UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 TECHNOLOGY ADVISORY COMMITTEE MEETING

 Washington, D.C.

 Tuesday, April 30, 2013
 2

 1 PARTICIPANTS:

 2 CFTC

 3 COMMISSIONER SCOTT D. O'MALIA

 4 COMMISSIONER GARY GENSLER

 5 COMMISSIONER JILL SOMMERS

 6 COMMISSIONER BART CHILTON

 7 High Frequency Trading Subcommittee Members:

 8 CHRIS ISSACSON

 9 CHRIS LORENZSEN

 10 PAUL KEPES

 11 CHRISTOPHER CONCANNON

 12 COLIN CLARK

 13 DEAN PAYTON

 14 SEAN CASTETTE

 15 ED DASSO

 16 GREGORY WOOD

 17 IRENE ALDRIDGE

 18 JIM NORTHEY

 19 JITESH THAKKAR

 20 JOEL HASBROUK

 21 JORDAN LEA

 22 JOSEPH SALUZZI
 3

 1 PARTICIPANTS (CONT'D):

 2 KEITH FISHE

 3 LARRY TABB

 4 MARK WASSERSUG

 5 MICHAEL MENDELSON

 6 PETER BUCKLEY

 7 PETER REISS

 8 ROBERT HEGARTY

 9 TERRENCE HENDERSHOTT

 10 TIM SARGENT

 11 Technology Advisory Committee "2.0" Members:

 12 JOHN BATES

 13 GARRY DEWAAL

 14 EVELYN FUHRER

 15 RICHARD GORELICK

 16 MICHAEL GORHAM

 17 CHRIS HEHMEYER

 18 DAVID HARTNEY

 19 STEVEN A. JOACHIM

 20 BEN MACDONALD

 21 BRYAN DURKIN

 22 CHUCK VICE
 4

 1 PARTICIPANTS (CONT'D):

 2 ROBERT GARRISON

 3 MIKE EVANS

 4 PIERRE LAMY

 5 LEE OLESKY

 6 JOHN LOTHIAN

 7 MARSHALL TERRY

 8 SUPURNA VEDBRAT

 9 JEFFREY TRAHAN

 10 JAMES S. ROWEN

 11 CLIFF LEWIS

 12 Data Standards Subcommittee Members:

 13 WILLIAM NICHOLS

 14 BRIAN OKUPSKI

 15 ERIC CHACON

 16 JAMES WOODS

 17 JIM MORAN

 18 KAREL ENGELEN

 19 KARLA MCKENNA

 20 MALENE MCMAHON

 21 MICHAEL WILL

 22 NEIL CHINAI
 5

 1 PARTICIPANTS (CONT'D):

 2 PAULO RODELA

 3 PETER MARNEY

 4 R.J. CUMMINGS

 5 SAM GAER

 6 STEVEN REICH

 7 WALTER HAMSCHER

 8 MICHAEL ATKIN

 9 ROBERT GREEN

 10

 11

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 6

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

 2 (10:00 a.m.)

 3 COMMISSIONER O'MALIA: We will bring the

 4 TAC meeting to order. I'd like to welcome our TAC

 5 members. We have also included the Data

 6 Subcommittee members and some of the High

 7 Frequency Trading Subcommittee members are here as

 8 well, so I appreciate everybody's participation,

 9 and I certainly appreciate the participation of

 10 our witnesses as we have six panels today and

 11 we'll have a lot of people coming through.

 12 We have several topics today. When we

 13 started formatting this meeting agenda it was

 14 about data and so the main topic today will be

 15 focusing on swap data reporting, and much like

 16 Thomas Edison's sentiment, he said the value of

 17 the idea lies in the using of it, and the value of

 18 data lies in the using of it. In other words,

 19 it's one thing for the swap data reporting to be

 20 mandated by Dodd-Frank and regulations, and it's

 21 quite another for it to be formed properly to

 22 reporting entities to the SERs and then ultimately
 7

 1 to the Commission itself for access and use in

 2 surveilling our markets. I want to thank the TAC

 3 for working at the Data Subcommittee level and

 4 make recommendations to the TAC and ultimately to

 5 the Commission a year ago. We're going to come

 6 back and revisit some of those recommendations

 7 that you had then and say we should have paid

 8 attention to this a little more closely when

 9 developing our rules.

 10 The first data panel today we will hear

 11 from market participants, all walks of life in the

 12 market, to give their perspective on the

 13 compliance challenges that they've had in meeting

 14 the data requirements of the Commission and

 15 interacting with the SDRs. The second data panel

 16 will consist of the SDRs themselves and we will

 17 attempt to frame that debate with our Office of

 18 Market Oversight and Data and Technology. They

 19 have a presentation that they're going to make so

 20 we can begin to figure out these issues and how we

 21 are going to make data reporting an effective

 22 enterprise for this Commission. Then the third
 8

 1 panel will be related to data and will hear from

 2 Tradeworx, an organization that the SEC has hired

 3 to help them sort out their data issues. I think

 4 this will give us a good opportunity to look at

 5 the possibilities of using data by the SEC, the

 6 CFTC and figure out what the possible will be in

 7 dealing with big data challenges.

 8 As we go through these panels I want to

 9 think of various tools that we need and that we

 10 can harness in order to address the challenges of

 11 swap data reporting. For example, I've called on

 12 a cross-divisional data unit to be created within

 13 our Commission of staff dedicated full time to

 14 organizing and examining the data for completeness

 15 and accuracy, and we also need to work on

 16 interpreting and analyzing that data and

 17 developing the necessary analytical tools to

 18 identify market risk. Another potential tool will

 19 be the development of a written guidebook to

 20 articulate specific instructions to the market

 21 participants and SDRs in order to make the data

 22 reporting process more efficient and consistent.
 9

 1 Here I have at the desk Part 20 rules, large

 2 trader reporting, quite a handful of rules. This

 3 is the how-to book to make those rules work. We

 4 publish the rules and then we had to publish the

 5 guidebook. You can see the difference. This was

 6 quite simple. This is 226 pages and 24 pages here

 7 of rules telling you what to report and this is

 8 how to report. Our SDR reporting is going to be

 9 much more complicated than that and I suspect our

 10 guidebook, if you will, for SDRs with fields well

 11 over the 40 or so in large trader will be much

 12 more complicated and much more extensive so that

 13 the paper is going to continue to flow around

 14 here. I'd be very interested to understand the

 15 best way to address things like this the same way

 16 we introduced the Part 20 guidebook on large

 17 traders.

 18 The thing we need to focus on is the end

 19 result and the process and we need to have

 20 interaction with the market participants which is

 21 why we're here today and to make sure that we are

 22 asking and demanding of them the things that can
 10

 1 be easily done and efficiently done to give us the

 2 best data into the market. I fully expect the TAC

 3 to focus on the SDR issues to continue well beyond

 4 today's meeting. We will continue to refine our

 5 proprieties for reporting in order to reach the

 6 most effective and efficient ways to collect,

 7 manage and utilize data to best effect. These are

 8 big challenges and I will continue to commit the

 9 TAC's attention and resources to help solve them

 10 and make sure the job is done.

 11 We also have some other topics on here

 12 to follow- up on previous meetings. Before we get

 13 to the data reporting panels, we have updates on

 14 two topics we have discussed in previous meetings.

 15 First we will hear from CME and NFA, the two SROs

 16 that are addressing the status of customer

 17 protection and technology and a solution to verify

 18 and reconcile account balances claimed by future

 19 Commission merchants and their custodian banks.

 20 As you will recall, these measures were initiated

 21 at our emergency TAC meeting last July in response

 22 to the Peregrine Financial Group debacle and MF
 11

 1 Global, and we also held a discussion at our

 2 October 30 meeting in Chicago. Since then the

 3 technology solution has been launched and much

 4 progress has been made, so we look forward to

 5 follow-up with that group and understand what the

 6 status of that is, and we'll also hear from the

 7 technology entity AlfaMetrix who has worked to

 8 implement that solution.

 9 After that we'll hear an update from FIA

 10 on the status of compliance of Rules 1.73 and 1.74

 11 relating to the timely acceptance and rejection of

 12 clearing. Last but not least, I've added a

 13 session to the agenda to focus on last week's

 14 Twitter hack and the market's reaction to the

 15 event. It's something that needs to be discussed

 16 and what better place to do it when you have a

 17 room filled with technology experts? Rather than

 18 applying a shoot-first, aim-later strategy, I'm

 19 going to have an open discussion with all the TAC

 20 members including the exchanges where the market

 21 reaction took place to understand the

 22 implications, concerns and possible solutions.
 12

 1 The social media genie is out of the bottle and

 2 rather than attempt the impossible of trying to

 3 put it back in the bottle, we need to figure out a

 4 way for our markets and the regulators to respond

 5 to these new market forces. Again I am grateful

 6 for everybody's attendance and participation here

 7 today and am thankful for our panelists. Let me

 8 turn to the Chairman for any remarks he might

 9 have.

 10 CHAIRMAN GENSLER: Thank you, Scott, for

 11 your leadership in bringing this committee

 12 together. It's been a great effort of yours, but

 13 you've done an excellent job throughout the years

 14 and this couldn't come at a more timely moment.

 15 The TAC Advisory Committee, I want to thank you as

 16 well. Why is it such a timely moment? For two

 17 reasons. One, we've had a very real change since

 18 your earlier meetings. We've had a paradigm shift

 19 that now the swaps market is moving into

 20 implementation of Dodd-Frank reforms. This means

 21 that we for the first time have real-time

 22 reporting, we have 75 swap dealers registered, we
 13

 1 have clearing, it's being phased in between March

 2 and September of this year and we have reporting

 3 to the swap data repositories already underway.

 4 Secondly, as Scott so said and so much has been

 5 reported in the press, we live in a time that

 6 technology is constantly changing and this is

 7 generally a good thing. Innovation in our society

 8 whether it's in the markets, whether it's in

 9 health care, whether it's in our day-to-day life,

 10 all one has to do is look in the kitchen and see

 11 how wonderful technology is and how much easier

 12 things are even today than 40 years ago. There's

 13 a paradigm shift in the swaps market as it's come

 14 to more transparency and central clearing, but

 15 there's also a continual shift, one might say a

 16 paradigm shift as well, with technology. We

 17 always need to adapt and adjust our rules to make

 18 sure that the market ultimately benefits from

 19 transparency but also has a sense that there is

 20 some oversight of these markets.

 21 Regarding data, in the panels we'll see

 22 on data, there is and has been a full commitment
 14

 1 from the G-20, that's the 20 leading nations

 2 around the globe and jurisdictions, Europe is in

 3 there as well, and it's been there since 2009 to

 4 gather data into trade repositories so that

 5 regulators, central bankers and finance ministers

 6 around the globe can get a sense of these

 7 important markets, the $600 trillion marketplace

 8 we call the swaps marketplace. Here in the U.S.

 9 and a number of other countries we now have data

 10 repositories registered and reporting that

 11 information. But I think it's natural that we

 12 have some growing pains, and I'm glad that we're

 13 going to have not one, but I guess two panels to

 14 discuss this today. For me, I think that it's

 15 clear what the regulators and the finance

 16 ministers around the globe were saying. They want

 17 a place where they can go and sort and search

 18 data. I say sort and search data, and it's

 19 accessible. Congress put into the statute that

 20 it's directly electronically accessible for the

 21 regulators. That means it's not a report, it's

 22 not necessarily a summary, but a regulator can go
 15

 1 in and see trade by trade. We can aggregate it by

 2 counter-party, by reference rate, by trade date

 3 and use modern technology to do that. We're not

 4 there yet. This is natural growing pains, but I

 5 think today's process will help is get along the

 6 way and maybe a guidebook hopefully a little

 7 shorter than this one, but maybe a guidebook

 8 similar to this will help as well.

 9 We are also going to hear further about

 10 customer protection and we have put out rules

 11 working with the self- regulatory organizations

 12 like CME and the NFA about direct electronic

 13 access to bank account and custodial statements,

 14 so I look forward to hearing from you today on how

 15 that's working so far. Our rules haven't been

 16 finalized, but you've started with the

 17 self-regulatory organizations to do that, and post

 18 the events of last year particularly at Peregrine

 19 this is a critical issue.

 20 Then of course I'm glad that Scott has

 21 put a small panel at the end and maybe that's why

 22 we have the cameras here today with regard to last
 16

 1 week's events. As technology changes our

 2 financial system, the rules in place need to be

 3 resilient. As sure as there were bad actors

 4 putting our false information 100 years into the

 5 marketplaces, and all we need to do is read about

 6 the late-19th century and the wonderful but

 7 sometimes heart-wrenching stories about false

 8 information and runs that were created in the

 9 markets of that era, it's sure to be the case that

 10 100 years for now that people will try to put out

 11 false information into markets. They'll use new

 12 technology, things that will make Twitter and

 13 Facebook look old style 100 years from now, but I

 14 think as regulators we need to be resilient as

 15 well and continue to update what we do to promote

 16 transparency and protect the markets and sure that

 17 false information is not put out in the markets.

 18 That's one of the things we're even doing with

 19 regard to LIBOR and Euribor, that false

 20 information is not put out into the market.

 21 I think that we do need to finalize a

 22 concept release that we've been working on for
 17

 1 many moons here at the CFTC. My hope is that we

 2 could put out a concept release which is about

 3 risk controls and system safeguards for automatic

 4 trading environments. We've talked about it and

 5 sometimes I reference it as testing and

 6 supervision, but last week's events reminds me

 7 once again, and I've been chatting with fellow

 8 Commissioners, I think we will do that in the next

 9 month to 2 months and put that out and get the

 10 benefit of the public comments on it. I think

 11 also we need to finalize something that's in the

 12 weeds, but it's called ownership and control

 13 reporting which we proposed and it's now in front

 14 of my fellow Commissioners and I think the staff

 15 has done an excellent job so that we can know the

 16 actual owners and controllers of futures accounts

 17 in a similar way to what's in the swap data

 18 repositories for swaps. Yes, as a final note we

 19 do need more resources here at the CFTC. If we

 20 don't have the technology resources to keep up,

 21 then all the data in the data repositories, all

 22 that's being done out there in the marketplaces,
 18

 1 it's going to be hard for us to be nimble and be

 2 aware of what's going on. I thank you and I thank

 3 Scott for putting this together.

 4 COMMISSIONER O'MALIA: Thank you very

 5 much. With regard to the testing and supervision,

 6 we're really ready to use this Commission once we

 7 get it out and we have the benefit of getting

 8 public comment, I think we will schedule another

 9 TAC meeting to address that specifically. So

 10 maybe this summer at our next meeting we can

 11 address high- frequency trading and market

 12 controls directly.

 13 CHAIRMAN GENSLER: That would be

 14 terrific. I know that we've all worked very

 15 closely particularly I want to applaud your work

 16 and Commissioner Chilton's work for getting this

 17 document through.

 18 COMMISSIONER O'MALIA: Happy to do it.

 19 Commissioner Sommers?

 20 COMMISSIONER SOMMERS: Thank you. Good

 21 morning, and thank you all for being here today,

 22 and especially thanks to Commissioner O'Malia for
 19

 1 chairing his advisory committee. When he took the

 2 lead on this advisory committee that had sort of

 3 been dormant for a few years, I think none of us

 4 really realized how important the role of this

 5 advisory committee would be in helping us to

 6 resolve some of the challenges that we're having

 7 in implementing the rules surrounding Dodd-Frank.

 8 I think as we review some of the issues that are

 9 on the agenda today, it's important for us to

 10 continue to review the costs and benefits of the

 11 requirements that the Commission has put into

 12 place and the benefits to our regulatory goals in

 13 making sure that those are level with the costs to

 14 the industry. I think that we need to continue to

 15 make sure that these requirements are reasonable

 16 and make sense, and although we may have a long

 17 way to go in resolving some of these growing pains

 18 as we implement Dodd-Frank, the topics that we're

 19 talking about today are extremely important for us

 20 to review and to listen to you as participants

 21 here and the panelists and members of this

 22 advisory committee. Thank you for holding this
 20

 1 meeting.

 2 COMMISSIONER O'MALIA: Commissioner

 3 Chilton?

 4 COMMISSIONER CHILTON: Thanks, and

 5 thanks, Commissioner O'Malia, for really just

 6 incredible work on this and on the concept release

 7 too. The amount of time you've spent on this is a

 8 whole lot more than the rest of us. I know Jill

 9 has spent a lot of time traveling so I can't say I

 10 guess more time than traveling, but the time that

 11 you spend on it every day is really invaluable.

 12 We're not supposed to talk about where things are

 13 like this concept release so I won't talk about it

 14 specifically, but there are a lot of really good

 15 things in there and thank you for that.

 16 It seems like every time we meet there's

 17 another meltdown moment taking place, whether or

 18 not it's Knight Capital or the Facebook IPO or the

 19 hack attack last week. For me what it raised was

 20 there's a confluence of the social networks and

 21 the markets that we hadn't really noticed before.

 22 Obviously things that are out there impact the
 21

 1 markets, but it really wasn't the social network

 2 to the extent that we saw it last week. So that

 3 comes on the heels of the SEC allowing for

 4 registrants to go ahead and put forth information

 5 about earnings, et cetera, in Twitter, Facebook or

 6 other social media. I think that a lot firms have

 7 over the years looked at social media as more of a

 8 marketing tool as opposed to something that can be

 9 interrelated with their trading computer programs.

 10 It raises a question and we can get to it later as

 11 to whether or not there's anything that needs to

 12 be done, and I'm not suggesting that something

 13 should. Maybe everybody will just supersize their

 14 cyber security regime out of the goodness of their

 15 heart or because they think it's in their business

 16 interest, but I think it's something that we need

 17 to consider and as Commissioner O'Malia said,

 18 maybe we'll think about including something like

 19 that in this document that I hope we can review

 20 later. I'm pleased that we're having the meeting.

 21 I thank everybody for coming. I know it's a big

 22 deal and there's lots of folks and it takes a lot
 22

 1 of time to travel, but we really do appreciate it.

 2 Thank you.

 3 CHAIRMAN GENSLER: I wanted to add one

 4 more thing because I think what we're all chatting

 5 about toward the end of today with regard to

 6 Twitter and I noticed Commissioner O'Malia handed

 7 me a Journal article as well, was also highlighted

 8 by the Financial Stability Oversight Council last

 9 week in its annual report. It was organized

 10 around seven themes. One of the themes that this

 11 council of regulators that includes the Federal

 12 Reserve and Treasury and the SEC and ourselves was

 13 operational risk, just that we as a council all

 14 recognize that with enhanced technology we also

 15 end up with whether it's the events that we've

 16 looked at in the last year around Knight Capital

 17 or CBOE and so forth. It's these operational

 18 risks that are also part of a theme that the

 19 council picked up.

 20 COMMISSIONER CHILTON: Maybe you could

 21 get me invited to one of those meetings.

 22 COMMISSIONER O'MALIA: Let's start with
 23

 1 our first panel. We're going to talk about the

 2 customer protection technology solution that's

 3 been initiated by our SROs, NFA, CME and really

 4 provided us a great solution going forward that

 5 will enable us to check, that does enable us.

 6 It's no longer a vision. It's actual reality,

 7 that does enable us to check customer funds and

 8 where they are at all times. We get these on a

 9 T+1 basis and no longer can somebody dip into

 10 customer funds over a 20-year period and get away

 11 with it. We're going to know immediately. I

 12 don't know who wants to go first. Chris, you're

 13 going to go first. Chris, Bryan and then Al.

 14 MR. HEHMEYER: Thank you, Commissioner

 15 O'Malia. I'm going to start and then Bryan, and

 16 I'm going to be brief and then Bryan is going to

 17 talk about their experience from the CME and then

 18 we're going to hear from Aleks Kins from

 19 AlphaMetrix. I too would like to chime in and

 20 thank you for your leadership for the Technology

 21 Advisory Committee and to the Commission for

 22 having us all here because I get to tell a good
 24

 1 story amongst all of the challenges and dead ends

 2 that the industry faces these days, this is a

 3 story that's a good one. It came out of this

 4 committee. It was in July after the Peregrine

 5 thing and we were using at NFA and I think also at

 6 CME to some degree econfirmation.com which was a

 7 manual basis of going in and checking bank

 8 balances and it was NFA's insistence that Russ

 9 Wassendorf had to give his authorization to

 10 confirm the bank balances which uncovered the

 11 fraud.

 12 I think it was in July at this

 13 committee, Commissioner O'Malia was pressing me to

 14 ask if there wasn't a way that the industry could

 15 come up with a technology solution to be able to

 16 check these bank balances on line. Honestly I

 17 came on behalf of NFA and its board and talked

 18 about the vision of something like that and a

 19 little bit winging it because we weren't exactly

 20 sure what that would take and what that would

 21 cost. It was soon after that when I got back to

 22 Chicago and my friends at AlphaMetrix, Aleks Kins
 25

 1 and Dennis Zar said you guys know, Chris, that we

 2 have a technology that could probably do what it

 3 is that you all at NFA and CME are looking for.

 4 That led to lunch outside at Seres with Dennis Zar

 5 and David Young and Ken Haas from NAF and myself

 6 where we explored this. Then that led of course

 7 to a high-level discussion with CME who I think

 8 was also talking to AlphaMetrix already on their

 9 own at that point. Quickly things led to things.

 10 And then of course the due diligence that's

 11 involved in looking into AlphaMetrix if the two

 12 regulatory organizations are going to trust this

 13 technology. As we all know, sometimes the

 14 technology needs of one organization may be close

 15 to what another organization has built, but it's

 16 not always perfect. So over the course of the

 17 fall we had to pass our rules and get them in

 18 place at NFA which went into effect February 13 of

 19 this year. Then the two organizations came to

 20 conclude that the AlphaMetrix solution as a good

 21 one. I'd like to make a couple of quick points

 22 and that is that the system is being implemented
 26

 1 in phases and the first phase covers bank

 2 depositories. As you all know, SEG locations are

 3 also brokerage firms and other places, but we

 4 began with the bank depositories which is the

 5 majority of course of the funds and certainly

 6 would have prevented the Peregrine problem. Both

 7 of the organizations, NFA and CME, are using this

 8 third party AlphaMetrix 360 to collect the cash

 9 and securities balances on a daily basis. NFA's

 10 FCMs have a total of 172 SEG accounts at 15 banks,

 11 while CME has almost 2,100 accounts at 40 banks so

 12 their task is a lot bigger than NFA's.

 13 Again the two organizations worked

 14 closely and worked well together in trying to

 15 implement the solution. It's very important to

 16 note that the third party's role is to collect the

 17 data from the banks and to send it to NFA and CME

 18 and AlphaMetrix doesn't play a role in analyzing

 19 the data or reconciling the data which is

 20 important to keep in mind. They're providing the

 21 technology. CME and NFA have developed automated

 22 systems which alert the staff to material
 27

 1 differences in these comparisons so they can

 2 follow through with analysis and perform

 3 reconciliations and the amount in the beginning

 4 was 5 percent and we've quickly been shrinking

 5 that as we've gotten some experience with it.

 6 Most of the exceptions are issues of reporting or

 7 issues of some out trade or something like that,

 8 but they can quickly detect it and then be in

 9 touch with the FCM as to what the nature of that

 10 is or what the nature of the discrepancy is.

 11 With the banks essentially complete, NFA

 12 and CME are going to be moving on to phase two of

 13 the project which will cover as I mentioned the

 14 balances between the clearing brokers and the

 15 clearinghouses. NFA and CME are going to split

 16 this effort for this phasing with NFA establishing

 17 the requirements for the clearing broker balances

 18 and CME handling the clearinghouses. Beginning

 19 this month NFA started to meet with clearing FCMs

 20 to discuss their capabilities for providing this

 21 data and that's why the two organizations are

 22 going to split this effort. NFA is doing some
 28

 1 initial research which is something that I would

 2 really like to see in confirming of assets held in

 3 pools. This is complex and a large technology

 4 challenge because there are so many pools. There

 5 are many more pools than there are FCMs. The pool

 6 frauds typically get the sort of press that the

 7 FCM frauds get. They're usually much smaller, but

 8 there are more of them. Somebody making off with

 9 somebody's money in a pool to me while it may not

 10 get the press of what happens in a fraud like

 11 Wassendorf's at Peregrine and it may not be as

 12 large an amount of money as $200 million, but the

 13 person that's got money in that pool has been

 14 harmed just as much by their money being stolen by

 15 a criminal pool operator and it would be great if

 16 NFA could get to balance these reported balances

 17 in these pools but that's going to take some time

 18 to try to deploy this technology but it looks like

 19 this technology is one that can do that for the

 20 pools. Most importantly me and the board from my

 21 chair at NFA is that this was a very good example

 22 of the way a technology that was developed on
 29

 1 behalf of the investors by private enterprise on

 2 behalf of investors was something that we were

 3 able to use on the regulatory side and get us to

 4 market quickly. The amount of time that it took

 5 for us to get to market for due diligence,

 6 exploring the technology and deploying it in a

 7 manner of months, in comparison to having to try

 8 to build that, pay for it and then all of the

 9 issues that go along with the testing of building

 10 something and having it be cutting edge, all of

 11 those issues, I shudder in fear how long that

 12 would have taken. We needed a solution to get to

 13 market fast to check these balances and this was a

 14 very good example of the way the regulators worked

 15 together with the private enterprise to bring a

 16 solution that will work, I don't know for how

 17 long, but for certainly the foreseeable future or

 18 a couple of years at least, maybe longer, that

 19 this technology has worked very well. With that I

 20 think you'll probably want to hear also from Bryan

 21 and then from Aleks, and then of course I'm

 22 available for any questions particularly from my
 30

 1 chair at NFA.

 2 MR. DURKIN: Thank you, Commissioner

 3 O'Malia. On behalf of the CME Group's work with

 4 the NFA, first of all, Chris has done a very

 5 detailed overview of where we're at with the

 6 implementation of this mechanism. We are pleased

 7 to report to the Commission today that from the

 8 CME's perspective we currently received bank

 9 depository information from 2,082 accounts which

 10 represents all material bank depository balances.

 11 This covers all 46 FCMs that maintain customer

 12 balances. As of current date, the cash balances

 13 that have been received from AM 360 represents

 14 over 99 percent of all cash balances that are held

 15 at CME DSRO FCMs.

 16 In taking that information in, since we

 17 effectuated this in the middle of March and the

 18 NFA in the middle of February, both regulators

 19 have done reconciliations utilizing their

 20 analytics that they built internally. At CME we

 21 performed automated comparisons of 2,914

 22 segregated balances since we went live with our
 31

 1 system and I believe the NFA did some over 2,000

 2 themselves. As a part of this we look for any

 3 materiality events. Where those triggers as Chris

 4 has alluded to did unveil themselves, for the most

 5 part those were reporting issues between the

 6 firms, AlphaMetrix and the depositories that were

 7 able to be validated and reconciled. As we move

 8 toward phase two, we think that given what's been

 9 achieved to date so far, we've learned a lot in

 10 the context of what can be done in a fairly

 11 accelerated path when you have two major

 12 regulators coming together and trying to find a

 13 solution that has worked very well for our

 14 regulatory means. It's our goal as part of phase

 15 two to be able to onboard accounts at

 16 clearinghouses and carrying brokers internally by

 17 the end of this year.

 18 COMMISSIONER O'MALIA: How many carrying

 19 brokers are there out there? Do you have a sense

 20 of what that number is?

 21 MR. HEHMEYER: Carrying brokers? I'm

 22 not sure. That's not a number that I'm armed
 32

 1 with.

 2 COMMISSIONER O'MALIA: Is there anything

 3 else?

 4 MR. DURKIN: No, that's it.

 5 COMMISSIONER O'MALIA: Aleks, you're up.

 6 MR. KINS: Good morning. My name is

 7 Aleks Kins. I'm the CEO of AlphaMetrix and I want

 8 to start off by thanking the CFTC and Commissioner

 9 O'Malia for inviting AlphaMetrix in to speak today

 10 as well as the NFA and CME for having me

 11 participate on their update.

 12 What is AlphaMetrix? AlphaMetrix is a

 13 company that has built a business based on

 14 investor demand for transparency. I myself have

 15 been in the hedge fund and managed futures

 16 industry for nearly 20 years. For about a decade

 17 I was a fund of funds and as I managed my fund of

 18 funds I felt that it was quite ironic that as an

 19 institutional investor allocating hundreds of

 20 millions of dollars there were no tools out there

 21 to help me with not just daily but our intraday or

 22 daily, but anything less than a monthly in terms
 33

 1 of seeing the performance and status of the funds.

 2 Lo and behold, as a fund of funds in the 1990s I

 3 built some technology that stated a process very

 4 simply. Some of the managed accounts I started

 5 receiving from various managed futures managers

 6 and it was a case of be careful what you wish for

 7 because I started getting the transparency I

 8 remembered getting a stack of papers about an inch

 9 thick on my desk in the morning and that was my

 10 transparency. I remember lamenting that I wanted

 11 to know if I was long on the S&P 500 which would

 12 have taken us a month to figure out. As I

 13 searched for a way to aggregate, there was nothing

 14 readily available and I found it ironic that in

 15 the retail let's say equity trading market

 16 investors had already by the mid-1990s to

 17 late-1990s at their fingertips streaming

 18 information and there I was as an institutional

 19 allocator and there was nothing of the sort.

 20 Further, I found once I started building it as we

 21 had investors come in to do due diligence on us

 22 and review what we were doing, I found I lost
 34

 1 their attention quite frequently because as I was

 2 explaining our investment methodology and

 3 procedures we had screens on our walls much like

 4 these screens around the room and it had moving,

 5 real-time profit and loss and risk information.

 6 They would tell me one after another, Aleks, this

 7 is very interesting, your guidelines and the way

 8 you do due diligence, but how do I get some of

 9 that? How do I see my funds moving like that in

 10 my P&L? So I only had to hear that a few hundred

 11 times to think maybe there's a business idea. In

 12 2005 we started AlphaMetrix with a handful of fund

 13 to funds as our initial clients and I began a

 14 process of building technology which we found that

 15 even in 2005 there were quite a few large

 16 institutions that were very interested in the

 17 concept of seeing their own portfolios. Obviously

 18 that goes without saying that with the advance of

 19 2008 it was quite the catalyst for bringing us to

 20 the forefront in the investors' minds as our

 21 product in essence is transparency. That helped

 22 propel us to being one of the fastest growing
 35

 1 companies in Chicago and so forth, all driven by

 2 investors who were willing to pay for data

 3 aggregation.

 4 In short, the way we looked at it is we

 5 believe in free-market principles for driving

 6 transparency problems and solutions to those

 7 problems. Again in 2005 we would from time to

 8 time find pension fund investors, sovereign

 9 wealth, you name it, that would say do I really

 10 need my data on a daily basis? Do I really need

 11 to see the granular level? We found post-2008 we

 12 really don't ever get asked that question anymore.

 13 What is in our DNA? How do we do this? Why is

 14 this different than any other group that we know

 15 of? It started out for me as I said as a

 16 portfolio manager what I thought was a simple

 17 problem. I just want to get my trades aggregated,

 18 I want to see what my P&L is and see my profit and

 19 loss and see what my risk is. That's where I

 20 started discovering that data within the financial

 21 system exists in silos. There are many, many,

 22 many silos and our technology doesn't
 36

 1 differentiate between the silos, but some of those

 2 silos are banks, some of them are exchanges, some

 3 of them are hedge funds themselves and what we

 4 found is that as we started streaming managed

 5 futures and hedge fund funds throughout the day,

 6 creating a price and risk information that we one

 7 by one had to in essence map out nearly the entire

 8 financial system, that we might now aggregate data

 9 from about 4,000 hedge funds and managed futures

 10 funds, we are connected to approximately 300 FCMs,

 11 prime brokers, custodians, banks, you name it.

 12 These are all data sources for us so that a new

 13 hedge fund or a new bank is basically how we built

 14 our technology and it's just a form of mapping.

 15 We estimate that we have spent in aggregate

 16 several thousand man years developing -- if you

 17 look at how the sausage is made, it's the meat

 18 grinder that takes the data and turns it into

 19 something that's usable for investors or

 20 regulators or even hedge funds themselves. We

 21 estimate that there's been as much as $100 million

 22 put into the technology to build this. It is
 37

 1 complex because there is no real standardization

 2 of data across the financial system. The other

 3 thing we found is that obviously the common

 4 denominator to all financial instruments is cash.

 5 You could reduce an instrument down to cash flow.

 6 You can then aggregate it any which way.

 7 Obviously with certain derivatives or

 8 over-the-counter instruments, it's a challenge to

 9 reduce it to a common denominator, but that's what

 10 this system does. As Chris Hehmeyer mentioned,

 11 when the NFA and the CME were looking for a

 12 solution, we connected with them and said in

 13 essence we've spent years already building

 14 something that could potentially be of use and we

 15 are already processing for a large number of

 16 institutional investors aggregating information on

 17 their own portfolios. That said, the slide I have

 18 here shows that 84 days from sitting down and

 19 meeting to delivering the phase one which is

 20 complete. We've got 71 different FCMs already

 21 being processed and I think 95 percent with the

 22 CME and that's already 99 percent, so it's
 38

 1 basically complete. But why were we able to do

 2 this in this type of speed? The reason why I'm

 3 presenting this is because the only thing that had

 4 to be adapted was the final let's say 1 percent of

 5 the project, the core again, the meat grinder I

 6 mentioned, was already completely developed. We

 7 were able to process not just bank account cash

 8 information, but also financial instruments. We

 9 are already processing on average about 7,500

 10 instruments, Treasuries, you name it, in these FCM

 11 accounts right now and that's not even as large as

 12 the volume within 200 hedge funds that we process

 13 all sorts of esoteric instruments. The machine is

 14 created and now it's a question of looking at it

 15 and maybe turning it upside down and seeing are

 16 there other uses for it. Are there other types

 17 aggregation that can be mapped out and aggregated?

 18 That leads us to as I think was already mentioned

 19 the phase two where we're expanding from FCMs with

 20 the banking holdings to clearing brokers and

 21 carrying brokers and clearing firms and so forth.

 22 Once again AlphaMetrix thanks the CFTC, NFA and
 39

 1 CME. Thank you.

 2 COMMISSIONER O'MALIA: The Chairman

 3 mentioned that our customer protection rule has a

 4 proposal that would require each bank to give

 5 login access for each individual account to the

 6 Commission and the relevant password. In light of

 7 hacking and cyber issues that we're going to

 8 discuss later, we had a discussion in July about

 9 the issues of pushing out the data versus pulling

 10 the data and trying to understand was there an

 11 exposure issue, do we create additional liability

 12 or holes in the cyber security network if we have

 13 this login ability as opposed to collecting the

 14 data. I'm trying to understand the advantages of

 15 one over the other or is it redundant what we're

 16 asking for in terms of being able to login at will

 17 using the password, and then who updates the

 18 password and how do we keep all of that straight?

