UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 PUBLIC MEETING OF ADVISORY COMMITTEE

 Washington, D.C.

 Friday, October 1, 2010
 2

 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BART CHILTON, Commissioner

 5 MICHAEL V. DUNN, Commissioner

 6 SCOTT D. O'MALIA, Commissioner

 7 JILL E. SOMMERS, Commissioner

 8 Staff:

 9 DAN BERKOVITZ

 General Counsel

 10

 PHYLLIS DIETZ

 11 Division of Clearing and Intermediary

 Oversight

 12

 JOHN LAWTON

 13 Division of Clearing and Intermediary

 Oversight

 14

 SUSAN NATHAN

 15 Division of Market Oversight

 16 ANANDA RADHAKRISHNAN

 Division of Clearing and Intermediary

 17 Oversight

 18 NANCY SCHNABEL

 Division of Clearing and Intermediary

 19 Oversight

 20 RICK SHILTZ

 Division of Market Oversight

 21

 22 * * * * *
 3

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

 2 (9:35 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 meeting will come to order. This is the public

 5 meeting of the Commodity Futures Trading

 6 Commission to consider issuance of one interim

 7 final rule and two proposed rules. It's an

 8 interim final rule relating to the timeframe for

 9 the reporting or preenactment unexpired swaps to a

 10 swap data repository or to the Commission itself;

 11 a proposed rule that would prescribe certain

 12 financial resource standards for derivative

 13 clearing organizations including those clearing

 14 organizations that may in the future be designated

 15 systemically important by the Financial Stability

 16 Oversight Council under Title VIII of the

 17 Dodd-Frank Act, and as that council's first

 18 meeting is later today, of course these

 19 designations are not yet made. And thirdly a

 20 proposed rule specifying requirements for

 21 derivatives clearing organizations, designated

 22 contract markets and swap execution facilities on
 4

 1 their governance arrangements and ways to mitigate

 2 conflicts of interest.

 3 This is the first public meeting that we

 4 have had to consider rulemakings under Dodd-Frank,

 5 the Wall Street Reform and Consumer Protection

 6 Act. The next meeting will be scheduled for

 7 October 19. We anticipate putting out the Federal

 8 Register notice for that. We also anticipate

 9 continuing to have meetings through the fall

 10 approximately once a week, we're still working on

 11 our collective schedules, but we will notice each

 12 of them and the specific topics to be discussed in

 13 those meetings through the Federal Register as we

 14 go along.

 15 We will hear from staff today, and I'd

 16 like to thank my fellow Commissioners for all

 17 their hard work on the passage of the Dodd-Frank

 18 Act, that was a team effort, but now that we have

 19 these existing authorities I certainly

 20 particularly want to thank their input into these

 21 three proposals. We have a challenging agenda but

 22 I know staff is up to it and I know for sure the
 5

 1 Commissioners are up to it as well.

 2 I'd also like to welcome members of the

 3 public. Two members of the public who are

 4 particularly special who I want to mention include

 5 John and Bev O'Malia, Commissioner O'Malia's

 6 parents. I don't know if they're going to have

 7 particular comments on these rules, but we look

 8 forward to all of the public's comments.

 9 COMMISSIONER O'MALIA: I'm going to have

 10 them edit my statements next time.

 11 CHAIRMAN GENSLER: Having met them, they

 12 might have different views though. I don't know.

 13 Welcome to all market participants and members of

 14 the media at today's meeting as well as welcoming

 15 those listening to the meeting on phone or

 16 watching live on the webcast. I'd like to thank

 17 staff for all their hard work. This was passed

 18 July 21, and they had their first initial thoughts

 19 and memos to the chair within days sometimes,

 20 sometimes week, but to the full Commission within

 21 4 or 5 weeks including term sheets and the debates

 22 and dialogue with the SEC, the Federal Reserve and
 6

 1 other prudential regulators has been an enormous

 2 accomplishment and I am so proud of what you all

 3 have done. You've been able to incorporate as

 4 best you can all the thoughtful recommendations

 5 from fellow regulators and certainly the many

 6 thoughtful comments from our Commissioners here

 7 and considering international regulators as well.

 8 This is the first step in a long path.

 9 Two of the rules are proposals and we look forward

 10 to receiving public comment and that public

 11 comment is critical. The final rules often are

 12 similar to the proposals but they naturally change

 13 as we get the full input from the public, and

 14 certainly I know for me that's going to be very

 15 important as we move forward. Within regard to

 16 the interim final rule on swap data repositories,

 17 staff will come back later in the fall with

 18 specific proposals at the appropriate time on

 19 those swap data repositories themselves. This is

 20 a specific feature of Dodd-Frank about

 21 preenactment swaps.

 22 We've organized ourselves around 30
 7

 1 rulemaking teams and they're all actively at work

 2 so that we will be reviewing additional

 3 recommendations from these teams as well as other

 4 teams in a similar format going forward. Before I

 5 turn to staff I'd like to turn to my fellow

 6 Commissioners. Commissioner Dunn?

 7 COMMISSIONER DUNN: Thank you, Mister

 8 Chairman. I appreciate the hard work of the

 9 staff. As I look out there I see you've twisted

 10 Susan's arm just a little too far to get her to

 11 give you everything we need.

 12 As we begin the first steps in

 13 implementing the Dodd-Frank Act, this is this

 14 country's most significant financial reform bill

 15 during my entire government service. While

 16 Congress worked for nearly 2 years crafting the

 17 legislation, they have charged us with

 18 implementing it in 360 days. For an agency the

 19 size of the CFTC with very limited fiscal and

 20 human resources at its disposal, this will be a

 21 Herculean task. Under the leadership of Chairman

 22 Gensler, almost a third of CFTC staff have been
 8

 1 working in 30 areas to develop the rules necessary

 2 to implement this legislation. We will be holding

 3 a series of public meetings this fall to consider

 4 rules in an effort to meet the timelines mandated

 5 by Congress. Congress has worked hard, our staff

 6 is working hard and now it is time for the public

 7 to go to work.

 8 In most cases we will be adopting

 9 proposed regulations. There will be a period of

 10 time for the public to comment on those proposals

 11 and then we will adopt final regulations taking

 12 the public's comments into account. If we are to

 13 get it right, it is imperative that we have a firm

 14 understanding of how the regulations created will

 15 impact the markets we regulate and those who use

 16 them. It is the role of the public to help us

 17 understand that impact. Your input begins now.

 18 Please take the time to review and comment on

 19 these proposed regs to ensure we succeed together.

 20 Due to the congressionally mandated

 21 deadlines, comment period may be much shorter than

 22 we might desire and extensions of comment periods
 9

 1 may not be feasible. It is therefore crucial that

 2 those designed to have input on this process do so

 3 as soon as possible. Your comments are important

 4 in shaping the final outcome of the regulations.

 5 As a Commissioner I intend to be liberal in

 6 letting proposed regulations be published. This

 7 includes proposals that I may not entirely agree

 8 with. I intend to keep an open mind and take into

 9 consideration the public's comments when making a

 10 decision on a final rule. As staff work to

 11 prepare these proposed rules, I would ask them to

 12 keep two concepts in mind. First, I believe that

 13 the principle- based regulatory regime that the

 14 Commission currently adheres to works well. It is

 15 no coincidence that with the advent of

 16 principle-based regulations the markets we oversee

 17 experienced a new wave of innovation and explosive

 18 growth due in no small part to the nimbleness of

 19 the CFTC. To the extent possible, I will ask

 20 staff to continue to follow our principle-based

 21 regime and forego prescriptive rules that mandate

 22 a one-size-fits-all approach.
 10

 1 Second, I also believe that there are

 2 several approaches this agency can take to

 3 implement Dodd-Frank and still follow the

 4 intentions of the drafters. I would ask staff to

 5 present alternatives to proposed regulations that

 6 would allow the public to comment on more than

 7 just one solution and allow the Commissioners to

 8 have choices on final rules adequately considered

 9 by the public. I would be remiss if I did not

 10 mention one other externality that will have a

 11 major impact on the rulemaking process. Adequate

 12 funding of the CFTC is essential to fulfill the

 13 mandates of Congress. During the debate over this

 14 legislation the CFTC was asked to provide an

 15 estimate of the cost of implementing various

 16 provisions of the bill. This estimate was based

 17 on being funded at current request levels for FY

 18 2011 with additional resources to reflect the

 19 burdens imposed by the new law. Without full

 20 funding it will be impossible to meet all of the

 21 law's mandates and continue to fulfill our duties

 22 under the current law. This puts the Commission
 11

 1 in the position of choosing what parts of

 2 Dodd-Frank we actually have the resources to

 3 implement and whether we can do so while

 4 continuing to fulfill the core mission of the

 5 agency. I would ask that staff provide an

 6 estimate of the cost of each proposed regulation

 7 and an analysis detailing whether the CFTC can

 8 delegate duties to SROs to fulfill the mandates of

 9 Congress. Further, I would ask staff working in

 10 concert with the Chairman to provide the

 11 Commissioners with a list of prioritizing

 12 regulations based on available funding. It is

 13 also important that the implementation of

 14 Dodd-Frank means that certain services the CFTC

 15 provides will no longer be provided. Those

 16 services must be made public. Finally, I would

 17 ask that staff begin to determine what rules and

 18 regulations the CFTC can rescind as a result of

 19 the adoption of new rules and I would encourage

 20 CFTC Commissioners in the future to review the

 21 Dodd-Frank rules within 3 years of enactment to

 22 determine if they were actually doing what they
 12

 1 were designed to do.

 2 I want to thank you, Mister Chairman,

 3 for your leadership and the hard work of the

 4 dedicated employees of the CFTC in preparing these

 5 and future proposals.

 6 CHAIRMAN GENSLER: Thank you,

 7 Commissioner Dunn. Commissioner Sommers?

 8 COMMISSIONER SOMMERS: Thank you, Mister

 9 Chairman. Good morning.

 10 Now that Congress had done its part over

 11 the last year and given us Dodd-Frank, regulators

 12 are tasked with putting meat on the bones by

 13 crafting the many regulations required to give

 14 effect to the statute. Generally the headline

 15 from Dodd-Frank is that the OTC swaps market will

 16 now be subject to stringent regulatory oversight.

 17 To implement this regulator oversight we have set

 18 up 30 rule- writing teams that are drafting dozens

 19 of regulations that we expect to formally propose

 20 before the end of this year. This is a very

 21 ambitious agenda, but Congress has given us little

 22 choice with the statutory deadlines imposed.
 13

 1 While the rule-writing teams are

 2 composed of very capable and hardworking staff and

 3 have already been working for months, they will

 4 have a daunting amount of work ahead of them. The

 5 Commission began the process of publishing rules

 6 last month. So far we've published final rules

 7 relating to the retail forex trading, a project

 8 that dates back to the passage of the 2008 Farm

 9 Bill and was also included in Dodd-Frank, a

 10 petition process for grandfathering exempt

 11 commercial markets and an advanced notice of

 12 rulemakings for agricultural swaps. Going forward

 13 the process of proposing new rules will begin

 14 rather quickly. Today we hold a meeting to vote

 15 on three agenda items from Dodd-Frank. I fully

 16 expect there to be many more such meetings as the

 17 Chairman just discussed where the Commission will

 18 publicly deliberate and vote on these proposed

 19 rules. I want to continue to urge all interested

 20 parties to engage in this transparent process.

 21 Commenting before a regulation is proposed can be

 22 very helpful as well as commenting after a
 14

 1 proposal has been published. It's imperative for

 2 us to have this input from stakeholders and I

 3 agree with Commissioner Dunn about encouraging you

 4 to do is as soon as a rule is proposed.

 5 Some of the issues we are discussing

 6 today are much more complex than they first

 7 appear. Adding to the complexity, many of the

 8 provision require multiagency coordination. I

 9 know the Chairman and the rulemaking teams have

 10 been very mindful of the importance of successful

 11 cooperation among regulatory agencies that are

 12 tasked with enforcing this new statute. Without

 13 continued progress in this area and consistent

 14 rule proposals, the agencies risk injecting

 15 additional uncertainty into the already complex

 16 process by which the OTC markets and participants

 17 will come under the regulatory regimes of one or

 18 more agency. In my view, additional uncertainty

 19 could be devastating and I will do all I can to

 20 ensure that we do not have such an outcome.

