1 

 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 2 

 3 

 4 

 5 

 6 JOINT SEC-CFTC ROUNDTABLE

 7 TO DISCUSS SWAP EXECUTION FACILITIES AND

 8 SECURITY-BASED SWAP EXECUTION FACILITIES

 9 

 10

 11 Wednesday, September 15, 2010

 12 9:00 a.m.

 13

 14

 15

 16

 17 Securities and Exchange Commission

 18 100 F. Street, N.E.

 19 Washington, D.C.

 20

 21

 22

 23

 24 Diversified Reporting Services, Inc.
 25 (202) 467-9200
 

2 

 1 PARTICIPANTS:

 2 Scott Bauguess, SEC

 3 James Brigagliano, SEC

 4 Nancy Burke-Sanow, SEC

 5 Robert Cook, SEC

 6 Jon DeBord, CFTC

 7 Thomas Eady, SEC

 8 Mauricio Melara, CFTC

 9 Dhaval Patel, CFTC

 10 Gregory Price, CFTC

 11 Richard Shilts, CFTC

 12 Sebastian Pujol Schott, CFTC

 13 Heather Seidel, SEC

 14 Riva Spear Adriance, CFTC

 15

 16 PANEL ONE:

 17 William De Leon

 18 Global Head of Portfolio Risk Management, PIMCO

 19 Yves P. Denize

 20 Director & Associate General Counsel, TIAA-CREF

 21 Andrew Downes

 22 Managing Director, UBS Securities, LLC

 23 Richard DuFour
 24 Executive Vice President, Chicago Board Options 

Exchange

 25
 

3 

 1 PANEL ONE (cont.):

 2 Julian Harding 

 3 Executive Director, Tradition Brokerage, Chairman, 

 4 Wholesale Markets Brokers Association Americas

 5 John J. Jeffers

 6 Senior Vice President and General Counsel, 

 7 OTC Global Holdings

 8 Ben MacDonald

 9 Global Head of Trading, Bloomberg, L.P.

 10 Lee Olesky

 11 Chief Executive Officer and Co-founder, Tradeweb

 12 Stephen Semlitz (via video)

 13 Managing Director, HESS 

 14 Heather Slavkin

 15 Senior Legal Policy Advisor for the Office of 

 16 Investment, AFL-CIO

 17 Jeff Sprecher

 18 Chairman and Chief Executive Officer

 19 IntercontinentalExchange, Inc.

 20 S. "Vish" Viswanathan

 21 Professor, Fuqua School of Business, Duke 

University

 22

 23
 24

 25
 

4 

 1 PANEL TWO: 

 2 Athanassios Diplas

 3 Managing Director and Global Head of Counterparty

 4 Management Group, Deutsche Bank

 5 William De Leon

 6 Global Head of Portfolio Risk Management, PIMCO

 7 Yves P. Denize

 8 Director and Associate General Counsel, TIAA-CREF

 9 Bryan T. Durkin

 10 Chief Operating Officer and Managing Director,

 11 Products and Services, CME Group

 12 Julian Harding 

 13 Executive Director, Tradition Brokerage, Chairman, 

 14 Wholesale Markets Brokers Association Americas

 15 Edward S. Knight

 16 Executive Vice President and General Counsel, the 

 17 NASDAQ OMX Group, Inc.

 18 Michael Masters

 19 President, Masters Capital Management, Americans

 20 for Financial Reform

 21 Richard McVey

 22 Chief Executive Officer, MarketAxess

 23 Stephen Semlitz (via video)

 24 Managing Director, HESS 
 25
 

5 

 1 PANEL TWO (cont.):

 2 S. "Vish" Viswanathan

 3 Professor, Fuqua School of Business, Duke 

University

 4 Philip Weisberg

 5 Chief Executive Officer, Fxall

 6 Brian S. Yelvington

 7 Director - Strategy, Knight Capital Group 

 8 

 9 

 10

 11 

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22

 23
 24

 25
 

6 

 1 C O N T E N T S

 2 

PAGE

 3 Opening Remarks by SEC and CFTC Staff

 4 

 5 Robert Cook, Director

 6 Division of Trading and Markets, SEC 

8 

 7 Richard Shilts, Director, 

 8 Division of Market Oversight, CFTC 

10

 9 

 10 Panel One

 11 Swap Execution Facilities ("SEFs") and 

 12 Security-Based Swap Execution Facilities ("SB SEFs")

 13 - Definition and scope of SEFs/SB SEFs 

14

 14 - Scope of exception from mandatory 

 15 trading requirement 

53

 16

 17 Panel Two

 18

 19 Compliance with Core Principles for SEFs and SB SEFs

 20 - Block trades 

79

 21 - Surveillance, investigation, and enforcement
 22 of SEF/SB SEF rules 

97

 23 - Cross-market issues 

113

 24 - Obligation of SEFs/SB SEFs to provide 

 25 impartial access 

122
 

7 

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

 2 MR. COOK: Good morning. I think we would 

like to

 3 get underway here. My name is Robert Cook. I'm the 

director

 4 of Trading and Markets at the SEC and on behalf of the 

staff

 5 of the SEC and the CFTC, it's my pleasure to welcome you 

this

 6 morning to this third in a series of joint staff 

roundtables

 7 on the implementation of the Dodd-Frank Wall Street 

Reform

 8 and Customer -- Consumer Protection Act.

 9 To my right is my colleague from the CFTC, 

Rick

 10 Shilts, director of the Division of Market Oversight at 

the

 11 CFTC. It is a great pleasure to be collaborating with 

Rick

 12 and the rest of the CFTC staff on this initiative, and I

 13 would like to thank the staff of the CFTC and the SEC 

for all

 14 of their very hard work in putting this roundtable 

together 

 15 and their ongoing close cooperation on the 

implementation of 

 16 the Dodd-Frank Act.

 17 I need to read a mandatory announcement 

related to
 18 the use of this room. So if you'll bear with me, but 

listen. 

 19 In the unlikely event we must evacuate the building, 

please

 20 exit the multipurpose room, make a right to reach the 

main

 21 staircase to the main lobby and exit the building on F

 22 Street. Once out of the building, please follow SEC

 23 employees or SEC guards to the assembly area at 3rd and 

G 

 24 Streets. If you're unable to easily use stairs, please

 25 notify an SEC employee or guard. In the event we must
 

8 

 1 shelter in place because of an incident occurring 

outside the

 2 building, we ask that you remain in the multipurpose 

room --

 3 that's the room we're in -- and await further 

instructions. 

 4 Thank you. Back to our regularly scheduled program 

here.

 5 The Dodd-Frank Act tasked the SEC and the CFTC 

with

 6 bringing greater transparency and oversight to the OTC

 7 derivatives markets. At our roundtable yesterday, we

 8 discussed the reporting and public dissemination of

 9 transaction information regarding swaps. 

 10 The purpose of today's roundtable is to 

provide a

 11 forum for discussing the implementation of the DoddFrank Act

 12 with respect to the trading of OTC derivatives. In

 13 particular, we'll be focusing on transitioning that 

trading

 14 onto regulated markets and issues regarding the creation 

and

 15 regulation of a new type of market called a swap 

execution

 16 facility or SEF. 

 17 Under the Act, the agencies are directed to

 18 establish a registration framework for SEFs and to set 

the
 19 regulatory standards for swaps to move from an 

unregulated

 20 trading environment to these new trading venues. In

 21 addition, the Act requires that with respect to swaps 

that

 22 are required to be cleared, the counterparties must 

execute

 23 the transaction on an exchange,designated contract 

market or

 24 a SEF unless no exchange, DCM or SEF makes a swap 

available

 25 to trade. The Act also requires that in order to 

maintain
 

9 

 1 registration, a SEF must comply with certain core 

principles

 2 established in the Act, as well as any other 

requirements

 3 that the CFTC or the SEC may impose by rule or 

regulation.

 4 Today we'll be focusing on our respective

 5 rulemakings regarding SEFs, including the definition of 

a SEF

 6 and its scope and activities, the mandatory trade 

execution

 7 requirement, the creation of a registration framework 

for

 8 SEFs and the SEF's compliance with and enforcement of 

its core

 9 principles.

 10 We are very pleased to welcome to this 

discussion

 11 two panels of experts who have kindly agreed to join us 

today

 12 and share their insights, advice and recommendations. 

These

 13 panelists represent investors, end users, dealers, 

academia, 

 14 exchanges and potential SEFs. We are grateful for your 

time 

 15 and participation and we expect that your comments will 

be 

 16 very valuable to the staffs as we develop proposals for 

a 

 17 regulatory framework applicable to SEFs.
 18 I would like to note that today's roundtable 

is not

 19 the only opportunity for interested parties to share 

their

 20 views on SEFs with us. Each agency has open mailboxes 

into

 21 which you may send comments on all of our OTC 

derivatives

 22 rulemakings. Then, of course, the types of rules that 

we are

 23 discussing here today will be formally published for 

public

 24 comment before they are adopted.

 25 I need to make clear that the remarks, 

questions or
 

10

 1 lines of inquiry that you may hear from me or other SEC 

staff

 2 today represent only our respective views and not 

necessarily

 3 the views of the Commission, the individual 

commissioners, or

 4 our colleagues on the Commission staff. I should also 

make

 5 everyone aware that this meeting is being webcast and 

your

 6 remarks will be recorded. 

 7 With that, let me give Rick an opportunity to 

offer

 8 any introductory comments.

 9 MR. SHILTS: Thank you, Robert. I also want 

to

 10 welcome all -- everyone here today, especially all the

 11 panelists for taking times out of their busy schedule to 

come

 12 here and give us their views on these important topics. 

Also

 13 to express my thanks both to Robert and the SEC staff, 

as

 14 well as the CFTC staff, in arranging for this 

roundtable, as

 15 well as all the other roundtables. It's a lot of work.

 16 We're looking for a great discussion today and

 17 these are some of the most important topics that we're

 18 addressing with respect to these rulemakings and with 

respect
 19 to the definitions and responsibilities associated with 

swap

 20 execution facilities.

 21 As Robert mentioned, the comments that I make 

or

 22 other CFTC staff, similarly we're not speaking for the

 23 Commission at the CFTC or the CFTC in general, and also 

to

 24 note that, again, this is not the only opportunity for

 25 interested parties to comment. We have a site on our --

a
 

11

 1 box on our website where traders and others can submit

 2 interested comments. And also, we're looking forward to 

the

 3 comments as the rulemakings come out, which we'll take 

into

 4 account over the next couple of months after we do 

publish

 5 them. So with that, we're looking forward to a great

 6 discussion today, and I'll turn it back to Robert. 

Thank

 7 you.

 8 MR. COOK: Thanks, Rick.

 9 So with that, let me welcome our first panel. 

And

 10 again, thank you for your participation today, and we're

 11 looking forward to your contribution to this discussion. 

 12 Just as a way to kick it off, if I could ask that we 

just go

 13 down the line and if each of you could give us your name 

and

 14 state your affiliation please. 

 15 MR. SPRECHER: Hi. I'm Jeff Sprecher, 

chairman and

 16 CEO of IntercontinentalExchange.

 17 MS. SLAVKIN: Heather Slavkin, AFL-CIO.

 18 MR. OLESKY: Lee Olesky, Tradeweb.

 19 MR. MacDONALD: Ben MacDonald, Bloomberg.
 20 MR. JEFFERS: John Jeffers, OTC Global 

Holdings.

 21 MR. HARDING: Julian Harding from the 

Tradition

 22 Group representing the Wholesale Markets Brokers 

Association.

 23 MR. DuFOUR: Richard DuFour, Chicago Board 

Options 

 24 Exchange.

 25 MR. DOWNES: Andrew Downes, UBS.
 

12

 1 MR. DENIZE: Yves Denize, TIAA-CREF.

 2 MR. DE LEON: Bill De Leon, PIMCO.

 3 MR. COOK: Thank you. And on the screen, 

Steve?

 4 MR. SEMLITZ: Steve Semlitz from HESS Energy

 5 Company.

 6 MR. COOK: Great. Thank you. And then we 

have

 7 staff from the CFTC and the SEC bookending the panel 

here. 

 8 Maybe we could just quickly go down and you could 

introduce

 9 yourself and your division, please.

 10 MR. DeBORD: Jon DeBord, DCIO.

 11 MR. PRICE: Greg Price, DMO.

 12 MS. PATEL: Dhaval Patel, Office of General

 13 Counsel.

 14 MR. BRIGAGLIANO: Jamie Brigagliano, SEC 

Trading

 15 and Markets.

 16 MR. EADY: Tom Eady, SEC Trading and Markets.

 17 MR. BAUGUESS: Scott Bauguess, Division of 

Risk

 18 Strategy and Financial Innovation.

 19 MR. SCHOTT: Sebastian Pujol, CFTC, Division 

of

 20 Market Oversight.
 21 MR. MELARA: Mauricio Melara, Division of 

Market

 22 Oversight, CFTC.

 23 MS. ADRIANCE: Riva Adriance, Division of 

Market

 24 Oversight, CFTC.

 25 MS. SEIDEL: Heather Seidel, Division of 

Trading
 

13

 1 and Markets, SEC.

 2 MS. BURKE-SANOW: Nancy Burke-Sanow, Division 

of

 3 Trading and Markets, SEC.

 4 MR. COOK: Thank you. So the format today is 

that

 5 the staff from the CFTC and the SEC will ask questions 

and

 6 throw it out there. Anyone will be free to jump in and

 7 answer. When you speak, if you could please try to 

remember

 8 to begin with your name so that those who may not have a

 9 clear line of sight to you will know who is speaking.

 10 Also, in the category of information that 

would

 11 have been useful to have had earlier, just make sure you 

push

 12 the button when you want to speak and it will be helpful 

if

 13 you push it again when you're done so that we don't have

 14 unnecessary feedback.

 15 We have a -- this panel is going to run from -

- 

 16 until a break at 10:45. So we have a lot to cover, we 

have a

 17 lot of panelists and we have, I think, a lot to say

about these

 18 issues. And so, we just ask that when you make your 

remarks,
 19 if you could limit your air time as appropriate to give

 20 everyone a chance to weigh in. And we may need to move 

the

 21 discussion along from time to time, too, because of a 

number of

 22 topics we would like to make sure we get the benefit of 

your

 23 thinking on. So bear with us if it comes to that.

 24 So with that, we'll begin the first panel. 

There

 25 are two main topics that we want to talk about on this 

panel. 
 

14

 1 One is the definition and scope of a SEF, and the second 

is

 2 the scope of the exception from the mandatory trading

 3 requirement for SEFs. And with that, let's begin with 

our

 4 first question.

 5 MR. BRIGAGLIANO: Yeah. I'm going to ask for 

your

 6 indulgence while I engage in a sometimes tedious 

exercise of

 7 reading a definition, but it's so important. It's the

 8 cornerstone of our discussion today. And that's the

 9 definition of swap execution facility in the 

legislation. So

 10 it's defined as, "A trading system or a platform in 

which

 11 multiple participants have the ability to execute or 

trade

 12 security-based swaps, or swaps, by accepting bids and 

offers

 13 made by multiple participants in a facility or system 

through

 14 any means of interstate commerce, including any trading 

 15 facility that (a) facilitates the execution of swaps 

between

 16 persons and (b) is not a national securities exchange."

 17 So, I would like to hear what the panelists' 

views

 18 are on the type of trading that would meet this 

definition. 
 19 Do the goals of impartial access and pre-trade price

 20 transparency dictate a model such as a fully displayed

 21 electronic limit order book for a SEF? Are there swaps 

that

 22 currently have enough liquidity to trade on this type of

 23 market? And I invite the panelists to jump in and give 

their

 24 thoughts.

 25 MR. OLESKY: I'm happy to start. It's Lee 

Olesky
 

15

 1 from Tradeweb.

 2 To start off with, we -- getting to the 

definition of 

 3 SEF -- our view is that a SEF should not be interpreted 

merely

 4 as a central order book. And the starting point for 

that, I

 5 guess, is the fact that there is such a definition or a 

word

 6 in the law - SEF - and that's separate from a DCM. So 

we would

 7 have to say that there is an assumption that this SEF is

 8 something other than DCM, otherwise it would be 

redundant to

 9 have both.

 10 So our starting point is that this is 

something

 11 separate and that there should be an opportunity to have

 12 flexible trading models and protocols in order to 

support

 13 that model so long as you, you know, you're fitting 

within

 14 the core principles and you're achieving the policy

 15 objectives of what the legislation is about. 

 16 So that's pre-trade transparency. You know, 

we

 17 would argue things like electronic trading are great

 18 indications of that pre-trade transparency, the ability 

to
 19 execute a transaction at a price that you see on a 

screen,

 20 and to have multiple participants. And when we get into 

the

 21 multiple participant point, we think that means there 

should

 22 be multiple participants providing liquidity and 

multiple

 23 participants being able to access the liquidity.

 24 MR. HARDING: Julian Harding. There are two

 25 components, I guess, in the statute that you've 

carefully read
 

16

 1 that are significant. The first being the multiple to

 2 multiple issue, which I think intended to drive at 

creating

 3 forces in a SEF environment, a genuine marketplace. 

 4 Multiple to multiple insistence implies a marketplace 

that,

 5 in fact, the inter-dealer brokers for some 50 years or 

so 

 6 have generally operated and chestrated a great dynamic 

system 

 7 where each participant is a market maker and market 

taker in 

 8 the same breath. That is a different thing to the 

central order 

 9 book system that Lee is referring to and as you asked 

about.

 10 The second component is the injection of the

 11 language by "any means of interstate commerce," which is 

an

 12 important element for us and for, I think, for the 

marketplace

 13 in that it preserves the ability to transact an 

organized

 14 transactions not just in electronic format, which one 

would

 15 contend allows for a better chance of optimizing 

liquidity in

 16 an institutional setting than just having been 

constrained to

 17 an electronic format.
 18 MR. DuFOUR: I would add that, you know, 

although

 19 some products traded in the over-the-counter market may 

have

 20 sufficient liquidity to where they -- there might be a

 21 populated order book, that I would think in most cases, 

or in

 22 many cases, it would -- a typical SEF would be more like 

a 

 23 request for a quote system where you might put up a 

trade you

 24 want to do, but there is not necessarily going to be 

bids

 25 and offers sitting in a book.
 

17

 1 MR. DOWNES: Andrew Downes. I think as you 

look at

 2 the definition or the rulemaking in terms of defining a 

SEF,

 3 I think you need to take account of the liquidity of the

 4 market that we're talking about. And I'd say, you know,

 5 if you think that currently the markets that trade on

 6 exchanges, the order of volume in terms of those 

exchanges is

 7 in the hundreds of thousands, or at least tens of 

thousands

 8 or thousands. I think if we look at data for, say, the

 9 interest rate swap market, the most liquid point is the

 10 10-year U.S. dollar interest rate swap. I think that 

trades,

 11 if we look at June and say 508 times a day, then that 

gives

 12 you a sense of the liquidity in that market.

 13 If you look at the CDS market and take, for

 14 example, the most liquid name in the investment grade 

index,

 15 I think that's G.E. And that trades about 15 times a 

day. 

 16 So I think, obviously, there's an exercise to define 

what

 17 should be SEF traded. And no matter where you draw that

 18 line, there will be a spectrum of liquidity of that 

which
 19 needs to be SEF traded. And therefore, the definition 

of

 20 what is a SEF needs to encompass a plurality of models

 21 because at one extreme, say if you look at certain most

 22 liquid on-the-run indices, one might think that's 

susceptible

 23 to a central order book approach, but at the other

extreme, 

 24 if you've got something that's only trading 15 or so 

times

 25 a day, that would probably be better traded through an 

RFQ
 

18

 1 model, providing it meets the requirements in terms of

 2 multiple participants, et cetera, et cetera.

 3 So I think it's important to, for the 

definition to

 4 encompass multiple models. I think that's the key. And

 5 obviously to the extent that you encompass multiple 

models

 6 that allows for innovation, creativity and competition 

and

 7 that will drive liquidity to the best place depending on 

the

 8 spectrum of the product that we're talking about.

 9 MR. MacDONALD: Ben MacDonald, Bloomberg. I 

would

 10 agree with a lot of the points that are being made. I 

think

 11 one of the interesting things about the derivatives 

market is

 12 that even looking at the benchmark space, there is ways 

to

 13 trade around the benchmarks, and not everything is --

can

 14 really be classified as just a pure benchmark or a

 15 benchmark trade. 

 16 I think that really goes to the point that 

there

 17 are multiple models that exist within the potential SEF

 18 space. RFQs are very favorable, for instance, in 

certain
 19 instances, but there are other models that intermediate 

by

 20 buyers and sellers. And I think it's important, 

especially

 21 in the early days of the rulemaking, to allow for all of

 22 those models, as long as they meet the principles, to 

coexist

 23 together. And I think that will drive, you know, that 

will

 24 drive a lot of innovation and liquidity in the market.

 25 MR. SHILTS: Could I just -- as you're 

responding
 

19

 1 to the questions here, I'm just interested in you 

talking about

 2 the RFQ models, whether people think that the existing 

RFQ

 3 models would comply with the multiple to multiple 

requirement

 4 in the definition.

