new entrants some 

 4 degree of time to catch up to the existing market. 

 5 I'm sympathetic to D.E. Shaw's concern 

 6 that some people are ready and want to get going. 

 7 But what the buy side is going to find out, 

 8 they're going to have very few competitive options 

 9 and an ability to compare pricing and competence 

 10 if you just start with the people that are ready 

 11 to go. I think the voluntary market that's been 

 12 established demonstrates that the clearing 

 13 facilities that get out first tend to dominate the 

 14 market, and so, whatever the ownership 

 15 requirements are, you've got a competitive 

 16 disadvantage. On the other hand, you don't want 

 17 to wait too long because you've got people who are 

 18 anxious to use the clearing and the more things 

 19 that are put into clearing eliminates systemic 

 20 risk. 

 21 The other thing I would say about this 

 22 idea that you're going to have bottlenecks and 
 27 

 1 overload is the transition rules in 723 

 2 contemplate that all existing swaps don't have to 

 3 be cleared and all swaps that are entered into 

 4 before the clearing rules are finalized don't have 

 5 to be cleared. Now, there may be voluntary 

 6 clearance of those things, but the clearance 

 7 requirements began after the rules are in place, 

 8 which I think is another reason why in this 

 9 tightrope walking you're going to do, there is an 

 10 importance to put the clearing in place. 

 11 Finally, I think this idea that 

 12 everybody around the world has to start at the 

 13 same time is going to be exactly the kind of delay 

 14 that D.E. Shaw is worried about. If we have to 

 15 wait, everybody's going to be waiting for each 

 16 other, and it's going to slow down the 

 17 implementation of these rules. My analysis is the 

 18 Dodd-Frank, while not adopted uniformly around the 

 19 world, has been a template for the European Union 

 20 and other regulators to decide how they're going 

 21 to operate. I think a lot of the European Union 

 22 agent regulators are looking to the CFTC on how 
 28 

 1 they're going to set this up. And I think both 

 2 the comprehensiveness of the CFTC's regulation as 

 3 well as its getting so much input from the markets 

 4 as to how this clearing facility should be set up 

 5 demonstrates to me that this will be a leader in a 

 6 regulatory market and we shouldn't wait around to 

 7 see what everybody else is going to do. 

 8 MR. BUTHORN: I just want to add a 

 9 couple comments. I'm extremely sympathetic to 

 10 that point of view. I think BNP is one of those 

 11 organizations that is trying to get into the 

 12 clearing business after not having had one for the 

 13 proceeding period of time. For us and I think for 

 14 many banks, we oftentimes are the bottlenecks of 

 15 the process because we have very high threshold 

 16 for due diligence and documentation that we 

 17 oftentimes have to cross. And that combined with 

 18 many of the new rules within Title VII, in 

 19 particular business conduct and others, are making 

 20 that threshold higher, which is fine. We're 

 21 enthusiastic about doing that and we will. But 

 22 one thing I think to consider in terms of your 
 29 

 1 sequencing question is how can you, in effect, 

 2 simplify that burden so that we can accelerate our 

 3 implementation process? 

 4 And one way to do that, I think, is to 

 5 allow us to focus on certain classes of clients 

 6 first as opposed to others because if we're trying 

 7 to deal with the whole world, real money managers, 

 8 hedge funds, insurance companies, GSEs, it just 

 9 expands the problem that we're trying to solve, 

 10 whereas if we can focus on it from a (inaudible) 

 11 and due diligence perceptive one set of clients 

 12 first, we can relieve some of our internal 

 13 bottlenecks, accelerate implementation, and become 

 14 more competitive with banks that are very much in 

 15 that space already where we are currently trying 

 16 to catch up. 

 17 MR. DeLEON: I'd just like to comment on 

 18 a few of the comments here. While I agree with 

 19 many of them in concept, there are some things 

 20 that I think we have a slightly different view on 

 21 at PIMCO, and I think that are important to think 

 22 about in terms of phasing. 
 30 

 1 One of the things that have come up is 

 2 sort of the concept of phasing by dealer type, and 

 3 the issue associated with breaking it down further 

 4 than the three that have been defined by the 

 5 regulatory agencies is that there's a fiduciary 

 6 responsibility for each money manager or end-user 

 7 to treat all of its clients in a similar way. So, 

 8 prescribing percentage hurdles or different type 

 9 of cutoffs based on size is something that goes 

 10 against that generic rule that we have in our 

 11 fiduciary responsibility and creates a conflict. 

 12 So, as someone who's looking to clear and wants to 

 13 clear, we want the ability to decide when it is 

 14 best to clear, whether it's the beginning, middle, 

 15 or end, and being forced to do it other than by 

 16 the end date, it creates issues because you may be 

 17 favoring certain clients or disadvantaging 

 18 clients. 

 19 The other point that Darcy brought up is 

 20 there are a lot of commercial things going on 

 21 pre-Dodd-Frank that Dodd-Frank mimics or is 

 22 improving upon, so there are commercial reasons 
 31 

 1 for wanting to clear sooner than later, especially 

 2 for levered funds and for other vehicles. 

 3 For example, many levered funds or 

 4 certain accounts need to post what's known as 

 5 initial margin, which is standard in futures 

 6 clearing, and that would be in CCPs and is also 

 7 going to be mandatory for non-cleared trades after 

 8 the prospective date is set. A lot of hedge funds 

 9 and other players are forced to post initial 

 10 margin already. This is done on a unilateral 

 11 basis and not necessarily fully segregated or 

 12 mandated or controlled by a third party. The 

 13 dealers set what they think is initial margin, 

 14 which is always a fair statement because it's a 

 15 unilateral discussion. Moving those positions to 

 16 central clearing would be a benefit to many 

 17 players that have that situation and I think that 

 18 was Darcy's point, not just before, but there's an 

 19 incentive for those type of accounts, and PIMCO 

 20 has some of those, to want to move sooner or 

 21 later, as well. 

 22 And the only other thing I would add 
 32 

 1 about the sequencing thing, which hasn't been 

 2 brought up, is the fact that there's also now 

 3 rules proposed about at a certain date if things 

 4 are not cleared, you will need to post initial 

 5 margin on a unilateral basis for end-users to swap 

 6 dealers. As a result of that, there's an 

 7 incentive to want to clear sooner or be able to 

 8 clear sooner because that is, as Garry pointed 

 9 out, would create additional asymmetric, 

 10 counterparty exposure. 

 11 Now, there is the ability to create 

 12 tri-party agreements, but that's yet another 

 13 operational burden. And I just want to point out 

 14 that the sequencing needs to be thought about in 

 15 terms of if you're going to sequence products and 

 16 you're going to sequence groupings, we need to 

 17 make sure that all of the regulatory bodies agree 

 18 what the drop-dead date is and that it be after or 

 19 close to the end of all the products for posting 

 20 margin on non-cleared trades. Otherwise you'll 

 21 wind up with a race condition where you will need 

 22 to clear, otherwise you'll be posting these 
 33 

 1 unilateral margins. 

 2 MR. O'CONNOR: I think to avoid those 

 3 issues, the best thing that we can do is start 

 4 because the sooner we start, the sooner we can get 

 5 infrastructure in place that's going to allow your 

 6 fiduciary accounts to move on mass or leveraged 

 7 accounts to move once the clearing members are 

 8 able to support the offering. 

 9 So, I don't think it's easy, but I think 

 10 the hardest thing about doing anything is 

 11 starting. And I think that the phased-in 

 12 implementation that needs to be nuanced, the 

 13 phased-in implementation allows us to start. 

 14 MR. EDMONDS: I was going to head to 

 15 Darcy's comment regarding the products. We talked 

 16 a little bit yesterday on the panels around how 

 17 especially in the world of credit default swaps 

 18 it's the regulatory process that's ending up with 

 19 two separate structures and harmonizing those 

 20 things. I know it's consistent with not only the 

 21 intended legislation, but some of the work that 

 22 has been considered by the commissions. But 
 34 

 1 that's one example that we can't forget to Darcy's 

 2 point about making sure that there is adequate 

 3 capital efficient access to those products that 

 4 the buy and sell side both need. 

 5 CHAIRMAN GENSLER: Let me just give it a 

 6 shot because I wanted to ask something about 

 7 Bill's, but since there are a couple of things I 

 8 could probably -- one, credit default swaps and 

 9 portfolio margining. I would just say at least 

 10 the chair of the CFTC has clearly heard you not 

 11 just because of yesterday, but over the months. I 

 12 know some fellow commissioners are in the room, 

 13 too, and, so, they can come to their own views, 

 14 but I think that the SEC and CFTC, I hope, will 

 15 really be working hard on at least portfolio 

 16 margining and the credit default swap area where 

 17 because of jurisdictional divides over in this 

 18 building, we have some of the indices over in by 

 19 Union Station that would be the single names and 

 20 narrow base. So, I think a lot of work needs to 

 21 be done there and it would be helpful to get the 

 22 best input, and I'm not saying we're there yet, 
 35 

 1 but I think we've heard them on that. 

 2 I had a question though. Bill, you were 

 3 saying how to divide this up. Products are 

 4 somewhat dependent on how the clearinghouse has 

 5 come in. Under the statute, as I understand the 

 6 statute, it's really the clearinghouses that 

 7 submit to the CFTC or SEC products that they want 

 8 to clear. And of course the clearinghouses, 

 9 you're right, already are clearing significant 

 10 portions of the credit market, the rates market, 

 11 and even the energy markets. So, I suspect as we 

 12 finish our rules sometime maybe this fall of 2011, 

 13 that these clearinghouses will come in. And, so, 

 14 there is a question for them as to when they plan 

 15 to come in to start the 90-day public process. 

 16 That's products. 

 17 But my question for you, Bill, is 

 18 because I think the lawyers might agree with you, 

 19 it's hard for us to do percentages. They might 

 20 share your view even though it's not Garry's view, 

 21 but my question is: Did you have a view on the 

 22 three sort of buckets that we're in, the CFTC 
 36 

 1 concept piece? And it was put out there just to 

 2 get reactions, too, but sort of a first bucket 

 3 would be -- what was it -- dealers and hedge 

 4 funds, and maybe a next bucket was other financial 

 5 entities that don't do subaccounts, and then maybe 

 6 a third was the subaccount group who have hundreds 

 7 or thousands. 

 8 So, it's that phasing of those three 

 9 buckets, so to speak, all with the assumption, the 

 10 third concept in the 13 concepts was that the 

 11 clearinghouses when they're open for business had 

 12 to be open for business for everybody, that they 

 13 had to have access for everybody. So, it starts 

 14 voluntary and then the mandate is sort of these 

 15 three buckets, and I was curious where you were on 

 16 that. And then the clearinghouses might answer 

 17 when they think they're going to submit these 

 18 swaps for a public process. 

 19 MR. DeLEON: Thank you, Garry. Yes. 

 20 No, I agree with your concept of the fact that the 

 21 most important thing is that the exchanges be 

 22 ready and accept. And our view is that as soon as 
 37 

 1 exchanges are ready, end- users will move at their 

 2 own pace regardless of where they fall into any of 

 3 these buckets. And the CCPs should not be set up 

 4 to look at the definitions you've picked. They 

 5 should say either you want to clear and you're a 

 6 valid customer and you've met our requirements to 

 7 become a customer through an FCM or not, and it 

 8 doesn't matter what type you are. 

 9 So, I agree with you there, and I would 

 10 hope, yet again, as I think all the exchanges here 

 11 are trying to do, to have all the products ready. 

 12 So, that would help move things along, and then 

 13 the bottleneck will just be getting the account 

 14 set up. But I also agree with your concept of 

 15 focusing on the biggest types first, which -- and 

 16 then moving that along, but, obviously, they're 

 17 going to be the legal issues with forcing things. 

 18 And that's our concern is that we have a fiduciary 

 19 responsibility to look at our clients because once 

 20 we have a client, unless you have -- or the 

 21 legislation, let me be clear, the legislation has 

 22 set them as an MSP or a swap dealer, they sort of 
 38 

 1 just fall into this other category. So, we'll 

 2 have an incentive from a commercial basis to move 

 3 different type of account at a different rate. 

 4 CHAIRMAN GENSLER: But did you have a 

 5 view on the three, dealers and hedge funds first, 

 6 what was it, insurance companies? And maybe it's 

 7 leasing companies and the like that are not 

 8 Subaccount Land and Subaccount Land is people with 

 9 lots of accounts like yourselves and the big 

 10 mutual funds and so forth? 

 11 MR. DeLEON: Right. My view would be I 

 12 think that makes sense. I don't know if other 

 13 than the hedge funds which are MSPs, I don't know 

 14 if you can legislate it or you can force it, but I 

 15 think that that sequencing makes sense in terms of 

 16 reducing systemic risks and achieving the fastest 

 17 move. It's a question of, as I said, there's a 

 18 dichotomy between what makes sense for moving 

 19 things and wanting to focus on systemic risk 

 20 versus the fact that the way you've defined 

 21 things. And this is just the way the rules are 

 22 written and sticking with the rule that I'm not 
 39 

 1 allowed to comment on the rule. The way they're 

 2 defined, we can't force certain things. So, I do 

 3 agree with your view that makes sense from a big 

 4 picture, I just don't know if you can get the 

 5 lawyers to approve it. 

 6 MS. BRADBURY: I guess since the issue 

 7 of hedge funds being in one of the buckets, maybe 

 8 I could just pipe up and it's sort of important to 

 9 remember that we're not all the same, just like 

 10 all long-only managers are not the same. And I 

 11 think firms like ourselves who are very active in 

 12 the futures market are much more ready to enter 

 13 into a clearing of swaps because we have a lot of 

 14 the expertise, the infrastructure, the 

 15 relationships, the contracts. We're, I don't 

 16 know, 80 percent of the way there already, and so, 

 17 I would be hesitant. And maybe there's a firm 

 18 that only does credit and all they do is CDS and 

 19 they've never traded an exchange, traded -- so 

 20 they don't have the infrastructure. 

 21 I know when you created in the margin 

 22 rules these categories of high-risk financial, 
 40 

 1 don't like the name mind you, but leaving that 

 2 aside for just a moment, I think those buckets are 

 3 also a little difficult because they speak to 

 4 whether your capital-regulated or not, which seems 

 5 to me a little irrelevant in this context. So if 

 6 you feel you need to have some clear guidelines or 

 7 maybe there's a volume trigger if you have 

 8 X-amount of swaps or something like that, but I 

 9 also to kind of go back to an earlier point, I 

 10 think phasing in by asset class also might be a 

 11 useful way to think about it. 

 12 Interest rate swaps are by far and away 

 13 the largest part of the market. It's a market 

 14 that the dealers clear pretty routinely now, so 

 15 it's not like you have to make the dealers clear 

 16 interest rate swaps, they're already clearing 

 17 them. I think I have some numbers, but I have the 

 18 clearing agencies here, so I hesitate to use their 

 19 numbers, but, I mean, they're clearing hundreds of 

 20 thousands of these contract. These clearinghouses 

 21 exist for years, have been doing this for a very 

 22 long time, and it seem that just opening those up 
 41 

 1 might be a way to kind of get the whole thing 

 2 going. And, so, I guess if I were queen of 

 3 derivatives for a day, I might start with interest 

 4 rate swaps because I think there are a tremendous 

 5 volume of liquid contracts available, but we'd 

 6 love to clear everything, so I don't want to pick 

 7 favorites here. 

 8 MR. NICHOLAS: Getting back to John's 

 9 point about fair and open access, I mean, 

 10 obviously, that is a mandate of Dodd-Frank and a 

 11 key concern in terms of sequencing. I mean, I 

 12 think if you look at presidents in the securities 

 13 and futures world for the rollout of major 

 14 regulatory developments such as this one, it seems 

 15 to me that, in general, it's been done on a 

 16 product or asset class basis. I think that that 

 17 addresses systemic concern issues, while at the 

 18 same time preserving competition and fair and open 

 19 access, and that seems to be the way it's been 

 20 done in many cases. 

 21 MS. BROWN-HRUSKA: I would just add, and 

 22 maybe put some caution on those comments and in 
 42 

 1 some sense on the interest rate swaps. I mean, 

 2 we've worked a lot with pricing interest rate 

 3 swaps and cases involving them at NERA, and one 

 4 thing we've seen is an incredible amount of 

 5 diversity, and as Mark mentioned, idiosyncratic 

 6 terms. And it's not an accident that there's a 

 7 huge interest rate futures market that is 

 8 developed to complement that OTC product space. 

 9 And so, I would actually caution against the 

 10 assumption that IRS are amenable certainly as a 

 11 product class to clearing, that there's, in fact, 

 12 some staging within that asset class that is 

 13 recommended just from a logistics perspective. 

 14 And, again, I think this is a systemic risk area, 

 15 as well, because I think that if you move too 

 16 quickly on clearing, a mandate for clearing, 

 17 there's a lot of IRS and interest rate risk 

 18 management that may be deterred because you're not 

 19 set up to do the transactions in the sort of 

 20 prescribed manner. 

 21 So, I feel differently about CDS. I 

 22 think that CDS has really somewhat less diversity 
 43 

 1 overall. Certainly different characteristics in 

 2 terms of liquidity, but there is, I think, a real 

 3 good argument for moving forward on clearing and 

 4 self-execution there. 

 5 MR. O'CONNOR: If I could just comment I 

 6 guess back on the interest rate swap side of 

 7 things, so LCH.Clearnet today is clearing, we have 

 8 over 50 clearing members. We have short of $300 

 9 trillion notional under management, of course many 

 10 different currencies, and every single day, every 

 11 single participant is collateralizing against our 

 12 pricing and our marks. So, actually moving to 

 13 clearing is actually you can counter that argument 

 14 somewhat and say moving to clearing out one price 

 15 rather than all the existing bilateral disputes 

 16 you see in the market today under CSAs, et cetera. 

 17 So, I think moving to clearing actually 

 18 in some ways helps price transparency and price 

 19 discovery and brings consistency to the market to 

 20 the extent that, tying with some of the other 

 21 comments, we've also seen quite a few 

 22 participants' approach is not just for new 
 44 

 1 business, but also looking to backload, as we call 

 2 it, lift their existing portfolios into clearing, 

 3 as well, for this exact reason, pricing to 

 4 actually get one single version of the truth 

 5 rather than having it there for bilateral 

 6 disputes. 

 7 And I think tying Michael, Garry, and 

 8 Chris' comments earlier, as well, around the sort 

 9 of bifurcation of the portfolios. The statute 

 10 says new trades and doesn't really say anything 

 11 about existing, but I think in practical reality, 

 12 bifurcating your option, but with your swap back 

 13 as a problem in the first instance, as Garry said, 

 14 if you then take your existing swap back, you're 

 15 new, and you're existing bifurcate that again, 

 16 portfolio managers like Bill and others are going 

 17 to have a difficult job managing all the rest 

 18 across all of their portfolios, which is split 

 19 into different buckets. 

 20 So, I think whilst the statute may say 

 21 only new business, I think the reality is you'll 

 22 see a lot of people looking to lift their existing 
 45 

 1 portfolios, as well, even though it doesn't 

 2 mandate that. 

 3 MR. DeLEON: Yes, and just to add to 

 4 that, and Daniel touch on this, I think while 

 5 there's a mandate to move certain products and 

 6 certain things, it should be kept in mind though 

 7 that certain products want to go with other 

 8 products. 

 9 So, for example, if you look at the 

 10 market now, there are several venues for clearing 

 11 interest rate swaps, and we can argue the merits 

 12 of all of them and they're all competitively-based 

 13 and they're all open access. There is no good 

 14 market right now for interest rate options. There 

 15 is no good clearing mechanism for any of that, and 

 16 if you look in many books where people will run 

 17 balanced books, moving only one part and not the 

 18 other, as Daniel pointed out and as Garry pointed 

 19 out, will create more and not less risk in the 

 20 system. 

 21 So, I would argue that if I had a choice 

 22 of being forced to move all my interest rate swaps 
 46 

 1 without my options or I could wait and move both 

 2 of them together, depending on my portfolio and 

 3 its construction, I might want to move them both 

 4 together as opposed to split because that would be 

 5 risk-reducing, not risk additive. So, I think 

 6 there's also a component of this which is while 

 7 you want to mandate certain things, there is going 

 8 to be a competitive pressure to move more products 

 9 that aren't mandated together. 

 10 For example, cross-jurisdictionally, if 

 11 I have a negative basis book or I have a CDS basis 

 12 book where I have a correlation book of index for 

 13 a single name, I'll have an incentive to want to 

 14 move both the single name and the single index 

 15 together because otherwise, yet again, I'll create 

 16 more risk and split risk than I would otherwise 

 17 because you'd have some stuff cleared. So that's 

 18 effectively one counterparty with initial margin 

 19 and then you'd have other stuff non-cleared with 

 20 different counterparties with or without margins. 

 21 So, you've now got no margining offset and no 

 22 positioning offset. 
 47 

 1 So, while we're talking about the 

 2 phasing here, which I think is important in terms 

 3 of forcing people to go, I think you need to 

 4 realize that there are going to be market 

 5 participants who will want to go faster on certain 

 6 products than the phase-in as things become 

 7 available. 

 8 MR. O'CONNOR: I think that comes back 

 9 to the point earlier, if we wait for the perfect 

 10 solution, we may never get started. So, I 

 11 appreciate that the phasing-in needs to be a 

 12 period of significant length, that everybody has 

 13 the opportunity to do what makes economic sense 

 14 for them, that they're not forced to do something 

 15 that doesn't make commercial sense. But and I 

 16 take the Chairman's point that percentages may not 

 17 work from a legal perspective, but you can achieve 

 18 something similar by managing the windows under 

 19 which mandates exist for different types of 

 20 products and different types of people. And 

 21 Bill's made a very good case for why some parts of 

 22 his business might want to move on at the end of 
 48 

 1 that process rather than some parts of his 

 2 business that might want to move earlier. 

 3 So, I think by managing those windows, 

 4 you can achieve something very, very similar and 

 5 something sensible that gets the ball rolling, 

 6 doesn't force people to do things that don't make 

 7 commercial sense and achieves a better clearing 

 8 result as a whole. 

 9 On your point about a comment period on 

 10 product, my understanding of the Act is that 

 11 clearing organizations that were clearing product 

 12 prior to enactment were grandfathered on that, so 

 13 we have, in fact, already make application for 

 14 those legacy products that we were clearing at the 

 15 time. 

 16 CHAIRMAN GENSLER: I think John should 

 17 go through or either Eileen, though I think you're 

 18 accurate, we still have the public comment period. 

 19 So, under a rule that Eileen Donovan and John can 

 20 describe, it might be worthwhile to talk about 

 21 that 90-day process. 

 22 MR. O'CONNOR: So, I was at risk of the 
 49 

 1 ball being in my court. I wanted to make sure -- 

 2 I knew it was in yours. 

 3 CHAIRMAN GENSLER: Now it's in -- yes. 

 4 MR. O'CONNOR: Okay, very good. 

 5 CHAIRMAN GENSLER: They can describe it, 

 6 I think, right? 

 7 MR. LAWTON: First, to address the 

 8 grandfathered products, basically, we talked to 

 9 the clearinghouses because certain things, as you 

 10 mentioned, are deemed submitted and clearinghouses 

 11 have voluntarily given us information about the 

 12 things that are deemed submitted. And basically 

 13 the 90-day clock on those will start on July 15. 

 14 MS. DONOVAN: When the clock does start 

 15 running though, there will be another 30-day 

 16 public comment period on each group, category, 

 17 type, or cost of swaps, so the Commission is 

 18 posting for review. So, there will be another 

 19 comment period. 

 20 MR. PETERSON: Bill, I think you 

 21 anticipated maybe a question that I was going to 

 22 ask a little bit earlier with respect to CDS, 
 50 

 1 which obviously is a product class that is of 

 2 particular interest to those of us at the SEC. 

 3 Interested in sort of views as to the sort of CDS 

 4 index versus single name in terms of readiness for 

 5 clearing, readiness for clearing mandates, harking 

 6 to Chairman Gensler's point on portfolio 

 7 margining. And I should say that I think those of 

 8 us at the staff and I think our colleagues at the 

 9 (inaudible) and the CFTC staff are both very 

 10 focused on the importance of making the 

 11 environment work for portfolio margining for CDS 

 12 in particular. The perception is that index 

 13 products are typically more liquid than single 

 14 names. Would it make sense to phase index 

 15 products first to the extent that they're 

 16 available in terms of clearing mandate or should 

 17 CDS be considered together? 

 18 MR. DeLEON: Unfortunately, the CDS 

 19 market, while due to the big bang and small bang 

 20 is much more homogenous than the rates market or 

 21 other markets in terms of structure. I think 

 22 going to Daniel's comments earlier, the CDS market 
 51 

 1 is much less homogenous along product lines 

 2 because you have a much higher bifurcation of what 

 3 is liquid versus what is illiquid. Obviously, if 

 4 you stick with index or you stick with certain 

 5 single names, they will be incredibly liquid, 

 6 highly-traded, frequently quoted structures. If 

 7 you move though to the non-standard dates in 

 8 single name or even in index, and then as you 

 9 start moving down the credit spectrum, you will 

 10 wind up with things that literally trade by 

 11 appointment or trade once or twice a week and some 

 12 of those are even less. 

 13 So, there's going to be an issue there, 

 14 and I agree that ultimately moving these to 

 15 changes will increase price transparency or reduce 

 16 the issue of price uncertainty, which leads to a 

 17 lot of disputes. And there are no dealers at this 

 18 table today, but I can tell you I have a lot of 

 19 disputes with some of those names. And that will 

 20 help reduce this because by being on an exchange. 

 21 So, I think you need to be careful about 

 22 the assumption that they're all homogenous, single 
 52 

 1 name versus index. However, I do think that you 

 2 could get a lot of risk reduction by moving index 

 3 first. But, at the end of the day, you want the 

 4 end date to be about the same because, ultimately, 

 5 you want to have the whole product, both single 

 6 name and index, and possibly tranches, which are 

 7 even less liquid, sort of finalize the same date 

 8 because you don't want to have the tale of certain 

 9 single names not being cleared. 

 10 So, I think that from that standpoint, 

 11 you could say index starts first, and, yet again, 

 12 you'd have the commercial opportunity to trade and 

 13 clear single names before the mandate kicks in. 

 14 But the end date is what's important, is you want 

 15 to have end dates coordinated where you say, okay, 

 16 on this date, everything needs to get cleared. 

 17 People will have the ability and desire to go 

 18 before, depending on what's in their book, what 

 19 they think their commercial makeup is, and what's 

 20 best for their clients in terms of collateral 

 21 management, what their view on the credit market 

 22 is, et cetera, but you want to have the end dates 
 53 

 1 coordinated, and I think that's the important 

 2 thing. Lots of people want to start before, and 

 3 that'll be a question of what's commercially best, 

 4 but the end date is what matters. 

 5 So, I would focus more on than that the 

 6 start date of these things, and I don't know if 

 7 you'll have the luxury of being able to delineate 

 8 start dates for different parts of the index of 

 9 the single-name market or you have to book that 

 10 together. I haven't focused on that with my 

 11 lawyers, but you probably have. But, clearly, 

 12 certain names that will trade more frequently, I 

 13 would want to see pushed before the less liquid by 

 14 appointment names. 

 15 MS. BRADBURY: Yes, I think the 

 16 single-name CDS that are components of the index 

 17 ideally would come at the same time. I think even 

 18 within single-name, I think the financial names 

 19 are the ones that tend to be traded the most. 

 20 I mean, for example, we would use those 

 21 essential as credit protection with our 

 22 counterparties. So, if there's a bank that's 
 54 

 1 holding a lot of the initial amount for us, we 

 2 have a big counterparty exposure to them a la 

 3 Lehman Brothers, and so, being able to make those 

 4 contracts clearable might be a very good thing. 

 5 The other interesting thing in CDS is 

 6 that as you bring in end-users, non-dealers, the 

 7 contracts that people will want to clear will 

 8 change a little bit. Dealers tend to focus more 

 9 on investment grade index, and there are many on 

 10 the buy side who use high-yield index CDS because 

 11 we might be trading distressed at or other things, 

 12 and we need to hedge those with the high-yield 

 13 index, and those are not currently a real focus on 

 14 the dealer side, so they're not as commonly 

 15 cleared. So, you will see some product evolution 

 16 as you bring in new participants to the 

 17 clearinghouse. 

 18 MR. MAGUIRE: Just speaking, hopefully, 

 19 on behalf of all of the clearing house, I will 

 20 risk that, it's all very interesting to hear about 

 21 these sort of lower-liquidity, slightly more 

 22 esoteric products coming into clearing. But I 
 55 

 1 think we just have to sort of have a sobriety 

 2 about whether they can be cleared from a default 

 3 standpoint, as well, or very well in a nice, 

 4 peacetime liquid market environment, but these 

 5 things change their characteristics during a 

 6 default kind of event. So, I think what we're 

 7 starting to see here is that the clearinghouses 

 8 aren't going to become more systemic and important 

 9 to the market. 

 10 Historically (inaudible) has been taking 

 11 liquid- commoditized, standardized type products 

 12 into a clearing environment. We're now sort of 

 13 flipping that on its head a little bit and 

 14 starting to think that clearing could make 

 15 products more liquid, standardized, and 

 16 commoditized. So, that's quite a structural 

 17 change, and I'm not sure we're there yet. 

 18 So, I think we just need to be balanced 

 19 in our view of what we bring in because the 

 20 worst-case scenario is we're left with an illiquid 

 21 single name or a very out- the-money swaption type 

 22 product in a default scenario that we can't get 
 56 

 1 our self. And I think that needs to be considered 

 2 soberly before we enter into going any further 

 3 down the future in these slightly more esoteric 

 4 products. 

 5 MR. EDMONDS: Yes, Dan, I would echo 

 6 your comments. I mean, there's certainly what 

 7 I'll call a lot of low-hanging fruit that can be 

 8 moved in. I mean, if you look at the voluntary 

 9 actions within the energy and commodity markets 

 10 and how that evolved over time, I mean, it 

 11 continued to grow, its confidence levels continued 

 12 to increase. 

 13 To Darcy's point about all the names in 

 14 the index, I mean, that's a capital efficiency, 

 15 and I don't want to words in Darcy's mouth, but 

 16 that's a lot to do with the capital efficiency 

 17 associated with that. And they can have the right 

 18 type of balance book, but as it relates to the 

 19 financial names from a regulatory perspective, 

 20 we're going to have to have a very honest 

 21 conversation about the wrong-way risk associated 

 22 with having pieces of the clearing names in the 
 57 

 1 index. But that's an exact product that a number 

 2 of the market participants want to have access to, 

 3 and that may not be the conversation that you're 

 4 prepared to have day one. So, that will take some 

 5 time. 