 21 It goes without saying that market

 22 regulators have their hands full. Achieving these
 15

 1 reforms will take time, and comprehensively

 2 changing the regulatory landscape in such a short

 3 period will not be easy. I recognize that it is

 4 imperative that we get it right and that our goal

 5 as regulators is smart regulation. We can do

 6 damage to these vital markets without that goal.

 7 I fully intend to do all I can to make sure we

 8 don't get it wrong and that our markets continue

 9 to thrive. I want to staffs of these three

 10 rule-writing teams for all of the work that they

 11 have done to get these proposals ready in such a

 12 short amount of time. I know you've spent a lot

 13 of long hours and I want to let you know how much

 14 we all appreciate that. Thank you.

 15 CHAIRMAN GENSLER: Thank you,

 16 Commissioner Sommers. Commissioner Chilton?

 17 COMMISSIONER CHILTON: Thanks, Mister

 18 Chairman. I was thinking about this last night

 19 and I was thinking about that old Chicago song, I

 20 don't know if people remember it, but I'm going to

 21 put it in your head for the day if you do, "Only

 22 the Beginning," remember it's only the beginning,
 16

 1 it's only just the start. So this is the first

 2 public meeting that's just the beginning and just

 3 the start and it's important and I thank all the

 4 staff who have been working double-time on this.

 5 There has been a lot of talk and a lot

 6 of news articles lately about the flash crash and

 7 there will be more on that in the next little bit,

 8 but here is what's clear, that these markets are

 9 all inter-related, the securities markets, the

 10 futures markets, even the global markets and to

 11 the extent that we can harmonize in the U.S. and

 12 globally, as the Chairman has been talking about

 13 earlier this week in Brussels, it's really

 14 critical. Some of the things that we're doing in

 15 the markets with our brethren regulators,

 16 particularly the SEC, but with our other sister

 17 regulators in the U.S. government, they're

 18 Band-Aids. They are important, they're

 19 significant, like Commissioner Sommers said I

 20 think these are imperative changes that we're

 21 doing. But the work that we're doing today, that

 22 we're starting today, are the real structural
 17

 1 changes. The Dodd-Frank stuff is the long-term

 2 stuff and I share Commissioner Dunn's concerns

 3 about the funding. We can deal with some of these

 4 issues with the flash crash but these longer-term

 5 things, if we don't have the money I think it will

 6 be really tough for us to aggregate position

 7 limits much less enforce them. I think doing the

 8 clearing that's required particularly with regard

 9 to what's currently dark markets, the OTC trades,

 10 that will really just be I think almost an

 11 insurmountable task for us. Likewise, the new

 12 authority we've been given in enforcement,

 13 disruptive trading practices, going out and

 14 investigating these things, that's another thing,

 15 whereas as Commissioner Dunn said we're going to

 16 have to make some tough choices if we don't have

 17 the money. Finally, dealing with things like the

 18 advent of high-frequency trading. I'm not saying

 19 it's a good or a bad thing, but it's certainly

 20 something we need to get our arms around.

 21 I hope that we get the funding we need

 22 and we can make it for a few months, we can put
 18

 1 the rules in place but we can't actually monitor

 2 them and oversee them like Congress intends. So

 3 this is just the beginning and it's just the start

 4 and I look forward to doing the work we have to do

 5 with all of you. Thanks.

 6 CHAIRMAN GENSLER: Thank you,

 7 Commissioner Chilton. Commissioner O'Malia? Did

 8 you want your folks to do the statement?

 9 COMMISSIONER O'MALIA: No, thanks. I do

 10 appreciate having them here and while I have no

 11 illusion that grandchildren might have been a

 12 stronger draw than a Commission meeting it is good

 13 to have them in my corner.

 14 I would also like to echo my fellow

 15 Commissioners in thanking staff for the very hard

 16 work that has gone into this rulemaking, long

 17 hours have resulted and this is the culmination of

 18 that and we're going to put these rules out. I'd

 19 also like the compliment the other 27 teams for

 20 their work in identifying issues and preparing the

 21 proposed rules. I can say from firsthand

 22 experience that the amount of paper and the number
 19

 1 of meetings that I've endured is overwhelming.

 2 It's a massive amount of work, staff is under

 3 great pressure to come up options and ideas and we

 4 appreciate all the work that they do to give us

 5 those options so we can make informed decisions

 6 and then obviously put them out for public comment

 7 which is essential and I strongly urge the public

 8 to comment. It will be under tight timeframes,

 9 but their input is essential.

 10 With regard to the rulemakings today I

 11 intend to support all three. However, I have a

 12 number of concerns associated with the

 13 prescriptiveness of the proposed

 14 conflict-of-interest rules. I believe that we

 15 have other remedies within Dodd-Frank that could

 16 be more effective in achieving the goal of

 17 expanding access to clearing. With regard to the

 18 conflict of interest, I'm mindful that the main

 19 goal of this Act is to reduce systemic risk and by

 20 imposing mandatory clearing that's the way the

 21 Congress has chosen to achieve that. The business

 22 of clearing is a serious and a financially complex
 20

 1 matter and it should be treated as such. I am

 2 concerned that the proposed rules seek to impose

 3 limited and inflexible ownership caps and not

 4 afford the Commission the flexibility to consider

 5 all statutory objectives including promotion of

 6 competition in reducing systemic risk.

 7 In addition, I'm quite confident that

 8 the open access and product eligibility provisions

 9 in Sections 2(h) and 2(b) under the Act will be

 10 more effective in guaranteeing access to clearing

 11 than the ownership rules which I believe to be an

 12 imprecise and ineffective tool to enhance

 13 competition, mitigate systemic risk and resolve

 14 conflicts of interest all specified in the

 15 statute. With that said, I do appreciate the

 16 inclusion of the waiver provisions resulting from

 17 working with the Chairman's staff that will

 18 provide the Commission with greater flexibility,

 19 and considering the Commission is yet to receive a

 20 single DCO application, I believe this flexibility

 21 is warranted.

 22 With regard to financial resources, core
 21

 1 principle B, this rulemaking is the first among

 2 many designed to mitigate systemic risk through

 3 clearing in the swaps market. However, as the

 4 Commission proposes rules to implement the Act,

 5 DCOs will be required to meet more stringent

 6 capital requirements which will be passed on to

 7 their customers. Market participants should have

 8 no illusion that the cost of clearing will

 9 increase. At the end of the day it remains to be

 10 seen whether lower returns on capital and higher

 11 transaction costs will have its own unintended

 12 negative impact on liquidity, competition and

 13 innovation in the markets. As to the interim

 14 final rule on margin and preenactment swaps, I

 15 agree with the Commission's decision to report

 16 swaps entered into before enactment and I know

 17 many commercial entities are interested to know

 18 whether or not the Commission will impose margin

 19 on these preenactment swaps. I understand this is

 20 an issue that will be addressed in a future

 21 rulemaking, but I would like to take the

 22 opportunity to make it crystal clear that I oppose
 22

 1 interfering with privately negotiated contracts

 2 entered into prior to the Act and I believe that

 3 ant rule of regulation designed to do so would be

 4 of questionable legality and an extraordinarily

 5 unwise policy decision.

 6 Mister Chairman, I'm pleased that we're

 7 going to have this first rulemaking and I look

 8 forward to the many rulemaking meetings to come

 9 and to have our say in these things. With that,

 10 let's move on.

 11 CHAIRMAN GENSLER: Thank you,

 12 Commissioner O'Malia. I want to associate with so

 13 many of the remarks of my fellow Commissioners in

 14 their openings but particularly that we really do

 15 look for and need the public's comments. I'm

 16 going to as you will see support all three of

 17 these rules, but I suspect 6 months from now or in

 18 the case of governance just 3 months from now when

 19 we try to finish it up that I will have changed my

 20 mind based on the public comments on all of these

 21 because the public's views are really important.

 22 I think we've all stressed that and that's what's
 23

 1 so important. These are just proposals. These

 2 are to get the public dialogue really moving to

 3 the next stage and I don't think they should be

 4 confused with where we'll end up as a final rule.

 5 We have 288 days to go until we finalize

 6 all this. We've had 170-plus meetings with public

 7 participants that we list on our website. We've

 8 counted it up and we've had 145 meetings at least

 9 with fellow regulators and 100 of those were with

 10 the SEC. We didn't count up the international

 11 regulators but there are probably a dozen or more.

 12 With that the first proposed rule we're

 13 considering today is an interim final rule

 14 relating to the timeframe for reporting

 15 preenactment swaps. These transactions existed

 16 before the President signed the bill and so what

 17 Congress asked is that those preenactment swaps

 18 that are still in existence be reported to a swap

 19 data repository and that's why it comes to this.

 20 Susan Nathan from the CFTC's Division of Market

 21 Oversight will be presenting an overview of the

 22 proposed interim final rule, Rick Shiltz who is
 24

 1 the head of the Division of Market Oversight will

 2 be I guess supporting Susan and giving guidance to

 3 Susan as her boss, but Susan and Rick will be

 4 presenting. I'm going to introduce the whole

 5 panel and then we'll be off.

 6 The second set of proposed rules being

 7 considered today prescribes certain financial

 8 resources standards for derivatives clearing

 9 organizations. These are the organizations that

 10 have existed from the 1890s that help lower risk

 11 to the American public that stand between parties

 12 in these complex transactions. Phyllis Dietz and

 13 John Lawton from the CFTC's Division of Clearing

 14 and Intermediary Oversight will be presenting here

 15 today. Ananda Radhakrishnan who is their boss and

 16 the head of the Division of Clearing and Oversight

 17 I guess will support Phyllis and John and give

 18 them direction. Finally, the third set of

 19 proposed rules being considered today specifically

 20 require derivative clearing organizations and

 21 various exchange platforms, what we call

 22 designated contract markets and swap execution
 25

 1 facilities, to have certain governance

 2 arrangements and mitigate their conflicts of

 3 interest. I think this is the one that's had the

 4 most debate not only here among the five of us in

 5 101 sessions, never on the wrong side of the

 6 Sunshine Act, but also public debate. This was a

 7 very healthy debate in Congress as well and I do

 8 look forward to a lot of comments there. Nancy

 9 Schnabel from the Division of Clearing and

 10 Intermediary Oversight with Ananda's support and

 11 guidance as well will be presenting that.

 12 The procedure will be you'll present,

 13 Susan and Rick will do this first one, and after

 14 your presentation I'll entertain a motion and then

 15 we'll have questions, debate, a vote and then

 16 we'll move to the second and third. With that,

 17 Susan and Rick?

 18 MS. NATHAN: Thank you, Mister Chairman

 19 and Commissioners. I'm pleased to provide a brief

 20 summary of this interim final rule. Essentially

 21 this rule imposes a present obligation on

 22 counterparties to preserve transaction data
 26

 1 associated with swaps executed prior to the

 2 enactment of the Dodd-Frank Act and a future

 3 obligation to report that data to an appropriate

 4 registered swap data repository or SDR. Before

 5 discussing the substance of the rule, I'd like to

 6 remind the Commission that this rule is styled as

 7 an interim final rule. Interim final rulemakings

 8 are designed to permit a federal agency to adopt

 9 as final for good cause shown a rule that hasn't

 10 been noticed for comment in the Federal Register

 11 in the traditional way. Instead, the agency may

 12 publish the rule as final while concurrently

 13 soliciting public comment. Frequently, public

 14 comment received in connection with an interim

 15 final rule will be responded to if and when a

 16 permanent rule is subsequently proposed by the

 17 agency.

 18 Here good cause is demonstrated first by

 19 the explicit direction in Section 729 of

 20 Dodd-Frank which requires the Commission to adopt

 21 such a rule. In addition, staff believes that an

 22 interim final rule is warranted in these
 27

 1 circumstances by the necessity to promptly provide

 2 notice to swap dealers, major swap participants

 3 and other counterparties that they may become

 4 subject to reporting requirements which

 5 necessitate that they preserve data relevant to

 6 those transactions.