 5 MR. DuFOUR: Richard DuFour. You know, CBOE 

has an

 6 existing RFQ model, which we call FLEX, which actually 

the

 7 other options exchanges have something similar too, and 

there

 8 are some roughly 200 trading firms that are qualified 

and use

 9 that. It doesn't mean you get 200 quotes every time 

you, you

 10 know, put in a request, but people monitor it on a fulltime

 11 basis. So I think it would meet your definition of 

multiple

 12 participants.

 13 MR. SCHOTT: If I could follow up to that. 

When

 14 you say that up to 200 people could see the request, is 

that

 15 only on one side or is that both the buy side and sell 

side

 16 we would be able to see?

 17 MR. DuFOUR: You can -- when you put in a 

request
 18 for a quote, it can be -- you can put in a request to 

buy or

 19 sell or you can just ask for a quote on a particular 

product

 20 without indicating whether you're a buyer or a seller. 

 21 Anyone that's monitoring the system will see whatever 

you put

 22 in.

 23 There's typically then a time established by 

the 

 24 person putting in the request, a maximum, I think, of 

five

 25 minutes, but generally much shorter, in which people 

then
 

20

 1 respond. So and then at the end of the response, you 

have

 2 the choice of doing nothing or going ahead and trading 

or you

 3 could, you know, you could be a firm and you could 

actually

 4 better the quote yourself and facilitate a customer.

 5 MS. ADRIANCE: And just to follow up on that,

 6 when -- once -- you said like 200 people see this bid 

offer,

 7 just to -- either side with both -- you know, where 

they're

 8 requesting both and 200 people see it, 200 people can

 9 respond. What happens when there is a response? Is it

 10 limited -- is the ability to transact at that -- with --

on

 11 the response limited to the person who initiated the RFQ 

or is

 12 others in the market able to also join in?

 13 MR. DuFOUR: I believe it's limited to the 

person

 14 that put in the request.

 15 MR. OLESKY: This is Lee Olesky. We have a 

market

 16 in the U.S. treasury market, government bond market, we 

trade

 17 about 25 billion a day on average in the treasury 

market. 

 18 And our RFQ system, the way it works in the U.S. 

treasury
 19 market, is you do have a request, prices come back from 

a 

 20 group of banks. That's part of the session is a private

 21 session between the banks and the customer, but after 

the

 22 trade occurs, we flash the price so that the entire 

market

 23 sees what the price was for a transaction.

 24 So in terms of, you know, sort of policy 

standard,

 25 what are you trying to accomplish there, well, you have 

the
 

21

 1 pre-trade price transparency you're after and you 

actually have

 2 post-trade price transparency for the market to observe, 

but

 3 you don't have a situation, at least in the treasury 

market,

 4 where you have the risk of interference between that

 5 privately negotiated transaction between two 

institutional

 6 participants. And that seems to have worked fairly well 

in a

 7 number of fixed income markets.

 8 MS. ADRIANCE: If I could just ask one more

 9 question, to go back before we move on, because right 

before

 10 we started talking about the question about the RFQ and 

what

 11 does that mean, there was, I have it down that, I think 

it

 12 was -- I'm sorry, Bloomberg -- I'm going to mess up your

 13 name -- Ben MacDonald. Yeah. You said that -- you 

referred

 14 to the fact that there is different -- you know, some

 15 instances in an RFQ model might be the appropriate model 

to

 16 execute in that particular swap, but then there may be 

other

 17 instances where another model would be appropriate, 

could you
 18 talk more about what is the other models that you're 

talking

 19 about. 

 20 Are you talking about central limit order book 

or

 21 are you also thinking of third or fourth in time, you 

know,

 22 to other models besides central limit order book and 

RFQs

 23 because so far we've talked about those two. And it has 

been

 24 mentioned like but there is voice brokers -- but I 

wasn't 

 25 sure what you were referring to.
 

22

 1 MR. MacDONALD: Sure. At Bloomberg we 

actually

 2 operate two models for trading. One is a traditional 

RFQ

 3 model where participants go out and launch an inquiry to

 4 multiple dealers and then execute by inquiry. We also

 5 operate a model, which we call single dealer franchise. 

And

 6 essentially what we do is that we allow all of the 

liquidity

 7 makers to use Bloomberg as a distribution mechanism to

 8 display over a page on Bloomberg the -- you know, where 

they

 9 might have an ask, for instance, or where, you know, the

 10 markets that they're interested in, obviously low liquid

 11 stuff, is available in that market.

 12 Our customers can look at as many pages as 

they

 13 want over the system, which means that they get, on the 

one

 14 hand, the price transparency and discoverability of 

looking at

 15 multiple quotes, but at the same time when they get to 

the

 16 actual executing part of the transaction, it allows them 

to

 17 execute on a one-to-one basis, which is important in 

many

 18 cases, you know, for both the buyer and the seller of 

the
 19 transaction who have both got concerns about that, you 

know,

 20 trade. So, you kind of get both of those models.

 21 If you draw -- you know, in the treasury 

market and

 22 the cash markets where that model is a lot further along

 23 because there's a lot more electronic trading in those

 24 markets, you know, you can go as far as looking at 

people to

 25 display firm pricing in those markets in a very liquid 

space,
 

23

 1 which allows people to essentially, you know, achieve

the

 2 same, you know, very fast level of liquidity.

 3 MR. OLESKY: If I could just tag onto what Ben 

said

 4 because we have similar concepts, and the variations in

 5 different models, which I think was your question, we 

equally

 6 have a model that's similar to what Ben described, but 

is yet

 7 slightly different in that we call it streaming prices. 

So

 8 we have a different terminology for it, but in the 

interest

 9 rate swap market in Euro denominated swaps, a client can 

come

 10 in and request a stream of live prices from the bid side 

and

 11 offer side from a particular bank and have a live market 

in

 12 front of them to click to trade. Is that really an RFQ? 

 13 I think you do start to get into these 

definitional

 14 issues of what's an RFQ, what's a request for stream,

 15 what's -- but fundamentally what we're talking about 

here is,

 16 you know, access to these live markets, real good pretrade

 17 transparency, post-trade transparency, and fundamentally 

an
 18 ability for the market and the buy side customers and 

the

 19 liquidity providers to be able to transact, which has 

been

 20 evolving, you know, in the last 12 years we've been in

 21 business from a more standardized type of business and 

fixed

 22 income such as U.S. treasuries out to other products and 

now

 23 into the derivative space. 

 24 But we think it's that flexibility that is so

 25 critical so that you can have the innovation to 

accomplish
 

24

 1 what the market needs are so long as it's fitting within 

the

 2 policy objectives that have been laid out by the 

legislation

 3 in the core principles.

 4 MR. VISWANATHAN: Vish Viswanathan from Duke. 

I 

 5 guess one of the things that concerns me about this RFQ

 6 model, if I'm an end user and I'm going to two different

 7 platforms, I literally have to request a quote from both

 8 platforms. I can't actually compare prices. There is 

no way

 9 to aggregate as there would be in stock markets. 

 10 So the question then is, from an end user

 11 perspective, is this the most efficient way or is there 

a way

 12 to kind of induce more cross-market competition. If 

there

 13 are a multiple of these entities that are created, how 

do you

 14 induce them to compete because the whole idea is to have

 15 innovation and competition and so how can you do 

comparison

 16 shopping in this context is the big issue.

 17 MR. HARDING: Julian Harding. It strikes me 

that

 18 there is a trenchant change in the air and all different 

forms 
 19 of execution that exist now will have to adapt in some 

form. 

 20 I think we should be under no illusion about that. And 

as an

 21 interdealer broker, as an interdealer broker myself and 

as

 22 representing the association, we are under no illusion 

at all

 23 that we're going to have to adapt in certain areas to 

meet

 24 the regular fee standards and policy standards that are

 25 coming out over the last year. And in the same way, it 

seems
 

25

 1 to me that probably an RFQ system, given it's a single

 2 requestor, will have to make some adaptations as well.

 3 MR. DE LEON: Bill De Leon, PIMCO. I think 

it's

 4 important to differentiate because as we've seen through 

the

 5 evolution of the stock market where there have been 

multiple

 6 sources of prices and central order books, that both the

 7 order books themselves, as well as the end users, have 

spent

 8 an enormous amount of time, energy and their own money 

to

 9 come up with systems to pull and pull that information

 10 together so that they can look at multiple sources of

 11 information.

 12 It's very analogous to what goes on now in the 

OTC

 13 market, especially in fixed income, where as an executor 

of a

 14 trade, you need to do price discovery talking to 

multiple

 15 dealers to get that information and/or looking at other 

price

 16 sources. Not to show favoritism, but a few of the 

people

 17 here who have talked have some very good SEF-like models 

already. 

 18 I've traded on them, as many people in this room 

probably have, 
 19 and there are pluses and minuses to them. And they're a 

 20 combination of RFQ, streaming quotes, central order 

books. 

 21 And they provide a lot of pre and post-trade 

transparency.

 22 What SEFs in our view will not provide is

 23 continuous price making because there is no central 

market

 24 maker, per se. And that's something we should focus on. 

In

 25 addition, as we move into the derivative market and you 

move
 

26

 1 away less from the widget market, and not to pick on 

anything

 2 in particular, if you take a stock, it's very nice 

because it

 3 is a defined widget.

 4 IBM, for example, is a single stock name. 

There is

 5 one piece of information: it's traded, how many shares 

trade,

 6 or are perceived to have traded at what sets of prices. 

And as

 7 you move away from that and you move to derivative 

markets,

 8 you wind up with a lot more bespoke characteristics. So

 9 getting that information and tracking it becomes much 

more

 10 difficult. And that's a plus and a minus. It allows

 11 standardization of things to be moved away to 

customization

 12 to meet different product needs for different end users.

 13 It also has the stigma of as you move away 

from the

 14 widget effect to a customized event, the footprint left 

by

 15 those using it becomes much more known. For example, 

certain

 16 people trade certain instruments. It will be known that 

only

 17 certain people do that. If everyone sees that 

information
 18 and it's not aggregated, you're going to know who is 

playing

 19 and if they are a large player or there is a small 

player,

 20 that information is given away. 

 21 So, you lose that concept of anonymity, which 

I think is

 22 an important function of the market, because while 

people have

 23 a right to know what is out there and where the fair 

level of

 24 a trade may be prior to a trade, not everyone has the 

right

 25 or ability to know every single trade in every detail 

because
 

27

 1 there are things that are not standardized and is a 

function

 2 of market liquidity and need.

 3 So I think that any SEF model or SB SEF model 

will

 4 have to take that into account and allow certain

 5 flexibilities because otherwise, you'll wind up with 

people

 6 not wanting to use it and as we've just alluded -- we 

have

 7 some very good statistics here -- there are a lot of 

things

 8 that trade -- that don't trade that actively especially 

in

 9 the standard form. 

 10 Ten-year swaps. A lot of players use 10-year

 11 swaps. They look at that quote every day. There aren't 

that

 12 many trades that occur every day. And the reality is 

when a

 13 10-year swap does trade, most end users don't trade the

 14 10-year swap. They will trade something that is around 

a 

 15 10-year swap. They may trade something that's 10 years 

and a

 16 quarter, they may trade something that's 9 years. The 

coupon

 17 will be different, the dates will be different, there 

are

 18 all these unique functions. 
 19 So to the extent that you're forcing things to 

be

 20 on an SEF and all that information needs to be given up,

 21 you're going to be telling an awful lot of people a lot 

of

 22 customized information about the end user which will 

hurt

 23 them and not help them. In addition, it will make using 

SEFs

 24 harder because to track and display that information 

will

 25 sort of be a player's curse. I'm sorry for taking so 

much
 

28

 1 time.

 2 MS. SLAVKIN: Heather Slavkin. I understand 

the

 3 concerns about accommodating a lot of different business

 4 models. I'm not sure I agree with the argument he just

 5 made, however, because the legislation envisions that 

the SEFs

 6 and the trading requirement will apply to products that 

have

 7 to clear. And the clearing requirement applies to 

liquid

 8 products. Standardized and customized transactions are 

not

 9 going to be required to clear. So I don't think that we

 10 should take customization into account when determining 

what

 11 types of information should be disclosed to SEFs or how 

SEFs

 12 should operate.

 13 MR. COOK: Let me sort of ask that -- sort of 

--

 14 and Bill or Yves, you can pick up on this. Sort of one 

line of

 15 reasoning that I think we're hearing is that it's a 

diverse

 16 market. Lot of different types of products, lot of 

different

 17 type of platforms need to take that into account in 

order to
 18 accommodate the status quo to some extent. One could 

also

 19 argue that the statutes require the agencies to think 

about a

 20 new market, a new paradigm for how swaps are being 

traded and

 21 which would have the effect that some of the existing 

models

 22 might not work with that new paradigm. 

 23 And I would be interested in getting, you 

know,

 24 also particularly from the end user perspective, in the 

first

 25 instance, but everyone's perspectives, on how we weigh 

those
 

29

 1 concerns. And if the idea is that we really are meant 

to be

 2 moving to a new market structure, how do we get there? 

Is it

 3 a one time leap or is it a transitional exercise? 

 4 MR. OLESKY: This is Lee Olesky, Robert. The

 5 interesting thing is -- 

 6 MR. COOK: If -- 

 7 MR. OLESKY: Oh, I'm sorry.

 8 MR. COOK: If you could Yves go after. Go 

ahead,

 9 but -- 

 10 MR. OLESKY: I just want to make a quick 

comment,

 11 which is the derivative markets right now are not there 

yet. 

 12 If you look at the percentage of the trades 

electronically on

 13 vehicles such as Tradeweb, Bloomberg, any of these other 

 14 entities, the market is not there yet. It's a small 

percentage 

 15 of the market relative to the total size of the market. 

So 

 16 in terms of change and structural change here, you would 

have

 17 significant structural change if there was a mandated

 18 requirement to take most of these standardized 

transactions

 19 and run them through a SEF because that's not happening
 20 today.

 21 So first and foremost, establishing the 

mandatory

 22 nature of this that's in the law and defining what's 

standard

 23 is going to create some significant change in the

 24 marketplace. That's how we look at it relative to other 

cash

 25 markets. This is still a market that's evolving towards
 

30

 1 electronic and it's still only a small percentage of the

 2 market.

 3 MR. SEMLITZ: Steve Semlitz from HESS Co. In 

the

 4 energy markets, I think we have just the opposite 

occurring

 5 where everything was OTC many years ago and now an 

inordinate

 6 number of products do trade in a derivative form. The 

energy

 7 market probably has the largest amount of customized 

types of

 8 trades. Many of those trade OTC and then get cleared, 

but

 9 overall, there are tremendous numbers of derivatives 

trading

 10 in forums like ICE, that trade and clear. There is no -

- 

 11 you're not requesting quotes. 

 12 And the real issue for everyone is can you 

attract

 13 enough eyeballs and enough people to look at the screens 

and

 14 figure out where there is an opportunity to trade 

because

 15 it's an infinite universe of trades that can occur. The

 16 definition of what a trade that has to be on a SEF will

 17 be -- that's where the -- 

 18 (Interruption to video call.)
 19 MR. SEMLITZ: -- because in the energy 

markets,

 20 there are just millions of types of customizable trades 

that

 21 occur. And you get quotes by going to a market maker 

and

 22 saying please spend the time to think about how to quote 

this

 23 product and then quote it. The question I would have is 

when

 24 you go to a request for a quote type of system and 

people

 25 aren't quoting their best customer and their high volume
 

31

 1 customer, whatever it is, whether -- 

 2 (Interruption to video call.)

 3 MR. SEMLITZ: -- for anyone to continuously go

 4 through all the requests for quotes that you might need. 

So

 5 where you draw that definition is going to be the key.

 6 MR. DENIZE: I just wanted to underline --

this is

 7 Yves Denize -- from the end user perspective, wanting to

 8 underline the difficulty in standardization. As you 

look at

 9 the end users in the various industries now, for 

instance,

 10 our life insurer, for instance, has very specific needs 

and

 11 comes to the derivatives market for very specific risk 

 12 mitigation needs. And it can't be overstated that 

defining 

 13 that standardization process in a way that can be freely 

 14 traded where you won't need a phone call and a 

discussion 

 15 about those terms is going to be very difficult. 

 16 And that process that will determine what 

should be

 17 traded on a mandatory basis, should not be -- should be 

an

 18 organic process that really reflects the growth in the 

market 
 19 and the growth of these trading facilities. And it 

should be 

 20 done in an organized manner, a centralized manner, so 

that we 

 21 have - are able to settle our expectations as end users 

when 

 22 and how the types of derivatives that we are used to 

being 

 23 able to access are going to be forced onto a trading 

system 

 24 that may change our model as to how we're mitigating 

risk. 

 25 MR. DE LEON: Bill De Leon. Yeah, I think 

it's
 

32

 1 important to separate a few things here, which we've 

sort of

 2 not brought up and I know it came up in some of the 

previous

 3 panels. So I apologize for revisiting. The important 

things

 4 in our view is to reduce systemic risk in the system and

 5 ensure that people have access to decent price 

information so

 6 that they're transacting approximately where the market 

is. 

 7 And the things to achieve that are not necessarily 

driven by

 8 standardization of everything down to the widget level. 

 9 Clearly, the more widget-like something is, the easier 

it is

 10 to turn it into a central order book. 

 11 If you look at futures, which they're a great

 12 example, farm contracts, S&P futures, we can talk about 

many

 13 different things. They're very standardized 

instruments. 

 14 You know what all the details are. And they lend 

themselves

 15 very easily to being traded on an exchange. Everyone 

knows

 16 exactly what it is. You don't have to stand behind and

 17 figure out customized things. They've lent some issues 

to
 18 it, however, because they don't necessarily meet end 

user

 19 hedging abilities, especially FAS-133 and cash flow 

hedging. 

 20 And that's something. But you've achieved a widget 

thing

 21 which allows a lot of people to look at a lot of 

information 

 22 and trade and transact.

 23 The nice thing about a SEF or the concept of 

it, in

 24 our view, is that it allows multiple participants to 

access

 25 and trade with anonymity. That's the important thing 

because
 

33

 1 if you take that away, you're just creating sort of a

 2 marketplace for people to sort of share information and 

try

 3 to get things done. The point is, and I know this is on 

a 

 4 later panel, a SEF needs to ensure that people who

 5 participate in it get the information they want or can

 6 provide it to trade. And then when they do a trade, it 

gets

 7 given up and cleared so that it goes through and reduces

 8 systemic risk and you're not worried about who you 

traded

 9 with.

 10 Our clients don't want us, necessarily, 

trading

 11 with the guy who is making a market in derivatives 

sitting in

 12 his, you know, basement. That's not what we want, 

right? 

 13 The SEF concept would allow clearing and it would take 

it

 14 away. So if the guy in a basement was doing it, he 

would be

 15 doing it via clearing mechanisms. Some would be 

providing

 16 capital and we would reduce risk. So if he wanted to 

provide

 17 the best price, we would be happy. So I think we need 

to
 18 focus on these aspects, and I think maybe that's getting 

to

 19 what you're talking about.

 20 So we need to sort of not lose sight of what 

we're

 21 trying to achieve through the SEF, which is allowing 

multiple

 22 people to come together, provide prices, provide 

information,

 23 allowing more people to transact and not having sort of 

an

 24 oligopolist situation where only dealers provide prices. 

 25 We're very much in favor of that, but it has to be done 

in a
 

34

 1 way realizing that when there are lots of unique things, 

it's

 2 more difficult to get that information, as well as by 

the

 3 nature of unique information, it tells you a lot about 

who is

 4 playing so as you move away from that.

 5 And one other thing which I think is very 

important

 6 and I think we shouldn't lose sight of, and I'll stop 

taking

 7 so much time. And I apologize. Is that there is a huge

 8 legacy set of positions that exist and the ultimate goal 

to

 9 reduce systemic risk is to move those positions over to 

a CCP

 10 like framework. How do you handle those positions so 

that

 11 they can be traded in a liquid manner where the end user 

--

 12 and the important thing to remember -- end user is mom 

and

 13 pop because institutions frequently represent very small

 14 investors that just pool their money with a large 

investment

 15 fund -- that this is sort of the view. And you don't 

want them

 16 paying high bid ask or information fees to make that 

happen.

 17 MR. EADY: So it sounds like the panelists 

believe
 18 that there are some desirable characteristics of the RFQ

 19 model that they would like to preserve. One of the 

things

 20 that we're focused on, obviously, is pre-trade price

 21 transparency, and we talked about it a little bit here. 

The

 22 question I would have for the panelists is do you 

believe

 23 that there is adequate pre-trade price transparency with 

the

 24 RFQ models that exist today or if not, what would you 

suggest

 25 as improvements to pre-trade price transparency to help 

us
 

35

 1 better meet that policy goal.

 2 MR. DuFOUR: Richard DuFour. I can only speak 

to,

 3 you know, what we do today, which is not really a SEF, 

but

 4 the FLEX system I mentioned before, which is targeted at 

the

 5 over the counter market kind of draw from that impact. 

The

 6 last two or three years has -- the volume has increased

 7 substantially, I think, because of what's been going on. 