 6 MS. BROWN-HRUSKA: Yes, I think I agree 

 7 -- I mean, Dan, I think we agree fundamentally 

 8 because that's my concern, is that we don't get 

 9 the cart before the horse, and we make sure that 

 10 we allow -- I mean, the markets have really made 

 11 great strides in clearing in the interest rate 

 12 space and CDS spaces as you're really opening up. 

 13 And I think that, again, we want to make sure that 

 14 in some sense there is this sort of market-driven 

 15 process that we respect, that we take the signal 

 16 from. The asset managers who do have different 

 17 risk profiles, whose asset classes do represent 

 18 different degrees of counterparty credit risk, 

 19 some being quite low and in the interest rate 

 20 space some having a great deal of liquidity. 

 21 So, my caution would be consistent with 

 22 the volunteer period, consistent with the sort of 
 58 

 1 sequencing, especially in the areas where there is 

 2 not a lot of standardization and there is a great 

 3 deal of variance in the risk profile. 

 4 MR. MAGUIRE: I think it's gone back 

 5 onto the open access point, as well. From our 

 6 perspective, from my firm's perspective, we're 

 7 agnostic in terms of the sequence. I think those 

 8 first were, I think we can all say this: We're 

 9 open for business, we all want more clients and 

 10 customers, quite frankly, so I don't think we're 

 11 going to be prescribing dealers first, MSP second, 

 12 asset managers third or whatever. I think, for 

 13 us, the rules need to be finalized, then we can 

 14 get our ducks in a row, get everything finalized 

 15 from our perspective in terms of internal 

 16 governance and other regulatory bodies, et cetera, 

 17 but then open for business. 

 18 And I like the point Bill raised about a 

 19 mandate rather than a start date. That's quite a 

 20 neat way of dealing with it, and then having a 

 21 voluntary period. 

 22 MR. LAWTON: One quick comment and then 
 59 

 1 one question. I have to correct something I said 

 2 a few moments ago. Basically, for the 

 3 pre-existing, pre-cleared swaps, the DCOs, and we 

 4 have agreed that the clock would actually start 

 5 when our process rules final, which may or may not 

 6 be July 15. 

 7 And then with a question that follows 

 8 onto what Dan just said, if on open for business 

 9 the DCOs or clearing agencies were able to clear 

 10 clients at all levels, and, early on, there was a 

 11 mandate say for dealer-to-dealer trades, what 

 12 would be a practical timeframe to then extend the 

 13 mandates? So, you have voluntary clearing for 

 14 those end-users who are ready to do it and those 

 15 firms that were ready to accommodate it, and for 

 16 others, you'd have some time to get ready what 

 17 would be a time to transition into full mandatory 

 18 clearing across the product for all market 

 19 participants. 

 20 MR. DeLEON: I know Garry's not going to 

 21 like my answer, but we still think it's probably 

 22 18 months to 24 months to get everyone onboard 
 60 

 1 given the documentation issues associated with 

 2 opening that money accounts with that many 

 3 clearing organizations. There are just a massive 

 4 number of accounts that are involved if you think 

 5 about what's involved. 

 6 So, taking a simple example, if I want 

 7 to open 2,000 accounts, I need to have all my 

 8 possible counterparties open so that anywhere 

 9 between 8 to 12 or possibly 15 because I need the 

 10 best liquidity possible, I need at least 3 

 11 clearing brokers to clear, and then I have to do 

 12 that for each one of the exchanges I'm going to 

 13 use. So, just using the ICE, LCH, CME, and if we 

 14 did IDCG, right, that's four. So, you'd just do 

 15 that, and then you take the rest of the buy side, 

 16 that's the amount of documentation that needs to 

 17 get opened, and every client needs to get 

 18 approved. They have to do a KYC and all of the 

 19 accounts need to get set up, all the custodians 

 20 needs to set up the wire instructions. And that's 

 21 just not something you can flip the switch for 

 22 because there's legal negotiations involved, as 
 61 

 1 well as system work that needs to get done. 

 2 So, I'm just trying to say that not that 

 3 certain firms couldn't move incredibly quickly to 

 4 get that done, there's just a massive amount that 

 5 needs to get done, and you need to get people to 

 6 sign and negotiate documents. So, while everyone 

 7 at this table who is offering to do clearing, I 

 8 can tell you if I wanted to clear with them 

 9 tomorrow, it wouldn't be possible because I'd have 

 10 to go negotiate legal documents, I'd have to call 

 11 and get things set up, and just setting all that 

 12 up and getting everyone to focus is not a one-day 

 13 event, unfortunately. I would love it if they 

 14 would take our terms and say done, and we would be 

 15 done in a day, but, unfortunately, they have their 

 16 fiduciary responsibilities. So the commercial 

 17 terms we want may not be the commercial terms 

 18 they're willing to give, and that's not a negative 

 19 statement on anyone's part, it's just what's 

 20 involved. 

 21 So, to your answer, I think 18 to 24 

 22 months is probably the right answer, although I 
 62 

 1 know Garry would like it to be much shorter. 

 2 CHAIRMAN GENSLER: You're answering 

 3 (inaudible). 

 4 MR. DeLEON: Yes, I'm answering it as 

 5 someone who's managing hundreds of subaccounts, 

 6 and I'm just pointing out that even if I was 

 7 managing 20, I'd have to -- and you think about 

 8 how many hedge funds there are that manage between 

 9 5, 10, 20-something, and Darcy could speak better 

 10 to that, accounts, just the sheer numbers, because 

 11 they're going to have to call and negotiate with 

 12 everybody. So, there's just a bottleneck 

 13 involved, and it's not a bad-faith bottleneck, 

 14 it's just a physical bottleneck. And when LCH or 

 15 CME gets hundreds of thousands of account-opening 

 16 documents, they can't do that in a day. And I've 

 17 spoken to Mark about this in particular, and I can 

 18 tell you his response would be I'd love to open 

 19 200,000 accounts tomorrow for the rest of the 

 20 street, but I can't physically do it, and that's 

 21 the issue. 

 22 MR. GREENBERGER: Yes, I think that the 
 63 

 1 point that the Chairman's made with Bill is that 

 2 subaccounts, huge numbers of subaccounts can be a 

 3 deferred process. I must say 18 months to 24 

 4 months seems to me to be a very, very long period 

 5 of time to accomplish something that's supposed to 

 6 avoid systemic risks. While those subaccounts are 

 7 waiting, you're not going to have clearing and 

 8 you're not going to have capital requirements, et 

 9 cetera, et cetera. 

 10 The other thing I would say is your 

 11 discussion, you've listed four clearing 

 12 facilities. I think in terms of Dan's talk about 

 13 they'll be no anti-competitiveness, Dan's clearing 

 14 facility will be open to all comers is what I 

 15 understood he said. The issue isn't the 

 16 competitiveness or who gets access to the 

 17 clearing, the issue is how many clearing 

 18 facilities are there going to be. And I think one 

 19 of the heartening things about the discussion 

 20 today reinforces my gut instinct that clearing is 

 21 going to be a very attractive business and there 

 22 may be more than four that you'll want to look to 
 64 

 1 if time is allowed for other entrance to catch up. 

 2 And the further point I would make is 

 3 there will now be competition about the clearing 

 4 facilities, and it may not be PIMCO's interest to 

 5 take time to open accounts with every clearing 

 6 facility, but to listen to those clearing 

 7 facilities that are going to offer you better 

 8 terms. The negotiation process you talk about is 

 9 going to go much easier for PIMCO if you have a 

 10 larger number of clearing facilities trying to do 

 11 business with you than limiting it to the four 

 12 you've already mentioned. 

 13 MR. COX: I would just like to add that 

 14 I think it's very important that we stress that 

 15 there be a mix of participants for any start date 

 16 of mandatory clearing. 

 17 To Bill's point, I think the flip of 

 18 that is that the task of registering thousands of 

 19 accounts and taking on all this workflow is going 

 20 to be important. That's going to incentivize the 

 21 market if you have this mix of participants to 

 22 develop the clearing services to tailor those 
 65 

 1 clearing services to those type of participants. 

 2 It's going to drive the kind of operational 

 3 efficiencies, it's going to serve the customers 

 4 the most, and I think that my sense is that the 

 5 intent on the act by Congress was to serve 

 6 customers. 

 7 So, I think it might be important to 

 8 make sure that there's a mix of participants, so 

 9 as clearing evolves and as we tackle these 

 10 operational issues and legal issues and account 

 11 registration issues, that the in clients' needs 

 12 are serviced. And that's only done if they are 

 13 right there at the beginning of the mandate and 

 14 not kind of delayed for other participants. 

 15 MR. PETERSON: I wanted to go back 

 16 briefly to, again, Darcy's, I think, general point 

 17 not to overwork it, but a distinction between 

 18 access and clearing mandate. 

 19 To the extent that there are buy side 

 20 firms out there that are prepared to clear, ready 

 21 to clear, want to clear, to what extent should 

 22 regulators focus on trying to nail down and make 
 66 

 1 sure that clearinghouses have appropriate open 

 2 access provisions in place, whatever that means, 

 3 before we can advance a focusing on individual 

 4 clearing mandates so that those at some level, buy 

 5 side participants who are prepared to and can deal 

 6 with a risk management sense everything else are 

 7 able to do so? 

 8 MR. EDMONDS: I don't believe until the 

 9 Commission's finished the rule-writing and we 

 10 adopt and become compliant with that rule-writing 

 11 that that process can even start. And that's the 

 12 big challenge. I think we would all take the same 

 13 risk that Dan did. We would all like to have the 

 14 rulebook finally done and say here it is, let's 

 15 go, and let's have that give-and-take and hear 

 16 back and talk about some of the commercial aspects 

 17 that different types of customers might bring in. 

 18 The problem is we're stuck in waiting on that 

 19 rule-writing to be done in order to complete our 

 20 rule set and not only certify it back to the 

 21 agencies, but also put it out in front of the 

 22 public and get that required feedback we need so 
 67 

 1 those conversations can begin in earnest. 

 2 MR. O'CONNOR: I would disagree to an 

 3 extent. I think that Dan has an operational 

 4 clearinghouse, he has a rulebook. It might not be 

 5 compliant with the final rule set, he may have to 

 6 do work on it, but he has a rulebook that he uses 

 7 today, and he does a significant amount of 

 8 business in today. 

 9 Mark has a rulebook; he's done business 

 10 in his clearinghouse. People can use it if they 

 11 choose to use it. 

 12 We have a clearinghouse, we have a 

 13 rulebook. We have business inside the 

 14 clearinghouse. 

 15 I have no doubt that those rulebooks 

 16 will need to change to adopt to regulation, but to 

 17 a greater or lesser extent. I mean, it is 

 18 available today. So, the rulebooks are there. 

 19 MR. EDMONDS: And to be clear, Garry, 

 20 I'm not talking about the current, I'm talking 

 21 about the proposed changes because at least what 

 22 we've heard, and I'd be interested to hear Bill, 
 68 

 1 Darcy's, and other's opinion, is they want to know 

 2 what they're going to be going to, not where 

 3 they're coming from necessarily. 

 4 MR. O'CONNOR: No, certainly you need 

 5 certainty about what that rulebook's going to look 

 6 like, and the further along we get in the 

 7 rule-writing process, the closer we'll get to 

 8 that, but you have many examples here at the table 

 9 and elsewhere about commercial alternatives to 

 10 clearing. Everyone's trying to present a good 

 11 clearing model. The vast majority of the 

 12 rulebooks that are out there today are going to be 

 13 Dodd-Frank-compliant. We're talking about tweaks 

 14 rather than rewrites of rulebooks so you have a 

 15 lot of the information. 

 16 MR. DeLEON: Just sort of by way of sort 

 17 of experience we've had here, and Darcy may be 

 18 different, but, right now, the industry is working 

 19 very hard to come up with new standard 

 20 documentation for cleared derivatives, and this 

 21 has been an ongoing process for quite a while. 

 22 The industry, fortunately, is close to finalizing 
 69 

 1 it. 

 2 We think we've gotten through most of 

 3 the major issues, but this has been a big industry 

 4 thing. And one of the major issues that's come up 

 5 and that's almost resolved and just by way of the 

 6 rules, and this is not a comment on anyone in 

 7 particular, is we don't know what the final staff 

 8 rules are going to be. And we're trying to put 

 9 language into this standard documentation based 

 10 upon what we think the final staff rules will be, 

 11 because depending on what those are and what the 

 12 rules are in terms of doing a trade and getting it 

 13 cleared and notification will change how 

 14 commercially you act and what your 

 15 responsibilities are. 

 16 So, there are things going on that the 

 17 industry is trying to move ahead on to accomplish 

 18 because they do want to clear. We do want to move 

 19 this process along, but there are things that as 

 20 not being finalized, we can't do or we have to 

 21 estimate, which will require us going back and 

 22 changing things or writing things in a more 
 70 

 1 open-ended manner. 

 2 So, this is not meant as a complaint, 

 3 but just goes to, yet again, why the timeframe 

 4 can't be flip a switch and do stuff tomorrow 

 5 because not everything is known. And while we try 

 6 to write documentation to think about that and 

 7 this dealers, FCMs, banks, buy side, custodians, 

 8 right, we just don't have all the facts and we 

 9 will have to adapt things. Hopefully, we'll guess 

 10 right and the adaptations will be minor, but there 

 11 is a chance that something comes up which is very 

 12 different than we thought and the documentation we 

 13 wrote doesn't work. 

 14 And I'll give you an example of that. 

 15 We negotiated and many other people did, 18 months 

 16 ago to start clearing certain documentation, and 

 17 with the passage of Dodd-Frank, that documentation 

 18 no longer works, which is why we're redoing all 

 19 the standard documentation to be more 

 20 Dodd-Frank-compliant. So, I have docs with ICE 

 21 and CME and LCH to clear stuff on the client side, 

 22 but given everything that's changed, we don't want 
 71 

 1 to use those docs anymore. So, there's a chance 

 2 that if things are different than we think they're 

 3 going to be, we have to renegotiate. So, this is 

 4 not a complaint, this is just an operational, 

 5 legal thing because we have fiduciary 

 6 responsibility to our clients. 

 7 MR. PETERSON: Right. And just to be 

 8 clear, I wasn't suggesting before that the 

 9 regulators ought to force changes in market 

 10 practice in advance of sort of finalizing rules. 

 11 I mean, in part, the issues about open access and 

 12 the obligations to ensure open access will be 

 13 determined by what the final rules look like. I'm 

 14 only sort of questioning whether the question of 

 15 providing access could be considered and mandating 

 16 access can be considered apart from the clearing 

 17 mandate, per se. 

 18 MR. BUTHORN: But I think this is what 

 19 always happens, right? I mean, we always in our 

 20 markets get into a situation where we do things, 

 21 we make changes, and then we have to change later 

 22 on because we realize there were practicalities 
 72 

 1 about what we're doing that are different than the 

 2 reality. I think from the dealer's perspective 

 3 the key priority for us has to be during this 

 4 phase that we simplify the considerations of how 

 5 to get to clearing. And, to be frank, trading a 

 6 clearing to your swap and giving it up to LCH is 

 7 very similar and almost identical to doing a 

 8 two-year swap or a five-year swap. There's very 

 9 little distinction there. 

 10 What matters is what we have to do with 

 11 our clients, to the Chairman's point before, 

 12 around getting them documented, getting them 

 13 through due diligence and getting them onboard, 

 14 those are really key priorities. So, from our 

 15 perspective, I think it's a very straightforward 

 16 question. If the priority is timed and if the 

 17 priority is to accelerate, which I think those are 

 18 all good things for everybody, then what we have 

 19 to do is focus on what simplifies the process at 

 20 every potential bottleneck. And, for us, it's 

 21 clearly in the documentation process, and I think 

 22 that we've heard that. 
 73 

 1 So, we would very much like to see as 

 2 much from the regulators, as much delineation and 

 3 simplification on those points as possible because 

 4 that allows us to focus. It allows to take 

 5 scarce, knowledgeable resources, deploy them 

 6 against the clients and deploy them against the 

 7 policies, the procedures we need to put in place 

 8 for those clients, and then get this thing going. 

 9 Otherwise, what'll end up happening is we'll be in 

 10 a constant debate about this isn't done and that's 

 11 not done, we can't do it yet because this isn't 

 12 finished, and that's going to be a problematic 

 13 debate if we're still having it a year from now. 

 14 MR. GREENBERGER: One point I would make 

 15 that I think arises from your question about, 

 16 well, can we do certain things quickly and then do 

 17 other things later on, do free and open access 

 18 after we get the clearing process started, I think 

 19 historically speaking, once you get something up 

 20 and running and there's a methodology to it, it's 

 21 very, very hard to then say, oh, we're going to 

 22 add these fill-ups on, we're going to make it a 
 74 

 1 different way for people to get access or we're 

 2 going to have different conflict of interest rules 

 3 or ownership rules. I think it's imperative that 

 4 when the clearing facility starts, that the 

 5 clearing facility, for the public interest to 

 6 understand immediately everything that it needs to 

 7 comply with about who gets access, who has 

 8 ownership, because if you don't, I'll tell you, 

 9 you'll get the thing started, and six months, 

 10 you'll want to do something else and you'll be up 

 11 in front of Congress answering questions about why 

 12 you're upsetting the clearing process by adding 

 13 new rules. It should all be started at one time. 

 14 And I think the documentation is 

 15 critically important, but I've just seen too many 

 16 deals -- I don't practice law anymore. I used to 

 17 practice law. I've seen too many deals get done 

 18 really, really quickly when they need to get done 

 19 quickly. Now, I'm not saying it should be a 

 20 reckless time period, but this documentation 

 21 problem, which I endorse and I compliment at the 

 22 buy side for being so concerned about, that can be 
 75 

 1 done very, very quickly when it needs to get done 

 2 quickly. 

 3 MR. PETERSON: Just -- 

 4 MS. BRADBURY: I think in addition -- 

 5 oh, I'm sorry. Go ahead, Sam. 

 6 MR. PETERSON: Maybe just to add to that 

 7 and just as background, I mean, we work with many 

 8 small, financial end-users, I think most of which 

 9 aren't looking forward to clearing. In regards to 

 10 the point Michael just made, I think the 

 11 documentation and steps can be taken very quickly 

 12 for a large client that presents a big 

 13 opportunity, but that is sadly not the case for 

 14 many smaller, financial entities. And with where 

 15 Title VII ended up, we're talking about a mandate 

 16 for clearing that applies to thousands of 

 17 financial end-users and many of which don't pose 

 18 systemic risk and don't have the infrastructure in 

 19 place right now, don't clear futures, or don't 

 20 trade futures or clear trades right now. 

 21 So, to sort of jump back to the 

 22 conversation that Darcy had with the Chairman, I 
 76 

 1 would support a sort of volume or size bucket in 

 2 addition to the buckets in your concept paper to 

 3 account for the fact that there are, for instance, 

 4 many small banks that are very infrequent hedgers 

 5 and should be accommodated in getting them set up 

 6 for a clearing. 

 7 MR. GREENBERGER: I would just say it's 

 8 a sad fact of life and you can look at the 

 9 unregulated market and the ISDA standard 

 10 agreements. The smaller entities, this is going 

 11 to be a highly-standardized market in the end. To 

 12 the extent it isn't now, I think with price 

 13 recovery and documentation being developed and 

 14 even small users' insistence on getting a hedge in 

 15 place is going to mean that standardized products 

 16 are going to be used. I don't see any small 

 17 hedgers even getting from clearing facilities some 

 18 kind of different documentation and big hedgers. 

 19 MS. BRADBURY: I was just going to say 

 20 in addition to the rules specifically governing 

 21 the clearinghouse, which are obviously important, 

 22 and you all have that largely underway and have 
 77 

 1 received many comment letters, which I'm sure you 

 2 read deciduously, but I think the capital margin 

 3 rules will be really important. 

 4 Going back to a point that I think was 

 5 made earlier, I think you can't put in place new 

 6 margin regimes in un-cleared swaps until everyone 

 7 has an opportunity to clear their swaps because 

 8 it's supposed to be an incentive to clear, but if 

 9 you don't actually have the ability to clear, it 

 10 would be obviously a big penalty. But I think 

 11 understanding the pricing at the end of the day is 

 12 going to drive the marketplace. So, whether it's 

 13 the dealers or the buy side understanding what the 

 14 capital treatment is on the dealer side and 

 15 understand what the margin rules are for 

 16 everybody, I think we've all gotten over the idea, 

 17 okay, clearing, it's going to happen, it's a fact. 

 18 We understand the legislation passed, 

 19 and some of us are more enthusiastic than others, 

 20 but now you're really looking at cost. What's it 

 21 going to cost me to clear, what is the new margin 

 22 regime look like? How can I get competition 
 78 

 1 between my dealers so I can get clearing brokers 

 2 that work for me that will do portfolio margining 

 3 within the clearing deal broker? There's a lot of 

 4 different ways that you can tackle these, but I 

 5 don't want to leave off that important thing that 

 6 does fundamentally drive the economics of the 

 7 marketplace, which is the margining regimes at the 

 8 end of the day. 

 9 MS. BROWN-HRUSKA: I would just note 

 10 that, unfortunately, there's no clearing members 

 11 here in terms of expressing their kind of progress 

 12 toward achieving open access or at least not open 

 13 access, but setting up relationships with the 

 14 thousands of small customers that Sam mentions. I 

 15 think that that's you have to have -- we kind of 

 16 have to include the clearing members in the 

 17 conversation and understand the process by which 

 18 they go through to do due diligence with 

 19 individual customers and manage the risks because, 

 20 after all, they do assume the risk and provide 

 21 credit to a vast number of users, and it's 

 22 envisioned that they will play a central role. 
 79 

 1 So, I think it's very important that they also are 

 2 considered sort of part of this process. 

 3 MR. MAGUIRE: I think coming back to 

 4 what John's original question was on this about 

 5 sort of the timelines and the DCO's perspective. 

 6 Again, thinking about all of us, we have 

 7 rulebooks, to Garry's point. We clear today 

 8 actively and size in many different products. We 

 9 will have new rulebooks; we will be 

 10 Dodd-Frank-compliant when the new rules are 

 11 finalized. We have a period of time, which we 

 12 talked about on some of the panels yesterday, 

 13 about the impediments or obstacles we have to go 

 14 through to comply, but we will. We're open for 

 15 business. We're all working on pipework and 

 16 improvements and connectivity to make this more 

 17 streamlined. 

 18 So, I think, in summary, I don't think 

 19 really the clearinghouses are the real impediment 

 20 to clearing here. I think it's the broader 

 21 infrastructure that we need to consider. And I 

 22 don't wish to be bullish around this, but I think 
 80 

 1 we will make sure we comply all the way through 

 2 this. It's really, I think, the broader 

 3 infrastructure, and, if you will, the ecosystem 

 4 and the documentation, the client readiness, the 

 5 FCM readiness, as well, that needs to be 

 6 considered in terms of finding the timeline 

 7 predominantly. 

 8 MR. DeLEON: I just wanted to be clear 

 9 that when I say there's time required to do 

 10 things, this is not meant as a bad-faith comment. 

 11 But I do want to point out, though, that, yes, 

 12 things can get done quickly, but you want to avoid 

 13 the situation where two people come to the table 

 14 to negotiate a document and it has to get done at 

 15 the end of the day. Because when that happens, 

 16 one player is not happy and one player takes 

 17 advantage of the other. And getting to Sam's 

 18 point, and I think you want to prevent that, and 

 19 that's why it can't happen so quickly because 

 20 large players or more sophisticated players will 

 21 want to protect themselves, and there will be 

 22 commercial interests, and these things will not 
 81 

 1 get done in a day. And even if they got done 

 2 quickly, there is still a timeframe issue of 

 3 getting these things done. 

 4 And I can tell you from experience 

 5 because my firm has done this and all the people 

 6 at this table have done this and the people in the 

 7 audience, when you want to add an account to open 

 8 and clear, it takes days to get done, even when 

 9 documentation is standardized. You have to have a 

 10 huge number of touch points. And I just want to 

 11 point out that this is a physical fact, it's not 

 12 like walking into a store and buying an iPad. And 

 13 guess what? If you want to do that, there may be 

 14 a backlog, and it may not be there, even though 

 15 Apple would be more than glad to sell it to you. 

 16 So, I just want to point out there are bottlenecks 

 17 you can't get around. 

 18 MR. GREENBERGER: Bill, I'm not saying 

 19 things should be done in a day. We're looking at 

 20 the relativity between needing 18 and 24 months 

 21 and setting something up in 6 months or 8 months 

 22 or 9 months. That's what I'm talking about. I 
 82 

 1 said we should not have reckless timeframes, but I 

 2 don't think we should have overly passive 

 3 timeframes either. 

 4 MR. NICHOLAS: Yes, just to address 

 5 John's point about the timing of the open access 

 6 issue, I mean, I think it is critical to address 

 7 that upfront and as soon as possible, and 

 8 particularly issues relating to eligibility, 

 9 clearinghouse participation, I think to start the 

 10 process and then address those issues after the 

 11 fact. I mean, it would put certain types of firms 

 12 at a disadvantage, and I think some firms are 

 13 reluctant to invest in the infrastructure required 

 14 until they know for sure that they're going to be 

 15 eligible. 

 16 MR. RAMSAY: I wanted to maybe talk 

 17 before we run out of time, which is very soon. We 

 18 touched on Europe very briefly, and I don't know 

 19 whether there was a consensus on this or not, but 

 20 is there a sense that it does not make sense in 

 21 terms of our own timing in the U.S. For clearing 

 22 mandates to await the completion of a regulatory 
 83 

 1 regime applicable to clearing in Europe or what do 

 2 people think about that? 

 3 MR. GREENBERGER: Well, I said earlier I 

 4 think it would be a mistake. I think that what 

 5 you set up is going to be a template and a model 

 6 because I think it's well considered and you've 

 7 had so much substantial input. If you play a 

 8 waiting game, everybody is going to be waiting for 

 9 the next person to move. Somebody has to move 

 10 first. I think the SEC and the CFTC with the 

 11 proposed rules in place, with the comments that 

 12 you're getting in written form through these 

 13 roundtables is going to be ready to go. And I 

 14 perceive from this discussion a lot of interest 

 15 from both the clearing side and the buy side to 

 16 get started here. And I think if we do get 

 17 started, I have a high degree of confidence we're 

 18 going to set up a system that's not only going to 

 19 prevent systemic risk, but it's going to be very 

 20 profitable and lucrative at the same time with a 

 21 lot of opportunities for people to contribute and 

 22 take part in this. That's why I emphasized we 
 84 

 1 shouldn't be looking for clearing facilities, we 

 2 should be looking at a lot more than four. I 

 3 think that's going to be in everybody's best 

 4 interest. 

 5 MS. BROWN-HRUSKA: I would never accuse 

 6 this commission of waiting in this rule process. 

 7 It seems to me that this group has done an awesome 

 8 job of working very hard to move this process 

 9 forward, but I also recall a very strong 

 10 relationship with other jurisdictions in Europe 

 11 and in the UK that are represented here. And I 

 12 think it's critically important to interact on a 

 13 very basic level going forward on the phasing even 

 14 of these proposals. 

 15 I think there's the real risk that you 

 16 could have flight of certain market users and 

 17 intermediaries to that market if you move too 

 18 hastily and create an environment that makes it 

 19 difficult to go forward. On the other hand, I 

 20 think that, again, this process is working well; 

 21 we're seeing the SEFs come online. I think at 

 22 that point I would second that point that we do 
 85 

 1 need to move forward on the SEF front. It's very 

 2 important, but we need to do a very deliberate 

 3 analysis of the requirements. 

 4 MS. BRADBURY: I guess I would be more 

 5 worried if I thought two continents were coming 

 6 out in a very different place. Certainly, the 

 7 conversations we've had with regulators in Europe 

 8 and if you look at the legislation, it will 

 9 probably never be identical. The securities 

 10 market and the futures markets are not regulated 

 11 identically now, but I feel like there is 

 12 convergence on the big ideas, and all of our 

 13 counterparties are major, global institutions, and 

 14 they're going to have a pretty common product 

 15 offering at the end of the day. 

 16 So, I guess I wouldn't be a huge fan of 

 17 waiting for them to catch up necessarily. The 

 18 other thing is without actual legislation, in many 

 19 ways, the European markets are ahead of us. I 

 20 mean, we do much more automated trading of 

 21 interest rate swaps that are European, for 

 22 example, as opposed to in the states. It just 
 86 

 1 happens. They don't call them SEFs, right? But, 

 2 so in many ways, the European market could be more 

 3 advanced. Certainly, London has been kind of the 

 4 headquarters of the swaps market for decades now, 

 5 and, so, I imagine at the end of the day we'll 

 6 kind of get to the same place, even if we do it in 

 7 slightly different timing. 

 8 MR. EDMONDS: I would add that this is a 

 9 global market, and behaving in a manner that is 

 10 inconsistent with the recognition of that would 

 11 seem to be irresponsible at this point. So, 

 12 certainly, we need to lead. I think Congress made 

 13 that decision when they worked on Dodd- Frank. 

 14 At the same time, the concerns that have 

 15 been talked about here today and the issues that 

 16 Bill raised of adding one more account, if we're 

 17 going to add that one more level of bifurcation of 

 18 that, the unintended consequences are going to be 

 19 someone's at a competitive disadvantage. I don't 

 20 know if any of us can handicap who that would be, 

 21 but we certainly don't want it to be this 

 22 infrastructure at the end of the day. When I say 
 87 

 1 "this infrastructure," the industry as a whole 

 2 regulated by this agencies. 

 3 MR. O'CONNOR: I would compliment the 

 4 commissions on the amount of work that they've 

 5 done working with their international 

 6 counterparts. I know that's clear in your 

 7 proposed rulemakings and in testimonies of 

 8 commissioners, that despite the enormous workload 

 9 that you're under, you are reaching out and you 

 10 are working with your international counterparts. 

 11 And to Darcy's point, I think that 

 12 provided that you're ending up in the same place, 

 13 the timing of when you'll end up in that place is 

 14 probably less important that the form of the 

 15 solution, and I think the form of the solution is 

 16 already achieving a level of harmony that, to 

 17 Chris' point, is not going to create sort of 

 18 regulatory arbitrage in terms of financial 

 19 infrastructure. 

 20 MR. RAMSAY: I think it's probably a 

 21 good idea to break on the compliment to the 

 22 agencies. (Laughter) So, yes, I guess a 15-minute 
 88 

 1 break. Thank you. This has been a terrific 

 2 discussion. 