 7 Among other things, Title VII of the

 8 Dodd-Frank Act amended the CEA to require that

 9 swaps be reported to a registered SDR or to the

 10 Commission if there is no registered SDR that

 11 would accept the swap. Practically this might

 12 occur where no SDR has yet been registered by the

 13 Commission or where no SDR has been approved for a

 14 particular asset class. Section 723 of Dodd-Frank

 15 adds Section 2(h)(V) to the CEA to require that

 16 swaps executed prior to enactment must be reported

 17 to a registered SDR or to the Commission no later

 18 than 180 days from the effective date of that

 19 subsection, so that would be approximately 540

 20 days from enactment. The statutory provision that

 21 is directly relevant here which is 729 establishes

 22 a new Section 4(r) of the CEA reporting
 28

 1 requirements in connection with preenactment

 2 unexpired swaps, those entered into before July

 3 21, 2010 and unexpired as of that date and that

 4 rule will remain in effect until the effective

 5 date of the permanent reporting rules to be

 6 adopted pursuant to 2(h)(V). Specifically,

 7 Section 4(r) provides that within the time period

 8 prescribed by the Commission, each swap must be

 9 reported to a registered SDR or where there is no

 10 SDR that would accept the data to the Commission.

 11 This section further specifies that each

 12 preenactment unexpired swap must be reported to a

 13 registered SDR or the Commission and directs the

 14 Commission to promulgate within 90 days of an

 15 enactment of Dodd-Frank an interim final rule

 16 governing reporting of such swaps. It's

 17 anticipated that the provisions of this rule will

 18 be supplanted by the permanent reporting rules to

 19 be enacted pursuant to new CEA Section 2(h)(V),

 20 but in the meantime these will govern how these

 21 swaps are to be traded.

 22 Consistent with the mandate of Section
 29

 1 729, new Part 44 of the Commission's regulations

 2 will first establish a reporting timeframe for

 3 preenactment unexpired swaps that is no later from

 4 60 days from the date the appropriate SDR is

 5 registered with the Commission or by the

 6 compliance date that will be established in the

 7 swap reporting rules required by new Section

 8 2(h)(V) of the CEA whichever comes first. And,

 9 two, will require that swap reporting parties

 10 specified in Section 4(r)(A)(iii) of the CEA, and

 11 those are swap dealers, major swap participants

 12 and other counterparties, report information

 13 concerning such swaps to the Commission on request

 14 during this interim period. The Part 44 rules

 15 will specify the information to be reported under

 16 the interim final rule including a copy of the

 17 transaction confirmation in electronic form where

 18 available and, two, if available the time the

 19 transaction was executed. The rules additionally

 20 provide that the Commission may request from

 21 reporting parties any information related to a

 22 swap transaction. Part 44 also includes an
 30

 1 interpretative note explaining the Commission's

 2 view that in order to comply with the reporting

 3 requirements of Part 44, each counterparty to a

 4 preenactment unexpired swap transaction that may

 5 be required to report that transaction must retain

 6 in its existing format all information and

 7 documents related to the terms of the swap

 8 transaction. The requirement takes the form of an

 9 interpretative note because a retention

 10 requirement is not explicit in Section 4(r). The

 11 requirement to retain information is nevertheless

 12 in staff's view implicit in a future reporting

 13 requirement. Thank you and I'll be happy to

 14 entertain any questions.

 15 CHAIRMAN GENSLER: Thank you very much,

 16 Susan. I think the Chair will now entertain a

 17 motion to accept the staff recommendation to issue

 18 the proposed interim final rule relating to the

 19 reporting of preenactment swap transactions to

 20 data repositories or to the CFTC.

 21 COMMISSIONER DUNN: So moved.

 22 CHAIRMAN GENSLER: Second?
 31

 1 COMMISSIONER SOMMERS: Second.

 2 CHAIRMAN GENSLER: All in favor?

 3 (Chorus of ayes.)

 4 CHAIRMAN GENSLER: I'm supposed to let

 5 questions happen. I know where we are, but are

 6 there questions for Susan or debate? Commissioner

 7 Chilton?

 8 COMMISSIONER CHILTON: Susan, thank you

 9 and thanks for all your work on this. I know

 10 you've spent a lot of time on it. I was looking

 11 through the comments online and for those of you

 12 who don't know, we're taking them even before we

 13 have these proposed rules. They've set it up on

 14 our website and there are a lot of them up there

 15 already. On this one, the Electric Power Supply

 16 Association sent us a comment talking about the

 17 transaction rule, but they are concerned that

 18 since we don't have the definitions done yet for

 19 major swap participants or for SDs, they wonder

 20 whether or not institutions should be responsible

 21 for -- they think they're going to have a

 22 reporting problem and that there perhaps -- let me
 32

 1 just get it right what they said. I'm looking for

 2 specifically what they said. In particular, we're

 3 recommending that financial institutions with

 4 prudential regulators be responsible for reporting

 5 or if there is perhaps it should be the seller,

 6 what's your view on that?

 7 MS. NATHAN: I'm not sure I entirely

 8 understand the comment. If their concern is that

 9 they may be subject to a reporting requirement

 10 before it's been determined that they should be

 11 subject to a reporting requirement, I think the

 12 best advice is that if they preserve the data

 13 until such time as these definitions are in place,

 14 it will become clear to potential reporting

 15 parties before there is any present obligation to

 16 report whether or not they are affected by these

 17 rules.

 18 CHAIRMAN GENSLER: Because we're allowed

 19 to deliberate, I think the question that's come up

 20 by many market participants is who might be a

 21 major swap participant. I was asked this question

 22 at a congressional hearing yesterday and I can't
 33

 1 say where you all are, but I think Congress has

 2 really laid out three criteria in that

 3 circumstance where this should be a very narrow

 4 set of companies. They're people who are not

 5 otherwise swap dealers and yet under each of these

 6 three prongs have some systemic relevance, their

 7 positions in the swaps market are such that

 8 Congress would deem and through us the rule makers

 9 deem that they should have a full regulatory

 10 regime. I'm hopeful when the SEC and the CFTC

 11 finish up the rulemaking that it will be quite

 12 clear that this is a pretty small set of parties.

 13 COMMISSIONER CHILTON: I have one more

 14 if it's okay. We've heard a lot about the

 15 practical problems with real-time swaps reporting

 16 for nonfinancial organizations that are designed

 17 to capture trades as they occur both in the

 18 grandfathering phase and in going forward and that

 19 this would be a compliance burden for them and

 20 perhaps even an enforcement problem, front-running

 21 for example. How does this proposal address that?

 22 MS. NATHAN: If I'm understanding your
 34

 1 question, I'm not sure that this proposal does

 2 address that.

 3 COMMISSIONER CHILTON: Like we said, we

 4 look forward to getting comments.

 5 CHAIRMAN GENSLER: Commissioner Dunn?

 6 COMMISSIONER DUNN: Thank you, Mister

 7 Chairman. Susan, to get it straight in my mind

 8 and in the public's that this is an interim final

 9 rule under the Administrative Procedure Act. It

 10 goes into effect immediately. But there is a

 11 comment period and we have 30 days on this one for

 12 people to look at it and comment. So under the

 13 Administrative Procedure Act we can take those

 14 comments and we can change this interim final

 15 rule. What we're really waiting for is the

 16 permanent rule on reporting.

 17 MS. NATHAN: That's correct.

 18 COMMISSIONER DUNN: Again it's incumbent

 19 on the public to take a look at this. If they

 20 think we've missed something or we should have

 21 included something, they can comment within 30

 22 days, but after that period this is what will be
 35

 1 in effect until the permanent rule?

 2 MS. NATHAN: Until the permanent rules

 3 are in effect.

 4 CHAIRMAN GENSLER: Commissioner Sommers?

 5 COMMISSIONER SOMMERS: I'm going to

 6 follow-up on Bart's line of questioning and ask if

 7 you can clarify because I think maybe where the

 8 questions are surrounding these issues is not

 9 whether you are considered a swap dealer or a

 10 major swap participant, but the questions are

 11 surrounding what is a swap. All of these people

 12 who have entered into transactions pre-Dodd-Frank

 13 and are not positive that these transactions are

 14 going to be defined as swaps have concerns about

 15 what information they should or should not retain.

 16 If you could maybe clarify your advice to people

 17 who are not sure about the transactions that they

 18 have entered into and whether or not they should

 19 retain that information.

 20 MS. NATHAN: My advice is that they

 21 should retain information necessary -- I can give

 22 you a short laundry list with the caveat that
 36

 1 you're absolutely right, we have no way of knowing

 2 now precisely who will be affected by the

 3 reporting rules so the best advice would be for

 4 anyone who thinks there is the potential for

 5 reporting to maintain basic advice, any

 6 information necessary to identify and value the

 7 transaction, the date an time of execution,

 8 information relevant to the price of the

 9 transaction, if the transaction was accepted for

 10 clearing, the identify of the clearing

 11 organization, any modification to the terms of the

 12 contract and the final confirmation. That would

 13 be a small dataset.

 14 COMMISSIONER SOMMERS: Thank you. I

 15 also have one other question in relation to the

 16 statutory language that requires preenactment

 17 unexpired swaps to be reported. I'm wondering if

 18 you have given any thought to considering

 19 exempting swaps from reporting requirements if

 20 they were unexpired before the date of Dodd-Frank

 21 but expire in the interim and if it is useful for

 22 us to have swaps reported to us that have expired
 37

 1 in the interim.

 2 MS. NATHAN: I take your point. The

 3 statutory language though is fairly clear that

 4 they want unexpired swaps. If they were unexpired

 5 on the date of the legislation then they count and

 6 without any clear legislative guidance on that, I

 7 am assuming and my counterparts at the SEC

 8 likewise believe that Congress may have intended

 9 that this would give a good snapshot of what the

 10 status of what the swaps markets were at that

 11 point.

 12 COMMISSIONER SOMMERS: Thank you.

 13 CHAIRMAN GENSLER: To give a little bit

 14 more context to this question of definitions which

 15 I think is an excellent question that Commissioner

 16 Sommers raises, the SEC and the CFTC under the Act

 17 as I understand it have to do joint rulemaking on

 18 two sets of definitions broadly, entity

 19 definitions, the swap dealer is pretty well

 20 defined in statute, major swap participant is

 21 defined in statute, but entity definitions will

 22 give more clarity to that. Then product
 38

 1 definitions. Again a swap is defined in statute

 2 and has a list of 15 or 20 things right there in

 3 statute and it excludes forwards for instance and

 4 the SEC and CFTC will work together. Our current

 5 working goal is to get a proposal out this fall.

 6 I think in fact that we may have even ambitiously

 7 tried to schedule that for a November hearing both

 8 at the SEC and at the CFTC. I say ambitious

 9 because 10 Commissioners ultimately will be

 10 involved and not just five and so there are just

 11 more moving parts. It will only be a proposal at

 12 that time but it will give some foreshadowing of a

 13 final rule that both Commissions are trying to do

 14 definitions. If we're successful before

 15 Thanksgiving or if we're not, hopefully shortly

 16 after Thanksgiving.

 17 COMMISSIONER DUNN: Mister Chairman, you

 18 make it sound like working with five is tough.

 19 CHAIRMAN GENSLER: I think that it's

 20 terrific, but it's five here, five there, the

 21 Federal Reserve, the international regulators, the

 22 FSOC and taking all of the public's interests and
 39

 1 congressional intent.

 2 COMMISSIONER DUNN: For the interim

 3 then, we're allowing people to look at the Act,

 4 read the definitions that are in the Act and then

 5 they have to make some assumptions on their own.

 6 Is that correct?

 7 MS. NATHAN: Yes, that's correct.

 8 CHAIRMAN GENSLER: Before I call the

 9 vote I was going to mention a couple of things. I

 10 wanted to clarify the comment period on this

 11 interim final rule is 30 days just to make sure

 12 the public knows that again as Commissioner Dunn I

 13 think helpfully pointed out. I'm going to vote

 14 for this. I support the interim final rule. I

 15 think it fulfills the Dodd-Frank requirement that

 16 those swaps executed before the bill's enactment

 17 but still in force at that point be reported to a

 18 swap data repository or the Commission if no swap

 19 data repository in the future takes this. I'm

 20 hopeful that a swap data repository does for all

 21 the resource reasons that Commissioners talked to.

 22 Under the interim final rule, swap participants
 40

 1 would preserve preenactment swap transactions and

 2 report the data to a registered swap data

 3 repository once it's established and since swap

 4 data repositories have not yet been established I

 5 think it is an appropriate thing to give people

 6 time and in a sense give them notice. The

 7 Dodd-Frank Act said we had to do this within 90

 8 days, but since swap data repositories are not

 9 registered yet and don't exist in that way I think

 10 it is appropriate that we in essence to fulfill

 11 this requirement are giving a delay to this and

 12 just asking people to maintain -- I don't know if

 13 any my fellow Commissioners wanted to say

 14 anything.