And

 8 I would argue that there is, you know, adequate 

transparency 

 9 in that. And the key thing, you know, in responding to a 

quote 

 10 is to know the terms of the trade, which you can vary, 

and, 

 11 you know, price and size. And I think those elements 

are all

 12 met. And I suspect in some of these other systems, but 

I 

 13 won't speak for them.

 14 MR. OLESKY: I guess I would just reflect what 

I 

 15 was saying a little bit before, which is the state of 

the

 16 market right now with derivatives trading through what 

we

 17 envision to be SEF like entities, such as some of the
 18 entities that are on this panel, is still in its early 

days. 

 19 And as a result, you don't have a lot of activity, not 

nearly 

 20 the same activity that you have in the other market.

 21 So what should happen here naturally, as more

 22 activity moves to these vehicles, you're going to have

 23 enhanced transparency in terms of more participants 

joining

 24 in, more prices coming in, more competition because for 

the

 25 first time, this is going to be a mandatory process. 

And if
 

36

 1 that market today, and let's just, you know, lump 

together

 2 credit and rates, is less than 5 percent through these 

kinds

 3 of vehicles, if you envision a world where there is 75 

percent

 4 of the activity going through those vehicles, you're 

going to

 5 have a lot more transparency.

 6 MR. MacDONALD: I would agree with a lot of 

the points

 7 that are being made on the SEF. Ben MacDonald from 

Bloomberg. 

 8 I think that the derivatives market is relatively early 

in its

 9 stages. I think we will draw comparisons in the cash 

market

 10 where the RFQ process is very prevalent, as are some of 

the

 11 other things that we're talking about here. And I think

 12 that, you know, the important thing from a kind of 

rulemaking

 13 standpoint is really going to be allowing multiple 

models to

 14 exist because I think that's ultimately going to promote

 15 liquidity.

 16 I think that the buyers -- the takers and 

makers

 17 of liquidity, will end up, you know, in the place which 

is
 18 the most efficient and suits their needs. And I think 

if you

 19 look -- if you draw the analogy today in the cash base, 

there

 20 are multiple models and people use those models for 

different

 21 reasons. But there is a vast majority of trading that

 22 happens over, you know, the RFQ model over the streaming

 23 model, you know, as well as other end users as well. 

And I

 24 think the really important thing today is to allow that

 25 market to continue to grow. And I think the risk we're
 

37

 1 just -- we're then posing, one model is that it will 

achieve

 2 the opposite to that.

 3 MR. DOWNES: Andrew Downes, UBS. I would say 

that

 4 if -- even with an RFQ model, if that's encompassed in 

the

 5 SEF definition, should provide more transparency than

 6 currently exists because you need a trigger for the

 7 discussion and that trigger will be a price around the

 8 benchmark tenors or trades. And having that will

 9 obviously provide more transparency.

 10 MR. DuFOUR: I would also add that this is 

really 

 11 on the issue of the customization, that I believe a 

great 

 12 deal of the customization that's done, I would even say, 

you 

 13 know, the majority of it, can be done in a standardized 

form 

 14 and that one of the challenges for you as regulators is 

to make 

 15 sure that customization doesn't become a loophole for 

avoiding 

 16 the exposure and clearing it.

 17 MR. HARDING: Julian Harding. Moving slightly 

away

 18 from the RFQ concept and talking a little more of the 

existing
 19 interdealer, the broker venue, the existing structure is 

a 

 20 little bit -- is not talked about very much, which is 

that there

 21 is a sort of an outer area of end user participants and 

there

 22 is an inner area of banking or dealing participants and 

there

 23 is a third inner area in which sit the interdealer, the 

brokers.

 24 In terms of the transparency issue, I think a 

lot

 25 of this will be attended to by the fact that in the new
 

38

 1 imagined environment, there will be introduced a great 

deal

 2 more different sorts of participants by the mandated 

areas

 3 that Lee just alluded to. First off, the fact that 

clearable

 4 trades now will be mandated through SEFs and DCMs will 

do

 5 something. Secondly, a whole new batch of players

 6 determined -- yet to be fully decided upon, but 

certainly in

 7 amongst the legislation, will be forced to go through 

SEFs as

 8 well. Brand new entrants to that marketplace to be --

what I

 9 would say the previous marketplace, the one we described 

as a

 10 SEF. 

 11 So, that is quite a dramatic change in and of

 12 itself and the transparency might even be contended --

the

 13 transparency desires may come from primarily a lot of 

those

 14 participants who, in fact, now will be fully 

participating in 

 15 those marketplaces, which is rather a large change. I 

think

 16 it's the same theme, but extending the theme that Lee 

was

 17 mentioning.
 18 MR. COOK: I want to make sure we get, you 

know,

 19 all the staff's questions in there.

 20 MR. BRIGAGLIANO: Can I ask the panelists 

whether

 21 they believe there should be a firm quote requirement 

for

 22 swaps and if so, should that depend on a liquidity 

threshold?

 23 MR. DE LEON: Bill De Leon. I think you've 

seen

 24 the market adapt to that concept already, that people 

put out

 25 quotes on many things in the OTC market, and that's how 

a lot
 

39

 1 of people get transparency. And the understanding is 

that

 2 people who put quotes out, understand that there's going 

to

 3 be some minimum size that they will transact on. 

Sometimes

 4 the quote information has that price information as well 

as a

 5 quote size or there is some indication. 

 6 We've found that dealers who send us 

information

 7 who don't include size and/or when you go and say I want 

to

 8 trade on one side of your market. And they say, oh, no, 

that

 9 was just an indication; we're not willing to trade. You 

tend

 10 not to get a lot of repeats.

 11 So, I would agree that having a quote without 

some

 12 concept of size and maybe it displayed or maybe there is 

an

 13 understood rule and obviously depending on the product, 

the

 14 size needs to be different, I think that makes sense 

because

 15 people flashing prices on screens not standing behind 

them

 16 I think gives -- lends to manipulation and/or misleading

 17 information. And it doesn't help anyone to have that, 

to say
 18 I'll buy it here at 25. Oh, okay. I'll sell it to you 

at

 19 25. Oh, no-no. That's only not good for any real size 

or I

 20 take it away. I think that hurts the market in 

liquidity in

 21 any process. 

 22 So, I think the concept of a firm size is good

 23 because it enforces that when you see this price there, 

well,

 24 it may not be all the size you want to do. At least you 

know

 25 you can do a transaction and it's not getting you to 

waste
 

40

 1 your time because otherwise, you're going to give away

 2 information to somebody.

 3 MR. DOWNES: Andrew Downes. I think in answer 

to

 4 the second part of your question, I think that 

definitely

 5 does have to be a liquidity requirement for firm quotes 

if

 6 there were to be that requirement at all. Obviously,

there

 7 is a lot of disparate standardized contracts that trade, 

and

 8 some in very small volumes, and I think it's obviously

 9 difficult to maintain prices across, you know, a number 

of

 10 tenors and hundreds of names all at once. That's just 

not

 11 feasible from a market making perspective. 

 12 So, I think you need to have a liquidity 

requirement

 13 and obviously, to the extent you were going to require 

firm

 14 prices, that should really just be around the benchmark 

and

 15 then obviously the benchmark price that is shown can be 

a 

 16 trigger for a discussion if someone wants something 

other

 17 than the benchmark.

 18 MR. OLESKY: Hi. It's Lee Olesky. One of the
 19 beauties of the way the market works right now, and this 

is

 20 following up on the two previous comments, is because 

it's

 21 fully disclosed, you know who is putting out the price. 

You

 22 know who you're asking for the price for. And I think 

we

 23 heard from Bill, if you are putting out prices and 

you're not

 24 standing behind them, you're not going to be asked for 

prices

 25 in the future. 
 

41

 1 And so we see that all the time. If you're 

not

 2 going to stand behind your prices, you know who it is, 

and

 3 this is the key to the anonymity of the relationship 

between

 4 the user and the liquidity provider, you're not going to 

go

 5 back to them. So, there's a self-enforcing mechanism

 6 that works quite well in terms of standing behind your

 7 prices. And, you know, we've experienced that in the

last 12

 8 years. If you're putting out prices and you're not 

standing

 9 behind them, you're not going to get that inquiry in the

 10 future.

 11 MR. SEMLITZ: I want to grab a question 

because it

 12 really goes to futures and derivatives and there is an 

entire

 13 industry that grew up around trading futures and those 

firms

 14 are canceling inordinate amounts of their orders, maybe 

up to

 15 97 percent of their orders. So, their orders aren't 

there to

 16 provide liquidity and many of their orders aren't there 

to

 17 really execute they're there to paint the market. We've 

got
 18 rules already in place to regulate this. And that's the

 19 current state of the market. So the question I have is 

why

 20 are we -- you know, why are we so concerned with request 

for

 21 quote and whether people will be firm on their quotes, 

but

 22 we're not doing anything about the futures markets.

 23 MR. MacDONALD: Ben MacDonald, Bloomberg. 

Just to

 24 kind of follow up on a lot of the comments. I think 

this

 25 goes back to the point of having, you know, different 

types
 

42

 1 of SEFs and to draw -- I mean, you know, I think one of 

the

 2 issues here is because the derivatives market is so new 

in

 3 the electronic trading space, I think we all draw 

comparisons

 4 with how we saw the cash space evolve. Natural 

evolution in

 5 the cash space was firm pricing and, you know, you've 

got to a

 6 point now where you can access hundreds of quotes on a

 7 system. And the way the liquidity providers 

differentiate

 8 themselves, one of the ways, is by firm quotes and, you 

know,

 9 people stand up to larger sizes from depending on what 

their

 10 appetite is. 

 11 So I think, you know, it's one of the reasons 

why

 12 it's very important to allow different models to exist

 13 because I think you'll naturally get this evolution, 

which

 14 we've seen in the cash space, across, you know, both the 

rates

 15 and the credit market.

 16 MR. OLESKY: Just to make another point on 

that is

 17 the -- in a sense, anonymity allows for backing away. I
 18 mean, I'm not going to be critical of the futures 

market;

 19 that's not my area, but I think when you have anonymity, 

it's

 20 easier to back away. When you don't have anonymity, 

when it's 

 21 a privately negotiated structure or deal, you can't back 

away

 22 or you won't do that business in the future.

 23 MR. DE LEON: One of the things, though, to 

sort of

 24 go back to that is as you -- you know, you look at your

 25 model, which works very well, people put up a quote and 

you
 

43

 1 know which dealer it is. Conversely, when you look at 

the

 2 futures market, this whole concept is that it's 

anonymous. 

 3 Whatever goes on, though, what you do know is if someone 

puts

 4 up a price and a size, they may be painting the screens 

as

 5 sort of the example that was laid out, but you do have 

the

 6 ability to do that trade. And there are times when 

people

 7 paint the screens and the market comes out and they 

don't

 8 pull their level quickly enough and they're held to that

 9 trade. 

 10 And also you tend to know when people paint

 11 screens, that is to say, well, if the market is $1 at 

$2, and

 12 they put a level out at $6, but they're willing to sell 

an

 13 awful lot of it, well, they know, and everyone knows, 

well,

 14 they're just painting the screen because it's so far off 

the

 15 market, you're not going to look at it and you know it's

 16 someone playing a game. Unfortunately we've not seen 

that,

 17 and that's just gamesmanship and it's -- I'm not a fan 

of it 
 18 or in favor of it, but if that person puts out a large 

block

 19 instead of at $2, at $2.02 and it's a large block, well, 

you

 20 might lift them on that offer because you may go, you 

know

 21 what? That's not painting the screen. That's them 

asking a

 22 little bit of bid-ask for a large block. So I think you 

need

 23 to differentiate the two.

 24 And the market does self-reinforce because 

people

 25 tend to look at it and go, these guys are constantly 

showing
 

44

 1 blocks off the market and I'm not going to look at it. 

So I

 2 do think that people self-correct for that even though 

it's

 3 anonymous. What I just want to get back to is the 

concept

 4 that if you're going to have a SEF model, the concept --

and

 5 it's going to be cleared, the concept is people having 

access

 6 need to be anonymous and be able to do things. 

 7 So, I think some of the points that have been 

made

 8 here is clearly there would be less customization over 

time,

 9 which I think is a natural outcome of the market, but we 

have

 10 this huge outstanding book of business that still needs 

to be

 11 traded and managed and eventually possibly cleared to 

reduce

 12 systemic risk to the system, which is the ultimate good. 

And

 13 how do you do that if you force the new model not to

 14 incorporate the existing body of positions.

 15 MR. VISWANATHAN: I just want to follow up on 

this. 

 16 I guess to me one of the presumptions of the Act is 

clearing

 17 itself will induce innovation. The fact you clear will 

lead
 18 to more standardization over time and hopefully it will

 19 mold - instead of just a request for a quote more actual 

 20 quote-setting behavior, but it might be that the 

regulators 

 21 need to set thresholds that if you meet certain volume 

hurdles,

 22 you're a big enough market that you want to prod more 

quote

 23 behavior because posting quotes, I think, makes a big

 24 difference to end users. 

 25 It goes from a negotiation relationship, which 

is
 

45

 1 kind of person to person -- RFQ model each person is 

getting

 2 a separate set of quotes. I'm seeing prices, but I'm 

not

 3 seeing the quotes that somebody else gets. But the 

posting

 4 quote model, it's completely different. I know the 

quotes

 5 that other customers have got for some standardized 

product. 

 6 So it changes the nature of the game in essence.

 7 MR. COOK: So you think if an RFQ model had a

 8 certain volume, then maybe you would say it needs to

 9 transition to a full disclosure model. 

 10 MR. VISWANATHAN: Yeah. I would say that that

 11 would be part of the regulatory kind of rule-making or

 12 decision-making.

 13 MS. ADRIANCE: That actually leads very nicely 

into

 14 my question, which is there have been several people who 

have 

 15 talked about RFQ models, the versions that have 

streaming 

 16 quotes, you know, whatever you want to call them. From 

what 

 17 we've heard before and today, the different versions of 

these 

 18 models, you know, have differed. There is many 

different 
 19 systems that's been mentioned. In fact, several people 

are 

 20 saying we need to have different models. 

 21 And I'm really curious, if, you know, if we as

 22 regulators, in addition, you know, we say everybody 

knows the

 23 control limit order book. We know how that works. We 

know

 24 that it has certain advantages. What I think is being 

said

 25 is that there are certain instances where a central 

order
 

46

 1 book just isn't going to work, like liquidity or 

whatever has

 2 been mentioned. 

 3 So, in addition to a central limit order book, 

 4 several people have mentioned other models. What I'm 

trying 

 5 to get more information on is if we could actually -- I 

 6 realize that a number of you already have models in 

place. 

 7 But if we were going to design a new model, if as 

regulators 

 8 we were going to say, well, what is the best additional 

model 

 9 in addition to a central limit order book that we want 

to . 

 10 encourage. Separate from where we are today, where do we 

want 

 11 to get to to deal with situations where there is the, 

you say, 

 12 the less liquid slots. 

 13 What would that model be that would provide 

 14 in a sense, the regulatory goals of the Dodd-Frank Act,

 15 you know, pre-trade price transparency, yet there is, as 

it

 16 has been mentioned, anonymity, you know, that there is 

this

 17 marketplace because many of the RFQ models, people have 

said,

 18 well, they're multiple to multiple because you have 

multiple 
 19 people sending out requests for quotes and you have 

multiple 

 20 people that can respond to that individual person.

 21 Is there something between that RFQ model -- I 

know

 22 there's been -- streaming quotes have been mentioned. 

That's

 23 something that can go to a lot of people who can react. 

But

 24 is there something else that is either out there that 

you're

 25 aware of, something between central limit order book and 
 

47

 1 RFQs, that is a beefed up version of an

 2 RFQ model or some other model that is either out there 

or

 3 that you can envision being a practical step if we're 

trying

 4 to evolve, you know, certainly as we've mentioned, as 

certain

 5 swaps become more liquid, if there is some and we have 

some

 6 kind of standard that we say, okay, if it reaches a 

certain

 7 liquidity it needs to move up the gradation of, in terms 

of

 8 models, is there something between this RFQ model, and 

the

 9 central limit order book. 

 10 One thing that was mentioned was streaming 

quotes,

 11 but that's not something that you can transact or

 12 that you can expect to necessarily transact I think. So 

I'm

 13 curious about what is -- what else might be in the 

middle

 14 between RFQs and central limit order book that's either 

out 

 15 there or that you can envision being a useful thing to 

have 

 16 out there.

 17 MR. SPRECHER: This is Jeff Sprecher from ICE. 

 18 What exists in the futures market for exactly that need,
 19 particularly in the options on futures market, is the

 20 requirement that there can be pre-trade conversation,

 21 arranging of somewhat customized deals. But when the 

moment

 22 comes to actually cross the trade, it is advertised, for 

some

 23 period of time, to a broad market before it's crossed. 

 24 So in other words, if the buyer and the seller 

have

 25 already found each other, one person puts up their bid 

or
 

48

 1 their offer, counts to three, and then the other one can

 2 cross it. That allows for a price improvement 

capability

 3 inside that bid and offer.

 4 Let me make one other point while we're on 

that. 

 5 And one of the issues that we have at ICE, as an 

operator of

 6 futures exchanges, many to many OTC markets, dealer to

 7 client OTC markets and inter-dealer OTC markets. So 

really

 8 covering across all trading types. One of the concerns 

we

 9 have is that in both Commissions requirements, to 

institute

 10 the core principles, as well as the aspirations of pretrade

 11 price transparency and some of the other aspirational 

aspects

 12 of the bill, that we not try to go through market type 

by

 13 market type or market by market and somehow give a broad

 14 set of exemptions. 

 15 It seems like that, however, those core 

principles

 16 are implemented, they ought to be consistent across all

 17 models, and then if the Commissions want to allow 

various

 18 trading models to exist, they shouldn't exist because of 

some
 19 kind of regulatory arbitrage differences between the way 

the

 20 core principles are implemented.

 21 MR. HARDING: Julian Harding. We seem to have

 22 stuck with, a little bit, the RFQ model, which as I 

 23 cautioned before, could -- I think needs to adapt a 

little to

 24 adhere to the strict definition that was read out at the

 25 beginning. The -- I would offer the inter-dealer broker 
 

49

 1 over-the-counter market places do offer what you've been

 2 suggesting might be a middle road between a central 

order

 3 book and an RFQ.

 4 The over-the-counter markets to date generate

 5 liquidity when compared pari passu to any other venue 

for a

 6 similar product area in an overwhelmingly greater 

manner. And

 7 if we agree that liquidity generation or liquidity

 8 preservation and improvement is a central tenet of 

safety

 9 and certainly is of the ability to clear trades and 

therefore

 10 create further levels of safety, then the inter-dealer 

broker

 11 model, the over-the-counter existing models can offer a 

lot

 12 of what you want in that we are looking at multiple 

parties

 13 transacting with multiple parties, accepting bids and 

offers

 14 from multiple parties, in a very dynamic environment 

where

 15 each player in that marketplace can be, at any one time, 

and

 16 even simultaneously, a market taker and a market maker.

 17 MR. EADY: So let's expand on that a little 

bit
 18 because my understanding is that the inter-dealer market 

is a

 19 market among dealers and not others. So when we get to 

the

 20 other policy goal of impartial access, are you 

suggesting

 21 that we open the inter-dealer market up to other 

participants

 22 who want to be involved for the benefits that you just

 23 described?

 24 MR. HARDING: Yes, and I said in my previous

 25 comment, that the new environment clearly envisages, by
 

50

 1 virtue of mandating certain existing parties to go 

through

 2 the SEF or the DCM and furthermore, mandates extra new

 3 parties that previously were not, possibly due to the 

fact of

 4 counterparty credit issues, were not having easy access 

or

 5 any access to those marketplaces. In the new 

environment, in

 6 newly cleared products, the counterparty credit issue is

 7 removed and those same newly mandated participants are 

going

 8 to have free access to those same marketplaces. So yes,

 9 indeed. The answer is yes.

 10 MR. MacDONALD: I think there is -- this is 

Ben

 11 MacDonald from Bloomberg. I think one of the things 

that's

 12 getting a little bit lost in the debate, perhaps, is 

that,

 13 you know, a large part of the derivatives market is what 

I'll

 14 call semi-standardized and by that, you know, the 

benchmark

 15 is where everybody is going to be basically looking as a

 16 reference but the reality is that a lot of the way 

trading is 

 17 done on these standardized products is the cash flows 

and 
 18 models slightly outside of, you know, the point which is 

made, 

 19 you might want to do a 10-year swap with, you know, 

three months

 20 forward, or something like that.

 21 And so, the risk is, it just becomes very, 

very 

 22 cumbersome, from a technology perspective, to be able 

to, you 

 23 know, if you change the model from an RFQ model, or 

don't have 

 24 that in your RFQ model, the RFQ model is actually the 

most 

 25 efficient model that we see today because it allows, you 

know,
 

51

 1 people to go out with this kind of semi-customized trade 

and 

 2 dealers can quote it or the price makers can quote that 

 3 transaction and come back, come back with a price. 

 4 It's just -- I think it becomes very, very

 5 complicated, you know, the more kind of -- the more you

 6 change that model and the more you get into the kind of

 7 semi-standardized space, I think those models become 

very

 8 complicated to maintain. So I'm just trying to kind of

 9 understand the thoughts around that.