 3 (Recess) 

 4 MR. BERMAN: Hello and welcome to the 

 5 second panel of day two of these roundtable 

 6 sessions. 

 7 My name is Greg Berman. I am the senior 

 8 advisor to the director of the Division of Trading 

 9 and Markets the SEC. Catherine Moore, senior 

 10 special counsel in the division's Office of 

 11 Clearance and Settlement, joins me for the second 

 12 panel, along with my colleagues Rick Shilts and 

 13 John Lawton at the Commodity Futures Trading 

 14 Commission. 

 15 I want to thank all of the panelists for 

 16 joining us this morning to continue the important 

 17 dialogue on the issues and considerations that may 

 18 affect the implementation of new rules under the 

 19 Dodd-Frank Act. We value the opportunity to hear 

 20 reviews on the various implementation issues, and, 

 21 in particular, on how to implement the rules in a 

 22 manner that best achieves the purposes of the 
 89 

 1 Dodd-Frank Act and efficient and cost-effective 

 2 manner. 

 3 As indicated in the agenda, this panel 

 4 will focus on transaction processing for swaps and 

 5 security-based swaps. In particular, the areas of 

 6 focus for today's panel include trade execution, 

 7 confirmation, documentation, and the submission of 

 8 trades for clearing. In addition, we will discuss 

 9 whether a phase-in approach is appropriate for 

 10 some of these requirements and what types of 

 11 objective criteria could be used for phased-in 

 12 implementation. 

 13 I should note that the SEC is still in 

 14 the process of proposing substantive requirements 

 15 for some of these areas, with the exception of 

 16 trade verification and acknowledgment requirements 

 17 which the SEC proposed in January. As always, the 

 18 input we receive today will help inform our 

 19 approach as we continue the proposing process. 

 20 Before we begin, I'd just like to give 

 21 everybody the opportunity to go around the room 

 22 and introduce themselves. Perhaps we can start 
 90 

 1 over here. 

 2 MR. HUNTER: Henry Hunter, head of 

 3 Product Development and Business Development at 

 4 MarkitSERV. 

 5 MR. CUSENZA: Paul Cusenza, CEO of Nodal 

 6 Exchange. 

 7 MR. CAWLEY: James Cawley, CEO of 

 8 Javelin. 

 9 MR. BERNARDO: Shawn Bernardo, senior 

 10 managing director, Tullett Prebon. 

 11 MR. CHAVEZ: I'm Marty Chavez, partner 

 12 at Goldman Sachs. 

 13 MR. LAWTON: John Lawton, Division of 

 14 Clearing, Intermediary Oversight, CFTC. 

 15 MR. SHILTS: Rick Shilts, CFTC Division 

 16 of Market Oversight. 

 17 MS. MOORE: Catherine Moore, SEC. 

 18 MR. McVEY: Rick McVey, CEO of 

 19 MarketAxess. 

 20 MR. HARRINGTON: George Harrington, head 

 21 of Fixed Income Trading at Bloomberg. 

 22 MR. OMAHEN: John Omahen, SunGard. 
 91 

 1 MR. DENIZÉ: Yves Denizé, director and 

 2 associate general counselor at TIAA-CREF. 

 3 MR. O'CONNOR: Garry O'Connor, IDCG. 

 4 MR. BERMAN: Excellent. Thank you. To 

 5 start off the panel, I'd like to start with a 

 6 rather general question. Where do panelists think 

 7 rules regarding transaction processing should come 

 8 in the larger implementation sequencing? 

 9 Specifically, are there contingencies that were a 

 10 part of the implementation of one aspect of 

 11 transaction processing prior to any of the others? 

 12 MR. CHAVEZ: I'll take a stab at that, 

 13 if I may. We're approaching the rule set from the 

 14 point of view of a huge software project and 

 15 really just thinking about it as software 

 16 developers would and breaking it down. And so, 

 17 one of the slogans that software developers have 

 18 is make it right before you make it faster, and 

 19 another one is do things concurrently and 

 20 iteratively. 

 21 And so, we've looked at all the rules 

 22 and I took the opportunity to reread them to 
 92 

 1 prepare for this morning. I want to say it's an 

 2 incredible and magnificent work and thoughtful 

 3 dialogue. And so, now we're just going to look at 

 4 the dependencies and say, for instance, the 

 5 real-time public reporting of swaps. We can get 

 6 to work on that right now. That would be the 

 7 concurrent way of approaching software 

 8 development, but to go live, you need first for 

 9 SEFs and the execution to exist. You can get to 

 10 work on SEFs right now, but the SEFs have to exist 

 11 for certain kinds of transactions to have 

 12 real-time reporting, and if you go back from SEFs, 

 13 you need the swap trading relationship 

 14 documentation in place, you need the reporting and 

 15 recordkeeping obligations in place, you also need 

 16 to know what you're going to do with clearing, 

 17 which, in turn, depends on capital enlarging. So, 

 18 we've done a very detailed dependency analysis of 

 19 which ones need to come first. 

 20 MR. CAWLEY: If I can jump in, this is 

 21 something at Javelin we've given a lot of thought 

 22 to. It's something that directly affects us as an 
 93 

 1 electronic execution venue, but it's also 

 2 something that broadly concerns us all. 

 3 Specifically, we feel that this is 

 4 mission-critical to get it right out of the blocks 

 5 because we think that trade execution/confirmation 

 6 or acceptance into clearing, without that, you 

 7 increase settlement risk, which in turn increases 

 8 or lessens trade integrity and faith in the 

 9 system. And, ultimately, it goes to the success 

 10 of clearing, broadly speaking. 

 11 So, it's really something at a strategic 

 12 macro level concerns us all, and something that we 

 13 should address right out of the blocks, and it 

 14 should be a standard that's set with your tutelage 

 15 to which all of us subscribe to some minimum 

 16 standard in terms of trade execution and 

 17 confirmation of those trades. 

 18 MR. BERNARDO: I think that Tullett 

 19 Prebon as an entity or broker, it really depends 

 20 on how descriptive you make the rules because we 

 21 currently operate as a SEF with pretty much all of 

 22 the products that we're speaking about. So, the 
 94 

 1 phasing in of these different systems, whether it 

 2 be for the execution, whether it be for 

 3 connectivity for clearing, the trade reporting, we 

 4 have a lot of the things in place. And, as Marty 

 5 said, it takes time to do a lot of the things that 

 6 we have to do to enhance either the existing 

 7 platforms or to develop new ones. So, it really 

 8 depends on how prescriptive you make the rules. 

 9 MR. HUNTER: To some extent, a lot of 

 10 what's being asked for is already going on today. 

 11 There's already clearing, there's already 

 12 execution, electronic execution, there's already 

 13 reporting going on, but it's happening to greater 

 14 or lesser extent. But a large volume of 

 15 transactions are already being confirmed and 

 16 reported through existing trade repositories, and 

 17 that would suggest that starting there is a good 

 18 place because a lot of it is already happening. 

 19 The next thing after that logically would be 

 20 clearing in terms of what's already happening 

 21 today, and, finally, the electronic execution 

 22 piece. So, that sequence from a purely practical 
 95 

 1 perspective would make sense to us. 

 2 MR. CUSENZA: And building on that, I 

 3 think that the concept, too, which talked about 

 4 phasing and having the stuff in place makes a lot 

 5 of sense. I think a lot of this discussion about 

 6 phasing things and then phasing within items is 

 7 important. 

 8 I would also add, for us at Nodal 

 9 Exchange, we do electricity features, but we're an 

 10 ECM, and we have to convert to either a SEF or 

 11 DCM, and we're still not sure which is appropriate 

 12 for us. And so, having time to then go through 

 13 those rules and determine what is the right 

 14 mechanism and for the grandfathering rules to be 

 15 clear, and within the grandfathering, there's 

 16 certain elements that will be conforming with 

 17 immediately in terms of we already are today, but 

 18 there's other items that are more complex that 

 19 involve third parties. 

 20 For example, our clearing members have 

 21 to be FCMs instead of general clearing members. 

 22 We have to do that transition. We have to change 
 96 

 1 our boards and our voting for our company. And, 

 2 so, all those things need to be worked out and 

 3 they have to have time to do that, but some of the 

 4 basic items because we do clear today, all of our 

 5 contracts are cleared through LCH, can be done 

 6 immediately. So, the phasing concept is very 

 7 good. 

 8 MR. HARRINGTON: I think from a 

 9 Bloomberg perspective, one of the things that 

 10 we're seeing right now, I agree with what Henry 

 11 said, the connectivity I think is well underway 

 12 today. So, with DDTC and the role that MarkitSERV 

 13 plays, most players do have some sort of 

 14 connectivity in there now from a reporting 

 15 standpoint, so that does help accomplish CSDR from 

 16 an electronic execution standpoint. Obviously, 

 17 that's a space we play in, our competitors play 

 18 in, as well, for both CDS and IRS. Those markets 

 19 are definitely new markets. However, the growth 

 20 that we're seeing in them now is certainly 

 21 reflective that the market is moving towards 

 22 accepting the electronic trading as a venue for 
 97 

 1 swap execution. 

 2 I think the area where we're still 

 3 looking for guidance mostly falls in around the 

 4 compliance and what the compliance left of the SEF 

 5 is going to be. That's something where we're 

 6 spending a great deal of our time. I said whether 

 7 it be clearing, whether it be reporting, whether 

 8 it be execution, the building blocks are there and 

 9 construction is well underway. The piece that 

 10 we're looking for, final guidance, as well as with 

 11 some date guidance, but is what exactly that 

 12 compliance left is going to look like. 

 13 MR. McVEY: I would echo those comments 

 14 and just point out that of the three main 

 15 components between electronic execution and trade 

 16 reporting and central clearing, arguably, 

 17 electronic execution today is the furthest along. 

 18 There are multiple electronic execution venues 

 19 already available in most asset classes today, and 

 20 a big part of our readiness for self-registration 

 21 and compliance will depend on the final rules. 

 22 And one of the key things for those of us that 
 98 

 1 operate in credit where there is dual regulatory 

 2 responsibilities between the SEC and the CFTC is 

 3 the ultimate convergence of those rules. 

 4 We really hope that we're not coding the 

 5 two separate sets of rules for one asset class, 

 6 and I think if there is convergence of those rule 

 7 sets, you will see that electronic execution 

 8 venues are ready to qualify as SEF sooner. And 

 9 the second part that George points out is really 

 10 the compliance aspects of meeting SEF 

 11 qualifications and where those final rules come 

 12 out. 

 13 MR. O'CONNOR: And let me just, you 

 14 know, couch it in the terms that IDCG is a 

 15 clearinghouse. We don't sponsor an execution 

 16 facility as such. But I'd echo Henry's comments 

 17 that there's already reporting structures in 

 18 place, as we've already heard, there's already 

 19 execution structures in place and there is a great 

 20 deal of clearing happening. I think that when you 

 21 think about the phasing in of those particular 

 22 items, I think part of it, as we've heard in the 
 99 

 1 previous panel, is about the open access 

 2 considerations. 

 3 So, I think when you look at the 

 4 electronic execution platforms in existence today, 

 5 they're operating at a very commercial manner. 

 6 Probably the biggest changes that they have to 

 7 make is to sort of facilitate open access to those 

 8 platforms, and I think that that's more difficult 

 9 to do prior to a broad clearing mandate than 

 10 after. I think once you have a broad clearing 

 11 mandate, so you have, at least to an extent, made 

 12 a common counterparty situation available to the 

 13 various execution facilities, I think it's more 

 14 difficult to develop broad open access execution 

 15 facilities. 

 16 MR. DENIZÉ: As a financial end-user, I 

 17 think, for us, one of the key components is that 

 18 we had several expectations as to what the process 

 19 is going to look like. For our organizations, 

 20 we're not as entranced and as engaged as some of 

 21 the larger industry players are, and so, we have a 

 22 narrower focus and a narrow amount of resources 
 100 

 1 able to put to this problem. And to do this on 

 2 the fly in a fashion where things continue to 

 3 move, it's very difficult for us. And so, to have 

 4 a settled expectation as to where the market has 

 5 come out on a lot of these rules, our risk 

 6 managers have to understand the counterparty 

 7 credit issues, the margin and capital 

 8 requirements. 

 9 Our accounting and legal folks have to 

 10 work through the reporting, as well as the 

 11 documentation process in a way that's logical and 

 12 rational for us. And so, our hope is that the 

 13 phase-in process and the dependencies are some 

 14 settled expectations in terms of how the industry 

 15 is coming forward with establishing this regime, 

 16 but also to do so with clear concern about how the 

 17 end-users -- the prior panel was talking about 

 18 documentation. 

 19 I think it's very important that the 

 20 end-users have appropriate voice in the process 

 21 that were not given a fait accompli with respect 

 22 to documentation or any of these decisions and 
 101 

 1 that our opinions are solicited in an appropriate 

 2 time and an appropriate time of the process. And 

 3 hopefully, the timeline is not so short that those 

 4 concerns are just put the side in the interest of 

 5 expediency. 

 6 MR. OMAHEN: I think I can safely say 

 7 that SunGard agrees with Goldman Sachs on this 

 8 one, that it is a software project. First, being 

 9 a software vendor, I don't know how else we would 

 10 view it. But I think as looking at it as a 

 11 software project, being able to define any one 

 12 piece of it from front to back has great benefits 

 13 to building out the rest of it because once you 

 14 can actually crystalize requirements, you find 

 15 that all the other work follows and becomes much 

 16 easier. 

 17 So, there are people that have to build 

 18 those requirements, have to get down to that 

 19 detail level, and we always find with other 

 20 projects that until the data actually starts 

 21 coming out, it's hard for us to really build 

 22 around it. You can see specks, you can go to 
 102 

 1 meetings, but until you actually see the data 

 2 coming through, you just don't know what you're 

 3 going to get. So, I think this kind of clarity on 

 4 one section would have immense benefits for us. 

 5 MR. CUSENZA: I'd like to build on 

 6 Rick's comment about the convergence of CFTC and 

 7 SEC rules. We clear less liquid power contracts 

 8 when we do that through an auction platform, 

 9 coupled with OTC clearing, and this auction 

 10 platform would be acceptable today as an ECM, 

 11 acceptable as a DCM. It's acceptable in the SEC 

 12 draft rules as a SEF, but in the pre-trade price 

 13 transparency requirement of the SFTC rules for 

 14 SEFs, it would appear to not be permitted as an 

 15 auction platform. Of course, that's really 

 16 important for us because if we want to become a 

 17 SEF in terms of the time to do that kind of 

 18 transition, it's important what the final rules 

 19 will actually be. We hope in the final rules 

 20 they'll be that convergence and auctions will be 

 21 permitted in the CFTC-SEF definition, as well, but 

 22 without that, there's a lot of uncertainty for us 
 103 

 1 as how we can move our current platform to the new 

 2 world. 

 3 MR. SHILTS: I had a question. 

 4 Yesterday, we talked about connectivity and 

 5 infrastructure issues, and I don't want to talk 

 6 about that again, but I wonder if people could 

 7 touch on the specific arrangements, processes, 

 8 agreements required for trading platforms and 

 9 clearing entities, such as SEFs, to enable 

 10 transactions to be submitted to clearing, and then 

 11 also to talk about kind of the timeframes for 

 12 getting these in place. 

 13 MR. McVEY: I'd be happy to. We run an 

 14 all institutional electronic execution business at 

 15 MarketAxess, and, in essence, our rulebooks are 

 16 simply user agreements for institutional investors 

 17 and dealer agreements for qualified broker dealers 

 18 that make markets on the system. So, the 

 19 agreements are already in place. We have today 

 20 about 1,000 institutional investor firms that have 

 21 signed up with user agreements in appropriately 80 

 22 broker dealers, and there's been plenty of 
 104 

 1 investment going to not only the electronic 

 2 execution engines, but also the post-trade trade 

 3 reporting. 

 4 So, the readiness of the industry, I 

 5 think, is getting very close with respect to the 

 6 connectivity to the affirmation hubs and the prime 

 7 brokers, and, ultimately, the clearinghouses. And 

 8 I can say with confidence over the next three to 

 9 six months, that those connections will be in 

 10 place. 

 11 MR. CAWLEY: You ask about trade 

 12 connectivity between SEFs and clearinghouses in 

 13 terms of the way we see that at Javelin in terms 

 14 of connectivity is we view it on a pre-trade and 

 15 post-trade vis-à-vis trade confirmation and 

 16 verifying margin for customers to trade. We have 

 17 a strong view that SEFs should be required to 

 18 deliver trades on a real-time basis to 

 19 clearinghouses, and that clearinghouses, likewise, 

 20 should accept that trade in real-time and respond 

 21 equally in real-time with an affirmation or with a 

 22 rejection, and that that it's really incumbent 
 105 

 1 upon, therefore, the CCP and their constituent 

 2 FCMs to improve their internal latency to ensure 

 3 that trade connectivity or trade affirmation 

 4 internally between the FCM and the CCP comes back 

 5 in near real-time. 

 6 We think that on a post-trade basis, 

 7 broadly speaking, a customer, from customers we 

 8 speak to, they're happy to have no trade if 

 9 there's a rejection on one side. If, indeed, the 

 10 trade is reported to them in real-time, that it's 

 11 rejected or accepted. Likewise, on a pre-trade 

 12 basis, to take a more proactive approach. 

 13 When we speak to FCMs, they talk about 

 14 selecting their full tolerances, if you will, on 

 15 customers within the clearinghouse as if to say, 

 16 well, once the trade is done, as it comes to the 

 17 CCP, don't send me every trade for me to opine on 

 18 on a micro basis, but let me set those full 

 19 tolerances at the beginning of the day and let me 

 20 update them real-time on all my customers 

 21 throughout the day at the clearinghouse, and that, 

 22 we think, is very positive. It improves the 
 106 

 1 latency and the round-trip on that trade 

 2 affirmation or confirmation process. 

 3 Likewise, we would advocate, as do 

 4 others, and I believe that this is the case with 

 5 some of our competitors right now, that we could 

 6 take that information as an execution venue from 

 7 the clearinghouse and actually project it back to 

 8 the customer on our user interface or UI, if you 

 9 will, at the CEF level such that the customer 

 10 would not unknowingly exceed their own margin 

 11 limits. Then, likewise, the CEF could come in and 

 12 impose some type of one step beyond fat-fingering 

 13 on a trade, but prevent them from trading in 

 14 excess of their margin if they were to attempt to 

 15 do it knowingly. So, that's sort of a more 

 16 proactive approach. We're told from certain CCPs 

 17 that they have that plumbing. We certainly have 

 18 that capability and it exists in other listed 

 19 derivatives marketplaces today. 

 20 That all is born from what we see as a 

 21 last look option that FCMs have currently in the 

 22 OTC derivative marketplace, which is not the case 
 107 

 1 in less derivative space where the FCM, in fact, 

 2 agrees to accept all trades until they reject 

 3 them. So, the owners in those marketplaces really 

 4 to say, well, we'll accept all trades on a 

 5 customer until such time that we tell you not to 

 6 accept those trades. We think that that works 

 7 well for two reasons: One is the onus is really 

 8 on the FCM to determine and to enforce credit and 

 9 margin on their own individual customer, but, 

 10 also, possession is nine-tenths of the law, and 

 11 they have the ability to liquidate the underlying 

 12 account if that customer runs afoul of the margin 

 13 limits. 

 14 MR. SHILTS: And those are interesting 

 15 comments, but could you kind of explain how that 

 16 kind of helps us as far as implementation? 

 17 MR. CAWLEY: Well, I think it goes back 

 18 to my original comment, which is in order to have 

 19 successful clearing, the optimal solution is to 

 20 have best trade integrity to know that if a trade 

 21 is executed and that the workflow is thus that the 

 22 customers have got confidence in the overall 
 108 

 1 process, without that confidence in the system, 

 2 people will be loathed to submit trades to 

 3 clearing and to execute on SEFs. 

 4 So, we speak to customers. They say, 

 5 well, look, we see the benefits of trading on SEFs 

 6 and some of us offer trade annuity, which from a 

 7 customer's standpoint, customers really like, and 

 8 they like to get the prospect of evening trading 

 9 amongst themselves. But the downside to that is 

 10 well, who am I trading with? So, what happens on 

 11 the other side if the trade gets rejected? 

 12 MR. O'CONNOR: I think with regard to 

 13 implementation, what it means -- and I think 

 14 they'll all very, very good comments -- I think 

 15 what it means is to successfully execute on an 

 16 electronic platform, certainty of transaction is 

 17 very important for people. That's a core of what 

 18 you're saying. So, in order to have that 

 19 certainty of transaction, you need to have the 

 20 pipes in place connecting to clearinghouses, which 

 21 are able to give a timely response, whether that's 

 22 real-time or near to real-time back to the 
 109 

 1 execution venue so that people will have that 

 2 confidence that what they're doing on the screen 

 3 or what they're doing on the system, be they 

 4 various or multiple, they know that they're 

 5 actually doing. 

 6 So, I think that gives you some clues 

 7 about, as we did in the first round-trip, what 

 8 things you need in place and in what order you 

 9 need them in place to implement successful 

 10 electronic execution. 

 11 MR. LAWTON: Yes, that sort of leads to 

 12 a natural phasing in the statute of clearing 

 13 mandate proceeds trading mandate, and we're 

 14 wondering what sort of timeframe should there be. 

 15 Say that a clearing mandate is on day one, when 

 16 should a trading mandate follow? How long in 

 17 time, and what should be the steps? 

 18 MR. CAWLEY: Well, I think from a 

 19 mandate standpoint, you'd obviously want to have a 

 20 tight window on that, but from a business 

 21 standpoint, in a competitive environment, I would 

 22 be surprised if you gave a mandate for clearing 
 110 

 1 that execution venues would not ready themselves 

 2 in anticipation for fear that they be left out. I 

 3 would say that it would be unusual from where we 

 4 sit, and we'd certainly welcome it from our 

 5 competitors, that they wait for the last rule to 

 6 get written and then become effective before they 

 7 start to turn on and accept trades. From where we 

 8 sit, we'll be looking primarily in where you are 

 9 in your clearing mandate because, as I said, 

 10 yesterday, you could have if you reverse the order 

 11 and require execution first and not clearing, you 

 12 might be open for business, but there would be no 

 13 impetus to clear, so there'd be no trades to be 

 14 done. So, but I guess you'd want to have a tight 

 15 window, but I'd be mindful of looking to the 

 16 competitive forces at work in the marketplace to 

 17 accelerate that. 

 18 MR. HARRINGTON: I think it'd really 

 19 important to speak for a moment about the role of 

 20 standards, and the commissions have definitely 

 21 taken leadership here in terms of unique product 

 22 identifiers and unique swap identifiers, 
 111 

 1 algorithmic derivates or descriptions for 

 2 derivatives. Standards are crucial to get the 

 3 documents and the plumbing in place. 

 4 So, just take a brief example, if you'd 

 5 got 10 participants and they're all going to 

 6 negotiate bilaterally, that's 45 documents, and 

 7 that might be doable. But if you've got 1,000 

 8 participants and they're all going to negotiate 

 9 bilaterally or they're going to connect to systems 

 10 bilaterally in a customized way, that's 499,500 

 11 different negotiations, and there just aren't 

 12 enough lawyers in the world to do that. 

 13 So, it's really important to make all of 

 14 this work in a timely way and to be able to answer 

 15 your question about how much time in between one 

 16 mandate and another for the agencies to take a 

 17 strong stand that the industry adopt standards. 

 18 That's going to make a scale and that going to 

 19 enable us to do this in what a computer geek would 

 20 call linear time rather than quadratic or 

 21 exponential time. 

 22 MR. O'CONNOR: You don't want to get 
 112 

 1 yourself in a position where you mandate something 

 2 on a tight timeframe and deliver a monopoly result 

 3 to somebody. So, you do need to give the industry 

 4 time to get the infrastructure in place and the 

 5 contracts in place that support a broad and 

 6 successful operation. 

 7 MR. HARRINGTON: I think if you look at 

 8 the technology that goes into someone who's going 

 9 to connect to a clearinghouse and just submit down 

 10 for clearing, and then you actually look at the 

 11 putting electronic execution on top of that, the 

 12 technology challenge there always from our 

 13 standpoint is not large, and, therefore, the 

 14 timing there from an implementation standpoint is 

 15 something that couldn't be done very closely. 

 16 I think the much broader question, 

 17 though, and this was sort of touched in the 

 18 earlier panels and certainly in earlier panel 

 19 discussions that we've had here, is what makes 

 20 sense from a product standpoint? In other words, 

 21 yes, you could rush and say technology can do 

 22 real-time reporting, technology can do electronic 
 113 

 1 execution, technology can do real-time submission 

 2 to clearing. That's all great, but if you build a 

 3 product that's not usable by the community, that's 

 4 a much greater fear. 

 5 So, whether you're talking about are the 

 6 indices the first ones, that would make sense or 

 7 investment grade or index underliers? Those are 

 8 the much more important questions to determine 

 9 versus what is the ability of the technology 

 10 because technology can move very fast, and, as 

 11 we've seen in these markets particularly, 

 12 sometimes it moves much faster than the business 

 13 actually can move. 

 14 MR. HUNTER: Yes, I would just echo that 

 15 sentiment, as well. With regard to technology, a 

 16 lot of which we agree is already in place to some 

 17 extent for certain products and processes, but 

 18 once you change business processes, that is the 

 19 real challenge, and it's the overlay between those 

 20 two, in particular. A point I want to make is 

 21 with regard to timing, not of implementation, but 

 22 of individual transactions and whether they can be 
 114 

 1 submitted in real-time and so on. Imposing 

 2 tighter requirements to put stuff through in 

 3 real-time may actually be more of a challenge 

 4 because it requires business process change than 

 5 if the requirements may be initially or even in 

 6 the longer term are looser, but people meet them 

 7 voluntarily because there's no reason not to, and 

 8 that limits them from having to make sudden and 

 9 large business process changes. 

 10 An example would be allocation of trades 

 11 by fund managers to subaccounts. That's a process 

 12 today which happens post-trade. It can be done 

 13 quite quickly, it can sometimes take longer, but 

 14 forcing trades to be submitted within prescriptive 

 15 timeframes would require business process change, 

 16 which, in turn, would delay implementation. 

 17 MR. CUSENZA: Yes, I was just going to 

 18 echo what George was saying in terms of I think 

 19 that's the concept when you mandate clearing and 

 20 trading. It should be different likely by product 

 21 because some products are going to come in much 

 22 more established than others and they're ready to 
 115 

 1 go, it could be even simultaneous. It depends on 

 2 what the product category is. Whatever you do, I 

 3 would set it up in a flexible way, such that 

 4 you're able to mandate those dates differently 

 5 depending on what the category is or the contracts 

 6 you're looking at. 

 7 MR. McVEY: I agree with the points that 

 8 have been made. I would make a slightly different 

 9 point. I think electronic execution provides 

 10 critical ingredients for central clearing. It is 

 11 the electronic execution venues that are going to 

 12 create real-time data and trade velocity 

 13 information that will help central clearinghouses 

 14 manage their risk. And I think even determining 

 15 which swaps are trading actively enough to manage 

 16 the risk in a clearinghouse partly comes from the 

 17 data that would come on the back of electronic 

 18 execution venues. So, in most cases, I think 

 19 these things are attached at the hip and I would 

 20 certainly suggest that the timing on those 

 21 mandates should be very similar. 

 22 MR. BERMAN: I'd like to come back to 
 116 

 1 something that I think, Marty, you started off 

 2 with. I think a few times you referenced the 

 3 whole software paradigm, and in your opening 

 4 comments, you talked about sort of backing up from 

 5 real-time reporting and going backwards. If we 

 6 take that paradigm and we go all the way 

 7 backwards, ultimately, you get to the end-user. 

 8 And I don't think I'm overgeneralizing, but among 

 9 all the participants, I think TIAA-CREF represents 

 10 the ultimate end-user. I think there was a 

 11 comment before about Apple. I have no idea how 

 12 YouTube works, but all I know is that it's 3:00 in 

 13 the morning, I can download videos of the royal 

 14 wedding, et cetera. So, it's sort of just 

 15 magical. 

 16 So, how, if you backup everything 

 17 ultimately to the end-user, how do you think about 

 18 both staging and from an end-user perspective, how 

 19 do you think about what you basically need from 

 20 all of the participants around and what order 

 21 would be best for you? 

 22 MR. DENIZÉ: Thinking from a taskforce 
 117 

 1 or a project team inside our company, we have to 

 2 know the rules, and I think that's perhaps facile 

 3 for this group, but it's certainly important 

 4 because we just have a cascade of decisions that 

 5 flow from that, including, as I mentioned before, 

 6 our risk management, our IT, even our audit 

 7 processing and policies and procedures all have to 

 8 flow from that. So, clear and determined rules. 

 9 We talked about the product phase-in, 

 10 and I'm handling the policy issues first, but the 

 11 product phase-in is very important. And for us, 

 12 there's a governance issue about how those 

 13 products get mandated to clear, get mandated to 

 14 trade, and having an opportunity either 

 15 individually or as a community to participate in 

 16 that process. It's important so we can also both 

 17 have input, but also plan appropriately as to what 

 18 that phase-in is going to look like on a 

 19 product-by-product basis. 

 20 And then as an end-user, we want a 

 21 fairly facile way to hook in. Hopefully, the 

 22 kinks have been worked up. Hopefully, the 
 118 

 1 inter-dealer experience has been tested 

 2 sufficiently as a first phase, for instance, of 

 3 implementation to work out the kinks, and then 

 4 we'll be able to be handed some fairly clear 

 5 direction as to how the process is going to be 

 6 on-boarded and so forth. And I think some of that 

 7 has been occurring, but I think, as some of the 

 8 other panelists have said, until the ground the 

 9 clears, the dust is settled, we won't have that 

 10 clarity for ourselves. And, again, it's just very 

 11 difficult to hit a moving target. And so, I think 

 12 as an end-user, we'd appreciate having some of 

 13 that worked out ahead of time. 

 14 MR. CHAVEZ: I think, as Yves pointed 

 15 and as you observed, again, standards are access 

 16 to getting all of this to work and to do it 

 17 robustly and rapidly. 

 18 So, you gave the YouTube example. The 

 19 great thing about YouTube is that you can go to 

 20 pretty much any smartphone or any browser and it 

 21 just works. You don't have to do any special 

 22 work. 
 119 

 1 And, so, it'd be really important and 

 2 particularly for the end-users, as a dealer, we 

 3 have literally hundreds of people reading the 

 4 rules and beginning to build software and to think 

 5 about all the dependencies, but the thousands of 

 6 end-users, this would be a relatively small corner 

 7 of their business. So, for them to get successful 

 8 on with us and the infrastructure providers, it's 

 9 really important to adopt the standards first. 