 15 COMMISSIONER DUNN: One more on

 16 clarification. Then if folks do have doubts of

 17 where they stand then they can contact staff?

 18 MR. LAWTON: They can contact someone

 19 here and we'll try to provide guidance to the

 20 extent we can.

 21 CHAIRMAN GENSLER: There is a motion on

 22 the floor. All those in favor?
 41

 1 (Chorus of ayes.)

 2 CHAIRMAN GENSLER: Are there any

 3 opposed? The vote being unanimous, the interim

 4 final rule should be sent to the Federal Register.

 5 I think I'll now turn to Phyllis Dietz

 6 and John Lawton. They'll present the staff report

 7 on the proposed rule considering clearinghouses,

 8 core principles and systemically important

 9 clearinghouses. Phyllis and John?

 10 MR. RADHAKRISHNAN: Thank you, Mister

 11 Chairman, and good morning to members of the

 12 Commission.

 13 Today we're going to recommend to the

 14 Commission that it approve three rulemakings on

 15 the Dodd-Frank Act. The first one relates to

 16 proposed rules to give effect to DCO Core

 17 Principle B which is in the statute as augmented

 18 by Dodd-Frank with respect to the prescription of

 19 financial resource requirements for derivatives

 20 clearing organizations including DCOs that would

 21 be designated as systemically important by the

 22 Financial Stability Oversight Council pursuant to
 42

 1 Title VIII of the Dodd-Frank Act. The team leader

 2 for the first rulemaking is Phyllis Dietz of DCIO.

 3 The team leader for the systemically important DCO

 4 rulemaking is John Lawton also of DCIO.

 5 Then the second set of rulemakings

 6 applies to potential conflicts of interest in

 7 connection with the interaction between swap

 8 dealers and major swap participants and certain

 9 DCO designated contract markets and swap execution

 10 facilities and proposed rules to adopt numerical

 11 limits on control of voting rights that enumerated

 12 entities may hold in certain DCOs, DCMs and SEFs.

 13 And also proposals specifying requirements for

 14 these entities on governance arrangements and

 15 mitigation of conflicts of interest. The team

 16 leader for that particular set of rulemakings is

 17 Nancy Schnabel of DCIO. Before I pass it on to my

 18 colleagues I would like to thank the other team

 19 members of each of these teams. There was a lot

 20 of effort that went cross-divisionally. I'd also

 21 like to thank the Commission for their feedback on

 22 these proposed rules and the staffs of the
 43

 1 relevant Commissioners for their helpful comments.

 2 With that I will turn it over to Phyllis Dietz.

 3 Thank you.

 4 MS. DIETZ: Good morning, Chairman

 5 Gensler and Commissioners. I am pleased to

 6 recommend that the Commission approve for

 7 publication the proposed rulemaking for

 8 derivatives clearing organization financial

 9 resources.

 10 Prior to enactment of the Dodd-Frank

 11 Act, the Commodity Exchange Act set forth 14 core

 12 principles with which a derivatives clearing

 13 organization must comply in order to be registered

 14 as a DCO and to maintain its registration.

 15 Dodd-Frank revised several of the core principles

 16 and it added four new core principles, bringing

 17 the total to 18. One of the core principles that

 18 was revised is Core Principle B concerning

 19 financial resources. It was amended by the

 20 Dodd-Frank Act to require more specifically that a

 21 DCO possess financial resources that at a minimum

 22 satisfy two requirements. First, the financial
 44

 1 resources must exceed the total amount that would

 2 enable the DCO to meet its financial obligations

 3 to its clearing members notwithstanding a default

 4 by the clearing member creating the largest

 5 financial exposure for the DCO in extreme but

 6 plausible market conditions. This is what we

 7 refer to as default resources. Second, it

 8 required that the DCO have sufficient financial

 9 resources to enable it to cover its operating

 10 costs for a period of 1 year calculated on a

 11 rolling basis. These we sometimes refer to as the

 12 operating resources.

 13 The proposed rule before you today would

 14 codify the standards set forth in Core Principle B

 15 with additional specificity concerning five areas,

 16 the types of financial resources that can be used

 17 to meet these requirements, computation of

 18 required resources, valuation, liquidity and

 19 reporting requirements regarding the DCO's

 20 financial resources. I would add to the earlier

 21 discussion about comment periods that there will

 22 be a 60-day public comment period for this
 45

 1 proposal.

 2 Going back to each of these five areas

 3 very briefly in overview, the types of financial

 4 resources that we are stating may be used to

 5 fulfill the requirements for default resources

 6 would include margin of the defaulting member,

 7 DCO's capital, guarantee fund, default insurance

 8 if any, assessments of nondefaulting clearing

 9 members with certain requirements and any other

 10 resource that might be acceptable to the

 11 Commission. The purpose of this catchall

 12 provision is to provide some flexibility for both

 13 the Commission and the DCO in meeting financial

 14 resource requirements. With respect to operating

 15 resources, permitted would be DCO capital and

 16 again a catchall for other acceptable resources,

 17 resources acceptable to the Commission.

 18 Second, computation of required

 19 resources. This would require that a DCO conduct

 20 monthly stress testing to determine the financial

 21 resources needed to withstand default of the

 22 clearing member with the largest exposure and a
 46

 1 monthly calculation of the financial resources

 2 needed to cover 1 year of operating costs. The

 3 DCO would be permitted to use its discretion in

 4 determining the stress- testing methodology, but

 5 it would be required to take into account historic

 6 data and hypothetical scenarios.

 7 In valuing resources, the regulation

 8 would require at least monthly that the DCO

 9 compute the current market value of each financial

 10 resource. It would have discretion regarding

 11 haircuts to be applied except in one instance and

 12 that would be with respect to assessments of

 13 nondefaulting clearing members. Assessments would

 14 be subject to a 30-percent haircut and the DCO

 15 would only be permitted to count the value of

 16 assessments after the haircut to meet up to 20

 17 percent of the financial resources requirement to

 18 cover a clearing member default.

 19 Fourth, the liquidity of resources.

 20 Financial resources would be required to be

 21 sufficiently liquid to enable a DCO to fulfill its

 22 obligations during a 1-day settlement cycle and
 47

 1 sufficient capital in the form of cash to meet the

 2 average daily settlement variation pay per

 3 clearing member over the last fiscal quarter. In

 4 addition, the DCO would be required to have

 5 unencumbered liquid financial resources equal to

 6 at least 6 months' operating costs. There would

 7 also be regulations for a DCO's guarantee fund

 8 which include prohibiting the use of letters of

 9 credit as a permissible asset.

 10 Finally, there is a proposed reporting

 11 regulation. The DCOs would be required to file

 12 quarterly reports with the Commission that among

 13 other things would describe the financial

 14 resources that they believe are required, provide

 15 the value of financial resources that are

 16 currently available, explain how the DCO meets

 17 liquidity requirements and discuss the methodology

 18 used in calculating the financial resources

 19 requirements. Thank you.

 20 CHAIRMAN GENSLER: John? Let's do the

 21 whole clearing piece then Nancy gets to await her

 22 turn.
 48

 1 MR. LAWTON: Good morning. The rules

 2 that Phyllis just described are being proposed

 3 pursuant to Title VII of Dodd-Frank. The rules

 4 I'm about to describe are being proposed pursuant

 5 to Title VIII of the Dodd-Frank Act.

 6 Title VIII allows the Financial

 7 Stability Oversight Council to designate certain

 8 entities as systemically important. This includes

 9 DCOs as well as some other types of entities

 10 subject to jurisdiction of the Fed, SEC and other

 11 entities. The staffs of the various members of

 12 the FSOC have begun consulting with regard to the

 13 designation process but clearly the FSOC has not

 14 met yet and no entity has been designated as yet.

 15 Pursuant to Title VIII, the Commission is allowed

 16 to prescribe enhanced risk-management standards

 17 for certain DCOs that the council has designated

 18 as systemically important. We have been calling

 19 them SIDCOs for shorthand. Any DCO that was

 20 designated by the FSOC would be subject to all the

 21 standards that Phyllis has just described. In

 22 addition, there would be certain areas where they
 49

 1 might be subject to enhanced standards. In the

 2 financial resource are there are two modifications

 3 to the rules that Phyllis has described that we

 4 would propose with regard to SIDCOs. The first

 5 would go to the amount of financial resources that

 6 the DCO was required to have. The second would go

 7 to the valuation of those financial resources.

 8 As Phyllis described, the DCO rules and

 9 Core Principle B currently requires that a DCO

 10 have sufficient resources to cover its largest

 11 single exposure. For SIDCOs we're proposing that

 12 they have sufficient resources to be able to cover

 13 their two largest exposures. The effect of that

 14 would be that a DCO which was designated as

 15 systemically important would be subject to a

 16 higher financial resource requirement.

 17 The second aspect that we are proposing

 18 is with regard to the valuation of the components

 19 of the resource package. As Phyllis described,

 20 there are certain haircuts that are being applied

 21 to any assessment power that a DCO would have if

 22 it had the power to assess nondefaulting clearing
 50

 1 members in the event of a default. What we are

 2 proposing for SIDCOs is that any assessment power

 3 be haircut 100 percent with regard to the

 4 calculation of the single largest default. With

 5 regard to the second-largest default it would be

 6 the same rule that Phyllis described. Effectively

 7 again the result of this proposal would be a SIDCO

 8 would have to have more financial resources on

 9 hand than another DCO because assessment powers

 10 are resources that are not in hand, they're

 11 something that you go to a nondefaulting clearing

 12 member if you need to. The other resources such

 13 as margin and guarantee funds are assets on hand.

 14 We have those two distinctions that we are

 15 proposing in the area of financial resources for

 16 systemically important DCOs. We'll be happy to

 17 take any questions.

 18 CHAIRMAN GENSLER: I think before the

 19 questions the chair will entertain a motion to

 20 accept the staff recommendations on the proposed

 21 rules concerning clearinghouses and the

 22 systemically important clearinghouses and how they
 51

 1 comply with the Core Principles.

 2 COMMISSIONER DUNN: So moved.

 3 COMMISSIONER SOMMERS: Second.

 4 CHAIRMAN GENSLER: For questions I might

 5 start. One of the things from my trip to Europe

 6 earlier this week is that the Europeans have

 7 proposed to their parliament and they're at least

 8 probably 9 months away from getting parliamentary

 9 action and finalizing it that they have very

 10 prescriptive rules on clearinghouses and that they

 11 would recognize U.S.-registered clearinghouses but

 12 only if they meet an equivalence to European

 13 standards and international standards as put

 14 forward by the organization which is called

 15 CPSS-IOSCO. In that context I'm going to bring

 16 this perspective to each clearinghouse rule, I

 17 want to know whether the staff's views and what

 18 you're recommending will the clearinghouses that

 19 are registered with us, if they would be the final

 20 rule, would they meet either the European test as

 21 we think it will come out on equivalence or the

 22 CPSS-IOSCO standards. John and Phyllis?
 52

 1 MR. LAWTON: The current CPSS-IOSCO

 2 standard for example is that you must be able to

 3 meet the default of your single-largest clearing

 4 members so that the proposal does meet that.

 5 CHAIRMAN GENSLER: I'm sorry to

 6 interrupt. You said the current IOSCO standards,

 7 but there is a draft as well.

 8 MR. LAWTON: Right, and the draft is

 9 still open. They're still discussing exactly what

 10 the final standard will be. It would one, it

 11 could be two or it could be one plus some other

 12 number that is not necessarily the largest, so

 13 that is still under discussion.

 14 CHAIRMAN GENSLER: If you look at the

 15 whole rule, those five areas that Phyllis went

 16 through, will it meet for the for the DCOs or

 17 international standards or will it only meet

 18 international standards for these so-to-speak

 19 systemically important ones?

 20 MS. DIETZ: It will be consistent with

 21 and meet the standards. The international

 22 standards in some cases there may be even more
 53

 1 detailed or higher standards for example in our

 2 reporting requirements based on the current

 3 CPSS-IOSCO standards and what I have is again a

 4 draft. I think that our standards are a little

 5 more specific when it comes to reporting and there

 6 may be other areas where it's a little higher, but

 7 certainly it meets the standards.