 10 MR. OLESKY: Yeah. One comment I would like 

to

 11 make is I think what happens here, again, as we're 

trying to

 12 anticipate the effect of these rules on the marketplace, 

and

 13 I'll go back to that point. With the establishment of 

SEF,

 14 as more and more activity goes through SEF, I think 

you're

 15 going to start to see potentially more volume occurring,

 16 which will drive business into different types of 

trading

 17 models. And it will be driven, to a large extent, I 

think by

 18 market participants.

 19 If there were thousands of participants, as 

there
 20 are in exchange models, who wanted to participate in a

 21 10-year swap, then I think you would have an order book 

real

 22 quick because I'm pretty sure, you know, all of us would 

want

 23 to open up our markets to an exchange type environment 

if

 24 there are enough participants and enough liquidity to 

support 

 25 that kind of model. 
 

52

 1 And I do think we will see an evolution, and 

we've

 2 seen this evolution in other products where, for 

example, you

 3 have the treasury market, you have other markets. As 

they've

 4 gone electronic, they become more liquid, they pull in 

more

 5 participants, and you have more of an order book type of

 6 model occurring, whether it's in IDBs or, you know, 

through

 7 Tradeweb or Bloomberg or wherever. I think you're going 

to

 8 see an evolution in certain products where they will 

move to,

 9 naturally move to different types of trading protocols.

 10 MS. SLAVKIN: I have a concern that the

 11 conversation about maintaining the RFQ model is the 

status

 12 quo that you mentioned earlier. And it seems to me that 

the

 13 legislation envisioned, and what we should be trying to

 14 aspire to, is something as close to an order book as

 15 possible. As soon as we start adding the human element 

in,

 16 you invite the possibility for manipulation. 

 17 So, I also think that this can be, you know, 

made

 18 electronic and have as many participants as possible who 

are
 19 interested in participating in the process to have 

access to

 20 it. That should be the goal of this process and to move 

as

 21 much of the market onto that type of model as possible.

 22 MR. COOK: Okay. Thanks. I want to make sure 

we

 23 have time for our other topic we want to get to on this

 24 panel, then we can circle back in the end, which is the 

 25 exception to the mandatory trading requirement. Why 
 

53

 1 don't we start with a line of questioning on that.

 2 MS. ADRIANCE: We've just been talking about 

what

 3 is this -- the model that have -- the different versions 

of

 4 the models that have the pre-trade price transparency, 

et

 5 cetera. We know that there is language in the DoddFrank Act 

 6 that refers to, for instance, block trades. There is a

 7 possibility of some other language that might allow 

other

 8 situations, which might not be -- which might be trades 

done

 9 without a pre-trade price transparency. And we're 

trying to

 10 understand what that means. 

 11 What -- your views of under the Dodd-Frank, is

 12 there something in addition to block trades that should

 13 have -- that can be a method that trades can be executed 

 14 without requiring pre-trade price transparency and, you 

know, 

 15 what might those methods be and as well as under what

 16 circumstances would it be appropriate to allow, you 

know, as

 17 regulators we're supposed to be sorting out well, when 

and

 18 under which circumstances are block trades allowed? Can 

they
 19 be accepted as just block trades? Is it an adjunct to 

these

 20 other markets that have the, as it was discussed, 

central 

 21 limit order books, RFQs or these other models in 

between. 

 22 Where does this fit in, these exceptions to this rule of 

 23 pre-trade price transparency.

 24 MR. DE LEON: I would like to -- sorry. You 

know,

 25 block trading and post-trade transparency is something I
 

54

 1 think that offers very different information than pretrade. 

 2 And there are different social aspects to it, in terms 

of

 3 information, information flow and who benefits from that

 4 information. And I think it's important to separate 

those

 5 out.

 6 What I think, and I think that most people 

agree

 7 on, pre-trade transparency is incredibly important to 

make

 8 sure that as many people have access to (a) get the best

 9 price information out there, (b) be allowed to trade and

 10 offer liquidity, and (c) when they transact, get that 

best

 11 price. That's a common good, I think, because you want

 12 people to trade and get the best levels and not be 

forced to

 13 pay a substantially higher bid ask price. 

 14 What happens post-trade, however, is what

 15 information gets given out and how it is given out and 

who

 16 gets it. Post-trade is now a transaction barring a 

central

 17 limit order book where there is a trade done where that 

size

 18 then gets done. But what information gets given out

 19 afterwards and at what rate.
 20 You very quickly run into a situation where if

you

 21 don't have a central limit order book where it's clear 

that

 22 there were willing buyers and sellers to offset each 

other,

 23 and that was the clearing price, where the market starts 

to

 24 move. If I want to buy a lot of something and the 

central

 25 order limit book isn't deep enough, I'll move the price 

up. 
 

55

 1 If I want to buy something, the central limit order book 

is

 2 big enough, actually it can trade through me.

 3 When you do something, a block trade, which is 

now

 4 off central order and it's occurred, what information do 

you

 5 give out and when and why. I think it's really 

important

 6 because you create the situation of the buyer's curse 

and

 7 the, you know, or the winner's curse. And you need to

 8 prevent that because that's not a social good. Because 

that

 9 means that the two people transacting are taking extra 

risk

 10 on both sides and everyone else who doesn't take part in 

that

 11 transaction gets a lot of free information that they can 

then

 12 use against both people transacting.

 13 For example, if I want to buy a lot of 

something

 14 and I call someone and I ask, well, where can I buy it. 

 15 Well, if the typical order size is one car and I want to 

buy

 16 five thousand cars, well, the price for that is going to 

be

 17 very different. You have to produce 5,000 cars, where 

are 
 18 they available. There is a uniqueness factor for it. 

And 

 19 if the person who sells me them doesn't have the 

inventory 

 20 and needs to work out of it, everyone is going to know 

he is 

 21 short them so they can run the price up on that person. 

 22 So there is a real disincentive for that

 23 information to get out. What is important is that that 

trade

 24 did occur, people should know a large trade occurred, 

but how

 25 large and exactly what details should be protected 

because
 

56

 1 otherwise, everyone else in the room, or everyone else 

in the

 2 market, will have an unfair advantage. So the person 

who

 3 sold the car is going to want to protect themselves and

 4 charge a higher price. The person who buys them will 

pay a

 5 higher price. And conversely if I wanted to buy more 

cars

 6 after that first block, it's going to be more difficult. 

So

 7 I think when we talk about block trading, we have to

 8 understand the social implications and who is 

benefitting,

 9 versus who is getting hurt and what is the information.

 10 MR. COOK: I would like to steer us away, 

maybe --

 11 thanks for those comments -- from yesterday's topic of

 12 transparency and reporting and maybe back a little bit 

to the

 13 mandatory clearing requirement. Because what the 

statute

 14 says is that if a swap is subject to the clearing

 15 requirement, then it must be traded on an exchange or 

SEF

 16 unless no SEF or exchange makes the swap available for

 17 trading. 

 18 So, I think what would be helpful is to get 

your
 19 thoughts on how we should be interpreting the words

 20 "available for trading" when we're defining the scope of 

this

 21 exception from the mandatory trading requirement.

 22 MR. HARDING: Julian Harding. Robert, this 

might

 23 point to the big differences between an exchange or DCM

 24 situation and a SEF situation. It is -- whilst it is

 25 possible to conceive that a newly clearable swap may be
 

57

 1 turned down because of structural concerns of some kind 

or

 2 something else within an exchange environment, as being 

able

 3 to be listed for whatever reason, it is similarly almost

 4 inconceivable that a SEF that one might imagine with a

 5 different sort of structure, would ever turn down the 

chance

 6 to operate a market to trade a newly cleared swap. 

 7 So it doesn't point to the differences. And 

it's a

 8 common thread in the discussions over many, many months 

now

 9 that the word "listing" often comes up in terms of SEFs 

as

 10 well and if SEFs reflect the marketplaces that I believe 

they

 11 do, the listing concept is not correct and, in fact, the

 12 SEF will quickly and effectively create a marketplace or

 13 operate a marketplace for that newly created swap. So 

the

 14 exception, to me, never made that much sense.

 15 MR. COOK: So you would interpret it very 

narrowly

 16 and so that if it's available to be traded, then the

 17 exception would not be -- would not apply.

 18 MR. HARDING: Yes. For the SEF? Yes.

 19 MR. COOK: Yeah. Okay.
 20 MR. DuFOUR: Richard DuFour. I think the real 

key

 21 isn't going to be at the SEF level, but at the clearing

 22 level, that if a clearing -- there is a clearing entity 

out

 23 there that believes they can clear the contract with 

whatever

 24 the specifications are, then a SEF will be happy to act 

as

 25 the, you know, the place to match buyer and seller.
 

58

 1 MR. SPRECHER: This is Jeff Sprecher from ICE. 

 2 Just to follow up on that comment. As probably one of 

the

 3 largest, if not the largest, operator of the OTC

 4 clearinghouses, the reason that we've become successful 

in

 5 doing that is that we've made arrangements with the 

industry

 6 to give us price transparency because the remedy in a

 7 clearinghouse on a default is to liquidate the position. 

And

 8 so by default, we need to know at all times where the 

market

 9 price is, which means we need price transparency. So

 10 clearing will follow markets where there is price

 11 transparency. Not the opposite.

 12 And also, let me just expand my comments to 

say,

 13 again, as an operator of futures exchanges, we recognize

 14 there are contracts that are large size that are parts 

of a

 15 tailored risk profiles and the like that are arranged 

off

 16 exchange and are given to us as blocks. We try to 

maintain 

 17 that at a reasonable amount of quantity, usually in our 

 18 futures exchanges, it's under 10 percent of our volume, 

and 
 19 we try to influence that by the pricing that we charge 

to 

 20 accept blocks, the rules that we put in place to force 

 21 advertising of trades, and the like.

 22 In ICE's OTC energy markets, which are 

probably the

 23 most liquid two-way bid offer, OTC markets that exist 

today,

 24 97 percent of all the trades that go across our platform 

are

 25 cleared and about 15 percent of the volume that comes 

into
 

59

 1 our OTC market or 15 percent of the number of trades 

that

 2 come in are done away. Those are typically, again, 

large

 3 size, customized deals, and so on and so forth. So I 

think

 4 that the market can develop around a price transparent 

market

 5 and still accommodate some customization for both 

clearing

 6 and trading.

 7 MR. DOWNES: Andrew Downes. With respect to 

the

 8 available to trade, meaning I think that has to have,

 9 implicit in it the level of liquidity that's necessary 

for

 10 trading actually to occur; i.e., that someone can come 

in and

 11 there is trading available. I don't think it's a matter 

of

 12 build it and it's mandatory to come. I think it's more 

build

 13 it. They may come. Then if they come, it should be

 14 mandatory to come. That's the way I would understand 

the

 15 legislation.

 16 And I think, you know, if you're looking at

 17 liquidity, which is back to the sort of plurality of 

models 
 18 to be encompassed in the SEF definition, as I said and 

people

 19 have said earlier, there will be a large range of 

liquidity. 

 20 So I think you need to think about, in each case, what 

is

 21 available to trade based on, you know, the frequency of

 22 trading of the instrument. 

 23 You know, in some cases, if there's only X 

amount

 24 of, say, 10 trades a day, that's not really going to 

lend

 25 itself to a central order book because there just won't 

be
 

60

 1 bids and offers seeking each other in order to clear. 

So I

 2 would say liquidity is absolutely key.

 3 MR. MacDONALD: I think -- Ben MacDonald from

 4 Bloomberg. One of the -- just thinking about the debate 

a 

 5 little bit, one of the models which does exist today is 

the

 6 single dealer franchises that we spoke about which allow 

people

 7 to look in multiple offerings simultaneously. The 

beauty of

 8 that model is it actually allows the market to start 

becoming

 9 more electronic and people to post new products out 

there. 

 10 And I think, you know, just kind of I guess thinking out

 11 loud, the question is whether, you know, that -- if you 

have

 12 that kind of forum, what happens, you eventually reach a

 13 critical mass in terms of liquidity which then allows 

you to

 14 kind of, you know, hit that point. 

 15 So, I think what you're encouraging, by having 

that

 16 kind of model, is people to post liquidity and it gives 

you a

 17 mechanism to understand at what point those products 

actually
 18 do become liquid and then should, you know, I make a 

decision

 19 as to whether I should -- whether you belong, you know, 

in a

 20 clearing house.

 21 MR. DENIZE: Again, just a note. This is Yves

 22 Denize. A note to encourage a process in place that 

provides

 23 us with some subtle expectations as to how that would

 24 transition into a mandatory trading environment. You 

know,

 25 simply having a SEF raise its hand and say I'm prepared 

to
 

61

 1 list or prepared to provide a trading venue may not be 

the

 2 right process to have a trade go into mandatory trading. 

And

 3 I think there was some discussion about that over the 

course

 4 of the legislation when we talked about mandatory 

clearing 

 5 and how the agencies would be involved and having 

something 

 6 be designated for mandatory clearing. A similar process 

 7 would be at least logical here when you talk about 

mandatory

 8 trading and whether you're looking at liquidity volumes, 

et

 9 cetera, would be welcome.

 10 MR. MacDONALD: I think -- actually which 

raises a

 11 very, very good point. I think one of the things which, 

you

 12 know, which we have to think about, and I know this is 

part

 13 of the second discussion is, you know, the mechanisms by

 14 which, you know, you can ensure that all of the SEFs 

kind

 15 of, you know, have the same rules and there is clear

 16 understanding as to, you know, what belongs in which 

forum,

 17 which, you know, does raise the question as to, you 

know, to
 18 what extent should there be some form of central utility 

or

 19 something like that which is responsible for some of 

these

 20 activities around defining what's available and, you 

know,

 21 where the products should be going.

 22 MS. SLAVKIN: I think this language should be 

read

 23 relatively narrowly and that the requirement should flow 

from

 24 the clearing requirement. I think what we're seeing 

here is

 25 a preference that was reflected throughout the DoddFrank Act
 

62

 1 on the part of Congress to avoid mandating private 

market 

 2 actors to do pretty much anything, but allow the 

regulators 

 3 to make the determinations as necessary. And so I think 

it 

 4 would be a mistake to put too much emphasis on this 

language.

 5 MR. VISWANATHAN: I would also kind of say you 

 6 probably want a narrow interpretation simply because it 

could 

 7 be that, you know, the 10 year T-bond is traded and I'm

 8 customizing the 9 1/2 year, the 9 1/2 year may not be 

traded, 

 9 but for all practical purposes, you know, I'm pricing it 

off

 10 something that's out there. 

 11 So if you're going to make exemptions, you're 

kind

 12 of worried that if you make too many exemptions, people 

will

 13 use the exemptions to -- the 9 1/2 year's exempt and 

maybe I

 14 don't want to disclose. I simply trade the 9 1/2 year

 15 instead of the 10 year. So you have to worry a little 

about

 16 in the rule-making process, you start inducing 

regulatory

 17 arbitrage. So my view is that exceptions should be 

narrow
 18 and the rules should be very clear on when transitions 

occur.

 19 MR. DOWNES: Andrew Downes. I would just say 

in 

 20 terms of the requirement to clear compared to the, you 

know, 

 21 the requirement to SEF trade, I think when you look at 

 22 available to trade and take into account liquidity, the 

 23 liquidity measure or standard is different from that 

which I 

 24 would say is relevant for clearing. If you're looking 

at 

 25 clearing, what you want is enough price transparency in 
 

63

 1 order to have safety for the clearer to be able to 

calculate 

 2 the exposures and get the margins. 

 3 And you can get that with respect to trades, 

which

 4 actually aren't trading on a daily basis in the market

 5 because people clearing members will have those trades 

on 

 6 their books and they will be marking them on a daily 

basis.

 7 And the risk that you take where people aren't seeing 

those

 8 markets is mitigated to the extent that you can require

 9 additional margin and additional safety factors.

 10 If you distinguish that from liquidity in the

 11 context of trading, it may be that people have trades on

 12 their books, as I mentioned, for clearing, but there's 

no 

 13 trading going on and no bids and offers to find each 

other on

 14 a daily basis. So I think you need to look at liquidity 

in

 15 different ways for each of the two exercises, clearing 

and

 16 execution.

 17 MR. MELARA: If I could follow up on liquidity

 18 measures, we heard frequency of trading referenced. 

Could the

 19 panel expand, to the extent they can, as to what other
 20 factors we should be looking at when considering this

 21 particular issue.

 22 MR. DOWNES: I would say other factors that 

would

 23 be relevant, aside from frequency of trading, is the 

amount

 24 of market makers or people that are involved in the 

market. 

 25 I think if you've got, you know, only a couple of people 

that
 

64

 1 are making markets, that's clearly less of the market 

than if

 2 you've got, you know, 16 market makers all participating 

on a

 3 daily basis. So I think that's another key aspect.

 4 I think you also need in different, depending 

on

 5 the product, you need to look across the curves, sort of

 6 tenor points and find out, you know, what proportion of 

the

 7 contract is trading at which points because there will 

be

 8 some names that we would regard as relatively liquid, 

but

 9 they'll only be liquid, say, at one point, as opposed to 

the

 10 other points. So I think those are some of the key 

things

 11 that people need to consider.

 12 MR. OLESKY: I would agree, Andrew. I think 

in 

 13 addition to the velocity of trading and the frequency of 

 14 trading, it would really be the breadth of the market, 

is 

 15 critical component here, how many participants are there 

 16 willing to take on that risk. If you're talking about a 

 17 principal market, it's almost as important as the 

velocity 

 18 and the frequency with which things trade because that 

really 
 19 does establish. If you only have two folks making those 

markets, 

 20 I would say that's a little bit less liquid instrument.

 21 MR. DuFOUR: I think there is -- Richard 

DuFour. I

 22 think there is a couple of other measures you can also 

look

 23 at. Some of it would just be in a -- well, if you had

 24 something that was traded in an order book, you know, 

it's

 25 kind of the depth of the book; if it's a request for 

quotes,
 

65

 1 you would look at, you know, how many people had 

responded

 2 and the sizes for the responses. And you also can look 

at

 3 the open interest in the particular series or contract 

that's

 4 been created. Typically greater open interest will 

indicate,

 5 you know, greater liquidity.

 6 MR. HARDING: Julian Harding. I think also

 7 following from Andrew's point that certainly the number 

of

 8 participants is a crucial measure. But broadly, there 

are --

 9 there is a -- there are two forms of liquidity, retail

 10 liquidity which could be characterized by an equity

 11 marketplace where there are 100 pieces of 100 lots on 

each

 12 side of the bid offer spread. And then there is

 13 institutional liquidity where that same bid offer spread 

may

 14 be populated by one market maker in an average size. 

But

 15 right behind that, maybe one tick away on both sides, 

there

 16 is a vast amount of size that can be transacted. And 

that

 17 sort of liquidity, I think, is a very important element 

to

 18 preserve in any debates we have about liquidity.
 19 MR. OLESKY: Arguably, a definition of 

liquidity is

 20 can you do -- how much size can you do relative to 

moving the

 21 market is one definition. If you can do a lot of size,

 22 there's a lot of liquidity. If you can't do a lot of 

size,

 23 there is not so much liquidity.

 24 MR. VISWANATHAN: I would agree with that. I 

think

 25 in the end, it has to come with measuring your price 

impact. 
 

66

 1 If every trade moves prices a lot, then you have to say 

the

 2 market -- you would have to measure, somehow, the size 

and

 3 the depth of the market of something.

 4 MR. COOK: If a product goes through the 

process of

 5 being qualified to clear, so you have a clearing agency 

who

 6 thinks there's enough price transparency or modeling

 7 capability around that product field to accept it, how 

likely

 8 is it that product wouldn't be available in -- for 

trading in

 9 some facility that would qualify as a SEF? I mean, how 

big

 10 an issue do you think this will be as a real world 

manner once 

 11 it makes it through the -- over the threshold of being 

clearable 

 12 then why wouldn't it normally be tradeable in a liquid 

market?

 13 MR. MacDONALD: I think it's unlikely that 

anything

 14 which is accepted by the clearinghouse wouldn't be

 15 immediately available on the SEF. I think that, you 

know,

 16 especially if you've got multiple SEFs, there will be a, 

you

 17 know, competitive aspect to being first to market with 

anything
 18 which is made available on the clearinghouse.

 19 MR. DE LEON: I'm not sure that you'll see 

that

 20 because as we've seen, there are multiple security --

 21 multiple things that trade or are cleared or are 

clearing 

 22 eligible and especially if you look at the CDS market 

where 

 23 there is the big bang and small bang, so there's been a 

lot of

 24 standardization already, but a lot of smaller names 

don't

 25 trade that actively. 
 

67

 1 So, I would say that it's in the public good 

to have

 2 these CDS cleared and margined and marked on a daily 

basis,

 3 but it's not necessarily clear that they will be trading 

very

 4 frequently. They trade once or twice a week as is. So 

--

 5 and that's only by a limited number of players and 

dealers. 

 6 So given that, I don't foresee a pickup in that 

dramatically

 7 as it is SEF eligible. It will obviously help over 

time, but

 8 there are things that are not that liquidly traded as 

is. So

 9 just by definition, it doesn't mean there will now be a 

full

 10 deep market in it.