 10 MR. BERNARDO: I guess from a broker's 

 11 perspective, we've been building these platforms 

 12 for the various products long before the rules 

 13 were even written or even before Dodd-Frank 

 14 because, depending on the product, as the products 

 15 evolve and maybe become more efficient through the 

 16 use of electronics, and they can capture those 

 17 efficiencies, we've actually been rolling them out 

 18 in different product sectors. So, I think it's 

 19 obviously important. The implementation, I think, 

 20 the connectivity to clearing is one of the things 

 21 that should be done first. So, the connectivity 

 22 to a swap data repository, but we obviously, as 
 120 

 1 brokers, need non-discriminatory access to that 

 2 clearing. And then the execution, we have the 

 3 platforms in place, we can develop those 

 4 platforms, but they should come at a later date. 

 5 MR. LAWTON: There was a discussion in 

 6 the previous panel about potentially clearing 

 7 mandates being applied by market participants. 

 8 So, for certain types of market participants 

 9 getting subject to a clearing mandate earlier than 

 10 others. 

 11 Would the same sort of thinking apply 

 12 with regard to a trading mandate? Are there 

 13 distinctions you would make between a clearing 

 14 mandate and a trading mandate with regard to 

 15 market participants? 

 16 MR. CAWLEY: I think we thought about 

 17 this, too. It's dangerous to start segmenting out 

 18 the client base to say, for example, that dealers 

 19 go first. That would certainly put us at, I 

 20 think, extreme competitive, I would say, at a 

 21 considerable sustainable competitive disadvantage. 

 22 Liquidity is combustible and it's sticky and, with 
 121 

 1 all due respect to Sean and Tullett, we wouldn't 

 2 want to give an inter-dealer first look at the 

 3 business first such that dealer to customer 

 4 platforms be somehow handicapped. 

 5 So, you really want to give that a good, 

 6 hard, long look, vis-à-vis the competitive aspects 

 7 or the anti- competitive aspects that that might 

 8 ensue, and that would certainly stifle or could 

 9 stifle considerable innovation and competition in 

 10 the space that would ultimately have negative 

 11 impacts and transparency and customer choice. So, 

 12 one has to be very careful how you start to self- 

 13 select and start having guys subscribe to it. 

 14 Away from the anti-competitive 

 15 standpoint, there's also a liquidity standpoint 

 16 for customers. Does that mean then the customers 

 17 get a worse shake on a trade because there's less 

 18 liquidity in that pool to begin with because only 

 19 a small segment of that marketplace is required to 

 20 trade? There's been talk about, well, you have 

 21 end-user exemptions where they're not required 

 22 necessarily to post margin and so forth. But, 
 122 

 1 ultimately, we see those customers coming on, as 

 2 well, being for the simple reason that you're 

 3 going to see a tighter bid offer spread in a more 

 4 transparent market. 

 5 So, as you consider that, two things: 

 6 One is the anti-competitive aspect and giving one 

 7 group of SEFs a competitive advantage over 

 8 another, but, also, to the restrictions and the 

 9 negative impact and the unintended consequences 

 10 that could occur vis-à-vis execution and cost of 

 11 execution in transparency if you were to say, 

 12 well, one group goes first and another group goes 

 13 second. 

 14 MR. CUSENZA: I would also say that in 

 15 terms of any tiering, that that should be done 

 16 depending on what the market is if you do do the 

 17 tiering. Like, for example, our market, which is 

 18 a power market, I don't see where the tiering 

 19 would necessarily be a useful thing for the 

 20 trading requirement, but that may be different of 

 21 other markets, and so, therefore, it's important 

 22 to have a flexible approach there. 
 123 

 1 MR. McVEY: I would just add there's a 

 2 lot of talk about implementation by client 

 3 category or client segment. Our observation is 

 4 that the OTC derivative markets are much more 

 5 concentrated in terms of trading activity than the 

 6 securities markets. And I would have thought that 

 7 it makes some sense to look at overall trading 

 8 activity levels or open interest as a way to make 

 9 sure that the most active and most sophisticated 

 10 derivative market participants are being phased in 

 11 to the new regulations first, irrespective of 

 12 their client segment. And we're all hoping that 

 13 with central clearing, we will see much broader 

 14 market participation in swaps, but it is a 

 15 highly-concentrated market today. And it is those 

 16 users, whether they come from the dealer 

 17 community, the hedge fund community, investment 

 18 management community that I think are most capable 

 19 of embracing the new regulations and the new rules 

 20 the soonest. 

 21 MR. O'CONNOR: I think your question is 

 22 should we look at phasing-in by type of 
 124 

 1 participant and to the execution facilities, and I 

 2 would ask a couple of questions in response. And 

 3 number one: What do you think you would achieve 

 4 by doing that? Because as you've already heard 

 5 from panelists today, if you mandate a narrow 

 6 section of the market for execution, there may be 

 7 some value in doing that, but you're really 

 8 reinforcing what's already there today because we 

 9 have those sort of facilities today. 

 10 And the second question that I'd ask you 

 11 is: Why would you need to do that? 

 12 I think there's been consensus at this 

 13 panel, I think, that data connectivity needs to 

 14 come first, the clearing needs to come second, and 

 15 execution comes third after those things are in 

 16 place. There's some debate about the speed of 

 17 those transitions, but there's consensus on the 

 18 order. So, if you've already got data connection 

 19 and you've already got clearing in place, I'm not 

 20 sure what you achieve by then phasing in by 

 21 participant the execution facility because there's 

 22 already been a lot of work done. 
 125 

 1 MR. CHAVEZ: The commissions have an 

 2 excellent construct for phasing in the trading 

 3 mandate, which is the concept of made available to 

 4 trade on a SEF. And, so, with those, with a lot 

 5 of thought given to what that actually means, 

 6 number of participants, number of transaction 

 7 size, diversity of client participation, I think 

 8 you will get to the right answer without having to 

 9 mandate a particular group of clients go first. 

 10 MR. SHILTS: Are there any thoughts on 

 11 once there is a determination for mandatory 

 12 trading, how long the delay should be before it 

 13 actually goes into effect for a particular swap? 

 14 MR. McVEY: Are you asking the question 

 15 from an end-user perspective or from a staff 

 16 provider? 

 17 MR. SHILTS: Anyone who would have to 

 18 comply with the requirement, as well as for SEFs 

 19 to be -- presumably, there would be some SEFs that 

 20 are offering this product already if there was a 

 21 determination that it would have to be mandatorily 

 22 traded, but to make this a requirement that this 
 126 

 1 particular swap or category of swap now is subject 

 2 to the mandatory trading requirement? I mean, the 

 3 determination today and it starts tomorrow, I'm 

 4 just interested in what types of things we should 

 5 think about in terms of what types of delays 

 6 should there be before it actually goes into 

 7 effect and anyone that wants to trade the swap, 

 8 unless they're subject to an end-user exemption, 

 9 would have to then do it on a SEF or DCM. 

 10 MR. McVEY: Purely speaking as a 

 11 perspective SEF, I think the practical matter is 

 12 that we believe after the rules are finalized, we 

 13 would need appropriately 180 days to make sure 

 14 that our trading system and surveillance system 

 15 comply with that final set of rules. Having said 

 16 that, a lot of that has to do with what the final 

 17 rules say, and I talked earlier about the hopeful 

 18 convergence of the SEC and CFTC rules, and Paul 

 19 followed on as well. And we obviously are 

 20 offering requests for quote or auction-based 

 21 technology and credit today, and clients have 

 22 embraced that because it is the most competitive 
 127 

 1 form of electronic execution available to them. 

 2 We compete directly with Central Limit 

 3 Order books; we've offered Central Limit Order 

 4 books in the past. Our clients are finding that 

 5 in certain asset classes, requests for quote 

 6 technology is where they're getting the best price 

 7 and the most efficient trading technology. So, if 

 8 we're permitted to continue to offer requests for 

 9 quote without being forced to simultaneously offer 

 10 Central Limit Order book technology, then I think 

 11 our readiness will come very shortly after the 

 12 rule set if finalized. If there are significant 

 13 changes that those of us that offer RFQ technology 

 14 have to make to our trading businesses or Central 

 15 Limit Order books have to make to theirs, then I 

 16 think the implementation dates would need to be 

 17 pushed out further. And it's clear that there 

 18 will be competition space with both Central Limit 

 19 Order books and RFQ systems, and our view would be 

 20 to let the market decide and let people compete 

 21 with the technology that they think best serves 

 22 their client base. 
 128 

 1 MR. HARRINGTON: Rick took the macro 

 2 path to that answer, and I fully agree with that. 

 3 On a more micro level, and this gets a little bit 

 4 more into the weeds, but the best example that I 

 5 can look back is where we connect to CME and ICE 

 6 and LCH and IDCG, and those CCPs all have a 

 7 product set that they clear, and it's literally 

 8 down to they will clear a five-year IBM CDX 

 9 contract, and with that, market provides red 

 10 codes, which are actually identifiers. And then 

 11 in our system, we basically have a clearing 

 12 eligibility file that we maintain. 

 13 So, on a micro level, I think that it's 

 14 important to note that you're going to have two 

 15 things. Number one, there's going to be a 

 16 mandatory clearing requirement, and then there's 

 17 going to be the second requirement of made 

 18 available for trading. It almost pushes some of 

 19 the questions back, and our comment letter will 

 20 reflect this, that what level of detail are we 

 21 going to have either from the regulators, whether 

 22 it be the CFTC or the SEC as far as something has 
 129 

 1 gone to that level. And if it is as macro enough 

 2 as that, we're going to identify let's just say 

 3 the underling 125 names in the CDX on the run 

 4 index contract. Then we would know very clearly 

 5 which ones we would require that when you came on 

 6 to our system, you're going to trade that has to 

 7 direct to the SEF offering or you could trade at 

 8 voice and process it or whatever it may be. 

 9 So, really, it's a matter of what level 

 10 of detail and what level of granularity that we 

 11 get from the commission. We would push for more 

 12 because you could simply say that now we're 

 13 putting Proctor and Gamble -- Proctor and Gamble 

 14 has now been deemed made available for trading, we 

 15 flip the switch, and it's on and it's almost 

 16 immediate. If it's something where made available 

 17 for trading is in a grey area where we can 

 18 determine whether or not, maybe it is, maybe it's 

 19 not, we're not sure how to interact. That just 

 20 creates a lot more difficulty for us as a 

 21 provider. 

 22 MR. CAWLEY: Just coming back to what 
 130 

 1 Rick said at a macro level, I agree with Rick. 

 2 First, a couple of set-in points there. 

 3 One, you want to look at is the compliance with 

 4 the rule sets as you promulgate them, but, also, 

 5 as staffs prepare for those, there are entities 

 6 out there, such as Rick's, that are trading today. 

 7 So, again, getting back to my earlier point, no 

 8 one's necessarily going to wait for the last rule, 

 9 the ink to dry on the last rule before they start 

 10 trading for fear that they lose market share. So, 

 11 in anticipation of those rule sets, people are 

 12 going to be trading once clearing becomes 

 13 effective, and it would be our expectation. 

 14 MR. DENIZÉ: I'll take a view again from 

 15 the end-user's perspective. I think identifying 

 16 the bucket of trades that we either do at that 

 17 point or intend to be doing in the near future 

 18 once that's been determined to be a mandated 

 19 trade, adjusting our system requirements, whether 

 20 it's for changes to the margin process, changes to 

 21 the confirmation process, changes to the trading 

 22 process, including the RFQ, whatever the process 
 131 

 1 that's going to be applied to those trades. Any 

 2 related incremental documentation and any changes 

 3 to our policies and processes, again, from a risk 

 4 management perspective, all of that in an end-user 

 5 perspective when someone's not trading on a daily 

 6 basis or in the volume, as some of our colleagues 

 7 here on the panel, is going to take some time. I 

 8 don't have a date for you, but I didn't want to 

 9 kind of lay that out for you in terms of the types 

 10 of steps that we would have to go through once 

 11 that announcement was made and the adjustment 

 12 would have to be made. 

 13 MR. BERNARDO: I know we keep saying the 

 14 implementation and we're talking about 

 15 electronics, but I don't want the voice brokers to 

 16 be forgotten about here because, even today, we're 

 17 talking about phasing in the electronics and 

 18 putting all these systems in place. The voice 

 19 brokers are actually doing these trades today in 

 20 all of the product areas that we're talking about. 

 21 So, some of the products may become fully 

 22 electronic, like the Treasury market, other 
 132 

 1 markets are going to be hybrid, where you are 

 2 going to have voice intervention, and then other 

 3 markets are just going to use some of the 

 4 platforms, whether it be for display purposes and 

 5 to send these trades through the Swap Data 

 6 Repository and to clearing. But the voice brokers 

 7 are doing these trades today, because, again, 

 8 we're talking a lot about implementation and 

 9 platforms and how they're going to operate. We 

 10 actually operate the markets as we speak. 

 11 MR. CHAVEZ: To briefly get back to your 

 12 question on the gap between when a swap is made 

 13 available for trading and when everyone must 

 14 mandatorily trade it on a SEF, again, the 

 15 standards are just so important here. The beauty 

 16 of YouTube is that people put a lot of work into 

 17 the HTML standards and the browser standards, so 

 18 any end-user can just go get a browser and it 

 19 works. We will need to create the same kind of 

 20 thing here. To the extent we do that, it will be 

 21 very easy for end-users to plug in. If we don't 

 22 have the standards and the proper foundation, it 
 133 

 1 could be extremely hard and take a long time. 

 2 MR. LAWTON: Going back to the comment 

 3 that was made a moment ago about end-users need a 

 4 certain amount of time to get their procedures in 

 5 place, could you go a little bit more into detail 

 6 which aspects, for example, confirmation, 

 7 documentation, valuation? When you're dealing 

 8 with it, there's going to be requirements for 

 9 dealers to have certain policies and procedures, 

 10 and then the question would be: How do the 

 11 end-users fit into that? 

 12 MR. DENIZÉ: On documentation alone, 

 13 most end-users who are moving from LTC derivatives 

 14 transactions into the clearing and the mandatory 

 15 clearing and the mandatory trading space are 

 16 facing new documentation in each case. And as we 

 17 transition to those different type of 

 18 documentation, those are changing, and so, we'd 

 19 have to adjust those. Those govern all the 

 20 agreements, all the transactions that are going to 

 21 take place. They do deal with conflict, dispute 

 22 resolutions, and so forth, and so, they spinout 
 134 

 1 into our own processes and policies as to how to 

 2 manage those contractual relationships and so 

 3 forth. 

 4 The valuation process, we have our own 

 5 internal valuation process that has to both 

 6 reflect and respond to the ability to either 

 7 question valuation, dispute it if possible or if 

 8 appropriate, and under what circumstances to do 

 9 that. And, so, those processes have to be laid 

 10 and be established. 

 11 In terms of trading, the trading process 

 12 for the end-user, as Marty was indicating, if it's 

 13 easy to hook in and it's all standardized, that 

 14 that makes it easier for us. If it's multiple 

 15 vendors, multiple types of systems, John is here 

 16 from SunGard. 

 17 I mean, as any number of software 

 18 vendors out there, we have to go through RFP 

 19 processes that talk about the costs involved, how 

 20 easily they match and mesh with our own systems, 

 21 and there's a fairly long testing process to 

 22 implement those software and process changes or 
 135 

 1 technological changes. And some of those just 

 2 aren't standard to the industry because we all 

 3 have legacy systems. We all have quite strange 

 4 systems, unfortunately, within our shops, and to 

 5 adjust all of that to even a single best in class 

 6 YouTube experience requires some adjustment. 

 7 So, we as end-users, and certainly I as 

 8 an end- user, certainly aren't suggesting that the 

 9 time should be infinite, but, we do want the -- 

 10 and we encourage the commission to keep asking 

 11 these questions about the detail, and we'll 

 12 continue to provide that detail as we can. 

 13 MR. BERMAN: Can I ask a detailed 

 14 question about some of the information flow? So, 

 15 if you have to trade something that is on a SEF, 

 16 would you be trading that primarily using an 

 17 interface provided by the SEFs itself or would you 

 18 be using your own systems and, therefore, require 

 19 more of a programmatic connectivity to the SEFs, 

 20 which would obviously take longer than opening up 

 21 YouTube or SEF application on the iPhone and 

 22 typing in the swap that you want to trade? 
 136 

 1 MR. DENIZÉ: I think, interestingly, it 

 2 goes to the types of trades we're talking about, 

 3 as well. One of the reasons I think we have RFQ 

 4 versus some type of ticker approach on the SEF 

 5 trading is because we don't know what type of 

 6 liquidity and volume we're going to have on 

 7 certain types of trades. And I think the industry 

 8 is continuing to indicate that we're going to need 

 9 RFQ approaches because we won't have the liquidity 

 10 and volume to have that more automated process. 

 11 And so, something like an RFQ would be different, 

 12 but I view that a bit more manual than seeing a 

 13 ticker trade or something more automated in terms 

 14 of a process. 

 15 We as a current OTC derivatives trader, 

 16 we appreciate the elements of the RFQ process and 

 17 we look forward to a SEF process that, when robust 

 18 and sufficiently liquid and sufficient volume, 

 19 provides a set price transparency by all means, 

 20 but if we need to get all our trades done and RFQ 

 21 is a middle ground, then we'll have to pursue that 

 22 appropriately. 
 137 

 1 MR. HARRINGTON: I would just add to 

 2 that as a SEF provider, and I think I'll let Rick 

 3 comment, but I would think that he would probably 

 4 agree that, I mean, that's an area where we 

 5 compete as SEFs, as well. So, obviously, we're 

 6 going to build a platform, we're going to try and 

 7 build the best breed. We're going to try and 

 8 gather the best full liquidity, but then when you 

 9 do all those things on the surface, that's great. 

 10 But, a lot of times, in at least the electronic 

 11 trading business, a lot of the wins or losses is 

 12 what your level of integration is. So, offering. 

 13 So, yes, you've got the front end, but 

 14 you can directly route trades into the end-user's 

 15 OMS. They can do their allocations, they can go 

 16 through all their internal processes, and then use 

 17 that connectivity that you, as a provider, give 

 18 back to them. So, I think that's a space where 

 19 differentiate ourselves or attempt to 

 20 differentiate ourselves. 

 21 MR. McVEY: Yes, and I would echo that 

 22 if you look at electronic trading today both in 
 138 

 1 the fixed income markets, as well as the OTC 

 2 derivative markets, clients are using the 

 3 platform's front end, and the most active clients 

 4 are doing integration work into the OMS system. 

 5 So, ultimately, they will be directly connected so 

 6 that orders can flow directly from their blotter 

 7 into an execution venue, and then completed trades 

 8 back into their blotter for clearing. But I think 

 9 many of the connections have already been made. 

 10 There are many potential SEFs that already have 

 11 critical mass in terms of client and dealer 

 12 connections in place today. 

 13 MR. CAWLEY: Just I would echo both what 

 14 Rick and George has said. I think some of the 

 15 proof in the pudding is going to be in terms of 

 16 connectivity, API connectivity on a pre-trade and 

 17 post-trade basis, not just the front-end GUI or 

 18 user interface or UI, or to use Marty's analogy, 

 19 the YouTube interface. 

 20 One point, while we're on the subject of 

 21 YouTube interface is I think it's fair to say that 

 22 we want to get this right. One thing, to continue 
 139 

 1 the YouTube analogy is there have been several 

 2 versions of YouTube and Internet Explorer before 

 3 they essentially got it right, and I don't think 

 4 anyone here is saying for a second, and correct me 

 5 if I'm wrong, that we're expecting it all to be 

 6 done right on day one, and then for it to be set 

 7 in stone and for us not to make changes. 

 8 One of the great things about technology 

 9 is that the new technology is coming into the 

 10 realm every day, and one of the clear 

 11 differentiating factors who with clearinghouses 

 12 and electronic venues is how we deploy and utilize 

 13 that new technology as it becomes effective. So, 

 14 again, it took many iterations for some of this 

 15 technology to get within the YouTube or the 

 16 Internet Explorer space. And I would expect that 

 17 over the course of the next 5 to 10 years, as this 

 18 market migrates into central clearing and a fully 

 19 electronified markets, you're going to see the 

 20 same type of innovation. 

 21 MR. O'CONNOR: The only word of caution 

 22 I would offer is that there's no mandate to watch 
 140 

 1 YouTube and there is a mandate to use these sorts 

 2 of facilities. So, it's going to get better over 

 3 time, but there is an obligation for us to not get 

 4 it wrong on day one. 

 5 MR. CHAVEZ: Indeed. It'll be crucial 

 6 to take an iterative approach. The perfect is the 

 7 enemy of the goods. So, we definitely want to 

 8 pick milestones. 

 9 I'll just draw in an example from the 

 10 fed letter process during the crisis. So, the fed 

 11 would challenge the industry and say what are the 

 12 statements that are false today and they will all 

 13 be true three months from today and get everybody 

 14 to buy in and just keep doing it and doing it? We 

 15 will converge to a great answer, but with that 

 16 kind of approach, we can get to workable answers 

 17 soon. 

 18 MR. CUSENZA: Maybe just to build on 

 19 that a little bit, with July 16 approaching 

 20 quickly, to provide some clarity of what happens 

 21 then, July 16 and what's the status of the 

 22 situation, grandfather and other things would be, 
 141 

 1 of course, very helpful for the markets. 

 2 MR. HUNTER: Yes, I think each of these 

 3 products have different liquidity pools, as we 

 4 heard before. So, some products are more 

 5 susceptible to trade fully electronic, some need 

 6 to remain voice or have some sort of voice 

 7 intervention. So, as you write the rules, 

 8 depending on how prescriptive you make them, you 

 9 really don't want to rule out certain things and 

 10 hurt markets and low liquidity. 

 11 MR. BERNARDO: Yes, I think the markets, 

 12 while you reference the fed process earlier on, 

 13 the fed commitments are quite good at coming up 

 14 with solutions once mandates are in place, and 

 15 they know what the target is, are quite good at 

 16 saying, okay, let's get that infrastructure built, 

 17 and competitive pressures, as well, will dictate 

 18 their providers offer good solutions. One thing 

 19 we would recommend is that those choices are 

 20 allowed. There isn't a prescriptive approach to 

 21 saying this is how SEFs must connect to DCOs or 

 22 how counterparts must report their trades what 
 142 

 1 particular mechanisms they should use. So, that 

 2 ability to choose and use the optimal 

 3 infrastructure is the thing that's going to work 

 4 out the best in the long run. 

 5 MR. BERMAN: Can we drill down on that 

 6 just a bit? I think the common theme over both 

 7 today and all the panels is that a lot of this is 

 8 already happening, there are SEFs, there are 

 9 clearinghouses, there is lots of transaction 

 10 processing, there is a phasing possibility of the 

 11 huge influx of new requirements that will trade. 

 12 But when it comes to transaction processing are 

 13 there specific new requirements coming out of 

 14 Dodd-Frank that you say even though we have a lot 

 15 of aspects of straight through processing today, 

 16 there is one aspect or two aspects that it's 

 17 completely new, that would need to be built that's 

 18 not captured in current workflow? 

 19 MR. CHAVEZ: I think the poster child 

 20 example to your question would be the give-up 

 21 agreements for client clearing of OTC derivatives. 

 22 It is a brand-new thing, it is a really important 
 143 

 1 thing to get right, and here, the Commission's 

 2 leadership, together with the collaboration that's 

 3 already happening in the industry to come up with 

 4 a fully standard give-up agreement, and then we 

 5 all get into a protocol, and one day, we adopt 

 6 that agreement. That'll be crucial for getting 

 7 this to work. 

 8 MR. HUNTER: There are additional data 

 9 elements that are being asked for that aren't part 

 10 of the process today, for example, execution 

 11 timestamps and standard identifiers. So, it's not 

 12 a radical departure from what happens today. The 

 13 process is broadly the same, but there are 

 14 definitely some real implementation considerations 

 15 that are going to come into way to provide that 

 16 extra data. 

 17 MR. HARRINGTON: From an execution to a 

 18 reporting and to clearing standpoint, I think 

 19 everyone's made the point that those elements are 

 20 there. The big major difference as a provider and 

 21 as a SEF provider is on the detailed level of 

 22 compliance that we're being asked to conduct. 
 144 

 1 And one of the things that we commented 

 2 on was that given that the SEF offering that we're 

 3 planning on bringing to the market will be for 

 4 clearing only eligible swaps and then they'll be a 

 5 DCM in place on every single transaction that gets 

 6 done, a lot of the regulatory oversight will 

 7 already be being accomplished by those elements. 

 8 And, therefore, what we're pushing back on or 

 9 hoping to get some regulatory relief on is that 

 10 given that there's already so much regulatory 

 11 oversight taking place because of the DCM, and 

 12 because of the DCO, why, as the SEF, do we have to 

 13 come in and do a third level of pretty much asking 

 14 for the same level of detail if we verify that 

 15 those elements are in place? That's the major 

 16 change of something that's not there at all today 

 17 and something that would be a new requirement. 

 18 MR. CHAVEZ: To pick up George's point 

 19 very briefly, the swap trading relationship 

 20 documentation, that's going to be another very 

 21 substantial area of undertaking. 

 22 So, for instance, exchanging documents 
 145 

 1 on how to value swaps and how to value them in the 

 2 absence of market inputs is a mind-bendingly 

 3 difficult problem you could fill libraries with, 

 4 with very boring PhDs on that topic of how to 

 5 value even interest rate swap. So, that's going 

 6 to take a lot of work for the industry to get 

 7 right, as well. 

 8 MR. CAWLEY: If I can just chime in on 

 9 that one point, when it comes to documentation, I 

 10 think it's fair to say that, broadly speaking 

 11 across all facets of OTC clearing, whether it be 

 12 documentation, workflow, technology, a lot of the 

 13 building blocks are already there. Trade is 

 14 certainly going on, clearing is going on, and it's 

 15 a question of whether you port those, that 

 16 experience and those aspects into this 

 17 marketplace, and most of us and all of us probably 

 18 are to a certain extent with our own individual 

 19 companies. 

 20 Broadly speaking from a market 

 21 standpoint, we disagree with Marty. We don't 

 22 think we are putting men on the moon when it comes 
 146 

 1 to documentation vis-à-vis Execution Give-Up 

 2 Agreements. The FIA historically in the list of 

 3 derivatives context has done a really good job of 

 4 standardizing some very simple, straightforward 

 5 documents that can be universally adopted. We 

 6 need to be mindful when we consider that 

 7 documentation for the OTC context that we don't 

 8 attempt to start to put in workflows that are 

 9 going to limit open access and competition in this 

 10 space. It's something we're very mindful of 

 11 doing, and we look to give open access as a SEF 

 12 going forward. We don't want to deny access. We 

 13 also don't want to have documentation forced upon 

 14 us that we weren't included in drafting. 

 15 It's something that Yves from TIAA-CREFF 

 16 mentioned. Don't come to us in the eleventh hour 

 17 and say you have to adopt this documentation. 

 18 There is this fair degree of autonomy with SEFs 

 19 granted under Dodd-Frank and as seen so far from 

 20 the rule sets suggested and promulgated by the 

 21 commissions. We are licensed entities, and we 

 22 expect to be licensed entities with our own rule 
 147 

 1 sets and our own procedures and so forth. And one 

 2 of the mission-critical things that we're looking 

 3 for there, frankly, is documentation to offer 

 4 fair, open, and unfettered access with appropriate 

 5 rule sets attached to those such that there is 

 6 liquid and transparent trading, and so, we'd be 

 7 very mindful. But, again, coming back to it, 

 8 we're not putting men on the moon with this 

 9 documentation. 

 10 I've heard yesterday and today that 

 11 hundreds of thousands of man hours, the need to go 

 12 into this, and how do you segment out the market? 

 13 Do you take the most active guys first? And I 

 14 think Rick mentioned that earlier within the 

 15 context of if you're going to segment out the user 

 16 base, how do you approach it? And I think that's 

 17 not a bad way to start approaching it as you 

 18 consider the 80/20 rule and adoption as the rule 

 19 sets go forward. 

 20 When it comes to documentation 

 21 specifically, you've got standardized documents. 

 22 You're not reinventing the wheel on every 
 148 

 1 document. Yes, there are clearing agreements 

 2 today with simple addendums that can be attached 

 3 to cover OTC derivatives. These are addendums 

 4 attached to existing documentation. There is 

 5 existing documentation within the FIA context for 

 6 list of derivatives that can be ported into the 

 7 OTC space. We need to be mindful that as that 

 8 porting goes on, that it's done in a thoughtful, 

 9 neutral manner such that access is not somehow 

 10 diminished for one group over another within the 

 11 context. 

 12 But, again, coming back to this, a lot 

 13 of these things are, they're currently in use, and 

 14 it really behooves us, especially with 

 15 documentation to learn from some of the 

 16 documentation that we already have today. 

 17 MR. BERMAN: A big theme over the last 

 18 few days has been around phasing in, and I think 

 19 I've heard phasing in around client type, phasing 

 20 in around product type. 

 21 Should we be considering phasing in 

 22 around implementation of some of these technical 
 149 

 1 issues in terms of maybe phasing in over what data 

 2 elements should be required, phasing in things 

 3 don't require to give up versus required to give 

 4 up, or is that so well contained that it's not 

 5 necessarily something that really should be on the 

 6 table? 

 7 MR. O'CONNOR: I think you just need to 

 8 give people time to conform. I'm not sure that 

 9 you add any value by phasing in based on the 

 10 operational complexity of someone's business 

 11 versus somebody else's. I think you need to give 

 12 all participants sufficient warning, and then time 

 13 to conform. 

 14 MR. CUSENZA: Yes, I would just add that 

 15 in having the time and flexibility to allow people 

 16 to conform is an important piece. 

 17 For example, we clear as an ECM, but we 

 18 have to be now clearing or facilitating as a SEF 

 19 or a DCM. We may be able to meet most or if not 

 20 99 percent of the requirements. There may be some 

 21 that are unique to us that can be difficult and 

 22 work with the commission to basically say we will 
 150 

 1 conform at this set date and this certain process, 

 2 and so, it can be managed that way. I'm going to 

 3 guess those items could be different for different 

 4 entities, and so, having some flexibility to allow 

 5 the commissions to have the ability to flexibility 

 6 say well, everything but, you've got to do this 

 7 next, and then manage us individually would be 

 8 probably a good way to do that. 