 19 It seems from our standpoint to be monumentally

 20 difficult if we have staffing issues how we're

 21 going to login. You mentioned over 2,000

 22 accounts, Bryan. We've got over 2,000 accounts
 40

 1 that we'd have to login to and I guess it's a

 2 lottery which one we login to every day. I'm

 3 trying to understand the tradeoff here. Haven't

 4 we solved this problem with this solution you've

 5 put forward?

 6 MR. HEHMEYER: One thing I will say is

 7 through the miracles of modern technology there

 8 are about 70 carrying brokers, 50 of which are

 9 clearing members. I got that out there because

 10 your question is more complex once you get the

 11 carrying brokers on there. Then which carrying

 12 brokers can you login to? It's a push technology.

 13 The banks push the information to AlphaMetrix and

 14 then the organizations then do the comparisons.

 15 Am I right, Bryan? I don't know if that answers

 16 your question.

 17 COMMISSIONER O'MALIA: Aleks, you can

 18 address the issue of how you're going to protect

 19 this data.

 20 MR. KINS: Sure. For us, a push or pull

 21 technology, we've designed it to work other way,

 22 that different institutions have set up files and
 41

 1 file transfers differently. There is no physical

 2 logging in to a website and pulling. It's all

 3 automated machinery. One of the challenges why we

 4 weren't able to go to 100 percent right away on

 5 day one is we'd already expected to have completed

 6 a way to communicate with some of the largest

 7 institutions, but there are a lot of much smaller

 8 banks and groups that didn't have push technology

 9 which is probably easier to work with so we had to

 10 work with them to implement a way to receive data

 11 but in a process that was unattended and

 12 automated. Then further I think the question was

 13 security of data. That is always our top, top

 14 concern. You hear people talk about the cloud

 15 versus server and so forth and we don't think

 16 there is one perfect solution for one versus the

 17 other. We'll use the internet and the cloud where

 18 we think it's appropriate to aggregate and pull

 19 data but all data is stored not connected to the

 20 internet on servers and very encrypted and so

 21 forth. We have that all in a separate group

 22 within AlphaMetrix, a separate company called
 42

 1 AlphaMetrix 360, which is a subsidiary. We've

 2 gone through SAS 70 compliance, Sarbanes-Oxley and

 3 so forth to putting controls in place. But the

 4 idea is to remove and storage of data from harm's

 5 way on the internet, to only have bits and pieces

 6 out there at any given time and then be

 7 transferring a daily file to the CME and the NFA.

 8 I was trying not to get too technical there, but I

 9 hope that answered what you were looking for.

 10 MR. HEHMEYER: One other thing,

 11 Commissioner. Security of course is always an

 12 issue that has to be 24 by 27 under your wings

 13 every day kind of thing, but the logging in thing

 14 at NFA, we've come to find that there are

 15 thousands of passwords and this is a much more

 16 efficient way to monitor these balances, certainly

 17 the daily seg balances.

 18 COMMISSIONER O'MALIA: I think you had

 19 contemplated a daily logging in strategy.

 20 MR. HEHMEYER: I think we had used one

 21 before too. This is much more efficient if what

 22 we found. We have all those passwords floating
 43

 1 around, the one can be prone to being hacked.

 2 COMMISSIONER O'MALIA: You guys are all

 3 Technology Advisory Committee members. Anybody

 4 who wants to raise something, put your card up and

 5 jump in, it does not matter and ask any questions

 6 you want. I don't know if any of my fellow

 7 Commissions have a question on this front. Do you

 8 have a timeframe on the next set of the carrying

 9 brokers and the clearing members?

 10 MR. DURKIN: Our goal is to have that

 11 account pushed by the end of the year. We should

 12 be in a position, Chris, to be able to report our

 13 progress at the next TAC.

 14 MR. HEHMEYER: The pools issue is more

 15 complex. The pool rules the way I understand them

 16 without quoting them allow for pools to invest in

 17 a variety of different instruments. That gets

 18 more complicated in trying to balance it, in

 19 trying to confirm them. That's going to take

 20 longer. But the phase two, as Bryan said, by the

 21 next TAC.

 22 COMMISSIONER O'MALIA: Is there anything
 44

 1 we can do to help you with the pool issue?

 2 MR. HEHMEYER: I can't tell you off the

 3 top of my head what that might be, but if I need

 4 some help, I'm going to ask you.

 5 COMMISSIONER O'MALIA: Thanks. So I

 6 assume that they're not held in necessarily bank

 7 accounts, that it's not all cash, it's not all

 8 securities.

 9 MR. HEHMEYER: Correct.

 10 COMMISSIONER O'MALIA: It would be

 11 metal?

 12 MR. HEHMEYER: My feeling is if they're

 13 not current assets, how much of it is not in

 14 current assets, but it's going to take us a little

 15 while. The board and the senior management at NFA

 16 organizational and with AlphaMetrix is a bigger

 17 project and it's much more hours than this one

 18 with CME. The first thing is phase two.

 19 COMMISSIONER O'MALIA: Supurna?

 20 MS. VEDBRAT: As the data sets are being

 21 designed, is it taking into account that

 22 ultimately there may be a requirement to allow
 45

 1 either if it's an asset manager, the end user to

 2 also be able to view this data? I ask this

 3 question because we've recently experienced in

 4 another data exercise where the SDR was not able

 5 to identify which asset manager may have been the

 6 owner of the transaction underlying. The question

 7 is on the data set that's being currently

 8 developed, is it taking account that ultimately

 9 either the asset manager or the end user may also

 10 be one of the viewable bodies?

 11 MR. HEHMEYER: There hasn't been any

 12 discussion along the lines of that at the NFA. I

 13 don't have any interest in AlphaMetrix, but

 14 Aleks's description of going to different

 15 exchanges and different asset classes with his

 16 technology is one that might provide something

 17 like that for the industry, but that's more of a

 18 CFTC thing. So there hasn't been any discussion

 19 at NFA along those lines.

 20 MR. DURKIN: The same for us at this

 21 point, but we can certainly take it under

 22 consideration with the Commission.
 46

 1 MS. FUHRER: First of all, thank you for

 2 your presentation. It was very, very interesting.

 3 One of the questions that I was thinking about as

 4 you were talking, and I know you touched upon

 5 cyber threats and so on, I was wondering what

 6 consideration was given to customer privacy and

 7 all the privacy considerations as you collect and

 8 aggregate data and also as you disseminate the

 9 data. What are your thoughts about privacy?

 10 MR. KINS: That's a very, very good

 11 question. Security and privacy are at the upmost

 12 of what we do. If we didn't respect security and

 13 privacy, we wouldn't have a business because

 14 outside of this relationship how we built the

 15 business is getting voluntary contribution of

 16 information so we've had to go a long way to

 17 demonstrate that we put in a lot of security as

 18 well as privacy measures. Just for an example,

 19 here with the NFA-CME relationship, we pull this

 20 data but we do not process it or show it to

 21 anybody. It's pushed right to the NFA and CME. I

 22 don't have access to that in aggregate. It's
 47

 1 really locked down. But separately on the rest of

 2 our business, data sharing is in essence a private

 3 contract between the hedge fund and the investor,

 4 that the investor can request it and then the

 5 managed futures fund or hedge fund can agree to

 6 share it. It's a system like we're running

 7 through our technology so in the end, each entity

 8 is in control of their own data and if they choose

 9 to share it, they're able to. We're built that

 10 technology, the bridge that allows them to do it

 11 efficiently, so they don't have to send files or

 12 do back office work. That's really the principle

 13 that drives and that's why we also call it our

 14 marketplace because the marketplace of information

 15 and data that they're sharing back and forth and

 16 that's really what drives the sort of free-market

 17 private sector element of it.

 18 MS. FUHRER: Thank you.

 19 COMMISSIONER O'MALIA: Chris and Bryan,

 20 one thing that occurred to me is we haven't talked

 21 about what the interaction after he pulls it and

 22 gives it to you for evaluation and look for any
 48

 1 anomalies to make sure you've got all the data and

 2 all the money in the right spot at the right time

 3 with the right banks, what interface do you have

 4 with the Commission? Are we linked up to this

 5 system? Are we receiving reports?

 6 MR. DUNKIN: For any issues where we're

 7 finding materiality concerns in the normal course

 8 of conducting our reviews and exams, we will be in

 9 communication with our counterparts at the

 10 Commission. We look at this in the context of

 11 performing our due diligent in terms of our

 12 overall financial monitoring of our firms.

 13 MR. HEHMEYER: I think it's probably

 14 similar at NFA from the board level, I'm sure

 15 about the answer to that, but I would assume it's

 16 very similar. We are posting as you know at NFA

 17 this FCM data twice a month on the website.

 18 CHAIRMAN GENSLER: May I ask this

 19 question of Bryan and Chris? Given what you're

 20 doing already in the direct electronic access to

 21 accounts, do you think at Peregrine that somebody

 22 would do that again today, April 30?
 49

 1 MR. HEHMEYER: Much harder. It would

 2 take hacking and it would take real computer

 3 technology sophistication. It's like saying could

 4 anybody hack the defense system? It's possible,

 5 but this is a significant advancement and much

 6 more difficult.

 7 CHAIRMAN GENSLER: For listeners are

 8 home, we do broadcast this, why is that in your

 9 own words? Why is that which an operator at

 10 Peregrine can forge and fraudulently doctor bank

 11 statements, why isn't that possible in this

 12 system?

 13 MR. HEHMEYER: In some ways it's almost

 14 generational. The generation that learned how to

 15 doctor documents, that age group has been rendered

 16 irrelevant. They can't do that anymore. So is it

 17 possible down the road?

 18 CHAIRMAN GENSLER: Why is that not

 19 possible?

 20 MR. HEHMEYER: The secure pushing of the

 21 data that comes from the bank.

 22 CHAIRMAN GENSLER: Directly from the
 50

 1 bank.

 2 MR. HEHMEYER: Directly from the bank

 3 into the AlphaMetrix 360 technology into NFA and

 4 CME where we compare it with the FCM tells us, the

 5 200 million that was missing from Peregrine would

 6 have been found the first day it was $7,000 and

 7 Russ had taken the check out.

 8 MR. DURKIN: I would agree in the

 9 totality of the steps that we've taken in terms of

 10 customer protections. This is one major one that

 11 there's been a number of steps that we have taken

 12 to lock up the ability for a firm to be able to

 13 take advantage of the data or the information that

 14 we saw in Peregrine. So it's the independent

 15 reporting that's coming and being pushed to us

 16 from the banks, the electronic reporting from the

 17 FCMs doing those reconcilements on a near

 18 real-time basis to identify whether or not there

 19 are any anomalies and being able to act on them.

 20 CHAIRMAN GENSLER: All you're saying,

 21 Chris, is, yes, it's addressed that Peregrine

 22 forged or doctored documents, but a new generation
 51

 1 maybe yet to be born, whether they can go into the

 2 computer system, sorry about this, Aleks, but into

 3 Aleks's computer system and doctor something.

 4 MR. HEHMEYER: Right and hack a bank.

 5 CHAIRMAN GENSLER: Hack a bank or hack

 6 Aleks. That brings is to the topics of later

 7 today about cyber security and so forth.

 8 MR. HEHMEYER: Correct.

 9 CHAIRMAN GENSLER: Thank you.

 10 COMMISSIONER O'MALIA: What about the

 11 issue of MF Global, the thresholds with moving

 12 funds and excess funds and when does it go into

 13 customer funds versus excess funds and we're

 14 trying to understand that? How will that be

 15 solved?

 16 MR. DURKIN: Again to my earlier

 17 comments, there are a number of steps that we've

 18 taken that require the CEO or the CFO of a firm to

 19 sign off and authorize any disbursements of funds

 20 in excess of a certain limit. So there are a

 21 number of protocols that we've put in place since

 22 MF Global to be able to readily identify and
 52

 1 transfers in addition to watching the customer

 2 balance.

 3 CHAIRMAN GENSLER: I think that these

 4 steps which have been taken in coordination with

 5 the CFTC and that have been taken by the

 6 self-regulatory organizations and many futures

 7 commission merchants, we should finalize in some

 8 federal rules and that's what was out for notice

 9 and comment along with other rules. I think there

 10 are positive steps addressing some of the known

 11 problems that came out of the last 18 months.

 12 MR. HEHMEYER: I agree. If I could, it

 13 was the result of this committee.

 14 CHAIRMAN GENSLER: Plenty of credit to

 15 the committee and Scott O'Malia's leadership.

 16 MR. HEHMEYER: The industry and the

 17 Commission can collaborate on issues and we can

 18 raise awareness to certain things where somebody

 19 could step forward with a technology solution.

 20 Hopefully today as you all talk about various

 21 topics, there will be people who might step

 22 forward with a solution that could work between
 53

 1 the private and the public.

 2 COMMISSIONER O'MALIA: Jim?

 3 MR. ROWEN: Just a quick question. As I

 4 understand it, the information is aggregated and

 5 then pushed out to you folks. The question is, do

 6 you now have two aggregation units? You have one,

 7 AlphaMetrix, one at the NFA and CME because that

 8 may create an issue of reconciliation if you're

 9 both collecting data versus just pulling it as you

 10 need it.

 11 MR. DURKIN: We conduct an aggregation

 12 across all of the FCMs as we're receiving that

 13 information so that we can reconcile what's been

 14 provided by AlphaMetrix compared to what the FCMs

 15 have individually reported to us. We have a

 16 system that does that reconcilement.

 17 MR. ROWEN: But does that reconciliation

 18 go on continuously? Because as you build more and

 19 more data every day, the question is do you go

 20 looking back to the very beginning and reconcile

 21 or is it just as the data comes in you assume the

 22 set that was done previously is accurate?
 54

 1 MR. DURKIN: I don't have the answer to

 2 that question.

 3 MR. ROWEN: Because that could become an

 4 overwhelming task at the end if you have data at

 5 AlphaMetrix as well as what's on site that has to

 6 be reconciled.

 7 MR. DURKIN: I'd have to follow-up on

 8 that one.

 9 COMMISSIONER O'MALIA: John?

 10 MR. LOTHIAN: There have been some

 11 incidents where FCMs have had money in accounts

 12 that were not properly named. They didn't have

 13 customer-segregated funds. There have been some

 14 fines by the Commission as a result of that with

 15 some fairly high-profile cases. Does your system

 16 verify those accounts as being customer-segregated

 17 accounts, and how does it account for anomalies

 18 like we've seen where these fines have been

 19 created?

 20 MR. DURKIN: I don't know the answer to

 21 that.

 22 MR. KINS: A sort of broader answer to
 55

 1 that is that the general premise that we've built

 2 the whole system is a trust but verify system and

 3 it's under the premise that multiple unrelated

 4 entities won't corroborate information that's not

 5 true. What our system does is try to find sources

 6 of data and then to reconcile. To answer the

 7 earlier question, the way we're doing the

 8 reconciliation is we can see when something

 9 changes and then we will go back and we'll look at

 10 if there is a change. If there is no change, we

 11 leave the data alone. But in terms of how do you

 12 look at let's say customer-seg accounts, generally

 13 even the large banks and institutions are holding

 14 money at other institutions and so forth and that

 15 goes back to as we started with hedge funds, a

 16 medium to larger size hedge fund, might have 10 or

 17 20 prime brokers, FCM, custodial relationships so

 18 there are pieces of data at all of them, we're

 19 putting it together and then we test it against

 20 something. Generally if it's a hedge fund there's

 21 a net asset value that you look at and so forth

 22 and then nothing can be completely automated, if
 56

 1 there is an error or mismatch then there are

 2 people that look at it. We from our side are

 3 looking at it, the NFA and CME are looking at the

 4 data on their side, but in general that's the

 5 concept of how this works. It is corroborating

 6 information across the system.

 7 CHAIRMAN GENSLER: John, one piece that

 8 we put in that proposed customer protection, I

 9 don't know that it would be implemented yet,

 10 relates to acknowledgement letters and direct

 11 access to the acknowledgement letters and so forth

 12 would add a little bit more to what you're saying.

 13 MR. DURKIN: I would add on to that that

 14 this information would also be incorporated as

 15 part of our exams of the firms, so we do a deeper

 16 analysis into what is actually reported under

 17 their segregated funds.

 18 MR. LOTHIAN: It would seem that if

 19 there were a qualification check for the name to

 20 make sure that it says customer seg account, that

 21 you could catch that much sooner as opposed to

 22 having something like that go on for months.
 57

 1 COMMISSIONER O'MALIA: I think you'll

 2 find in some of our later discussion today garbage

 3 in is garbage out and if we can't get the basics

 4 handled in terms of what is or is not customer

 5 funds, we're going to have a hard time figuring

 6 some of these larger data questions. So it's a

 7 great point and it really starts with the quality

 8 of the information going in. Does anybody else

 9 have any questions on this panel? We're going to

 10 go right to the next panel. Aleks, thank you very

 11 much. We have Walt Lukken to update us on Rules

 12 1.73 and 1.74. These are a couple of rules that

 13 are not Dodd-Frank related. The Commission has

 14 leapt into required some extensive technology

 15 requirements on the industry some of which are

 16 available, some of which are not available. This

 17 is a topic that we attempted to get to in October

 18 at the FIA meeting in Chicago, but due to the

 19 storm we couldn't get the right participants at

 20 the meeting due to travel plans with the hurricane

 21 so we're kind of picking up where we left off

 22 there. Walt, thank you very much for your
 58

 1 participation.

 2 MR. LUKKEN: Thank you, Chairman

 3 O'Malia, and I'll try to catch us up a bit here.

 4 I've been tasked with the exciting and riveting

 5 task of talking about 1.73 and 1.74 which are

 6 correlation rules. 1.73 deals with risk limits

 7 that clearing FCMs have to put on any type of

 8 transactions coming through the clearing firm. On

 9 the flip side, 1.74 deals with straight-through

 10 processing. Once the cleared trade comes into the

 11 system, then it's cleared within a certain period

 12 of time.

 13 I wanted to first tackle 1.73. As you

 14 recall, 1.73 as Scott mentioned was briefly talked

 15 about last October at the TAC meeting in Chicago,

 16 but 1.73 requires clearing FCMs of a registered

 17 DCO to establish risk limits and to screen for

 18 compliance with those risk limits. This rule was

 19 scheduled to go into effect last October 1.

 20 Because of the varied way that execution happens

 21 in the futures industry, clearing FCMs found it

 22 very difficult to come into compliance with this
 59

 1 requirement. In particular, FIA raised last

 2 summer two issues that were really challenging for

 3 clearing FCMs, one dealing with give-ups in which

 4 an executing broker has to give up a trade to a

 5 clearing firm because the clearing firm doesn't

 6 have a relationship with the customer. It's

 7 difficult in that situation for the clearing firm

 8 to actually screen for orders. And the second is

 9 bunched orders in which an asset management firm

 10 or an account manager pools customer funds and

 11 gives it to an initial clearinghouse which is

 12 allocated at the end of the day to some ultimately

 13 clearing firms for clearing. Again because of the

 14 network effect, the externalities of those types

 15 of trading situations, it was very difficult for

 16 risk limits to be put onto those types of

 17 execution matters and also to be screened. As a

 18 result of that, the CFTC last September 26

 19 provided some relief to the FCM community in

 20 regards to give-up transactions and bunched orders

 21 through June 1 of this year. The date is

 22 approaching so we wanted to give the committee an
 60

 1 update on where things stand.

 2 After the relief was given last fall, we

 3 sat down with many of the clearing FCMs in New

 4 York and had what we called a vendor showcase.

 5 Greg was part of that group, but all day in a very

 6 large conference room with coffee and donuts for

 7 the guests we brought in vendor after vendor after

 8 vendor to see if there was an outside technology

 9 solution to help us with this problem. I think

 10 what we quickly learned because of the network

 11 effect of the problem is that one vendor although

 12 could solve pieces of the problem, couldn't solve

 13 for the entirety of the problem. So we had to go

 14 back to the drawing board and come up with an

 15 independent solution that FIA has helped to craft

 16 and I think after working with the CFTC and Rick

 17 and some of his team and the Ananda's shop, we

 18 found out that the best and straightforward way to

 19 do this was to enter into a simple screening

 20 agreement between the executing firm and the

 21 clearing firm. This would be very simple. Again

 22 that would agree to a limit based on these
 61

 1 screening agreements. These screening agreements

 2 could be housed within FIA's EGUS system. EGUS is

 3 a give-up repository that FIA runs. These

 4 screening agreements could be housed there as well

 5 and automated through the EGUS system. That

 6 allows people to update limits over time. IF the

 7 creditworthiness of a counterparty changes, they

 8 can go into EGUS and change those limits and

 9 notification and the approval system is all

 10 automated so that EGUS makes sure that all the

 11 right people are approving that and it's all in a

 12 repository for those parties to see. So far there

 13 has been good take-up of this solution with the

 14 industry. To date we have nearly 800 screening

 15 agreements in processing in our EGUS systems with

 16 nearly 50 executed fully already, so with roughly

 17 a month to go before the June 1 deadline, we feel

 18 we're well on our way to being in compliance on

 19 the give-up side of this 1.73 problem and

 20 hopefully can report closer to the June 1 deadline

 21 when we'll be fully in compliance.

 22 Dealing with bunched orders, there's a
 62

 1 similar problem with bunched orders. We took the

 2 solution on give- ups and tried to apply it to

 3 bunched orders. Remember, bunched orders are the

 4 situation in which an account manager bunches or

 5 pools orders on behalf of clients, gives it to an

 6 initial clearing firm and then it's allocated at

 7 the end of the day to several clearing firms. We

 8 thought again could we use a simple screening

 9 agreement between the account manager and the

 10 ultimate clearing firm in order to end up with

 11 again a similar screening agreement where the

 12 account manager agrees to screen for some simple

 13 limits and that that could be either housed with

 14 EGUS if possible or just independently not housed,

 15 just executed between the account managers and the

 16 ultimate clearing firms. The challenge with

 17 bunched orders versus give-ups is, one, we're

 18 dealing with a community outside the FCM community

 19 so it involves account managers and buy-side firms

 20 so that the challenge of getting everybody on

 21 board with a standardized screening agreement is

 22 difficult, and also just sheer numbers. Unlike
 63

 1 give-ups in which we're dealing in the hundreds of

 2 give-up screening agreements we have to execute,

 3 we're probably talking in the thousands for

 4 bunched orders. That has made it a challenge to

 5 get into compliance by the June 1 deadline. I

 6 think we have been in discussions with the CFTC as

 7 well as the buy-side about ways to bulk, get

 8 consent and get some of these agreements into

 9 place in what I would call an absent objection,

 10 meaning that the consent agreement goes out and if

 11 firms would object to it, unless they object to

 12 it, account managers would agree to screen for

 13 certain limits communicated to them. This would

 14 be a way for the FCMs and the account managers to

 15 get into compliance by the June 1 deadline and to

 16 get many of these agreements into place at the

 17 same time. If that is not an acceptable solution

 18 to the community, we would have to enter into

 19 individual negotiations with thousands of these

 20 agreements which would certainly get us past our

 21 June 1 deadline and not into compliance. We have

 22 been in discussions with trade associations, with
 64

 1 MG, with MFA, with ICI, and we're talking to other

 2 influential members on the buy-side to talk to

 3 them about this concept and to try to see if we

 4 can get agreement with again a very simple

 5 screening agreement to get us into compliance by

 6 the June 1 deadline, so those are both the give-up

 7 arrangements and the bunched order arrangements.

 8 I do want to touch on 1.74 and then

 9 we'll answer questions after that as well. 1.74

 10 as I mentioned requires clearing FCMs to accept or

 11 reject a trade within 60 seconds of its submission

 12 to the clearing FCM. A similar 60-second

 13 requirement is in place on CCPs after an FCM

 14 submits a trade for clearing. Last October when

 15 this rule was to take effect, FCMs individually

 16 offered alternative compliance matters under 1.75

 17 to meet this rule, then the CFTC granted relief

 18 through the end of the year. An additional

 19 extension of relief was granted through February 1

 20 of this year to find an alternative method for

 21 compliance with this 6-second requirement. FCMs'

 22 concerns were in order to get to straight-through
 65

 1 processing they also recognized that there may be

 2 exceptions and that there will be times when they

 3 couldn't get 60 seconds. It could be operational

 4 issues as we're moving into mandatory clearing.

 5 It could be complex trades in which there are

 6 several legs to a swap trade that may not be

 7 coming into the clearing FCM at the same time. Or

 8 it could be simply a large notional amount coming

 9 in that the clearing FCM has to guarantee that

 10 they may want to do additional credit checks. We

 11 had during this relief period of time tried to

 12 submit an alternative compliance regime having

 13 worked with this buy-side firms on this in which

 14 there would be a ratcheting up over time, an

 15 allowance for exceptions and a ratcheting up over

 16 time of the 60-second requirement so that there

 17 could be exceptions and also reporting of those

 18 exceptions so the CFTC could gather data, they

 19 could see where the trends were, where the

 20 out-trades were and to make further refinements to

 21 this rule as time went on. Unfortunately that

 22 alternative compliance regime was not accepted by
 66

 1 the CFTC. The March 11 mandatory category one

 2 deadline came into being. Anecdotally we have

 3 heard from firms that there have been rejections

 4 of trades during this period of time. I think

 5 people are also looking to the category two June

 6 deadline and ratcheting up of clearing that may

 7 cause additional rejections. The CFTC in talking

 8 to the Division of Clearing and Risk have asked

 9 for some data from the clearing firms in order to

 10 understand trends in this area. It's our hope at

 11 FIA that we'd want to work with the Commission as

 12 they get more data, they see whether rejections

 13 are occurring and whether there are trends, that

 14 we can develop an exceptions process if that's

 15 appropriate and work with people as we go through

 16 this transition of mandatory clearing so that we

 17 can get to straight-through processing which is

 18 something that FIA supports. I will cease fire

 19 there and then it over to the Chairman for

 20 questions.

 21 COMMISSIONER O'MALIA: Thank you very

 22 much. This is an area where our rules are just
 67

 1 goofy. We've tried to come up with a solution and

 2 put it on the industry and we could talk about

 3 cost-benefit analysis whether we got that right or

 4 not and what it took to get to this papering and

 5 re-papering the industry and trying to get all the

 6 account managers to sign up for this, and maybe

 7 Supurna can chime in as to what her thoughts might

 8 be on bunched and give-up orders. These were

 9 massive amounts of agreements in addition to all

 10 the other agreements we're requiring you to

 11 repaper through external business conduct

 12 standards, et cetera. So while our heart is in

 13 the right place, I do know that we're missed the

 14 technology boat in trying to figure out how to do

 15 this. Congratulations on solving the bunched

 16 orders because it was a well-defined community.

 17 The give- ups you got right. As for the bunched

 18 orders, we're still kind of searching for. Then

 19 on 1.74 it confounds me. You sent a letter in

 20 asking under our rules for an alternative

 21 compliance program back in January, January 29, I

 22 believe. You received no official answer back on
 68

 1 that. The rule says if you don't get an answer

 2 it's deemed to be in place within 30 days. You've

 3 probably contemplated that and said we won't

 4 assume anything in this one and didn't move

 5 forward on that. Now apparently we're sent a

 6 letter to the entire FCM clearing broker space and

 7 said tell us how many trades you've made or have

 8 not made or you've cancelled that have exceeded

 9 the 60-second requirement that we set under 1.74.

 10 We didn't set it under 1.74. We sent it in an

 11 email subsequently. I'm trying to understand how

 12 we've been completely transparent on this. Now

 13 we're asking for all the same data that you

 14 offered to send us back in January in this new

 15 April letter. Is that your understanding of all

 16 of this?

 17 MR. LUKKEN: I think our clearing FCMs

 18 want to be in compliance. Certainly that is our

 19 goal and we are trying to because of the

 20 difficulty of not knowing if a trade is rejected

 21 or if the trade goes over 60 seconds what is our

 22 obligation involved in that. We've tried to
 69

 1 develop I think a process in which we would agree

 2 that if there are exceptions that we would be the

 3 first to tell you in weekly reports here are the

 4 exceptions, here is why they ran over 60 seconds

 5 and certainly work with feedback with the CFTC to

 6 find-tune this over time. I think because of the

 7 letters that went out we're getting to the same

 8 place that we had offered in January, but we want

 9 to work with the Commission. If there is not a

 10 problem here, we'll be the first say there's not a

 11 problem here, but we were trying to anticipate

 12 during this transitional time that again it's

 13 transitional, that we hoped within a year to be at

 14 100 percent compliance within 60 seconds, but

 15 there is going to be during these very difficult

 16 uncertain times during operational times, there

 17 may be exceptions to this process and we wanted to

 18 recognize that up front.

 19 COMMISSIONER O'MALIA: I guess I forgot

 20 to mention one other step, that we did provide LCH

 21 which has the same 60-second requirement

 22 additional relief for I think until -- John, how
 70

 1 long did we give LCH relief?

 2 MR. LAWTON: May 17.

 3 COMMISSIONER O'MALIA: May?

 4 MR. LAWTON: Yes.

 5 COMMISSIONER O'MALIA: The FCMs, no

 6 relief, LCH some relief or second relief. WE do

 7 have John Lawton here. Do you want to share any

 8 thoughts from the Office of DCR?

 9 MR. LAWTON: As Walt mentioned, there

 10 were a couple of extensions granted. I think the

 11 thinking was that the rule originally went into

 12 effect was approved in April with an effective

 13 date of October and then there was an extension

 14 granted in October and a second granted in

 15 December, a third request in January and I think

 16 the decision was there wasn't a need for a third

 17 extension so the rule went into effect. The

 18 reporting that Walk was talking about was in

 19 connection with the third request for extension.

 20 Subsequently there were some press reports about

 21 there wasn't compliance. Our informal view of it

 22 is there's been very good compliance and we've
 71

 1 talked to firms and we've talked to

 2 clearinghouses. We think there is very good

 3 compliance, but we saw these press reports so

 4 therefore a letter went out to all the firms

 5 saying please give us some data about the actual

 6 extent of our compliance since the effective date

 7 which was March 1 and then the shortened timeframe

 8 as of February 1 and then March 11 which was the

 9 opening of the clearing mandate. The current

 10 letter that's out there is asking for reports from

 11 the firm about compliance since the effective date

 12 of the rule. We expect to be getting those

 13 reports shortly and we will be reviewing them and

 14 we will be in consultation with FIA and the firms

 15 to talk about the data that we get to see what

 16 kind of results we get from the reporting and if

 17 there are anomalies what the situation is. Again

 18 informally it looks like there is probably very

 19 good compliance out there right now.

 20 MR. LUKKEN: I would add to that that we

 21 appreciate John's efforts to get more data here,

 22 but the truth is we can be compliance if we set
 72

 1 things to auto reject and so at 60 seconds we can

 2 auto reject and be in compliance with this rule.

 3 I think that the alternative costs to this is that

 4 had we had a bit more time either to do credit

 5 checks or if there are maybe operational issues we

 6 might have had to auto reject, and maybe Supurna

 7 can even talk to the problems when the rejection

 8 occurs that that creates uncertainty with

 9 resubmissions of swaps. That was the only issue.

 10 It's not an issue of getting into compliance for

 11 our folks. Our folks can do that through auto

 12 reject. But the question is what the alternatives

 13 could have been had we had more time.

 14 COMMISSIONER O'MALIA: John, why is it

 15 that the January 29 letter, the alternative

 16 compliance that was going to provide reports on

 17 any exceptions to the trade, why wasn't that

 18 adopted or accepted or even responded to?

 19 MR. LAWTON: I think the view was that

 20 there had been plenty of notice and that it was

 21 appropriate particularly to give some lead time

 22 before the clearing mandate started to have the
 73

 1 straight-through processing rule in place.

 2 COMMISSIONER O'MALIA: But they weren't

 3 asking for relief to the rule. They were saying

 4 that if they had thresholds over 90 percent that

 5 they wouldn't have to auto reject and they could

 6 send you what exceeded that -- they were going to

 7 be in compliance. You were giving the

 8 straight-through.

 9 MR. LAWTON: They were asking for a

 10 later effective date, essentially saying we'll

 11 give you reports and you can review the reports

 12 and we expect to be largely in compliance but

 13 we're asking for the effective date to be later.

 14 COMMISSIONER O'MALIA: Supurna, do you

 15 have any thoughts on either one of these rules?

 16 MS. VEDBRAT: How long do I have?

 17 COMMISSIONER O'MALIA: I know

 18 Commissioner Sommers wanted to ask some questions,

 19 so you have until she gets back.

 20 MS. VEDBRAT: I think that it's

 21 important to understand that from a futures

 22 perspective the system has been working. If we
 74

 1 were given enough time that the solution that

 2 being developed for swaps as far as credit limit

 3 checking goes, if that was allowed to materialize

 4 it could be extended to futures. And I think that

 5 that would be at least from a BlackRock

 6 perspective a much more optimal solution that

 7 putting in place an assessment letter which if you

 8 can elaborate a little bit about what that means

 9 it would help us. That's on the futures side

 10 something that we would like the Commission to

 11 explore to give an extension. As far as the

 12 rejections of trades taking place, it's important

 13 to understand that in this new world of cleared

 14 swaps a trade floor will interact with six

 15 different entities, a bilateral trade, that's

 16 between two parties. And the interoperability of

 17 the six entities is critical to straight-through

 18 processing. The industry infrastructure is not

 19 ready to allow for a rejected trade to be

 20 resubmitted in a timely manner at this state. I

 21 think given a couple of months the providers will

 22 have the solution that if a trade rejected the
 75

 1 buy-side or the client leg of the trade, or

 2 actually it could even be the executing dealer,

 3 would be able to efficiently resubmit the trade

 4 which would ultimately lead to the trade clearing

 5 versus a trade break and that's very important.

 6 The other piece that I think hasn't been

 7 mentioned here that I want to draw some attention

 8 to is as this rule is being implemented, auto

 9 rejection may be put in place in some FCMs that

 10 put that in place. The liability of a trade

 11 rejection and a trade break has been passed on to

 12 the end user and that's not trivial. It's been

 13 passed on through documentation if an FCM has not

 14 been able to comply with the 60-second rule or

 15 there's a carve out, that if there is a trade

 16 rejection because of this the FCM wants

 17 indemnification of any market loss or any trade

 18 loss associated with that. The buy-side whether

 19 it's an asset manager or it's the end users, we're

 20 really not in a position to fight this. At least

 21 I'd like to let the Commission know that this is

 22 part of the documentation and given that the
 76

 1 mandate for clearing, March 11 has already gone by

 2 and June 10 is around the corner, there is really

 3 no room for negotiation from the buy-side. If

 4 possible do consider all of these as extensions

 5 that are required or requested as well as

 6 understanding that in the swap world we will have

 7 a solution that ultimately can be applied to

 8 futures.

 9 MR. LAWTON: Can you describe who the

 10 six entities are?