 11 MS. ADRIANCE: In terms of that, you mentioned

 12 that, you know, just because it's determined to be 

clearable,

 13 it does not necessarily mean that it will trade 

frequently. 

 14 The question that we began on was what does "makes 

available

 15 for trading" mean. If it's determined clearable, but 

it's not

 16 trading frequently, is that available for trading 

because
 17 it's being offered by some SEFs and so therefore there 

is

 18 mandatory trading or are you suggesting that there is --

it's

 19 not being really made available. I'm not sure really 

what

 20 you're saying.

 21 MR. DE LEON: I just -- 

 22 MR. DOWNES: I would say if you look at what's

 23 clearing, you know, there's obviously -- say you look at 

the

 24 less frequently traded single names, which should be the

 25 constituents of the investment grade index, I think on
 

68

 1 average across all of the constituent names, they trade 

four

 2 times a day. That is not very frequent. So, what I 

would say

 3 is whilst all those names or most of those names will 

clear and

 4 many of them already clear, it would be unlikely, at 

least

 5 for some subset, that they may trade in a SEF depending 

on

 6 the model for the SEF. 

 7 So if one were to prescribe that a SEF should 

be a 

 8 central order book, I don't think those names would 

trade on a 

 9 central order book because there's not enough bids and 

offers 

 10 seeking each other. But to the extent that the SEF 

definition 

 11 is wider and can encompass more models, then there's 

more

 12 likelihood that some names can be picked up and traded 

in a

 13 different model.

 14 MR. OLESKY: I wanted to go back to your 

question,

 15 Robert and I think yours as well Riva. One of the 

things,

 16 and Ben made this point, I think if it's clearable, a 

SEF is
 17 going to want to have it on their system. What might 

stop

 18 that from happening is if there is not equal access to 

that

 19 central counterparty and clearing so that it's not 

economic for

 20 that SEF to actually be able to do that business. So 

this

 21 gets back to what might stop an organization from 

actually

 22 making something available. Well, if we can't be 

competitive

 23 in the marketplace, vis-a-vis the customer base, that 

would

 24 be a hindrance.

 25 MR. MacDONALD: I think in a funny way --
 

69

 1 MR. SEMLITZ: I'm sorry. Go ahead.

 2 MR. MacDONALD: I was going to say I think it 

also

 3 goes back -- I think there is two issues, there is

 4 availability and liquidity, which is ultimately going to

 5 drive what's on the screen. I think it does kind of go 

a 

 6 little bit back to the RFQ model as well because the 

relevance 

 7 of that model is that it allows you to trade illiquid 

products 

 8 by sending out a quote rather than actually only being 

able to 

 9 trade if that product is available on the screen. So, I 

think 

 10 that remains a very important part especially as this 

market 

 11 continues to grow.

 12 MR. SEMLITZ: You know, it's one thing to say

 13 something is available to be traded on a screen, but 

it's not

 14 trading, and if the purpose -- unless you want to 

exclude end

 15 users or people who need semi-customizable products from

 16 trading and executing what they need, if you don't

 17 differentiate between clearing and available to be 

traded,

 18 you're going to end up constraining trade by not 

permitting
 19 people to execute trades because there are no quotes on 

a 

 20 particular SEF. So you're going to have to separate the 

two.

 21 MR. DuFOUR: What I would visualize happening 

is

 22 you would have the relationship between a SEF and a 

clearing

 23 entity and this concept of a product being listed I 

think

 24 isn't quite the right way to think about it, but rather, 

and

 25 I'm thinking of a request for quote model, I would come 

in
 

70

 1 and request for a quote for a product, you know,

 2 specifications, and the listing, if you will, would be

 3 created as a function of the trade as long as it was 

within

 4 some parameters that had previously been agreed upon 

with the

 5 clearing corporation and we can clear the following 

things.

 6 You can vary the following, you know, aspects 

of

 7 the contract, then the product would become listed or

 8 available because a trade took place and now there would 

be

 9 open interest carried in that particular product and, 

you

 10 know, someone else could come in and request quotes for

 11 order.

 12 MR. HARDING: Julian Harding. Just picking up 

on

 13 what Lee was just saying, which needs emphasis, I think,

 14 again. It is in the statute that there is full and open 

and

 15 non-discriminatory access from a competing SEF to a DCO 

and

 16 it's important, and it's an important proviso. I think 

it's

 17 important to preserve the ability of competing SEFs to 

have

 18 this non-discriminatory access, which has to be 

complete. 
 19 There can't be subtle or nuanced or discreet ways to

 20 discriminate against the access that SEF has. 

 21 This point is well taken that there is -- one 

could

 22 possibly imagine a situation where a SEF's desire and 

ability 

 23 to organize trading markets in that cleared product,

 24 may be in some ways stifled or stultified by a

 25 disadvantageous access to that DCO.
 

71

 1 MR. SPRECHER: This is Jeff Sprecher from ICE. 

I 

 2 just want to make the point again, that again as the 

operator 

 3 of a leading CDS clearinghouse, one of the most 

complicated

 4 derivatives, we can't clear a product unless there is a

 5 liquid market. And not only does there have to be a 

liquid

 6 market, we need pre-trade price transparency, which 

means it

 7 will be very difficult for market operators like us to 

clear

 8 contracts that simply exist through a request for quote, 

for

 9 example.

 10 The reason I say that is that if a market is 

an

 11 illiquid market and let's say it's 20 bid at 50, which

 12 means there is somebody willing to buy at 20 and sell at 

50,

 13 if somebody trades and does a trade at 50 and we receive 

it

 14 at the clearinghouse, we can't mark our positions to 

market

 15 at 50. If we have to sell, we're going to have to sell 

at

 16 20. 

 17 So, we need to know the bid-offer spread and 

we
 18 need -- and then in other words, we need the pre-trade 

price

 19 transparency in order to properly mark to market unless 

we

 20 want to margin somebody at a hundred percent, which is 

the

 21 only other -- in other words, everybody prepays for all 

their

 22 business, which I think probably is self-defeating in 

the

 23 marketplace.

 24 As Julian mentioned, the single name CDS 

market is

 25 relatively illiquid as it has existed; however, the 

reason
 

72

 1 that we're able to clear that, is we run a separate 

market

 2 with market participants where we run a daily auction to 

give

 3 us pre-trade and post-trade price transparency. And 

it's

 4 only because we have found market participants willing 

to

 5 accept that daily risk and with products that can trade 

on a

 6 daily basis that we're able to clear the portfolio that 

we

 7 clear right now.

 8 MR. SCHOTT: I would like to follow up on that 

and

 9 also bring it back to a question that I think Tom has 

asked

 10 some time ago emphasizing that pre-trade price 

transparency

 11 was one of the goals we were trying to achieve here. 

When

 12 the different answers that came across this question 

talked

 13 about different potential SEF models, but I'm not sure 

we

 14 squarely addressed pre-trade price transparency. We 

talked

 15 about central limit order books and RFQs and so forth. 

 16 Is there any reason why, regardless of the 

model or
 17 models that the Commissions may adopt, why the models 

could

 18 not include pre-trade transparency as part of how the

 19 SEF operates, so that even if it's an RFQ, you can see 

all

 20 responses, all participants can see the responses to the

 21 quotes.

 22 MR. DE LEON: I think, and I'll let some of my

 23 other colleagues who actually run sort of flex type 

models is

 24 that when you do put an RFQ out to these things, when it

 25 comes back, it's sort of public information and everyone 

has
 

73

 1 access to see that information. Whether or not you can 

trade

 2 on it is a function of whether or not you're a member or

 3 you're clearing through a member to that exchange. And

 4 that's a different discussion. But assuming one of 

those two

 5 things is the case, you would see that RFQ and you could

 6 then go back and either transact on it or counter back 

with

 7 another level. Please correct me if I missed something.

 8 MR. DuFOUR: That's correct.

 9 MR. OLESKY: I would just say a slight 

variation. 

 10 I think one of the RFQ models that we run has actually -

- 

 11 does not have a feature where the whole market sees the

 12 inquiry that's coming in from a buy side customer. And 

the

 13 reason for that is to protect that buy side customer 

from --

 14 and give the confidence to those providing liquidity 

that

 15 they can actually do the transaction before it becomes

 16 public, and potentially, that information could be used

 17 against each of those market participants. That's kind 

of 

 18 how the voice market has functioned for years. 

 19 And the risks there, in terms of the tradeoffs, 

are
 20 transparency, immediate transparency for the whole world

 21 versus the liquidity and price formation. And if you 

make it

 22 immediately obvious to the whole world that someone 

wants to

 23 do a trade for a billion five-year U.S. treasuries, it's

 24 going to be very hard for any liquidity provider to step 

up

 25 and say I'm going to provide you with that liquidity 

because
 

74

 1 they're going to be concerned about how they're going to

 2 hedge that risk and get out of that risk. 

 3 And in a principal market like for example 

just to

 4 use the U.S. treasury market, in the U.S. treasury 

market, it

 5 would be very difficult for primary dealers to extend 

the

 6 kind of liquidity they do instantaneously over TradeWeb 

and

 7 other platforms if they didn't have that protected 

section

 8 when the RFQ is going on. And I think what would be the

 9 result is if you open that up so that everyone can see 

it,

 10 you're going to have less willing participants in terms 

of

 11 opening up there and taking on that risk that they're

 12 providing to a customer when they're making a market, 

for

 13 example, in the U.S. treasury market.

 14 MS. ADRIANCE: And just to follow up on that, 

what

 15 you've just mentioned was, in a sense, a large block 

trade

 16 that another party may not want to take on the risk of a

 17 large block if it's a fully transparent marketplace. 

But

 18 what you've just described is a large block, which is 

clearly
 19 mentioned in the Act, under Dodd-Frank. And in that 

sense,

 20 there is, like for instance, to use the model that we 

have in

 21 the futures world, you can have a centralized 

marketplace and

 22 you can still have exceptions to the rule; for instance 

for

 23 blocks or U fees or whatever. 

 24 I guess part of our question here is, is there

 25 something -- while there may be situations that are
 

75

 1 appropriate that there is a block trade with a large 

notional

 2 amount, or whatever, what should be the rule, the basic

 3 marketplace, what variations of models. I think 

Sebastian

 4 was asking if the variations of models that are 

appropriate

 5 for the overall marketplace, can all those different 

flavors

 6 of models somehow offer pre-trade price transparency as

 7 separate from those situations, those -- the exceptions 

to

 8 the rule, the block trades, that wouldn't offer that. 

 9 So if we can get any thoughts as to back to,

 10 in a sense, the basic rule, what is this -- the usual 

model,

 11 whether it's central limit order book, RFQ's, streaming

 12 quotes, these other versions that we've been talking 

about,

 13 can all of those be -- either have now or be adapted to

 14 provide pre-trade price transparency for that basic

 15 marketplace. And we'll view that as the -- as not the

 16 exceptions, but the basic model.

 17 MR. DE LEON: I think you're sort of alluding 

to

 18 something we already see in the market now, which is the

 19 concept of people do pre-trade transparency either 

because
 20 things are electronically available or they pick up the 

phone

 21 and call and ask five people where do you see the 

following

 22 or show me a two-way on the following to get information

 23 back. And then once they've done that, when they want 

to do

 24 a block trade, they'll pick one or maybe two people and 

then

 25 show it to them on the block size because as -- not to 

delve
 

76

 1 into the other thing, I apologize for that earlier, but 

when

 2 you do do a block trade, obviously you want to be 

careful

 3 about what information you show and how.

 4 So, to the extent that you can do an upstairs 

block

 5 trade, but you've gone through some of the other methods 

to

 6 get pre-trade information, either through RFQs, looking 

at

 7 central order book, et cetera, streaming levels, you 

have an

 8 idea of where to trade and what to trade and then you 

can do

 9 your block trade.

 10 And another thing to sort of incorporate, 

depending

 11 on how these SEFs work, there are some issues, in terms 

of

 12 going to the treasury model, just to dwell on it --

there are 

 13 compliance and other legal issues because some accounts 

can't 

 14 trade with certain people. And it's not a credit 

quality thing, 

 15 it's sort of a structural thing. So, there are certain 

rules, 

 16 and especially in Tradeweb, where you may not choose to 

show

 17 prices to a specific set of dealers because you're 
 18 legally not allowed to trade with them due to compliance 

or

 19 legal or client guidelines. So that's sort of just an

 20 adjunct.

 21 But I do think that there are plenty of ways 

to do

 22 pre-trade transparency that would work in the sort of

 23 SEF model and then post that, you would then do either 

an RFQ

 24 or you would do an upstairs block trade where you don't

 25 necessarily show out to the universe what you want to do 

and
 

77

 1 advertise it up-front.

 2 MR. COOK: Thanks. So we're coming to the end 

of 

 3 our time. I just want to give anyone that wants to get 

in on 

 4 this question a final opportunity to do so, keeping 

comments 

 5 very brief. And let me ask Steve, do you have anything 

you 

 6 want to add before we wrap up?

 7 MR. SEMLITZ: No, nothing here.

 8 MR. COOK: Okay. Thanks. Anyone else?

 9 MR. OLESKY: I just wanted to reiterate a 

point I

 10 made earlier, which is I think as we -- this is such a 

big

 11 change. If you move derivatives markets into a

 12 SEF environment, which is largely electronic, I think 

one of

 13 the outcomes is you're going to have more participation,

 14 you're going to have more prices coming in, and you're 

going

 15 to have more pre-trade price transparency. And it's 

hard to

 16 talk about each of these bits of the legislation in 

piecemeal

 17 because I think they are all interrelated. The block 

rules

 18 are tied to the RFQ, which is tied to liquidity issues, 

which
 19 is tied to pre-trade price transparency. They all kind 

of

 20 need to be viewed, I think, holistically.

 21 MR. HARDING: Julian Harding. I would just 

like to

 22 almost endorse what Lee has said before, that the new 

SEF

 23 environment should be required of it a level of 

transparency

 24 that does not hamper liquidity. That for me should be 

the

 25 statement we should make, that liquidity maintenance or
 

78

 1 preservation is of paramount importance and we should

 2 offer -- we should construct marketplaces that insist 

upon

 3 the level of transparency -- the highest level of

 4 transparency that does not hamper liquidity.

 5 MR. DuFOUR: Richard DuFour. I would add to -

- I 

 6 would agree with both of them, and I would add to that 

the

 7 importance of -- it came up earlier, the issue of a firm 

quote,

 8 that if I'm going to be able to trade anonymously, in 

these

 9 systems and I put in a quote, I have to be held to it, 

you

 10 know, for a period of time.

 11 MR. COOK: Very good. Well, thank you very 

much

 12 for your participation on this panel. It's been very 

helpful

 13 and we appreciate your time and your contributions. We 

will

 14 be taking a 15 minute break and we'll reconvene at 11:00 

for

 15 our second panel. Thank you.

 16 (A brief recess was taken.)

 17 MR. COOK: Well, welcome back to our second 

panel

 18 of the day on SEFs. This panel will focus on the 

compliance
 19 with core principles for SEFs. There are four key 

subtopics 

 20 that we would hope to touch on, one is block trades, the 

second

 21 is surveillance, investigation and enforcement of SEF 

rules,

 22 the third is cross-market issues, and the fourth is the

 23 obligation of SEFs to provide impartial access. 

 24 So the format for the panel will be the same 

as the

 25 last, but why don't we again start by asking if folks 

could
 

79

 1 please kind of go down the line and say your name and 

your

 2 affiliation please.

 3 MR. VISWANATHAN: Vish Viswanathan, Duke

 4 University.

 5 MR. YELVINGTON: Brian Yelvington, Knight 

Capital

 6 Group.

 7 MR. WEISBERG: Philip Weisberg, FXall.

 8 MR. McVEY: Rick McVey, Market Axess.

 9 MR. KNIGHT: Ed Knight, NASDAQ.

 10 MR. DURKIN: Bryan Durkin, COO, CME Group.

 11 MR. DIPLAS: Athanassios Diplas, Deutsche 

Bank.

 12 MR. DENIZE: Yves Denize, TIAA-CREF.

 13 MR. DE LEON: Bill De Leon, PIMCO.

 14 MR. HARDING: Julian Harding, Tradition,

 15 representing the Wholesale Market Brokers' Association.

 16 MR. COOK: And we may be joined by Michael 

Masters

 17 momentarily. 

 18 So again, the format will be the same. We'll 

start

 19 with the staff asking questions and anyone is free to 

jump

 20 in, and we'll ask again that you'll just bear in mind 

the
 21 number of panelists, the interest in the topics and the 

short

 22 time that we have to get through this material. So with

 23 that, let's start with the first question.

 24 MR. MELARA: Thank you. The first topic is 

block

 25 trades. And as Director Cook indicated, this regards 

compliance
 

80

 1 with core principles. So, with respect to the core 

principles,

 2 Section 733 of Dodd-Frank, core principle 2 reads that, 

it

 3 says that, "A swap execution facility shall establish 

rules

 4 governing the operation of the facility, including rules

 5 specifying trading procedures to be used in entering and

 6 executing orders traded or posted on the facility, 

including

 7 block trades."

 8 Now the first panel spoke at length and on

 9 various -- in answers to various questions about block

 10 trades. So I would like to get a sense from this new 

panel

 11 as to your views regarding block trades and how they 

impact

 12 your various businesses or your perspectives, the 

perspectives

 13 that you represent here today.

 14 MR. McVEY: Rick McVey with Market Axess. 

Happy

 15 to jump in and start there. We run an electronic 

trading

 16 network primarily active in institutional credit markets

 17 today. We primarily utilize an RFQ protocol, although 

there

 18 are a variety of different trading protocols available 

on the
 19 system, and we compete with many entities that have

 20 alternative models.

 21 With respect to block trades, what we have 

found in

 22 our 10 year history is that the larger the trade size

 23 becomes, the more likely it is that both the buyer and 

seller

 24 have interest in bilateral transactions or in narrowing 

the

 25 audience for an RFQ or an auction process. In our 

opinion,
 

81

 1 those trades can take place electronically in an RFQ 

model

 2 through anything from a bilateral transaction to an 

inquiry

 3 they might want to share only with two or three key

 4 counterparties at a time.

 5 So in our opinion, block trades can be 

accommodated

 6 electronically and meet the market objectives of 

sourcing

 7 liquidity without exposing an excess amount of market 

risk

 8 that may lead to front running in the marketplace. We 

also

 9 are fans of the compromises that have been made around 

price

 10 reporting for block trades with TRACE, wherein corporate

 11 bonds, there are size thresholds above which a trade is

 12 reported as only having taken place above that size

 13 threshold. 

 14 So for instance, for high grade corporate 

bonds,

 15 the transaction is reported as 5 million plus 

irrespective of

 16 the block trading size. In high yield, which is an even 

less

 17 liquid market, TRACE reports at 1 million plus. I think

 18 those are sensible compromises that have been made 

between
 19 the regulators and the industry that could be applied

 20 successfully in the OTC derivative space.

 21 MR. MELARA: Thank you. Anyone else?

 22 MR. DE LEON: Yeah, hi. Bill De Leon. We 

tend to

 23 agree with that view, that it is incredibly important 

that

 24 while the public has information to be achieved that you 

want

 25 the trade to occur on a SEF, it is important that you
 

82

 1 bifurcate sort of what information goes out there. 

Because

 2 as the trade size increases or it becomes customized, it 

 3 tends to be more bilateral in nature and you want to 

limit 

 4 what information is given out. 

 5 And we think the TRACE-style compromise of 

treating

 6 it as above a certain amount accomplishes that. It lets

 7 people know a block trade occurred. It doesn't tell 

them

 8 exactly how much, which insulates the players, and it 

allows

 9 the bilateral conversation to occur in a way such that 

both

 10 the buyer and the seller are not giving away too much

 11 information, which leads to the free rider problem and 

sort

 12 of the loser's curse. So, I do echo those points and I 

think

 13 they were said more eloquently than I just did there.

 14 MR. DURKIN: Bryan Durkin from the CME Group. 

 15 Clearly, as part of our model, block trades has a 

relevance

 16 and has a place in the markets and the determination of

 17 what's appropriate, in the context of thresholds, one 

needs

 18 to take into consideration liquidity of the product and 

the
 19 platform in which the product is available.

 20 And then, you know, lastly, you know, I think 

in

 21 considering thresholds, one has to consider equivalent

 22 products or equivalent markets. And so if there is an

 23 equivalent product or market to benchmark off of, those

 24 thresholds need to be taken into consideration so as not 

to

 25 take away from the transparency or the liquidity of a
 

83

 1 centralized market in which block thresholds have been

 2 established for some period of time.

 3 MR. DIPLAS: Hi. Athanassios Diplas. I would

 4 agree with some of the comments that Bill De Leon over 

here

 5 made. One of the primary objectives or policy 

objectives

 6 obviously has been to ensure that the clients get to 

transact

 7 their desired size in the best possible price. And

 8 transparency obviously is one of the means in achieving 

that

 9 goal, but obviously there is a limit to how far we can 

take

 10 that when the transaction size gets large. And that is 

why I

 11 think it is these combination of places you have a lot 

of

 12 transparency for the smaller type transactions combined 

with

 13 the ability to share the protected transacting parties 

for

 14 larger size transactions is a very smart way to go about 

it.