 8 CHAIRMAN GENSLER: My second question is

 9 how does this compare to what I might call

 10 industry best practice and the guidance and rules

 11 that we have in place? We currently regulate 14

 12 clearinghouses, some small, some very large.

 13 MR. LAWTON: I think it's generally

 14 consistent with best practice again going back to

 15 the standard of meeting the default of your

 16 single-largest clearing member. In doing DCO

 17 reviews in the last few years we have in fact used

 18 that standard. We've been able to do stress tests

 19 which indicated that the DCOs were in compliance

 20 with that standard. Again it moves because it's

 21 based on a stress test so that it's based on open

 22 interest current positions, it's based on the
 54

 1 inputs to the stress test, but we have done

 2 reviews in the past and the DCOs are currently in

 3 compliance.

 4 CHAIRMAN GENSLER: I'm going to turn it

 5 over to Commissioner Dunn. Again the prism that

 6 I'm going to look at least as one Commissioner

 7 through the clearinghouse rules is how does it

 8 compare to international standards? We'd want to

 9 ensure that around the globe they can use

 10 clearinghouses that we register and regulate here

 11 and that these clearinghouses will meet

 12 equivalency. And also since for the first time

 13 we'll have a mandate that swaps must go into

 14 clearinghouses, we would ensure that these are

 15 robustly managed for risk.

 16 MR. RADHAKRISHNAN: Mister Chairman I

 17 think it would be fair to say that the staff will

 18 propose standards that will at a minimum meet the

 19 international standards but in most cases exceed

 20 international standards because of the specificity

 21 which we will propose.

 22 CHAIRMAN GENSLER: So it would be more
 55

 1 specific but not necessarily higher capital? It

 2 would be just more specific?

 3 MR. RADHAKRISHNAN: Correct, because the

 4 draft is a moving target so we look at the draft

 5 as of a particular day and that's the language

 6 that we put in the proposal. When it comes to

 7 finalizing the rules, we will look at the draft

 8 again because the new iteration of these standards

 9 will not be finalized by July of next year because

 10 it is still in draft form and it has to go through

 11 a consultation period and because we are working

 12 on different timeframe we will look at the

 13 language in the draft as of the day that staff

 14 proposes the final rules.

 15 CHAIRMAN GENSLER: Thank you.

 16 Commissioner Dunn?

 17 COMMISSIONER DUNN: To follow-up on that

 18 line, I guess I would also be concerned that we're

 19 not setting up an environment for regulatory

 20 arbitrage that our capital requirements aren't so

 21 high that folks are saying we're just going to go

 22 offshore or some place else.
 56

 1 MR. RADHAKRISHNAN: I think that's a

 2 fair comment, Commissioner, but at the same time

 3 staff is very mindful of the fact that with

 4 Dodd-Frank there is the potential for our DCOs to

 5 have large concentrations of risk and if that

 6 happens, and we are always preparing for what

 7 could happen and I always assume the best-case

 8 scenario which is a lot of business comes to our

 9 DCOs, so we want to make sure that our DCOs have

 10 very safe and sound capital standards because if

 11 you look at the notional value of swaps, it's 10

 12 times futures contracts so if you take even a

 13 significant percentage of that, the amount of

 14 clearing that will be done by our DCOs is going to

 15 be dwarfed by what -- it will be tremendously

 16 higher than what they do right now, so we want to

 17 be prepared for that.

 18 COMMISSIONER DUNN: Mister Chairman, I'm

 19 intrigued about how the designation of the SIDCO

 20 comes about especially as we have to interact with

 21 the FSOC, if you're going to have your first

 22 meeting today I guess we'll know more by Saturday.
 57

 1 There are requirements in here that we have and,

 2 Phyllis, one of the things that I find intriguing

 3 in here is that we're requesting a living will,

 4 that we know how to unwind things and that is to

 5 be done on an annual basis. I know a lot of times

 6 that things happen very quickly and from quarter

 7 to quarter may change very, very rapidly. Is

 8 staff going to be updating and are there

 9 provisions for us to get updates on these living

 10 wills and how they go about it? Then again how

 11 does dovetail with what the FSOC might be doing?

 12 CHAIRMAN GENSLER: Phyllis, do you want

 13 to take the first and I'll try to answer

 14 Commissioner Dunn's question about this

 15 afternoon's meeting as best I know about this

 16 afternoon's meeting?

 17 MS. DIETZ: There is always the option

 18 that the Commission can request information and

 19 receive it even in between the scheduled quarterly

 20 reports. One of the things we are also

 21 contemplating, and this goes to a future

 22 rulemaking, is establishing certain special events
 58

 1 reporting requirements so that there are periodic

 2 reports that a derivatives clearing organization

 3 would have to provide like financial reports.

 4 Then there would be certain circumstances that are

 5 a significant change in the level of financial

 6 resources or certain other aspects that affect

 7 risk management that would trigger a reporting

 8 requirement so that we don't find ourselves

 9 finding out after the fact or only on a quarterly

 10 basis that 3 days after the last report something

 11 dramatic happened. So we are in the process and

 12 we're working with our risk surveillance people to

 13 come up with the special events reports and I

 14 think that they will address some of those

 15 concerns.

 16 COMMISSIONER DUNN: All of that is going

 17 to take human resources to analyze. Again Ananda

 18 I would go back to my opening statement that I

 19 would like to see what these are going to cost and

 20 how we go about meeting those based upon the

 21 resources that are going to be allocated to us by

 22 Congress.
 59

 1 CHAIRMAN GENSLER: Commissioner Dunn and

 2 my fellow Commissioners, the Financial Stability

 3 Oversight Council which is under statute chaired

 4 by Secretary of the Treasury Tim Geithner will

 5 first meet this afternoon. As I understand it,

 6 there will be a closed session and an open session

 7 so that the public will be able to see and there

 8 will be a transparency policy and the like. In

 9 terms of the systemically important clearing

 10 organizations, that council gets to make that

 11 determination I think by a two- thirds vote, if

 12 somebody reminds me by a two-thirds vote. There

 13 are various criteria in statute in Section 804.

 14 COMMISSIONER DUNN: I'm giving you an A

 15 plus.

 16 CHAIRMAN GENSLER: So the council though

 17 today is considering I would hope putting out an

 18 advanced notice of proposed rulemaking about

 19 another section under Title I about designating

 20 systemically important nonbank financial

 21 companies. I think that's under Section 113 if I

 22 remember. This topic as well will be discussed a
 60

 1 bit. I plan to at least raise the intersection of

 2 what we've done this morning and to raise with my

 3 fellow council members at the first meeting that

 4 as to our timing it would be helpful in my opinion

 5 that if whatever designations are made would come

 6 into place by next summer or so, that it might not

 7 align perfectly but that's one thing that I would

 8 be hopeful for. The council may in fact put out,

 9 and we're not going to do it today, and ask for

 10 comment on the systemic designation of what are

 11 called financial market utilities. We may have a

 12 short handful. We have 14 clearinghouses we

 13 regulate now. I know staff has estimated that

 14 that would grow to maybe 20 or so. There may be a

 15 handful that are systemically relevant by the

 16 council and that will be the council's

 17 determination. But also the SEC may have some

 18 they oversee, there may be payment systems the

 19 Federal Reserve oversees so that all of them have

 20 to have some consistency and I know the council

 21 will take it up. My hope though is that these

 22 designations might come into place by next summer
 61

 1 as our new rules come into place. Of course it

 2 doesn't have to happen that way but that is my

 3 hope. Commissioner Sommers?

 4 COMMISSIONER SOMMERS: To follow-up on

 5 that line of questioning, I would be interested to

 6 know about our coordination with both the SEC and

 7 the Fed on these rules and if we anticipate that

 8 they will also be putting out rules for financial

 9 resources for their clearing organizations and any

 10 significantly important clearing organizations

 11 they may have.

 12 MR. LAWTON: We've been consulting quite

 13 a bit with them. We've had meetings where we've

 14 shared drafts with them and we've in some cases

 15 modified our documents based on their comments

 16 both the Fed and the SEC in particular and some of

 17 the other members of the council as well.

 18 COMMISSIONER SOMMERS: Thanks. I have a

 19 more specific question for Phyllis I think. With

 20 regard to the computation of the financial

 21 resources, I understand and think it's very

 22 reasonable to have the stress tests done on a
 62

 1 monthly basis because it's an evolving process

 2 knowing where the risks are in the clearinghouse.

 3 The part that I'm not sure I understand is about

 4 the operating costs and if that is more of a

 5 static number, and if we define what operating

 6 costs are do we assume that all clearinghouses

 7 will calculate operating costs in the same way,

 8 and how do we figure out if what they're

 9 allocating for operating costs is appropriate?

 10 MS. DIETZ: First of all, the monthly

 11 calculation is consistent with IOSCO and the idea

 12 here is that the operating costs are based on

 13 their business plan, their budget and what they

 14 expect their expenses to be. We would not expect

 15 that number to change dramatically, perhaps if

 16 they enter a new line of business of set up a new

 17 subsidiary of something like that. The

 18 calculation goes not only to what they think

 19 they're going to need but what they have to

 20 satisfy that requirement so that that's what we're

 21 looking for. Even if the operating costs are

 22 static over the course of a year, what is the
 63

 1 level of financial resources that you have, what

 2 financial resources do you h have and what's their

 3 value in order to satisfy that.

 4 COMMISSIONER SOMMERS: The kind of

 5 calculations for operating costs, do we currently

 6 do that so that that's something that's not really

 7 going to change for us or this is different than

 8 what we currently apply?

 9 MR. RADHAKRISHNAN: We've been asking

 10 new DCO registrants to do that and we started

 11 doing it as a result of the Commission's

 12 experience with one exchange/DCO which engaged in

 13 what I would call just-in-time financing meaning

 14 they realized that they were going to go out of

 15 business if they didn't get money and there would

 16 be a mad scramble to get money, and the

 17 Commission's staff had to shepherd them through

 18 this process. At that time we realized that it

 19 would be useful for DCOs to be able to demonstrate

 20 that they had enough resources to pay the light

 21 bill and to keep on operating.

 22 The other concern is we wanted to make
 64

 1 sure that if they stop operating they've got

 2 enough resources to be able to either liquidate

 3 all contracts or transfer all contracts because

 4 the last thing we want to see is a disruption in a

 5 particular market because a DCO doesn't have

 6 resources just to be able to function.

 7 COMMISSIONER SOMMERS: Thank you.

 8 MS. DIETZ: If I could add to that that

 9 the statute itself now requires this 1 year of

 10 financial resources to cover operating expenses,

 11 but even prior to that as Ananda says, we have

 12 informally been applying that standard. An

 13 example of that is recently the Cantor

 14 Clearinghouse, a derivatives clearing organization

 15 registration, among the conditions in the order

 16 that was issued I think in June was this 1-year

 17 financial resources standard. Many of these

 18 standards are not really now, it's just we're

 19 codifying them in the regulation now, but they've

 20 been around and they can be satisfied and are

 21 being satisfied now.

 22 CHAIRMAN GENSLER: Phyllis, that last
 65

 1 part is very helpful to me. You're saying much of

 2 what we're doing here is codifying what is either

 3 industry practice or what we've put in orders and

 4 guidance, but given this new environment where

 5 we're mandating swaps into clearing and we have a

 6 whole systemic risk council, the FSOC, that we're

 7 trying to put these in a rule, get public comment

 8 on it but put it in a rule. Commissioner Chilton?

 9 COMMISSIONER CHILTON: I wanted to

 10 follow-up on Commissioner Sommers's question or at

 11 least get a clarification. Does the static part

 12 of this stay the same always? Is it revisited

 13 when certain actions take place or on a certain

 14 time period?

 15 MS. DIETZ: I think on a monthly basis

 16 there is stress testing of the resources and we

 17 require quarterly reports in the ordinary course

 18 to update us on the operating expenses and what

 19 the status of the financial resources is.

 20 COMMISSIONER CHILTON: Quarterly?

 21 MS. DIETZ: There are quarterly reports.

 22 COMMISSIONER CHILTON: One of the things
 66

 1 is that I'd asked folks about comment letters and

 2 I just looked when I stepped out here and didn't

 3 see like there were any comment letters on this

 4 one specifically. I am curious if you can give me

 5 a little bit of insight into your thinking about

 6 the formula where you say we're going to cover the

 7 largest two entities or some other formula. Where

 8 did you come up with the two? Why wasn't it

 9 three? Why wasn't it one? Why wasn't it six?