 11 MS. VEDBRAT: The executing dealer, the

 12 client, ultimately there will be a SEF and the

 13 will go to an affirmation platform. The

 14 affirmation platform will send the trade to CCP,

 15 the CCP will send it to an FCM, vice versa and

 16 there will be an SDR. John, I can send you the

 17 layout because we've got a layout that shows the

 18 entities. All I'm saying is that ultimately I

 19 think we're going to have an SDP process that's

 20 going to work efficiently, but just allow time

 21 that these pieces of interoperability are allowed

 22 to be developed in the optimal way and lack of
 77

 1 time doesn't make us end up with a solution that

 2 is suboptimal because it's not easy to rectify it.

 3 COMMISSIONER O'MALIA: Do you want to

 4 touch on the allocation issue under 1.73? Do you

 5 have any perspective on how difficult it will be

 6 for FIA to organize a repapering to do a risk

 7 check?

 8 MS. VEDBRAT: The risk check for the

 9 futures component of it is going to be a very

 10 onerous task because today what we have is we have

 11 agreements in place with executing counterparties

 12 and FCMs that are essentially tri- party agreement

 13 that essentially allow for the transfer of risk

 14 once a futures trade is executed to the clearing

 15 member. These are done on an umbrella basis and

 16 third-party agreements. In order for us to be

 17 able to repaper that for futures where there is a

 18 credit limit given at the account level by the

 19 clearing member and then the executing dealer

 20 having access to that will require almost the same

 21 paperwork that we have in place today that we have

 22 to do for swaps. The proposal was if we had a
 78

 1 credit hub in the middle and the credit hub were

 2 to receive limits from every FCM at the account

 3 level, at the allocation level or subaccount level

 4 and then that hub were to be used to do any type

 5 of limit checking when an executing dealer was

 6 going to trade and the account manager were to do

 7 a subscreen screening on a pretrade basis. That

 8 would allow for a lot less paperwork or repapering

 9 but the right screening that that should satisfy

 10 the rule. From a risk perspective, at least in

 11 futures we don't necessarily think we are solving

 12 for anything.

 13 COMMISSIONER O'MALIA: Greg?

 14 MR. WOOD: In response to that, I worked

 15 with Walt extensively on the futures side of 1.73

 16 particularly with regard to give-ups. As Walt

 17 alluded to, we did have a vendor showcase where we

 18 had several people come in to discuss their

 19 proposals for compliance around the give-up

 20 component of 1.73 for futures. One of the

 21 participants we had there was talking very much

 22 about a central credit check model which their
 79

 1 proposal was to integrate that into the matching

 2 engine for the exchange. One of the things that

 3 we were concerned about and it certainly became

 4 clear when we've had discussions with the various

 5 solution providers who were trying to come up with

 6 approaches for credit checking in futures is it

 7 would be a radical change to the way the futures

 8 trading environment has worked on several levels.

 9 Firstly, it would require either the introduction

 10 of credit checking at the venue or a separate

 11 credit hub that would be called either by the

 12 venue or by the execution systems that people are

 13 using. That would certainly take probably years

 14 rather than months to implement into the futures

 15 environment which is why we went for the solution

 16 that meets the requirements of the rule with

 17 regard to the screening agreements based on the

 18 fact that we actually do pretty adequate credit

 19 checks on a near trade basis at most of the FCMs.

 20 MS. VEDBRAT: I think that's why this

 21 assessment letter that was discussed is important

 22 to understand what does that entail.
 80

 1 MR. WOOD: Do you want to speak to that

 2 with regard to what the actual screening agreement

 3 is?

 4 MR. LUKKEN: It very closely follows the

 5 actual rule. It requires that the ultimate

 6 clearing firm and the account manager enter into

 7 an agreement on risk limits and those risk limits

 8 as John and his division have talked about are

 9 very flexible and what those could be, they could

 10 be max order sizes, they could be vet finger

 11 limits, they could be a variety of different ways

 12 of measuring risk. Once that agreement is in

 13 place then the account manager would be required

 14 to screen for that with the ultimate customer.

 15 It's a page and a half. I apologize, Supurna, we

 16 are socializing this real time now with the

 17 buy-side community and started last week with the

 18 associations, but this is something where we're

 19 faced with a dilemma of either negotiating

 20 thousands of agreements with account managers or

 21 trying to in bulk discuss this and come to a

 22 standardized form that people could agree to. So
 81

 1 we're socializing that right now and we'd

 2 certainly welcome the feedback of BlackRock and

 3 others.

 4 MS. VEDBRAT: In the assessment letter

 5 if the credit limit agreement is between the asset

 6 manager and the clearing member and those limits

 7 now become the responsibility of the asset manager

 8 to be able to screen, the asset manager needs a

 9 solution of how they do that. The other thing is

 10 if I were to use swaps as an example because

 11 currently we are working with seven FCMs to get

 12 the unit of measure and to get an easy for us to

 13 be able to check credit limits, if I were to just

 14 use that as an example of how difficult it is to

 15 get some form of standardization across the

 16 industry, that it's not really fair to assume that

 17 the asset manager community or the buy side will

 18 be able to comply with that letter by June 1.

 19 MR. LUKKEN: I agree. I'm just stating

 20 what the rule states. The rule states that the

 21 clearing FCM enters into an agreement and the

 22 account manager has to screen. That's what the
 82

 1 rule says. So we're just following what the rule

 2 states. I agree that difficulty levels are high

 3 here, but we're trying to stick to as close to the

 4 rule. This is not something that we're imposing.

 5 It's something the rule is imposing.

 6 MR. WOOD: And from the perspective of

 7 the FCM community, we're trying to be compliant

 8 with the rule, the qualitative aspects of risk

 9 management between an asset manager such as

 10 yourselves and us as a clearing broker is still

 11 something that we're not trying to sidetrack.

 12 That is something that is very much part of the

 13 discussion between you and your clearing brokers

 14 and it's something that the screening agreement

 15 that we put in particularly around 1.73 and then

 16 the negative consent on bunched orders, these

 17 don't override the conversations that you would

 18 have with the risk managers at your clearing

 19 brokers because we very actively have risk

 20 management in place for your futures trading in

 21 your accounts. The word and the approach that's

 22 been agreed with on give-ups and bunched orders
 83

 1 allow us more flexibility around how we implement

 2 them, but we definitely implement them in

 3 discussion with yourselves.

 4 MS. VEDBRAT: The other thing as to my

 5 concern about some of these solutions that are

 6 being proposed, today from a best ex perspective

 7 we can execute with a number of executing dealers

 8 and then we are able to give up those trades on an

 9 individual account level to the primary clearing

 10 member for that fund. As these rules break down,

 11 one concern I have is that are we being put into a

 12 state that we can only execute with the executing

 13 dealer that is linked or affiliated with the

 14 clearing member to that fund because from a

 15 pricing perspective, a best ex perspective, that

 16 would not be an area that we would want to end up

 17 in.

 18 COMMISSIONER O'MALIA: John, any words

 19 of advice or wisdom?

 20 MR. LAWTON: Certainly not wisdom. I

 21 don't think the problem that you just identified

 22 would be a problem. I think the rule contemplates
 84

 1 that the firms decide they want to execute through

 2 firm A, they want to clear through firm B or maybe

 3 the client wants to clear through firm B, so there

 4 is no limitation on separating out who ultimately

 5 clears from who you execute through.

 6 MR. TERRY: I work for a small credit

 7 fund in the city and an issue that we've recently

 8 run into is we spend an inordinate amount of time

 9 negotiating our prime brokers and ISDA documents

 10 and there's a timely fashion by which we go

 11 through it and we've now started to negotiate

 12 these execution agreements and the underlying

 13 clearing agreements and it's become a very, long

 14 drawn out process and from both a fiduciary

 15 perspective as well as an expense perspective

 16 we're in a tough position because for reasons I

 17 now better understand, a lot of the clearing

 18 entities we're talking to are refusing to deal

 19 with the issue of what happens if there's a trade

 20 that's kicked back. We bear all of the risk. As

 21 the CEO of my firm I need to determine with our

 22 traders can we live with this risk? These are
 85

 1 risks that we've clearly negotiated around in all

 2 the other trading agreements and now we're focused

 3 to deal with these. I don't know how to quantify

 4 that risk. From a fiduciary perspective I don't

 5 know how to quantify that risk and then from a

 6 best execution perspective it puts us in a very

 7 tough position. It has been an interesting 3

 8 weeks to 4 weeks that we've been doing this

 9 because it's forced us into a situation that we

 10 have not been in before which is we cannot get any

 11 reasonable discussion around the negotiation. You

 12 guys are multiples and multiples bigger than we

 13 are, but I would argue that my situation is very

 14 similar to those folks who are coming through June

 15 2 and it's a significant problem. I thought that

 16 that was worth mentioning.

 17 MS. VEDBRAT: I was highlighting that

 18 more from the perspective of buy side in general.

 19 It's a risk that is not necessarily brought to

 20 light through the regulation, but it's done

 21 through the documentation. It's important to note

 22 that a lot of these risks are being passed on to
 86

 1 the end user.

 2 COMMISSIONER O'MALIA: I was just told

 3 that Commissioner Sommers is coming down and she

 4 wants to ask a few questions on this topic. John,

 5 if you'll share with Ananda and everyone else over

 6 in your division the challenges we've heard here

 7 today and if you could articulate specifically

 8 what it is you want and by when and how you

 9 recommend they get there, I think they would find

 10 that very useful.

 11 MR. LAWTON: We'll do that.

 12 COMMISSIONER O'MALIA: Have you

 13 submitted any relief requests on timing at this

 14 point? I know you're working through it.

 15 MR. LUKKEN: I think like I mentioned,

 16 in John's shop they've been very open to

 17 discussions on this and Ananda, so we're waiting

 18 to get more data through these letters. Again if

 19 it's showing trends that we anticipate, then we

 20 would love to offer our help in how to develop an

 21 exceptions process to avoid these types of what I

 22 would call unnecessary rejections.
 87

 1 MS. VEDBRAT: If we have another minute,

 2 I would like us to be able to discuss the numbers

 3 that we're seeing as far as rejections go today,

 4 obviously there is very little voluntary clearing

 5 taking place relative to mandatory clearing and

 6 also like the March -- active funds, most of the

 7 buy side is going to start to clear by June 10.

 8 One concern that we have is if there was a market

 9 event in which case we would fully expect clearing

 10 members and everyone to start tightening the

 11 limits that they're distributed to us, the level

 12 of the percentage of rejections will go up a lot

 13 more than business as usual and has the Commission

 14 contemplated what would be the state of the market

 15 if our rejection rate went from 1 percent to 5

 16 percent in a day because we will have a lot of

 17 outstanding market risk at that point not knowing

 18 really who is going to be the bearer of the loss.

 19 Then the other piece that I'd like the Commission

 20 to also take into account, this rule will make the

 21 buy side lean more toward a handful of SCMs

 22 because we're going to want to limit any type of
 88

 1 operational loss or market loss that we have. Is

 2 it in the best interest of the market to have a

 3 concentration of clearing members for swap

 4 clearing or to allow for a little bit more of a

 5 distributed model?

 6 COMMISSIONER O'MALIA: Let me do a

 7 little bit of housekeeping here. We're over. We

 8 started late. We're going to blow through this

 9 break. Those of you who don't know where the

 10 restrooms are, they're down that way. There is

 11 food that way. We're going to try to get back on

 12 schedule. After Commissioner Chilton comes in

 13 we're going to rotate in the next panel and begin

 14 asking those questions right away. Obviously want

 15 you to hear the testimony and the input, but we

 16 are going to go through this break and try to get

 17 back on schedule so we can get to lunch. Maybe if

 18 we can have the next panel get set up and we can

 19 go from there. This is our third panel. This is

 20 the panel where we're going to hear from the

 21 market participants. This is the time to get into

 22 the big data question. Part of the challenge is
 89

 1 making sure everybody submits all of the data

 2 correctly in the same manner and it's harmonized

 3 and it's well understood so when the SDR receives

 4 it, it can easily match it, compare it, analyze it

 5 and give the Commission that same ability once we

 6 get ahold of the data. We've heard from a number

 7 of people in implementing Part 43 which is

 8 real-time reporting, Part 45 which is the

 9 regulatory reporting and a much more thorough,

 10 complete set of data and Part 46 which is the

 11 historical reporting of swaps. There have been

 12 lawsuits threatened. There have been extensive

 13 discussions about who has to report to whom in the

 14 SDR community, all of which has been going on

 15 while everybody has been trying to report and

 16 trying to understand the rules and the form and

 17 the format that they have to report to the SDRs.

 18 In the third panel I want to have the opportunity

 19 to hear from the market participants. I think

 20 we've got a good representation of different end

 21 users, buy side, sell side, et cetera, who can

 22 speak to some of these issues and the challenges
 90

 1 that they've dealt with in complying with our

 2 rules and the timetables we've given them. If

 3 nobody has any objection, I think we're going to

 4 start on my left, your right, and just walk down

 5 the line unless you guys have already drawn straws

 6 and you have a different format.

 7 MS. SMITH: Dana Smith. I'm speaking on

 8 behalf of the working group of commercial energy

 9 firms. My comments are not by any means on behalf

 10 of NextEra individually or any specific working

 11 group. Some of the issues that we've been facing

 12 have been with the rules and where the rules

 13 require some dataset and then when you go to

 14 implement with the SDR, the SDRs have an

 15 additional dataset that they're requiring. It

 16 just makes things a little difficult to

 17 communicate back and forth.

 18 COMMISSIONER O'MALIA: Do you want to

 19 elaborate on that? We have what the rule says.

 20 Is it you're complying with what you read in the

 21 rule and then when you submit to the SDR, they're

 22 saying we interpret the rule in a different way?
 91

 1 MS. SMITH: They also have those same

 2 requirements, but they have their own requirements

 3 because they're trying to utilize existing

 4 platforms that they already have, whereas we have

 5 been communicating with those SDRs previously on

 6 those existing platforms, it was only a small

 7 dataset that we were communicating. There are

 8 issues with that, and then with the fact that each

 9 of our ETRM systems are highly configured. They

 10 were initially out of the box, but over the years

 11 the systems have been changed to meet each

 12 company's needs and also as products evolve over

 13 time, you're not trading the same products you

 14 were 10 years ago and every year a new product

 15 comes out and everybody specializes and changes

 16 their systems in their own way. So now that we're

 17 all having to try and move everything together and

 18 standardize, whereas there is no MISMO standard

 19 right now for energy. So it's been a longer

 20 process and a more difficult process than

 21 initially anticipated.

 22 COMMISSIONER O'MALIA: Are you in
 92

 1 compliance, do you believe? What's the status of

 2 this?

 3 MS. SMITH: I believe everyone has done

 4 the best they possibly can to be in compliance

 5 when the April 10 was the deadline. I think the

 6 relief was much needed and appreciated to give us

 7 more time to ensure that the data that we are

 8 reporting is accurate when we're reporting stuff,

 9 it's just are we reporting what you want?

 10 COMMISSIONER O'MALIA: Have you received

 11 any feedback from us?

 12 MS. SMITH: Not recently.

 13 COMMISSIONER O'MALIA: How recently?

 14 MS. SMITH: I said not recently.

 15 COMMISSIONER O'MALIA: Since reporting?

 16 MS. SMITH: No.

 17 COMMISSIONER O'MALIA: Can you give us

 18 an example of in terms of harmonizing it? Is it

 19 the way they want it reported? Is it what's in

 20 the fields that they want reported? And it's not

 21 what they want, it's what we want and the way

 22 they're complying and demanding of you to comply.
 93

 1 MS. SMITH: I think the end users read

 2 the rule and the feedback that they've gotten has

 3 been one thing, in the way SDRs have read the rule

 4 and what they're required to do is something else.

 5 And then I think the way the CFTC meant the rule

 6 to be is probably something completely different.

 7 You have to make assumptions and document and then

 8 move forward and hope that you're doing your best.

 9 COMMISSIONER O'MALIA: Would a guidebook

 10 similar to what we did with large trader reporting

 11 at this level be helpful to you?

 12 MS. SMITH: I'm sure it would be

 13 helpful, although it would take some time to get

 14 through it, but, yes.

 15 COMMISSIONER O'MALIA: This was smaller

 16 than that and then it grew, but that's one of the

 17 elements that we started with. Is there anything

 18 else to add on that point?

 19 MS. SMITH: No. Thank you.

 20 COMMISSIONER O'MALIA: Raymond?

 21 MR. HANSON: Thank you very much.

 22 Raymond Hanson from Credit Suisse. I think I
 94

 1 would highlight our challenges with where we are

 2 today and the areas we've either done well or can

 3 improve on in three major areas. The first is

 4 extraterritoriality. There remain a lot of

 5 challenges around the clarity of the rules. Just

 6 a check with the team the other day, we have

 7 approximately 140 use cases as a non-U.S. swap

 8 dealer that we have to ensure we comply with.

 9 That's a significant amount of complexity in our

 10 system and that's being done without the final

 11 guidance on paper which we'll then have to

 12 revisit. That's a real challenge for us in terms

 13 of implementing a solution we can be confident in,

 14 but also having the dependency on that final set

 15 of rules to review that. Our preference would

 16 certainly that we can make those rules as

 17 normalized across the global jurisdictions as

 18 consistent as possible so that we don't have one

 19 engine to meet all our obligations in the U.S. and

 20 another one for the European regulations and

 21 another one for each one of the Asian regulators

 22 because ultimately my understanding is the goal
 95

 1 would be to have one set of data consistently

 2 represented that any regulator who needs that when

 3 appropriate can see it. I think that's the first

 4 concern for us.

 5 I think also that because the rules have

 6 stated single-side reporting which is we report

 7 one side of the transaction reports, it's

 8 determined who the reporting parties are to

 9 report, whereas when you look at the European

 10 regulations and some of the other regulations, you

 11 look at how TRACE operates, it's two-side

 12 reporting. That introduces a dependency on both

 13 sides having a consistent understanding of their

 14 status as a U.S. person. Whereas if both sides

 15 are reporting, where those disagreements, where

 16 those misunderstandings or lack of clarity exists,

 17 at least both sides can meet their obligations

 18 from their perspective without worrying about

 19 whether or not the entire industry, literally

 20 every dealer and every firm, is in synch. I think

 21 although it would be difficult at this point to

 22 ratchet back the single-side reporting, that is
 96

 1 something to keep in mind is a challenge for us.

 2 I think the other I would highlight

 3 would be operational issues. I think while the

 4 aspiration of having a U.S. eye on all

 5 transactions through the entire trade flow is

 6 certainly a good one in terms of providing clarity

 7 and traceability. What we've seen is it has

 8 introduced a lot of operational issues because we

 9 now have to think about reporting which was

 10 historically a separate logical function. You now

 11 have to think about any issue in reporting, will

 12 that have a knock-on impact in the confirmation

 13 process. We've been working through that making

 14 sure those issues are identified and they're

 15 addressed, but that's certainly been a challenge

 16 for us as a firm to make sure we're one step ahead

 17 of that and ultimately we're not creating

 18 additional operational risk while being compliant

 19 with reporting.

 20 The third one I would talk about really

 21 be around the focusing in the sequence. I know,

 22 Commissioner, you've in many of your speeches
 97

 1 talked about big data and the challenges there.

 2 The fact that we are trying to address issues

 3 across five major asset classes and across all the

 4 products in the asset class makes it very

 5 difficult for us to get single products or single

 6 asset classes to what I believe is the level of

 7 detail and level of consistency, something as

 8 simple is it 3M Lib, 3M LIBOR, is it 3M space

 9 LIBOR, something that simple which to me is what

 10 really drives the usability of the data, to me

 11 focusing on that and understanding the

 12 Commission's preference in terms of where we focus

 13 our efforts in the short term rather than a broad-

 14 brush approach which we have today where we have

 15 food-faith compliance expiring in July and

 16 therefore our focus has to be on all the issues

 17 and all the product types and all the asset

 18 classes. Any guidance we can receive in terms of

 19 where to focus our efforts as an industry I think

 20 would help allow us to get some of those key

 21 product sets in a healthier state and the data in

 22 a more usable state.
 98

 1 CHAIRMAN O'MALIA: You want to touch on

 2 the USI issue? I don't understand that as well.

 3 So can you explain what the challenge --

 4 MR. HANSON: So the challenge with the

 5 USI is that there's a requirement that the USI is,

 6 first of all, generated based on the determination

 7 of who is the reporting party. So in single side

 8 reporting, two sides of the trade, one -- you

 9 know, that decision then is used to drive the name

 10 space of the USI. And that name space ties then

 11 back to the U.S. jurisdictions, so we have a

 12 dependency on, first of all, it being a U.S.

 13 counterparty involved in the trade, and then you

 14 generate the USI.

 15 You need to place that USI on things

 16 like the confirmations, for example. By doing

 17 that, what you're doing is introducing a

 18 dependency on successfully reporting the trade or

 19 you're reporting system being operational. For

 20 non-swap dealers, you know, the SDR is responsible

 21 for creating the USI, so you now have an

 22 operational challenge of not only ensuring that
 99

 1 the trade was successfully processed internally,

 2 but that the round trip to the SDR was successful.

 3 They return back the USI that they generated.

 4 You then need to apply that on the

 5 confirmation, which operationally means

 6 essentially you have to ensure that your systems

 7 can handle that state, management that state or

 8 handle the ability to wait for a successful USI

 9 before processing the trade further downstream,

 10 you know. So it's something we're working

 11 through, but it's certainly something that may

 12 have been either an unintended consequence or just

 13 a challenge in terms of making sure that meeting

 14 reporting obligations does not impact our ability

 15 to issue a confirmation t clients and ultimately

 16 move the money at the end of the day.

 17 CHAIRMAN O'MALIA: On the issue related

 18 to 3M LIBOR, just the harmonization of data is

 19 something that Dana talked about as well. Do you

 20 have any recommendations? What can we do to help

 21 you on that?

 22 MR. HANSON: So I think the challenge
 100

 1 that I speak first, but certainly I would assume

 2 across industry, is the number of products. We

 3 have five asset classes, and the number of

 4 products, there is a limitation in terms of how

 5 many experts you can actually throw at this and

 6 solve the problems collectively in industry in a

 7 relatively short period of time.

 8 So I would think that having a focus on

 9 a certain set of products where we're really

 10 looking to get that data consistent, get the

 11 industry mobilized to focus on those knowing that

 12 that's where you want to see the energy spent

 13 rather than working on good faith compliance all

 14 the way out to wind down businesses and other, you

 15 know, trades that, you know, you may print a trade

 16 once or twice a week. The value of that in the

 17 real time tape is most likely much less than

 18 getting consistent data on those trades that are

 19 printed in high volume.

 20 So helping us to understand your focus

 21 areas and where you'd like us as industry to focus

 22 over the next six to 12 months.
 101

 1 CHAIRMAN O'MALIA: John?

 2 MR. LIFTIN: I'm John Liftin. I'm

 3 General Counsel and Managing Director of the DE

 4 Shaw Group. I appreciate the chance to be here

 5 and give our perspective on some of these SDR

 6 reporting issues.

 7 Just by way of background, we are a buy

 8 side firm. We serve predominantly institutional

 9 investors. We have over 1,000 employees. We're

 10 based in New York. We have offices across the

 11 globe, and we have a significant presence in the

 12 world's capital markets.

 13 We have been a strong advocate of many

 14 of the Dodd-Frank reforms, including central

 15 clearing of liquid and standardized swaps, and

 16 reporting to the CFTC and the SEC. We believe

 17 that this will advance Dodd-Frank's objectives of

 18 promoting market integrity, increasing

 19 transparency, and fostering competition. And we

 20 invested many months in and many person hours in

 21 getting ourselves ready for swap clearing and

 22 reporting, and we've already cleared at this point
 102

 1 several hundred interest rate and credit swaps

 2 since the mandatory clearing requirement has been

 3 put in place.

 4 And I would just observe that the

 5 burdens that we've been subjected to do this have

 6 been far in excess of the estimates that the

 7 Commission put forth for people like us, non-swap

 8 dealer, non-major swap participants.

 9 And in addition to what I just said,

 10 we're also voluntarily clearing more swap products

 11 than are currently required by your clearing

 12 mandate. We consistently support reasonable

 13 reporting requirements because we think it's

 14 important that regulators have meaningful data on

 15 which to base policy decisions. I know that's

 16 something you've been addressing. And also firms

 17 like us want to have better information to manage

 18 our investors' portfolios.

 19 As we've e moved into the implementation

 20 stage, though, it hasn't been without challenges,

 21 and we wanted to give a few observations based on

 22 our experience that we hope will help you in your
 103

 1 oversight and supervision of these forums.

 2 A key element to ensuring market

 3 confidence in these systems is to ensure that all

 4 the parties involved in overseeing swap trades --

 5 I'm talking about DCOs, and SDRs, SROs -- that

 6 they have robust systems and processes for the

 7 protection of confidential data in place prior to

 8 --

 9 CHAIRMAN O'MALIA: John, can you pull

 10 your microphone a little closer?

 11 MR. LIFTIN: Sure, be glad to. Sorry --

 12 prior to commencing the clearing and reporting of

 13 swaps.

 14 Now by way of example, and you may know

 15 this, we and a number of other firms recently had

 16 certain sensitive swap data exposed when a systems

 17 error at one of the SDRs inadvertently allowed

 18 some market participants to access data related to

 19 certain cleared swaps.

 20 Now, I don't mean to overstate this. It

 21 was not a Twitter attack. It was, we believe, an

 22 isolated instance, but it certainly got our
 104

 1 attention. I know it got the attention of the

 2 SDR. And we just think it's an example of what

 3 can go wrong as we begin to try out these new

 4 processes.

 5 Another example of the challenges, we

 6 experienced certain difficulties in trying to

 7 prepare our own systems for reporting on April

 8 10th, and, in particular, we weren't really able

 9 to have an opportunity perform sufficient testing

 10 of the swap reporting system in a timely fashion.

 11 Now, we appreciate that the Commission's just in

 12 time extension of the deadline for historical

 13 reporting, and we hope that that additional time

 14 will be used by the SDRs to allow for greater

 15 testing of swap reporting functionality and

 16 provide them time to test for confidentiality,

 17 security, and the readiness of the systems in

 18 general.

 19 I'm sure you know this, but I just want

 20 to emphasize that these trade details are very

 21 sensitive market data. They require the

 22 investment of significant research, time, and
 105

 1 resources on our part to create. And we consider

 2 this proprietary information highly valuable

 3 because if a third party were to get access to it,

 4 they could reverse engineer it and emulate our

 5 trading strategies, or with knowledge of our

 6 positions, use it to trade against us, or both.

 7 And our intellectual property is

 8 absolutely critical to our franchise. It's the

 9 principle reason that investors entrust us with

 10 their money. So that's why I'm here to make this

 11 point.

 12 What we would ask of you is that you

 13 work closely with the new SDRs to ensure that they

 14 strengthen their systems and confidentiality

 15 protection of the trade data that's reported to

 16 them. I would respectfully suggest that these

 17 procedures could include ongoing surveillance and

 18 monitoring of the SDRs, user access, routine

 19 testing of the systems, rigorous supervisory

 20 procedures and obligations, third party validation

 21 of their information, security, and privacy

 22 controls, and timely self-reporting obligations in
 106

 1 the event of information security breaches or

 2 leaks. We believe that strong confidentiality

 3 protections like these will foster an atmosphere

 4 of stability and trust among the regulators and

 5 market participants.

 6 I would just also note that a side issue

 7 that relates to this is with the reporting forums,

 8 like PF, CPO, PQR, and other forums regulators,

 9 such as yourselves, as well as the SEC, the FSOC,

 10 and the SROs, are receiving a tremendous amount of

 11 systemic risk information from market

 12 participants. We believe that privacy, data

 13 protection has to extend to regulators and SROs as

 14 well, and we hope that that will be a key focus

 15 for all of the regulators. I'm aware that the

 16 Managed Funds Association is planning to submit a

 17 letter very shortly that raises these issues and

 18 provides specific recommendations along these

 19 lines.

 20 So to conclude, we want to see swap

 21 reporting and clearing implemented successfully as

 22 does the Commission, and the DCOs, and the SDRs.
 107

 1 As implementation unfolds, we do expect there will

 2 be hiccups. We realize not all of them can be

 3 prevented. However, we think with careful

 4 oversight and further rulemaking by the CFTC, many

 5 of these potential pitfalls can be avoided in the

 6 future.

 7 And we think a seamlessly functioning

 8 national system of swap reporting and clearing

 9 will encourage other market participants to clear

 10 and report swaps. And this will in turn result in

 11 increased market stability and benefit all market

 12 participants.

 13 So thank you very much for the chance to

 14 address these issues.

 15 CHAIRMAN O'MALIA: Thank you very much.

 16 I think those are, in light of what we're going to

 17 be talking about later today, very important as

 18 well to maintain the privacy at the SDR and in

 19 this building as well. So thank you very much for

 20 those comments.

 21 Tara?

 22 MS. KRUSE: Hi. Good afternoon. I'm
 108

 1 Tara Kruse. I work at Morgan Stanley, and I'm

 2 here today on behalf of the International Swaps

 3 and Derivatives Association.

 4 I think in terms of the issue of further

 5 data standardization and SDRs, to me the largest

 6 challenge that we have faced and will face in

 7 further standardization is really coordinating a

 8 large number and array of market participants,

 9 right? We've got large and small swap dealers.

 10 We have end users, financial and non-financial

 11 parties, middleware providers, CCPs, execution

 12 platforms, a myriad of industry participants who,

 13 frankly, have different technological levels of

 14 sophistication and capacity. They frankly have

 15 different views and interpretations on what the

 16 rules mean and how they should be complying with

 17 them.

 18 And unfortunately we all are very much

 19 integrated. It's a complex web. Every trade may

 20 involve several market participants, and unless

 21 they agree on exactly what's supposed to happen

 22 with respect to that trade, it is difficult to get
 109

 1 to further data standardization. To the extent

 2 that any of those parties take a different

 3 interpretation, it makes it very difficult to

 4 comply with the rules.

 5 And as we each into more global

 6 regulation and other regulators are looking to

 7 fulfill their G20 requirements, it becomes a

 8 situation where you have multi- jurisdictional

 9 reporting across the board. So that web of

 10 complexity continues to increase. We have more

 11 participants from more jurisdictions who are all

 12 looking to have sort of a singular solution.

 13 And I think as we look to improve data

 14 standardization, we have to take into

 15 consideration multi- jurisdictional reporting. We

 16 can't have a different data standard for CFTC

 17 reporting versus other global regulators. We need

 18 some global coordination on this.

 19 I would also emphasize that time to

 20 market in terms of additional changes is very

 21 important. We are now live. We're in production.

 22 We have a very complicated and integrated system
 110

 1 that is helping us comply with our current

 2 reporting requirements. And to the extent we seek

 3 to make changes to improve that that are necessary

 4 and appropriate, we have to make sure those are

 5 implemented in a reasonable time frame that takes

 6 into consideration that complexity, the fact that

 7 it's serving multiple jurisdictions.

 8 And then we don't want to risk impacting

 9 what we've already built and impact our abilities

 10 to deliver what we're currently delivering to you.

 11 So I think proper change order management really

 12 has to be considered so that we phase in

 13 additional changes for standardization over time.

 14 CHAIRMAN O'MALIA: Now, in your capacity

 15 at ISDA, this is not organizing the industries not

 16 foreign to you all. So what opportunities can you

 17 take to help organize either standardization, some

 18 of these phasing requirements, common language

 19 issues. What's being done on that front to help

 20 things go on?

 21 MS. KRUSE: Well, I think trade

 22 organizations, trade associations like ISDA have
 111

 1 been really key so far, right, and will continue

 2 to be important. They are the means by which we

 3 bring together different market participants to

 4 try to solve these issues and come to agreement.

 5 But frankly, there's different organizations that

 6 represent different market participants.

 7 Not all participants come to the table.

 8 And frankly, despite our efforts to always get

 9 folks to agree, you don't always come to

 10 agreement. People have a different view. And in

 11 the end, it does require some further

 12 clarification and assistance from yourselves in

 13 order to get us all on the same page and ensure we

 14 are all complying with what your expectations are.

 15 CHAIRMAN O'MALIA: Is there an

 16 expectation that you could help us with a

 17 guidebook?

 18 MS. KRUSE: You know, I think guidebooks

 19 are great frankly. I mean, I know it's a lot of

 20 work. It's something that has been brought up in

 21 conversation with some of your staff along the way

 22 that because there are many different
 112

 1 interpretations and many nuances to reporting,

 2 that having a guidebook would be useful.

 3 And we understand that because of all of

 4 you've had on your plate, it wasn't something you

 5 were able to produce previously. But I think it

 6 is something as an industry we would welcome, and

 7 we would welcome your encouragement of all market

 8 participants to comply with what those guidelines

 9 are.

 10 I would also suggest that we make sure

 11 that to the extent that guidebook indicates

 12 changes to what we currently have in place, that

 13 we have a phased-in approach that works for all

 14 market participants. You know, it's one thing for

 15 a swap dealer to implement a change perhaps in,

 16 you know, a few months' time frame, but a smaller

 17 market participant may not have the same capacity.

 18 So we have to take into consideration time to

 19 market for all participants.

 20 CHAIRMAN O'MALIA: Ed?

 21 MR. PROSSER: Good afternoon. Thanks

 22 for the opportunity to participate here today. My
 113

 1 name is Ed Prosser. I'm the Vice President of

 2 Back Trading for Gavilon. I'm here on today on

 3 behalf of Gavilon and also on behalf of the

 4 Commodity Markets Council of which we are a

 5 member.

 6 CMC is a trade association that brings

 7 together exchanges in their industry counterparts.

 8 The activities of CMC members include the complete

 9 spectrum of commercial end users of all futures

 10 markets, including energy and ag. Our comments

 11 represent the collective view of CMC members.

 12 Gavilon is a supply chain management

 13 company that manages risk across the commodity

 14 spectrum. We are constantly in the market trying

 15 to find the optimal hedge. Most often, we find

 16 that in the organized futures exchanges.

 17 Infrequently, the best hedge is a swap, and more

 18 often than not, a cleared swap. But we do find at

 19 times that non- cleared swaps are counterparties

 20 or entities that we tend not to be swap dealers or

 21 major swap participants.

 22 Dodd-Frank established a reporting
 114

 1 regimen for swaps, which the CFTC has begun to

 2 implement. Reporting structure is complicated and

 3 confusing, particularly in regards to swaps

 4 between end users, something that is very common

 5 in physical commodity swaps.

 6 I don't think the Commission has an

 7 appreciation for the diversity of swap terms. If

 8 they could be standardized, they would be

 9 futurized. I know that part of the unspoken

 10 thought regarding swaps is that many are

 11 standardized, which may be true, especially in

 12 some of the financial products. But in the

 13 agricultural world, as was true in 2000 when CFMA

 14 was passed, there are still swaps being executed

 15 with customized terms on a daily basis by

 16 companies like Gavilon.

 17 While we fully support transparent and

 18 access to market data by regulators for robust

 19 market oversight, we question the value to the

 20 Commission of the vast expansion of data

 21 collection we've seen. Trying to turn the data

 22 that we report into information that is accurate
 115

 1 scares us. A bushel of corn is 56 pounds. A

 2 bushel of beans is 60 pounds. A bushel of oats is

 3 32 pounds. A ton here is 2,000 pounds. A ton in

 4 England is 2,200 pounds. A ton in the rest of the

 5 world is 2,204.6 pounds.