 9 MR. McVEY: Yes, and I would just follow 

 10 on, I agree with that comment. I would also say 

 11 we're big fans of temporary registration for SEFs, 

 12 that is SEF is meeting the majority of core 

 13 principles described by the commissions. We think 

 14 they should qualify for temporary registration and 

 15 there should be a follow-on period from that where 

 16 they would need to fully comply with all of the 

 17 regulations. But I think if you do that, you'll 

 18 find that more SEFs are ready to go sooner than 

 19 would otherwise be the case if you require full 

 20 compliance of every one of the final rules. 

 21 MR. CHAVEZ: There are a number of 

 22 examples of successful big builds in the industry, 
 151 

 1 whether it's Trace or the Euro or MiFID-1 or the 

 2 DTCC Trade Information Warehouse, where part of 

 3 the success has been lay out requirements and then 

 4 progressively tighten them over time. 

 5 So, to give another example from the SEC 

 6 cash equity market rules, recently that the 

 7 reporting limit went from 90 seconds to 30 

 8 seconds, and it was very easy to do because we 

 9 were already at 90 seconds. If it had gone right 

 10 to 30 seconds from the outset, that would have 

 11 been difficult. So, as one concept end of the day 

 12 reporting, and then one hour and then five minutes 

 13 and then five seconds is something that would work 

 14 well as opposed to going immediately to the 

 15 desired outcome. 

 16 MR. BERMAN: Well, I'm sensitive. We're 

 17 standing between everybody and lunch. So, since 

 18 it is 12:30, I think I'll just take the 

 19 opportunity to thank all of the panelists, and I 

 20 think we regroup here at 1:30. Thank you. 

 21 (Whereupon, at 12:27 p.m., a 

 22 luncheon recess was taken.) 
 152 

 1 A F T E R N O O N S E S S I O N 

 2 (1:33 p.m.) 

 3 MR. SHILTS: If everyone could take 

 4 their seats, please. 

 5 All right. I guess we're ready to 

 6 begin. This is our third panel of the day to 

 7 discuss implementation issues. This panel will 

 8 address issues related to implementation of 

 9 various reporting requirements. We'd like to 

 10 focus on rules related to reporting data to swap 

 11 data repositories, as well as rules related to 

 12 implementation of real-time public dissemination 

 13 of economic terms of swaps, the real-time 

 14 reporting requirements. We want to hear 

 15 panelists' views on the key issues and challenges 

 16 to be faced and the timing required for 

 17 compliance. We'd also like to discuss how best to 

 18 phase in these requirements, whether by asset 

 19 class or some other criteria -- criterion. We'd 

 20 also like to hear your thoughts on the sequencing 

 21 of rules that may require data for full 

 22 implementation, such as the determination of the 
 153 

 1 appropriate block trade sizes and position limits. 

 2 To get going with that we'll be asking 

 3 some questions and then we'll -- whoever wants to 

 4 comment just, again, just press the red button to 

 5 turn it on and then press it again to turn it off. 

 6 So before we start off with the first 

 7 question, let's go around the table and introduce 

 8 everyone. I'm Rick Shilts, the director of the 

 9 division of Market Oversight at the CFTC. 

 10 MR. EADY: Tom Eady from the SEC. 

 11 MR. GAW: Michael Gaw, SEC. 

 12 MS. COLLAZO: Marisol Collazo, 

 13 Depository Trust and Clearing Corp. 

 14 MR. GOOCH: Jeff Gooch, MarkitSERV. 

 15 MR. PRITCHARD: Raf Pritchard, 

 16 TriOptima. 

 17 MR. CUMMINGS: R.J. Cummings, 

 18 Intercontinental Exchange. 

 19 MR. OKOCHI: Jiro Okochi, Reval. 

 20 MR. THUM: Bill Thum, The Vanguard 

 21 Group. 

 22 MS. McKENNA: Karla McKenna, 
 154 

 1 International Organization for Standardization. 

 2 MR. TURBEVILLE: Wally Turbeville, 

 3 Better Markets. 

 4 MR. JOACHIM: Steve Joachim, FINRA. 

 5 MR. MORAN: Jim Moran, CME Group. 

 6 MR. BERNARDO: Shawn Bernardo, Tullett 

 7 Prebon. 

 8 MS. THOMAS: Merritt Thomas, Barclays 

 9 Capital. 

 10 MR. TAYLOR: David Taylor, CFTC. 

 11 MR. SHILTS: And thank all for 

 12 participating today. 

 13 We'll start off, I guess, with the first 

 14 question, kind of talking about data reporting to 

 15 swap data repositories, and maybe to get initial 

 16 thoughts on when you think that swap dealers and 

 17 major swap participants, and then looking at other 

 18 participants and other counterparties, including 

 19 end-users, would be ready to commence data 

 20 reporting to swap data repositories. And also 

 21 noting what considerations we should take into 

 22 account as we phase in these various requirements 
 155 

 1 and whether asset class should be a major 

 2 consideration. 

 3 MR. GOOCH: Do you want me to kick off 

 4 on that one? I think it depends on if you look at 

 5 the rules as you've written them there's a number 

 6 of different data types people are expected to 

 7 pass over. I think on the basic level, you know, 

 8 the confirm of principle economic terms, which is 

 9 largely the same data set I think is, you know, 

 10 available today electronically and the credit 

 11 market already goes into the Trade Information 

 12 Warehouse. I think that piece can be done 

 13 relatively quickly. 

 14 I think where you'll get, you know, 

 15 bigger delays either in terms of the real-time 

 16 reporting of the reduced information set which can 

 17 be facilitated on the current networks but does 

 18 require some changes, particularly some of the 

 19 more complex trades, I think the SEFs will talk 

 20 probably at some point about, you know, that flow 

 21 being relatively quick, which I think is correct, 

 22 but I think for some of the bilateral trades 
 156 

 1 that's more of an issue in terms of capturing it. 

 2 I think also there's a number of things 

 3 you've defined in terms of collateral information, 

 4 other types of post-trade information, which 

 5 require a longer (inaudible). So I would say the 

 6 core data is largely electronified already and 

 7 group (inaudible) quite quickly by the majority of 

 8 participants. I think some of these other things 

 9 would then need a little bit of phasing in, in the 

 10 current vernacular of the last two days, 

 11 (inaudible) bringing some of the other 

 12 requirements. 

 13 MR. TAYLOR: You -- 

 14 MR. PRITCHARD: Sorry. 

 15 MR. TAYLOR: Let me just do a follow-up 

 16 question, if I may. You sort of referenced the 

 17 credit asset class in that answer. Are you 

 18 directing that specifically to credit or do you 

 19 think that's generally across the asset classes or 

 20 are there differences? 

 21 MR. GOOCH: I think if you look at 

 22 credit we have and 99 percent of the trades 
 157 

 1 electronified already. In the interest rate asset 

 2 class, you know, on trade day real- time we're 

 3 sort of getting 85 percent and probably higher in 

 4 the U.S. Frankly, it's a global number. I think 

 5 that's relatively in good shape. You look at some 

 6 of the other asset classes -- Jiro should think 

 7 about this -- the equity is a lot further behind 

 8 foreign exchanges, past the commodities market, a 

 9 very sophisticated (inaudible). So it's probably 

 10 a bit more of a patchwork quilt. You have to keep 

 11 reminding me we're talking about lots of different 

 12 asset classes. I tend to focus on the credit 

 13 equities in most of my answers. 

 14 MR. PRITCHARD: Yes. I think we'd agree 

 15 with a lot of what Jeff is saying there that, you 

 16 know, the different asset classes have their 

 17 different characteristics and the electronic 

 18 platforms that support them are at different 

 19 stages of their sort of development and evolution 

 20 and readiness. 

 21 I think what we would observe from our 

 22 experience is in terms of the systemic risk 
 158 

 1 monitoring goal largely being served by the 

 2 capturing of the daily continuation and valuation 

 3 data across all trades, we're currently seeing 

 4 over 75 percent across all asset classes through 

 5 our commercial platforms, including the primary 

 6 economic terms of these trades along with daily 

 7 valuations and the exposures on over four million 

 8 trades on a daily basis, for example. And so, you 

 9 know, that I think speaks to the fact that in 

 10 terms of realizing one of the key systemic risk 

 11 monitoring benefits, there aren't any real 

 12 dependences on technologies or standards or 

 13 current activities really impeding the rapid 

 14 realization of that goal. 

 15 MR. OKOCHI: Jiro Okochi, Reval. So I 

 16 would say there's two answers to that question. 

 17 Are swap dealers ready? Of all the 200 swap 

 18 dealers and the major swap participants, I'm not 

 19 sure everyone is ready today. But assuming they 

 20 could be ready with the data they have, you know, 

 21 I think that's another part of the answer. If 

 22 it's getting the data in the right format, that 
 159 

 1 can take some time depending on the reporting 

 2 entity. 

 3 And then I'd say it's the work -- 

 4 MR. SHILTS: When you say take some 

 5 time, if people could comment on how -- what do 

 6 you, you know, estimate? What would be like a 

 7 reasonable time period? 

 8 MR. OKOCHI: It's very hard to say 

 9 depending on, you know, which trades are going to 

 10 be the unclear-type trades, which trades are maybe 

 11 customized to the business segment they're in, if 

 12 they're in all asset classes, what kind of volumes 

 13 they have. What kind of systems the different 

 14 desks have. So, oftentimes, the commodities desk 

 15 will have a different trading system, different 

 16 data warehouse than say the interest rate does. 

 17 But I think it's not just the data. It's also the 

 18 workflow around that data. So just sending the 

 19 data in is half of the interface workflow, but all 

 20 of the utility tools around exception reporting, 

 21 et cetera, I think will be as big of a concern. 

 22 It's just sending the data in. 
 160 

 1 And lastly, getting the data that's not 

 2 yet completely defined. You know, the end-user 

 3 clearing exemption data to, you know, the unique 

 4 product identifiers, the unique counterparty 

 5 identifiers. You need to get all that kind of 

 6 squared away first. 

 7 MR. THUM: I think from Vanguard's 

 8 perspective we are gratified by the CFTC staff's 

 9 issuance of the concepts and questions on 

 10 implementation and we largely agree with the 

 11 concepts that are laid out there. We think that 

 12 probably once the final rules are in place there 

 13 needs to be a period for the market to digest the 

 14 rules and build the infrastructure to accommodate 

 15 the rules. But we think one of the first 

 16 priorities should be the nonpublic reporting of 

 17 general trading data. And we think that's 

 18 important to inform the decisions that have to be 

 19 made with respect to block trade sizes, delays 

 20 related to releasing information, related to 

 21 public information, related to block trades, and 

 22 also to make an appropriateness determination with 
 161 

 1 respect to position limits. 

 2 So we think that you've got it right in 

 3 terms of the sequencing that you've laid out and 

 4 the concept release. And we think that following 

 5 an initial period for the market to digest the 

 6 rules and to develop the infrastructure, then 

 7 collecting the data, is the first step. 

 8 MR. TAYLOR: How long do you think that 

 9 digestion period needs to be? 

 10 MR. THUM: Well, I think that's a 

 11 question. And, you know, I think it's hard to sit 

 12 here today and say that. I think that the 

 13 Commissions should come up with a time, whether 

 14 that's after the rules are published, whether 

 15 that's three to six months and then engage in a 

 16 regular series of meetings with the different 

 17 market participants, particularly if it's going to 

 18 be on data reporting, you're going to have to be 

 19 meeting with the swap dealers, with the MSPs, with 

 20 the SDRs, to see that their infrastructure is in 

 21 place to be able to meet the deadlines and, you 

 22 know, to effectively crack the whip where 
 162 

 1 necessary to get them in line to be able to 

 2 collect that data because we don't think that you 

 3 can make informed decisions on block trade sizes 

 4 or delays or position limits until you have that 

 5 information. 

 6 So clearly we've got implementation in 

 7 terms of market infrastructure, collecting the 

 8 data, then determining which swaps are 

 9 standardized for clearing. Then from there 

 10 determining which standardized swaps are available 

 11 to trade and having mandated a phased rollout of 

 12 mandates relating to party type and product type 

 13 starting with the dealers and the MSPs and moving 

 14 eventually through to asset managers, like 

 15 ourselves, and end-users, but focusing on products 

 16 as well, such as the most liquid range of interest 

 17 rate swaps and credit default swaps and then 

 18 building from there to the less liquid types of 

 19 products. 

 20 MR. TURBEVILLE: It strikes me that a 

 21 lot of what I know I've gotten from other 

 22 roundtables and absorbed some information. I have 
 163 

 1 a little bit of experience in the market myself. 

 2 But it strikes me that the packets of information 

 3 associated with these transactions are by and 

 4 large not huge packets of information. And we've 

 5 got a couple of things going for us. One is that 

 6 each one of these trading institutions actually 

 7 has to record that information in their own 

 8 systems, or if they're not recording it in their 

 9 own systems they don't know actually what's going 

 10 on with their own books, which I think is not 

 11 true. I think they're actually able to record it. 

 12 We also know that trade information, trade data 

 13 has been successfully sent many times and to many 

 14 places as the markets have emerged. 

 15 The one thing that struck me just from 

 16 listening to the roundtables was that more 

 17 complicated transactions are actually recorded, if 

 18 I got it right, are actually recorded in the 

 19 systems of the trading firms, not in their more 

 20 complicated form but broken down and disaggregated 

 21 into simpler units. And one of the things I'm 

 22 sort of interested in is is it a deterrent to 
 164 

 1 getting things launched that if the regulators are 

 2 requiring transaction- based information as 

 3 opposed to risk-based information which would take 

 4 a more complicated transaction and record it in a 

 5 simpler way. 

 6 By the way, we actually think it should 

 7 be -- the regulations should be talking about the 

 8 simpler forms rather than transaction-based but I 

 9 just wondered if it's accurate to say that's 

 10 actually something that needs to be addressed -- 

 11 transaction-based versus risk-based information. 

 12 MR. OKOCHI: My comment to that would be 

 13 that when the dealers do that it's probably 

 14 because they're in a different hedge book and it's 

 15 not, you know, it could be an option volatility 

 16 book for the embedded component of the swap versus 

 17 an interest rate book for the coupon of a 

 18 structured debt instrument. I'm not sure it's 

 19 that they're -- 

 20 MR. TURBEVILLE: Yeah. The point is if 

 21 the regulations say it's a transaction-based 

 22 recordation into the SDR as opposed to the 
 165 

 1 risk-based recordation, which you're suggesting in 

 2 two different books, is that an issue? 

 3 MR. GOOCH: I think the issue is not so 

 4 much about the availability information. Every 

 5 dealer books these trades in their books every 

 6 day. I mean, they always get electronified. The 

 7 question is just how quickly. I think if you're 

 8 doing a flow interest rate swap off an electronic 

 9 execution venue you have the electronic format. 

 10 In seconds it can be made available. If you've 

 11 done some very complex swap trade with an embedded 

 12 option which maybe you can break up a little bit, 

 13 then you might have, you know, people working from 

 14 the paperwork for several hours to enter it into 

 15 the system. It gets electronified. I think the 

 16 issue and the challenge, you know, in terms of 

 17 business process for people is what do they now do 

 18 if they have to take the basics of that trade and 

 19 make it available in 15 minutes, they have to 

 20 fundamentally change the way they book it. It's 

 21 not the trade data is not going to be available, 

 22 it's just a question of how long it takes. It 
 166 

 1 always gets there because they have to run risk at 

 2 the end of the day. They always have it in some 

 3 form in their system eventually. 

 4 MR. TURBEVILLE: They certainly do. I'm 

 5 just asking sort of a simple question. Is it -- 

 6 are the rules -- are the rules requiring SDRs to 

 7 carry transactions as opposed to disaggregated 

 8 risks? The disaggregated risks they'll have? I'm 

 9 sure that's true. And the only concern I would 

 10 have is if you had to reaggregate it somehow and 

 11 when you actually record it to the SDR. 

 12 MS. COLLAZO: Well, if I can just speak 

 13 to that. You know, we tend to see the transaction 

 14 model as a way in which the regulators aren't 

 15 going to be able to see the audit trail, if you 

 16 will, from taking it from a position or risk 

 17 perspective back to the transactions. And you 

 18 know, from our understanding and having spoken 

 19 with yourselves, is that -- there's two objectives 

 20 here and one is understanding the exposure in the 

 21 market which is a risk- based view, but the other 

 22 is understanding from a market abuse perspective 
 167 

 1 and just monitoring what are the records that make 

 2 up that position. And to do that you have to have 

 3 the transactions. 

 4 And so, you know, the model, and I think 

 5 when you look at it per asset class, we, you know, 

 6 at DTCC we tend to have two perspectives here in 

 7 the sequencing. One is as regulators you do need 

 8 to see the transactions, we think, because you 

 9 need to see both essentially. You need to see the 

 10 risk and then you need to be able to go back and 

 11 understand what led to that risk exposure. 

 12 Two is being informed about the data I 

 13 think is absolutely correct. So separate 

 14 reporting from dissemination for the moment and 

 15 see the information flowing through and understand 

 16 what does that look like. So how do you formulate 

 17 your views on block trade and on what the 

 18 liquidity impact could be? So certainly we've 

 19 talked, you know, and you've heard conversations 

 20 from many folks on the potential for liquidity 

 21 impact. But this allows you to actually form a 

 22 basis of what does that do before public 
 168 

 1 dissemination actually happens. 

 2 And, you know, the third thing really is 

 3 when we talk about swap data repositories and the 

 4 information, look at where trades have been 

 5 electronically confirmed. Or what is the most 

 6 natural asset class that should go first as far as 

 7 electronic confirmation? Certainly, our 

 8 experience from the Trade Information Warehouse is 

 9 the CDS market is very ripe for that. Interest 

 10 rates, we think, you know, is probably the next 

 11 logical place, perhaps FX, equities, and then 

 12 commodities last because that tends to be much 

 13 more end-user to end-user-based. 

 14 And I guess just the last thing to say 

 15 there is there is an existing process today and we 

 16 need to be mindful that there is a process that 

 17 does allow for the most sophisticated high volume, 

 18 you know, users, such as, you know, the dealers to 

 19 submit a technical capability of flowing 

 20 information through but also supports the buy side 

 21 end-user in a more simple form of either web-based 

 22 or spreadsheet upload. 
 169 

 1 And so I think we have to be cautious 

 2 from, you know, at least from a regulatory 

 3 perspective as to the scope of data when we talk 

 4 about phasing and implementation. If you look at 

 5 pieces within an asset class then you're not going 

 6 to have a full market view. And that to me is an 

 7 important objective, an overarching objective of 

 8 what you're looking to do here, is to have that 

 9 market view. So, you know, we tend to think of 

 10 the phasing on a per asset class basis, not 

 11 necessarily by financial entity under that. 

 12 MR. EADY: A question here. Yesterday 

 13 there was some discussion among some of the 

 14 participants or the firms represented here about 

 15 when they would be ready or open for business and 

 16 some of the SDRs were represented. And I think a 

 17 lot of it, you know, the conversation centered 

 18 around, well, it depends what the final rules look 

 19 like, which is certainly understandable. I'm 

 20 curious here for those who are panelists who are 

 21 currently thinking about registering as SDRs, 

 22 which products are you considering being an SDR 
 170 

 1 for or which type of swaps? And at what date -- 

 2 assuming that the rules as currently proposed by 

 3 both the SEC and CFTC are adopted in substantially 

 4 the same form as final rules, how soon would you 

 5 be ready to accept trade reports from the 

 6 participants who are obligated to do so and for 

 7 which products? 

 8 MR. CUMMINGS: I can start that one. I 

 9 guess at the risk of requesting to go first, I 

 10 think commodities is probably the outlier in this 

 11 group. We've been -- ICE has been clearing energy 

 12 commodities for almost nine years and reporting to 

 13 the CFTC daily trade capture messages, including 

 14 transaction-based information, user-based 

 15 information, lifecycle events related to 

 16 positions, offsets, deliveries, for almost five 

 17 years running now for price discovery contracts. 

 18 So as far as commodities as an asset is concerned, 

 19 we're pretty far ahead. 

 20 ICE does plan to apply for SDR 

 21 recognition. You know, if we're talking solely 

 22 for transaction venues that ICE operates it's a 
 171 

 1 very short walk. I think Bill said maybe three to 

 2 six months. That seems about right. But that 

 3 leans on a lot of benefits that the commodities 

 4 market has developed over a longer period of time, 

 5 which is standardized APIs, standard transactions, 

 6 experience in high frequency trading, you know, a 

 7 lot of data that's moving through in real-time and 

 8 real-time reporting off of our transaction 

 9 systems. 

 10 It's not difficult from that aspect but 

 11 I think some of yesterday's panels discussed, you 

 12 know, how do SEFs connect and what protocol would 

 13 they have to write to for an open access 

 14 clearinghouse? What protocols would an SDR 

 15 support for one to multiple DCOs who supported a 

 16 swap that was for all intents and purposes 

 17 identical across DCOs? I think that, you know, 

 18 that question is unknown right now depending on 

 19 which players decide to register as SEFs, for 

 20 energy commodities in particular. But the 

 21 protocols that we would put out would closely 

 22 mirror what's already in place today. 
 172 

 1 MS. COLLAZO: I'll guess I'll add at the 

 2 risk of going second. So, you know, we think that 

 3 from the asset class perspective, obviously with 

 4 credit derivatives having over 95 percent of 

 5 trades electronically confirmed that that is an 

 6 asset class that is also ripe for initial 

 7 implementation. But we are very much mindful of 

 8 some of the proposed rules and language that the 

 9 SDR needs to demonstrate the ability to 

 10 accommodate all swaps of the asset class. And, 

 11 you know, with respect to that we feel that we 

 12 have a model that allows for all the electronic 

 13 confirmation but also we have a model that allows 

 14 for the paper confirmed trades to be represented. 

 15 Those are represented currently today on a trade 

 16 basis or much more on a risk basis. 

 17 With the Trade Information Warehouse, we 

 18 understand there is work that we'll need to do to 

 19 bring that more compliant with Dodd-Frank, though 

 20 we would urge some consideration about how paper 

 21 confirmations are reported and looking at a very 

 22 light set of details that would allow an image 
 173 

 1 copy of the confirmation to be submitted initially 

 2 as part of the phasing-in approach. 

 3 So taking the approach of what is mostly 

 4 electronified in asset class, we think credit is 

 5 the first one to go. And then we would see 

 6 interest rates, you know, as the next logical one. 

 7 Certainly, our plan is to register as an SDR. 

 8 Currently, our firms recognize us as the 

 9 repository for credit, as well as for equities. 

 10 And there are RFPs going on right now, one through 

 11 ISDA for rates and one through AFME for FX. And 

 12 so we're sort of respectful of that process. 

 13 MR. EADY: So is that answer that -- 

 14 let's say the final rule was adopted on -- I'll 

 15 just pick a date for sake of the argument here -- 

 16 July 1st. 

 17 MS. COLLAZO: Right. 

 18 MR. EADY: -- that you would virtually 

 19 be ready immediately to accept trade reports for 

 20 the asset classes that you just mentioned? 

 21 MS. COLLAZO: Well, there's some work 

 22 that still needs to be done with respect to the 
 174 

 1 additional field. And so there is an append -- we 

 2 need to append the existing records that we have 

 3 with additional information as they flow through. 

 4 So there is going to be -- 

 5 MR. EADY: As you plan through those 

 6 things, how long do you think that will take? 

 7 MS. COLLAZO: Based on our information 

 8 it's about six months. Six, you know, months at 

 9 the lower end, nine months at the higher end that 

 10 we would see as far as being ready with the 

 11 industry. Because, again, what we need to be 

 12 mindful of, I think we need to go back to the 

 13 connectivity discussion in that we need to ensure 

 14 that all the firms are able to submit the 

 15 additional information that is needed and that the 

 16 flow of information, not just for firms but from 

 17 all the relevant parties submitting downstream to 

 18 the SDR to enable that 100 percent coverage is -- 

 19 that all the necessary upgrades are being made. 

 20 MR. EADY: Well, that speaks to the 

 21 participants' readiness to report that information 

 22 to you. 
 175 

 1 MS. COLLAZO: That's right. 

 2 MR. EADY: But you'll be ready to 

 3 receive it. 

 4 MS. COLLAZO: That's right. 

 5 MR. EADY: That's what I'm getting at. 

 6 Okay. And in your case, R.J., you said basically 

 7 three to six months? 

 8 MR. CUMMINGS: That's for -- 

 9 MR. EADY: For commodities? 

 10 MR. CUMMINGS: For commodities, 

 11 probably. What I would comment is what Marisol 

 12 said, is that, you know, the SDR, the way it's 

 13 been drafted is contemplating taking trades from 

 14 SEFs and DCOs for different types of lifecycle 

 15 events. I mean, there are other rules pending 

 16 related to the DCO, at which point a DCO would be 

 17 ready to submit a trade to an SDR based on a 

 18 confirmation. So right now that's unknown. 

 19 Whether the SDR could accept them or not doesn't 

 20 mean that the DCO is going to be in a position on 

 21 that same timeframe to report its transactions on 

 22 the timeframes that have been outlined in the 
 176 

 1 rules. 

 2 MR. EADY: Right, but you'd be ready to 

 3 accept it if they were? Is that right? 

 4 MR. CUMMINGS: Excuse me. 

 5 MR. EADY: No, no--but you as an SDR, 

 6 you're going to register as an SDR? 

 7 MR. CUMMINGS: Yes, for commodities. 

 8 MR. EADY: So you'll be ready to accept 

 9 the report presuming that the people who are 

 10 obligated to send them are in a position to send 

 11 them to you? 

 12 MR. CUMMINGS: I think we're in a -- for 

 13 commodities, we're in a very different position 

 14 from the other asset classes because of the 

 15 standardization that already exists in the market. 

 16 MR. JOACHIM: We have no plans to 

 17 register an SDR but we do have recent experience 

 18 with creating data repositories with Trace in the 

 19 last two years. We've probably done, and maybe 

 20 this will help you, we've probably had the 

 21 bookends of complexities. We did agency 

 22 debentures, which was a commoditized product that 
 177 

 1 was well known, well traded, well identified with 

 2 pretty simple rules, pretty homogeneous as a 

 3 product, and that took us about six months to 

 4 create the data repository to collect the data and 

 5 also plan for dissemination at the same time. And 

 6 we had a strong foundation already built with 

 7 corporate -- with similar corporate bonds. 

 8 We're about to do asset-backed to 

 9 mortgage-backed securities, which is kind of the 

 10 other end of the game. There's a portion of the 

 11 market that's homogeneous since the agency 

 12 mortgage-backed securities, TBAs in particular, 

 13 but the rest of the marketplace is particularly 

 14 bespoke, customized, highly unique, a tremendous 

 15 number of variety of instruments, probably similar 

 16 in size to a lot of the issues is almost the 1.3 

 17 million CUSIPs, instruments that are identified in 

 18 the group. And that's probably taken us from 

 19 beginning of planning almost two years, including 

 20 the industry to get ready to do it, to do it 

 21 right, to cover all the different wrinkles and 

 22 different instruments. 
 178 

 1 So if I was going to plan and think 

 2 through each of these instruments as to what I 

 3 would think through as an appropriate timeframe 

 4 and a fair timeframe to expect, you'd have to look 

 5 at the level of standardization that exists and 

 6 preconditions. And I think we've heard a couple 

 7 of places where there is a fair amount of that and 

 8 six months looks like about the right time. But I 

 9 would say that if you're thinking about markets 

 10 that have very little infrastructure in place, 

 11 very little standardization, not much 

 12 commoditization, I don't think it's unreasonable 

 13 to think you're going to need to spend at least 18 

 14 months to 2 years to be ready to have all the 

 15 pieces in place to ensure that you're collecting 

 16 uniform data that is usable by regulators, as well 

 17 as prepare for dissemination in the long term and 

 18 that the industry is ready to provide that 

 19 information. 

 20 MR. MORAN: At CME, we're looking to 

 21 have a service in rates -- in interest rates -- in 

 22 energy and commodities. We kind of look at the 
 179 

 1 SDR functions as being very similar to functions 

 2 we already perform as a DCO. You know, we 

 3 warehouse the trades. We record them with 

 4 regulatory information. So to the extent a 

 5 product is listed in clearing and it comes in, you 

 6 know, for the most part, we're pretty close there. 

 7 There are a couple of caveats. One is, you know, 

 8 some of the rules are not finalized. There's a 

 9 lot of discussion about data points that may 

 10 change. Different identifiers that are not yet 

 11 created. So obviously those would have to be 

 12 incorporated into the structure at whatever point 

 13 they're created. 

 14 So that -- and the other piece of that 

 15 is the current rules require that if somebody is 

 16 listing a swap they need to take in parts of the 

 17 uncleared market that are reported. This would 

 18 involve some development. I'm not exactly sure on 

 19 what the timeframe is for that but it would be our 

 20 intent to extend the SDR service to also include 

 21 reporting for the uncleared market. 

 22 MR. PRITCHARD: Yes, we operate the 
 180 

 1 rates repository at the moment and we see 3.9 

 2 million live rate swaps on regulator basis through 

 3 that. As mentioned, we also, through our 

 4 commercial services, receive a huge number of 

 5 primary economic details and valuations across all 

 6 asset classes. So we don't see a large dependency 

 7 on getting that part of the data repository 

 8 requirements ready. I think the intradata, the 

 9 real-time data, is what we'd be adding and the 

 10 timeframes that we talked about, three to six 

 11 months seem perfectly realistic. To put our basic 

 12 receptor, the parties could send that data, too. 

 13 And one of the points we've advocated in our 

 14 discussions is that the turnover in the rates 

 15 market is not that high. There's thousands of 

 16 trades a day is the volume of business that goes 

 17 through the interest rate swap market. So it's 

 18 not a huge sort of fire hose of new intraday data, 

 19 but that real-time aspect. And I think the key 

 20 point that a number of the other panelists have 

 21 referred to is that a repository can put out a 

 22 receptor that SEFs or parties can put the data 
 181 

 1 into but getting the industry as a whole connected 

 2 up to that and reliably, you know, comfortable 

 3 with their ability to comply with these 

 4 regulations, 15 minutes or 30 minutes, that's, you 

 5 know, that puts some pressure on the respondent. 

 6 Maybe Tommy does a trade to be really sure that 

 7 he's got a mechanism in place to discharge his 

 8 obligations and that potentially is a greater 

 9 dependency in terms of the timeframes. 