 10 How did you come up with this?

 11 MR. LAWTON: I think we started because

 12 two has been discussed in the various

 13 international forums as a potential standard, they

 14 haven't landed there, but that's where it came

 15 from. We also again did some testing ourselves to

 16 see how that would work for our DCOs and I think

 17 some of them do that themselves already as well.

 18 COMMISSIONER CHILTON: Thanks, John.

 19 CHAIRMAN GENSLER: Commissioner O'Malia?

 20 COMMISSIONER O'MALIA: I have a question

 21 for the Commission. We have talked about having a

 22 public meeting on segregation and bankruptcy and
 67

 1 Bob Wasserman is leading that group. It's all

 2 related to the clearing and obviously under the

 3 larger clearing requirements and the cumulative

 4 needs we're going to have going forward under this

 5 Act. I know we're planning a hearing on

 6 segregation. Would it be possible to have both

 7 Phyllis and John participate in that or due to the

 8 fact that it's out for comment that might prohibit

 9 having their participation?

 10 CHAIRMAN GENSLER: I'm trying to

 11 clarify. Are you talking about a hearing or are

 12 you talking about a staff roundtable?

 13 COMMISSIONER O'MALIA: Staff

 14 roundtables.

 15 MR. RADHAKRISHNAN: That would be

 16 perfectly fine because we're going to have a staff

 17 roundtable in my view which is open to the public

 18 and it will be recorded and there will be a court

 19 reporter. We'll be talking about this matter, but

 20 whatever people say will form part of the comment

 21 file.

 22 COMMISSIONER O'MALIA: Yes. Nancy's
 68

 1 already off the hook. She started this off with a

 2 comment period. But I think cumulatively we need

 3 to look at all the rules affecting clearing, the

 4 costs associated with that and the requirements

 5 we're considering in order to get a better sense

 6 of the totality of this rule.

 7 MR. RADHAKRISHNAN: Yes.

 8 CHAIRMAN GENSLER: I think in the staff

 9 roundtable we'll have more than segregation. I

 10 know I'm making news here, but I'm hopeful that

 11 we'll have one on credit default swaps because I

 12 think that we really need to hear from the public

 13 or staff needs to hear from the public with regard

 14 to the risk-management standards for credit

 15 default swaps and clearinghouses and the

 16 risk-standards for credit default swaps at swap

 17 dealers. And as we're going to be doing business

 18 conduct standards to make sure to lower risk at

 19 swap dealers and we're doing clearing rules at

 20 clearinghouses, I think that as I understand it

 21 staff would like to hear from the public in a

 22 roundtable with credit default swaps so that it's
 69

 1 the same question.

 2 COMMISSIONER O'MALIA: Essentially yes.

 3 I know we hadn't agreed on this but I did want to

 4 make sure that both John and Phyllis are able to

 5 participate in that and there wouldn't be any

 6 limitation due to the fact that it was open for

 7 comment.

 8 CHAIRMAN GENSLER: I see our General

 9 Counsel Dan Berkovitz.

 10 MR. BERKOVITZ: There will be no

 11 limitation.

 12 CHAIRMAN GENSLER: Dan Berkovitz our

 13 general counsel says there will be no limitation.

 14 MR. RADHAKRISHNAN: Mister Chairman and

 15 Commissioners, the current plan is to have a

 16 roundtable on the segregation and bankruptcy

 17 issues, credit default issues and we can these

 18 issues as well. What other subjects the

 19 Commission would like us to discuss we'll be happy

 20 to do so. In fact, the current thinking is to

 21 have a 1-day roundtable so that all of these

 22 matters can be discussed.
 70

 1 CHAIRMAN GENSLER: Working with the

 2 Securities and Exchange Commission and

 3 coordinating.

 4 MR. RADHAKRISHNAN: Absolutely.

 5 CHAIRMAN GENSLER: Mary said it would be

 6 good if you guys schedule it because we're all so

 7 busy.

 8 MR. RADHAKRISHNAN: As long as we could

 9 have it here we'll be happy to schedule it.

 10 CHAIRMAN GENSLER: I think they'd even

 11 agree to that as long as you handle the

 12 scheduling.

 13 COMMISSIONER O'MALIA: We could make a

 14 motion.

 15 CHAIRMAN GENSLER: No, it's the other

 16 Commission. Other questions? I wanted to go back

 17 because I got this statute book here. On these

 18 designations, Commissioner Dunn, under 804 there

 19 is also, and this is very important, a

 20 consultation and notice and opportunity for

 21 hearing so that the Financial Stability Oversight

 22 Council as I recall it in 804 also before making
 71

 1 any determinations under this gives notice and

 2 opportunity for hearing for those individual

 3 companies that may be designated. That's similar

 4 in a different context as to what would be done

 5 for nonbank financial companies. It's a long

 6 process. It may take more than until next summer

 7 but I'm hopeful.

 8 COMMISSIONER DUNN: At that point,

 9 Mister Chairman, will already have made

 10 preliminary decisions.

 11 CHAIRMAN GENSLER: If we're moving ahead

 12 with the proposals, we might not have finalized

 13 but we will have proposed the financial resources,

 14 the participants, the risk-management standards

 15 and I think staff is going to do this on each one

 16 of these, here's the base and here's a little bit

 17 extra if needed.

 18 MR. LAWTON: In some instances we're

 19 going to say that the standards would apply to

 20 all, but in some other areas we would have these

 21 enhanced proposals.

 22 CHAIRMAN GENSLER: Are there any other
 72

 1 questions? I've entertained a motion. I want to

 2 say that I am supporting this notice of final

 3 rulemaking. I think it's an important first step.

 4 Ananda called it two rules. We're packaging it I

 5 guess into one document so that it will be one

 6 vote. Is that right?

 7 MR. RADHAKRISHNAN: That's right.

 8 CHAIRMAN GENSLER: We're going to have

 9 four or five of these along the way. We'll

 10 probably see Phyllis, John and Ananda in these

 11 seats several times in December and December and

 12 we're coordinating closely with the Federal

 13 Reserve and the SEC and the other regulators as

 14 well but particularly those. And the Financial

 15 Stability Oversight Council. I'm supporting them

 16 mostly because they're staff recommendations and

 17 they're consistent with the newest draft

 18 CPSS-IOSCO. As I understand them they're largely

 19 consistent with the orders and guidance that we've

 20 put out. We're not trying to exceed international

 21 standards, but these proposed rules have my

 22 support because I think they're in line. They may
 73

 1 be more specific, but they're in line with those

 2 international standards and that's the key basis

 3 of where I am on this. Of course the council will

 4 designate the systemically important clearing

 5 organizations and we won't, but I'm supportive

 6 that we anticipate that and I think it's important

 7 as the Commission to show where we might come out

 8 on that so that when the council is doing those

 9 determinations they can take that into

 10 consideration and see at least our proposals. And

 11 that the parties that might be designated when

 12 they have that opportunity for hearing and public

 13 comment will have some sense of where we might

 14 come out on this. Some have asked why we're doing

 15 the systemically important pieces now and the

 16 reason I'm supportive is I think it gives market

 17 participants and the clearinghouses a sense of

 18 where we might come out and I think it's better to

 19 inform the public and the council.

 20 COMMISSIONER DUNN: Certainly they would

 21 take our lead, Mister Chairman. I am struck that

 22 we are faced with a number of chicken-and-egg
 74

 1 situations here as we try to get through this.

 2 Again it's been tough on the staff to

 3 clairvoyantly figure out where we're going to be

 4 and what it's going to be moving forward and

 5 that's why they've worked so hard and it is

 6 important that we get public input into this as we

 7 go forward with the realization right now that

 8 these are all proposed until these things get

 9 together.

 10 CHAIRMAN GENSLER: That's right, but

 11 with 288 days we want to get the proposal out and

 12 get the comments. I'll call the vote. All in

 13 favor?

 14 (Chorus of ayes.)

 15 CHAIRMAN GENSLER: Are there any

 16 opposed? The vote being unanimous we'll again be

 17 submitting it to the Federal Register shortly.

 18 Nancy is going to talk about DCOs, designated

 19 clearing organizations, designated contract

 20 markets and swap execution facilities.

 21 MS. SCHNABEL: Thank you, Chairman and

 22 Commissioners. Today staff is recommending that
 75

 1 the Commission approve a notice of proposed

 2 rulemaking to implement among other things Section

 3 726 of the Dodd-Frank Act. Before discussing the

 4 substance of the proposal, staff wants to echo the

 5 Commission's emphasis on the importance of public

 6 comment. We've asked many specific questions in

 7 the proposals and we hope to receive specific

 8 answers and thoughtful answers from the public

 9 which will inform our final rule.

 10 Section 726 of the Dodd-Frank Act

 11 requires the Commission to promulgate rules to

 12 address potential conflicts of interest in

 13 connection with the interaction between swap

 14 dealers and major swap participants on the one

 15 hand, and certain DCOs, DCMs and SEFs on the other

 16 hand, and it specifically empowers the Commission

 17 to adopt numerical limits on control or voting

 18 rights that enumerated entities may hold in

 19 certain DCOs, DCMs or SEFs. The enumerated

 20 entities include certain bank holding companies

 21 and nonbank financial companies as well as swap

 22 dealers and major swap participants.
 76

 1 On August 20, 2010, staff of the

 2 Commission and the SEC held a joint roundtable to

 3 discuss potential conflicts of interest in DCO,

 4 DCM or SEF operation and possible methods of

 5 mitigating such conflicts. Based on roundtable

 6 discussions as well as external meetings and the

 7 materials that the Commission has posted on its

 8 website, staff has identified a number of

 9 potential conflicts of interest.

 10 With respect to a DCO, conflicts of

 11 interest may present themselves in among other

 12 things determinations regarding whether a swap

 13 contract is capable of being cleared, the minimum

 14 criteria that an entity must meet in order to

 15 become a swap clearing member and whether a

 16 particular entity satisfies such criteria. With

 17 respect to a DCM or SEF, conflicts of interest may

 18 present themselves in among other things

 19 determinations regarding the balance between

 20 advancement of commercial interests and

 21 fulfillment of self-regulatory responsibilities

 22 including in regard to DCM or SEF access. In
 77

 1 order to mitigate such potential conflicts of

 2 interest, staff proposed certain structural

 3 governance requirements as well as certain limits

 4 on ownership or exercise of voting power. Staff

 5 notes that more substantive requirements on

 6 determination subject to conflict may be covered

 7 in other rulemakings that will be coming in the

 8 fall.

 9 The proposed structural governance

 10 requirements build upon the acceptable practices

 11 that the Commission previously adopted for the DCM

 12 conflicts of interest core principle. In general

 13 the proposals aim to mitigate conflicts of

 14 interest at a DCO, DCM or SEF through introducing

 15 a perspective that is independent of competitive,

 16 commercial or industry considerations to

 17 deliberations of governing bodies for those

 18 registered entities. More specifically, the

 19 notice of proposed rulemaking requires that a DCO,

 20 DCM or SEF board of directors be composed of a

 21 certain percentage of public directors. It also

 22 requires that each DCO, DCM or SEF have a
 78

 1 nominating committee and one or more disciplinary

 2 panels. It further requires that each DCO have a

 3 risk-management committee and each DCM or SEF have

 4 a regulatory oversight committee as well as a

 5 membership or participation committee.

 6 The notice of proposed rulemaking

 7 specifics the percentage of public directors that

 8 must be included on each committee, and with

 9 respect to the DCO risk-management committee, the

 10 percentage of customer representatives. The

 11 notice of proposed rulemaking also includes

 12 modifications to the definition of public director

 13 to conform with the definition of independent

 14 director that the Securities and Exchange

 15 Commission had proposed in 2004 and currently

 16 accepted practices among the listing companies.

 17 Given that the Commission is currently regulating

 18 and may in the future regulate certain of the same

 19 entities as the SEC, staff believes that greater

 20 harmonization is important.