 6 The idea that we try to get all of that

 7 data pushed through and somebody makes

 8 conclusions, I don't know if we can even get the

 9 quantities of these swaps to standard. And the

 10 idea that we report that information, and there

 11 are some conclusions made about that information

 12 that might not be accurate, concerns us.

 13 Two examples of Dodd-Frank related

 14 initiatives come to mind that are very troubling

 15 to Gavilon, the CMC and the entire commercial

 16 place. The first issue appeared in the position

 17 limit's final rule that was ultimately struck down

 18 by the courts. The rule required the reporting of

 19 daily physical positions to justify hedge

 20 exemptions, which under the rule were only

 21 available to commercial market participants rather

 22 than the historical requirement of monthly
 116

 1 physical position reporting. The change would be

 2 virtually impossible for a global commodities firm

 3 to comply with.

 4 The industry viewed the change as

 5 necessary and overly burdensome, given that the

 6 Commission has always had the ability to ask for

 7 data to justify a hedge exemption. Does the

 8 Commission really have the resources, given all

 9 the new market oversight responsibility, to

 10 analyze 30 times the data? Was there an issue

 11 with the monthly reporting regimen that would be

 12 resolved by daily positions being reported? We

 13 implore the CFTC to retain the historical

 14 requirement to report monthly positions in the new

 15 position limits proposal.

 16 The second significant expansion of

 17 current data requirements beyond the scope of

 18 Dodd-Frank is related to record keeping

 19 requirements in part one of Commission

 20 regulations. In accordance with Dodd-Frank, the

 21 CFTC expanded the record keeping requirements that

 22 existed for certain market participants in futures
 117

 1 to swaps. However, they also significantly

 2 expanded the written requirements and created a

 3 new requirement to report oral conversations.

 4 Compliance costs have already been

 5 incredibly substantial now that compliance with

 6 the written requirements is mandatory, and will

 7 only increase once compliance with the oral

 8 recording requirements become mandatory later this

 9 year. Again, the market is searching for a reason

 10 all of this new information must be maintained and

 11 archived.

 12 In addition, the rule is vague as to

 13 which communication must be retained. So in an

 14 abundance of caution, market participants are

 15 effectively saving everything.

 16 Requests for clarification have not yet

 17 been answered. The CMC will be submitting a

 18 written request soon in a continuing effort to

 19 clarify and hopefully narrow the scope of what may

 20 be retained and, therefore, reduce compliance

 21 costs. I hope the Commission will consider the

 22 idea of how many transactions, how much contact
 118

 1 between counterparties goes in to make all of

 2 these swaps come together, and define further what

 3 leads to the execution of a transaction.

 4 The development systems, in order to

 5 comply, would be extremely burdensome and costly

 6 on non-swap dealers and end users. To Gavilon, it

 7 matters not that less than one percent of our

 8 transactions would be subject to the new reporting

 9 requirements. We would have to change our IT

 10 systems to handle all the required information,

 11 whether it is for one swap or 1,000. I suspect

 12 that our situation is similar to other companies

 13 in the same market position as us. The days of

 14 submitting a handwritten note on exceptions are

 15 behind us.

 16 When you think about the cost of

 17 compliance when spread over such few transactions,

 18 you can appreciate the cost of our compliance.

 19 The economics of compliance coupled with the

 20 complexity of reporting is sending a strong signal

 21 to simply use futures. When you add on the

 22 unknown potential risk associated with
 119

 1 non-compliance around swap reporting, the message

 2 to us to use only futures is amplified. Reporting

 3 will force an increase in transaction costs, and

 4 ultimately that cost will be passed onto

 5 consumers.

 6 In closing, we fully support the CFTC's

 7 effort to implement Dodd-Frank, bring the OTC

 8 markets into a regulated environment, and generate

 9 transparency in opaque markets. However, we

 10 implore the Commission to do so in a realistic

 11 manner that considers the regulatory benefits

 12 versus the market cost, and not to overly burden

 13 the end users these markets were created for.

 14 Thank you.

 15 CHAIRMAN O'MALIA: Thank you very much.

 16 Greg Wood will --

 17 MR. WOOD: Thank you very much,

 18 Commissioner O'Malia. Just for the record, I'm

 19 here representing the FIA in my capacity as

 20 President of the IT Division, and also as the

 21 Co-Chair of the FIXX Protocol organization's

 22 Global Derivatives Committee.
 120

 1 I was asked by various people at the FIA

 2 to just come and give a little sort of view on

 3 this topic, not specifically from the view of swap

 4 data repositories, but also -- but more from the

 5 issue of reporting requirements and data

 6 requirements.

 7 So looking ahead, you know, well,

 8 looking behind, we have large trader reporting

 9 where we have a guidebook that is very thick. You

 10 know, we have conversations about swap data

 11 repositories and the quality of data that is going

 12 into those repositories and its usability. In the

 13 future we also have OCR coming, ownership,

 14 control, and reporting. So these are very big

 15 requirements for many participants in the markets,

 16 not just for swaps, but also for the FCMs, for the

 17 buy side as well, you know. These requirements

 18 touch every participant in the market place.

 19 And the thing that we would like to ask

 20 or emphasize is we need to look at this in some

 21 sort of holistic manner. There's a lot of

 22 information here that actually overlaps, and there
 121

 1 are certain parts that are specific to particular

 2 requirements with regards to swaps and the

 3 challenges around representing swaps and wherever

 4 they can normalized, or, you know, or they remain

 5 bespoke. But there are also - there's a lot of

 6 details around who the participants are,

 7 particularly details around transactions.

 8 These are things that can -- if we were

 9 standardize approaches around particular discrete

 10 elements of our reporting requirements, we can

 11 actually reduce the cost of being compliant quite

 12 considerably across the firms. And I think that

 13 is something that everyone in this room is

 14 probably looking towards. We have ever-increasing

 15 budgets with regards to our regulatory

 16 requirements. And whatever we can utilize in most

 17 places is definitely of benefit to all of the

 18 participants in this room.

 19 So how do we do that? That's really

 20 where we're asking the question here. We don't

 21 expect someone, for example, like John Rogers to

 22 provide us with a spec to say this is the data
 122

 1 that I require. I mean, some guidelines would

 2 definitely be very useful. But then it comes up

 3 to the industry associations wherever it is, where

 4 it's fixed protocol, whether it's even FIA working

 5 as a coordination across the FCMs to then actually

 6 meet those data requirements.

 7 And I'm sure, you know, we can work

 8 together. I mean, often there is not going to be

 9 agreement, as Tara highlighted, but I think in

 10 general if we have guidance and we have a goal to

 11 what we can do, we can certainly work together to

 12 actually meet the requirements, and hopefully then

 13 present something that is usable and not just a

 14 massive overhead in terms of time and expense.

 15 So really, that's the gist of where I'm

 16 trying to come to here is, you know. There are a

 17 lot of overlapping parts. There are discrete

 18 components that I think we can easily work on

 19 together to identify participants, to identify

 20 transactions. And then there's instrument

 21 details, there's economic details, there may be

 22 more bespoke to certain types of data. But then
 123

 1 we can work within the certain organizations that

 2 look after those particular areas, and then we can

 3 fit into whatever framework that you can use.

 4 CHAIRMAN O'MALIA: Thank you very much.

 5 In trying to keep us on time, we're butting up

 6 against lunch, but I just want to kind of

 7 summarize some of these things, and I hope you all

 8 stay for the next panel, which will be after lunch

 9 where the SDRs will be in place to help. And John

 10 Rogers and Rick Shilts are going to be here to

 11 kind of frame the debate about the challenges

 12 we're facing.

 13 We've heard from you about your

 14 challenges, and let me just tick off the themes

 15 that I heard: Harmonization, operational

 16 challenges, privacy, kind of the complexity of all

 17 of this. There's a time and phase in that we need

 18 to recognize, as well as size. I think somebody

 19 has mentioned the size of the entity is going to

 20 matter in how we mandate this.

 21 Multi-jurisdictional, I think that's an

 22 issue that probably we need to get our house in
 124

 1 order, but understanding where other jurisdictions

 2 are in this debate and how we're going to meet up

 3 with them. The Chairman has talked about the

 4 multi-jurisdictional goal that he wants to solve.

 5 That's great, but maybe we can touch on that a

 6 little later on. But I think our problem is right

 7 in front of us just dealing with our own rules.

 8 And then the standardization and cost

 9 that you all solved and the best way to solve

 10 this. I mean, who's going to be in the room to

 11 sit down, identify what it is we want, and hen

 12 what is it is you can provide, and if everybody

 13 agrees on the term and terminology on that.

 14 Before we leave, let's just keep that in

 15 mind, and we'll talk to our SDR panels. If

 16 anybody wants to make a comment about anything

 17 they've heard today about this or anything else,

 18 go ahead and do it now. Otherwise, we're going to

 19 talk about it. Adam?

 20 MR. LITKE: Yeah, just a question. When

 21 we were working on the guidelines for the swap

 22 data repository reporting in the Data
 125

 1 Standardization Subcommittee, one of the things

 2 that was very clear was that it was intended that

 3 the SDRs should be setting the standard for what

 4 was reported to them to be able to answer the

 5 questions that the CFTC was going to ask of the

 6 SDRs.

 7 Yet I'd say approximately half of the

 8 members of this panel have said they were

 9 confused. Their interpretation of the rules was

 10 different than the SDR. And it was my impression

 11 that there was no room for the reporting parties

 12 to have any interpretation whatsoever of the

 13 rules, and that was supposed to be done -- the SDR

 14 was supposed to say this is what you're going to

 15 report to us if we're going to be the SDR. That

 16 has nothing to do with the timing or who reports.

 17 I fully understand the questions.

 18 And then there was supposed to be a

 19 negotiation between the SDRs and the Commission

 20 over what data could be reported when to the

 21 Commission for usefulness. And the rule was sort

 22 of written that way because the SDR -- each SDR is
 126

 1 allowed to set its own standards.

 2 Now I'm hearing that people are confused

 3 as to what they should report to the SDR, and I'm

 4 wondering why people are feeling that confusion if

 5 the SDR is supposed to be saying this is my

 6 standard.

 7 CHAIRMAN O'MALIA: Supurna?

 8 MS. VEDBRAT: Yeah, I'd just like, you

 9 know, add to the cost and standardization, if

 10 accessibility of the data could also be included,

 11 you know, because market participants may have

 12 requirements to be able to reconcile the data.

 13 And, you know, being a user of the SDRs, it hasn't

 14 actually been easy or, I should say, successful to

 15 be able to get the data, which would be the first

 16 step for us to be able to reconcile what's -- you

 17 know, what the SDRs have.

 18 CHAIRMAN O'MALIA: That's a great point.

 19 We've heard anecdotally that some people have

 20 submitted data, getting access to their data, what

 21 they submitted is incomplete or not there. Has

 22 anybody else had that problem?
 127

 1 MS. VEDBRAT: It's not easy to identify

 2 the data, where it came from, you know. One of

 3 the issues that we've experienced, you know. Then

 4 the other piece of it is, you know, it's unclear

 5 if the SDR -- you know, your own data, if that

 6 should be available free of cost or not. And what

 7 type of agreements are you required to sign, and

 8 is there, like, indemnification from privacy

 9 breaches and things like that that are in those

 10 agreements, you know, which become problematic

 11 again.

 12 MR. HANSON: If I could address more to

 13 the first question -- I've had less interaction

 14 with the SDRs in pulling back out data. I think

 15 there's really two issues. One issue is as a firm

 16 we have historic, I'll call them mappings, and

 17 information the way we structure trades is

 18 different, as Tara mentioned, and pretty much

 19 every other firm has a unique way somewhere in the

 20 systems across the breadth of the products. So

 21 there are areas where we as a firm need to

 22 identify where things are not mapped the way the
 128

 1 SDR would have them reported and resolve those.

 2 The challenge really for us is doing

 3 that across every asset class, every product out

 4 to the most bespoke in very, very short time

 5 frames as opposed to being able to focus.

 6 I think on the flip side, you then also

 7 have the challenge for the -- I agree in principle

 8 that, you know, the SDRs have access to CFTC.

 9 They can clarify. But you do have issues around

 10 multi-jurisdiction where a flag may be mandatory

 11 for one jurisdiction, optional for another. So

 12 we've had, you know, many dialogues with the DCC,

 13 for example, trying to understand what's the

 14 appropriate flag to set. Is it required? Is it

 15 not required? As well as information where we may

 16 be providing a piece of information that from a

 17 purely technical perspective, it's difficult for

 18 them out of, call them potentially hundreds of

 19 trade attributes on a single trade, whether or not

 20 we provided "the appropriate value," you know, in

 21 terms of, you know, for their systems to actually

 22 validate them.
 129

 1 So I think at a broad level it works,

 2 but at a very technical implementation level, it

 3 is a challenge, you know, too, because clearly not

 4 every field we're passing is being validated for

 5 every -- you know, for every jurisdiction. That

 6 would be an extremely complex ask, especially as

 7 you get out beyond the more vanilla products.

 8 MS. KRUSE: Yeah. I think I would add

 9 on that, too. I mean, it's definitely been a

 10 collaborative process between market participants

 11 and some of the SDRs in terms of determining how

 12 data is reported. But at the end of the day, the

 13 SDRs, one, have administrative pieces they're

 14 working at around validation of certain fields.

 15 So, for instance, they may need to make a certain

 16 field optional just because it doesn't apply to

 17 all transactions. But from my perspective, I'm

 18 always going to turn back to my rules to say, oh,

 19 for this particular type of transaction, I'm

 20 required to report it.

 21 So I can't always rely on them to tell

 22 me what makes me compliant. At the end of the day
 130

 1 I think I think as firms, we always feel like it's

 2 going to come back to us. I can't point to the

 3 SDR and say, well, they didn't make report this,

 4 you know, so it's their fault I'm not compliant.

 5 Rather we take the responsibility on ourselves and

 6 work together with them to make sure that the

 7 availability is there to report everything we

 8 believe we need to report, and then we take it on

 9 ourselves to analyze the rules and understand what

 10 we believe will make us compliant in case we need

 11 to speak to what we have done.

 12 CHAIRMAN O'MALIA: Anybody else? We're

 13 pretty close to on schedule, believe it or not.

 14 Housekeeping. All the panelists and all

 15 the TAC members are invited upstairs for lunch.

 16 And we will see you all at 1:30. Thank you.

 17 (Recess)

 18 CHAIRMAN O'MALIA: I don't have the

 19 chairman here to shush you, so please sit down. I

 20 refuse to shush.

 21 Okay, 1:30, panel four, SDR Data Issues

 22 and Perspective of the SDRs. We're going to start
 131

 1 with John Rogers, who many of you know is our --

 2 head of our Office of Data and Technology, and has

 3 been leading kind of our technology effort to make

 4 our rules work, and to ensure compliance, and make

 5 your job easier to comply with our objectives. So

 6 John is going to frame the debate. We had the

 7 markup participants kind of identify their broad

 8 challenges in complying with our rules, and they

 9 were correct.

 10 I don't know -- I think it was Adam

 11 mentioned that I thought it was the SDR's

 12 responsibility to tell us what to do. Well, you

 13 know, they maybe a little confused about what our

 14 rules require as well. So based on the data we

 15 received and the efforts put in so far, John is

 16 going to help frame the debate a little bit, and

 17 I'll turn it over to him. Then we will go to the

 18 SDR panels. I don't know if you have guys have an

 19 order. I'll just start at one end and work my way

 20 down, if that's okay. John?

 21 MR. ROGERS: Okay, thank you very much.

 22 Yeah, so hopefully this presentation will answer
 132

 1 some of the earlier questions from the preceding

 2 panel, too. Maybe not all of them, but some of

 3 them.

 4 What we're going to do here is I'm going

 5 to speak for a while, then turn it over to the

 6 SDRs. I'll go through my slides here. But before

 7 I start, I want to mention that, you know, for

 8 those that are provisionally registered that I

 9 appreciate all of the hard work and collaboration

 10 that we've been doing together. That would be,

 11 you know, us from the IT perspective and certainly

 12 from the business divisions at the Commission with

 13 each SDR. So it's been very collaborative and

 14 cooperative.

 15 Clearly there's a lot of work to -- that

 16 remains to be done, and we are in the midst -- at

 17 the very beginning stages of a very long-term

 18 process. The way that I look at it is we are

 19 actually standing up a new system. We might be

 20 leveraging existing technologies, but we're

 21 standing up a new system for how we perform this

 22 regulatory function and, you know, how the markets
 133

 1 work and whatnot. And standing them up will take

 2 some time.

 3 So I've divided the conversation into

 4 four themes: Data quality, data harmonization,

 5 accessibility, and analytics. And I'll go into

 6 each one in turn. The focus that I would like to

 7 have from an SDR perspective is to have people

 8 focus on what they're doing around each one of

 9 these themes, what their future plans are, and

 10 then we can have questions. And I'm going to end

 11 it with a little about the process going forward.

 12 So in terms of quality, we're talking

 13 about the validation and normalization of data.

 14 The themes actually begin with the notion of data

 15 coming into the SDR and then how data is used

 16 within the SDR and potentially across SDRs for our

 17 purposes. That's where we get into harmonization.

 18 We actually need to aggregate across SDRs, and so

 19 we're talking about harmonization.

 20 The next thing would be accessibility,

 21 how could we go out to the SDRs? As Chairman

 22 Gensler mentioned earlier on, having direct
 134

 1 electronic access to the SDRs, including sorting,

 2 filtering, and aggregating by party, counterparty,

 3 product, underlying. And being able to search

 4 based on time is a primary objective of what we're

 5 trying to achieve here. So accessibility is a

 6 very important portion of this.

 7 And then ending the themes with the

 8 notion of analytics. We are in the mode of

 9 analyzing data both from an operational

 10 perspective and from a market perspective, and so

 11 we'll be talking a little bit about those

 12 capabilities.

 13 One of the things that's important for

 14 us is not to focus on how the SDRs handle

 15 something, but what we need from them. I know

 16 that each SDR has a different method or is

 17 leveraging existing technology to become

 18 operational. We understand that and appreciate

 19 that. But we really have been focusing our

 20 dialogue and will continue to focus our dialogue

 21 on the -- what we need from a regulatory

 22 perspective.
 135

 1 So let's go into validation. Okay, it's

 2 up there. So we talked about quality and include

 3 validation in that. The ideal scenario for us is

 4 to get good standardized data from the source.

 5 Someone had mentioned earlier, you know, the whole

 6 principle of garbage in, garbage out. I think to

 7 some extent, some of the information that we

 8 received could be erroneous certainly, but I also

 9 think that it's not necessarily always erroneous.

 10 It may be based on the multi- jurisdictional

 11 issues that were raised in the previous panel or

 12 things like that, or just maybe that it's coming

 13 from an existing system and having to flow into

 14 the SDR. But it's important to get the best

 15 standardized data from the source.

 16 To that end, we've sent an initial set

 17 of fields that we will be focusing on to review

 18 and analyze to make sure that we are getting --

 19 that we are seeing good quality data. There are,

 20 in some cases, thousands of fields that we have to

 21 sift through. We can't really tackle all fields

 22 all at once, so we're focusing on particular ones
 136

 1 that we need to focus on to support the notion of

 2 the ability to aggregate information.

 3 An important thing for us in terms of

 4 ensuring that the level of quality goes up is that

 5 we track data quality issues, that the SDRs have a

 6 sense of what issues they're encountering and that

 7 we can see it as well so that we can work together

 8 to make sure that the quality rises. And that

 9 begins with the SDRs reaching out to the

 10 submitters and ensuring that the quality is

 11 increasing, but also us getting involved where

 12 necessary.

 13 One of the things that we've noticed,

 14 one of the things that's a challenge is that there

 15 are different requirements for the acceptance and

 16 rejection of records, and there are different

 17 schools of thought on that. So, for example, if

 18 there's greater acceptance of data, then there's

 19 more visibility into it. But on the flip side,

 20 that raises a question of the integrity of the

 21 data, what can you trust and not trust as opposed

 22 to rejecting data and having it be the only things
 137

 1 flowing into the repository are that which are

 2 clean and not necessarily seeing as much of it,

 3 but knowing that the quality is -- the bar is

 4 high. And so having talked with each of the SDRs,

 5 I know that there are different rationales for

 6 that, so it would be very interesting to hear what

 7 people think about those notions.

 8 In terms of the kinds of data that we

 9 get, there are -- or not get, but have a view

 10 into, there are four categories that we've talked

 11 about so far. There are messages. That's what we

 12 consider to be the raw data received by the SDRs.

 13 There are events, open swaps, and exposure. Those

 14 last three elements are things that really are

 15 normalized versions of the original message data.

 16 So in our -- from our vantage point, it

 17 would be taking those messages and creating some

 18 sort of set of data that we can look at and make

 19 use of that will be based on those events. So

 20 events turn out to be things like confirms, or

 21 terminations, or new trades, and to that extent.

 22 An open swap would be the aggregated data for swap
 138

 1 at the end of each day, and the exposure would be

 2 the ability to roll up swaps to really what we

 3 would consider a position level in the futures

 4 space, but we called it exposure for the sake of

 5 this conversation.

 6 So let me give you some examples of

 7 validation. This is not meant to be in any way,

 8 shape, or form an exhaustive list of things, but

 9 just to give you a flavor of some of the things

 10 that we're looking at, and what we will look at as

 11 we look at these 22 fields that we recently sent

 12 out.

 13 So we've spent a lot of time and effort,

 14 many people, working on a CICI utility to create

 15 an LEI, and there are multiple instances in each

 16 SDR where an LEI is called for. We need that LEI

 17 to be validated against the CICI utility to make

 18 sure that it's a valid LEI. In some cases, there

 19 has been, you know, up until recently no action

 20 relief that has meant that some people didn't have

 21 LEIs necessarily to report. We recognize that

 22 that could be the cause of these issues.
 139

 1 But when we look at something like

 2 validating what the legal entity is that's engaged

 3 in a swap, we would expect to see the rate of

 4 valid LEIs going up, and we want to make sure that

 5 we're taking action to ensure that that happens.

 6 Others that are simple are on the list,

 7 but if there are particular enumerated values that

 8 need to be validated to ensure that we're getting

 9 the same data, we need to be checking on that. We

 10 need to verify that USIs are properly constructed,

 11 that dates and times are represented in the

 12 appropriate way, that required fields are always

 13 present. Even if someone has a challenge, a

 14 multi- jurisdictional challenge, we still need to

 15 make sure that the data that we require is

 16 provided.

 17 Another example that I came up with that

 18 we've been working through in some instances is

 19 the notion of duplication. Are there duplicate

 20 records out there? And this kind of fits in with

 21 the whole rejection-acceptance paradigm. And it

 22 could also relate to the notion of us working more
 140

 1 closely with HSDR and understanding the portal and

 2 understanding the data structures, but there are

 3 instances where we see duplication, and we want to

 4 resolve those.

 5 From my vantage point, one of the big

 6 things that we have to address is the notion of

 7 product identification because if you think about

 8 how we then want to aggregate, product would be an

 9 important ingredient to that. So we've talked --

 10 I know that there's been lots of discussion in

 11 previous TAC meetings, and there's been discussion

 12 elsewhere about the unique product identifier, and

 13 that effort needs to pick up so that we can

 14 aggregate across products. And, of course, the

 15 challenge is different for different asset

 16 classes. We need to establish that.

 17 So moving on to -- oh, so one other

 18 thing I wanted to say about validation, you notice

 19 I didn't mention anything about a particular

 20 standard. I didn't mention anything about FPML or

 21 FIX ML. That was by design because while those

 22 things have a lot of value in them, I think that
 141

 1 we're really looking at the underlying content and

 2 the ways that we're ensuring, and the processes

 3 that we're using to ensure integrity of data and

 4 whatnot, and that's why we're not focusing on that

 5 at this point.

 6 In terms of harmonization, one of the

 7 keys here is that we need to harmonize the data

 8 across SDR, so there are three provisional SDRs

 9 right now. Each one has, just by way of example,

 10 you know, has responsibility for the credit asset

 11 class. We're going to need to look at and come up

 12 with aggregated information about the credit

 13 space, and the only way that we're going to be

 14 able to do that is if we're going to -- if we can

 15 see similar things across each one.

 16 So following on to the Chairman's

 17 previous, you know, comments, you know, we need to

 18 aggregate to show the size of the markets overall.

 19 We need to see it by party and counterparty, and

 20 by party, counterparty, and product.

 21 Some of the challenges that we face in

 22 that is that there's different types of content
 142

 1 flowing into the different SDRs, different

 2 messages, different sizes and shapes of fields and

 3 whatnot, and so making sense of it is one of the

 4 things we have to work through. We need to,

 5 again, aggregate across different types of fields.

 6 Overall we've noticed that the volume of

 7 transactions is not as significant as what we're

 8 seeing in the future space, but the future space

 9 is far more standardized, and there's far less

 10 complexity in the data, so that creates a

 11 challenge from that perspective.

 12 So some of the examples of principles

 13 are listed on the next slide, and it comes back to

 14 cross checking fields. One of the ones that's

 15 really important that I've seen in some of our

 16 conversations is that from a data management

 17 perspective, fields should never be used for more

 18 than one purpose. If fields -- if one field has

 19 two meanings, then it becomes really difficult to

 20 manage because what happens is you have to manage

 21 it in your software. You have to figure out how

 22 to deduce the meaning of that, and we don't want
 143

 1 to be looking to software. So I think that as we

 2 analyze the data more and more, we're going to be

 3 making sure that fields only serve a single

 4 purpose.

 5 So moving on. The major elements in

 6 terms of what we're standardizing and harmonizing

 7 on are the types of messages we receive. I know

 8 that the different SDRs know these types of

 9 messages. There's the PET real time confirmation

 10 continuation data, which is referred to as

 11 snapshots. I know that in some instances, some

 12 SDRs are accepting snapshots. Some are not. But

 13 there's valuation records, and then there's

 14 combinations of all of the above. There are

 15 records that are coming in with PET and real time

 16 data all in one place, and that's all fine. It's

 17 useful to see the raw data, but making sense of it

 18 and getting it harmonized is the key. And that's

 19 why we came up with the concept of events, open

 20 swaps, and exposures.

 21 So we've already talked about the notion

 22 that we've got these 22 fields that we're going to
 144

 1 be looking at. One of the things that -- the

 2 reasons that we focused on these particular 22

 3 fields is because they're pretty consistent across

 4 asset classes. And one of the things we want to

 5 harmonize on is data across asset classes first,

 6 and then we have data that will be focusing on,

 7 you know, more specifically within an asset class.

 8 So just like LEI is something that would

 9 apply to all asset classes, or USI, or UPI, there

 10 are a number of fields that fit into that mold,

 11 and we're focusing on those first to allow us to

 12 perform the functions that we want to perform or

 13 need to perform.

 14 In terms of accessibility, one of the

 15 key ingredients for Dodd-Frank is, as I've always

 16 come to know it, is the data must be directly

 17 available at the SDR. That means all of the

 18 messages are up there, and then these

 19 transformative things that I've been describing

 20 earlier need to be up at the SDR. They need to be

 21 available within minutes of coming in, not at the

 22 end of the day or something like that. It's
 145

 1 important that we have a view into the data as it

 2 flows into the SDR.

 3 We understand that certain data will

 4 need to be derived -- actually in some respects we

 5 probably will have more of a requirement for data

 6 to be derived and presented to us if the data is

 7 not flowing in -- you know, in a standardized way.

 8 So the ability to reduce the ask of actually

 9 having to transform data is directly related in

 10 some respects to the quality, and the consistency,

 11 and the standardization that's coming into us.

 12 I've already -- we've already touched on

 13 the notion of searching and sorting by a variety

 14 of fields: Party, counterparty, product, data,

 15 and time. The portal needs to have -- each portal

 16 needs to have that capability. We need to be able

 17 to search by some combination or all combinations.

 18 That's an essential ingredient to this process.

 19 The other thing is even though we want

 20 to look at data, there's no doubt that we will

 21 want to bring data back to the Commission for use.

 22 And some of those kinds of things will be done on
 146

 1 an ad hoc basis, so each portal needs to have an

 2 ad hoc query capability to bring data back to the

 3 Commission.

 4 Another ingredient will be the fact that

 5 we need to have -- we need to see reports existing

 6 on the portal, which is not necessarily what I

 7 would consider to be the grid filter sort and

 8 search capability, but rather snapshots in time of

 9 how things looked. So, for example, at the end of

 10 the day, for example. What are the open swaps at

 11 the end of the day, or was it a position, what is

 12 an exposure at the end of the day kind of thing?

 13 Those will need to be out there. Operational

 14 status reports, documentation, all of those things

 15 need to be on the portal.

 16 One of our challenges in coming up to

 17 speed on using them is each individual SDR has a

 18 different portal, and that's okay. But it means

 19 that we have to learn how to use those things.

 20 One of the benefits of seeing things differently

 21 is that we're actually shooting for the highest

 22 common denominator. We're going to look for
 147

 1 things in one that we really like and ask others

 2 to replicate that kind of capability, again, not

 3 focusing on the how we want things to be done, but

 4 what it is that we need to be effective in our

 5 role. And so that will require lots of

 6 interaction between us.

 7 Ultimately, though, we're going to be

 8 asking for a regular feed of information to the

 9 CFTC, and actually, in fact, more than one. To

 10 give you an example of something like that, we are

 11 preparing a swaps report that will be published, I

 12 would expect, in the May time frame, that will be

 13 initially off of credit and rates. The work that

 14 we've had to do to analyze the data across the

 15 swaps repositories was very specific because the

 16 data repositories were different.

 17 We were able to figure it out and how to

 18 come up with like data from each swaps data

 19 repository. But ultimately, we want the SDRs to

 20 be producing that output and feeding us that

 21 aggregate of information so that we can then, in a

 22 more -- in an easier manner, put that information
 148

 1 together and make use of it.

 2 We will also want to see the underlying

 3 data obviously to understand how those numbers

 4 were derived, but that would be an example of

 5 actually what I would think would be a relatively

 6 straightforward feed of information. But we will

 7 also need to have some form of transactional data

 8 flowing into CFTC so that we can do that analysis,

 9 because there are certain types of analysis that

 10 we recognize that we can't do just by looking at a

 11 single SDR.

 12 So in cases where we can identify a need

 13 to be pulling data for analysis across SDRs or to

 14 relate that data to futures, we'll need to bring

 15 data down for that purpose. The goal is not to

 16 replicate what an SDR can already do, but rather

 17 to go beyond that capability, and that's why we'll

 18 be asking for standardized data feeds. We're not

 19 there yet, but that's where we're heading.

 20 And then the last thing -- the last

 21 theme I wanted to talk about was analytics. So

 22 we've gone over the notion of operational reports
 149

 1 that we are asking each SDR to produce, and each

 2 SDR thankfully is giving us something every week

 3 that talks about the flow of data, the amount of

 4 rejections and acceptances. There's going to be

 5 some refinements we're going to need to make to

 6 that. Operational issues that come up, you know,

 7 out of an SDR and how we're working through those

 8 kinds of issues. But there are also other kinds

 9 of metrics that I would say are more on the

 10 business side from my perspective, so things like,

 11 you know, top notional amounts outstanding by a

 12 variety of categories, CDS types, and currency and

 13 customer type, or types in region, types in asset

 14 class, so on and so forth, or trade volumes, and

 15 that sort of thing.

 16 So we'll be continuing to ask for

 17 analytics along those lines. We have to define

 18 our requirements and give them to each SDR and

 19 work through the process of how we're going to get

 20 those things delivered to us so that we can make

 21 use of the information.

 22 So that takes me to the process going
 150

 1 forward. The processes going forward is very much

 2 the process that we already have, which is to

 3 continue regularly recurring conversations with

 4 each SDR about what our needs are. Sometimes

 5 those will be in depth conversations. Like, I

 6 know with each of you we've had day-long meetings.

 7 We've been following that up with calls and

 8 whatnot. I expect that pattern to continue. I

 9 would also expect that at some point in time we'll

 10 want to bring the SDRs together and talk about

 11 harmonization so that we can be in the same room

 12 and hear things.

 13 But the bottom line is we all must work

 14 together to harmonize data, reports, and portal

 15 capabilities to facilitate regulatory oversight.

 16 And, you know, I'm happy to say that we've got a

 17 lot of people that are dedicated, and focused, and

 18 working hard on this. But as Commissioner O'Malia

 19 said to me at one point when we were talking about

 20 TAC, it's really an all hands on deck issue that

 21 we need to work through to get us to the point

 22 where we want to be.
 151

 1 Thank you.

 2 CHAIRMAN O'MALIA: Thank you very much,

 3 John. I have a number of questions kind of

 4 regarding, you know, starting -- well, if you go

 5 to slide four, John, if you can get your magic

 6 clicker out there and go back.

 7 MR. ROGERS: Oh, sure. We're on four.

 8 CHAIRMAN O'MALIA: Okay. So "Establish

 9 a process with submitters, track data using data

 10 quality issues to ensure systemic errors are

 11 addressed, provide information to the Commission

 12 on data quality." And it says, the top line is,

 13 "We must set the course of action for consistency

 14 in data quality."

 15 Have we told everybody what our

 16 standards are and what we want from them, or are

 17 we having these one-on-one conversations? What's

 18 the process for informing the market, and how soon

 19 will that be done, and what's the timeline for all

 20 of this?

 21 MR. ROGERS: I think it's an ongoing

 22 process, so we have been -- we've just begun, I
 152

 1 think, with the issuance of these 22 fields to

 2 articulate what it is that we're requiring to

 3 ensure quality. So things like LEIs or USIs and

 4 things that we need to ensure those things, or

 5 date fields, for example. Some of the fields are

 6 execution time.

 7 Those are actually relatively easy to

 8 articulate. We've articulated those to the SDRs.

 9 Now it's -- I think the next step is for people to

 10 come back and say this is how long we can take to

 11 implement the validation rules. Those I don't

 12 think would take an inordinate amount of time, but

 13 then there are some that are going to be a lot

 14 more complex. Taking something like UPI and

 15 figuring out what the standard is.

 16 I actually envision this -- that there

 17 will be a degree of harmonization that would need

 18 to occur in a global context, going back to that

 19 multi-jurisdictional issue that was raised in an

 20 earlier panel. So I would say that that kind of

 21 an issue is at least a year out.

 22 And there are different nuances by asset
 153

 1 class, so there isn't one specific answer, but I

 2 think that the 22 fields that we selected were

 3 fields that we felt like we could make significant

 4 progress in the short term, looking for, you know,

 5 feedback from the SDRs on what they can do to

 6 ensure that we are checking this data to make sure

 7 that it is clean. And, of course, that does

 8 involve the front end of the process, the people

 9 that are submitting the data. There's going to

 10 have to be some interaction on that end to ensure

 11 that there's quality information flowing in. It

 12 also --

 13 CHAIRMAN O'MALIA: We use the SDRs to

 14 communicate to that to the market. We're not

 15 sending out -- we have not sent out further

 16 guidance on the 22 fields --

 17 MR. ROGERS: We have not, and I would

 18 expect that the SDRs would perform the initial

 19 reach out to the industry on compliance with

 20 those.