 10 And then the point I think Marisol 

 11 mentioned is a good one. It's easy to get the 

 12 high percentage of relatively standardized trades 

 13 flowing through but including the smaller tail of 

 14 the more complex trades and making sure that 

 15 you're compliant with the full prescriptions of 

 16 the rulemaking for those more complex trades could 

 17 take some time. 

 18 MS. THOMAS: Sorry. I think it's 

 19 important to look not at just the asset class but 

 20 the products within the asset class. So, for 

 21 example, in commodities, the stuff that's already 

 22 trading on ICE, you know, is not a problem. And 
 182 

 1 simple swaps that mimic futures that are already 

 2 trading, those are also very simple. So I think, 

 3 you know, looking at it on both the product and an 

 4 asset class will be very important. 

 5 I also think, you know, it's very 

 6 difficult to pin down these times and therefore, 

 7 the way to accelerate getting this done would be 

 8 to have some sort of phased implementation process 

 9 where, you know, there's a risk-free trial period 

 10 where everybody is trying to get their stuff into 

 11 the SDRs and, you know, there's no penalties 

 12 because people are working through the kinks in 

 13 their systems and trying to get this done. 

 14 And then as you have, you know, you can 

 15 create certain triggers which, you know, if you 

 16 see that, you know, these are very liquid 

 17 products. Okay, well, you know, people seem to be 

 18 getting them into the SDRs and this data looks 

 19 sensible to us, let's start disseminating this 

 20 publicly, et cetera. And then as you progress 

 21 those products from, you know, your most liquid 

 22 standard products, which you can move quickly on 
 183 

 1 to the less liquid, more customized products that 

 2 are more difficult, you know, you can accelerate 

 3 the process. You can get people putting stuff 

 4 into these SDRs faster with the stage process, I 

 5 think. 

 6 MR. OKOCHI: Jiro Okochi, Reval. So we 

 7 plan on registering for three asset classes: 

 8 Interest rates, FX, cross commodities. We're 

 9 technically ready now since we currently host all 

 10 of this data, primarily on the uncleared-type 

 11 trades for end-users, since that's our major 

 12 client-base. We think we can stand up a similar 

 13 environment and add the additional data points in 

 14 five months and three weeks. 

 15 MR. THUM: From the buy side 

 16 perspective, one other issue that is relevant, I 

 17 think, is, again, who is putting that information 

 18 into the SDR? And when we're trading with a US 

 19 dealer, certainly we'd expect the U.S. Dealer to 

 20 be putting that information in. An issue for us 

 21 will be when we're trading with a non-U.S. bank or 

 22 dealer, I think the way the rules are currently 
 184 

 1 written would require us to put the data in. And 

 2 we would like to have the non-U.S. dealer have the 

 3 requirement to put the information into the SDR. 

 4 I think if it's going to be put onto the buy side 

 5 to do that, then it would require significant 

 6 additional work to be able to do it where we think 

 7 the relative merit and expertise probably lies 

 8 with the dealer, U.S. or non-U.S. 

 9 MR. EADY: So if you were to have to 

 10 undertake that responsibility, how long do you 

 11 think it would take for you to be ready to do 

 12 that? 

 13 MR. THUM: I think it's hard for me to 

 14 estimate that. I think our expectation is that we 

 15 won't have to do that. Certainly, we track all of 

 16 our trades. We have detailed operations and 

 17 systems to keep track of them, value them, margin 

 18 them, and otherwise so we have the data in-house. 

 19 And we actively risk manage it. However, the 

 20 connectivity to report that data to the SDR is 

 21 another thing, and we think that that connectivity 

 22 should come dealer to SDR as opposed to buy side 
 185 

 1 to SDR. 

 2 MR. SHILTS: I'd like to turn to a 

 3 little different subject here. As I think you had 

 4 mentioned before, some of the various provisions 

 5 of Dodd-Frank may require having certain data, 

 6 data from the SDRs, for example, in setting block 

 7 trade sizes. 

 8 And in terms of implementation, I wanted 

 9 to get people's thoughts on what we might or the 

 10 Commissions might want to do with respect to SEFs 

 11 or designated contract markets. Setting block 

 12 trade sizes for swaps, say, in this kind of an 

 13 interim period after they're up and operational 

 14 but before we may have the data to actually do the 

 15 calculations and setting the block trade sizes. 

 16 And whether the SEF should be doing that, and if 

 17 so, on what types of criteria should they be 

 18 looking at? 

 19 MR. THUM: Right. We think again, as I 

 20 mentioned previously, that the issue of liquidity 

 21 and the impact on liquidity needs to be assessed. 

 22 And the relative liquidity between the products 
 186 

 1 needs to be considered when assessing a block side 

 2 delay related to public dissemination of the 

 3 information or indeed position limits. So we do 

 4 think that once the data is able to come into the 

 5 SDR and be reported to the commissions, that the 

 6 determination can be made, while initially by the 

 7 SEF in terms of a relative liquidity analysis 

 8 based on looking at the most liquid product. And 

 9 again, we're talking about all swaps trading down 

 10 to standardized swaps that can be clearable down 

 11 to standardized swaps that can be made available 

 12 for trading on a SEF. Looking at that most liquid 

 13 standardized trade that's made available for 

 14 trading and then comparing every other trade that 

 15 is made available trading to that and then 

 16 developing -- instead of having a static block 

 17 size, have a relative block size based on a 

 18 comparison of the liquidity from the most liquid 

 19 product through the least liquid product. So we 

 20 also think that for the most liquid product 

 21 certainly at the outset as opposed to the upper 95 

 22 percent of trading liquidity, we think that the 80 
 187 

 1 percent level makes more sense. We think that if, 

 2 for the most liquid -- 

 3 MR. SHILTS: I guess I'm not really 

 4 focusing on what the ultimate criteria are that we 

 5 establish for setting the blocks. I'm really 

 6 trying to get an idea irrespective of what the 

 7 commissions decide ultimately -- 

 8 MR. THUM: Right. 

 9 MR. SHILTS: It's in this interim period 

 10 before we are able to actually make calculations 

 11 based on the criteria that's adopted. How should 

 12 we permit SEFs or others to set block trade sizes 

 13 absent the data. What kind of criteria -- what 

 14 should they look at in terms of setting block 

 15 trade sizes and who should do it? 

 16 MR. THUM: I think it's going to be very 

 17 hard for a SEF to make an analysis based on 

 18 liquidity when the data isn't there. So I think 

 19 that in terms of -- we feel that the focus of the 

 20 earliest point of implementation should be on risk 

 21 reduction as opposed to price transparency or some 

 22 of the other objectives. So some of those 
 188 

 1 objectives I think day one are going to have to be 

 2 compromised while the data is being gathered. So 

 3 in the absence of having the data to come up with 

 4 a clear analysis of liquidity to set SEF block 

 5 sizes, then there's going to have to be a much 

 6 more generic and delayed reporting of things like 

 7 the size of trades. And maybe that would have to 

 8 be based on buckets of trade sizes -- say 10 

 9 million and under would be 1 bucket, 10 million to 

 10 50 million would be a bucket, 50 million plus 

 11 would be a bucket -- so that there would be some 

 12 public dissemination at end of day but that that 

 13 information could not be used for the negative 

 14 purposes that we've all been talking about in 

 15 terms of releasing actual trade sizes and pricing 

 16 prematurely. 

 17 MR. BERNARDO: I would agree with that. 

 18 Because if you take six months or longer to gather 

 19 data and focus on the trade reporting, from a 

 20 SEF's perspective, a Tullet Prebon's perspective, 

 21 we can handle the trade reporting. We can handle 

 22 the reporting to the SDR. We do that currently. 
 189 

 1 It doesn't matter which means of in-state commerce 

 2 that we're executing. We'll take care of the 

 3 reporting. We'll do that as we do now. And then 

 4 six months down the road figure out what is the 

 5 correct block trade size for each particular 

 6 product and maturity. And I would also give 

 7 yourself leeway to change that, you know, six 

 8 months after that. Depending upon the data and 

 9 the market environment you can alter it again. 

 10 That's, again, my opinion. 

 11 MR. OKOCHI: One other approach could be 

 12 just take a nominal dollar amount, $10 million, 

 13 and look at the PVO1 of any instrument and say if 

 14 the PVO1 is greater than $X million, that's a 

 15 large enough trade. It's reported. Just try and 

 16 make it greater than X million notional or 500 

 17 million notional. So you can set up some basic 

 18 parameters that way. 

 19 MR. TURBEVILLE: In terms of 

 20 implementation, we went around and talked about 

 21 how soon will you be able to actually be a 

 22 receptacle for the information? What wasn't 
 190 

 1 discussed was how soon will you be able to 

 2 disseminate? And dissemination is sort of -- it's 

 3 said, it's statutory that you must disseminate. 

 4 It's in the regulations that you must disseminate. 

 5 It doesn't say really what dissemination is. But 

 6 I was wondering whether -- we answered, you know, 

 7 three to six months, six to nine, whatever the 

 8 number was. That was about becoming a receptacle. 

 9 All of this isn't that important if you're going 

 10 to become a receptacle and receive and then at a 

 11 later date become a disseminator. Isn't that 

 12 right? Because it's about the release of 

 13 information. So there could be a natural 

 14 progression from receiving data, understanding 

 15 better what the appropriate block trade sizes 

 16 might be, and then disseminating. If that's the 

 17 order in which people think it's going to go. 

 18 MR. GOOCH: I think that's the important 

 19 point that Wally makes. I think a lot of this 

 20 data is available today. I'm going to go to my 

 21 (inaudible) current rates in equity market have 

 22 every trade pretty much in databases today. So in 
 191 

 1 terms of some of these processes to analyze that 

 2 data, I think some of that could start relatively 

 3 soon. I mean, clearly to my mind the emphasis 

 4 will be on getting the SDRs registered because at 

 5 that point you have full and unfettered access to 

 6 all of the data you want to look at. I think 

 7 that's probably your start point for analysis as 

 8 opposed to when it becomes mandatory to report to 

 9 SDRs because most large participants already do it 

 10 on a voluntary basis. Some of the small guys 

 11 don't and there will be a mandatory day for them. 

 12 But to be honest, you're trying to identify very 

 13 liquid products in the first phase, not analyze 

 14 the nuances of very illiquid ones. So if you're 

 15 missing a couple of small trades from the 

 16 corporates it probably doesn't make a lot of 

 17 difference. 

 18 So I would think the key day is 

 19 registration when you can start getting full 

 20 access and start thinking about it as opposed to 

 21 when the slowest guy is going to start reporting 

 22 in because you're going to get receptacles that 
 192 

 1 are, you know, 90 to 95 percent full on day one is 

 2 my guess. And then, you know, maybe not quite the 

 3 timeliness you want. Maybe you're missing the old 

 4 field but I think you're going to start a pretty 

 5 rich place in terms of sequencing. And certainly, 

 6 you know, back to the conversations yesterday, if 

 7 we're going to have this ordering of reporting, 

 8 clearing, execution, then you need to be getting 

 9 that reporting piece sorted out fairly early to 

 10 move onto the other decisions. 

 11 MR. GAW: Jeff, you said in your earlier 

 12 comments that some configurations would be 

 13 necessary to existing systems and processes to 

 14 support real-time reporting. I was wondering if 

 15 you or other panelists could provide some detail 

 16 on those additional configurations and how long it 

 17 would take to make them. 

 18 MR. GOOCH: Sure. There's two types of 

 19 changes to my mind that are needed. One, which is 

 20 relatively straightforward which is that there's 

 21 some additional fields. I think Henry mentioned 

 22 this on an earlier panel, that technically it is 
 193 

 1 not there in the feeds today. Timestamps is one. 

 2 People don't tend to record the place of 

 3 execution, which is a requirement. So there are a 

 4 couple of those which don't fundamentally change 

 5 any of your analysis but there's some work to do 

 6 to be able to receive those and for people to send 

 7 them. Some participants will find them very easy, 

 8 some won't, but I think it's just depending on 

 9 what they happen to have in their system. 

 10 I think the bigger issue is, you know, 

 11 around this issue of timing issue. Basically, put 

 12 a requirement to send most things in 15 to 30 

 13 minutes, you know. If you're in a major, you 

 14 know, dealer-to-dealer market, that's not going to 

 15 be a problem. The interest rate market, for 

 16 example, generally starts coming in a matter of, 

 17 you know, certainly less than 10 minutes. I don't 

 18 think that's going to cause too many issues. The 

 19 other extreme is your fund manager has to get the 

 20 subfund allocations in within 15 minutes in order 

 21 to get confirms out in 30. For some guys that 

 22 could be a major challenge. They struggle to do 
 194 

 1 it by the end of the day given compliance checking 

 2 rules and things they have. So I think it's the 

 3 ramifications in terms of business process that 

 4 makes the big difference. You know, this 

 5 conversation we're doing about some of the complex 

 6 trades, they're all getting electronified on the 

 7 day; they're not all getting electronified in 30 

 8 minutes. To require that of people would 

 9 basically mean that, you know, guys on desks will 

 10 be sitting there entering stub records to meet the 

 11 reporting requirement quickly, then booking it 

 12 properly later. Maybe that's what we need to do 

 13 but that's the sort of thing that will take a 

 14 little bit of time and a little bit of discussion. 

 15 MR. TURBEVILLE: But it's also 

 16 critically important to actually get the 

 17 information in a sensible, usable form as opposed 

 18 to information that's not usable, but soon. 

 19 MR. GOOCH: That's why I think rather 

 20 than creating a false process to get something 

 21 quickly on a trade that's not going to get 

 22 publicly disseminated anyway, it's not that kind 
 195 

 1 of business, you know, give people a bit more time 

 2 to the end of the day so they can do it properly. 

 3 The regulators still get their access. It clears 

 4 (inaudible) that's a different issue. But I don't 

 5 think we're talking about problems with those kind 

 6 of products. 

 7 MR. SHILTS: I think Chairman Gensler 

 8 has a question. 

 9 CHAIRMAN GENSLER: I have a question 

 10 back to the earlier. I noticed that a number of 

 11 you will be trying to register in rates and 

 12 commodities and equities, so there will be some 

 13 competitive SDRs and so forth. But I was curious 

 14 how does that relate to this ISDA process that I 

 15 understand -- if anybody is willing to raise their 

 16 hand and tell us a little bit about -- I know 

 17 there's nobody from -- I don't think officially 

 18 from ISDA -- but their process of going out for a 

 19 request for proposal in a number of SDR classes. 

 20 And how it relates to that and, I mean, if you're 

 21 not the winner of some ISDA process -- we're not 

 22 involved in that -- what that means. 
 196 

 1 MR. GOOCH: Somebody's not responding. 

 2 Do you want me to give my understanding? Because 

 3 I'm not bidding in the ISDA process so I can 

 4 probably avoid embarrassing anybody else. 

 5 As I understand that, having read the 

 6 document, is that the (inaudible) on a voluntary 

 7 basis, most of the major players globally report 

 8 into SDRs. For the ODRF, the group of global 

 9 regulators have put out a requirement. You know, 

 10 that was a process requested by the regulatory 

 11 community a while back. The ODRF, as I understand 

 12 it for rates in particular, increased the level of 

 13 detail they require. ISDA has gone back and asked 

 14 someone to bid to produce that. I don't think 

 15 legally that's an SDR or an MA compliant European 

 16 solution. That's a voluntary solution on a global 

 17 basis to meet a requirement to the coalition of 

 18 regulators, I guess. Some of you guys sit on that 

 19 coalition and probably determined what you want. 

 20 So I don't think it was trying to end around any 

 21 kind of competitive position in the U.S. or Europe 

 22 or anywhere else as I understand it. There's a 
 197 

 1 requirement regulator put on major dealers and, 

 2 you know, major swap participants using your 

 3 terminology, but (inaudible) on a voluntary basis 

 4 and they need somewhere to put it. It would be 

 5 very helpful, obviously, if that was the same 

 6 solution as required to (inaudible). 

 7 CHAIRMAN GENSLER: I guess my question 

 8 is is what's the timing? What's the deadlines? 

 9 And for those of you who are, you know, do you 

 10 still plan to be SDRs if you don't get the nod 

 11 from -- it's not technically an SDR but I suspect 

 12 anybody who wins that is going to register as a 

 13 SDR. 

 14 MR. GOOCH: I believe the timing was 

 15 September for live but I didn't read it that 

 16 closely because I wasn't responding. 

 17 MR. CUMMINGS: I think the application 

 18 deadline was the end of April. 

 19 CHAIRMAN GENSLER: That's for rates or 

 20 is it also for commodities? 

 21 MR. CUMMINGS: It's for commodities. 

 22 CHAIRMAN GENSLER: Commodities? 
 198 

 1 MR. CUMMINGS: I think it's safe to say, 

 2 at least from ICE's perspective, that if ISDA 

 3 doesn't nominate an SDR proposal, it won't 

 4 materially change our plans to register as an SDR. 

 5 MR. SHILTS: Any other comments on that? 

 6 Go ahead. 

 7 MR. DeLEON: The current process right 

 8 now is going on and there's a bid process which 

 9 has gone out. There were 13, I believe -- it was 

 10 11 or 13 proposals that is now down to 4. And 

 11 members of ISDA, there's a working group, will be 

 12 meeting on that later this week, actually, to 

 13 review the final proposals to choose an SDR for 

 14 the industry for rates. There is already an 

 15 approved credit one and there are other RFPs 

 16 running for the other products. 

 17 So to the extent that the original one 

 18 that was accepted was not going to be Dodd-Frank 

 19 compliant or G-14 for the commitment letter 

 20 compliant, this process was done again. So ISDA 

 21 is rerunning that process and the other RFPs have 

 22 gone out for other products. So the dealers plan 
 199 

 1 to use this to be compliant for regulatory reasons 

 2 with their prudential regulators, as well as there 

 3 is a chance that this becomes the SDR. One issue 

 4 that obviously has come up is if there are 

 5 multiple SDRs, then you're going to have the 

 6 SDR-squared problem, which will be that you will 

 7 then need -- all the regulators will need to 

 8 aggregate between SDRs and make sure they're not 

 9 double or triple counting positions to get a full 

 10 look. So that is something that people are 

 11 focused on but you, as the regulator, and we've 

 12 spoke to the SEC as well on this, that is an issue 

 13 that people are aware of and there is a concern. 

 14 But the ISDA process will be final -- the RFPs are 

 15 being reviewed and as I said, they are down to 

 16 four now. 

 17 MR. SHILTS: Thank you. We've got a few 

 18 more topics here so we'll try to get those in 

 19 quickly. One, if we could just get some quick 

 20 thoughts on again looking at block trades and the 

 21 provisions for block trading is there will be a 

 22 delay in the reporting. And I was wondering what 
 200 

 1 the thoughts are as far as whether there is 

 2 specific things to think about in terms of type of 

 3 trade or asset class as far as implementing the 

 4 delays, the length of the delays and what we 

 5 should be thinking about coming up with final 

 6 rules. 

 7 MS. COLLAZO: If I could just speak on 

 8 it. One of the things which goes back to my 

 9 earlier statement about dissemination, you know, 

 10 coming later that you get the opportunity to look 

 11 at the information. If you look at credit 

 12 derivatives, for example, there is a different 

 13 size that you normally see in the way that trades 

 14 and standard trades are traded with respect to 

 15 sovereigns versus corporate, for example. And so 

 16 you see very much a different, you know, notional 

 17 that gets traded. The notional on sovereigns are 

 18 much, you know, higher. 

 19 And so once you start to receive some of 

 20 that information, I think those are some of the 

 21 conclusions that you'll start to find in the data 

 22 is that even within an asset class certain 
 201 

 1 products will trade -- have different, you know, 

 2 trading patterns and how that informs -- how block 

 3 logic should work, you know, subsequently. So, 

 4 you know, that's one example that I would say that 

 5 you could look to as to the notional size and CDS. 

 6 MS. THOMAS: I think it's the same with 

 7 commodities as well. I think, you know, you need 

 8 to be looking at the liquidity and the volume in 

 9 those markets. I mean, because most of our 

 10 transactions are, you know, obviously 

 11 customer-based transactions, we will do large 

 12 hedging programs where we will take on a large, 

 13 you know, chunk of risk for a client and we may 

 14 not be able to hedge that in the market for weeks 

 15 or even months depending on the liquidity in 

 16 smaller, more niche commodity markets. So I think 

 17 it's important to look at the volume in the 

 18 individual markets and how often that trades. 

 19 MR. SHILTS: Does that vary at all by 

 20 asset class or type of product or just volume 

 21 exclusively? 

 22 MS. THOMAS: It varies by product within 
 202 

 1 the asset class. So asset class commodities, you 

 2 know, oil or WTI will be very different from a 

 3 small basis gas location. So it's important to 

 4 look at the individual products. 

 5 MR. BERNARDO: I would think not only 

 6 the product but even the maturity as well. It's 

 7 going to be different for every product class. 

 8 It's going to be different for maturity. It will 

 9 absolutely be different and the Trace Model or the 

 10 model that they use is probably a good model to 

 11 follow. Again, you phase it in. You start off 

 12 with longer times, and if it works and everybody 

 13 is meeting their requirements and you think that 

 14 you can shorten them, shorten them to a lesser 

 15 time. 

 16 MR. JOACHIM: In fact, what we did was 

 17 we had a team of academic analyzing the data for 

 18 us looking at liquidity and all the factors we 

 19 just talked about to see empirically what they 

 20 could actually see because what you hear from 

 21 people, stories told, they're usually very 

 22 different than the empirical evidence that you can 
 203 

 1 tell. But you'll need a team of people to look at 

 2 this empirically and see what the impacts are as 

 3 best you can. It will never be QED but it will 

 4 give you an indication. It will be an informed 

 5 decision, better than an uninformed decision. 

 6 MR. EADY: One thing that I wanted to 

 7 ask about was both the SEC and the CFTC rule make 

 8 reference to certain unique identifiers for legal 

 9 entities, products, and transactions. I wanted to 

 10 get from Karla's point of view what we should 

 11 expect in terms of the possibility of, for 

 12 example, a legal entity identifier, unique 

 13 identifier being available according to an 

 14 internationally recognized standard. 

 15 MS. McKENNA: Thank you Tom. In terms 

 16 of background and context, the technical committee 

 17 that I manage for ISO is solely dedicated to the 

 18 development and maintenance of standards for the 

 19 financial services area of business. So this is 

 20 the area where the ISO and the BIC, the market 

 21 identifier code, currency codes, et cetera. So 

 22 it's out of this family of standards that we set 
 204 

 1 our sights on solving the legal entity identifier 

 2 for business and financial transactions' solution 

 3 for the marketplace and for regulators. 

 4 We started sometime last year and we 

 5 filed a draft standard based on the qualifications 

 6 and the requirements that we had seen published so 

 7 far by the industry and by regulators in March of 

 8 this year. The ISO process is made up of a 

 9 succession of consensus-building exercises, 

 10 reviews, and agreements. And so we started the 

 11 process in March of this year and on a very 

 12 aggressive but realistic timeframe, we think that 

 13 we could have a published LEI standard by next 

 14 summer, probably by July of 2012. That breaks 

 15 down into two to three sessions or rounds of 

 16 review and comment and updating of the standard. 

 17 We actually reached a number of milestones this 

 18 week. When we put together in ISO a standard 

 19 that's code based, we need to appoint somebody who 

 20 is going to look after it. I like to call it -- 

 21 and that's called a registration authority in 

 22 ISO-speak. We've picked a registration authority 
 205 

 1 to put forward in the standard in order to be able 

 2 to do functions like assign and maintain and 

 3 validate entities for legal entity identifiers and 

 4 that is Swift with the aid of Avox, a subsidiary 

 5 of DTCC. And we also look forward in the next 

 6 round of review to be able to insert that 

 7 information and have that role fulfilled in the 

 8 standard. 

 9 We also agreed to appoint a working 

 10 group in order to handle, or as we call them, 

 11 dispose of the comments that come in and to handle 

 12 the review process between now and the last round 

 13 of voting that we have within ISO. So that is 

 14 where we are at this point. And we offer this as 

 15 a solution, both to industry and to regulators, 

 16 for the collection and dissemination of 

 17 information. 

 18 MR. GAW: A follow-up question to the 

 19 panelists. If sort of a consensus standard does 

 20 not develop or particular identifiers are needed 

 21 for say products or transactions which as I 

 22 understand it might not be in the near term future 
 206 

 1 for ISO, what implementation issues will there be 

 2 to develop say SDR-specific nomenclature systems? 

 3 MR. GOOCH: So we spent a little time 

 4 with our customers and some of the proposed SDRs 

 5 as well. I think it breaks down -- we need to 

 6 look at each identifier separately. I think the 

 7 LEI identifiers could be enormously powerful when 

 8 it comes but it's going to take a while to create 

 9 a standard and the codes created for the entities. 

 10 So I think at the moment we certainly use BIC in 

 11 the interest world and the DTCC warehouse IDs in 

 12 the credit world. You know, a little bit of a 

 13 hybrid of the two, but moving to BIC in the equity 

 14 world. I think we can run with those for the time 

 15 being and then when the time comes, an available 

 16 map to them because the reality is every 

 17 participant has varied embedded co-structures in 

 18 their underlying systems. Every RMS has different 

 19 structures. Every vendor does. People are not -- 

 20 it's going to take a decade or more for everyone 

 21 to switch to this to be their core underlying 

 22 identifiers. So to start with, people are going 
 207 

 1 to send what they have, you know, they'll rely on 

 2 people like (inaudible) or SunGard or other 

 3 vendors to map for them to the new codes that 

 4 eventually they'll change their underlying codes 

 5 to be there. So there I think it's a relatively 

 6 easy transition. You just have to be careful 

 7 across multiple SDRs. That causes an issue. 

 8 I think transaction identifiers, there's 

 9 a lot of good discussion around workflows and the 

 10 CFTC and SEC have taken slightly different 

 11 approaches there. I think there's a little bit 

 12 more work needed to agree how that's going to work 

 13 but I think that's a fixable problem. I think 

 14 product identifiers is the much tougher one to 

 15 work out how you create them, who creates them, 

 16 what are they used for. Again, I think people 

 17 will map to them once they're known but that's 

 18 something I think is a much tougher thing to do. 

 19 From our perspective, we'll wait for the standard 

 20 to emerge and then work out how we take our trade 

 21 details and create the code out from them which 

 22 I'm sure we can without a problem. But I think 
 208 

 1 that's going to be a much tougher one. And that 

 2 probably isn't a critical path for some of the 

 3 public dissemination, you know, we talked about 

 4 earlier on in terms of how that's going to work. 

 5 I think there are some interesting debates to have 

 6 there. 

 7 MS. McKENNA: Just to follow on from 

 8 that, we are -- now that we have identified the 

 9 registration authority within ISO starting 

 10 discussions with the regulators and the industry 

 11 about ways that we could preassign or preregister 

 12 some of the participants in the first round and 

 13 maybe use that as a model going forward, there 

 14 will be a time in the ISO-consensus process where 

 15 we no longer accept comments in the process, so we 

 16 will know what the structure and what the data 

 17 attributes that will be attributed to the LEI will 

 18 be. So even before the standard is approved and 

 19 published in its final form we will know what the 

 20 technical aspects will be and we can discuss 

 21 around possible preregistration of the first round 

 22 to make it available. 
 209 

 1 MR. CUMMINGS: I think with regard to 

 2 the product identifiers, one of the things that 

 3 the Commission needs to be sensitive to is that 

 4 where a product identifier already exists in the 

 5 market, and as the de facto standard, for instance 

 6 in credit the read ID, that can be subject to 

 7 being withheld from SDRs or DCOs based on maybe an 

 8 arbitrary licensing decision by one or more 

 9 competitors in the marketplace. So that lends 

 10 itself to finding an international independent 

 11 group that can define and administer product 

 12 identifiers that maybe across asset classes would 

 13 work. 

 14 MR. PRITCHARD: If I could just make a 

 15 point there about following on from what Jeff said 

 16 about the transaction identifiers, I think one 

 17 thing that sets up the requirement for the 

 18 uniqueness of those is the way the rules are 

 19 formulated so that a transaction may be reported 

 20 by multiple types of entity over its life -- the 

 21 SEF or the clearinghouse or the party -- and that 

 22 obviously sets up a big requirement for 
 210 

 1 consistency and to use the same identity. You 

 2 know, a solution to that is obviously to fall back 

 3 to just having one type of entity report on a 

 4 transaction over its life and that gets us past 

 5 the dependency on that unique transaction 

 6 identifier being around. 

 7 MR. TAYLOR: If we were to end up with a 

 8 system where transaction identifiers or a unique 

 9 swap identifier was a random number generated and, 

 10 therefore, was done following a first touch 

 11 approach, do you all have a view as to how quickly 

 12 something like that could get implemented? 

 13 MR. CUMMINGS: I think the first touch 

 14 approach is probably a bad idea if you're talking 

 15 about multiple SEFs originating transactions on a 

 16 first touch basis into multiple DCOs. Talking 

 17 about reporting of lifecycle events on the same 

 18 day for the same instrument for the same maturity 

 19 across multiple DCOs, it's going to be hard for 

 20 not only the DCOs to keep up with that, the SEFs 

 21 to keep up with that, looking laterally and 

 22 vertically you run the risk of putting in 
 211 

 1 identical swap identifiers into one or many SDRs. 

 2 MS. COLLAZO: So, I agree that is a 

 3 challenge of the uniqueness. You absolutely have 

 4 to have a model in place that allows for unique 

 5 identifier, you know, random in nature to ensure 

 6 against the duplicate IDs. One of the challenges 

 7 when we looked at how you address the USI in the 

 8 workflow is in order for an SDR to be able to meet 

 9 the requirements under the rules and be able to 

 10 reconcile between messages and in order for the 

 11 reporting parties as well to be able to do that 

 12 you have to have an audit trail and you need to 

 13 have a unique ID that is unique in all instances. 

 14 And, you know, difficult to implement though 

 15 theoretically, that's the model that has to 

 16 prevail. 

 17 You know, if you look at what we did for 

 18 credit in the Trade Information Warehouse, we had 

 19 to establish that central trade record ID to 

 20 enable firms to talk the same language in the 

 21 message that they recognize and the trade they 

 22 recognize. So it is important but it is, you 
 212 

 1 know, no small feat to implement. So, you know, 

 2 we actually ended up, you know, debating which 

 3 model is better. Should the SDR issue or should 

 4 it be a first touch approach? And from a workflow 

 5 perspective, if you look at it, you know, in the 

 6 workflow, first touch makes sense but again, the 

 7 challenge is going to be who that USI issuer is 

 8 and how that information flows down from the SEF, 

 9 through the DCO, maintained by the reporting party 

 10 and tracked. 