 15 As people have said before, we have seen 

examples

 16 of how TRACE can set thresholds. Also we have seen now 

in

 17 the current legislation and proposals how they have also 

set
 18 thresholds that take into account the liquidity aspects 

of

 19 the underlying product. In doing that analysis, 

obviously,

 20 we need to -- I think we need to base it on facts, 

rather

 21 than obviously our own beliefs, and all of us come from 

 22 different angles, so the beliefs are going to be 

multiple. 

 23 And in that respect, you know, I urge you to look, 

obviously,

 24 at the data in the underlying markets.

 25 What we have done, as part of market 

participants,
 

84

 1 the different dealers along with the large buy side 

clients,

 2 as part of the commitments to the international 

regulators,

 3 we have done a study on transparency and we have 

delivered 

 4 now a three month slice of data for credit rates and 

equities,

 5 along with credit rates quotes that are associated with 

those

 6 instruments, and that is, I think, an extremely valuable

 7 piece of information that's going to allow the 

supervisors to

 8 make those determinations in terms of what constitutes a

 9 large market size moving transaction, based on actual 

data. 

 10 What you will see there, obviously, is that the market, 

the

 11 OTC market, is much more diverse than something like a 

futures

 12 market, which tends to focus on very high concentrated

 13 widgets. 

 14 The breadth of the market is managed here and 

I 

 15 think it is so for a reason in that it tries to 

accommodate

 16 client needs. And you will see that basically a lot of

 17 transactions happen in the benchmarks and those would be 

then

 18 accommodated very easily in the SEF, in the standard
 19 SEF example, but some of the others that are either 

smaller,

 20 still clearable, because they have been admitted to a

 21 clearinghouse because either they were older or they 

have

 22 naturally aged, but they don't naturally trade, those 

need to

 23 be subject to the block trading requirement.

 24 MR. WEISBERG: Phil Weisberg from FXall. When 

we

 25 were originally starting our electronic market, we had a 

lot
 

85

 1 of discussions with market participants about how we 

would

 2 have to set it up to enable them to do most, if not all, 

of

 3 their trading on our platform and what was important to 

the 

 4 end users, that we have transacting, the market 

participants 

 5 that are very diverse, was choices. So the ability to 

 6 transfer the whole risk in a block in one immediate 

activity 

 7 or the ability, if it was available, to take more 

execution 

 8 risk and break that, you know, trade up over time.

 9 So, they initially asked us, 'can you make 

sure that

 10 your trade protocol has the ability to let a market 

maker

 11 know if I'm asking just them or I'm asking everybody,' 

because

 12 they felt it would impact the price that they would, you

 13 know, receive. So, we just would encourage the 

regulators to

 14 draft the regulations in a way that would maximize the 

amount

 15 of trades that could occur on a SEF, allow blocks to 

happen 

 16 on a SEF if possible and with respect to the reporting 

of 

 17 block trade information, we would agree with Mr. McVey's 
 18 comments that TRACE-like distribution mechanisms, where 

 19 people were informed of trades and slightly larger 

trades 

 20 have a little bit of a delay and are reported as large 

trades 

 21 as opposed to the exact size would be the best 

compromise to 

 22 achieve the objectives.

 23 MR. DENIZE: Just a quick note -- Yves Denize 

--

 24 because of our discussion in the last panel about how

 25 different types of transactions will have vastly 

different
 

86

 1 liquidities, one size limit probably won't fit all. So, 

I 

 2 think the example used was 5 million plus, for instance, 

but

 3 clearly as you look at different types of trades, there 

will

 4 be different types of limits applicable for the block 

trade.

 5 MR. MELARA: If I may follow up along the same 

line

 6 of questioning as the liquidity measures question in the 

last

 7 panel, if there are these factors that you would like to 

share 

 8 with respect to looking at block trades, depending on 

the 

 9 asset class and/or the market that trades them, I think 

that 

 10 would be useful.

 11 MR. DE LEON: I think it's very important to, 

as

 12 Yves pointed out and was initially brought up, different

 13 asset classes and products will have different 

thresholds for

 14 what's considered a block trade. So, if you take the 

generic

 15 interest rate market or treasury market, clearly trading 

a 

 16 hundred million dollars of long bonds is a very 

different

 17 trade than trading a hundred million dollars of two year
 18 treasury notes. The duration and market impact there is 

very

 19 different between those two, even though they're both 

about

 20 the same notional and the same market value. And I'm 

just

 21 using that as an example. I'm not giving guidance on 

where I

 22 think the threshold should be.

 23 So, I think as you go through the market, you 

need

 24 to take into account not only the size of the trade, but 

the

 25 type of market and the market risk that's associated 

with
 

87

 1 it, so as well as what are the market conditions at the 

time. 

 2 So, for example, doing a hundred million dollar trade in 

U.S.

 3 long government bonds at 10 o'clock eastern time is a 

very

 4 different liquidity stress, and I would say it's 

relatively

 5 low, than if I were to try to do that in Asia time or if 

I 

 6 were to try to do that after an economic event occurred, 

you

 7 know, non-farm payroll comes out at 8:30 New York time, 

but

 8 try to do a large trade at 8:31, what's considered a 

block

 9 trade would be different.

 10 So, I think you need to scale market 

conditions, as

 11 well as products, into that factor, so to get a better 

feeling

 12 because it's definitively not a one-stop fits all type

 13 approach in terms of what a block trade is.

 14 MS. ADRIANCE: It sounds like what you're

 15 suggesting is that rather than a number be determined to 

be an

 16 appropriate threshold, that you're talking about some 

process

 17 or some algorithm or some calculation through which we, 

or
 18 somebody, should be going through to determine what's 

the

 19 appropriate size. Is that correct?

 20 MR. DE LEON: Yes, that's what I was implying. 

 21 Some concept of risk is best -- and I apologize for

 22 being technical, but the risk associated with something 

in

 23 terms of -- I think this came out in one of the earlier

 24 panels. What is the liquidity cost of doing a large 

trade

 25 might be your standard. So, for something that, you 

know, a
 

88

 1 $5 million trade has the ability to move the market X 

amount

 2 where in another market, you can do a $500 million trade

 3 without moving the market -- with moving the market the 

same

 4 amount. That would get you a similar sort of concept 

there

 5 where liquidity and price discovery equate what a block 

is.

 6 MR. DIPLAS: I think to get it started along 

those

 7 lines, I mean, you can see right now in the market if 

you

 8 look at the pre-trade quotes that are available -- and 

there

 9 is a big database of those that we have accumulated --

you

 10 can see, for example, what the market participants and 

dealers

 11 in particular are willing to quote as a standard 

transaction. 

 12 So, you're looking at an on-the-run index someone is 

willing

 13 to quote, you know, 200 million two ways and are sending 

--

 14 blasting that to everyone. Clearly that someone doesn't

 15 think that as a market moving transaction are willing to 

send

 16 that out to everyone. And that would not constitute the

 17 block. 
 18 I think if you go three times that amount, it

 19 definitely -- it will have a market moving impact. So, 

to

 20 the extent that you have that space to get all those 

numbers

 21 out, the same thing for single names, a low beta name,

 22 meaning a name that doesn't move that much, is often 

quoted,

 23 you know, at 20 million two ways, but the high beta name 

is

 24 quoted at 10 million this way. You go to high yield, 

the

 25 number drops a lot of times to two by two. So, that is 

- at
 

89

 1 least gives you the basis from which to start because I 

think

 2 obviously you turn to an algorithm, such a huge number 

of

 3 names is going to be a very impossible task for you. 

So, at

 4 least you need to start with something simpler.

 5 MR. EADY: Athanassios, when you said this in 

a 

 6 database somewhere, I mean, what are you talking about?

 7 MR. DIPLAS: Yeah. The numbers -- the way the

 8 market is communicating this level right now is actually 

by

 9 blasting out Bloomberg messages to everybody. So, 

clients

 10 actually have the problem of getting way too much

 11 information. Vendors have stepped in and actually have 

taken

 12 all the information and started sharing it in a way that

 13 actually becomes useable for market participants and 

they -- 

 14 given the fact that they have stock in a best bid offer.

 15 Now these vendors have kept all that 

information

 16 and as part of the study I mentioned earlier, we gave a

 17 three-month slice of that information to regulators so 

they can

 18 actually see how -- what kind of quotes were actually 

given
 19 out and how the market was trading. At the same time, 

you

 20 can see where actual trades occurred. So, you see if 

the --

 21 how well correlated basically the trade was to the 

actual

 22 quote. So, if the trade was done at five times the 

size, you

 23 would see a difference.

 24 MR. YELVINGTON: Additionally, just to kind of 

echo

 25 the comments that Bill made earlier, you know, you have 

to
 

90

 1 take into account not only the time at which the 

transactions

 2 occurred, acknowledged that for various instruments that 

may

 3 be a little bit more granular, I was thinking here 

possibly

 4 in the area of credit derivatives, it changes through 

time. 

 5 A particular event such as, you know, a corporate 

disaster of

 6 some sort may increase the trading activity of 

particular

 7 name in such a rapid fashion that what would have been a

 8 block trade before is no longer a block trade. And that 

can

 9 happen in a matter of a day.

 10 MR. McVEY: Go ahead.

 11 MR. VISWANATHAN: The only thing I want to 

caution

 12 is it's hard for me to imagine regulators running 

through a

 13 complicated process every day trying to figure out what 

the

 14 depth of every market is to determine what the threshold 

is. 

 15 It doesn't seem to be -- I mean, clearly, there has to 

be

 16 some mechanism to take the volume, the price impact, 

perhaps,

 17 over the last six months. But beyond that, perhaps 

another
 18 approach is simply to say all trades are disclosed. But 

if

 19 you're over this threshold, because it's impulse like, 

you get

 20 a delay of one day or something and leave it at that. 

 21 So, all trades are eventually disclosed. Some 

are

 22 disclosed with a threshold. You know, for this market, 

it's

 23 1 percent of volume. So, a hundred, you know, a hundred

 24 million, or whatever it is. But if a day later you're 

told,

 25 without being told exactly that it was that trade, they 

had a
 

91

 1 trade of, you know, maybe 300 million occurred at that 

price. 

 2 And that might be a compromise that might work rather 

than

 3 requiring the regulators to collect, you know, 

information

 4 that it may be difficult to actually do.

 5 MR. McVEY: Yeah, I would agree with that. I 

think

 6 simple is better with respect to block trading rules. 

 7 Fortunately for all of us there is more and more data

 8 available on OTC trading activity through the growth in

 9 central clearing and also the DTCC warehouse. And I 

think

 10 it's instructive, in terms of which instruments have

 11 different levels of liquidity and what block trading 

rules

 12 might apply to, say, a CDS index versus an inactively 

traded

 13 single name. 

 14 But I think it's important to keep the rules

 15 simple. I think TRACE has worked and it's generally 

simple. 

 16 The only caveat to that is what's liquid today may not 

be

 17 liquid in six months. So, I don't think you could do 

this one

 18 time and forget about it. I think it requires some 

regular
 19 monitoring, but I think simple rules would be better.

 20 MR. DURKIN: Just to echo Bill's comments, 

though,

 21 earlier, and also to compliment your comments, yes, 

simple is

 22 better in the context of the users' need to understand 

what

 23 the rules and the requirements are to be able to 

accomplish

 24 these block provisions; however, there definitely is

 25 something to be said for the differences in liquidity 

based
 

92

 1 on time zones. And there are levers that you can put in

 2 place, as Bill has suggested, to accomplish that to deal 

with

 3 those market idiosyncrasies based upon time zone.

 4 MR. MASTERS: Just to make one point that I 

made

 5 yesterday in the block panel, I mean, there is a key

 6 difference here between pre-trade transparency and 

reporting

 7 and post-trade. I mean, clearly, the post-trade regime 

is

 8 much narrower than the pre-trade period where people are

 9 going to, you know, Alltax or -- I'm dating myself here 

--

 10 but, you know, other vendors to try to discover what the

 11 price should be.

 12 The post-trade regime, as a general rule, 

should be

 13 much tighter. You know, the public needs to see the 

trade 

 14 ASAP and I understand the dealer has to hedge, but in 

many of

 15 these markets, as we all know, these over the counter 

trades

 16 can be broken out into, you know, the least common 

denominators. 

 17 And it doesn't take long to -- not as long as maybe some 

would

 18 like to postulate, to actually get your hedge done. 
 19 So, there is an offsetting public interest 

here in

 20 the sense of we would like to see the data as soon as

 21 possible, including market participants, regulators, but 

we

 22 would also like to see it in a standardized format. We 

would 

 23 like to see the data in a universal way, so that we can 

all 

 24 comprehend the data. 

 25 So, if we're doing, you know, a billion dollar
 

93

 1 interest rates swap-- the trader on the other side of 

that

 2 swap knows how to break that down into its component 

parts

 3 because he has got to do his own hedge. And so, I would 

like

 4 to see it, in terms of a delta equivalent, to its 

nearest

 5 listed equivalent, if possible, so that we can compare 

apples

 6 to apples. And that's critical not only for regulators 

to be

 7 able to do things like position limits and so forth, but 

it's

 8 also critical for market participants to be able to be

 9 involved in these markets because if you want more 

liquidity,

 10 we have got to see prints. 

 11 We've got to see those prints and see where 

things

 12 happen and that stimulates activity. If we don't see 

the 

 13 prints, the post-trade prints, on a quick basis, then 

the 

 14 market -- some of these markets are going to be what 

they 

 15 are now, in many cases, which is sort of back waters.

 16 MR. KNIGHT: I would like to echo that point. 

Ed

 17 Knight, NASDAQ. We certainly believe that the statute 

seeks
 18 to accommodate block trades. We think our own model, 

public

 19 exchanges, are not as efficient in handling block 

trades. 

 20 There needs to be an alternative. But what you're 

talking

 21 about is creating private markets and tolerating private

 22 markets. And the question is, how much of one do you 

want. 

 23 And so, it comes down to the definitions. And 

to

 24 some degree, if the private market becomes so large, 

you're

 25 going to destroy the ability to have a public market 

with
 

94

 1 transparent price discovery. So, you've got to balance 

a 

 2 number of factors.

 3 MR. McVEY: I would just, you know, add to 

that

 4 with respect to our electronic trading experience and 

the

 5 speed of price reporting. And I think it does go back 

to the

 6 benefits of electronic trading, even if the transaction 

is

 7 done bilaterally, which it can be done in an RFQ model. 

On

 8 average, for a trade that's completed on MarketAxess 

through

 9 the APIs that we have that facilitate straight through

 10 processing, the trade leaves our system, goes to a 

dealers

 11 trade capture system, is immediately sent onto FINRA for

 12 trade reporting, and is back and available publicly 

within

 13 one minute. 

 14 So, I think in a market that we're talking 

about

 15 where most instruments trade relatively infrequently, 

that's

 16 a great example of how e-trading reporting facilitates

 17 immediate and real time transaction price reporting for 

the

 18 overall market.
 19 MR. DE LEON: I would like to separate sort of 

a 

 20 couple of concepts because I'm not sure I agree with 

some of

 21 this line of thought. I think that the public good is 

to

 22 reduce counterparty exposure, to reduce systemic risk, 

and to

 23 have pre-trade price transparency for things. I do not 

think

 24 that everyone has a right to know what everyone else

 25 does. 
 

95

 1 And so, I sort of disagree with that. And I 

think

 2 TRACE does an incredibly good job of providing good real 

time

 3 information about what has traded in terms of a block, 

in

 4 terms of sizing, and coming up with a meaningful 

mechanism

 5 for it, but every single transaction that gets done 

creates 

 6 several issues. It creates the free rider problem, it

 7 creates the winner's curse, and it also takes the 

incentive 

 8 to do people's own research away, because when someone 

does 

 9 a trade, it means that they have done economic work, 

they've 

 10 done financial work, they've got an investment guideline 

 11 they're trying to achieve on behalf of their investors, 

many

 12 of which who are small investors who have pooled their 

 13 assets, possibly. 

 14 And that information and research, by doing a

 15 transaction, is signaling information. And everyone 

doesn't

 16 have to have that information for free. And that sort 

of

 17 defeats the purpose. The purpose here is to make sure 

that
 18 when people transact, that they get the best price 

possible,

 19 not that they know what everyone else in the market is 

doing. 

 20 And I think we need to separate that. And TRACE has 

done an

 21 incredibly good job of sort of mitigating that issue. 

And

 22 it's a very good compromise. 

 23 And if you look at the equity markets, to get 

around

 24 size and block trading, there are people who spend 

millions

 25 upon millions of dollars to come up with algorithmic 

models to
 

96

 1 hide what they're doing electronically. So, they break 

up

 2 block trades into small little pieces. So, I think that 

the

 3 market will go out of its way to avoid this. And it 

will

 4 cost money, it will cost investors money, it will hide

 5 information.

 6 MR. COOK: If we could just finish -- wrap 

this up

 7 quickly. So please go ahead, but I want to move onto 

some --

 8 

 9 MR. DIPLAS: Yeah, I'll do that quickly. 

 10 Athanassios Diplas. 

 11 I think TRACE is a good example. And we have 

seen

 12 TRACE has affected behavior. That -- it doesn't have to 

be

 13 good or bad, but it changes behavior. And where we set 

those

 14 limits is what dictates the behavior of the 

counterparty. So,

 15 in the example that Bill mentioned that the large trade 

is

 16 broken into smaller pieces in order to be actually 

liquidated

 17 in the market, that means that the risk has moved from 

the
 18 dealer that normally would take it in a large chunk to 

his

 19 counterparty that actually has to take that risk. So, 

that is

 20 something we need to be cognizant of. And where we set 

that

 21 limit is going to dictate that behavior.

 22 And the last part is that I agree with Bill, there 

is no 

 23 inalienable right for everyone in the market to know 

where

 24 every single trade has occurred. The point of 

transparency

 25 is to enable the participants to do their transactions 

in the
 

97

 1 best possible price. But if that comes at the detriment 

of

 2 the two transacting parties, clearly we moved too fast. 

 3 So, it's an issue about achieving that fine balance.

 4 MR. COOK: Okay. Thank you. Why don't we 

move on

 5 to the -- some of the other core principles we want to

 6 explore. Heather, do you want to ask the next question?

 7 MS. SEIDEL: The Dodd-Frank Act, under

 8 the Dodd-Frank Act, SEFs, swap execution facilities, 

have an

 9 obligation to monitor trading on their markets and also 

to

 10 enforce the rules that they put in place with respect to

 11 trading on their markets.

 12 I guess if we could get the panelists' views 

on sort

 13 of in this new world where you have markets that have

 14 obligations that they might not have now, how would that

 15 work? You know, what do the markets think about how 

they

 16 might go about carrying out their obligations, market

 17 participants that would be subject to those obligations,

 18 views on, you know, sort of how this would work in the 

new

 19 structure where there are sort of regulatory obligations 

on

 20 the SEFs.
 21 MR. HARDING: Julian Harding. Just as a 

slight

 22 preamble, the Wholesale Market Brokers' Association 

gamely

 23 attempted to send off a discussion draft on the core

 24 principles for SEFs, as soon as it was able, to both the

 25 agencies here. And I hope everyone knows that. I have 

a
 

98

 1 copy here if anyone needs one. As we know, the core

 2 principles for SEF were born of something very similar 

for a

 3 DCM and we've attempted to be flexible and adjust some 

of the

 4 core principles to reflect a more competitive SEF market 

that

 5 we might imagine for the future.

 6 But on the specific point, you're asking, 

Heather,

 7 the -- our view on the SRO type of issue. We endorse 

the

 8 idea of an independent SRO populated, hopefully, by

 9 practitioners who understand, at least a large body of 

which

 10 will understand, the swap marketplaces, which is not the 

case

 11 right now, probably in existing possible entities that 

could

 12 fulfill the function. And we would also like to imagine 

a 

 13 situation where there is one unifying SRO for all SEFs, 

so as

 14 to avoid any sort of imagined regulatory arbitrage where 

one

 15 SRO allied to a single SEF might interpret its 

obligations

 16 differently.

 17 MR. KNIGHT: I would like to make a comment 

just on
 18 the statute and how we view it. I think, from the

 19 perspective of a stock exchange and subject to exchangelike

 20 regulation, our first question was what did Congress 

intend

 21 here. And to me, the most revealing language is in the

 22 Senate report where the report states trading more

 23 derivatives on regulated exchanges should be encouraged,

 24 because it will result in more price transparency, 

efficiency

 25 and liquidity. In order to allow the OTC market to 

adapt to
 

99

 1 more exchange trading, the legislation provides for what 

was

 2 then called alternative swap execution facility.

 3 To me, they're equating the regulation in this 

area

 4 to something very much like an exchange. Then when you 

look

 5 at the language of the statute, the key responsibilities 

of

 6 an exchange is the ability to enforce its rules against

 7 members. Its responsibility to do that, its obligation 

to

 8 take disciplinary actions and to investigate. Those 

verbs

 9 are all found in the core principles here.