 21 CHAIRMAN O'MALIA: Okay. I think what I

 22 want to do is you've kind of heard John's
 154

 1 presentation. Let's hear from the SDRs, and then

 2 we'll get into it and ask the questions about

 3 whether John is right, or the SDRs are right, or

 4 how they're going to work together.

 5 The point of this at the end of the day

 6 is that we're all comfortable with the path

 7 forward, that whatever John is dictating to the

 8 SDRs will filter into the market, and we can ask

 9 them to submit and comply with all of the

 10 expectations we have to make kind of the

 11 presentation John identified and make it

 12 successful.

 13 If at the end of the day we are not

 14 confident that there is a road map forward and a

 15 process that you are comfortable with, please let

 16 me know because we haven't succeeded. And so at

 17 the end of this, I want to make sure that whether

 18 it's DMO or ODT, the guys that wrote the rules,

 19 and the guys who are implementing the rules, and

 20 then you all are trying to figure out how this is

 21 going to be completed. It has to succeed. And if

 22 we leave here and we still have questions, then
 155

 1 shame on us. This is the perfect opportunity to

 2 solve them. We've got the two guys and we've got

 3 staff back here that are part of it. And, of

 4 course, we've got Commissioner Chilton here, and

 5 he can help.

 6 So we're going to start with Bloomberg.

 7 Greg and Nathan are going to testify, and then

 8 we'll just go down the line.

 9 MR. DUMARK: Thank you, Commissioner.

 10 My name is Greg Dumark. I'm the Senior Compliance

 11 Officer with Bloomberg's Fixed Income Electronic

 12 Trading Business in New York. Nathan Jenner is

 13 with me. He's the Fixed Income Electronic Trading

 14 COO.

 15 CHAIRMAN O'MALIA: Greg, can you pull

 16 that a little closer so we can hear?

 17 MR. DUMARK: I'm saying Nathan Jenner is

 18 with me. He's the COO of our Fixed Income

 19 Electronic Trading Business. We'd like to thank

 20 the Commission for giving us the opportunity to be

 21 here today and talk about data issues relative to

 22 the SDR.
 156

 1 In case you didn't know, our

 2 wholly-owned subsidiary, BSDR, filed an

 3 application for provisional registration on March

 4 10th of this year with the Commission. So in

 5 short, we hope to be the fourth provisionally

 6 registered SDR. We feel pretty confident that we

 7 could fulfill our mandate, our duties to be an SDR

 8 in the sense that we'll allow participants to

 9 fulfill their reporting obligations across all

 10 derivative asset classes.

 11 The regulatory reporting of swap

 12 transaction is a critical component to mitigating

 13 systemic risk, promoting standardization and

 14 increased transparency in the swap markets. We

 15 are, meaning BSDRs, committed to providing the

 16 highest level of service as an SDR consistent with

 17 the importance of price transparency. Our BSDR is

 18 built on proven systems processes that draw on our

 19 experience as a leader in delivering financial

 20 data and pricing of the markets. In particular,

 21 BSDR will make use of our widely- accepted

 22 technology platform and experience as an industry
 157

 1 partner to provide a secure, reliable SDR

 2 database.

 3 We appreciate the Commission's concern

 4 about reporting inconsistencies, technical

 5 challenges, and the validation and normalization

 6 of SDR data. In the end, the value of the swap

 7 data reported, as you noted, Commissioner, to the

 8 SDRs rests on the ability to standardize data,

 9 process and retrieve large amounts of data that

 10 allows for the aggregation and risk analysis that

 11 needs to be done on this data.

 12 When we got this list of items, the

 13 issue that we're going to discuss today, I sat

 14 down with our Chief Technology Officer for the SDR

 15 and I said, let's go over this and see what's

 16 doable. And many of the items from our

 17 perspective are ones that we absolutely can commit

 18 to working with the Commission and a lot of them

 19 are doable. So we can help work with our fellow

 20 SDRs to standardize this data and have consistent

 21 fields to push out data to you to be able to look

 22 into our database and do the analysis that you
 158

 1 want.

 2 One of the interesting questions came

 3 up, though, which was it would be helpful to know

 4 from the Commission what their objectives are in

 5 doing surveillance. So in essence, you telling us

 6 what you want to do with the data, and I think

 7 that would be part of the discussion today. We

 8 certainly can work to normalize, standardize these

 9 data fields, but it's also very important from our

 10 perspective to know prospectively what you want

 11 out of the data. So I think it works both ways.

 12 And so I think that's an important component of

 13 this discussion.

 14 As I said, we look forward to working

 15 with the Commission and our fellow SDRs to

 16 harmonize the data, the reports, the portal

 17 capabilities necessary to facilitate your

 18 regulatory oversight. Again, we thank the

 19 Commission for the opportunity to be here today,

 20 and we're happy to answer any questions that you

 21 have.

 22 CHAIRMAN O'MALIA: Thank you.
 159

 1 MR. JENNER: Great. Thanks, Greg.

 2 Nathan Jenner from Bloomberg. I'm aware that I'm

 3 also from Bloomberg, so I don't want to double my

 4 -- double our floor time. But I'll just add to a

 5 couple of points that Greg made.

 6 So although we are here in the capacity

 7 of us being an SDR, it's worth sort of

 8 understanding where Bloomberg as a parent company

 9 comes from. Essentially, Bloomberg is all about

 10 taking in data from a varying set of sources

 11 around different markets, around different

 12 regions, and essentially turning that into usable

 13 information, whether that's standardizing data,

 14 whether that's turning it into risk reports, or

 15 whether that's even producing downstream feeds for

 16 our customers. So, you know, that's the sort of

 17 background for Bloomberg as a company.

 18 And if you look, a good example of it as

 19 it relates to this discussion, you know, there's

 20 already a function on the terminal called SDR Go,

 21 imaginatively named. But that is a function that

 22 exists today, which takes in data from other SDRs
 160

 1 outside of Bloomberg. And, you know, already on

 2 that function, there's already some examples of

 3 some of the themes that you're talking about, you

 4 know, the ability to search, the ability to sort

 5 data, even the ability to take some of those

 6 trades and turn those into risk reports, whether

 7 they're Delta ladders, or whether they're, you

 8 know, they're some sort of FX exposure, or credit

 9 exposure. Some of that is already available, and

 10 those are things that, you know, even outside of

 11 the Commission, I think the general market is

 12 looking to digest that information as well.

 13 So, you know, the point in there is some

 14 of those things that you're asking for, I think,

 15 are already happening. And that leads me into

 16 just the sort of final point echoing what Greg was

 17 sort of saying towards the end of his piece, is

 18 that, you know, I think one of the things that you

 19 will consider as you move through this process is,

 20 you know, do you want to focus more on the

 21 questions that you want answered, or do you want

 22 to focus more on sort of the prescriptions around
 161

 1 the data the SDRs collect.

 2 You know, arguably, you know, both

 3 courses might get you to a similar place, but from

 4 our perspective, you know, with us as an SDR, if

 5 the Commission is clear on these are the questions

 6 we want answered, i.e., what is the transaction

 7 volume going through the market today? What is

 8 the exposure of certain counterparties? Is there

 9 a spike in a certain instrument? I think it's

 10 very easy for us to then take that question and

 11 figure out this is the data, this is the set of

 12 data we'll need, and we'll turn that data into

 13 information for you. That's the way we'll work

 14 quite well.

 15 I think if you, you know, if you focus

 16 more on a prescription on, you know, data should

 17 be collected in this format with this particular

 18 set of fields, I think that's definitely helpful

 19 to a certain point. But I think if you

 20 crystallize the questions that you need answered,

 21 the rest of it will become a lot easier.

 22 Thanks.
 162

 1 CHAIRMAN O'MALIA: I think that's a

 2 great point, and I think to John -- John mentioned

 3 it earlier. We want reports now, but I think we

 4 want to be able to do it all on our own at some

 5 point in the future. And I think to the point

 6 about surveillance, what do you want in terms of

 7 surveillance. We want to be able to do any

 8 surveillance on any entity on any asset. And that

 9 requires us to look at and manipulate the data in

 10 the manner we see fit and to kind of serve our

 11 purposes. And I didn't mean manipulate, but "use"

 12 I think is the term I was searching for,

 13 "utilize," "access."

 14 So I think we're of kind of a split

 15 right now. We want both what you have to offer

 16 today, but we also want the ability to do it on

 17 our own in the future. And I think we know we

 18 can't -- we don't have it all put together yet,

 19 but we need to be putting it together.

 20 And I think the point about, you know,

 21 are you going to ask us questions or are you going

 22 to prescribe what you want. And I think we need
 163

 1 to be much more prescriptive about what we want so

 2 you can provide it to us, because clearly you're

 3 that tool that we're going to face the market and

 4 we're going to make you do all the work, and make

 5 demands of you, et cetera.

 6 So to answer that brief question, unless

 7 you have --

 8 MR. ROGERS: Yeah, I want to add to

 9 that. Yeah, I agree, and it's very interesting.

 10 I think that at one level we'll come up with

 11 specific questions, but we don't necessarily want

 12 to go down the road of asking a specific question,

 13 getting that question answered. If we have the

 14 same question again, ask the question again, get

 15 that answer. It's really around developing

 16 capabilities so that we can looking to NSDR or

 17 look at data across an SDR to answer the question

 18 on our own, which really gets back to more what

 19 was just said. It really becomes a method of

 20 empowerment so that we can search on our own.

 21 From the standpoint -- I mean, I really

 22 look at this from two different perspectives. I
 164

 1 represent the IT side, so when I look at things,

 2 I'm looking at it from the perspective of data

 3 management, IT functionality, and that sort of

 4 thing. So we'll be looking at how do we get data

 5 in a place where the business can make use of it.

 6 In terms of the kinds of questions of risk

 7 analyses or whatnot, those are going to come from

 8 the business side.

 9 I think that you will find that you will

 10 get both of those things. I'm not trying to be

 11 overly prescriptive certainly, but it's important

 12 that when we take these concepts, we turn them

 13 into empowering tools for us to use at the CFTC

 14 for a myriad of purposes. And that even extends

 15 to the notion of something like just validating an

 16 LEI. It doesn't really solve a problem in terms

 17 of risk. It enables things, but when we talk

 18 about let's validate CICIs against every place

 19 where a CICI is used, we should have to mention

 20 that once and have it universally applied so that

 21 we can move those kinds of issues and move into

 22 more complex issues. And that's the way I think
 165

 1 the evolution of this process is going to be.

 2 Right now, we want to understand things

 3 around size of markets both from a notional value

 4 perspective/transaction perspective, you know. We

 5 want to know who's opposite whom from a

 6 party/counterparty perspective. But I think that

 7 the requirements are going to continually evolve

 8 and get more complex, and we need you to be

 9 building the capabilities that enable us to do the

 10 analysis that we need to do.

 11 CHAIRMAN O'MALIA: Okay. We're going to

 12 go to Chris. Thank you.

 13 MR. CHILDS: Thank you, Commissioner,

 14 and thank you for the Commission for giving us the

 15 opportunity to come here and talk to you today.

 16 My name is Chris Childs. I'm the CEO of

 17 DTC Data Repository, also known as DDR. I've

 18 prepared a PET, which is is all on your -- in

 19 front of you. You'll be pleased to hear I'm not

 20 going through bullet by bullet. I'll assume that

 21 you can kind of read when you've got an evening of

 22 nothing to do.
 166

 1 So I just wanted to put into perspective

 2 DDR. We currently have about eight million open

 3 swaps in our repositories across five asset

 4 classes. This is on page 3, by the way. That

 5 portfolio size drives around 40 to 50 million data

 6 submissions per week, which we in turn then feed

 7 down to John's group. We receive and publish

 8 about 85,000 real time price messages every week.

 9 In addition to the USSDRs, we also operate a

 10 regulatory repository in Japan, and we also have

 11 repository in the UK for helping market

 12 participants with their voluntary reporting.

 13 And I think one of things that we picked

 14 up earlier from some of the comments was the

 15 global nature of reporting. And just to highlight

 16 a couple of things, we have two repositories that

 17 are actually live now, one for Japan, one to

 18 support U.S. reporting. One is single sided, one

 19 side reports, the other, both sides report. One

 20 we have real time PET confirm snapshots, as John

 21 was talking about. The other one we have end of

 22 day snapshots on a T plus two basis. One we have
 167

 1 counterparties identified by LEI. The other we

 2 have counterparties with BIC.

 3 So those are the types of things that

 4 we're seeing already with two repositories live.

 5 We know the European rules, they're different

 6 again.

 7 So I do think that when we talk about

 8 standards and has been pointed out by the FSB as

 9 well, it's important that for those market

 10 participants that are global in nature that we

 11 think about these standards in the global context.

 12 Just turning to page 4. I think, you

 13 know, we are now four months into receiving data

 14 from swap dealers, which, in the long scheme of

 15 things, is not a huge amount of time. And we have

 16 collected a hell of a lot of data, and now the

 17 challenge for the industry to is turn that data

 18 into information. And I think the next stage

 19 along that continuum path is what we're talking

 20 about here, which is to standardize and make sure

 21 that the data is sufficient quality that we can

 22 actually aggregate that.
 168

 1 And to the point my friends were making

 2 from Bloomberg here, given the fact that there are

 3 multiple repositories, you can only aggregate that

 4 data and do true market analytics on top of that

 5 when you've taken data in a standard format for

 6 multiple repositories so that you can then

 7 aggregate that data. And again, I think that if

 8 you're looking at it from central banks'

 9 perspective, it's important to understand that is

 10 going to have to be done potentially on a global

 11 basis as well.

 12 Just turning to the next page and I'm

 13 picking out on some of the points here. Again,

 14 standards are typically driven by business needs,

 15 so we've seen that over the last few years when,

 16 you know, e-confirm platforms come in, e-

 17 affirmation systems come in. And because you're

 18 then trying to compare data from two different

 19 sources, you have to create the standards to be

 20 able to make that comparison. And I think that

 21 the regulatory need for good data is the next

 22 catalyst. And already we're seeing new language
 169

 1 appear in the industry, whether it's USIs, LEIs,

 2 UPIs, and so on. I think, again, when we're

 3 talking about standards, again, it's important to

 4 think about this on a global basis.

 5 So if you turn to page 6, just a couple

 6 of things that we've already kicked off at DDR

 7 based on the conversations that we've had with

 8 John and his team at the Commission. We are or

 9 have already started to do reviews of Part 43 and

 10 Part 45 data starting with credit and rates as

 11 they were the first asset classes to kick off.

 12 And, you know, the good news is that we are seeing

 13 standardization, more than people would perhaps

 14 would give credit for.

 15 Typically, where the data is coming from

 16 in e- confirm platform or some market

 17 infrastructure, standards are being applied. The

 18 trouble is I think that that population of data

 19 that complies with those standards is getting

 20 muddied with the stuff that isn't complying with

 21 those standards.

 22 And so I think, you know, as this
 170

 1 evolves, I think you're going to see that, you

 2 know, especially for credit and rates, there are

 3 actually through ISDA and through other kind of

 4 middleware providers and data providers, there are

 5 already standards. I think what we need to focus

 6 on is which standards are we going to embrace and

 7 the move forward with those standards across all

 8 of the swap data repositories.

 9 And John mentioned the face that he has

 10 recently provided the 22 fields to us. We are now

 11 incorporating that into our reviews of data. The

 12 reviews that we're doing now we're feeding back to

 13 our industry market participants to get their

 14 observations around the level of standardization

 15 and talk to them about the next steps.

 16 As it relates to accessibility and

 17 analytics on page 7, I think we're in a kind of

 18 infancy here. We have just recently provided

 19 John's staff with portal access. That was

 20 actually yesterday. So we look forward to working

 21 with the Commission on improving the -- you know,

 22 the functionality of that portal, providing the
 171

 1 Commission with all of the attributes that they

 2 need, search criteria improvements, and timeliness

 3 of data improvements. And obviously

 4 standardization is also the key to making the

 5 portal more effective and more usable for the

 6 folks at the Commission.

 7 One point I do want to pick up that

 8 Bloomberg had made is that ultimately after we've

 9 looked at the size of the market and we've

 10 captured some of that stuff, we are going to want

 11 to reply as an industry, and I'm sure the

 12 regulators are thinking about this market level

 13 analytics. Where are exposures? Can we put this

 14 data through stress tests? Can we identify market

 15 participants that under certain scenarios may be

 16 facing issues? And that analytics and how we can

 17 work with the Commission and the rest of the swap

 18 depositories to provide that level of analytics is

 19 something that I think will become key over a

 20 period of time.

 21 So in summing up and on the last page,

 22 what can we do to help the Commission? I think we
 172

 1 need to -- you know, we need to embrace standards.

 2 We need to work with the Commission and the other

 3 swap data repositories and the industry on what

 4 those standards should be. We need to monitor

 5 progress against those standards, and over time

 6 increase our validation so that the data that's

 7 coming through to the Commission already meets the

 8 standards that have been set.

 9 We need to provide consistent output in

 10 a standard format so that the Commission can

 11 actually take the data from multiple repositories,

 12 irrespective of how the data comes into us in a

 13 standard format so that they can then amalgamate

 14 the data. And we need to obviously cooperate with

 15 each other as SDRs to make sure that we move

 16 forward at the same pace and that we, you know,

 17 provide the data that you need and when you need

 18 it. It's not going to be -- it's a lot easier to

 19 say than it is to do.

 20 And I do want to pick up something that

 21 Raymond had said on the prior panel. I actually

 22 think the prioritization is key. We're not going
 173

 1 to be able to do all of this across all five asset

 2 classes overnight. I think we need to focus on

 3 where we can make the biggest headway, focus on

 4 that, and move forward with the industry, with the

 5 Commission, and with the rest of the swap data

 6 repositories.

 7 So once again, thank you, and I look

 8 forward to the dialogue.

 9 CHAIRMAN O'MALIA: Thank you very much,

 10 Chris. Bruce?

 11 MR. TUPPER: My name is Bruce Tupper.

 12 I'm President of ICE's Repository Services, ICE

 13 Trade Vault. During June of last year, ICE Trade

 14 Vault became the first provisionally registered

 15 SDR by the Commission. The service is operational

 16 in the CDS, in commodities asset classes. My

 17 remarks are maybe a little more focused on

 18 commodities and end users.

 19 So in the commodities asset class, we

 20 have over 600 participants enrolled, and we've

 21 received over 16 million trades. Many of those

 22 those are historical trades. As an SDR, we are
 174

 1 committed to supporting all of our participants

 2 from the most advanced swap dealers to the end

 3 users. Obviously in the commodity asset class,

 4 the end user group makes up a large percentage of

 5 that market.

 6 In order to support this group we've

 7 sort of taken the role of a pseudo consultant.

 8 There's a lot of assistance that the end users

 9 need in regards to interpretation of the rules and

 10 how to implement into their systems. So to that

 11 effort, we've, for the past 10 months, held twice

 12 weekly calls with the end users and swap dealers

 13 to review how we offer our service, how to

 14 integrate, how our validation works, our data

 15 standards.

 16 It was mentioned earlier by Commissioner

 17 O'Malia the guidebook. We've in absence of that

 18 developed very robust guides for our service.

 19 It's kind of comprised of three separate guides,

 20 but we have more of a user guide that describes a

 21 functionality to our customers. It's about 200

 22 pages. A technical guide which really speaks to
 175

 1 how we define our class, our products, and all the

 2 way down to what's an acceptable value for a

 3 particular field.

 4 We worked very closely with the staff

 5 during the drafting of Part 45 rules, particularly

 6 the commodities annex to make sure that those

 7 fields properly represented the trade types in the

 8 commodities asset class. In addition, we also

 9 maintain an ongoing list of questions or Q&A list

 10 that -- it's gone over 600 commonly asked

 11 questions that just over the time of operating

 12 these calls, we've found that our customers find a

 13 lot of benefit to how to interpret how to -- in

 14 regards to the different markets within

 15 commodities, how they should connect their

 16 systems.

 17 I'd say one of the biggest challenges

 18 for us, particularly with end users, is you're

 19 working with older systems that were never meant

 20 to connect to an SDR. So we've spent a lot of

 21 time on our end building functionality that, one,

 22 allows data translation so at the end of the day
 176

 1 when we report to John the 16 million trades we

 2 have today that we report to John's group, it's

 3 all in one format. So to be specific, if someone

 4 were to send us a representation of a WTI swap

 5 from 12 different customers, we take all that

 6 data, we validate it. If it doesn't make our

 7 validation, we reject the trade. So we hold a

 8 very high standard in regards to submissions to

 9 our SDR.

 10 Once that data is accepted, we then

 11 translate all those fields to standard values. So

 12 at the end of the day, when John and his team are

 13 reviewing the data, they see one representation

 14 for that transaction for all reporting parties. I

 15 think it's a very important to note because we've

 16 chosen up front to do the hard work, which is

 17 validate the data and publish standards that over

 18 the past nine months, all of our customers have

 19 reported to.

 20 It's been difficult at times, but we've

 21 found that there are ways to help facilitate that.

 22 For example, we work closely with the major trade
 177

 1 capture vendors in the commodities space. We work

 2 with them to build an out of the box SDR module

 3 that could be sold to end users that would connect

 4 to their systems that would help bridge the gap

 5 between what's required of Part 43 and 45, and the

 6 46 historical reporting, which has been

 7 challenging, and then be able to make this level

 8 of validation.

 9 With regards to -- let me just catch up.

 10 With regards to supporting staff, we built a very

 11 robust regulator component to our system. We felt

 12 that it was important in order to support the

 13 Commission to build a separate component that

 14 could be developed independent of the -- of all

 15 the parts of the application.

 16 So that component is comprised of kind

 17 of two main sections. One is more of a

 18 transactional view of the market, which allows the

 19 staff to pull down trade by trade the transactions

 20 as we receive them, so it's real time. And ten

 21 another component -- section to that component,

 22 which is more of a position driven report. We
 178

 1 moved a number of our developers from our

 2 clearinghouse to work with us so that we could

 3 generate a position.

 4 So when you look at our system or the

 5 functionality, it looks a lot like our clearing

 6 infrastructure, but without the banking. So when

 7 we reviewed early on about a year the rules, we

 8 really reviewed and determined that an SDR really

 9 -- when you look at it from a system perspective,

 10 it really is much like a clearinghouse, but

 11 obviously no movement of funds. Taking in

 12 transactions, compression, netting, calculation,

 13 position. And that's what our SDR does.

 14 Finally, I would like to just make one

 15 note to the Commission and this is more of a maybe

 16 a note or a plea. Provisional registration. As I

 17 said, we've been under the provisional

 18 registration. It'll be about a year in June. We

 19 really hope that final requirements can be

 20 published in regards to have full registration.

 21 From our perspective, we view the

 22 implementation -- we're in the implementation
 179

 1 phase now, so we're working very closely with

 2 John's group and other departments at the

 3 Commission to support them in using the system.

 4 We're hopeful that we can receive final guidance

 5 in regards to the registration requirements and

 6 those will be issued so we can move out of the

 7 provisional registration.

 8 I appreciate the Commission's time and

 9 look forward to any questions.

 10 CHAIRMAN O'MALIA: Jonathan?

 11 MR. THURSBY:: Hello, and thank you to

 12 the Commission for having me join today's SDR

 13 panel. My name is Jonathan Thursby, and I serve

 14 as the Chief Operating Officer of CME's Global

 15 Repository Service, so we're in the U.S. CME

 16 operates registered -- CFTC registered swap dealer

 17 repository for the rates, credit, FX, and other

 18 commodities assets classes. We are operational

 19 and accepting SDR reports in all four of our asset

 20 classes. CME's SDR is designed to provide our

 21 customers with the most efficient option of

 22 reporting, particularly for trades cleared at CME,
 180

 1 straight through processing. CME offers our

 2 customers the lowest operational and lowest

 3 burdens for complying with their regulatory

 4 reporting.

 5 In leveraging our long tradition of

 6 regulatory reporting systems and widely-installed

 7 infrastructure with our customers and third party

 8 vendors, CME is able to be a low cost provider and

 9 simplifier of SDR services. CME is further in the

 10 process of registering trade repositories globally

 11 to assist our customers and the market with multi-

 12 jurisdictional reporting obligations.

 13 Today we gather after an intense period

 14 of drafting, finalizing, and implementing rules,

 15 and we're just a handful of months into reporting,

 16 as Chris commented on. And it's appropriate that

 17 we do, in fact, take stock of where we're at and

 18 work to levels and expectations. As with any

 19 entirely new ecosystem comprised of software, and

 20 networking, and intricate processes, it should be

 21 expected that we go through a period of tuning and

 22 dialing in. And really after we experience what
 181

 1 all our hard work is doing, put into a real world

 2 setting.

 3 This reporting ecosystem is exceedingly

 4 complex and comprehensive, and we should be

 5 careful to keep sight of the primary purpose of

 6 mandatory swap dealer priority. It should result

 7 in the collection of useful regulatory data that

 8 provides access to swap positions for the purpose

 9 of assessing systemic risk.

 10 Implementation of such a large

 11 technology project should proceed deliberately.

 12 Market participants need to have clarity on

 13 requirements and sufficient lead times. They've

 14 been working very hard to understand our

 15 obligations and meet them, and clients look to

 16 CME, and I'm sure the other SDRs as well, looking

 17 for answers, but unfortunately many times we just

 18 don't have them. And given that, we need to pass

 19 through the threshold of having all of the

 20 foundational reporting mechanisms in place prior

 21 to going on a path of deep scrutiny on measuring

 22 against the end goal that we're all working
 182

 1 towards.

 2 For example, if there are not widely

 3 accepted standard, product code, IDs, the ability

 4 of regulators to aggregate will be compromised.

 5 UPI is a long-term project, and I would urge

 6 against attempts to harmonize product in advance

 7 of a UPI system, effectively doubling the work.

 8 And there's other instances where that would be

 9 true as well.

 10 At the same time, there are clearly

 11 challenges working to aggregate product where

 12 product descriptions can vary greatly for the same

 13 instrument. And I think this is an area where we

 14 can look at markets, such as credit, where some

 15 standardization already substantially exists, and

 16 the lift would not be too great to assemble a

 17 cohesive pitcher. For this and other prioritized

 18 areas of focus, we'd be best served as an SDR

 19 working group coming together at the direction of

 20 the Commission to identify the greatest needs and

 21 solve for them collectively.

 22 I was pleased to see last week's draft
 183

 1 of the key reporting fields, and we, too, have

 2 taken those under advisement and are looking to

 3 see where we can work to try to accommodate those

 4 fields. And I think the fact that they've been

 5 identified as critical to the work that we're all

 6 doing. It's this type of focus and prioritization

 7 that I think will serve us well in the goal of

 8 monitoring systemic risk.

 9 And it's understandable to have the

 10 desire for good analysis quickly following the

 11 implementation. And CME, and I'm sure the other

 12 SDR operators, are fully committed to doing

 13 everything reasonably possible to aid in all

 14 aspects of reporting and delivering good

 15 monitoring. Given the expansiveness, however, I,

 16 again, urge prioritization, along with identifying

 17 more controlled aspects as critical to our

 18 success.

 19 One important area that has more control

 20 is the interface between the SDRs and the CFTC.

 21 Purely on numbers, it's a far easier effort

 22 initially to work on our few entities than the
 184

 1 entirety of the marketplace to solve for how data

 2 is exchanged. And it's also worth remembering

 3 that in major events on the near horizon, that

 4 would change the landscape of reporting in a

 5 major. With the onset of SEFs, we'll see a

 6 significant consolidation of reporting entities

 7 for the vast majority of the swaps market. And

 8 given the projections of approximately 20 SEFs,

 9 the outlook should be promising that SDRs can work

 10 closely with this smaller audience to fully and

 11 more accurately represent the data. And working

 12 in this far more manageable context, I think we'll

 13 build benefits sooner.

 14 And as a side note, I would urge that as

 15 many of the end user reporting obligations that

 16 still remain to be linked with SEF rules timing.

 17 I think doing so would bring a clear transition to

 18 the market and prevent building solutions for

 19 short-term gap periods.

 20 In addition to harmonizing data into

 21 SDRs and then SDRs into CFTC, it will be important

 22 to achieve a level of harmonization across
 185

 1 jurisdictions to ensure data collected is usable

 2 for regulatory purposes. As the purpose of

 3 mandatory regimes is to monitor systemic risk, it

 4 will be necessary to review positions on market

 5 participants who engage in trading across

 6 jurisdictional lines. And establishing global

 7 best practices on representing data is essential

 8 to having readily available and meaningful data

 9 feed for a cross the board review.

 10 In addition, there are potential

 11 challenges around duplicate reporting. For

 12 example, as currently contemplated in the MIR and

 13 the Dodd-Frank cleared swaps would be both

 14 reportable to a U.S. SDR as well as an European

 15 TR. It will be burdensome to market participants

 16 and the service providers to have to make multiple

 17 reports on the same data under different

 18 representations and key rules. It's better to

 19 waive reporting where a substantially similar

 20 regime exists, and CME supports a collaborative

 21 regulator sharing model.

 22 The regional trace repositories could
 186

 1 serve as intermediate and aggregation points to

 2 the local regulator who is in the best position to

 3 coordinate with their global peers on data

 4 sharing. And to ease that effort, work should

 5 start first with end of day data. We obviously

 6 have much to do and much has been accomplished

 7 already. We look forward to the open discussion

 8 that will start today on how we collectively solve

 9 for our outstanding issues.

 10 CHAIRMAN O'MALIA: Well, I'm not going

 11 to -- this is where you all have to go to work

 12 now, figure out whether -- what John's request is,

 13 and these guys are going to deliver, and how you

 14 all fit into this. So don't hesitate to jump in.

 15 But let me -- John's slide is still up

 16 there, so what I'm a little confused about is the

 17 process you have all talked about, establishing a

 18 process, tracking data quality issues, provide

 19 information. ISDA mentioned it, FIA mentioned,

 20 but I don't see the process by which all of this

 21 gets done. Is it -- do you wait for John to

 22 dictate what he thinks is right? What's the best
 187

 1 to get everybody on board and solve this as

 2 quickly as possible? I'm confused as to what the

 3 process is, so maybe -- how are we going to get

 4 there? I'm open to ideas.

 5 MR. ROGERS: Because, I mean, certainly

 6 we will dictate the process. I mean, I think that

 7 ultimately it would be outstanding if, you know,

 8 from an industry group perspective, people were,

 9 you know, coming at us with solutions to solve the

 10 problem. But certainly we will be working with

 11 each SDR separately and together to continually

 12 improve the data quality, you know, issues and to

 13 continue to make use of the portals, including

 14 adding functionality to it. Each SDR has a portal

 15 that's up and running.

 16 Each one has particular things we would

 17 like to see in it. We will be in on an ongoing

 18 basis working towards improving that. So I think

 19 we have to step back and go back through each of

 20 the different themes.

 21 I think from a harmonization

 22 perspective, there needs to be collective dialogue
 188

 1 with us and with the SDRs on what we can

 2 harmonize.

 3 CHAIRMAN O'MALIA: I like the collective

 4 dialogue, but when and where does that happen?

 5 MR. ROGERS: It's been happening. It's

 6 actually happening, in some cases just begun, but

 7 in other cases been going on for a little bit

 8 longer. But it's been going on probably for the

 9 last month or two.

 10 CHAIRMAN O'MALIA: Is that a bilateral

 11 dialogue with each of the SEFs?

 12 MR. ROGERS: So far --

 13 CHAIRMAN O'MALIA: I'm sorry, with the

 14 SDRs.

 15 MR. ROGERS: -- it's with the SDRs. So

 16 far it's been a bilateral dialogue. I think that

 17 we need to do is add to that a dialogue that

 18 occurs with each of the SDRs. But that's only one

 19 facet of the challenge. I think that in terms of

 20 something like a UPI, it transcends. A

 21 conversation that we have with an SDR involves a

 22 broader community, and certainly this group has
 189

 1 talked about UPI and where it fits.

 2 There have been -- there's been global

 3 outreach in that regard. So I think it depends

 4 upon which category of data you're talking about.

 5 CHAIRMAN O'MALIA: All right. You've

 6 heard -- sorry, Chris.

 7 MR. CHILDS: Yeah. Could I just make a

 8 point on that?

 9 CHAIRMAN O'MALIA: Well then, we're

 10 going to go Steve, Pierre, and then the Chairman

 11 apparently wants to talk.

 12 MR. CHILDS: One of the things that

 13 we've noticed, and, again, the focus for us is, to

 14 start off with as being on credit rates, is there

 15 is actually a lot of standards already in there

 16 where trades are coming through. DS Match, for

 17 example, as a confirm platform standard exist. So

 18 I think what's not clear to me, however, is where

 19 other SDRs in the same space are collecting the

 20 same standards. And I think that that's something

 21 that we need to work on.

 22 But one of the things that will come out
 190

 1 of the analysis that each of the SDRs is working

 2 on at the moment is how bad is bad. And I think

 3 that what we're going to find is there's a quiet,

 4 broad population actually in those two asset

 5 classes that we can standardize. We can put it to

 6 bed. We can actually increase our validation on

 7 those trades almost immediately so that we

 8 actually reject anything within those -- coming

 9 through those channels that don't meet those

 10 standards. And then that will leave the rest.

 11 And then we need to have a look at the

 12 rest and we need to see whether or not standards

 13 can be applied. You know, in some instances on

 14 the very, very bespoke trades, and I'm sure Pierre

 15 will have a view on this, that's going to be

 16 harder.

 17 But we can start working on that

 18 population, which is not as big as people may

 19 think in rates and credit at this moment in time

 20 where standards don't exist. And we can make sure

 21 that those standards are then shared with -- put

 22 together in conjunction with the industry,
 191

 1 increase our monitoring and validation against

 2 those, and then hopefully apply to all SDRs. So I

 3 think a GAP analysis and a relatively quick gap

 4 analysis is where we should be starting across

 5 those asset classes.

 6 MR. JOACHIM: Sure, thank you. At

 7 FINRA, we've had 11 years' experience operating in

 8 the over the counter market with trace, and a

 9 couple of principles I think that we've dealt with

 10 and we've listened to a lot of the issues that

 11 have been here. And we've actually been working

 12 from the simple side from the more complex world.

 13 And what we call "complex" is not nearly as

 14 complex as what you're dealing with here, so I'll

 15 make that statement first.

 16 And we've been both in the exchange

 17 world and in the over the counter world, and there

 18 are very big differences between with exchange

 19 data where you can control and tightly define

 20 definitions and ensure consistency very easily.