 11 MR. SHILTS: Is there a last -- 

 12 MR. CUMMINGS: I think there's -- an 

 13 additional point is that each one of these 

 14 entities through the lifecycle of that trade is 

 15 going to assign its own unique ID to the 

 16 transaction as it touches it and works it through 

 17 its workflow. The USI, while valuable, someone 

 18 generates it, is probably going to be a 

 19 concatenation of multiple values across the 

 20 systems that the trade moves through. The 

 21 participants, they offload transactions at 

 22 multiple points in the workflow and lifecycle of a 
 213 

 1 trade. So a USI that has to travel uniformly 

 2 through these systems and be updated across the 

 3 multiple entities that are a party to that 

 4 transaction, either the FCM, the end user, the 

 5 SEF, it seems like a lot of back and forth if you 

 6 settle on the first touch approach. 

 7 MR. GOOCH: Yeah, I think there's a very 

 8 interesting (inaudible) access element to this 

 9 which is it's very technologically easy to create 

 10 a unique identifier generated locally at first 

 11 touch making the string very long. Anybody in the 

 12 IT department does that all the time. That makes 

 13 it very easy. The trouble is you get something 

 14 that's then so long that, you know, all the big 

 15 participants are fine because they talk on APIs. 

 16 They don't care whether there's 20 characters, 500 

 17 characters, it just flows down the pipe. Any 

 18 smaller guy who relies on CS spreadsheets or 

 19 screens then has a real problem of importing that. 

 20 On the other hand, if you try and shrink 

 21 it in order to keep uniqueness, you have to put a 

 22 code in that's unique to the SEF or the SDR or DCO 
 214 

 1 or something, you know, you can concatenate those 

 2 things together and then some people really get 

 3 nervous about their trade forever being tagged for 

 4 the rest of its life with details of how it was 

 5 first executed which, you know, worries some 

 6 people as well. So I think there's a balance 

 7 there to strike between complete anonymity, you 

 8 know, which is perfect but then you have a 

 9 consequence because some small users, they're 

 10 going to have to, you know, have record keyboard 

 11 skills to accurately type this stuff off screens. 

 12 MR. SHILTS: All right, we've gone 5, 10 

 13 minutes over. It was a good discussion. So I 

 14 want to thank all the panelists for their 

 15 participation today. We'll take I guess about a 

 16 15-minute break which was scheduled -- we'll try 

 17 to start here around 10 till. Thank you. 

 18 (Recess) 

 19 MR. CURLEY: Okay, thanks every one. 

 20 This is our fourth session today and the last 

 21 session in the two-day joint roundtable on 

 22 implementation for Dodd-Frank. We appreciate all 
 215 

 1 the comments contributed by participants to this 

 2 point and are grateful to everyone who has stuck 

 3 it out right to the end. 

 4 My name is Peter Curley from the SEC and 

 5 this panel focuses on implementation matters 

 6 associated with commercial end-users, nonfinancial 

 7 entities that use swaps and security-based swaps 

 8 are -- to hedge or mitigate commercial risk in 

 9 particular -- are given special consideration in 

 10 both the Commodities Exchange Act and the Exchange 

 11 Act. So it's certainly appropriate to give time 

 12 and attention to the particular implementation 

 13 challenges that arise for them. Like in the other 

 14 panels, we're going to try to focus really on the 

 15 implementation issues and not on interpretative 

 16 issues, rather things associated with the 

 17 rule-making. There's been a lot of time for that 

 18 and this is more of a nuts and bolts session, if 

 19 we can make it that way. 

 20 And so some of the things we'd like to 

 21 cover are the compliance practices and other 

 22 associated matters important internally for 
 216 

 1 end-users associated with the proposed rules, 

 2 international timing and coordination issues that 

 3 might arise that are unique to the end-user 

 4 community, and related matters of that kind. We'd 

 5 also like to discuss whether the requirements 

 6 should be phased in by asset class-type of market 

 7 participant or other facts and the point of view 

 8 that the end-users might have on points like that. 

 9 So before we begin I'd like to just go 

 10 around the table and have everyone introduce 

 11 themselves and identify who they represent. So we 

 12 can start over with you, Peter. 

 13 MR. SHAPIRO: Peter Shapiro, Swap 

 14 Financial Group. We're an advisor to end-users. 

 15 Our business includes a heavy number of what would 

 16 be called under the act special entities, 

 17 governments, nonprofits, as well as nonfinancial 

 18 for-profit businesses. 

 19 MR. DONOVAN: Thank you. I am Bill 

 20 Donovan, vice president of Investments for the 

 21 United States Stone Carnegie Pension Fund. I'm 

 22 also here on behalf of CIEBA, the Committee for 
 217 

 1 the Investment of Employee Benefit Assets, which 

 2 represent over 100 of the largest pensions plans 

 3 in the United States. 

 4 MR. WASSON: I'm Russ Wasson with the 

 5 National Rural Electric Cooperative Association. 

 6 We have 1,000 members that serve about 43 million 

 7 people in the United States with electric energy. 

 8 MR. OKOCHI: Jiro Okochi, CO of Reval. 

 9 We provide derivative management solutions to over 

 10 500 corporates, primarily end-users. 

 11 MR. GLACE: Joe Glace, chief risk 

 12 officer for Exelon Corporation. We have 

 13 generation as well as utilities in both Chicago 

 14 and Philadelphia. 

 15 MR. PETERSEN: Sam Petersen, Chatham 

 16 Financial. We're a consulting firm that works 

 17 with both nonfinancial and financial end-users. 

 18 MR. TURBEVILLE: Wally Turbeville, 

 19 Better Markets, a nonprofit, nonpartisan 

 20 organization interested in implementation of the 

 21 Dodd-Frank Act and most recently a repeat 

 22 performer on roundtables. 
 218 

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

 2 We represent 12 million working people across the 

 3 country. 

 4 MS. MIMS: Verett Mims. I'm assistant 

 5 treasurer of the Boeing Company, the largest U.S. 

 6 exporter in the country. So we have three issues. 

 7 One, we're a commercial end-user; two, we're one 

 8 of those CIEBA members as having a large pension 

 9 fund; and three, we have a captive finance 

 10 program. 

 11 MR. COTA: I'm Sean Cota. I'm a 

 12 retailer of petroleum products in Vermont. I'm 

 13 chairman of the board of the Petroleum Marketers 

 14 Association of American, past president of the New 

 15 England Fuel Institute. We represent virtually 

 16 all the heating oil that's sold in the United 

 17 States and 90 percent of all the retail gasoline 

 18 sold. And we've done trading in commodities a 

 19 long time. 

 20 MR. LAWTON: John Lawton, Division of 

 21 Clearing, Intermediary Oversight, CFTC. 

 22 MR. SHILTS: Rick Shilts, director of 
 219 

 1 Division of Market Oversight at the CFTC. 

 2 MR. BERMAN: Gregg Berman from the SEC. 

 3 Thank you. 

 4 MR. CURLEY: Great. Thanks, everyone. 

 5 So just to kick off I'd like to ask a relatively 

 6 general question regarding the types of issues 

 7 overall that are important to end-users when it 

 8 comes to implementation, both on the 

 9 infrastructure side and also with respect to their 

 10 own internal compliance matters. 

 11 MR. PETERSEN: I guess I'll sort of 

 12 start it off. So working with a wide variety of 

 13 firms, including firms that would neither be 

 14 classified as a swap dealer or a major swap 

 15 participant and may at times be entering into 

 16 trades with firms that are neither classified as a 

 17 swap dealer nor a major swap participant, one of 

 18 the issues that comes into play is the reporting 

 19 requirement and also the items that an end-user 

 20 would have to report in order to be exempt from 

 21 clearing. And I think a general concern or maybe 

 22 an observation is that, you know, we've met with 
 220 

 1 CFTC staff and SEC staff on this and we certainly 

 2 appreciate the thoughtful rule that was put forth 

 3 on the end-user exemption, but based on how it's 

 4 deemed that one satisfies those 10 to 12 pieces of 

 5 information, for instance, that requirement could 

 6 either be fairly easy to satisfy or it could be 

 7 more burdensome in nature. 

 8 And knowing that it's only recently come 

 9 out and there's a lot of understanding yet to be 

 10 done on the margin rules, depending on the asset 

 11 class that an end-user is trading in and depending 

 12 on whether they're trading with a bank swap dealer 

 13 or a non-bank swap dealer, there are a variety of 

 14 concerns that end-users have related to those 

 15 margin rules and many of them are very practical 

 16 rules related to negotiating documentation with 

 17 dealers, credit support arrangements, et cetera. 

 18 MR. SHAPIRO: Just to chime in briefly 

 19 in support of what Sam was saying, in terms -- 

 20 particularly in terms of the reporting with regard 

 21 to how the end-user generally meets its financial 

 22 obligations, if it could be done as a standing 
 221 

 1 report rather than with every transaction, we know 

 2 this would help our clients vastly on 

 3 implementation. If it could be simply a standing 

 4 report, even if it had a check-the-box saying no 

 5 changes from the last report. We're concerned 

 6 about just people missing and not getting it 

 7 right, having compliance issues unnecessarily and 

 8 about having, you know, too great a burden that 

 9 would be provided. With the requirement, of 

 10 course, then you would say if there were a 

 11 material change that must, of course, be added. 

 12 MR. OKOCHI: My comment would be to 

 13 commend the CFTC for coming out with basically 

 14 what we viewed as as check-the-box, burden of 

 15 proof approach as opposed to extensive 

 16 documentation to prove that you're commercially 

 17 hedging a risk. So in our opinion and in our 

 18 client's opinion, there wasn't a lot of uproar 

 19 around the end-user exemption rule that came out. 

 20 I think where we should get a lot of interesting 

 21 comments would be around the margining aspects, 

 22 even though there could be threshold allowed. It 
 222 

 1 does appear that CSAs would be required by all 

 2 nonfinancial end-users entering into derivatives. 

 3 I think that's going to raise more issues than the 

 4 actual proof that you can be exempt from clearing. 

 5 MR. WASSON: In our markets, the 

 6 majority of our transactions are with other 

 7 end-users. We do transactions with swap dealers 

 8 and major swap participants or those entities we 

 9 suspect will become swap dealers or major swap 

 10 participants, but in our markets where we have 

 11 nonfinancial commercial entities dealing with each 

 12 other, we don't really have collateralization or 

 13 margin requirements. I mean, those are exceptions 

 14 rather than the rule. So where they exist you may 

 15 have unsecured credit thresholds but they're set 

 16 high because our counterparties are perceived to 

 17 be low risk. We've been doing business this way 

 18 for 80 years where the credit analysis is done 

 19 between the counterparties. And so rather than 

 20 dealing with someone on exchange where you don't 

 21 know who the counterparty is, we know very well 

 22 who our counterparties are. 
 223 

 1 And so in our markets, we typically 

 2 provide types of assurance, such as letter of 

 3 credit, letters of credit or sometimes physical 

 4 assets, but not typically cash or treasury 

 5 securities. And we don't deliver margin 

 6 electronically or even daily. Our swaps don't 

 7 even settle on a daily basis typically. And the 

 8 valuation exposures are not agreed to necessarily 

 9 by the counterparties except in a termination-type 

 10 event sort of scenario. So our commercial hedging 

 11 needs from an electric utility point of view are 

 12 very geographically specific and they're highly 

 13 customized and they contain a great deal of 

 14 operating and transmission contingencies and 

 15 optionality but not optionality in the sense that 

 16 you might have been thinking of in the sense of 

 17 with respect to physical delivery or not, but 

 18 optimality with regard to what is going to be the 

 19 demand for electricity because it constantly 

 20 changes. When we leave this room and turn out the 

 21 lights, it's going to affect the load of whatever 

 22 utility is serving this building. And so as the 
 224 

 1 CFTC might have thought of futures markets where 

 2 you have specific quantities are delivered at 

 3 specific times, it doesn't exist in the electric 

 4 industry that way. 

 5 MS. MIMS: The same thing for us in 

 6 terms of our commercial use of derivatives. Thank 

 7 you for the FX exemption, by the way. For us, if 

 8 we needed to enter into some type of commodity 

 9 hedge, we would be precluded from hedging unless 

 10 we get hedge accounting. And right now we're not 

 11 margining. We're not setting aside margin for any 

 12 of our OTC trades. And so you can imagine if say 

 13 we had a liquidity crisis, you know, to issue 

 14 commercial paper, in essence you're now saying you 

 15 need to go out and raise more money just to 

 16 satisfy that initial and variation margin 

 17 requirements. So it's definitely a concern for us 

 18 because we prefer to use that cash to develop 

 19 aircraft and create jobs, not to have it set aside 

 20 for something that we, too, have been doing for a 

 21 very long time quite successfully. 

 22 MR. COTA: I guess my -- in general, the 
 225 

 1 check- the-box criteria, I think, works. We do 

 2 both futures and a variety of different derivative 

 3 options for hedging of heating fuels in 

 4 particular. It sometimes is a cash -- the 

 5 derivatives cost me more. The futures cost me 

 6 less, but there's a cash flow issue. So it's all 

 7 baked in in one part or the other. So from an 

 8 implementation standpoint, we really don't have a 

 9 large concern as an industry as to how that's 

 10 going to come up in the other criteria. But for 

 11 the qualifications and the check-the-box, I think 

 12 that makes sense. 

 13 MR. TURBEVILLE: For folks that 

 14 generally are proponents in the comment letter 

 15 process of more disclosure, that's us, have to 

 16 agree with you guys fundamentally. Peter, you 

 17 made a good point about the check-the-box and 

 18 really recognizing that these transactions are 

 19 often part of our program. The swap -- the 

 20 end-user's swap exemption is based on a 

 21 swap-by-swap analysis. But in fact, the swaps are 

 22 actually part of a program and we think it's 
 226 

 1 sensible to do so. However, we also think it's 

 2 sensible that as you look at doing the program, 

 3 that the disclosure is programmatic. So how 

 4 you're going to satisfy your obligations with 

 5 regard to this hedging program and then 

 6 check-the-box as swaps come through is a good 

 7 idea. But also, this is the disclosure that this 

 8 is the hedging program that we're entering into, 

 9 and these swaps are attached to that hedging 

 10 program we think is a very important factor. And 

 11 we've suggested perhaps that SDRs can keep files, 

 12 not necessarily the high tech files with 

 13 gazillions of bits of information but files that 

 14 recognize for each end-user this is the hedging 

 15 program and these are the swaps that we've done in 

 16 regard to that hedging program. I wonder if 

 17 that's the kind of thing that you guys might be 

 18 interested in. 

 19 Joe, we go way back so -- 

 20 MR. GLACE: Absolutely. And, yeah, we 

 21 actually agree that the check-the-box is a good 

 22 approach and we need sort of a standing disclosure 
 227 

 1 because we're very transparent. We have a very 

 2 transparent hedging program. That's what we do. 

 3 We actually try to -- we guarantee our cash flows 

 4 over the next several years forward and we're not 

 5 focused on things like real-time exposures or 

 6 real-time reporting, if you will, because this is 

 7 a long-term program. So that's, again, we think 

 8 these ideas are good ideas. We think -- I echo 

 9 the point of having a standing election until 

 10 something changes, if you will, so we can continue 

 11 to flow business under our normal operations. 

 12 MR. TURBEVILLE: And the idea of 

 13 identifying it by a hedging program, this is an 

 14 asset or a contract or a need for fuel or whatever 

 15 the heck you guys do. This is what we're hedging 

 16 and these are the swaps that we're doing under 

 17 that hedging program. And by the way -- and this 

 18 is how we intend -- this is how we can pay them 

 19 off and nothing has changed. 

 20 MR. GLACE: Correct. 

 21 MR. PETERSEN: Just to maybe add to 

 22 that, I mean, I guess it depends on what you mean 
 228 

 1 by this is how we intend to pay them off. I mean, 

 2 that could be a little bit of information or a lot 

 3 and certainly we don't think it was the intent of 

 4 Congress to have a requirement that end-users 

 5 prove any of the items in that list for the CFTC 

 6 notification. So I guess that's an example of one 

 7 of the areas where I think it depends on how you 

 8 interpret the items even in the proposed rule. 

 9 And depending on how you interpret that, it could 

 10 be an easy thing. A check-the- box-type approach 

 11 could qualify or it could be something more 

 12 onerous. So, for instance, the requirement that 

 13 an SEC filer has to get board approval in order to 

 14 opt out of central clearing, I mean, that right 

 15 there, depending on how you read that, that could 

 16 be a major problem for many end-users or it could 

 17 be not that big of a deal. Again, it's a matter 

 18 of how that's actually required to be complied 

 19 with. 

 20 MR. TURBEVILLE: Yeah, you found things 

 21 that we could agree on. But I think because 

 22 likely we would say these are the kinds of things 
 229 

 1 you would need to do to show how you can pay, 

 2 these are the board approval rule we would 

 3 support, but in terms of the process, I think we 

 4 would be in agreement, forgetting the substantive 

 5 roles of what you show, the process of a hedge 

 6 program checking off and then a different issue is 

 7 the substantive rule of what you have to say which 

 8 we probably wouldn't agree with you on. 

 9 MR. OKOCHI: I would just add, so I 

 10 would say most companies that are entering into 

 11 derivatives already have Board approval to enter 

 12 into derivatives risk management policy. 

 13 MR. TURBEVILLE: And the hedge program 

 14 somewhere (inaudible). 

 15 MR. OKOCHI: And financial obligations 

 16 to meet the swap, otherwise they wouldn't be able 

 17 to enter into the swap with a swap dealer anyway. 

 18 So I think the check-the- box is good. I think 

 19 the unintended consequence could be the swap 

 20 dealers who may feel they're on the hook to make 

 21 sure that that trade was a commercial hedge. What 

 22 other information might they ask for even though 
 230 

 1 it may not be a requirement under the rules? 

 2 MR. CURLEY: Maybe just to play out that 

 3 a little bit further in terms of people's 

 4 confidence in passing on information to the SDR 

 5 and particular interaction with the counterparty, 

 6 the dealers who may be involved in that reporting 

 7 process. We've had some comments indicating their 

 8 different levels of concern that might arise 

 9 depending on exactly how the connection is made. 

 10 So do one or two of you have comments along those 

 11 lines or thoughts? 

 12 MR. OKOCHI: Well, I think again the 

 13 good news on the U.S. side is only one 

 14 counterparty is supposed to report, whereas on the 

 15 EC side there could be situations where end-users 

 16 would have to report to the SDR. So I think 

 17 that's less of a burden to end-users. 

 18 You know, I think the data, the 10, 12 

 19 sets of data that would be required that swap 

 20 dealers or the reporting entity would have to 

 21 report to the SDR, that's again not a monumental 

 22 task. Again, I think it would be a question of 
 231 

 1 how would they know that that information that was 

 2 reported to them is confirmed? So it's one thing 

 3 confirming the trade execution data. It's another 

 4 thing confirming, you know, can I see your board 

 5 resolution that allows you to do your first 

 6 commodity swap. So I think again the unintended 

 7 consequences could be the additional reporting 

 8 that the swap dealers would feel the need to 

 9 obtain. 

 10 MR. TURBEVILLE: This is not real-time. 

 11 This data I would assume is going to happen -- is 

 12 going to go into files. It's not going to be the 

 13 real-time data reporting necessarily and it can 

 14 actually be reviewed and corrected if there's 

 15 errors and that sort of thing because this is 

 16 actually a sort of record of the justification of 

 17 the qualification of the swap as an end-user swap. 

 18 So that's something to consider, too. That it's a 

 19 little bit different from the real-time data 

 20 that's going to be publicly disseminated. 

 21 MR. WASSON: Well, we're concerned about 

 22 the public dissemination of some of this 
 232 

 1 information because it's never been available to 

 2 the public before. And in our industry, 

 3 particularly the electric industry, the concept of 

 4 real-time reporting really has no meaning because 

 5 many of us don't actually know what our, you know, 

 6 our billing cycles are until the 30 days or so 

 7 have passed. You know, the concept of real-time 

 8 reporting for a financial institution is fine 

 9 because they're choosing which transactions to 

 10 enter into and they have the ability to capture 

 11 that data. But for an entity like a utility, 

 12 which has a public service obligation to serve 

 13 everyone in their territory and the data is 

 14 constantly changing, there is no mechanism really 

 15 by which we can affect real-time reporting at 

 16 least in the analogous where you're thinking of it 

 17 for a financial institution. 

 18 MR. SHILTS: With respect to reporting, 

 19 whether it be for real-time or other reporting to 

 20 data repositories, could people comment on how 

 21 they think end- users might comply with any 

 22 reporting requirements? Would you be expected to 
 233 

 1 establish or build your own in-house proprietary 

 2 systems or use third-party providers or secure 

 3 internet connections or whatever? And how might 

 4 that affect any phased implementation? 

 5 MR. DONOVAN: If I might from a pension 

 6 fund perspective, as the gentleman from Vanguard 

 7 said earlier, we would be anticipating that the 

 8 buy side not have to report, that the sell side 

 9 would. But from what we understand, the rules 

 10 would require us to report if they don't. So we 

 11 have to be ready for that and that's a monumental 

 12 task for us to get ready in order to take on all 

 13 of the reporting, dissemination of information, 

 14 and so forth, on the chance that it might occur. 

 15 So we'd like some more clarity that really if the 

 16 burden is on them and it does not come back to the 

 17 buy side because we're just not set up to do it. 

 18 MR. SHILTS: Can you also elaborate 

 19 exactly what the burden is? 

 20 MR. DONOVAN: Obviously, there are 

 21 systems that have to connect between the parties, 

 22 you know, and just to give you an idea of, you 
 234 

 1 know, your people from Wall Street here get up and 

 2 talk about their systems and their people and the 

 3 effort they're putting into this, you know, and 

 4 perhaps devoting maybe 100 people to get 

 5 Dodd-Frank implemented. I have one accountant, 

 6 one systems specialist, and one programmer -- or 

 7 half a programmer actually. So those two and a 

 8 half people have to do all this. And, you know, 

 9 it takes time from the investment side as well. 

 10 So all the things that need to be done, it's going 

 11 to have to be done by a very few amount of people. 

 12 MR. PETERSEN: Just to add to that, just 

 13 to sort of put some categories to this issue of 

 14 what an end-user would have to report, the 

 15 gentleman from Vanguard mentioned the case or the 

 16 concern with if an end-user is doing a trade or 

 17 buy side or end-user firm is doing a trade with a 

 18 non-U.S. dealer according to the rule, if they're 

 19 not a U.S. person, then the end-user would 

 20 actually have to report. So that's one case. 

 21 Another case, a comment, it's not 

 22 uncommon in the commodity space, and especially 
 235 

 1 the energy space where you will have two firms 

 2 that are end-users, you know, not swap dealers, 

 3 not major swap participants. So that's another 

 4 case where you'd have end-user reporting. 

 5 And then another one you'll have cases 

 6 where many, you know, community or regional banks 

 7 actually offer derivatives to their customers. 

 8 It's expected that many of them would not be swap 

 9 dealers and certainly many of them are small and 

 10 do a very low number of trades. And again, they 

 11 would likely be the reporting party there. 

 12 In terms of the burden, you know, having 

 13 worked through the question of how one of our 

 14 firms might have to satisfy the reporting 

 15 requirement, it's a question of building on an 

 16 internal system or it's a question of at a minimum 

 17 being able to do some sort of data dump that can 

 18 be pulled into one of these firms that will likely 

 19 register as swap data repositories. In addition, 

 20 there's obviously costs associated with that, 

 21 especially if you have to hire staff, but also 

 22 just in paying for the reporting service and maybe 
 236 

 1 Jiro would be able to add to how an end-user might 

 2 do that. 

 3 MR. GLACE: Typically, we would actually 

 4 see a protypical format, file format from somebody 

 5 who is going to accept the data. We'd have a 

 6 sandbox, a trial period in which the past data, 

 7 you know, this counterparty is X. I know them as 

 8 Y. Do we have to map these tables? Et cetera. 

 9 So it's all about data and moving the data in a 

 10 consistent and reliable manner. And that just 

 11 costs money and time to get the work done and you 

 12 have to sort of find, you know, typically when 

 13 we've done these, we just did ERCOT Nodal. That 

 14 was a couple of years in the making where again 

 15 there's a lot of participants honing in on the 

 16 data model, if you will, that's been exposed by 

 17 the -- in this case, ERCOT. You know, that we 

 18 actually have to submit the data to. And then 

 19 everybody sort of has a trial period and works 

 20 through all that EDI, Electronic Data Interchange, 

 21 for lack of a better word. It's just a lot of 

 22 mechanics and a lot of costs and a lot of systems 
 237 

 1 focused to get that type of work done to do it 

 2 reliably and do it well. 

 3 MR. WASSON: And I would just like to 

 4 say that whether it's a third-party provider or 

 5 whether we are building out the infrastructure 

 6 ourselves to do the reporting, it's our customers, 

 7 it's our members, it's our owners that are going 

 8 to bear the burden because the cost is going to 

 9 flow directly to them. Because in cooperatives, 

 10 our customers are our owners. There are no 

 11 third-party shareholders where cost could be 

 12 shifted. And so whatever cost we incur for 

 13 compliance with respect to Dodd-Frank, those costs 

 14 are going to flow through to the electric bills of 

 15 our 43 million consumer-owners in the United 

 16 States. 

 17 MR. OKOCHI: I do believe the rules say 

 18 though whenever it's technologically feasible. 

 19 So, you know, PDF for FX, technologically 

 20 feasible. So that would be a cheaper way to do 

 21 it. 

 22 MS. SLAVKIN: I understand that there 
 238 

 1 are additional burdens that go along with 

 2 transacting in the swaps market with the 

 3 implementation of Dodd-Frank, but it seems to me 

 4 that there are certain things that are not being 

 5 addressed in all of your comments. You seem to be 

 6 focusing on the problems that it will create for 

 7 your business, but these rules are being put in 

 8 place to protect the safety and soundness of the 

 9 system so that folks like my members don't have to 

 10 spend their taxpayer dollars again to bail out big 

 11 financial institutions. And it seems to me that 

 12 the data reporting requirements that were proposed 

 13 in both the CFTC's and the SEC's rules were not 

 14 really that burdensome, but the information that's 

 15 going to be provided to the regulators as a result 

 16 is essential in order to ensure things like the 

 17 end-user exemption is correctly applied. That if 

 18 an institution is a major swap participant it's 

 19 captured by the regulations and that the 

 20 regulators have the ability to monitor systemic 

 21 risk. And I think, you know, these nitpicks about 

 22 the various troublesome aspects of the regulation 
 239 

 1 are ignoring the bigger picture. 

 2 MR. PETERSEN: Just to sort of respond 

 3 to that, I mean, perhaps I should have been more 

 4 positive at the outset and talked about what I 

 5 like about the reporting requirement. But I think 

 6 it's extremely important. I don't think by large 

 7 measure end-users ever opposed it. So I 

 8 absolutely agree that it's critical to improving 

 9 the derivatives markets and to giving the 

 10 regulators the tools they need to detect risk and 

 11 take steps to reduce and mitigate risks. 

 12 I think it's just a question of cost 

 13 benefit. If we're talking about a relatively 

 14 small part of the market in which the reporting 

 15 entity would not be a swap dealer or major swap 

 16 participant, it's not necessarily a nitpick. I 

 17 mean, what you might consider to be a nitpick 

 18 might actually be a big deal for a firm. And 

 19 again, that firm in many cases is a firm that is 

 20 simply trying to do right by their business and 

 21 hedge their business risk. So that's one point. 

 22 And then on a second point, I agree that 
 240 

 1 these issues, they don't necessarily have to be 

 2 impediments to reporting. And I think the 

 3 gentleman from Reval seems positive that there are 

 4 ways we can find sort of solutions or ways to 

 5 comply with these rules that don't require a great 

 6 deal of cost or burden for end-users. I'm simply 

 7 raising the concern that if they do, that would be 

 8 a negative and it would be a consequence that we 

 9 don't need to bear. 

 10 MR. SHAPIRO: It's probably worth just 

 11 giving an illustration of an end-user to end-user 

 12 transaction which are a relative rarity, Sam. I 

 13 assume you see them as relative rarities as well 

 14 in your practice. I'm just thinking of an example 

 15 that we've had where the City of New York, one of 

 16 our clients, did a transaction with one of the -- 

 17 a related entity, the New York City Housing 

 18 Finance Corporation, where one side had one set of 

 19 exposures it wanted to get rid of and the other 

 20 side wanted to acquire. And it was one of those 

 21 perfect matches that you do. There was no 

 22 systemic risk issue that would come from this. If 
 241 

 1 you're not feeling good about the banks, what this 

 2 did was it made it so it disintermediated the 

 3 banks from standing in the middle and taking 

 4 profit out of each side. Simple, straightforward. 

 5 But what it would do is make it so that under 

 6 these rules the folks entering into this 

 7 transaction would no longer be able to rely upon a 

 8 bank to do the reporting requirement and would 

 9 have to do it themselves. 

 10 So realizing that that's a legitimate, 

 11 you know, imposition upon them, it should be done 

 12 intelligently, it should be done carefully, and it 

 13 should be done with something that would allow 

 14 them to have the leeway and the time to be able to 

 15 comply with it. It's not the risk item that I 

 16 think we're looking at. It's a rarity but it does 

 17 occur. 

 18 MR. TURBEVILLE: And when it's not a 

 19 rarity, Exelon, for instance, another, you know, 

 20 large, sophisticated utilities, have risk systems, 

 21 deal capture systems, which capture all of the 

 22 data that is necessary to identify the 
 242 

 1 information, roughly speaking. 

 2 MR. GLACE: Most of the data. 

 3 MR. TURBEVILLE: Most of the data that 

 4 is going to go to the SDR. So as Joe was saying, 

 5 for folks that do it with some regularity, they 

 6 are also going to be the people that have the 

 7 systems that pick it up. I would guess the real 

 8 issue is absolute time periods. Once it gets into 

 9 the system it can be instantaneously transmitted 

 10 over. The question is how long does it take you 

 11 guys to get it into your system? 

 12 MR. SHILTS: Chairman Gensler. 

 13 MR. GLACE: That's another key issue, is 

 14 we actually don't do real-time reporting on the 

 15 trade floor today. We're more of a daily close. 

 16 CHAIRMAN GENSLER: I don't remember 

 17 exactly how we asked questions on each of our 

 18 rules but what I'm taking just listening here, 

 19 that there are some transactions that are between 

 20 end-users or what Sam calls non-dealer, non- MSPs. 