 21 Turning now to limits on ownership and

 22 voting power, staff believes that such limits
 79

 1 enhance the structural governance requirements in

 2 that such limits restrict the direct influence

 3 that certain shareholders may exert through

 4 election or compensation over the DCO, DCM or SEF

 5 board of directors. Staff believes that such

 6 influence could among other things affect the

 7 independent perspective that we demand of public

 8 directors. Because staff is primarily concerned

 9 with direct influence, the notice of proposed

 10 rulemaking does not impose limits on nonvoting

 11 economic equity. With respect to a DCM or SEF,

 12 the notice of proposed rulemaking states that no

 13 member or its related persons may beneficially own

 14 more than 20 percent of any class of DCM or SEF

 15 voting equity. An identical limit applies to the

 16 exercise of voting rights. With respect to a DCO,

 17 the notice proposes two alternatives as well as a

 18 waiver procedure. Under the first alternative no

 19 individual DCO member and its related persons may

 20 beneficially own more than 20 percent of any class

 21 of DCO voting equity. Additionally, the

 22 enumerated entities and their related persons
 80

 1 whether or not they are DCO members may not own

 2 more than an aggregate of 40 percent of any such

 3 class. Identical limits on exercise of voting

 4 rights apply.

 5 Under the second alternative, now

 6 individual DCO member or enumerated entity whether

 7 or not it is a DCO member as well as related

 8 persons may own more than 5 percent of any class

 9 of DCO voting equity and an identical limit

 10 applies to the exercise of voting rights. In the

 11 case of a DCO, staff recognizes that circumstances

 12 may exist where neither the first nor second

 13 alternatives would be appropriate. To enhance

 14 flexibility, staff is proposing a procedure for

 15 the DCO to apply for and the Commission to grant a

 16 waiver of the limits specified in the first and

 17 second alternatives for a reasonable period of

 18 time. Staff believes that proposing different

 19 limits on ownership and voting power for DCOs on

 20 the one hand and DCMs and SEFs on the other hand

 21 makes sense given that the two different types of

 22 entities have differing competitive dynamics and
 81

 1 degrees of systemic important.

 2 Currently staff does not propose to

 3 distinguish for purposes of the notice of proposed

 4 rulemaking between DCOs and DCMs that operate only

 5 within the commodity futures and options sphere

 6 and those that operate within the swaps sphere.

 7 In certain ways the two types of products are

 8 sufficiently similar that staff does not believe

 9 that the Commission should create regulatory

 10 arbitrage due to differing governance

 11 requirements. Finally, staff would like to

 12 observe that the notice of proposed rulemaking

 13 provides for a long transition period, 2 years or

 14 two regularly scheduled board elections whichever

 15 is earlier.

 16 Again we would like to emphasize that we

 17 welcome public comments and we will devote

 18 attention to reviewing public comments in detail

 19 and that the final rule will depend on such

 20 comments.

 21 CHAIRMAN GENSLER: Thank you very much,

 22 Nancy. I will now entertain a motion on the
 82

 1 recommendation of staff for the proposed rule

 2 regarding governance issues for the clearinghouses

 3 and exchange platforms.

 4 COMMISSIONER DUNN: So moved.

 5 CHAIRMAN GENSLER: Do I hear a second?

 6 COMMISSIONER SOMMERS: Second.

 7 CHAIRMAN GENSLER: With the motion

 8 having been moved and seconded we will now have

 9 questions. Nancy, I know that you've engaged in a

 10 lot of discussions with the SEC and in no way

 11 projecting where they will be because that's a

 12 separate agency and Commission, but can you give

 13 us a sense on whether you know as of today of any

 14 material differences in this in your discussions

 15 with SEC staff? Is there any recommendation

 16 they've made to us that you haven't done you best

 17 to incorporate?

 18 MS. SCHNABEL: I've done my best to

 19 incorporate every recommendation. I think that

 20 the SEC staff in certain instances may have a

 21 slightly different view with respect to some of

 22 the percentages that we've proposed for structural
 83

 1 governance requirements and that view may be I

 2 think more --

 3 CHAIRMAN GENSLER: You don't need to say

 4 where they are, but we have a body of regulations

 5 that have grown up over 70-plus years and in the

 6 futures world they have a body of regulations that

 7 have grown up over an equally long time in the

 8 securities world and the President asked last

 9 summer that we try to seek to harmonize the swaps

 10 areas, a new area that's sort of in between

 11 securities and futures so that in some instances

 12 it will be possible to make sure the swaps

 13 regulation is uniform but taking the best and

 14 hopefully just the best out of the securities

 15 world and taking the best out of the futures

 16 world. I think this governance area particularly

 17 for a swap execution facilities because there

 18 could be SEFs that do both securities-based swaps

 19 and swaps so I'm hopeful that at the end of this

 20 next summer we end up in the same place on this

 21 governance issue. I think we're there at least on

 22 the proposal stage, but I for one am going to be
 84

 1 very mindful to try to be in the same place when

 2 we end this up at the end.

 3 My second question is there is no

 4 aggregate limit on swap execution facilities being

 5 proposed. Is that right?

 6 MS. SCHNABEL: That's correct.

 7 CHAIRMAN GENSLER: But there is an

 8 aggregate voting limit on the clearing which only

 9 exists if one individual member has more than 5

 10 percent voting control. Is that right?

 11 MS. SCHNABEL: That's correct. There

 12 are two alternatives. If any one individual

 13 member has more than 5 percent then there will be

 14 an automatic default to the second alternative

 15 which is 20 percent --

 16 CHAIRMAN GENSLER: But is it correct if

 17 no one is over 5 percent thus then there is on

 18 aggregate limit?

 19 MS. SCHNABEL: Yes.

 20 CHAIRMAN GENSLER: So in essence the

 21 aggregate only kicks in if somebody is larger.

 22 MS. SCHNABEL: Over. That's right.
 85

 1 CHAIRMAN GENSLER: I think it was a

 2 terrific suggestion that Commissioner O'Malia

 3 made. This is a very deliberative process and the

 4 public should know about having to retain some

 5 flexibility and that we have waiver ability in

 6 there and that's included as well.

 7 MS. SCHNABEL: That's correct.

 8 CHAIRMAN GENSLER: One other thing. On

 9 the nonownership side as to the board governance

 10 rules, I take it that they're quite similar, maybe

 11 not identical, to what we've recently adopted for

 12 contract markets and in this case we're extending

 13 them to clearing organizations and SEFs and asking

 14 a lot of further questions.

 15 MS. SCHNABEL: That's right, previous

 16 Commission precedent.

 17 CHAIRMAN GENSLER: Thank you.

 18 Commissioner Dunn?

 19 COMMISSIONER DUNN: Thank you, Mister

 20 Chairman. I know in 2007 the Commission had

 21 adopted SRO governance and many of them this last

 22 month have been put into place and it will take
 86

 1 some time to fulfill all of these proposals that

 2 we've got in the regulation. I am concerned about

 3 the regulations that we have in there for public

 4 membership especially in the regulatory oversight

 5 committees. I believe for the SEFs it's 100

 6 percent. Is that correct? I want to be reassured

 7 that we have people who are in the business who

 8 know what the impact of these committees are going

 9 to have on the overall operation and if we're

 10 excluding industry folks or folks that are

 11 noninsiders, as they fill these various boards

 12 will there be a large enough pool out there to

 13 ensure that we get people with the expertise

 14 needed to make recommendations from the board's

 15 positions?

 16 MS. SCHNABEL: That's a very important

 17 question and I think that there are people who are

 18 out there, for instance, ex-employees or

 19 academics.

 20 COMMISSIONER DUNN: This isn't a

 21 full-employment act.

 22 MS. SCHNABEL: I know. I understand
 87

 1 that. But there are people who are not currently

 2 affiliated with industry and also for the

 3 regulatory oversight committee for DCMs we in 2007

 4 required that DCMs have 100 percent independent.

 5 DCMs have now currently come into compliance, we

 6 gave them a long transition period as we are

 7 completing for this proposed rulemaking and there

 8 should be no reason that SEFs cannot also come

 9 into compliance with the 100- percent regulatory

 10 oversight committee that's public.

 11 COMMISSIONER DUNN: The second question

 12 I have is on ownership. With the requirements

 13 that we have, are we assured that this will still

 14 allow the new startups that will be significantly

 15 financed and will it not stifle competition?

 16 MS. SCHNABEL: I think that the various

 17 alternatives that we've proposed will leave room

 18 for new startups. For DCMs and SEFs we're saying

 19 a 20-percent single member limit and that would

 20 mean that a new startup would need five member

 21 investors and it seems as if five is not

 22 necessarily an excessively onerous number for a
 88

 1 new startup. Plus they can have outside investors

 2 as well who are not members and the same limits

 3 apply for SEFs. For DCOs we have various

 4 alternatives including the waiver procedure so

 5 that with respect to the 5-percent limitation if a

 6 DCO wants to organize itself as more of a utility

 7 it will have a chance to and it will have 20

 8 members, and if it would like to organize itself

 9 with a more concentrated membership we have a

 10 structure that would provide that and we

 11 ultimately have the waiver so that if staff

 12 believes that having a new DCO in the swaps space

 13 is important then staff will recommend that the

 14 Commission adopt the waiver.

 15 COMMISSIONER DUNN: To the public, I

 16 think this is an extremely important part and as a

 17 Commissioner I really do look for public comments

 18 in this area to help guide my decisions.

 19 CHAIRMAN GENSLER: Before I turn to

 20 Commissioner Sommers I want to associate myself

 21 with this last point. This had a lot of debate in

 22 Congress, but I think it really is something that
 89

 1 we new public input on in a broad range of views

 2 on this. Commissioner Sommers?

 3 COMMISSIONER SOMMERS: Thank you, Mister

 4 Chairman. I don't have any questions but I do

 5 want to comment specifically on this proposal

 6 regarding governance and conflicts of interest and

 7 specifically where I think the Act and

 8 congressional intent leads us. Section

 9 7(ii)(V)(D) of the Act directs the Commission to

 10 adopt rules mitigating conflicts of interest, and

 11 then Section 726 of the Act provides that the

 12 Commission shall adopt rules which may include

 13 numerical limits on the degree of control or

 14 voting rights that certain enumerated entities may

 15 possess with respect to DCOs, DCMs and SEFs if the

 16 Commission determines after a review that such

 17 rules are necessary are appropriate. I recognize

 18 that these provisions direct the Commission to

 19 adopt strong governance rules and to mitigate

 20 conflicts of interest in connection with the

 21 interaction between swap dealers and major swap

 22 participants on DCOs, DCMs and SEFs in which they
 90

 1 may have a material debt or equity investment. In

 2 my opinion, however, the voting equity

 3 restrictions being proposed are not necessary or

 4 appropriate to mitigate the perceived conflicts

 5 and in fact may do more harm than good to the

 6 emerging marketplace for trading and clearing

 7 swaps.

 8 In 2009 after more than 2 years of study

 9 the Commission finalized acceptable practices to

 10 provide a safe harbor for complying with Core

 11 Principle 15 for DCMs dealing with conflicts of

 12 interest. I support making those acceptable

 13 practices mandatory for DCMs, DCOs and SEFs as

 14 augmented by some of the additional provisions

 15 being proposed such today such as the Risk

 16 Management Committee for DCOs. I believe that

 17 strong governance rules coupled with the

 18 Commission's ultimate authority to determine which

 19 swaps must be cleared under Section 723 of

 20 Dodd-Frank is sufficient to ensure that swaps that

 21 should be listed for trading and cleared will be

 22 listed for trading and cleared. I have grave
 91

 1 concerns that the proposed limitations on voting

 2 equity especially those proposed for enumerated

 3 entities in aggregate with respect to DCOs may

 4 stifle competition by preventing new DCMs, DCOs

 5 and SEFs that trade or clear swaps from being

 6 formed. The Commission recognizes in the preamble

 7 to the proposal that the enumerated entities will

 8 be the most likely source of funding for DCMs and

 9 SEFs and thus chose not to propose the aggregate

 10 limits for trading facilities. I believe the same

 11 logic applies with even greater force for DCOs.

 12 I'm equally concerned that a number of recent

 13 entrants into the swaps trading and clearing space

 14 will potentially be required to disband their

 15 operations if they're unable to attract the

 16 required amount of nonvoting equity within the

 17 2-year two-board election cycle proposed.