 21 The over the counter marketplace is far more

 22 complex and difficult because every counterparty
 192

 1 becomes a decision point when they're completing

 2 their information that gets submitted to

 3 intermediaries who ultimately will pass on that

 4 information to the Commission.

 5 I'm going to echo some of the things at

 6 least from the lessons we've learned that are very

 7 important I think that have been said today, and

 8 some things maybe I'll say a little differently

 9 that may be a little heretical for some of the

 10 group here.

 11 And first is that -- I'm going to

 12 reiterate that I think that it's critical that the

 13 Commission start with a good idea, a very good

 14 idea of what they're going to do with the data.

 15 The temptation is to try to boil the ocean and say

 16 I'm going to collect this data for any way

 17 possible. The problem is when you do that, when

 18 you really get down to needing the data, you won't

 19 be able to use it the way you think because it'll

 20 be -- different questions have different answers.

 21 When you ask a question a different way, you'll

 22 define fields differently.
 193

 1 So I think some of the things you'll

 2 find out is when clearing -- and, you know, Chris

 3 just talked about clearing businesses, the

 4 definitions you might use for clearing might be

 5 very different than what you use for regulatory

 6 purposes. And you may want to define fields

 7 differently when you think about how you might use

 8 that data. It doesn't mean for clearing purposes

 9 the standard is not good. It's just that it's

 10 good for clearing purposes. It may not be good

 11 for regulatory purposes. And you have to resolve

 12 those key definitional issues as early as

 13 possible.

 14 I would say that in the more complex

 15 worlds, the one thing we discovered very early on

 16 in the process has been critical that we act

 17 together with the industry, that we listen

 18 carefully, but ultimately the regulator has to be

 19 the arbiter of what the ultimate call is as to

 20 what the definition is, that we can't just allow

 21 the consensus to define that because the consensus

 22 will come out with something that may not be the
 194

 1 right answer for regulatory purposes, and

 2 ultimately the regulator needs to make the hard

 3 call as to how things have to be defined.

 4 I think they have to do that with

 5 sensitivity to the issues with doing things and

 6 whether they're doable or not, but need to be very

 7 close to that decision process, intimately

 8 involved, and I don't mean with intermediaries. I

 9 mean with the counterparties who are going to have

 10 to complete this information who will start the

 11 process, because you need to understand the

 12 complexity that they're dealing with to make it

 13 work right.

 14 I'm going to try not to filibuster

 15 today. I have a couple of things because as

 16 people talked, it brings up a lot of the history

 17 that we've been through over the last 11 years. I

 18 think the one thing I listened to here is I don't

 19 know who is accountable for the integrity of the

 20 data. The integrity of the data is the most

 21 important thing you're going to have when you're a

 22 regulatory -- regulator. You need to know who to
 195

 1 hold accountable when you get the inevitable

 2 information that isn't accurate. And it's not

 3 clear to me who you define as the accountable

 4 party.

 5 At FINRA, we've always defined the

 6 accountable party as the counterparties. They

 7 were responsible for getting us the most accurate

 8 data. If the data is not accurate, they're

 9 accountable for it. There may be intermediaries

 10 that handle that data in between, but it clearly

 11 has to be in the hands of the counterparty. That

 12 may not be the right answer here, but that's been

 13 the right answer for us, and it's worked for us on

 14 a repeated basis when we found people who didn't

 15 report the data, or didn't report it accurately,

 16 even when they thought they reported accurately,

 17 sometimes they didn't or interpreted it

 18 differently. Very important for us to define that

 19 accountability structure so we can have that.

 20 In addition, as every party that touched

 21 that transaction from the time it's created to the

 22 time it's used by you, you need an audit trail.
 196

 1 Every change, every modification, every process

 2 needs to be recorded so that -- you know, and

 3 who's touched that so you know who to hold

 4 accountable for it during that process to ensure

 5 you have that integrity. When you use it, it's

 6 got to be done. It's got to be clean, and it's

 7 got to be in a way that you can make good

 8 decisions.

 9 The more macro the questions are you ask

 10 yourself, the less concerned you've got for

 11 precision in the data. So when you're asking for

 12 volumes and other kinds of things like that, you

 13 know, close is good enough. One percent, two

 14 percent off, you don't worry about that. But if

 15 you're looking at surveillance issues and you're

 16 down to the individual transactions, you need to

 17 have precision in all of that information, or it

 18 really is garbage in and garbage out. And you're

 19 going to find that when you need it the most, that

 20 that integrity will be elusive for you. And that

 21 goes right down to the customer set.

 22 So just some of the thoughts that I've
 197

 1 got. I've probably gone for another half hour,

 2 but I'll stop here.

 3 CHAIRMAN O'MALIA: Pierre?

 4 MR. LAMY: Yeah, I agree with what Steve

 5 said. What I would like to add is I think that

 6 the expression that we have today is you have,

 7 especially for the population of bilateral trends,

 8 is you have different reporting counterparties

 9 have been reporting the data without necessarily

 10 always a good understanding of the way they should

 11 report the data. And it's as to why we end up in

 12 that situation so we could debate for a long time,

 13 but definitely that is the situation.

 14 And I think on the other side, to some

 15 extent, probably there was a desire to get the

 16 data here, to make sure that people were able to

 17 comply with the reporting obligation.

 18 I think what we need to do now is to

 19 (inaudible) themselves into letting the

 20 counterparty reporting party know when they do not

 21 abide to the standard because each of the

 22 respective SDRs have defined their own grammar in
 198

 1 which they want to see the data. So the grammar

 2 exists, the protocol exists, the standard exists

 3 for each of those SDRs.

 4 What I would suggest in the initial

 5 stage is they let each and every participant know

 6 when each and every thread do not abide do not

 7 abide to the standard is not compliant with the

 8 protocol and then for a period of time of X number

 9 of months. After that period of time, then the

 10 thread will be rejected.

 11 But I think the discussion that we have

 12 today is -- and we heard that in some of the

 13 testimony before, is some of the SDRs may not

 14 necessarily know when they do not comply with the

 15 requirement that is being requested. So that

 16 definitely is the other side, is just letting the

 17 party know when they do not respect the protocol.

 18 On the CFTC side, it has been said quite

 19 a few times, is just to define the way you want to

 20 see the data and what do you want to use that data

 21 as a ball and thread, because definitely you will

 22 end up with data that will be specific to issues
 199

 1 here that may not have the same way to express

 2 itself, so you will have to define the common

 3 denominator in which you want to express the data.

 4 In that respect, what I would suggest is

 5 don't develop a CFTC specific way to express the

 6 data, but think about global correction down the

 7 road, and you want probably to leverage what

 8 exists at the industry level what exists among the

 9 SDRs. And you say the highest common denominator

 10 is the potential (inaudible). But leverage what

 11 exists already and do not engage yourself in

 12 developing your own guidebook because that would

 13 be a very long effort, and could position you in a

 14 CFTC specific solution that would not be scalable.

 15 MR. JENNER: Commissioner, may I make a

 16 point just in response to some of those?

 17 So I think just to echo what Steven and

 18 Pierre were saying about the Commission defining

 19 the data that's needed. I think another reason

 20 why that's important is perhaps something that we

 21 haven't considered yet so far in this discussion,

 22 and that is that with multiple SDRs, you are very
 200

 1 likely to get to a situation where not only is

 2 some of the market fragmented so you have a

 3 quarter of the rate to market in SDR one, another

 4 half in SDR two, and so on. But even beyond that,

 5 you'll have another layer of fragmentation, and it

 6 is very likely that PET data, real time data, will

 7 go one to SDR, and very possible, in fact, likely

 8 the continuation data will go to a different SDR.

 9 So, you know, in a punitive example, you

 10 could trade on a SEF that would report to perhaps

 11 the DTCC, SDR, and then you could clear that at

 12 CME whereby the continuation data would end up the

 13 CME SDR. And if you haven't defined the framework

 14 of data that you expect, you know, you're going to

 15 be lost in a sea of information where it's tough

 16 to even trace one trade through a life cycle.

 17 CHAIRMAN GENSLER: In listening to the

 18 last conversation, I find it interesting because

 19 normally we're led to believe that it would be

 20 better if some of our rules were less

 21 prescriptive, less detailed, and leave more to the

 22 markets, and here we're kind of getting some of
 201

 1 the reverse. We were fairly detailed in the rules

 2 for data reporting, rules in Part 45 and rules in

 3 Part 43, but we left some flexibility to the

 4 markets. And I think -- am I right? We're

 5 hearing -- well, you might want a little bit more,

 6 and then I have something further. But is that

 7 what I'm hearing, at least from some of you?

 8 MR. JOACHIM: Yeah, from me are. I

 9 mean, I think from a data perspective, when you

 10 use data, it has to be consistent, and, therefore,

 11 you have to be prescriptive to make sure it's

 12 accurate and consistent. And I also say that

 13 because you have all these counterparties making

 14 decisions, they're all investing in their

 15 environments today to get you their precise

 16 information you want, so they need to know the

 17 first time they do it or as close to the first

 18 time they do it, it's the right way.

 19 CHAIRMAN GENSLER: Right. Even though,

 20 I mean, we did have -- I can't remember -- these

 21 are the 120 fields, and it has to have legal

 22 identifier, and it has to have a unique swap
 202

 1 identifier. I mean, we're not without detail, but

 2 you're saying, at least for you, it would be

 3 further.

 4 MR. CHILDS: I guess the question is,

 5 you know, and I think John is coming to this now,

 6 that there are probably key fields that you need

 7 to be able to amalgamate across all SDRs and all

 8 reporting. And so, thereby -- and, therefore,

 9 they need standards. So the question is, do you

 10 go to that point, and you say we need standards

 11 here, and then let the industry work on what

 12 standards to apply, or do you actually define the

 13 standard, which would arguably reinvent something

 14 that's already in place?

 15 CHAIRMAN GENSLER: Can I just add one

 16 thing before -- Scott's earlier question and so

 17 forth in timing. I look at this in several areas.

 18 One is what you all are talking about

 19 standardization, or maybe I would just say

 20 reconciling data, or in a lay term, cleaning up

 21 the data. We have 75 swap dealers that are

 22 reporting data to three registered data
 203

 1 repositories. We may soon have a fourth or fifth

 2 data repository.

 3 So there's some uniformity, but it's not

 4 always uniform, and that's this discussion of

 5 standardization. We even have some dealers that

 6 might inadvertently be reporting the same trade

 7 twice or three times. I mean, we're still in a

 8 growing area here. I don't know that I personally

 9 have much to contribute there other than I know we

 10 need to clean up the data and make it usable and

 11 reconciled.

 12 But there's a second area is access to

 13 the data, which John laid out on his page 8. And

 14 I think he did it very well, so that's why I'm

 15 turning back. When he says the portal allows for

 16 data filtering, searching, sorting, and

 17 aggregation, those are the types of things that

 18 whether it's this regulatory body, or the bank

 19 regulators, or international regulators, when I'm

 20 in meeting with regulators or when we're just in

 21 our Friday surveillance meetings -- this

 22 Commission has had Friday surveillance meetings
 204

 1 for 30 plus years, and really talented staff come

 2 in and talk about -- they talk about something

 3 that they've in the futures market play sorted by

 4 this party or counterparty is doing this by this

 5 product on this day. These things that John

 6 picked here are very much in the bloodstream of

 7 regulators to be able to sort, filter transaction

 8 data by these types of things. That's what we

 9 anticipate and hope for, but also, I think, our

 10 rules require, rather than a stale portal or just

 11 a report, that our chief economist or our

 12 surveillance people can go swim in the data and

 13 aggregate and filter by these fields. So I

 14 wouldn't want to lose that. That's a really

 15 important one.

 16 And then lastly on aggregation, just

 17 because I've been in enough of these international

 18 meetings, there is a very real desire on the part

 19 of the international regulatory community to see

 20 some way to aggregate across data repositories,

 21 not just that in the U.S. we have three and may

 22 have four or five, but also that there may be data
 205

 1 repositories in certain countries. Maybe certain

 2 countries will dictate that they need them in that

 3 country.

 4 And so I think should anticipate that

 5 the international community will be keenly looking

 6 and studying about how to aggregate across data

 7 repositories and whether there needs to be a data

 8 -- an aggregation of all data repositories. And

 9 that might be more out of the Financial Stability

 10 Board and other organizations, and we might

 11 participate in those studies. But I think that

 12 that's a reality that the international community

 13 is looking at, how to aggregate across data

 14 repositories, either within jurisdictions or

 15 across jurisdictions.

 16 CHAIRMAN O'MALIA: Supurna?

 17 MS. VEDBRAT: I just wanted to add a

 18 little bit to the conversation that took place

 19 regarding the continuation data and the real time

 20 data, because one concern is, you know, like it

 21 was mentioned, we can -- you know, you can do to a

 22 block trade and its reported to the SEF SDR, and
 206

 1 then the end of day clearing takes place, you

 2 know, either at CME, ICE, or LCH. And then your

 3 end of day reporting goes to another SDR. So you

 4 have, you know, right there a fragmentation of the

 5 same trade flow.

 6 So, you know, if the market participants

 7 have the optionality that they could tell the SDR

 8 report my data to this other SDR, we would be able

 9 to help to keep at least the information of the

 10 same trade intact.

 11 And then, you know, the other piece of

 12 it is, you know, I would encourage, you know, the

 13 CFTC or the Commission to use the market to also

 14 help with, you know, some of the cleansing of the

 15 data because if the data is allowed to flow back

 16 or is accessible, you know, to the end users, you

 17 know, we will be doing our own reconciliation.

 18 And through that process, a lot of, at least, you

 19 know, the high level issues, you know, will get

 20 results, you know.

 21 So if, you know, John, the 22 fields

 22 that you mentioned, making that available to the
 207

 1 market, you know, may help to make sure that the

 2 interpretation as it flows through, you know, for

 3 SDRs in the U.S., it's consistently interpreted.

 4 CHAIRMAN O'MALIA: Can we focus on that

 5 issue for a second? And what is the right level

 6 of coordination among John telling the SDR what he

 7 wants, the SDR working with end users to

 8 contribute because there's kind of this feedback

 9 loop between the CFTC and the SDR in this, talking

 10 about taxonomy and all of the different potential

 11 ways to report it. But at the same time, we've

 12 heard from the end users, many of which do not

 13 have a dealer currently doing the reporting for

 14 them. So they're struggling a little bit to

 15 understand what it is the rules are. That goes to

 16 Bruce's point about, you know, serving as their

 17 information source in terms of explaining what the

 18 rules actually are to a whole area of end users

 19 that are currently uncomfortable with what's going

 20 on, haven't been following it very closely, and

 21 don't have a dealer to report in their trade.

 22 So we've heard it mentioned here, both
 208

 1 -- Pierre mentioned it, industry leverage and

 2 prioritization, and Steven mentioned it in

 3 coordination among the entities. So what is the

 4 right relationship?

 5 And we've already established the SDRs

 6 -- we're doing this on a bilateral, so

 7 coordination among the SDRs is kind of first order

 8 critical, and then what is the role for industry

 9 participating in that relationship? Can we just

 10 focus on that? Cliff, you had your card up, and

 11 then we'll go to Marshall.

 12 MR. LEWIS: Just an extension of this

 13 plan. I think it's particularly apt given recent

 14 events with the quality of commonly used pricing

 15 standards and indexes and benchmarks. And the

 16 analogy to the FINRA experience with trace I think

 17 is very apt. That really was a -- pardon me if

 18 I'm simplifying this too much -- really was the

 19 equivalent of the equity ticker. The idea was in

 20 a market that had no transparency whatsoever, buy

 21 sides fundamentally were really at the mercy of

 22 the sell side as to whether they were getting a
 209

 1 decent fill. And there was no way to do

 2 transaction cost analysis or any kind of best

 3 execution analysis. You know, some cynics would

 4 argue that was the reason CDS was invented indeed

 5 because of trace, but I wouldn't be that cynical.

 6 The reality is, however, I think the

 7 Commission should be thinking more broadly than

 8 just what is good for the Commission's purposes as

 9 a regulator, and basically view this as an

 10 integral part of the, if you will, the

 11 transformation of the market by introducing

 12 transparency, you know, a very fundamental

 13 principle. So you going to permit buy sides and

 14 new market participants on the market making side

 15 to operate differently.

 16 Getting them involved, I think, arguably

 17 is a much better force multiplier for you, the

 18 Commission, to figure out what's really important

 19 because what you've created is a hugely valuable

 20 data source, and it's the people that are going to

 21 be consuming the data, I suspect, even more so

 22 than your own internal statisticians that'll
 210

 1 decide how to make this really useful.

 2 There's no shortage of data or analytics

 3 companies, and those guys are going to be viewing

 4 this as a commercial opportunity. Obviously

 5 you're not going to give counterparty information

 6 out. But the reality is you should be thinking, I

 7 think, very much in terms of this being the

 8 equivalent of what trace did to fixed income, to

 9 the credit space, in basically providing a

 10 non-manipulatable benchmark that people can

 11 measure their transaction activities against. And

 12 that's a pretty fundamental part of the overall

 13 reform agenda that you guys are leading the charge

 14 on.

 15 I think more emphasis on the way people

 16 use this for transparency purposes, I think that's

 17 a hell of a lot more important than some of the

 18 more, you know, nitty gritty points. And I think

 19 you can get a lot of help on that, too, because

 20 there are going to be a lot of people that are

 21 going to be thinking they can make money out of

 22 using this kind of data. So I think you guys
 211

 1 basically can enlist the help of a lot of people.

 2 It's pretty clear that our friends at Bloomberg

 3 see this as a major value add for their commercial

 4 product. They're not doing it because they want

 5 to help the CFTC, I suspect. They're doing it

 6 because they, believe it or not, want to help

 7 Bloomberg, and that's a pretty good motive to

 8 have.

 9 And, as I say, the trace experience is

 10 really an interesting one, which I think you guys

 11 should get your head around fundamentally that

 12 this is about pricing transparency in a market

 13 that's today very opaque. And I think you should

 14 get your head around how you're going to help --

 15 how this is going to help solve some of the other

 16 problems, page 19-901, stuff that you're up to

 17 your, you know, your eyeballs on.

 18 CHAIRMAN GENSLER: I think it's a major

 19 part of what Congress and the President came to do

 20 in Dodd-Frank is to bring public market

 21 transparency after the trade, and that real time

 22 reporting was very much, when Secretary Geithner
 212

 1 put it in a letter to Congress in May of 2009, was

 2 very much focused on that similar, not identical,

 3 to a trace. And I think this is what we'd now

 4 call Part 43. So I agree with you there.

 5 And that the problems with benchmarks,

 6 like LIBOR and your EURIBOR, are now well known,

 7 that the challenge is there that there may not be.

 8 In fact, it looks like there isn't an underlying

 9 market underlying those critical indexes makes

 10 them susceptible to misconduct, that people can do

 11 a lot of mischief when it's not tied an anchored

 12 to real transactions, whereas putting this

 13 information out there on interest rates, and

 14 credit swaps, and energy swaps on a real time

 15 basis helps end users -- tremendous help to end

 16 users, but also it anchors stuff in reality. So I

 17 agree.

 18 MR. TERRY: So I just wanted to just to

 19 add, again, anecdotally, I mean, this is an issue

 20 I thought that in a large part -- Chris, you had

 21 mentioned it -- had been solved to some degree

 22 maybe two or three years ago when this issue was
 213

 1 finally picked up by the New York fed. Prior to

 2 that, there was a bunch of buy side folks, myself

 3 being one of them, who were driving the standards

 4 initiative for purposes of -- for various

 5 purposes. And only after the fed came in was

 6 worried about the exposure to derivatives when

 7 they forced buy side, sell side, and I think it is

 8 to play the key role in this. And they hired an

 9 outside consultant to help avoid the monkey

 10 chasing its tail scenario where everybody was

 11 trying to build something and they didn't really

 12 know what it was until they took a deep breath and

 13 those folks came into a room and put a road map

 14 together, an outline, and really started to figure

 15 out what it was they were trying to build towards

 16 so they can get to an end result.

 17 But it's surprising because a lot of

 18 these issues I thought would've been resolved, you

 19 know, when we did the data standards that came out

 20 in the fed -- you know, the New York fed when they

 21 were looking at this issue trying to reconcile and

 22 what have you. There's teams out there, like Try
 214

 1 Resolve, that have certainly benchmarked the 10 to

 2 15 trade attributes who need to figure out whether

 3 you have the trade, the market to market, so on

 4 and so forth. And a small shop like myself, I

 5 look at that report every day. I can scan it very

 6 quickly and kind of figure out where my exposures

 7 are, where are the outliers. So it sounds like

 8 we're reinventing the wheel here quite a bit.

 9 So, I mean, to your point, Scott,

 10 specifically, like, where do you look to, I would

 11 look to perhaps Karel from ISDA or whoever,

 12 because they have solved this problem to a great

 13 deal, and there's a road map that I think,

 14 although maybe not 100 percent in line with what

 15 you're trying to accomplish, is probably 80

 16 percent. Just from past experience.

 17 MR. ROGERS: I think that you're right

 18 to some extent in the sense that, I mean, I don't

 19 think that -- I don't want to convey that we're

 20 starting from zero. I think, you know, to

 21 Pierre's point, there are a lot of things that are

 22 already in existence that can continue to be
 215

 1 leveraged. And to several people's point, part of

 2 what the challenge is how do we want to make use

 3 of the data, because when you take something that

 4 is already standardized, you bump against -- you

 5 bump that against what your requirements are for

 6 the use of the data.

 7 MR. TERRY: Yeah, I totally get that

 8 point, but it sounds like then it's for you as the

 9 driver to tell the folks -- what I'm hearing over

 10 her is we have the data, we can do that. But they

 11 don't seem to have the exact -- like, what's the

 12 output, the end product going to look like? I

 13 know you're going to still try and do all these

 14 things, but like --

 15 MR. ROGERS: Right. There's multiple

 16 facets to it. The other part of that -- I think

 17 you're right. As we evolve through this process,

 18 there will be more and more detailed requirements

 19 that people will be able to react to. I think

 20 that at the beginning, we're talking about being

 21 able to aggregate on certain data, like laid out

 22 in the slides. But I think those requirements
 216

 1 will continue to evolve and become more specific

 2 and more complex, and there will be different

 3 asks.

 4 The other side of this, though, is also

 5 the -- just the implementation of it. You can

 6 have a standard, but then if you have multiple

 7 people implementing that standard, you can get

 8 very different results across each one. So having

 9 the standard in and of itself is insufficient.

 10 It's the application of it. And then it's

 11 understanding of the party that's utilizing that

 12 particular implementation that raises

 13 complexities. So it's a multi-faceted problem, as

 14 I'm sure you understand.

 15 But I think the main point is, yes, we

 16 should leverage what exists and bump it up against

 17 what the particular need is.

 18 MR. TERRY: I totally get that, and this

 19 will be my last comment. But then I guess I'm

 20 really confused as to where is the issue if it's

 21 not the standardization of the data. Is it

 22 because these folks aren't getting enough
 217

 1 directive to say, hey, this is what we're going to

 2 do with the data? Like, I don't mean to be

 3 political.

 4 CHAIRMAN GENSLER: We probably, if I had

 5 to guess, are more prescriptive and more detailed

 6 than anything the New York fed did, right?

 7 MR. TERRY: Probably.

 8 CHAIRMAN GENSLER: And at the time we

 9 did it, we were probably a little bit weary that

 10 we were getting too prescriptive.

 11 I think what's happened is now it's a

 12 year and a half since we finalized those reporting

 13 rules, and people have gotten -- you know, they're

 14 actually doing a good faith effort, 75 swap

 15 dealers are reporting, non-swap dealers are

 16 reporting now as well. It's human nature. Some

 17 are just reporting slightly different, and so then

 18 it comes to the data repositories to make heads of

 19 the tails of the slight differences.

 20 And so what I'm hearing from at least a

 21 number of people around the table is we need to

 22 maybe with the market wade back into this and see
 218

 1 where do we help standardize even more than we --

 2 So I suspect we probably are far more

 3 detailed than where there New York fed once was,

 4 but that's because the markets now have a legal

 5 requirement, and that was a voluntary requirement.

 6 And we've moved four or five years on from it.

 7 John has identified 22 fields, which are

 8 the first fields to work on. They're not the only

 9 fields long term. And it's really trying to work

 10 through. I wonder, John, to Supurna's question,

 11 whether you can let others know what those 22

 12 fields are. That's up to you and the SDRs, you

 13 know, some way to let others know.

 14 MR. ROGERS: Yeah, I think that's

 15 something that we should actually take up and

 16 figure out, I mean, because really what we're

 17 striving for is to improve quality. So sharing --

 18 the information we can share speaks to the

 19 transparency initiative and helps us get there

 20 faster. So I would agree with that.

 21 MS. VEDBRAT: And I think you know then

 22 just also making it mandatory that SDRs are
 219

 1 allowed the optionality of what -- where you want

 2 the data to be reported will help with the data

 3 integrity. So just as an example, if we traded on

 4 Bloomberg and they reported a real time trade, you

 5 know, to their SDR, you know, but we said that

 6 this is going to clear out CME, please report it

 7 to the CME. SDR, you have your data contained.

 8 There is data integrity over there. We're able to

 9 validate that the whole trade flow, you know, is

 10 either good or bad.

 11 You know, that's just going to help your

 12 process when you're aggregating the information.

 13 Just that one forced linkage will force

 14 standardization among all the SDRs because

 15 otherwise the market will not trade on those SEFs

 16 or participate with those SDRs if they can't cross

 17 -- send the data.

 18 CHAIRMAN O'MALIA: SDRs want to take

 19 that?

 20 MR. THURSBY:: Yeah, I'll go ahead and

 21 start. I think that with respect to what Supurna

 22 was talking, many of you probably don't have the
 220

 1 benefit to see this, but John and staff do and the

 2 portal that we provide, which we feel it's very

 3 state of the art in the way that it operates. And

 4 one of the nice features is the traceability to

 5 see back in linkage between the initial SDR, the

 6 original pre-cleared and then the post-cleared.

 7 And so actually there's a full audit history and

 8 linkage that's available. In fact, it's available

 9 to Black Rock and whomever.

 10 And I think the value in doing that is

 11 that you do get that full traceability and audit

 12 function. Perhaps maybe that's a function of, you

 13 know, the organic nature of where we're going

 14 where that type of view needs to ripple elsewhere

 15 across, you know, other places where data is

 16 housed. But it certainly is very possible to do

 17 that. I think that brings back and ties back and

 18 brings that consolidated view to that.

 19 And I would also add, getting back to

 20 discussions of standards, you know, I think we

 21 should be careful not to oversimplify and just

 22 say, you know, standardization. John had kind of
 221

 1 teased up our discussion talking about

 2 harmonization. And I think what we really could

 3 benefit from is direction where the Commission has

 4 seen the differences in what's being reported to

 5 them. Everybody kind of worked in their own

 6 little burrow and built out their solution.

 7 Reporters did, SDRs did, and now we're seeing what

 8 couldn't have really been fully contemplated,

 9 which was the blending and merging of the data

 10 back together again. And I think that's the daily

 11 sessions we've been having ongoing, to start

 12 saying, well, I'm seeing this over here, I'm

 13 seeing it from over here. And that's the

 14 harmonization I think we're talking about, being

 15 able to put together what language is everybody

 16 speaking and doing that.

 17 And in doing that process, we're

 18 learning about ourselves, and I'm sure the other

 19 SDRs are as well. And then it ripples back. We

 20 make changes, and those go on back down to our

 21 standards that we have we're reporting in, our

 22 client services team, with our customers. And
 222

 1 it's this very organic process, I believe, that

 2 happens. And I just feel that we're at the very

 3 early stages of it, and I know that we're working

 4 on a day-by-day basis right now, but I believe

 5 it'll resume. If we just continue and support

 6 that process, I believe that's one that we'll get

 7 good results out of.

 8 MR. TUPPER: I'd just like to add on

 9 Jonathan's point, I think as far as benefit, each

 10 of us as SDRs, the provision registered SDRs did

 11 meet with John's team for day sessions to review

 12 our portals, our standards.

 13 I think what his team is realizing is

 14 that each of us, we all collect data, but we do it

 15 in a different manner. And if I can make an

 16 analogy, the analogy I make is, you know,

 17 validation to SDRs, like margins or a

 18 clearinghouse, okay? So if we have very little

 19 validation and we'll just take anything in, which,

 20 you know, is happening in certain asset classes,

 21 that at the end, the end result is it's very

 22 difficult for John and his team to make sense of
 223

 1 that data. So, yes, we filled in these boxes. We

 2 filled in these fields. But did we do it in a

 3 high quality manner? Did we really validate that

 4 those values that were submitted by that customer

 5 are actual -- you know, they make sense for that

 6 particular field?

 7 So this whole level of what is

 8 validation in the quality of data really is

 9 different. You know, particularly even for us on

 10 the CDS side, you know, if you can clear a trade,

 11 then obviously it should be of high quality for an

 12 SDR. It's been cleared. You know, and I made my

 13 point earlier when you're dealing with end users,

 14 particularly in the commodity asset class -- the

 15 reporting hierarchy works well in fixed income

 16 markets. It does not in commodities. The largest

 17 group of trading is amongst end users. So there's

 18 a lot of challenges we're dealing with who should

 19 be the reporting entity, what is the definition of

 20 a swap particularly when you look at the trade

 21 options. So there's a lot of confusion there.

 22 I think by and large, the common trade
 224

 1 types are fairly easy, and those trades are coming

 2 in. Now that we've -- we're close to getting live

 3 and then were delayed, people have postponed

 4 dealing with reporting the hard trade set.

 5 CHAIRMAN O'MALIA: Greg, did you want to

 6 make a comment?

 7 MR. DUMARK: Yeah, two comments. Yeah,

 8 two comments. One is I know the issue of

 9 consolidation of the data post-novation, I think

 10 Supurna may have said, which is the choice to send

 11 a trade to the clearing house that is also

 12 operating an SDR. And I can see some of the logic

 13 behind that, but I also -- I think it belies some

 14 of the policy concerns and the Commissioner's

 15 directives on this point, which is that the SEF

 16 does have discretion to report to an SDR of

 17 choice. But also I think the underlying concept

 18 is that you would have multiple SDRs out there

 19 competing in this field, presumably to offer

 20 premium services, and you wouldn't get into the

 21 scenario of having things consolidated within a

 22 limited number of entities. So that's first.
 225

 1 The second, I wanted to revisit

 2 something Commissioner O'Malia started with

 3 several minutes ago, which is as a SEF or, pardon

 4 me, as an SDR that's hopefully coming to market

 5 soon, as I sit here from a practical standpoint,

 6 there are a lot of ways to get to the

 7 standardization issue. But I would love to get

 8 some coordination feedback from the Commission as

 9 I go back and work with our chief technology

 10 officer to put together these fields as a very,

 11 very practical matter of wanting to get this

 12 right.

 13 So I know in certain instances on your,

 14 I think it's Attachment A to the Part 43 with the

 15 fields, there are some suggestions. So for date

 16 and time, I think it's the UTC standard that we

 17 can take the lead on, and it's a well- recognized

 18 standard, so we know how to do that. If there are

 19 other examples, which it sounds like we're

 20 trending towards getting those examples or

 21 guidance to do that, we very much appreciate that.

 22 In other words, I think we can dialogue. Again,
 226

 1 we're not in the provisional status yet, but we

 2 hope to be there, but we can dialogue with our

 3 fellow SDRs how to get there.

 4 But I think having this triangulation

 5 with the Commission is essential because, you

 6 know, you can get astray here, and if there's --

 7 you know, and I understand there's been some

 8 bilateral ad hoc conversations. We're not yet an

 9 SDR. But I think you lose something when you have

 10 these conversations separately, individually, and

 11 understanding it's working through the process.

 12 But we need sort of this collective guidance or

 13 judgment and expectations from you as we,

 14 particularly us, come to market with our SDR. And

 15 I think having that sort of level of specificity

 16 is going to be critical for us.

 17 CHAIRMAN O'MALIA: Okay. I asked John

 18 to pull up slide four again to go back to these

 19 original questions. It says, "CFTC must set the

 20 course of action for consistency in data." So let

 21 me ask the SDRs, of the four of you, do you feel

 22 that you have a uniform process among yourselves
 227

 1 consistent with the CFTC to establish a process

 2 with submitters to ensure the quality of data

 3 flows in? Do you believe you have all the

 4 direction you need on that?

 5 MR. CHILDS: I can take that first if

 6 you'd like. I think that the dialogue that we've

 7 been having with the Commission over the last

 8 couple of months has been very, very useful. You

 9 know, we'd heard obviously comments around the

 10 fact that the data cannot be used, and it's poor

 11 quality data. So we really asked for some focus

 12 and prioritization. The 22 fields are going to

 13 help.

 14 I do think we need to do a gap analysis.

 15 I don't think we actually know how big or small

 16 the problem is at the moment, and I think it's

 17 important for each of the SDRs to actually do that

 18 analysis, first of all. How much of the buy asset

 19 class, how much of the data already has standards

 20 that are being complied with, and then what's the

 21 population that doesn't. For the population that

 22 doesn't, these standards exist already, in which
 228

 1 case, we can start ratcheting up monitoring and

 2 working with the industry on the usage of that --

 3 of those standards. Where they do not exist, we

 4 need to then work with the industry on creating

 5 those standards, and then going through the

 6 monitoring and validation process.

 7 So, you know, to answer your question, I

 8 think we've got more guidance now. I think we

 9 need more cooperation, not just bilaterally --

 10 CHAIRMAN O'MALIA: Specifically with

 11 who?

 12 MR. CHILDS: Sorry?

 13 CHAIRMAN O'MALIA: Specifically with

 14 whom do you need this cooperation?

 15 MR. CHILDS: Amongst the SDRs. And I

 16 think to understand where I've got standards and

 17 whether or not everybody is using the same

 18 standards would be extremely useful. That, by the

 19 way, doesn't mean that we all have to. It just

 20 means that if we've got different standards we

 21 need to be able to map that.

 22 So I think that, you know, the next
 229

 1 stage on this, right, is to do some, you know,

 2 kind of deep -- the devil is always in the detail

 3 on this stuff, so I think it's important that we

 4 do some -- we take a step back and so some

 5 analysis on the 22 fields and the level to which

 6 standards already exist. And then address a

 7 course of -- you know, or come up with a course of

 8 action based on that analysis. And to be quite

 9 honest, it shouldn't take us too long to do that

 10 in some of the asset classes.

 11 CHAIRMAN O'MALIA: Can I ask the SDRs

 12 whether they agree with Chris' evaluation of

 13 bubble number one up there? We'll get to the

 14 other two next.

 15 MR. JENNER: You know, I broadly agree.

 16 So I think we have some level of guidance that

 17 we're comfortable with in terms of collecting data

 18 from reporting parties. I think where there may

 19 be some guidance left to be given is once we have

 20 that data, I think we're comfortable collecting

 21 that data, aside from some sort of exotic kind of

 22 swaps, which we'll just put aside for a second.
 230

 1 So I think we're comfortable getting

 2 that data, but then once we have that data, how do

 3 you want to see it, specifically the Commission.