 21 But, you know, commercial end-user to commercial 

 22 end-user, I think we asked questions in the swap 
 243 

 1 data repository and the data rules about how to 

 2 treat these, but since we've reopened our comment 

 3 letters, you know, it would be helpful if you 

 4 think whether it's facts, and PDF was mentioned, 

 5 or whether it's a GUI interface, you know, just an 

 6 easy so that it's sort of the least cost to end- 

 7 users but still the information comes in. It 

 8 would be helpful to just, you know, I'm just 

 9 mentioning to help give this Commission, you know, 

 10 guidance within those rules on that matter. 

 11 And I thank Sam for mentioning there are 

 12 other avenues, of course, you know, that some of 

 13 the trades might be end-user to de minimis dealer. 

 14 So there might not be a dealer because they're de 

 15 minimis and, you know, things like that. But -- 

 16 MR. CURLEY: And one of the topics we've 

 17 been asking about consistently is phasing of the 

 18 implementation. And we touched on it a moment ago 

 19 but in terms of your own views on phasing in these 

 20 requirements or where the end- user community 

 21 would fall in the phasing process, would you have 

 22 a preference for being earlier or later in the 
 244 

 1 process? Is there any risk or concern on your 

 2 part that being later in the process, for example, 

 3 might mean you would be presented with a fait 

 4 accompli as one of the earlier panelists had 

 5 mentioned? 

 6 MR. COTA: Sean Cota here. Following up 

 7 on the chairman's comments on the end-user, we do 

 8 end-user to consumer contracts all of the time. 

 9 There are thousands of them that we do. And 

 10 previously it was described that that's going to 

 11 be fully exempt and that's terrific because 

 12 otherwise it would be a nightmare. 

 13 But as to the timing, the retail 

 14 petroleum industry is -- Rome is burning and 

 15 people are fiddling. We need to do things 

 16 immediately. The amount of leverage and the 

 17 impacts that these are making in the derivative 

 18 markets showing up and the DCM markets are huge 

 19 and pronounced. The differential that has emerged 

 20 between the WTI contract and the BRINK contract, 

 21 people will debate that it's about fundamentals. 

 22 It's not about fundamentals. It's about leverage 
 245 

 1 and moving these trades from a somewhat regulated 

 2 market to an unregulated market. 

 3 The other markets need to know that 

 4 we're serious. They need to know the timing of 

 5 that. They need to know what the game plan is. 

 6 We have the same set up as 2008, only the largest 

 7 players that buy and sell the world oil market, 

 8 multiples per day, now have access to the Fed 

 9 window. So when this thing comes apart, and it's 

 10 going to come apart, the longer you wait, the 

 11 bigger the boom and the bust cycle will be. So I 

 12 would say do it now. 

 13 MR. WASSON: We do have some points we'd 

 14 like to make on sequencing if you would indulge 

 15 me. 

 16 Since we're non-financial end-users, we 

 17 recommend sequencing the final rules and 

 18 implementation of the rules in the new markets as 

 19 follows. First, define the scope of the CFTC's 

 20 new jurisdiction over non-financial commodity 

 21 transactions by finalizing the definitions of 

 22 swap, defining non-financial commodity, and 
 246 

 1 providing certainty on the question of all 

 2 requested and anticipated exclusions and 

 3 exemptions from non-financial commodity options to 

 4 the public interest exemptions for tariff products 

 5 and between the Federal Power Act 201(f)-type 

 6 entities. 

 7 In other clear congressional mandates, 

 8 to avoid overlap and regulatory uncertainty, we 

 9 need clarity in our business. If we don't need to 

 10 spend 2011 dollars on understanding and 

 11 implementing CFTC's new rules, those are dollars 

 12 that we can put to good use on reliability and 

 13 energy infrastructure projects. 

 14 Secondly, we would encourage the CFTC to 

 15 enter into the statutory MOUs with federal energy 

 16 regulators and analyze the information the 

 17 industry already provides to regulators such as 

 18 FERC, the EIA, and the EPA, to reduce the 

 19 duplicative regulatory costs and burdens that may 

 20 be weighing down our economy. 

 21 Third, establish recordkeeping reporting 

 22 rules I clear and common sense terms and provide 
 247 

 1 for a CFTC light regulatory scheme for 

 2 non-financial entities new to the CFTC regulatory 

 3 regime, commercial end-users without systems and 

 4 personnel that the CFTC assumes would be present 

 5 if we were financial entities. 

 6 Fourth, proceed to define rules and 

 7 constructs, new market infrastructure entities, 

 8 and construct new market infrastructure entities, 

 9 define and register market professionals, such as 

 10 swap dealers and MSPs, and test the regulatory 

 11 structure on financial products first -- those 

 12 that can be easily standardized, moved to 

 13 exchanges, accepted by transaction reporting 

 14 entities, and cleared. 

 15 Fifth, within an asset class, sequence 

 16 the implementation such that transactions between 

 17 SDRs and MSPs, once those entities are defined, 

 18 registered, and tested, are regulated well before 

 19 transactions to which non-financial entities are 

 20 parties. 

 21 Sixth, provide a CFTC office to assist 

 22 commercial end-users, especially those who need 
 248 

 1 non-financial commodity swaps and options to hedge 

 2 commercial risk in understanding the new 

 3 regulatory regime which once again is sort of a 

 4 CFTC light approach to regulation. 

 5 And finally, provide significant time 

 6 for different types of commercial end-users, 

 7 whether they be Fortune 100 or global entities or 

 8 small not-for-profit electric cooperatives, to 

 9 watch and learn and to choose to participate in 

 10 the new regulatory structure or not participate, 

 11 and to register and assume a place in the new 

 12 CFTC-regulated swaps markets. 

 13 Thank you. 

 14 MR. DONOVAN: Could I make a comment 

 15 regarding the phasing of buy product. It seems 

 16 that if we're attempting to control and mitigate 

 17 systemic risk, those are the products that should 

 18 go first in the cycle. Pension plans used 

 19 interest rate swaps which were not the cause for 

 20 any issues in the last recession. And much like 

 21 with the Treasury exempting foreign exchange 

 22 swaps, we felt that interest rate swaps are the 
 249 

 1 same way so that others ought to go first that 

 2 present the greatest risk to the system and have 

 3 perhaps a narrower participation than interest 

 4 rate swaps which are very broad. And that we 

 5 might get the biggest bang for the buck right out 

 6 of the gate. 

 7 MS. MIMS: And I would like to echo 

 8 those sentiments because Boeing entered into a 

 9 long-duration strategy which we thought was a 

 10 great thing in terms of mitigating, you know, our 

 11 notion of matching up our plan's liability. So we 

 12 don't see this as pension security for our current 

 13 employees and retirees if we're saying we want to 

 14 enter into interest rate swaps to mitigate more 

 15 surplus volatility, but now we're seeing that 

 16 because we don't have the ability to net and we're 

 17 just, you know, long one way, that we can probably 

 18 be like further disadvantaged than the swap 

 19 dealers themselves because, like I say, we have no 

 20 offset. And so if nothing else I think that's the 

 21 reason why we're saying, yes, phase it in because 

 22 we don't see those interest rate swaps as being 
 250 

 1 real systemic risks. It's more likely that on a 

 2 go-for-it basis we may even delay that depending 

 3 on how this is implemented. So I think we 

 4 definitely want to see how it rolls out. So I 

 5 agree with you guys. 

 6 MR. TURBEVILLE: One of the problems 

 7 with talking about instruments that weren't the 

 8 cause of the near ruin of the financial system of 

 9 the developed world the last time, the instruments 

 10 that will be the next problem probably are 

 11 different instruments. Right? So we sort of view 

 12 the whole Dodd-Frank system as a fabric and that 

 13 it's quite important not to think of one type of 

 14 instrument or one type of participant in the 

 15 marketplace as by itself lacking in systemic risk 

 16 when the whole system is designed to work 

 17 together. The Dodd-Frank system is designed to 

 18 work together and not to be peeled away one part 

 19 at a time because each individual part is 

 20 nonsystemically risky. The Bank of England 

 21 estimated that somewhere between -- I believe the 

 22 figures are $60 trillion and $120 trillion of 
 251 

 1 wealth was lost to this world as a result of the 

 2 losses of the financial crisis. 

 3 And so that being the case, it's 

 4 important that the whole thing be viewed together, 

 5 and recognizing that, you know, let's all try and 

 6 make it work but by the same token not try to talk 

 7 about individual pieces as individually 

 8 nonsystemically risky when the whole structure is 

 9 designed to support the system. 

 10 MR. DONOVAN: I'd agree that the whole 

 11 system has to eventually work together, but I 

 12 think it's practically impossible to implement the 

 13 whole thing at one fell swoop. So while we're 

 14 talking about phasing and implementation -- 

 15 MR. TURBEVILLE: Right. 

 16 MR. DONOVAN: -- is that certain things 

 17 have to happen first and the things that should 

 18 happen first were those that posed the most 

 19 systemic risk the last go-round. And perhaps the 

 20 participants in that arena are still posing the 

 21 systemic risks such as hedge funds. 

 22 MR. TURBEVILLE: Possibly so the 
 252 

 1 participants do. But I think -- my point is just 

 2 that it's a slippery slope to start talking about 

 3 taking a piece because each individual piece, no 

 4 matter, you know, the banks, the insurance 

 5 companies, the hedge funds, each one argue their 

 6 particular piece isn't individually systemically a 

 7 threat. So that's what the issue is. 

 8 MR. DONOVAN: But if you do look at the 

 9 facts, I think the facts support who is the most 

 10 -- who poses the most risk. 

 11 MR. SHAPIRO: I think there's perhaps an 

 12 easier way to slice which is large-small. And, 

 13 you know, I think that's one of the things you'd 

 14 look at. You raised correctly, Peter, I think, 

 15 the issue about people being concerned about being 

 16 last in and not having their interests heard. So 

 17 we would want to see, for example, the major 

 18 governmental and major nonprofit institutions be 

 19 in but there's a tremendous difference in 

 20 implementation for someone like, for example, you 

 21 know, Harvard or University of California versus 

 22 Olin College of Engineering or Simmons College or 
 253 

 1 something like that, all of whom I mention because 

 2 they're swap users. There's a big difference 

 3 between somebody like Memorial Sloan-Kettering 

 4 with a $3 billion endowment than a smaller urban, 

 5 you know, hospital system in Elizabeth, New 

 6 Jersey, like Trinitas. In some ways you could 

 7 make sure that the interests of the whole group is 

 8 met by making sure that the larger issuers get 

 9 their issues out first. Again, just in terms of 

 10 Wally's comments, I don't think anybody's talking 

 11 about exemption anyone. We're talking about how 

 12 we'd roll it out. 

 13 MR. SHILTS: Just in terms of that, how 

 14 -- do you or others have any thoughts on timing in 

 15 rolling it out if you did like a large-small 

 16 breakdown as you're talking about? 

 17 MR. SHAPIRO: One of the beauties of 

 18 timing it in this way is that there's some 

 19 learning that the ecology of the market will have 

 20 that way among the larger users, their counsel, 

 21 their advisors, the dealers who will work with 

 22 them as it's adapted. I think that the distance 
 254 

 1 between the initial adaption and the final 

 2 adaption by everyone should really need be no more 

 3 than a couple years. 

 4 MR. OKOCHI: I think we're talking about 

 5 a couple different things. So the phasing in, do 

 6 you phase things in because you're trying to test 

 7 how things will work? Versus the view I would 

 8 have is if you're looking to layer things in to 

 9 allow for people to plan and resource, you really 

 10 need to know the whole scope. So all of Russell's 

 11 points really kind of point to -- unless you 

 12 really know the end game -- to the level of detail 

 13 that may impact your requirements, it's hard to 

 14 say, well, I want to go first or last. So I think 

 15 that's a big question. Do you want to set up a 

 16 big beta test site for all of this for 12 months 

 17 to see how it works and then come back, set final 

 18 rules and requirements, and then phase in the 

 19 implementation or not? 

 20 MR. SHILTS: Chairman Gensler. 

 21 CHAIRMAN GENSLER: Russell, can I just 

 22 ask -- and I apologize. You may have said this. 
 255 

 1 I walked in and out -- because I took your point 

 2 is about pension funds so I was wondering whether 

 3 it was about the special entity provisions of 

 4 Dodd-Frank or -- 

 5 MR. WASSON: Not pension funds. We do 

 6 have some special entities in our industry that 

 7 are regulatory in nature. 

 8 CHAIRMAN GENSLER: Right, right. 

 9 MR. WASSON: You know, not affiliates. 

 10 CHAIRMAN GENSLER: So let me ask a 

 11 question maybe about special entities. Was there 

 12 any sense of -- there's a lot in Dodd-Frank, the 

 13 statute, even before you get to our rules -- to 

 14 protect pension funds and municipalities. And 

 15 hopefully we'll finalize those rules and we'll be 

 16 consistent and protect those parties. And I know 

 17 it's something that Heather and others have worked 

 18 a lot, hard on. Was there a sense that -- of any 

 19 phasing with regard to the protections for these 

 20 pension funds? The protection for the 

 21 municipalities or would that be at the same time? 

 22 This is swap dealers and how they deal with these 
 256 

 1 pension funds and special entities. 

 2 MR. SHAPIRO: The trickiest issues that 

 3 we see on the special entities side have to do 

 4 with communication between the dealer and the 

 5 special entity. And that's, you know, the area -- 

 6 we are only always on the special entities side. 

 7 We're always facing the dealer, fighting with the 

 8 dealer, making sure that we get as far a deal as 

 9 possible out of the dealer. But we want a free 

 10 flow of ideas on that. You know, it's just a 

 11 critically important thing. We hate the notion 

 12 that suddenly there'll be a chilling effect on 

 13 ideas, even what would be characterized as 

 14 recommendations. 

 15 Our clients overwhelmingly view dealer 

 16 recommendations with healthy skepticism. We know 

 17 there are those out there who do not. We know 

 18 there are those out there who are not well 

 19 advised. Those things need to be clarified before 

 20 you implement, and we think there needs to be 

 21 time. But by all means, implement quickly with 

 22 the big guys so that we can get the system 
 257 

 1 working. 

 2 CHAIRMAN GENSLER: So am I hearing you 

 3 would -- because I shouldn't speak for Congress, 

 4 but I think Congress did side with the special 

 5 entities in those provisions. And you're saying 

 6 correct? 

 7 MR. SHAPIRO: Correct, yeah. 

 8 CHAIRMAN GENSLER: And so however we end 

 9 up in the final rules, you're saying that all 

 10 special entities be protected from the same day or 

 11 just some get protected early? Because this is a 

 12 little hard for me to think how if you side with 

 13 the special entities, how do you say only some get 

 14 protected 60 days later and some get protected 12 

 15 months later? 

 16 MR. SHAPIRO: That's a very tricky 

 17 question. You'd think -- 

 18 CHAIRMAN GENSLER: That's why I'm asking 

 19 you the question. 

 20 MR. SHAPIRO: Yeah. You'd think you'd 

 21 want to protect everyone out of the chute. The 

 22 question really is how you nail down some of the 
 258 

 1 trickier questions on communication. NACUBO, the 

 2 National Association of College and University 

 3 Business Officers, submitted a thoughtful comment 

 4 to the draft regs where they talked about the 

 5 notion of sophistication and the difference among 

 6 their own membership between those who deal in the 

 7 billions and those who deal in the millions. And 

 8 in terms of the ability to be able to have that 

 9 end-user certify that he was not relying on the 

 10 dealer to provide advice so that there's clarity 

 11 to that dealer and clarity frankly to himself and 

 12 his own board, that he was able to digest these 

 13 things on his own, chew them up, and spit them 

 14 out. I think you'd want -- it's interesting to 

 15 look at that kind of carve out. It would be very 

 16 different from one set of users to another. The 

 17 notion that we need to protect Swenson and Yale 

 18 Endowment, thought of as one of the most 

 19 sophisticated groups of investors in the world, 

 20 the same way that you'd have to protect a pension 

 21 or retirement system at one of the rural electric 

 22 co-ops that we work with, you know, one looks like 
 259 

 1 a big hedge fund. The other guy looks like a 

 2 special entity. 

 3 MR. COTA: The question is timing and 

 4 how you're going to prioritize. There are two 

 5 different levels. The prioritization of the risk 

 6 and the prioritization of what you can accomplish. 

 7 And I think scale matters more than the type. I 

 8 think the Treasury's preannouncement that they're 

 9 going to exempt $4 trillion a day of trading and 

 10 FOREX was a huge mistake. And although FOREX 

 11 didn't take the system down, it didn't take it 

 12 down simply because the Fed agreed to print money 

 13 and give it around the world to even banks in 

 14 Libya. 

 15 So I think scale matters in your 

 16 implementation priorities, but you also need to 

 17 have an end game. I'm in the petroleum business. 

 18 We deal with the EPA. The EPA has lots of rules. 

 19 We have a law from 1973 that got reviewed in the 

 20 early '80s and was never implemented and we are 

 21 now in the ninth extension of the rule 

 22 implementation. At a certain point it gets to be 
 260 

 1 a joke. And the regulators are undermined because 

 2 people think that they'll never actually 

 3 accomplish the end goal so why should I even try 

 4 to comply? 

 5 And so the bad actors continue to get 

 6 away damaging the industry and the good actors get 

 7 punished because it costs them more because they 

 8 implemented early. So I think there are two 

 9 different stages in that regard. One is scale. 

 10 The second is you need to have a timeline at the 

 11 end that you need to implement things and 

 12 everybody needs to know. They need to be on the 

 13 same page at that date. 

 14 MR. WASSON: I'd also just like to 

 15 comment that many of us file 723 exemption 

 16 requests last August and the Commission correctly 

 17 stated that they would wait until 90 days before 

 18 the effective date of the Act to reconsider those 

 19 requests. And I think we're at that time right 

 20 now. And of course, the 723 would grant you a 

 21 year's exemption from the effective date of 

 22 Dodd-Frank. And I think that would be 
 261 

 1 exceptionally helpful for many smaller entities 

 2 that are going to find these rules. In fact, this 

 3 whole language we're talking about is foreign -- 

 4 it's a foreign language to us. And so it would 

 5 enable us to have more time to prepare so we'd be 

 6 most grateful if those 7023 exemption requests 

 7 could be reconsidered at this time. 

 8 MR. CURLEY: I would like to introduce a 

 9 question about public companies and any unique 

 10 considerations associated with the proposed rules 

 11 for end-users or for public companies or some 

 12 special factors associated with recording or the 

 13 processes of recording, and any thoughts that 

 14 people might have on that, both for larger 

 15 companies and smaller, public companies. 

 16 MR. PETERSEN: Just to bring that topic 

 17 up again, and it was said earlier that, you know, 

 18 many public companies already have hedging 

 19 policies in place that allow them to enter into 

 20 trades over the counter and that's correct. 

 21 However, those policies or resolutions would not 

 22 necessarily meet the requirements related to the 
 262 

 1 end-user exemption. I hope they do. It's just a 

 2 question that we have. So certainly, that is one 

 3 specific area that I know a lot of our public 

 4 end-user clients are very concerned with just 

 5 because they read it and they don't know what it 

 6 means. And again, it could on the one hand be 

 7 read where, you know, you simply amend an existing 

 8 resolution and periodically -- and hopefully not 

 9 too frequently -- reaffirm that or perhaps just 

 10 refer back to that on a trade-by-trade basis, or 

 11 at its worst it can mean that the Board actually 

 12 has to get together every time you have to do a 

 13 trade, which is obviously nonworkable. 

 14 So again, I hope it's an issue that can 

 15 be resolved, but depending on how that plays out 

 16 between now and the final rule, that could be a 

 17 major implementation hurdle for end-users. And 

 18 frankly, it could be an impediment to hedging 

 19 risks. 

 20 MR. TURBEVILLE: Consistent with what we 

 21 were talking about earlier, I think the notion 

 22 should be, and I believe it is, talking about a 
 263 

 1 hedge program and what assets should be hedged. 

 2 Some of the folks where know that I did other 

 3 things prior to doing this and I saw any number of 

 4 companies -- largely energy companies, at one time 

 5 or another, companies like Calpine, even dating 

 6 back to ENRON and some of the others -- ran into 

 7 grave issues when it came to what they were doing 

 8 with hedging -- whether they were hedging or 

 9 trading. And I think it's actually quite a good 

 10 thing to make certain that when companies are 

 11 entering into hedging programs that it is a big of 

 12 a solemn event and they actually adopt the -- at 

 13 the highest levels, the policy of hedging certain 

 14 assets. If you listen to calls -- analysts' calls 

 15 regarding a lot of these companies, one of the 

 16 major things they talk about is their hedging 

 17 programs because it's very central to them. And 

 18 to the extent it's central to them, it's also a 

 19 great risk for them as well. 

 20 So we applaud the notion of making 

 21 certain that here's what's going to be hedged, 

 22 here's our program, and it's actually a program 
 264 

 1 that's actually consensually entered into at sort 

 2 of the highest levels of the company. We think 

 3 it's a great idea. 

 4 MR. GLACE: We agree with your comments 

 5 so that the Board meets and approves policies and 

 6 programs and that the Board is not involved in 

 7 transactional activity. That's just got to get 

 8 fixed if it's a problem because that's not going 

 9 to work as was earlier pointed out. But again, if 

 10 the Board does approve the hedging programs, 

 11 approve the risk policies of the entity, and 

 12 that's their role. 

 13 MR. TURBEVILLE: It's a very big thing 

 14 for your company and others like you. This 

 15 program is very important and central to the value 

 16 -- your shareholders' value. 

 17 MS. MIMS: True, for every hedging 

 18 program we enter into we actually have a white 

 19 paper. We call it a risk mitigation strategy 

 20 document. So the controller of each of the 

 21 business units involved in the hedge and the CFO, 

 22 depending on the dollar limit, have to sign off on 
 265 

 1 them. So because we have a very stringent policy, 

 2 yes, I am concerned about every time we needed to 

 3 enter into something and prove that we still get 

 4 the exemption that it would require Board 

 5 approval. I would think that a one- time 

 6 corporate resolution would do the trick and that 

 7 each subsequent hedge would just, you know, be 

 8 grandfathered in to that first resolution. I'm 

 9 just not sure what your thinking is on that. 

 10 MR. CURLEY: I think today it's more of 

 11 an implementation point. And so what I'm hearing 

 12 from you is that it's relatively consistent across 

 13 public companies to have a policy if that kind or 

 14 more practices so that there wouldn't be as much 

 15 of a timing or implementation concern driven by 

 16 that factor if that's a fair statement. So thank 

 17 you for that input. 

 18 And then I'd like to follow on with this 

 19 in reference to international factors. We haven't 

 20 talked so much about the cross-border issues but I 

 21 know that it is a topic that comes up, even among 

 22 relatively small companies. It's part of their 
 266 

 1 business now in a global market. And just how is 

 2 it that with respect to end-users in particular, 

 3 international factors might be taken into account 

 4 for purposes of implementation concerns. Are 

 5 there rules outside the United States that we 

 6 should think about in terms of implementation and 

 7 how it affects the end-user community. 

 8 MR. PETERSEN: This is an issue that has 

 9 come up quite a lot with our clients over the last 

 10 year and I think one major concern is that they 

 11 just -- our clients want to know going forward if 

 12 they have international operations or, you know, 

 13 hedge at different entities, which set of rules 

 14 they need to be worried about, you know, they have 

 15 the question of, you know, how far do the U.S. 

 16 rules sort of reach? So with respect to that, to 

 17 the extent that the agencies could provide clear 

 18 guidance in the rules related to those points, 

 19 that would certainly be appreciated. And 

 20 obviously, this is a scenario that's going to be a 

 21 boon for many law firms going forward. 

 22 There are other issues just to briefly 
 267 

 1 talk about margin again. I mean, it seems to me 

 2 that margin is an area where right now the 

 3 European proposal appears to be quite different 

 4 than what the agencies here have proposed, which 

 5 of course could be easy for a firm that does have 

 6 international operations to consider doing trades 

 7 abroad. 

 8 MR. OKOCHI: I think the difference in 

 9 information threshold versus the clearing 

 10 threshold could be something that U.S. companies 

 11 should have to be mindful of when doing 

 12 derivatives overseas. 

 13 MR. CURLEY: Okay, we are just about at 

 14 the end of our time so if you have another 

 15 question. 

 16 MR. SHILTS: Yeah, it's kind of a 

 17 follow-up on something we talked about earlier. 

 18 It sounds like some of the key concerns with 

 19 respect to end-users who may have to report goes 

 20 to I guess resources, limited resources to develop 

 21 whatever needs to be done. But I was wondering, 

 22 if you could comment on how should the commissions 
 268 

 1 think about that in terms of any sort of phased in 

 2 implementation? You know, considering the 

 3 resource issue. I mean, what -- in context, 

 4 ultimately everybody will come into compliance. 

 5 So what might you think about is kind of a 

 6 realistic timeframe? 

 7 MR. COTA: From this group of end-users, 

 8 they would like it done immediately, as soon as 

 9 possible. We don't care where the paperwork is. 

 10 We are going out of business rapidly because 

 11 there's no control over these markets. So do it 

 12 now. 

 13 MR. SHAPIRO: I'm thinking about it in a 

 14 slightly different way. And that is just thinking 

 15 about the way in which I've watched the 

 16 over-the-counter market evolve itself since the, 

 17 you know, late 1980s. As it moved from initially 

 18 larger, more sophisticated users, down to smaller, 

 19 more frequent users. And one of the things that 

 20 clearly happened was the overwhelming number of 

 21 the transactions are dealer to end-user. The 

 22 dealer, in essence, is the one who will carry the 
 269 

 1 water of making it happen. Your regs 

 2 intelligently impose almost all the burden in that 

 3 direction to make sure that it happens. 

 4 Thinking about the implementation of 

 5 these regs, doing it from large to small, having 

 6 the dealer basically get the plumbing working for 

 7 that first year, I don't think it really should 

 8 take longer than a year, two max. I don't know if 

 9 anybody around the table thinks that it needs to 

 10 be longer than two years before it's 100 percent 

 11 implemented. 

 12 I'd be curious, you know, for anybody -- 

 13 Russ or Sam, if you've got anybody there that you 

 14 think that would be too short a time. 

 15 MR. TURBEVILLE: On the reporting side, 

 16 it's actually -- it's the usual event issue, isn't 

 17 it? Isn't it because these are events that don't 

 18 happen very often? 

 19 MR. SHAPIRO: It is. 

 20 MR. TURBEVILLE: Typically, that's not 

 21 going to get any better or worse in a year, is it? 

 22 MR. SHAPIRO: No, but the, you know, the 
 270 

 1 ecology will evolve. I think that's the key 

 2 thing. People will get used to it. This is how 

 3 it's done. It's not how it's done now. It's how 

 4 it's going to be done based upon what the 

 5 commissions do. 

 6 MR. DONOVAN: Could I make a comment, 

 7 Peter, as well? I would agree with what you said 

 8 earlier. If we do go from large to small, we're 

 9 very concerned that the largest dealers are going 

 10 to set the precedent and the models at the outset 

 11 and we're going to be left with it at the end. So 

 12 the smaller users, although they may have more 

 13 time, they may end up with a model that they 

 14 really don't want or don't have the ability to 

 15 work with very well. So I'd agree entirely with 

 16 what you had said earlier. And I think the 

 17 process that you're going through here, being very 

 18 deliberate about it and getting these comments is 

 19 what I would suggest that you continue before 

 20 doing anything -- rushing in quickly. So I 

 21 commend you on what you are doing. 

 22 MR. WASSON: And we would commend you as 
 271 

 1 well. I think one of the things, before we start 

 2 talking about timeframes, is that we need 

 3 certainty with respect to just exactly what it is 

 4 we're dealing with. And so when we talk about 

 5 product definitions, for example, Terry, I 

 6 suspect, when product definitions come out, you're 

 7 going to be asking for additional comments on 

 8 electric utility-type industry products that 

 9 perhaps are unclear whether they're swaps or not. 

 10 And as the chairman indicated, you know, the 

 11 30-day period where you're opening up all these 

 12 past NOPRs, that's greatly appreciated but first 

 13 off, when does the 30-day period start? And 

 14 secondly, can we have a final product definition 

 15 and then start the 30-day period because then we 

 16 would know what we're dealing with. But if we 

 17 open up all the NOPRs before we have a final 

 18 product definition, then we're sort of behind the 

 19 8-ball in the same position we've been in this 

 20 whole process but we've had to comment on various 

 21 NOPRS where we don't know the most basic elements 

 22 of how it might impact us. 
 272 

 1 MR. PETERSEN: Just to add to that, I 

 2 mean, I think just off the top of my head I would 

 3 expect that most firms could get ready in two 

 4 years. However, I definitely echo Russell's 

 5 concerns and point of view regarding, you know, 

 6 it's probably better to ask that exactly question 

 7 after we have a more final set of rules. I so 

 8 hope that this is, you know, the first of many for 

 9 a where we can ask these questions. 

 10 MR. CURLEY: All right. Well, I think 

 11 we've just about reached the end of our time for 

 12 this panel and the end of the day with Chairman. 

 13 Yeah, please. 

 14 CHAIRMAN GENSLER: Two things. One, the 

 15 final definition of (inaudible). 

 16 MR. SHILTS: Did anybody have any last 

 17 comment before we close? 

 18 MR. COTA: You guys have a huge job. 

 19 You're all understaffed, you don't have enough 

 20 money, and the future financial system depends on 

 21 you doing it well. So I appreciate all the time 

 22 and effort you guys do. 
 273 

 1 MR. CURLEY: All right. Thank you very 

 2 much. 

 3 MR. SHILTS: Thank you. 

 4 (Whereupon, at 3:58 p.m., the 

 5 PROCEEDINGS were adjourned.) 

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 274 

 1 CERTIFICATE OF NOTARY PUBLIC 

 2 DISTRICT OF COLUMBIA 

 3 I, Christine Allen, notary public in and 

 4 for the District of Columbia, do hereby certify 

 5 that the forgoing PROCEEDING was duly recorded and 

 6 thereafter reduced to print under my direction; 

 7 that the witnesses were sworn to tell the truth 

 8 under penalty of perjury; that said transcript is a 

 9 true record of the testimony given by witnesses; 

 10 that I am neither counsel for, related to, nor 

 11 employed by any of the parties to the action in 

 12 which this proceeding was called; and, furthermore, 

 13 that I am not a relative or employee of any 

 14 attorney or counsel employed by the parties hereto, 

 15 nor financially or otherwise interested in the 

 16 outcome of this action. 

 17 

 18 

 19 ----------------------------------- 

 20 Notary Public, in and for the District of Columbia 

 21 My Commission Expires: January 14, 2013 

 22