 10 So, and I think there is some logic to this 

because

 11 given the history of the financial crisis, given how the

 12 markets operated, I think the system of regulation of

 13 futures markets, the cash equities markets, seem to 

work. And

 14 Congress noticed that and wanted something like that in 

this

 15 space. I mean, we complain, at times, about the level 

of

 16 regulation, but it works. And I think the record is 

there. 

 17 Those markets did not shut down. They continued to 

operate. 
 18 The taxpayer did not have to step in and fund them to 

keep

 19 them going. People did not necessarily like the prices 

they

 20 were getting, but they were continuously operating in a

 21 well-regulated manner.

 22 So, I think that system of regulation, which

 23 Congress did not make any major changes to in this 

latest

 24 round of reform, is what they were looking to hear from 

this

 25 language as a legal matter. Now, the self-regulatory
 

100

 1 organization model, we use it. We outsource to a fully

 2 independent, what we believe, the gold standard of 

regulation

 3 to FINRA. We think that opportunity is helpful to the 

market

 4 overall. It provides us with a degree of independence 

that I

 5 think is irrefutable in how we, in particularly, enforce 

our

 6 rules against our members, so that there is no question 

about

 7 impartiality. But I think strictly from looking at the

 8 statute and the history of the statute, what the 

Congress

 9 appears to be asking for is something much like the way 

an

 10 exchange is regulated.

 11 MR. SCHOTT: Julian and Ed, you guys both in 

your

 12 answers sort of raised two distant concepts. One is who 

is

 13 doing the regulation, and you mentioned the SRO model. 

And I

 14 think we definitely need to talk about that, but I want 

to

 15 just sort of go a step back and go to the first part of 

your

 16 answers. And that is what ought they be doing. 

 17 So Julian, you mentioned the SEF core 

principles
 18 sort of born of the DCM core principles. And we have 

certain

 19 expectations around what appropriate trading practices 

are in

 20 a DCM and what practices are of concern and so forth. 

When

 21 investigations are conducted, violations are found, 

there are

 22 disciplinary actions. There is a structure in place. 

And

 23 it's fairly standard across the DCM. 

 24 So, I'm sort of wondering what the opinions 

around

 25 the panel are in terms of what are the sorts of conduct
 

101

 1 that -- whether it's the SEF itself or third party SRO, 

ought

 2 to be looking for. What is a prohibited trading 

practice on

 3 a SEF? How does it differ from a DCM? And once those

 4 practices are found, what sort of standards ought to be 

put 

 5 in place around sanctioning the conduct? 

 6 And as you answer that, think about, you know, 

are

 7 some of the concepts, at a big picture level, relevant 

in the

 8 SEF context as they are in the DCM context. We have a 

lot of

 9 rules in the DCM context that revolve around the

 10 intermediation of customer trade. And so you are 

protecting

 11 the customer. Are those sorts of concepts relevant in 

the

 12 SEF world?

 13 MR. KNIGHT: One comment, which is, be careful 

if

 14 you're thinking about setting standards that are 

different

 15 based upon the instrument standards and behavior. I 

think we

 16 are seeing more and more, and I guess that's another 

topic

 17 here, how these markets are interconnected. We do not 

want
 18 regulatory arbitrage between them. And again, you have 

a 

 19 long record of certain principles that I would have to 

think

 20 you believe work and you've got a statute where, you 

know,

 21 I've been asked does this create a national market. 

 22 I -- and looking at the SEC language in the 

1970's,

 23 I think this goes well beyond that where the SEC was 

given

 24 the authority to do it without a lot of, frankly, 

guidance

 25 from Congress. Congress has gone a step further in 

giving
 

102

 1 you explicit guidance about a market that it wants 

structured

 2 for the whole nation. It doesn't say this only applies 

in

 3 the lower 48. This is a national market with national

 4 standards and you've got a broad ground of authority to 

write

 5 rules here.

 6 MR. MASTERS: I would just say that there is -

- you

 7 know, in terms of what you were saying with regard to

 8 conflicts of interest, there is a lot of issues here in 

terms

 9 of, you know, what, I think, Congress intended, you 

know, in

 10 terms of, you know, when you look at SEFs versus DCOs, 

for

 11 instance, and you talk about, you know, compensation for

 12 referring business. 

 13 I mean, there is a lot of real tricky 

conflicts of

 14 interest here that I don't think the public wants to 

see. 

 15 You know, clearing and matching, you know, really need 

to be

 16 separate businesses. I mean, someone that clears ought 

to

 17 have different alternatives. There is an issue, you 

know,
 18 the old, you know, payment for order flow kinds of 

issues 

 19 that we've seen in the exchanges. I mean, there are 

some 

 20 things that we've dealt with that didn't work so well at 

 21 equities that we would like not to see in this sort of 

pro 

 22 forma regime that you're setting up. 

 23 But there's -- I think there is, as far as I'm

 24 concerned, there is going to be a very severe look at 

the

 25 whole notion of conflicts of interest in many different 

forms
 

103

 1 and how entities relate to each other and whatnot. And

 2 moreover, if those situations are anti-competitive. We 

want

 3 a broad, diverse group of participants involved, but we 

don't

 4 want levels set that prohibit one group at the expense 

of

 5 another group.

 6 MR. HARDING: Julian Harding. I guess the 

most

 7 important difference between the SEF and the DCM 

situation is

 8 that the SEFs in the future, as the IDBs are now, are

 9 competitive entities. And I think that there is a lot 

of

 10 questions of quality in the future of the surveillance 

or

 11 monitoring that will be undertaken by SEFs. It's just 

that

 12 they can only really do it in the -- within the confines 

of

 13 their own execution facility. So, they can -- as has 

been

 14 coined before, they can see what's going in their own

 15 classroom, but they can't see what's going on in the 

overall

 16 school or the playground. So, I think that's a primary

 17 difference as to what they're quoted as seeing.

 18 MR. WEISBERG: I think the regulators need to 

be
 19 mindful that often these markets that they're writing 

rules

 20 for are global markets. So, I would say even though the 

rules

 21 may apply nationally, the marketplaces themselves are 

global. 

 22 Our clients are global. We are in a currency market, 

which

 23 is global. And that really transcends all of the rules 

that

 24 people are writing. 

 25 So, there is no open and close for a foreign
 

104

 1 exchange market. It's a continuous market. But there 

are

 2 liquidity differences during times of the day and as an

 3 unregulated market, it performed quite well through the

 4 prices customers were always able to transact. So, I 

think

 5 the regulators have to make sure that continues to be 

the

 6 case after the introduction of rules that I think we all 

feel

 7 could be beneficial for the entire industry. 

 8 With respect to, you know, compliance, we --

in

 9 order to create a competitive SEF market, we think it's

 10 important that SEFs are able to outsource or delegate 

the

 11 surveillance function to third parties, appropriate

 12 third-party providers. We think the enforcement needs 

to be

 13 simple and not necessarily cumbersome and involve

 14 extraordinary expenses for the SEFs. And we think a

 15 suspension or revocation of trading privileges on a SEF,

 16 is oftentimes a very effective mechanism to ensure that

 17 people comply with the rules.

 18 MR. DIPLAS: Okay. Athanassios Diplas. In 

terms

 19 of the exchange model versus not, I think it is clear, 

and
 20 the drafters were very clear, that they did not want 

just the

 21 exchange model. That's why they wanted to be able to 

define

 22 the SEF. And they did that in recognition of the 

complexity

 23 of the market, of the derivatives market, that meets

 24 something more expansive. 

 25 So, that creates certain problems and also, 

you
 

105

 1 know, certain challenges, basically, in that for 

example, we

 2 would have multiple facilities for the instruments 

traded. 

 3 We also have multiple venues in which instruments clear. 

 4 And therefore, as we discussed in the swap data report, 

 5 sometimes you will be able to look for enforcement of 

the 

 6 principles in the actual SEFs and then you might have to 

 7 go wider as in the data report so we can get a better 

slice 

 8 of the whole market. So, I think we need to take a step 

back 

 9 and go for a little bit more open model.

 10 I don't have strong views of the outsourcing 

of

 11 the -- some of these functions or not, but the point is 

the

 12 market is much more complex than a single silo market 

that is

 13 containing one exchange.

 14 MR. SCHOTT: Just one last question on this. 

Oh,

 15 no, please, go ahead.

 16 MR. DE LEON: No, I just -- to reiterate some

 17 points. I think it's very important that -- I'm 

agreeing

 18 with Athanassios in terms of not being overly burdensome 

in
 19 terms of the regulatory things, so it's not meant to 

replace a

 20 DCM. However, it is very important to keep in mind that 

as

 21 regulations are written and rules are determined, that 

this

 22 is a global marketplace and we want to be careful to 

avoid

 23 regulatory arbitrage or a preferential market treatment. 

 

 24 And to the extent that we've seen this now 

already,

 25 a few people on this panel constantly are competing with
 

106

 1 overseas based markets in terms of clearing futures and 

their

 2 offerings, which I think is a good thing in terms of

 3 competition is good in this market as long as the right

 4 safeguards are in place for futures. We're going to see

 5 something similar for clearing of derivatives as well as 

for

 6 SEFs. 

 7 We want to make sure that whatever rules are

 8 created don't give an outright advantage to an overseas 

or

 9 one exchange versus another due to location, because 

you'll

 10 wind up losing control or having less impact where 

things go

 11 and you'll have both the ability to arbitrage by doing 

trades

 12 similar in nature on one exchange versus -- one SEF 

versus

 13 another. And more importantly, there will be a 

preferential

 14 treatment to where you want to clear your business, 

which may

 15 not be here if it's too onerous. 

 16 MR. COOK: Thank you. I just want to follow up 

on 

 17 this, pick up certain aspects of the conversation here, 

where, 

 18 Ed, you mentioned the national market system, and other 

people 
 19 have drawn analogies to the equity markets and this 

question 

 20 of arbitrage and different rules resonates a little bit 

with

 21 some of the debate that is happening in the equity 

market now

 22 where there has been a mandate to develop a national 

market

 23 system. And there is, has been an effort to balance

 24 competition of orders with competition of trading 

venues. 

 25 And, you know, that's constantly the issue is to get the
 

107

 1 right balance there.

 2 So, the question I would ask is when we're 

talking

 3 about the rules that SEFs will impose on their members, 

how

 4 uniform should we expect those to be. How much --

what's the

 5 cost of allowing SEFs, each SEF to develop its own 

rules. 

 6 What's the benefit of allowing each SEF to develop its 

own

 7 rules. If you're an investor trying to trade in these

 8 markets, how important is it to you to have a uniform 

set of

 9 rules that you can follow, so you have certainty, 

regardless

 10 of which platform you're trading on, as to what the 

rules of

 11 the game are, how much will imposing a requirement like 

that

 12 restrict the innovation of models that some people have

 13 argued on this panel and the last panel is important to 

the

 14 development of this market.

 15 MR. McVEY: I would tend to favor a uniform 

set of

 16 rules for all SEFs. And I agree with the comments 

earlier

 17 that being able to discharge someone -- not discharge, 

but
 18 share some of those responsibilities with a third party 

that

 19 may run a business in supervisory oversight of SEFs 

would be

 20 important from a cost standpoint.

 21 I think historically, electronic trading 

venues

 22 have successfully competed along the lines of 

technology,

 23 liquidity and price, and I do think that you can enhance

 24 competition in this space while at the same time, having

 25 consistency and efficiency in the rule process.
 

108

 1 MR. VISWANATHAN: I would tend to agree. You

 2 probably want to standardize clearing rules. The last 

thing

 3 you want to do is to find that you could clear across

 4 different SEFs in different ways. And you probably want 

to

 5 standardize some transparency rules and reporting rules. 

But

 6 within that, you want to allow -- from the equity 

markets,

 7 we've learned that allowing some degree of competition, 

kind

 8 of shakes the status quo in positive ways because it can 

lead

 9 to other outcomes as we've seen with stock pools of

 10 liquidity. But if you can get the right innovations and 

not

 11 restricted, I think that would actually be socially

 12 beneficial.

 13 MR. MASTERS: I would just -- this is Mike 

Masters. 

 14 I would just say that, you know, I think the key focus 

here

 15 for the regulator is to prevent a race to the bottom in 

the

 16 sense of, you know, establish a uniform set of rules. 

 17 Innovation is great except when it concerns regulatory

 18 arbitrage. And if you don't have a standard of rules 

that
 19 people across the board are -- have to comply with, then

 20 you're going to get a race to the bottom because, you

 21 know, one person has a -- you know, you have an easier 

time

 22 doing business here than there and people won't actually 

go

 23 there and then you're defeating your purpose as a 

regulator.

 24 So, I think it absolutely has to have -- there 

needs

 25 to be standard rules. It has to come from the 

regulator. 
 

109

 1 And I think the competition and stuff will take care of

 2 itself once people know what the playing field is.

 3 MR. SEMLITZ: Don't you think that there's 

going to 

 4 be issue with international versus domestic. That, even 

if

 5 you have standardized rules in the United States, that

 6 overseas you're going to have a different set of rules 

that

 7 already exist today. And it will be just compounded as 

we

 8 go forward. So, then how are you going to deal with the 

fact

 9 that U.S. rules, even if they are standard, are then 

offshore

 10 rules?

 11 MR. MASTERS: I think that in 2010, 

fiduciaries in

 12 general want more regulation, not less, as a matter of

 13 precept, in terms of where they're trading and where 

they're

 14 clearing. You know, there is -- you know, quite 

frankly,

 15 there's -- I'm not sure there is that much you can do 

about

 16 overseas other than linking -- trying to link regulatory

 17 groups together around the world. And I think that's

 18 something that needs to be done proactively by 

regulators.
 19 But clearly, I mean, someone has to come up 

with a

 20 standard. And I actually think if a market is known for

 21 being the one with the most integrity, the one with the 

best

 22 chance of having the most fiduciaries and institutional

 23 investors around the world where there is the most trust

in

 24 that market, I think that's going to naturally attract

 25 business. And again, maybe you can get, instead of a 

race to
 

110

 1 the bottom, you can get a race to the top.

 2 MR. KNIGHT: I mean, what we've observed in 

Europe

 3 is that the regulators there are watching very closely 

what

 4 the U.S. is doing and often waiting to see what they do 

and

 5 follow what they do. And I think some of them are 

pretty

 6 open about that and other countries the same way. So, I 

think

 7 to say don't do that because people won't follow I'm not 

sure

 8 is correct.

 9 In terms of uniform rules across market 

centers, I

 10 think there is the factor of, of course, different 

market

 11 structures and we would need -- if a SEF had a floor, a

 12 different set of rules and additional principles and all 

the

 13 electronics, but I think it should be core principles 

that

 14 apply across the various venues to promote competition.

 15 MR. DURKIN: I agree with that last comment. 

I was

 16 a little concerned that, you know, not every 

organization or

 17 market is exactly the same, that there should be core
 18 principles that need to be followed across a sector, but 

you

 19 must allow for some level of flexibility on the 

innovation

 20 side of things. So, you know, the rules of the game, 

you

 21 know, should be very consistent across the industry, but

 22 there should be capabilities there for a market to be 

able to

 23 innovate.

 24 MR. DENIZE: Again, as an end user, I think we

 25 certainly are supportive of measures and processes that 

would
 

111

 1 lead to supporting competition, but our traders don't 

want to

 2 have to figure out the arbitrage among, you know, 20 

SEFs and

 3 what rules they might be applying to themselves and so 

forth. 

 4 So, the uniform set of rules makes our decision-making a 

lot

 5 more streamlined and we can focus on the true issues 

that

 6 we're focused on for our products and for our 

participants,

 7 which would be the elements of the economic products and 

the

 8 economic risk mitigants that we're seeking.

 9 One of the issues, as you do set up the 

uniform set

 10 of rules, that we are concerned about, is to be -- to 

ensure

 11 that the governance process certainly includes the voice 

of

 12 the end users from the outset and throughout the 

process. 

 13 One of the clear observations of the OTC derivatives 

market,

 14 prior to the crisis, was its lack of transparency and 

lack of

 15 openness. 

 16 As we move to a regulated environment, the end

 17 users have a strong voice that need to be heard 

throughout
 18 that process. Even though we may not own the 

clearinghouses,

 19 we may not own the trading systems and we don't 

necessarily

 20 need to do that, although we should be, perhaps, members 

or we

 21 should be participating in the advisory committees and 

the

 22 rules and governance committees that are applying these

 23 uniform sets of rules.

 24 MR. DIPLAS: I would agree with some of these

 25 comments with respect to the end users. I think if you 

have
 

112

 1 seen something encouraging over the last couple of years 

is

 2 that the governance structure in the market has changed 

to

 3 include the end users, and I think this is going to 

continue. 

 4 The same thing goes for the CCPs and, as you've 

mentioned,

 5 the advisory committees, including the end users, and 

this is

 6 going to continue.

 7 The second thing that's also encouraging is 

that I

 8 think we have good evidence right now of international

 9 regulatory cooperation. We have the global supervisors

 10 forum, which now includes, what, 30 or 40 participants, 

more

 11 or less. And I think that that -- they're taking that 

job

 12 pretty seriously. So, in order to kind of -- it's a 

balance 

 13 of trying to ensure that we can have innovation and at 

the 

 14 same time have actually a well regulating environment we 

need 

 15 to, I think perhaps, look at the more hybrid system. 

 16 We start at the top with the core principles. 

 17 Perhaps we have some kind of set of super rules that 

actually
 18 apply to everybody and then you have a certain lower set 

of

 19 rules which actually are more flexible. But there are 

the

 20 different steps to operate, because they deal with

 21 different products and they need that flexibility. It 

allows

 22 the new participants to come in and offer something 

better. 

 23 So, that would be a bit more flexible and balanced 

approach,

 24 I think.

 25 MR. YELVINGTON: I think also having, at the 

very
 

113

 1 least, a core set of rules around the regulation there 

really

 2 might engender quite a bit of innovation, because it 

takes

 3 away a lot of the business risk for somebody looking up 

to

 4 set up a SEF. It actually helps them know their 

boundaries

 5 at least on a minimum basis. The same could be said 

with the

 6 conversation earlier this morning when people were

 7 discussing, you know, a standard for RFQ versus central 

limit

 8 order book.

 9 If you define the minimum and provide a, you 

know,

 10 a metric by which the market can evolve itself, then 

we'll

 11 get a better answer as to what's preferred by the market 

for

 12 different instruments, and I think that you'll probably 

end

 13 up seeing, not only on the regulatory side, but on the

market

 14 structure side, different instruments will trade in 

different

 15 markets just because they trade better there.

 16 MR. COOK: So let's move onto the cross-market

 17 portion. 
 18 MR. SCHOTT: I think we've already touched on 

a lot

 19 of these issues, but, you know, one of the things that 

we're

 20 struggling with is how do you appropriately regulate a 

market

 21 where a product can be trading across so many different

 22 platforms. Someone mentioned the schoolyard model. 

What

 23 happens in a classroom model? Who regulates the 

schoolyard? 

 24 We can say the SEFs can regulate what's happening in 

their

 25 own market. That leaves a gap.
 

114

 1 People have suggested a super SRO. I was 

wondering

 2 if just the panels could give their opinions a little 

bit as

 3 to who that entity might be, what sort of a relationship

 4 between the SEF and the SRO, what role the SEFs should 

still

 5 have, you know, either in terms of overseeing the 

services

 6 being provided for them. If there are super rules 

versus

 7 some local rules for SEF, does each SEF oversee its

 8 particular rules and leave the sort of the master rule 

book

 9 to the overall SRO. This is an area where we're just 

giving

 10 a lot of thought to. So your opinions would be welcome.

 11 MR. DE LEON: Hi. This is Bill De Leon. I 

think

 12 it's important to think about the roles that SEFs play 

in

 13 terms of the overall connectivity and the whole process. 

And

 14 that will sort of give you some guiding principles. I 

agree

 15 with the comments here that there should be some set of

 16 minimum standards for SEFs in terms of what they report, 

how

 17 they regulate requirements in terms of trading 

information,
 18 but there should be innovation.

 19 The two important things regarding that that I 

see

 20 is once a transaction is done on a SEF, it has to be 

given up

 21 into a CCP. So, you need to know that there is a 

process and

 22 capital behind the trade that's done on a SEF, so that 

it

 23 winds up in a CCP and is matched. And that's an 

incredibly

 24 important thing. To the extent you're trading directly 

on

 25 the CCP -- so, if I were to use ICE and then give up 

into ICE
 

115

 1 or I trade on the CME and give up into the CME, it's one

 2 unit. I have a lot less risk. But if I trade on some 

other

 3 third party vendor and then it gets given up into ICE or 

CME,

 4 or whoever it may be, I need to know that the process 

between

 5 the transaction and it getting there is going to be 

highly

 6 monitored and there is going to be capital there.

 7 So, just like all of us do detailed 

counterparty

 8 exposure management and credit review of any CCP we're 

going

 9 to use, because we want to make sure that the CCP stands

 10 behind it and whoever we are using to clear our trades 

are

 11 sufficient, when I do a transaction with a SEF, I need 

to

 12 know that they need some minimum standards that I have 

 13 incredibly high degree of confidence that that trade 

winds up

 14 in the CCP. 