 4 I think we're comfortable, you know, from an SDR

 5 perspective making that data available to the

 6 public, perhaps giving them tools to shop and

 7 analyze that data.

 8 But, you know, I heard the first segment

 9 of this discussion being the Commission quite

 10 rightly figuring out how they should interact with

 11 an SDR, what kind of data they want, what kind of

 12 questions they want answered. And that's where I

 13 feel at the moment you're doing the investigation

 14 as opposed to making the prescriptions. But I

 15 think that's where there's probably some clarity

 16 required.

 17 CHAIRMAN O'MALIA: Jonathan, a comment

 18 on it?

 19 MR. THURSBY:: Yeah, a brief one. I

 20 think that we've taken the approach over a recent

 21 period thinking that the data we produce is of

 22 good quality and is appropriate. And I think it's
 231

 1 only when we get into a dialogue coming back from

 2 people who have taken a real good look at the

 3 data, who have a broader perspective are we now

 4 just learning that, in fact, there's things that

 5 maybe we could do differently or just different

 6 orientations of looking at it. And that's the

 7 dialogue that John indicated has just started.

 8 And I think it's still a fledgling

 9 exercise. I think more needs to go into it. I do

 10 think that a more formalized approach would help.

 11 Whether that's a combination of all SDRs getting

 12 together under the guidance of the Commission on a

 13 regular occurrence meeting, identifying key areas

 14 that we can all focus on. We've talked a lot

 15 already just about these 22 points, but I think

 16 there's more to it than people aren't appreciating

 17 that really what these points are aren't just get

 18 the day time stamp correct. They're really more

 19 at a higher level validation that we're talking

 20 about, and that doesn't just come because you have

 21 a quick conversation. You're going to check

 22 reference data sets. There's actual
 232

 1 appropriateness to determinations you're going to

 2 make. And that only comes -- it's an organic

 3 process. It has to happen.

 4 I think what's missing and what's not

 5 clear to us yet is what cadence is that going to

 6 take and who's participating in that, and what's

 7 -- when does a final determination get made for

 8 that that we've reached the end stop point, and

 9 not that it's an ongoing discussion for each area,

 10 that we come to final determinations, call it

 11 done, and then move on to others.

 12 CHAIRMAN O'MALIA: All right. I think

 13 those are all great comments to solving number

 14 one, fledgling market, who makes the decision, who

 15 else is going to be involved, do the gap analysis.

 16 I think there -- maybe if Greg

 17 representing FIA and Carl with ISDA thoughts about

 18 what your respective organizations can do on this.

 19 We'll come back to you in a minute, but give you

 20 some thoughts.

 21 Now, the second bubble is "Track data

 22 quality issues." Do you believe that we have
 233

 1 given you all the direction you need and you are

 2 of a similar mind on all of this and to track

 3 data, kick out errors? I don't remember who

 4 mentioned the process. I think it was Steve?

 5 Yeah, you had mentioned kind of -- no, Pierre

 6 mentioned a kick out after -- work with the

 7 industry for six months, and after that then start

 8 rejecting.

 9 MR. LAMY: The initial period of time

 10 has led the participant to know that is sending it

 11 the right way, and then kick it back.

 12 CHAIRMAN O'MALIA: Yes. So is everybody

 13 -- have we been clear about what we expect for

 14 tracking data issues and validation with the SDRs?

 15 MR. TUPPER: I think these recent

 16 meetings have been very helpful. To us, maybe we

 17 had the benefit, you know, of operating an

 18 exchange in compliance, so when we built out our

 19 SDR, we felt we pretty early on what the

 20 Commission wanted to with that data. And I think

 21 after meeting with John's team, and the end result

 22 is that an SDR, you have an obligation to take in
 234

 1 data that will allow the Commission, one, to track

 2 transaction level data in an aggregate manner, and

 3 then, two, to be able to generate positions. And

 4 if you're receiving data that you can't do that

 5 with, then you haven't fulfilled your obligation.

 6 So I think the end result is once we

 7 have to start building to these reports, that will

 8 really come to light as to who good data quality

 9 and validation.

 10 CHAIRMAN O'MALIA: Do you have a sense

 11 -- each of you have kind of a screening process in

 12 which you can reject bad data coming into your

 13 SDR?

 14 MR. LAMY: Yes, we do.

 15 CHAIRMAN O'MALIA: CME does?

 16 MR. THURSBY:: We do.

 17 CHAIRMAN O'MALIA: DTCC?

 18 MR. CHILDS: We do. I would suspect

 19 that the standards are different, but we do.

 20 CHAIRMAN O'MALIA: Okay.

 21 MR. DURKIN: Absolutely we would expect

 22 we would have that.
 235

 1 CHAIRMAN O'MALIA: Okay.

 2 MR. DURKIN: And it's within our

 3 environment today for a lot of other reasons that

 4 we would have those risk tolerances and quality

 5 assurances around the data.

 6 CHAIRMAN O'MALIA: John, do you have a

 7 sense of whether they're uniform?

 8 MR. ROGERS: I have a sense that they're

 9 not.

 10 CHAIRMAN O'MALIA: Okay.

 11 MR. RIEDEL: I'm not saying anything

 12 about which one is, you know, better or anything.

 13 CHAIRMAN O'MALIA: So the last one is

 14 prove information to the Commission on data

 15 quality trends by submitter. Is that some of the

 16 bilateral discussions? Have you been -- have we

 17 been having some of these things that we -- we're

 18 having a better sense, and I guess why we've honed

 19 down to 22 points?

 20 John, do you have a time frame when --

 21 it says "The CFTC must set the course of action

 22 for consistency in data." So what is our course
 236

 1 of action, and what is our time frame on this?

 2 MR. ROGERS: I think that we're on our

 3 way right now, so, I mean, I think if it comes

 4 down to the question -- I mean, it's difficult to

 5 answer the question, you know, when is all the

 6 data good enough kind of a thing. So, I mean, I

 7 think it is a continual process, and what we've

 8 been working towards is the notion of how can we

 9 track what is coming in that is acceptable and

 10 what is rejected, not again making a value

 11 judgment as to, you know, which regime is the

 12 better of the bunch.

 13 But we've implemented operational

 14 reporting to give us a sense of that. We've had

 15 conversations with the SDRs about reaching back to

 16 the submitters to work through data issues. And I

 17 think that's going to be an ongoing process. So I

 18 would say that it is already underway, but I think

 19 the proof is going to be as we get these reports,

 20 we should be able to see a trend of issues going

 21 down.

 22 And right now I still think we have work
 237

 1 to do to get the reporting where we want to see it

 2 by submitter. And I would think that that should

 3 not -- I mean, I would ask the SDRs the question

 4 about that. But I would not think that that would

 5 take a long time.

 6 And then we need to be trending -- doing

 7 a trend analysis on this data to see if we are

 8 making progress. I don't think you really ever

 9 get to a zero state with any data, but you want to

 10 be making sure that you're moving in the right

 11 direction. I would expect it to go down because

 12 we have just started up a new system, and people

 13 are going to have to adapt their existing systems

 14 to feed into the new SDR repositories.

 15 CHAIRMAN O'MALIA: When is that going to

 16 happen?

 17 MR. ROGERS: So I'm going to throw that

 18 over the other side of the table. I guess -- I

 19 mean, I would say that we already have reports on

 20 -- operational reports on transactions, what we're

 21 accepting, what we're rejecting. I think that

 22 there is going to be further discussion about
 238

 1 harmonization around what is the appropriate level

 2 of acceptance or rejection. I don't think that

 3 we're necessarily going to get to the same place

 4 across the board, but I think we'll find perhaps a

 5 balance there.

 6 The thing that I would throw across the

 7 table is if we're talking specifically about the

 8 report that shows you acceptance and rejection by

 9 submitter, that's a report that we have not seen

 10 yet, so that would be something that would have to

 11 be produced by each SDR. It would be a new

 12 requirement. So the question would be --

 13 CHAIRMAN O'MALIA: I'm not interested in

 14 a new requirement, whether they -- I want the

 15 data. We don't -- you know. I understand we got

 16 to validate whether they're accepting good data or

 17 not and to create a new requirement when they

 18 haven't -- you know, we haven't given enough

 19 information to fill the current requirements. I

 20 want to get the good data. What is the process to

 21 get there?

 22 MR. ROGERS: I think it's to continue to
 239

 1 do all the things that we've described, to work

 2 on, you know, starting off with the 22 fields to

 3 be having the SDRs reach back to the submitters,

 4 to do the things that Chris, Bruce, and Jonathan,

 5 and Greg, for that matter, you know, mentioned in

 6 terms of looking for standards, seeing if they're

 7 being applied, reaching back to the submitters to

 8 get the quality of data.

 9 The thing that I was specifically

 10 reacting to in response to your question, though,

 11 was --

 12 CHAIRMAN O'MALIA: Validation.

 13 MR. ROGERS: Yeah. How are we measuring

 14 the quality of the validation that's happening?

 15 It's one thing to reach back to them, but we need

 16 to have a view into is the situation getting

 17 better. And that's the thing that is feedback

 18 that we need to get.

 19 MR. DUMARK: I would say we have a

 20 compelling reason to make sure the data that we're

 21 getting, not just as an SDR, but as a data and

 22 analytics company, to make sure it's of quality.
 240

 1 So we know that there's an existing law

 2 out there to report on timely submitters, but in

 3 terms of our own internal controls, we want to

 4 know submitters that are submitting information

 5 that's not of good quality. And so, we absolutely

 6 will be tracking that from an operational

 7 perspective.

 8 MR. ROGERS: And I would expect that

 9 each SDR has a similar driver, and the only thing

 10 that I would add to that is we would like to see

 11 that as well, because we would like to see -- to

 12 address the issue of data quality, we'd like to

 13 see, you know, real measures that show that the

 14 quality is increasing. Us having -- you know, we

 15 talk about transparency in a variety of different

 16 aspects. Us having the transparency into that

 17 will help us have assurances that the quality is

 18 on the rise. And if not, then we can discuss what

 19 we're doing about that on a very specific level.

 20 CHAIRMAN O'MALIA: Michael and then

 21 Larry.

 22 MR. ATKIN: Yeah, just a point of
 241

 1 clarification that might make it easier. So there

 2 are various types of standards that exist.

 3 They're not the same, and they're causing a lot of

 4 confusion.

 5 So I'm going to suggest that there are

 6 four steps in this chain that we have to address.

 7 The first one is the original contract between the

 8 counterparties defines the data concepts, and

 9 that's precise as drafted by the counterparties,

 10 no matter bespoke the contract.

 11 The language to express those concepts

 12 is a standard for meeting. It's semantic. And I

 13 know we manage it. That's an ontology. The

 14 mechanism to transmit those standards is a

 15 message, and there are format standards, like FITS

 16 and FPM, that are used. So the format standard is

 17 not the same thing as the contractual or

 18 definitional standard, but they can be aligned,

 19 and they can be met.

 20 It's the translation of those concepts

 21 in the contract or your 22 data points that need

 22 to be translated into the standard language. That
 242

 1 has to be separated from a calculation process or

 2 a derived data formula. That then is a map to a

 3 standard format, and that's the objective. You

 4 can't short cycle that process, and right now

 5 we're kind of missing that language ontology

 6 translation process to align the meaning of the

 7 data that's transmitted in those format standards

 8 when it is possible to do. And maybe that's the

 9 kind of new direction that you need to head.

 10 CHAIRMAN O'MALIA: Larry?

 11 MR. TABB: I want to reinforce, I think,

 12 something that Superna said. And you've been

 13 talking a lot about validation and validation is

 14 incredibly important, but you can't forget about

 15 process, too. And so you have to define the

 16 process, or else you wind up kind of like, you

 17 know, the European take where you can kind of

 18 report anywhere, and people report twice, and you

 19 wind up with a process that you're not sure you

 20 get everything, but you think you reported

 21 everything, but you can't really find it.

 22 And so you really need to define the
 243

 1 process, and that's actually going to be hard

 2 because that might actually impact, you know, the

 3 competitive nature of those guys over there.

 4 CHAIRMAN O'MALIA: Greg?

 5 MR. WOOD: Yeah. There's just one thing

 6 I can add onto that. If you look at, like, the

 7 evolution of trading, and it doesn't quite apply

 8 in the same way to reporting. But you come across

 9 multiple standards. Everyone has their own

 10 standard for doing something. And over time, you

 11 end up with a best of breed. And really, it takes

 12 an evolutionary process to actually work out the

 13 kinks of certain approaches and to standardize on

 14 the same approaches across different formats.

 15 I think the problem we have here is we

 16 don't have the time to go through that

 17 evolutionary process. So you have to bring

 18 together multiple standards and try and get our

 19 best of breed with guidance from the end consumer,

 20 which is ultimately the CFTC, and of the

 21 regulators to then hopefully bring together these

 22 competing standards into something that is going
 244

 1 to be workable.

 2 Now, there's no reason why you can't

 3 have differences in approaches, which certainly

 4 today is what each of these companies are

 5 proposing, their business proposition. But we --

 6 I think the message here is we need to work

 7 together to close the feedback loop from both the

 8 end user of the data, the end user of the swap on

 9 the asset managers, and the providers of the data

 10 towards what's going very quickly to get that

 11 standard together.

 12 MR. THURSBY:: And if I may, I would

 13 hearken back to some of the comments I shared in

 14 the beginning, which is I think that's -- if

 15 you're looking for a place to maybe solve it a

 16 little better, it is between the end customer, and

 17 the Commission, and the SDR providers. It's the

 18 recurring SDRs and one end customers. There's

 19 plenty of precedent of taking data in, doing the

 20 transformations that are necessary to represent it

 21 in a way that is most consumable by the

 22 Commission. And I think that's something that,
 245

 1 you know, we could do more rapidly than trying to

 2 move, you know, a marketplace.

 3 And I would also call back to a comment

 4 I made, too, about not to try to avoid, you know,

 5 the hard work that has to be done for end user

 6 reporting that will persist beyond the emergence

 7 of SEFs, but the SEFs and their reporting does

 8 present a unique opportunity to try to solve for

 9 what I think is a fairly widespread issue, that we

 10 can consolidate down to a far fewer number of

 11 participants. And I think that that's something

 12 that we have an opportunity now to learn from how

 13 end user reporting has gone and move to SEF

 14 reporting in advance of that happening, and make

 15 sure that the reporting that we'll get out of SEFs

 16 that will come online are consistent with what our

 17 expectations are.

 18 So I think if we can learn something

 19 from the experience we've gone through thus far

 20 and move that forward to the next phase, I think

 21 we would, you know, find a lot of benefit from

 22 that, and then still continue the end user work,
 246

 1 you know, in parallel.

 2 MR. CHILDS: If I may just add to the

 3 last comments as well. We're making this sound

 4 like it's, you know, kind of one validation that

 5 applies to all. We've got five different asset

 6 classes here, and we run the gamut from

 7 electronically executed to bespoke trades. The

 8 level of standardization and the level of

 9 validation that you can actually apply is

 10 different based on that continuum. So it may not

 11 be -- it may not just be one SDR versus another

 12 SDR. It's the type of trades that you're trying

 13 to report on and the amount of activity that's

 14 required on that different continuum of trades is

 15 something that we all need to continue to work.

 16 As I say, the stuff that's

 17 electronically executed, cleared -- a confirm is

 18 pretty standard right now, and that comes to the

 19 point about the fed getting involved in the credit

 20 world. The other end of the continuum is not so

 21 standard at the moment, and we need to continue to

 22 work on that.
 247

 1 CHAIRMAN O'MALIA: Supurna?

 2 MS. VEDBRAT: I think, you know, hearing

 3 what everybody has to say, you know, we all agree

 4 that aggregation of this information will need to

 5 take place. So as we determine what's the best

 6 place for that aggregation to happen, if, you

 7 know, cost benefit analysis is also about

 8 integration, you know, that will be helpful.

 9 CHAIRMAN O'MALIA: Anyone else?

 10 MR. DURKIN: Commissioner, I mean, in

 11 the past you've successfully utilized working

 12 groups for -- pardon me? Did I --

 13 CHAIRMAN O'MALIA: You just stole my

 14 thunder.

 15 MR. DURKIN: I'm sorry. You know, I

 16 mean -- well, it's worked with this group. So if

 17 we, you know, might get some collaboration and

 18 apparent -- you know, obviously everybody wants to

 19 work towards the same common goal. And at the end

 20 of the day, nobody wants to make it difficult in

 21 any way, shape, or form for the Commission to be

 22 able to consume the data.
 248

 1 It seems as though there can be a way to

 2 understand what is it exactly that the Commission

 3 is trying to be able to retrieve from that

 4 information. The SDRs are the best experts to

 5 figure out how can they present that in a way

 6 that's consumable to the CFTC and give them a

 7 timeline.

 8 CHAIRMAN O'MALIA: Go ahead, Bart.

 9 COMMISSIONER CHILTON: I'm just curious,

 10 Mr. Childs. So I think it's a reasonable to ask

 11 us, you know, what's our priority. But as a

 12 registrant, you're supposed to give us the

 13 information to come into compliance. How do you

 14 think you could come into compliance? On what

 15 sorts of things could you come into compliance

 16 with quickly to meet the mandate of Dodd-Frank?

 17 MR. CHILDS: Well, I think we're already

 18 compliant. If you ask our customer base, they're

 19 reporting the fields of information that's

 20 required under the rules. We are receiving data

 21 every single day. We are providing that through

 22 to the Commission. And, you know, we conducted
 249

 1 portal access the other day. So we are compliant.

 2 The question is, though, is to the

 3 extent that we're all compliant sitting here, and

 4 everybody is receiving data or reporting that

 5 data, is it actually the data that you want to be

 6 able to do your job? So it probably meets the

 7 rules, and all of our participants would say that

 8 they're reporting exactly the information that was

 9 requested of them.

 10 COMMISSIONER CHILTON: So there's

 11 nothing that you think that can do that would be

 12 easier than what you're doing already. I do think

 13 that, you know, this conversation was a perfect

 14 conversation from that perspective. There's

 15 clearly stuff that we need to do collectively as

 16 an industry to help the Commission get to where it

 17 wants to get to, to help global regulators get to

 18 where they need to get to. That's across all

 19 SDRs.

 20 But we will argue that we're compliant

 21 for our customer base.

 22 COMMISSIONER CHILTON: Thank you.
 250

 1 CHAIRMAN GENSLER: I thought I'd say we

 2 do appreciate that DTCC as of yesterday, and I

 3 think it was just yesterday as a portal, and maybe

 4 we can look inside. So that's, you know, it's all

 5 a work in progress. I don't know if you're

 6 compliant yet, but it's a work in progress.

 7 I mean, this is not an easy task to take

 8 an industry that was opaque and make them

 9 transparent both to the public, as was pointed out

 10 through Part 43, and to regulators through Part

 11 45. And today is an enormous help, I think, to

 12 the Commission, and to John, and to all of you to,

 13 you know, try to keep this journey going towards

 14 greater transparency.

 15 CHAIRMAN O'MALIA: Well, per Bryan's

 16 suggestion, we'll pull together a team. But I

 17 think -- I was just talking to John, and the

 18 effort to continue to work on a bilateral basis

 19 with the SDR is important. But it is clear that

 20 we need to make sure that we do this in concert so

 21 we're all working together so you can disseminate

 22 that.
 251

 1 What we were discussing a little bit

 2 here was who are the right submitters to have in

 3 the room, and to make sure that that's an

 4 effective tool. And I think we're interested in

 5 having the right people and to make sure that this

 6 is a very manageable process.

 7 I think, Chris, you pointed out it's

 8 important to do a GAP analysis, but it's also

 9 important to -- ultimately the Commission needs to

 10 make a decision, and you all can talk about it,

 11 and consensus will be very difficult. But we need

 12 to make a decision, but based on some of the input

 13 that you all are providing and working with the

 14 submitters dealing with the submitters directly in

 15 order to make sure that they have, you know, they

 16 can comply with this, do some analysis about the

 17 most efficient cost-effective way to get the data

 18 that we need.

 19 And I think ultimately we'll all be

 20 better served by that. You'll be in a better

 21 spot. The SDRs will be fully compliant, and we'll

 22 have the data we need. So everybody wins in that
 252

 1 situation. But obviously a lot of conversations

 2 have to happen, so John and I were going to work

 3 on to make sure -- a solution so we have the right

 4 staff in the room working with the right SDRs and

 5 the right participants. And we'll try to figure

 6 that out and do that immediately and not -- this

 7 isn't months. This is within weeks. So we'll

 8 continue to work with that. We'll obviously work

 9 with DMO to make sure that we're following the

 10 rules as they wrote them.

 11 Rick, I don't know if you want to

 12 mention anything for the good of the -- otherwise,

 13 we're going to go to break.

 14 All right. We're going to just do 10

 15 minutes. We're already over again, so thank you.

 16 (Recess)

 17 CHAIRMAN O'MALIA: Okay. The next

 18 presentation we have is from Tradeworx, and they

 19 are a technology firm that has won a contract to

 20 provide the SEC's Division of Risk Strategy and

 21 Financial Innovation, Division of Trading and

 22 Markets with an equity and equity option market
 253

 1 data collection and an analysis system that

 2 combines to data services, applications, and

 3 related databases, and provides the SEC staff with

 4 the same speed, ease, and reliability of data

 5 collection and analysis that is available to the

 6 most sophisticated of market participants.

 7 Now, the reason I've asked them to come

 8 here is to -- once we get our data sort of out and

 9 we're able to use it, this is the potential. This

 10 is the value that we will have at the end of the

 11 day. This is something we will be able to use

 12 going forward. So I've asked Mike to come in with

 13 -- and his team at Tradeworx to give us some

 14 insight. And since we're over time, you know,

 15 bear with Mike as he tries to fly through this

 16 thing. And if you have any questions, ask him

 17 afterwards.

 18 MR. BELLER: Thank you, Commissioner,

 19 and thanks to the Commission for giving us this

 20 opportunity to present. I'm going to go really

 21 quickly today. I know we're behind time, and a

 22 lot of important information has been transferred
 254

 1 today. But I think it'll be helpful to give you

 2 just a quick picture of what we've done, how we've

 3 helped the SEC accomplish their mission, and

 4 possibly give a vision of how we might be able to

 5 -- the Commission may be able to reach the same

 6 sort of visibility in the future as this project

 7 you're embarking upon proceeds.

 8 A quick background on Tradeworx. We

 9 were founded in 1999 as a financial technology

 10 company. We provide the fastest

 11 commercially-available trading platform in U.S.

 12 Equities, which currently processes about five

 13 percent of daily U.S. equities volume, both from

 14 trade, which is trading operations, and a group

 15 extremely demanding institutional traders. And we

 16 provide the MIDAS analytics platform for

 17 government and private use to the Securities and

 18 Exchange Commission for visibility into the

 19 equities and options markets.

 20 I'm just going to take you back to May

 21 6th, 2010, the flash crash. What you see is a

 22 graph of the evolution of S&P 500 throughout the
 255

 1 course of the day, and you see a big dip around

 2 2:20 -- 2:40 in the afternoon. How bad was it?

 3 Spy plunged 4.7 percent in three minutes, and the

 4 S&P recovered 5.4 percent in the next three

 5 minutes.

 6 During that day, three billion equities

 7 messages were transmitted to markets, and 300

 8 gigabytes of equities market data was created,

 9 millions of messages per second in the peak

 10 message rate. And to a regulator, there's a

 11 challenge here: How am I going to make sense of

 12 all this?

 13 One question a regulator would

 14 definitely want to ask in this case is how did

 15 liquidity in the marketplace evolve during the

 16 flash crash? Was does it take to answer this

 17 question? You've got to analyze every price tick

 18 across 5,000 plus stocks and possibly half a

 19 million options, billions of data points. Is this

 20 is an impossible task?

 21 Well, here's the answer. What you see

 22 here is a graph with a number of stocks trading at
 256

 1 a penny spread at each time throughout the day.

 2 It's superimposed on that S&P 500 graph. But the

 3 green line shows what essentially can be viewed as

 4 a proxy for liquidity in the market. And you can

 5 see that there's a big dip in liquidity at the

 6 time of the flash crash. So this would be

 7 important information for a regulator to be able

 8 to see, but it could be very difficult to get

 9 them.

 10 Without the appropriate type of system,

 11 it could take weeks, if not months, to accomplish

 12 this. But with the type of system -- with a

 13 system like MIDAS, it can all be done in two lines

 14 of code and take not weeks, not months, but around

 15 2.8 seconds to answer that question.

 16 How do we do this? It starts with a

 17 data collection network. We have to collect the

 18 data at the market data centers, in our case, for

 19 minimum latency and for the best quality. There

 20 are six data centers, four in New Jersey, two in

 21 Illinois.

 22 Collecting data in 15 different
 257

 1 protocols, millions of messages per second. Just

 2 to give a sense of scale, we heard talk about an

 3 hour ago about essentially 40, 50 million messages

 4 being collected in a week. Go give a sense of

 5 scale, the equities and options markets, we're

 6 looking at 40 to 50 million messages in a typical

 7 busy minute, so it's a lot of data.

 8 We've got to capture, we've got to

 9 store, and we've got to analyze. And I'm just

 10 going to take quickly into each of these steps to

 11 give you a sense of what can be done.

 12 Capturing, it starts with those six data

 13 centers, and let's drill down on an individual

 14 data center. Inside a data center, each of these

 15 data centers has a matching engine, one or more

 16 matching engines. In this case the Carterette

 17 Data Center has the NASDAQ matching engine, and

 18 lots and lots of racks of equipment, a lot of air

 19 conditioning, a lot of heat and cold blowing

 20 around. And inside the matching engine, of

 21 course, you've got all the books. It matches all

 22 the trades. It generates feeds. And individual
 258

 1 traders here represented by a Tradeworx computer,

 2 for example, might send an order and receive data

 3 feeds and executions from the matching engine.

 4 It takes very, very fat pipes to collect

 5 this much data, so we have 10 gigabit or even 40

 6 gigabit cross connects into these matching

 7 engines. And all of this data is collected in

 8 NASDAQ's proprietary protocol. So inside the

 9 Tradeworx rack here, we have to have a feed

 10 handler, which normalizes the data. It takes in

 11 the raw data. It produces the normalized data.

 12 The normalized data would go into trading servers

 13 of Tradeworx and other customers of Tradeworx and

 14 subsidiaries technologies who are trading based on

 15 that data. But it's also stored for later

 16 analysis.

 17 The conversion is fast and robust. The

 18 conversion is performed in a microsecond to go

 19 from raw to normalized, and all while processing

 20 millions of messages per second. But that's not

 21 the whole problem because we've got six data

 22 centers, 13 different matching engines -- NASDAQ,
 259

 1 BATTALION'S, EDGX, ICE, CME, NYSE, et cetera, et

 2 cetera. And we need to collect all that data, and

 3 it's a lot of data.

 4 We discussed some of the scope, but we

 5 also should bear in mind that each of these

 6 exchanges is speaking a different protocol, so

 7 it's a different language. It would be like if

 8 you had your fixed ML and you have your other

 9 protocols for reporting swaps, but you also had 13

 10 other protocols. So there is a big normalization

 11 problem going on here. There's also a problem in

 12 that it's very important to have very accurate

 13 time on the data, because the clocks in each

 14 system will drift relative to each other.

 15 So here you see that at the NASDAQ, you

 16 has some precise time, but in each of these other

 17 places, there's some other view of time, and we

 18 have to -- then the problem is compounded by the

 19 distance between the data centers. So we make use

 20 of global positioning system, the same system

 21 that's used to help you find your way from place

 22 to place using your iPhone or what have you. And
 260

 1 we use it to lock time precisely to each location

 2 and eliminate the synchronization problem.

 3 Then networking. We have to have very

 4 fat pipes between each exchange. And for minimum

 5 latency between New Jersey and Illinois, we even

 6 have a microwave link because it's much lower

 7 latency than the available fiber lines. But the

 8 point is that we can produce a complete and

 9 accurate and precisely timed picture of the

 10 markets at each location at any moment of the day

 11 down to the microsecond.

 12 Now let's focus a little bit on storage

 13 because we talked about how much data that the

 14 Commission has to collect and has to analyze. And

 15 we have a similar problem on a larger scale in

 16 terms of volume in equities. Let's take a look at

 17 that Tradeworx rack where we were collecting the

 18 data. And what we have to address is, if we're

 19 going to store all this data, do we want to store

 20 it in each of these data centers? These data

 21 centers are very expensive and have very limited

 22 space because each of these data centers are
 261

 1 specialized to manage the exchange or to hold the

 2 exchange that's at the location, and to hold

 3 everybody else who wants to interact with that

 4 exchange at the same location. And so the space

 5 becomes limited and it becomes very expensive.

 6 Another problem with it is if somebody

 7 -- in, for example, the SEC, or the CFTC, or a

 8 customer of Tradeworx, or a subsidiary thesis

 9 wants to access this data, they would have to be

 10 physically located in the same data center to

 11 access it.

 12 Our solution to this is to move to the

 13 cloud. Cloud computing is a relatively new

 14 concept. I would say that the concept really was

 15 broken open in, say, 2007 when Amazon web services

 16 was born. Amazon basically took its retail

 17 infrastructure for managing its retail business

 18 and decided to make that infrastructure available

 19 as a service to other people. When it did that,

 20 it opened sort of a new front in computing where

 21 it is no longer necessary for somebody who wants

 22 to build out a set of servers or a set of storage
 262

 1 to do so by obtaining space, and then buying

 2 equipment, and then hiring people to put that

 3 equipment in, and manage that equipment. Instead,

 4 you can leave that all to the cloud provider, for

 5 example, Amazon. And when you want servers, you

 6 simply run a command or bring up a web interface,

 7 and servers are automatically spun up. Because

 8 their infrastructure is so large and so scalable,

 9 however much resource you might need, it's still

 10 small compared to what they have.

 11 Advantages of the cloud: Low cost,

 12 scalable computing, as I mentioned, and easy

 13 collaboration. So it's easy to share huge data

 14 sets.

 15 Tradeworx was an early adopter adopting

 16 the cloud, the Amazon web services cloud,

 17 immediately after it was created in '07. What we

 18 do is we take our data that's at these five --

 19 these six data centers. We chunk it, compress it,

 20 and transfer it into the cloud, and then the cloud

 21 magic happens. Let's talk a little bit about that

 22 magic.
 263

 1 The data is collected in the data

 2 centers, transferred into the cloud, placed in a

 3 large scalable database, transferred into data

 4 servers, which filter and catch the data. Then

 5 when, for example, a Tradeworx analyst wants to

 6 use the data, that analyst can log into an

 7 analysis server, and queries go out, filter data

 8 comes back, beautiful graphs come back, everyone

 9 is happy.

 10 Now, what happens when we have

 11 additional data sets, additional users? Because

 12 we're using the cloud, we simply put those data

 13 sets in the scalable storage of the cloud. We

 14 don't have to make a big capital investment. We

 15 don't have to have a long planning cycle. We just

 16 demand the storage and it's there for us. We fire

 17 up more data servers. Our analysts come in. We

 18 fire up more analytic servers. And all of this

 19 just interacts with each other in one seamless

 20 way.

 21 I'm going to go -- again, trying to go

 22 as quickly as possible. Focus for a moment on
 264

 1 analysis. The data can be analyzed on multiple

 2 levels. At the highest level is a graphical order

 3 book viewer, which lets you view the depth of book

 4 at any -- to any level of detail, single exchange,

 5 multiple exchange, simultaneously, time stamped to

 6 the microsecond. You can move forward, move

 7 backward through time watching the market evolve.

 8 You can answer questions like, visualize the order

 9 book dynamic surrounding a flash crash. See how

 10 locked cross markets are formed and are dissolved.

 11 But if that visual representation is not

 12 what you need, but you need a statistical

 13 cross-sectional view of the data, you can drill

 14 down into an interval data research platform,

 15 which looks at the data on a one second or a tenth

 16 of a second or a millisecond basis, and lets you

 17 cluster and partition the data. It lets you do

 18 cross-sectional analyses and lets you interface

 19 with, for example, tools you might have on your

 20 desktop, like Python or R or SAS.

 21 And finally, if you need -- and using

 22 that type of system you could answer a question
 265

 1 like, on a typical day, does spy lead e-minis, or

 2 do e-minis lead spy?

 3 If you wanted to go down to the next

 4 level and actually examine the market data on a

 5 tick by tick level, we have the tick data research

 6 platform, which includes a pattern recognition

 7 capability and a state-of-the art multi- exchange

 8 simulator. So you can from the highest level to

 9 the lowest level, and there's always a tool for

 10 that level.

 11 Now, let's take a look at we helped out

 12 the Securities and Exchange Commission with their

 13 data issues. It stats again with all this data

 14 being collected in Tradeworx's network and

 15 transferred up into the cloud. Along comes the

 16 Securities and Exchange Commission, and they need

 17 access to this data. But it is a petabyte of

 18 data. It is an enormous amount of data. It would

 19 fill racks and racks and racks of computers.

 20 And to move that all into the Securities

 21 and Exchange Commission's data center, well, let's

 22 just say that I don't think this project would've
 266

 1 happened if we had to do that. Instead, what we

 2 did was we created a private area within the cloud

 3 specifically for the Securities and Exchange

 4 Commission because it wouldn't do for the

 5 Securities and Exchange Commission necessarily to

 6 be using servers inside the Tradeworx cloud.

 7 Sorry, I don't have a pointer, so I can't point.

 8 The Securities and Exchange Commission has very

 9 specific security restrictions and limitations.

 10 They want a moderate system. They have various

 11 standards that they must meet. And we have to

 12 comply with those standards if we're going to

 13 provide anything to the Securities and Exchange

 14 Commission.

 15 So we created within the Amazon web

 16 services using their security tools a virtual

 17 private cloud set up specifically to the SEC's

 18 demanding security standards. Then we moved --

 19 began to transfer our data into that cloud, spun

 20 up data servers specifically on behalf of the SEC

 21 cashing and filtering the data. Now SEC users can

 22 log in to analysis servers, make requests from the
 267

 1 data, get responses, and, boom, get graphs in 2.8

 2 seconds.

 3 I think a couple of points I want to

 4 make here. First of all, the deployment that was

 5 possible because of the cloud was remarkable in

 6 both its speed and its cost. We were able to do

 7 this from the time we got going on the contract to

 8 about four months before all this data was in the

 9 hands of the Securities and Exchange Commission

 10 and available for their analysis. And the total

 11 cost -- while it's true that building out this

 12 infrastructure in the first place did cost over

 13 the years Tradeworx certainly tens of millions of

 14 dollars, we're able to provide this capability to

 15 the SEC extremely cheaply, on the order of around

 16 $2 million a year for access to this information,

 17 which would just be impossible if we hadn't been

 18 able to take this very high-performance technology

 19 we've developed over the years and then make it

 20 available in the cloud to the SEC.