 18 I also want to note that the European

 19 Commission explicitly rejected ownership

 20 limitations in its proposal for regulating OTC

 21 derivatives which they announced on September 15

 22 because such limitations may have a negative
 92

 1 consequence for market structures and I agree with

 2 that. I hope that we will be mindful of this

 3 global consistency as we move forward. The

 4 marketplace for trading and clearing swaps is in

 5 its infancy and I strongly believe that the

 6 limitations the Commission is proposing will have

 7 the effect of inhibiting emerging competition

 8 rather than promoting it. I therefore am not

 9 going to be supporting the proposal. Thanks.

 10 CHAIRMAN GENSLER: Commissioner Sommers,

 11 I thank you for all your input and many of the

 12 points you raise. I will be supporting it but

 13 these are the exact questions I'd like to hear

 14 from the public. Part of the reason I am

 15 supporting this including the aggregate limit in

 16 certain circumstances because it's not an

 17 aggregate limit in all circumstances is to hear

 18 from the public on this important issue on

 19 clearinghouses. I think that we share a view that

 20 these are challenging issues. Where I come out is

 21 I'd like to continue hearing from the public.

 22 Commissioner Dunn is so good at this all the time
 93

 1 saying he's reserving until the final and I'm very

 2 much reserving judgement on whether there's an

 3 aggregate position limit. Commissioner Chilton?

 4 COMMISSIONER CHILTON: I agree with

 5 Commissioner Sommers too on a lot of these things.

 6 I'm going to support it also but I think those are

 7 really good questions. Congress wanted to make

 8 sure that DCOs didn't act solely in their

 9 self-interest despite what might be a public

 10 interest but that doesn't mean that government

 11 should be a control freak. I'm not suggesting

 12 this proposal is, but we have to ensure that we're

 13 balanced here and that we hit the right level.

 14 I've met with a lot of folks and I've mentioned

 15 the comments that we've received on other -- or

 16 didn't receive them on the second one but received

 17 them on the first one and I know we have a bunch

 18 on this and we've had the governance roundtable.

 19 It seems to me that some of these questions that

 20 Commissioner Sommers is asking and some of the

 21 questions that were being raised with me in the

 22 meetings are really about more texture to the
 94

 1 rules. For example, if you go to the Act to what

 2 Commissioner Sommers was talking about, 726(c), it

 3 says that in looking at conflicts of interest we

 4 shall consider equity and ability to vote but

 5 there is also an important addition to that list

 6 where it says we shall consider governance

 7 arrangements at the same time. For example, I've

 8 met with folks who say we have a lot of ownership

 9 but we don't actually have a governance vote so

 10 that setting a hard cap limit may be appropriate

 11 for them. So as we go forward and get these

 12 comments I hope will put a little bit more texture

 13 to these and listen to what makes sense and again

 14 that we're not control freaks on this but we're

 15 hitting the right balance. I don't really have

 16 any questions unless somebody wanted to respond to

 17 that.

 18 MS. SCHNABEL: I have no incentive for

 19 being a control freak so I would welcome the

 20 public to comment and that will definitely help

 21 inform staff opinion.

 22 COMMISSIONER CHILTON: And my comments
 95

 1 certainly weren't personally directed to anybody.

 2 It's more a general government thing. There are a

 3 lot of folks who are control freaks. Thank you.

 4 MR. RADHAKRISHNAN: If I could make a

 5 general observation, Commissioner. I realize that

 6 this is a difficult task because on the one hand

 7 clearinghouses are not the same as exchanges

 8 because if the clearinghouse fails, trading fails.

 9 The argument from one side is if I'm a clearing

 10 member, my money is on the hook so therefore I

 11 should have a say in risk management and I should

 12 have a say in what clears. That's a reasonable

 13 argument and it's hard to deny the force of the

 14 logic behind the argument.

 15 It worked well in an environment where

 16 all futures contracts have to be cleared. There

 17 is no exception. There is no end-user exception.

 18 There is no exception whatsoever. If you list a

 19 futures contract, the law says you must clear it.

 20 Now you've got an environment where it's

 21 backwards. The first decision is is something

 22 going to be cleared, and then if something is
 96

 1 going to be cleared then does have to be traded

 2 and here you have new concerns. The new concerns

 3 are if you have a group of people who have

 4 benefited from the opacity of the OTC markets

 5 deciding what is to be cleared then the incentive

 6 for them is let's not clear it, number one.

 7 Number two, the second consideration is that a lot

 8 of players who want their products to be cleared

 9 are not getting access and those are some of the

 10 comments that we have heard, that they're not

 11 getting access to the clearinghouse because

 12 they're not part of a particular group and I think

 13 we need to mindful of that as well. I guess what

 14 I'm saying is there needs to be a balance and this

 15 is staff's view on a preliminary basis as to how

 16 to achieve this balance, but certainly the

 17 comments would inform staff and hopefully inform

 18 the Commission.

 19 COMMISSIONER CHILTON: Thank you for

 20 that, Ananda. It's these idiosyncratic things I

 21 want to make sure we look at. I'm in favor of

 22 board independence. I think having diversity on
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 1 boards is a big plus. I think it helps market and

 2 I think it helps consumers in general so that I

 3 like diversity. I don't want anybody to think

 4 that that's not the case. But we just need to

 5 make sure that we're taking in all these comments

 6 particularly the ones that are idiosyncratic to

 7 entities that may have a real point about how this

 8 could adversely impact them. We want there to be

 9 lots of competition. I want there to be lots of

 10 competition there and to do that we need to make

 11 sure that we have both a rule that's flexible but

 12 also does what Congress intended.

 13 CHAIRMAN GENSLER: Thank you,

 14 Commissioner Chilton. Commissioner O'Malia?

 15 COMMISSIONER O'MALIA: Thank you, Mister

 16 Chairman. Thank you for your cooperation and

 17 staff's cooperation including waiver authority to

 18 give us some flexibility or at least have that

 19 considered in this rulemaking. I think, Ananda,

 20 your point is spot on. People have asked about

 21 access to clearing and I think that's a very

 22 important issue. I think that is also addressed
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 1 in the open-access provisions in 723 and then the

 2 participant product eligibility provisions in

 3 Section 725. I think this rulemaking especially

 4 on the ownership rules attempts to solve a problem

 5 that these other sections may be able to address

 6 more effectively and I don't believe that this

 7 rulemaking specifically takes that into account.

 8 I have a concurring statement here that I'd like

 9 included with the rule and in that I raise these

 10 questions and I hope that we'll be able to solicit

 11 some good public comment on the balance between

 12 ownership and access. We've heard those

 13 anecdotally. We've heard the stories about access

 14 to clearing. We want to make sure we can get good

 15 open access to clearing, get products cleared and

 16 the breadth and the depth in the market. That's

 17 important and I hope those tools are more

 18 effective. I don't think the ownership rules are

 19 going to be as effective in reaching that same

 20 objective so that I hope we get some good comments

 21 on this, and I'd like to associate myself with the

 22 comments of Commissioner Sommers as well.
 99

 1 CHAIRMAN GENSLER: Commissioner O'Malia,

 2 I agree with you. I think of open access in a

 3 number of ways such as participants could be

 4 members. In the futures world we have 127 futures

 5 commission merchants right now and pretty much the

 6 futures clearinghouses have figured out a way to

 7 have generally open access to those 127 members.

 8 The swaps clearinghouses some of whom we already

 9 regulate have a much more exclusive club and I

 10 think that I'm looking forward to staff's

 11 recommendations on participant membership in

 12 particular that we can make sure they're more

 13 inclusive, balancing risk management, but I for

 14 one think they have been too exclusive and

 15 sometimes even frankly possibly hiding behind risk

 16 management to keep startup swap dealers and

 17 smaller swap dealers out of the club. I think

 18 you're right that there is participant membership

 19 and that there is nondiscriminatory open access to

 20 trading venues so that the swap execution

 21 facilities can all have access and this will be

 22 different from the futures world. The futures
 100

 1 world has grown up around the globe to be

 2 vertically integrated and we're not suggesting a

 3 change to that, but in the swaps world that there

 4 be some open access to these trading platforms.

 5 Those are key access things on which I concur. I

 6 think that we really need how to staff recommends

 7 rules for 725, 723 and of course the clearing

 8 eligibility determinations.

 9 COMMISSIONER DUNN: Mister Chairman, in

 10 listening to the Commissioners and thinking about

 11 my earlier statement, I do think part and parcel

 12 of the Dodd-Frank Act was that Congress thought

 13 there was too much concentration primarily in the

 14 swaps area and we have to take that under

 15 consideration as well as to what is the spirit of

 16 what Congress intended to do so that that will

 17 also motivate me.

 18 CHAIRMAN GENSLER: I would say for the

 19 public listening that this is how we would like to

 20 talk with each other. The Government in the

 21 Sunshine Act says that no greater than two of us

 22 can get together at any one time and deliberate
 101

 1 unless we're in front of the public so that you

 2 will see in these hearings that we will deliberate

 3 in front of you because I'm not committed to

 4 having stiff staff presentations and votes up and

 5 down so that I apologize that participants are a

 6 little bored with us going back and forth. It's

 7 the way that we get to deliberate.

 8 Are there other questions for staff on

 9 this one having the vote? I am supporting the

 10 rules here. I think like all of my fellow

 11 Commissioners including Commissioner Sommers we

 12 really do look forward to public comment on this.

 13 I'm supporting them not just to get public

 14 comment. I do think that there is something

 15 positive about having a diverse group of input

 16 into governance, that governance is open to

 17 diverse views and consistent with what we've done

 18 on designated contract markets in that we're

 19 trying to bring those board governance rules to

 20 clearinghouses. On voting control I think we've

 21 had enough back and forth, but I'm supporting it.

 22 I think we're putting an aggregate in
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 1 circumstances on clearinghouses to get the public

 2 view as to whether that's appropriate, but it has

 3 a waiver and there's a way to have more diversity

 4 so that that is where I come out on it. With that

 5 I was going to ask all those in favor to say aye.

 6 (Chorus of ayes.)

 7 CHAIRMAN GENSLER: Opposed?

 8 COMMISSIONER SOMMERS: Aye.

 9 CHAIRMAN GENSLER: The vote being 4-1,

 10 we will be sending that as well to the Federal

 11 Register. I want to make sure that I ask also

 12 unanimous consent to allow staff to make technical

 13 corrections to the documents voted on today prior

 14 to send them to the Federal Register. You'll see

 15 any markups, but whatever technical corrections as

 16 apparently there might be a couple typos in

 17 different things here and there. I don't know.

 18 COMMISSIONER DUNN: So moved.

 19 COMMISSIONER SOMMERS: Second.

 20 CHAIRMAN GENSLER: All those in favor?

 21 (Chorus of ayes.)

 22 CHAIRMAN GENSLER: Are there other
 103

 1 things I need to do? I need to make sure I do all

 2 the right stuff. Is there is not any other

 3 Commission business, I want to thank my fellow

 4 Commissioners. I think this was a very healthy

 5 and constructive process. We're going to be doing

 6 a lot of this together. I think our next meeting

 7 will be October 19. Again we'll be trying to do

 8 these approximately weekly. We'll let the public

 9 know the specifics of those and the topics to be

 10 discussed. I think the last motion of the day is

 11 do I hear a motion to adjourn the meeting?

 12 COMMISSIONER DUNN: So moved.

 13 COMMISSIONER SOMMERS: Second.

 14 CHAIRMAN GENSLER: All those in favor?

 15 (Chorus of ayes.)

 16 CHAIRMAN GENSLER: Are there any

 17 opposed? It seems it's unanimous to adjourn this

 18 meeting. Thank you.

 19 (Whereupon, the PROCEEDINGS were

 20 adjourned.)

 21 * * * * *

 22
 104

 1 CERTIFICATE OF NOTARY PUBLIC

 2 I, Carleton J. Anderson, III do hereby

 3 certify that the witness whose testimony appears

 4 in the foregoing hearing was duly sworn by me;

 5 that the testimony of said witness was taken by me

 6 and thereafter reduced to print under my

 7 direction; that said deposition is a true record

 8 of the testimony given by said witness; that I am

 9 neither counsel for, related to, nor employed by

 10 any of the parties to the action in which these

 11 proceedings were taken; and, furthermore, that I

 12 am neither a relative or employee of any attorney

 13 or counsel employed by the parties hereto, nor

 14 financially or otherwise interested in the outcome

 15 of this action.

 16 /s/Carleton J. Anderson, III

 17

 18

 19 Notary Public in and for the

 20 Commonwealth of Virginia

 21 Commission No. 351998

 22 Expires: November 30, 2012