 21 Because of the scalable nature of the

 22 cloud, the SEC can also add their own data sets,
 268

 1 and they don't need to do a lot of capital

 2 investment or infrastructure planning to make that

 3 happen.

 4 So in conclusion, I do want to say that,

 5 you know, the MIDAS system has been a really a

 6 roaring success at the SEC. Many more users have

 7 jumped than we expected, accessing the platform

 8 from all over across the Agency. Greg Berman has

 9 said that this basically propels the SEC from zero

 10 to 60 in one fell swoop. And Elisse Walter,

 11 Chairman of the SEC, has said that MIDAS is really

 12 becoming the world's greatest data sandbox.

 13 You know, I want to conclude by saying

 14 the Commission is clearly facing a massive pool of

 15 data, and the Chairman just a few minutes ago has

 16 expressed a desire to be able to swim in that

 17 data. And, I guess, maybe the Chairman of the SEC

 18 views it as a sandbox, and the Chairman of the

 19 Commission is in favor of swimming pools. But

 20 either way, the -- we believe that the similar

 21 tool set of financial big data analytics deployed

 22 in the cloud can address this issue in a very
 269

 1 cost-effective manner and give the Commission what

 2 it wants in terms of the ability to really rip

 3 through that huge amount of data you're about to

 4 have available to you and make sense of it in a

 5 very rapid manner, and exploratory, and

 6 interactive manner.

 7 Thank you, and I'm happy to take any

 8 questions, Commissioner. It's up to you whether

 9 there's any time.

 10 CHAIRMAN O'MALIA: I think we're going

 11 to reserve the questions, but I really appreciate

 12 you guys coming in and providing us kind of some

 13 perspective about what ultimately is possible once

 14 we get our data pool or sandbox in order and fully

 15 utilize it.

 16 So let me turn now to our final panel,

 17 and this is a discussion of the Technology

 18 Advisory Committee. You all are the best and

 19 brightest in this field, so I just want to have a

 20 discussion with everyone here about their thoughts

 21 on the events of April 23rd, because shortly after

 22 1:00 p.m. That afternoon, hack on the AP Twitter
 270

 1 feed with an estimated two million followers

 2 seemed to initiate $100 billion move down, which

 3 recovered five minutes later.

 4 The S&P dropped 11 points,.6 percent.

 5 The Dow dropped 144, down one percent. And the

 6 CME also witnessed drops of similar one percent

 7 fall.

 8 Now that Twitter hacking is a good

 9 example of the challenges we face on a daily basis

 10 from a variety of new electronic sources and the

 11 inputs that have an instantaneous impact on an

 12 unprecedented scale. The fact that a billion

 13 dollars in value can be erased from investments is

 14 very disturbing. So what I wanted to figure out

 15 and what we thought we'd have a discussion about

 16 today is your thoughts on it, and think about

 17 different things about what the right --

 18 appropriate regulatory response is.

 19 How do we deal with these scrape and

 20 trade algorithms that automatically read

 21 electronic messages and trade? What about the

 22 time and responses that occur? I mean, it moved
 271

 1 down very quickly, it came back very quickly.

 2 What do we need to think about that? Did the

 3 market respond as intended? We have CME here, we

 4 have ICE here, two of our exchanges in this

 5 market. We'd like to understand what happened

 6 there.

 7 We had obviously May 6th, we saw a far

 8 bigger drop, and I think Mike highlighted that in

 9 his recent presentation. So what does it mean to

 10 our markets and what happened in our markets? You

 11 know, I've asked Brian if he'd make a few comments

 12 about that, but let me -- before I get to Brian,

 13 let me see if my fellow commissioners would like

 14 to make any comments about their observations or

 15 just ask any questions. So, Mr. Chairman?

 16 CHAIRMAN GENSLER: I will, but I'm going

 17 to let Bart go first because I know he's up

 18 against time.

 19 COMMISSIONER CHILTON: What I want to

 20 say is sort of what I talked about in my opening

 21 statement. But, you know, I don't want to go

 22 overboard with some, you know, super zealous
 272

 1 regulatory thing, so I'm curious whether or not

 2 you all think that there's any sort of due

 3 diligence from the registrant perspective.

 4 I mean, think about if maybe, you know,

 5 a large investment bank, for example, if they were

 6 hacked and put out a false report -- you know,

 7 crude oil is going to go to 150 or 200 or

 8 something. But think about this hack attack, if

 9 it was done in concert with other news services.

 10 Now, we don't regulate news services, but for the

 11 folks that have -- that are trading, is there

 12 something that we should do in addition to what we

 13 already have? So, for example, you know, our

 14 false reporting, 6C1(a), our false reporting

 15 standards. It's not just for intentional giving

 16 information out that may be false and move

 17 markets, but it's for reckless. There's a

 18 reckless standard there. So is that something we

 19 should look at?

 20 I really don't know the answer, but I'm

 21 curious when it's appropriate to hear what you all

 22 think.
 273

 1 CHAIRMAN GENSLER: I'm interested in

 2 what you have to say. I look at this and I think

 3 there are operational risks. As I said earlier,

 4 the Financial Stability Oversight Council, which

 5 I'm honored to be on, identified this as one of

 6 the seven themes just last week in our annual

 7 report, operational risk and technology, and that

 8 happens when somebody can hack into a system or

 9 whether there's just human error that a bunch of

 10 trades are put into a system. And over the last

 11 18 months, we've had numerous reminders of these

 12 operational challenges, mostly in the securities

 13 world, not in the futures world. But, you know,

 14 we're not immune from the same issues of

 15 operational issues.

 16 In this circumstance, there's also false

 17 reporting that hacked into a system, and so I'd be

 18 just interested in feedback, whether there's

 19 anything that the CFTC should be doing in terms of

 20 having -- to help assure the public that your

 21 systems, whether you're an exchange, a

 22 clearinghouse, an intermediary, are robust and
 274

 1 resilient against what we know to be cyber attacks

 2 or otherwise.

 3 CHAIRMAN O'MALIA: Bryan?

 4 MR. DURKIN: Thank you. I mean, first

 5 of all, just taking the MNES&P as an example,

 6 during that five- minute time period, the market

 7 actually traded from 1573 down to 1557, and then

 8 it retraced back up to 1573, as you alluded to, in

 9 five minutes. That was a one percent move in the

 10 marketplace.

 11 And as you know, we have a number of

 12 controls that we have in place to deal with

 13 aberrant movements in the market, and those are

 14 really calibrated very much mirrored towards a big

 15 drop or gap in market performance itself. We did

 16 not see that at all in the context of the

 17 movements that we experienced that day. And so

 18 there was a great deal of liquidity as the market

 19 was breaking, and it was -- while it was rapid, it

 20 was orderly in terms of tick per tick trading

 21 occurring on the downside, with some movement

 22 upwards, a continued downside, and then a retrace
 275

 1 back up.

 2 So throughout that whole period, there

 3 was never a gap or a, you know, a huge aberration

 4 in terms of the market itself being able to

 5 respond to those movements. I mean, obviously the

 6 market did respond to news, and once that news was

 7 corrected, you saw the market also responded

 8 accordingly.

 9 MR. VICE: I think our markets had a

 10 similar experience. The types of brakes or speed

 11 bumps, whatever you want to call it, functionality

 12 in the system, to arrest spikes. It's similar to

 13 CME. It's really geared toward more shorter-term

 14 births, particularly in the absence of sufficient

 15 liquidity. So given that this happened over a

 16 longer period of time, none of those -- none of

 17 that functionality kicked in.

 18 I think as I step back, you know, being

 19 in this industry for 15 years or so, I think when

 20 I first started learning the business, most of the

 21 people I learned it from had a very kind of purist

 22 attitude in terms of, you know, as a market
 276

 1 operator, you should intervene as little as

 2 possible, you know. Let the market find its

 3 price. And I think, you know, as I started to

 4 have some gray hairs, I think we're in a world

 5 where that is increasingly, increasingly not true.

 6 And as the exchanges, we've built functionality,

 7 as we've described here, many times, both of us,

 8 as have most exchanges to deal with those type of

 9 short- term spikes.

 10 I think, you know, when I look at these

 11 things, like the Twitter incident, I think we're

 12 probably tilting at windmills if we try to imagine

 13 all the different ways that bad orders or bad data

 14 could get fired at us. We have to just insulate

 15 ourselves from regardless of what the cause of it

 16 was. I think we need -- they're all going to have

 17 various types of -- there's a finite type of

 18 profile generally, and we need to have an answer

 19 for all those. And I think the market -- everyone

 20 in the marketplace is at a point now where they

 21 would prefer intervention and a little longer

 22 period for the market to find its level on
 277

 1 legitimate information if it can have fewer of

 2 these types of spikes and less severity when they

 3 do occur.

 4 So I suspect there's more work for us to

 5 do. We'll probably continue to build more of that

 6 type of functionality, whether it's a very

 7 short-term spike or something that's more

 8 prolonged. But I think that would be my

 9 suggestion as far as where exchanges would

 10 continue to direct their resources and effort as

 11 opposed to trying to -- working with -- alone or

 12 with the Commission to root out all of the

 13 different types of bad practices, or even good

 14 practices that are poorly implemented on the

 15 various types of traders out there on the other

 16 end of the trading systems.

 17 COMMISSIONER CHILTON: So, Chuck and

 18 Bryan, I mean, the market was resilient. That's a

 19 good thing. It went down and it came back up.

 20 But, I mean, people did lose money. I mean, it's

 21 not like people had stop loss orders in. You

 22 know, if the price went down on whatever it was,
 278

 1 they may not have gotten back in. Now a lot of

 2 cheetahs, lot of HFTs may have been in on the

 3 downside in getting back.

 4 But my question is more like, should we

 5 explicitly require under our false reporting to

 6 include social networks? I mean, it seems to me

 7 it's a confluence of if you're a registrant and

 8 you have a Twitter that you're using, and Twitter

 9 today just said expect more of these things. And

 10 how they get in is so simple, I mean, we all see

 11 it. It's this spearfishing where, you know, it's

 12 like I send something to Commissioner O'Malia, and

 13 he thinks, oh, it's Bart, and he clicks on it, and

 14 then they're in.

 15 And by the way, we've had something

 16 similar happen even here. So, I mean, I'm not

 17 just saying this is, like, bad companies or

 18 anything. I mean, it happens in government.

 19 Heck, it happened with the FOMC minutes. So, you

 20 know, nobody is immune to this stuff.

 21 But unquestionably, whether or not we

 22 should have some sort of specific requirement
 279

 1 perhaps under our false reporting that says if

 2 you're reckless and not protect having supersized

 3 cyber security or something else that would allow

 4 your systems to be hacked, then you could

 5 potentially, you know, be penalized. I'm not

 6 saying we should. I don't know. But that's my

 7 specific question. And I don't know if you -- if

 8 Bryan or Chuck has a view on it, but I'm

 9 interested in other folks, too.

 10 CHAIRMAN O'MALIA: Evelyn?

 11 MS. FUHRER: Thank you. You know, in

 12 thinking about, like, the Twitter attack, I mean,

 13 one of the things that seems to be the common

 14 thinking is that it was just a hack, you know.

 15 Just a hack out of Syria, whether it was

 16 malicious, some kids playing, or, you know,

 17 hackers trying to outdo each other, you know, we

 18 don't know.

 19 But I think to the question at hand and

 20 the question whether or not we should apply

 21 regulatory dictates, I think we have to think

 22 about the pure hacks and whether our people use
 280

 1 these types of techniques to actually try to

 2 manipulate the market, okay? There's one thing,

 3 you know, to penalize somebody if they don't have

 4 the right level of cyber security. I mean, you

 5 know, I'm very involved in these kinds of issues,

 6 and personally I think that, you know, there's

 7 constantly going to be a tax no matter what people

 8 do. And in my way of thinking, this is very

 9 analogous to where we were 20 years ago with

 10 disaster recovery, you know.

 11 We have come to a point where there was

 12 a realization in the marketplace. Things are

 13 going to happen. Terrorist threats are going to

 14 happen. Floods are going to happen. You have to

 15 have disaster recovery. I think that's where we

 16 are now in the area of cyber security. I think

 17 we're going to come to recognize that there are

 18 going to be attacks. Things are going to happen.

 19 We have to have alternatives to deal with this.

 20 And here specifically again, you know,

 21 to my point about I would be more concerned if

 22 people are maliciously spearfishing or attacking
 281

 1 because even if the markets are resilient -- go

 2 down three minutes, go up three minutes -- if

 3 people are trying to manipulate the market, they

 4 could be making a ton of money like you said in

 5 that particular time.

 6 Here, you know, there are people who --

 7 smart people who made money, but it's probably not

 8 -- I mean, they're probably not the same person

 9 who hacked the system. So I think we need to be

 10 careful about how we look at this and really think

 11 through all the possibilities.

 12 CHAIRMAN O'MALIA: Supurna and then

 13 Michael.

 14 MS. VEDBRAT: You know, this is

 15 obviously a very difficult problem, you know, to

 16 be able to solve for. But, you know, one thing

 17 that I'd just like to discuss is as we break it

 18 down into its different components. One is the

 19 source of information, so the source of

 20 information, you know, happened to be Twitter and,

 21 you know, whether that's used as a reliable source

 22 of information to drive a trading strategy that's
 282

 1 questionable in itself. So that's, you know, the

 2 source here was hack.

 3 The other is that information caused,

 4 you know, movements in the market, you know, which

 5 could be, you know, various different forms that

 6 may have triggered signals for trading. You know,

 7 now those trading signals, you know, they reacted

 8 to the movement in pricing, which could've been,

 9 you know, good or bad information. And you can't

 10 really figure out a way in which to say that,

 11 okay, these signals were good, that they're going

 12 to react to changes in the market.

 13 So, you know, as we try to solve for it,

 14 you know, we do have to keep those two components

 15 separate because the second one, you know, it is

 16 all algorithmic trading. It is high frequency

 17 trading. And, you know, we want to be mindful

 18 that we don't in any way harm that end of the

 19 business because of erroneous information, you

 20 know, whether it's Twitter or somewhere else, you

 21 know, driving, you know, the markets to react.

 22 CHAIRMAN O'MALIA: Michael?
 283

 1 MR. GORHAM: Yeah, two things. One is

 2 historical, and in the 18 years that I sprinted

 3 the CME, there were a number of times where there

 4 were rumors. In fact, I think it wasn't uncommon

 5 for the President to be assassinated a couple of

 6 times a year. So these rumors started --

 7 CHAIRMAN O'MALIA: Rumor. In

 8 rumorville.

 9 MR. GORHAM: Oh, in rumor. Sorry. You

 10 know the history. So the point is I don't know of

 11 any case -- it wasn't my job at the time, but I

 12 don't know of any case that those rumors were ever

 13 tracked down. And Bryan might know something

 14 about that.

 15 But the second is that -- well, my point

 16 there is people will always try that -- in those

 17 days it was always for profit that they were

 18 trying to do it. Second, but speaking, Mr.

 19 Commissioner, to your point, the -- I guess what's

 20 not clear to me is would you want the ability to

 21 go after AP or Twitter in this kind of case if

 22 there was --
 284

 1 CHAIRMAN O'MALIA: No. It would not

 2 only be somebody that we have jurisdiction over,

 3 so you would say, you know, should an investment

 4 bank, should somebody that trades in our markets

 5 have a heightened level of cyber security in place

 6 to avoid having -- because the information that

 7 registrants may -- if they're hacked in, it may

 8 mean a lot to the market. We can't control -- I

 9 can't control, you know, Twitter as a corporation,

 10 but I might be able to -- we might be able to deal

 11 with a market registrant. I mean, I think we

 12 could deal with a -- we may have the authority

 13 under 6C1(a) now, but I don't know that it's

 14 specific enough.

 15 And since this is a new issue and we're

 16 just getting it on our radar because of the hack

 17 attack, it seems to me that's why we should

 18 consider what we do.

 19 MR. GORHAM: So you think nothing that

 20 we could do would've prevented what just happened,

 21 but you're just thinking more broadly about the --

 22 okay. Got it. Thanks.
 285

 1 CHAIRMAN GENSLER: I think -- I mean, to

 2 my eyes, was you said, there's false information

 3 whether it's a rumor about the President or other

 4 rumors that will be here 100 years from now as

 5 well. But to me, I use this term -- it's kind of

 6 boring -- "operational risk." But it's a bit of

 7 an arm's race between hackers and bad actors, and

 8 I will include hackers with the bad actors. Oh,

 9 my god, now they're tweeting about me saying

 10 that's not good maybe.

 11 And so it could be a hacker. It could

 12 be a governmental or a terrorist organization, you

 13 know. It could be anything out there that just

 14 wants to disrupt the flow of commerce here in the

 15 U.S., whether it's false information or even

 16 trying to get into a clearinghouse system, a

 17 trading system, FINRA system, or an intermediary

 18 system. And that's what's so -- it's just

 19 reminding, to me, this event, as to this bit of an

 20 arms race of how you build firewalls, how you

 21 build appropriate protections at the large

 22 financial institutions that exchanges
 286

 1 clearinghouses and the like.

 2 We don't regulate AP or Twitter, but I'm

 3 just saying that's one of the reminders I take

 4 from this. But Bryan seems to -- I'm sorry.

 5 MR. DURKIN: I'm just -- without getting

 6 into any proprietary or confidential information,

 7 I just want to assure the Commission that the CME

 8 group has a very robust global information

 9 security program. We recognize the

 10 responsibilities that we have as a marketplace,

 11 and the fact that we have a global network that

 12 extends itself to, you know, virtually 100

 13 countries throughout the world. Having a robust

 14 information security and risk management system in

 15 place 24 by seven is a top priority to us.

 16 We're very, I think, conscientious in

 17 communicating with your team here in terms of our

 18 efforts and progress in that regard.

 19 CHAIRMAN O'MALIA: We will go with

 20 Irene, Larry, Cliff, and then I think Steve had

 21 something.

 22 MS. ALDRIDGE: Thank you. I think from
 287

 1 a regulatory standpoint, one thing that may be

 2 useful is to actually track persistence of

 3 entities that trade on similar events, like

 4 Twitter hacks, because there it's fairly -- I

 5 wouldn't say "simple," but it's possible to

 6 demonstrate some sort of an intent. So if the

 7 same entity trades and persistently benefits from

 8 something like the Twitter hack, then you can make

 9 a case that potentially they're doing it or

 10 they're involved somehow with malicious activity.

 11 CHAIRMAN O'MALIA: Larry?

 12 MR. TABB: I look at this as a, you

 13 know, a couple of different issues. I think, you

 14 know, first, you can't just look at Twitter, you

 15 know, because people are starting to mime

 16 Facebook, and, you know, they're digging down in

 17 the web. I forget exactly how long ago, but

 18 wasn't it IBM's corporate earnings were posted

 19 early, and somebody got a hold of it, you know,

 20 and traded before it was supposed to get released?

 21 There are these things that are

 22 happening all the time, and there are lots of
 288

 1 folks mining it, so you can't just look at

 2 Twitter. People are pulling information from

 3 everywhere. And so whether it's true or it's not

 4 true, people are going to be mining the stuff and

 5 trying to discern issues, so that's -- I think you

 6 got to take that out. I don't think you're going

 7 to be able to stop that.

 8 Then you've got the whole issue of

 9 market manipulation, people putting out fraudulent

 10 data. That's illegal to begin with. So the

 11 question then becomes is how do you track that

 12 down, and maybe that gets to, you know, Menage and

 13 Tradeworx, and trying to get a better data

 14 platform to be able to find, you know. What Irene

 15 said, how do I find out who's profiting, and maybe

 16 that's a way to look backwards and see who's doing

 17 it.

 18 And then you've got the security

 19 infrastructure, you know, the futures and

 20 securities infrastructure, which for most folks

 21 that I know, you know, it's on all private

 22 networks. Now that's not to say that I can hack
 289

 1 through an FCM and then, you know, trade through

 2 the, you know, the FCM to get into the exchange,

 3 but there needs to be best practices and support.

 4 And I think the industry has done a pretty good

 5 job on the security side of keeping that secure.

 6 So I'm not a big proponent of doing a

 7 whole ton more because I'm not sure that, you

 8 know, you've got news. You're not necessarily

 9 sure if it's a rumor or not when people are

 10 trading this down. It's only the point where it's

 11 going to be determined that it's not true that it

 12 starts going back up. And, you know, do you all

 13 of a sudden put, like, three-minute pauses every

 14 tick or something like that to say, well, is the

 15 information that Irene is trading on, is it right

 16 or not? You know, I don't know.

 17 I think it's really more to do with

 18 ensuring that the integrity of the infrastructure

 19 is good. I think that's the biggest thing that we

 20 can actually focus on, not what people are trading

 21 on and if the information they're trading on is

 22 reliable, you know.
 290

 1 CHAIRMAN O'MALIA: Cliff?

 2 MR. LEWIS: We had some experience or I

 3 had some experience with the way you guys reviewed

 4 the Commission staff reviewed security

 5 arrangements in the context of a designated

 6 contract market approval. And I would say that

 7 you did a good job. It's probably sensible to go

 8 back and look at it as to whether the core systems

 9 are secure. But, you know, banks have to do with

 10 this with the fed all the time.

 11 It all comes down to who on your staff

 12 has access to critical systems. Is part of this

 13 you go through the process of what they call

 14 ethical hacks where you bring in some guys who are

 15 sort of shaggy that need a bath, and they try to

 16 break the system? And everybody in the financial

 17 services industry does that.

 18 That said, I think the key thing here

 19 was something the Chairman alluded to, which is

 20 the extent to which this goes to a different level

 21 than merely for profit and goes to the level of

 22 state-sponsored terrorist activity. And I think
 291

 1 that's a totally different kettle of fish, and I

 2 don't think -- I think it's fair to say that the

 3 systems that commercial enterprises can put in

 4 place would not be expected to be necessarily

 5 sufficient to a concerted attack, say, by the

 6 Chinese government.

 7 And, you know, it sounds like a Clancy

 8 novel to talk about this, but I would encourage

 9 whether it's the board that the Chairman is

 10 talking about or the Commission to worry very much

 11 about that. I think that's a really big, big

 12 deal, and complacency is not smart about this.

 13 You know, as a platform operator, you get service

 14 attacks all the time, you know, thousands a month,

 15 but this is a different order.

 16 And the third thing I'd say is, you

 17 know, really what you got to come back to, and I,

 18 you know, I'm not arguing this, but I've known

 19 those that have. The old days -- I'm looking at

 20 Chris -- you know, when you'd have a limit, you

 21 know, price movement limits in markets, you know,

 22 whether or not because of the state-sponsored
 292

 1 possibility, or, frankly, if the Twitter thing had

 2 been true, what sort of price movement, if there

 3 had been an explosion at the White House, would

 4 have been a reasonable movement?

 5 I mean, I can't say, but I think it's

 6 something that that's -- you can argue a lot about

 7 what government is for. This is something

 8 government is for, to figure that out.

 9 CHAIRMAN O'MALIA: Steve, yeah.

 10 MR. JOACHIM: I'm not going to try and

 11 torpedo everything everybody else said. But I

 12 think that we have to keep our eye on the ball in

 13 terms of what the problem set is, and the problem

 14 is a moving target. One thing we know is

 15 technology is evolving at an incredibly fast pace,

 16 and it's becoming actually more decentralized.

 17 And the ability of one individual actor to create

 18 havoc has grown dramatically. I think if we focus

 19 on the information flow, I think we're going to

 20 lose track of what the real problem is.

 21 The thing that keeps me up at night are

 22 account intrusions. There are so many points of
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 1 entry into the environment today that a bad actor

 2 who can step into a weak player -- we're only as

 3 strong as the weakest link we've got -- could

 4 ultimately create significant havoc in the

 5 marketplace. And I think we as regulators need to

 6 keep our eye on that on a regular basis, always

 7 trying to find where those weakest points are and

 8 focusing on those to be sure that we are looking

 9 to find ways to close those loops.

 10 I don't think it's information. I think

 11 it's much more -- we're much in danger of a rogue

 12 trader or a rogue individual executing a

 13 tremendous number of transactions in a very short

 14 period of time in a way that potentially could

 15 have deleterious effect on the broad-scale

 16 marketplace.

 17 CHAIRMAN O'MALIA: Thinking of any

 18 special event in recent --

 19 MR. JOACHIM: I hope not. I try to

 20 ignore those.

 21 CHAIRMAN O'MALIA: Chris?

 22 MR. HEHMEYER: Just one last thought.
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 1 It is true the rumor thing is illegal, and we've

 2 talked about, whether it was a wheat embargo or

 3 the mad cow disease. One thing that's, I think,

 4 breathtaking is how fast the machines can now

 5 react, and the ability to distribute information

 6 can travel so much faster than just in the hallway

 7 at the Board of Trade. And so that's what's

 8 breathtaking about it.

 9 And the challenge for you all, and so

 10 much of this could be in the data. The challenge

 11 is that fast doesn't necessarily mean illegal, and

 12 that's a challenge because it's on the frontier of

 13 these technologies. And so it's a challenge for

 14 all of us. Thank you.

 15 CHAIRMAN O'MALIA: Bryan?

 16 MR. DURKIN: Just to reiterate, the

 17 industry and the exchanges in particular have

 18 taken a number of steps to prevent the types of

 19 movements that I think a conversation is carrying

 20 on into now: Velocity logic, stop logic. I mean,

 21 there's been a number of controls that we have put

 22 in place over the past two years to prevent those
 295

 1 types of movements, and the market would

 2 automatically stop. That was not the case in this

 3 situation.

 4 CHAIRMAN O'MALIA: Well, that's easy --

 5 interesting because a lot of reactions -- because

 6 it's an automated. I think somebody mentioned it

 7 was an automated reaction. It moves quickly. Big

 8 news in the market. But yet this -- in this

 9 instance, it went fairly -- relatively slow in the

 10 microsecond trading environment that we're used

 11 to. So what do you see in the market? Was it a

 12 different set of participants? Anybody want --

 13 anybody have any comments that -- I think you want

 14 to stay away from it, Bryan. But Larry?

 15 MR. TABB: Well, it was a Twitter feed,

 16 so it wasn't a registered, you know, AP secure

 17 line direct feed or Reuters, you know, or

 18 Bloomberg, you know, authorized, you know. People

 19 weren't paying for it. So, you know, trading off

 20 of Twitter is actually something pretty new, and

 21 there aren't a ton of folks doing it. So because

 22 it didn't -- you know, if it would've come through
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 1 the Dow Jones, you know, secure high speed, you

 2 know, news feed, I'm sure it would've had a much

 3 more severe reaction.

 4 CHAIRMAN GENSLER: Can I just ask? Are

 5 people on the Dow Jones feed technology scraping

 6 the information, looking for words, and then

 7 having algorithms that trade off of key words?

 8 MR. TABB: Yes.

 9 CHAIRMAN GENSLER: That was a yes. But

 10 you're saying they're not yet doing that over on

 11 the Twitter feed?

 12 MR. TABB: Twitter is much more

 13 difficult. First of all, some of the more news

 14 feed oriented things they actually have

 15 elementized news feeds, so, you know, you know

 16 it's an earnings release. You know it's very

 17 structured for machines to read this stuff. And

 18 even some of the more -- you know, the broader

 19 things are more structured, so they're used to

 20 being read.

 21 Twitter, I don't know if it's you. I

 22 don't know if it's your kid. I don't know if
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 1 it's, you know, someone who doesn't know anything.

 2 I have to really try to understand, you know, who

 3 it is, what they're saying, what's the sentiment,

 4 is it positive, is it negative, what's the

 5 context, you know, let me back test that.

 6 So if would've tweeted that same thing,

 7 it would've had no impact. It was an AP feed,

 8 hence far more people were reading it. But it's

 9 still fairly new in terms of how do I think about

 10 this and is it important or not.

 11 CHAIRMAN GENSLER: Whereas just I'm

 12 doing the education. But whether it's Dow Jones

 13 news feed or some of the other --

 14 MR. TABB: Well, it pays -- they pay big

 15 money for those feeds, so --

 16 CHAIRMAN GENSLER: Paid feeds, a

 17 Bloomberg feed. There were Bloomberg people here

 18 earlier.

 19 MR. TABB: Absolutely.

 20 CHAIRMAN GENSLER: Those feeds are being

 21 scraped by computers, or ready by computers, and

 22 then algorithms trade off of them.
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 1 MR. TABB: And because they're more

 2 secure, they're more known, they've got -- you

 3 know, they've got years of back testing that they

 4 can look at the same kinds of things and determine

 5 what's the reaction. It's much easier to start

 6 developing quantitative analytics and what should

 7 I do if this happens, whereas Twitter, it's all

 8 over the place.

 9 And as I said, because AP is AP, you

 10 know, people are trying to free ride off their --

 11 you know, off the news feed. So it's one step

 12 above most of the Twitter stuff, but people are

 13 starting to look at this.

 14 CHAIRMAN GENSLER: Thank you. That's

 15 helpful.

 16 MS. FUHRER: I have another comment. I

 17 actually think we got lucky, okay? And the reason

 18 I'm saying that it was a hack. It was one feed,

 19 okay? But now that it's out there that AP was

 20 hacked, if there would be a concerted effort, and

 21 multiple news sources were reporting the same

 22 thing, I think we would've had a different result,
 299

 1 because if you have a non -- besides the fact

 2 that, you know, how much value should we give

 3 Twitter and so on and so forth -- I agree with

 4 everything that's been said -- it was also not

 5 corroborated.

 6 So as people are watching all the news

 7 feeds that they're getting immediately through the

 8 computer, if it's trading, or individuals that are

 9 trading would see that it's an outlier and, you

 10 know, probably not true.

 11 And so I think that's important because

 12 most of the disasters, the real disasters, that

 13 happen is there's multiple bad things happening at

 14 the same time. So if this could've been

 15 corroborated and different people had a concerted

 16 effort to hack into and send out analogous

 17 messages over different Twitter feeds for

 18 different corporations, I think we would've had

 19 different results.

 20 CHAIRMAN O'MALIA: Keith, and then we'll

 21 go to John.

 22 MR. FISHE: Sure. I just wanted to add
 300

 1 something to what Larry said. So the Dow Jones

 2 feed that he's talking about can go directly into

 3 an automated trading system, but it's usually for

 4 data announcements or economic numbers that come

 5 out. I don't think that this particular example

 6 is something where someone scraped and traded off

 7 Twitter, and that's really also hard to do in more

 8 legitimate news services like Dow Jones or any of

 9 the other wires because your text analysis is not

 10 an exact science.

 11 And if you honestly want to bet your

 12 bank on the kind of errors that could come up in

 13 that, you know. One person writes one thing one

 14 way, and then puts in a comma in the next time and

 15 it means something completely different.

 16 So in this particular case, there was

 17 actually a pretty good lag between the Twitter

 18 feed message and the trade that actually moved the

 19 market, so it's hard to see that that was a, you

 20 know, scrape and trade activity.

 21 CHAIRMAN O'MALIA: John?

 22 MR. LOTHIAN: There are people out there
 301

 1 who are creating multiple Twitter IDs to magnify

 2 their -- the messages that they have about

 3 political things, about market things, about

 4 whatever. When the MF Global situation happened,

 5 I created an MF Global hashtag, and would look at

 6 anything that would have the MF Global name in it.

 7 And it was like watching a slot machine it was

 8 going by so fast. And many of the tweets were the

 9 same tweets that were, like, being robotically

 10 sent out to the marketplace, re-tweeted.

 11 See this all the time. You see this a

 12 lot in the gold world. You see it a lot in the

 13 silver world, you know, tweeting for various

 14 blogs, their messages, trying to influence the

 15 things with, you know, the central banks are doing

 16 this or whatever it is. It's out there every

 17 single day what happened. It's just that in this

 18 case there were some people that acted on this,

 19 okay, as opposed to the market just being mature

 20 and, you know, enough to say I don't need to

 21 listen to that.

 22 That being said, there's a company out
 302

 1 there called Social Media Analytics. They're now

 2 produced -- they're now -- they signed an

 3 agreement with NYC Technologies for distribution.

 4 And what they do is they take the Twitter feed in

 5 for a company, and they take all of the various

 6 tweets, and then they analyze them, and they come

 7 out with a reading that's a gradient kind of thing

 8 in terms of positive or negative. But they also

 9 look into, you know, the sources as to whether

 10 these are good sources, and also there's a

 11 qualitative aspect to it, not just a quantitative

 12 thing so that you can't just flaunt a particular

 13 company's, you know, out there and get a negative

 14 reading kind of a thing, okay?

 15 So in this case, I think that, you know,

 16 people that responded to a single tweet from AP

 17 and found out that it was false, you know what?

 18 They learned a valuable lesson, okay, and the

 19 market will teach you lots of different lessons,

 20 and they learned one. It only moved one percent,

 21 which is pretty good considering.

 22 And the next time they're going to go,
 303

 1 and they're going to go, hey, do you see this

 2 anywhere else, okay, before they press the button,

 3 okay? And when you have big events that have

 4 happened in the market, people call people and

 5 they go, what is your quote machine say? Mine

 6 says Dow is down 500 points, you know? I mean,

 7 that's what people do. They verify information.

 8 And if somebody is going to act on unverified

 9 information, you know, they're going to be taught

 10 a very difficult lesson by the market.

 11 CHAIRMAN O'MALIA: Any further thoughts,

 12 comments? Well put, John.

 13 Well, I want to thank everyone for

 14 coming out today. Long day, and very interesting

 15 issues. John, we have a lot of work to do on

 16 data, and we'll put together a team in a regular

 17 meeting process so we can get through all of these

 18 issues as quickly as possible, and cost-

 19 effectively, efficiently, all of these things, so

 20 everybody is able to comply quickly and we get the

 21 data that we need as expected, as provided in our

 22 rules. So wish us luck on that, right?
 304

 1 So I want to thank all of my staff, Ali

 2 and Shoenice, that helped out, our Commission

 3 staff, Margie and the LO staff. And our AV team,

 4 the guys that make -- keep the videos running,

 5 Mike, and Gian, and Arc, and Wilbur. So thank you

 6 very much for all of their help.

 7 And thank you for participating here

 8 today. Thanks.

 9 (Whereupon, at 4:55 p.m., the

 10 PROCEEDINGS were adjourned.)

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 305

 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Carleton J. Anderson, III, notary

 4 public in and for the District of Columbia, do

 5 hereby certify that the forgoing PROCEEDING was

 6 duly recorded and thereafter reduced to print under

 7 my direction; that the witnesses were sworn to tell

 8 the truth under penalty of perjury; that said

 9 transcript is a true record of the testimony given

 10 by witnesses; that I am neither counsel for,

 11 related to, nor employed by any of the parties to

 12 the action in which this proceeding was called;

 13 and, furthermore, that I am not a relative or

 14 employee of any attorney or counsel employed by the

 15 parties hereto, nor financially or otherwise

 16 interested in the outcome of this action.

 17

 18

 19 (Signature and Seal on File)

 20 -----------------------------------

 21 Notary Public, in and for the District of Columbia

 22 My Commission Expires: March 31, 2017