 15 It would be analogous to what we see when we 

trade

 16 equities. I can trade equities on multiple venues and 

then

 17 it gets given up into my actual clearing account. The 

beauty
 18 of most of the equity markets in the U.S., and probably 

all,

 19 is that I do a trade and very few people worry about 

where I

 20 did that trade and it getting cleared and me taking

 21 counterparty risks. Obviously I take credit risk or 

equity

 22 risk by doing that trade, but that component is taken 

out.

 23 Whatever regulatory environment, whatever 

rules are

 24 set, I would argue you need to make sure that the three

legs

 25 here are similar, that the -- when I do the trade, who I 

use
 

116

 1 to do my SEF execution is going to stand behind the

 2 transaction, the SEF itself will stand behind it, and 

then it

 3 will wind up in my CCP. And that connectivity and the 

credit

 4 risk there is limited or removed as much as possible and

 5 there is an overriding set of principles and rules, so 

that I

 6 can sleep at night, about the counterparty exposure, the

 7 clearing, the connectivity.

 8 MR. SCHOTT: Do other panelists have thoughts 

just

 9 around some of the more practical elements of 

establishing

 10 this SRO and sort of the legal relationships between the 

SEFs

 11 and the SROs, the financing of the SRO?

 12 MR. SEMLITZ: To have a consistency in

 13 regulatory. It would seem to me that the CFTC ought to 

be

 14 regulating all SEFs that relate to commodities, and the 

SEC

 15 ought to be regulating all SEFs that relate to 

securities and

 16 apply the same standards you're using today across all

 17 markets. Therefore, it takes out the regulatory 

arbitrage. 

 18 You've got counsel at every firm who is used to dealing 

with
 19 the regulators who are regulating them already and that

 20 creates a tremendous amount of consistency across 

existing

 21 markets today and the markets that are going to exist

 22 tomorrow.

 23 MR. SCHOTT: Speaking of markets existing 

tomorrow,

 24 we have, I forget what count we're at now, 330 some days

 25 before sort of this goes live. If that third entity 

isn't
 

117

 1 set up yet, what's the interim solution? Any ideas will 

be

 2 accepted.

 3 MR. KNIGHT: I think if the demand is there, 

and I

 4 believe the demand will be there, there will be 

offerings

 5 here and I -- you know, you look again at the FINRA 

example,

 6 both the New York Stock Exchange and NASDAQ use them, 

and

 7 they facilitated the entry of many other competitors in 

the

 8 space. So, I don't think you can no longer say that

 9 regulation is a hurdle to competition in our space. I 

can't

 10 see why a similar model wouldn't work.

 11 MR. DURKIN: And I think there is something to 

be

 12 said for the template that, you know, you've already

 13 established in terms of the respective agency's 

oversight

 14 into the centralized markets as they exist today and, 

you

 15 know, the establishment of, you know, rules, criteria,

 16 capital requirements, you know, a lot of the things that

 17 Bill, you know, had expressed, you know, the need and 

desire

 18 to have in place. So, there is that confidence for this
 19 central counterparty risk management capabilities. I 

mean

 20 there is a very solid template out there that can be 

built

 21 upon to adapt to this new evolution.

 22 MS. ADRIANCE: Thanks. In terms -- I mean,

 23 we've -- there was a little silence there when it came 

to

 24 suggestions for a possible third party, except there has 

been

 25 one or two suggestions. But in terms of this -- to get 

back
 

118

 1 to what was mentioned earlier, the interaction between 

the

 2 individual SEF, well, I should say derivative SEFs, and 

if

 3 there is this third party that is out there in the 

shadows

 4 that we do not yet know who exactly it's going to be and 

it

 5 may be more than one, or maybe it's one, it would -- so 

there

 6 are several questions there.

 7 One is what, you know, what is the -- what

 8 responsibility -- it is one that Sebastian asked 

earlier. 

 9 What is responsibility that you see being given up as

 10 compared to what is being retained. It was mentioned

 11 earlier, for instance, that an appropriate step, if 

there has

 12 been a some kind of you've gone to the design process, 

there

 13 could be some kind of -- one appropriate step would be 

that a

 14 trader has lost access to that SEF. Well, is it just to 

that

 15 SEF or is it across all SEFs. And who does that? 

 16 Is it -- so if it's just one SEF, that SEF can 

just

 17 pull the plug. But should it be -- you know, if 

something
 18 has happened on one SEF or has happened on multiple 

SEFs,

 19 should there be some coordination between what happens? 

Is

 20 this third party, this mystical third party that is 

going

 21 to do this? Should it be that each SEF has a 

responsibility

 22 to do its own after being notified by the CFTC, the SEC, 

some

 23 third party? 

 24 How is this interaction going to work when 

you've

 25 got -- you may have issues that are not going to be kept
 

119

 1 to necessarily one SEF or in each SEF you -- if there

 2 are several parties who end up being SEFs, you may not

 3 know, on one hand, when you're seeing a problem, if it's

 4 happening on other SEFs. What should happen?

 5 MR. KNIGHT: Well, I mean, in the exchange 

space,

 6 there is some robust principles in this area. There is 

the

 7 principle referring things to the appropriate regulator 

when

 8 you see a problem even if you have a suspicion of a 

problem. 

 9 So, it gets widely disseminated. You have access rules 

that

 10 make it clear when you can deny access to someone for a

 11 regulatory problem. And again, you have to share that

 12 information.

 13 And so, I think there are processes in place 

that

 14 you can borrow that are pretty well established. You 

know,

 15 one is all stock exchanges -- and the SEFs I wouldn't 

see why

 16 you wouldn't do the same -- you are regulatory officers 

and

 17 you have an obligation to enforce the rules. Even 

though you

 18 may be a salesman, if you see something, you have to 

report
 19 it. You know, these basic principles, I think, serve us

 20 well. 

 21 The question of what you would outsource or 

not, I

 22 think it really depends on who the vendors and what the

 23 capabilities of the SEF are, but generally, the most 

awkward

 24 aspects of these, if you will, self-regulatory

 25 responsibilities are enforcing rules and disciplining 

and
 

120

 1 investigating your own members who are also customers. 

 2 So, that is what we outsource to FINRA. And, 

but 

 3 the real time surveillance of the market and issues 

related 

 4 to that we conduct internally. The process of 

determining 

 5 what fits on our market or not we do internally through 

an 

 6 independent group that's again subject to oversight by 

the 

 7 SEC. But, you know, the awkward piece is enforcing 

those 

 8 rules against people who your salesmen are visiting the 

day 

 9 before. And that's where outsourcing works.

 10 MR. DURKIN: Well, I would have to take a 

little

 11 issue just from our existing model, and I'm using the

 12 centralized market at the CME group. I mean, we are, 

you

 13 know, a self-regulated organization. We have very 

stringent

 14 rules and regulations. We have a very aggressive market

 15 surveillance and trade practice surveillance program. 

 16 We do take actions and we do review all of our

 17 activity that occurs across all of our products every 

day. 

 18 And if we find trade practice abuses, we take 

appropriate
 19 action and it gets publicized to the CFTC as well who

 20 may also take action and decide to pick up the case. 

So, I

 21 would just be, you know, very careful in saying the

 22 awkwardness of being able to monitor and regulate your 

own

 23 markets because that model has worked and it has been in

 24 place for many, many years.

 25 MR. KNIGHT: Yeah. I premised by saying if 

you
 

121

 1 have the capability. You all do it well and I wasn't in 

any 

 2 way criticizing your model, but I think the option of 

being 

 3 able to do that is healthy out there. I think. 

 4 MR. McVEY: It was a multi-part question. So 

I'll

 5 take a crack at a few pieces of that. But FINRA has 

been

 6 mentioned several times on the panel today as a logical

 7 entity to provide some of the oversight services. I 

think

 8 NFA is another logical entity that would be willing to

 9 compete for that business if it's made available.

 10 I personally think that any SEF has to be

 11 responsible for the fairness and safety and reliability 

of

 12 their own marketplace, but I would agree that when it 

comes

 13 to arbitration and enforcement of the rules and fines, 

that's

 14 an area where we think it would be logical to lean on a 

third

 15 party like FINRA and the NFA. 

 16 And I also think that since I believe you do 

want

 17 to encourage competition in the SEF space, a large 

trader

 18 reporting is another piece that could be handled better 

on an
 19 aggregate basis by one of those entities, as opposed to 

a 

 20 variety of different SEFs.

 21 MR. DIPLAS: I would agree with that part. I

 22 think, to go back to Riva's initial question, you need 

that

 23 third party because you acknowledged that the market is 

a 

 24 little wider than that one silo containing one SEF. And 

so,

 25 the SEF can actually do on its own what it can see, but 

you
 

122

 1 need that third party to deal with the stuff that that 

one

 2 SEF might not be able to see.

 3 I would be agnostic in terms of which entity, 

in

 4 particular, could actually carry out that task, but at 

the

 5 same time what I would want that entity to have as a

 6 qualification is the knowledge and experience in the

 7 underlying asset class. The way SEFs are most likely 

going

 8 to be organized is along asset classes. And so that

 9 expertise is, I think is going to be very important. 

 10 Now some SEFs might actually do multiple asset

 11 class in which case, in some ways, that third party 

could

 12 cover those or it could be a multiple of those. But I 

think

 13 the expertise in that asset class has to be demonstrated 

and

 14 something that we need to focus on to make sure they 

 15 understand that because what works in equity, doesn't 

work 

 16 in trading, et cetera.

 17 MR. COOK: I want to make sure -- thank you. 

I 

 18 want to make sure we have time for our last topic, which 

is

 19 an important one, and it's standards for SEFs to fulfill
 20 their obligation to maintain impartial, open access. 

So,

 21 why don't we begin the questions on that topic.

 22 MS. SEIDEL: Well, I think the -- you know, as

 23 Robert noted, there are obligations on SEFs in the Act 

to

 24 ensure impartial access to their markets. And so, we 

would --

 25 you know, sort of an open question as to how would SEFs 

go
 

123

 1 about doing that and what types of entities, you know, 

would

 2 or should be allowed to have direct access to the 

markets.

 3 MR. McVEY: I will take a crack at that since 

no

 4 one seems to be diving in in any hurry. But I think the

 5 criteria for access have to be fair and impartial and, 

you

 6 know, ideally, publicly disclosed. We have an 

institutional

 7 credit market and as a result, qualified broker-dealers 

are

 8 welcomed to make markets on the market access system and 

 9 qualified institutional buyers are welcome as buy side

 10 participants. So, I think if there are fair and 

impartial

 11 criteria and they're publicly disclosed, then I think 

the

 12 open access issue would be addressed.

 13 MR. DURKIN: I would just say that every 

registered

 14 entity should have the ability to set the terms and

 15 conditions for their participation on their direct 

system. 

 16 And within that, there should be, then, impartial 

access. 

 17 But I do believe that, you know, every registered entity

 18 should have that flexibility to determine what those
 19 requirements are.

 20 MR. DE LEON: Hi. This is Bill De Leon. 

Yeah, I

 21 think it's important that things be impartial, but there 

have

 22 to be minimum capital and/or regulatory standards for 

anyone

 23 to have access or to provide access to clients. This is

 24 analogous to sort of the know your client and as well as 

sort

 25 of to become a member of an exchange, you would have to 

pass
 

124

 1 certain minimums. 

 2 What those minimums are, I'm not referring, 

you

 3 know, someone should set, but there needs to be a 

uniform set

 4 that are not, you know, capriciously set or sort of too 

high

 5 to hit the bar for anyone joining. But there obviously 

needs

 6 to be a bar set, because there is risk associated with 

the

 7 transaction being done that the person who does the

 8 transaction can't stand behind it or that even if they 

can,

 9 that the SEF needs the capital to make sure it gets all 

the

 10 way through. 

 11 So, you need to ensure that the SEFs 

themselves and

 12 the clients who use the SEFs on the way to having things

 13 cleared in a CCP are not creating systemic risk in the

 14 system. So, there needs to be these minimums.

 15 MR. SHILTS: Bryan, is that what you were 

pretty

 16 much referring to?

 17 MR. DURKIN: That is, you know, that they need 

to

 18 equally enforced across the participants and that, you
 19 know, you have these types of minimums established, the 

main

 20 predicate of maintaining market integrity.

 21 MR. DIPLAS: Athanassios Diplas. I would 

agree

 22 with both Bryan and Bill in that respect that standards 

are

 23 needed, but those standards have to be objective and 

they

 24 have to be transparent. But standards are needed, 

especially

 25 since we are actually linking the SEFs to clearing 

venues and
 

125

 1 we need to ensure that actually the trades are --

actually

 2 are going to get where they're supposed to get and the

 3 participants have claimed, for example, that they can 

offer

 4 clearing services are indeed able to do so.

 5 MR. HARDING: Julian Harding. Yes. It can't 

be

 6 emphasized enough the need for impartial nondiscriminatory

 7 access to the DCOs from the SEFs. The existing IDB, 

entity,

 8 the broker marketplace, as I said a little earlier 

today,

 9 will necessarily be expanded to include those entities 

that

 10 are mandated to now trade through a SEF or a DCM for a

 11 clearable swap. And further to that, there will be an

 12 evolution, I think, the way the public policy is 

constructed

 13 towards further entities who are not mandated to be --

to

 14 trade through a SEF to be -- to trade through a SEF in 

the

 15 future.

 16 The constraint that has existed to date has 

been,

 17 as I mentioned before, difficult creditworthiness issues

 18 around the time of the trade, which now with clearable
 19 solutions being offered and mandated more broadly will 

be

 20 removed. And that will open up the marketplace, the SEF

 21 marketplace to a greater -- a broader population for 

sure.

 22 MR. MASTERS: I would just echo those 

comments. I

 23 mean, there is a clear anti-competitive provision in the

 24 statute here that we're talking about. I mean, there is 

--

 25 you know, especially with regard to SEFs. And one of 

the
 

126

 1 points I was making earlier with regard to conflicts of

 2 interest with SEFs and DCOs, is you don't want DCOs, you

 3 don't want a linkage there where there is anticompetitive 

 4 kind of behavior. You want access from participants. 

 5 It's one thing to clear a trade, it's another

 6 thing, you know, with regard to a SEF. I mean, trading 

and

 7 clearing, you know, we've got to make sure that there is 

--

 8 that the market is anti-competitive, that we allow a

 9 significant amount of participants to get involved in 

these

 10 markets, especially in the fact, because they are going 

to

 11 evolve. They're going to move forward. And I think 

that's

 12 the healthiest alternative.

 13 MR. KNIGHT: Appropriately, there has been a 

lot of

 14 focus on the initial access to the market. But I think, 

just

 15 from a regulatory perspective, there is this question of 

once

 16 you have access, you have a group of members, if you 

will,

 17 there are times when you have to, for regulatory 

purposes,

 18 remove someone. And that has to be done also in a 

uniform
 19 manner. You can't have ambiguity around that.

 20 MR. YELVINGTON: I would also like -- you 

know, in

 21 the spirit of the legislation here, what you want to do 

is

 22 get some -- you know, the way I read it, you want to get 

more

 23 participants to help pricing, to help markets in 

troubled

 24 times. And when you're thinking about crafting the 

actual

 25 regulatory framework around this, probably the best 

thing
 

127

 1 that could be done would be to craft a framework that is

 2 extremely objective and not have a lot of opacity or

 3 subjective type of requirements. And also make sure 

that

 4 there is an ability for a firm to transfer in, a firm 

that

 5 could grow and mature and become a SEF member or a CCP

 6 member.

 7 MR. DIPLAS: I think this is a final

 8 clarification though. I think that we're mixing up a 

little

 9 bit the access issues between access from SEF to

 10 clearing venues and access within the SEFs. And these 

two

 11 are two distinct issues. I agree that, first of all, 

all

 12 clearing venues should allow access to the various SEF 

as

 13 long as they actually fulfill their own criteria. The 

topic

 14 here is, of course, access into the SEF itself.

 15 In that as well, we have to be clear that the 

advent 

 16 of clearing does not eliminate counterparty risk. It 

greatly

 17 reduces it, but there are still aspects of the 

counterparty

 18 risk that are varying types of the performance of the
 19 clearing broker to actually get the trade there. There 

is

 20 also sometimes exposure that someone gets within the 

same

 21 account with other clients, et cetera. 

 22 So, it's noticing that basically counterparty 

risk

 23 isn't basically being completely eliminated through the 

new

 24 system. It has been reduced, but clients, again, will 

have

 25 to do their own homework to ensure that the counterparty
 

128

 1 they're trading with is actually within their trading

 2 parameters.

 3 MR. YELVINGTON: I agree on that point. I 

would

 4 also point out that, you know, far from eliminating

 5 counterparty risk, what you've done here is neutralized 

it. 

 6 And, you know, in an act of neutralization, you should 

seek

 7 to, again, on an objective basis, kind of diversify 

those

 8 counterparty risks out in such a way that, you know, 

you've

 9 reduced the dependence on one individual or a small 

number

 10 of individual participants. And whether we're talking 

about

 11 access to the SEF or access to the CCP, still maintain 

that

 12 the objective nature of things should be maintained.

 13 MR. HARDING: Julian Harding. Just a --

you're

 14 right to qualify what I said in terms of removing risk. 

 15 Absolutely.

 16 I would like to bring up the historical 

precedent

 17 of the energy markets going back seven or eight years. 

In a

 18 post Enron crisis environment, there was a natural, dare 

one
 19 say, organic shift towards a clear solution that was 

offered

 20 by certain people around this table and the -- what 

might be

 21 SEFs in the future, but the IDBs at the time fully 

embraced

 22 that and, in fact, were definitely part and parcel of a

 23 broadening of the population that could avail themselves 

of

 24 the IDB markets and other markets by virtue of that move

 25 towards a cleared solution. So it did work. It has 

worked
 

129

 1 very well, naturally, seven or eight years ago and to 

this

 2 day in the energy spectrum.

 3 MR. DE LEON: Bill De Leon. I just want to 

get

 4 back to what Athanassios was talking about on 

environment. 

 5 Neutralization in and of itself is a good concept, but 

if the

 6 entries into that neutralization pool bring down the 

overall

 7 quality of it, it actually is worse than having few

 8 participants. So, you need to have a minimum standard. 

It is

 9 not just having additional participants being good, you 

have

 10 to have the right people. And there just has to be a 

minimum

 11 standard and they have to be enforced. 

 12 And that is why when you look at the futures 

market

 13 it has worked so incredibly well. When you look at the

 14 equity markets, it has worked so incredibly well. There 

are

 15 minimum standards in terms of becoming a clearing 

member,

 16 there is a minimum standard in terms of being able to 

execute

 17 trades and give things up and the rules in terms of

 18 segregation of assets and cash are very well defined for
 19 certain aspects of the market.

 20 So, you have to have the same concept apply. 

Just

 21 because you're executing a trade the person who is doing 

it

 22 or the exchange you're using and who you're using to

 23 facilitate that needs to be able to stand behind it. If 

they

 24 can't, they're going to dramatically weaken the 

confidence in

 25 the system and could possibly lead to people taking 

risks
 

130

 1 that they're not aware of and/or making the system less

 2 stable, which we've seen during the crisis. 

 3 So, I would just want to reiterate that I 

agree with

 4 the concept of more participants diversifying things as 

long

 5 as they are the right participants. And by that, I 

define

 6 the correct capital and the correct regulatory oversight

 7 meeting certain regime minimums.

 8 MS. ADRIANCE: Just to, in terms of the, what 

has

 9 been talked about, okay, there was a -- mentioned 

impartial

 10 access to the SEFs and impartial access to the clearing,

 11 central clearing parties. One thing that has not been

 12 mentioned -- it was mentioned that there should not be 

some

 13 tie between the SEFs and the clearinghouse that would 

not be

 14 partial access to the clearinghouse. 

 15 In terms of what the -- we need to just go a 

little

 16 bit further from just in addition to what standards of 

who

 17 can access the SEF, can the SEF -- is it impartial 

access if

 18 the SEF is saying, okay, here are my standards. They're
 19 based on, you know, as mentioned, in terms of the 

financial

 20 standards, or whatever, that are real basic and they 

look

 21 really good, but get sent into us as the regulators and 

it

 22 looks good, can the SEF differentiate between what does

 23 access mean. 

 24 Is there a different bandwith that's provided? 

Is

 25 there different pricing that's charged, depending on the
 

131

 1 amount of trades? What are -- what is impartial and 

what's

 2 not impartial when it comes to what the SEF can -- how 

the

 3 SEF can treat the traders separately from these overall

 4 basics? In a sense, if it's risk management kind of 

standards,

 5 what other kind of links can they put in? 

 6 Can it be that the SEF can offer certain 

extra, you

 7 know, they can offer more information if that trader 

also

 8 uses other services that particular SEF, you know, and

 9 affiliated businesses or if they use the particular --

you

 10 know, it's not that they don't offer the ability to link 

--

 11 to do trades and link to non-affiliated clearinghouses, 

but

 12 if you do do the trade on the system and you link to the

 13 affiliated clearinghouse, can they charge differently? 

Can

 14 they treat you differently? How does that play? You 

know,

 15 does impartial access have some kind of impact on that?

 16 MR. VISWANATHAN: Vish Viswanathan from Duke. 

I 

 17 guess you're kind of opening the can of worms that 

payment
 18 for order flow opened in equity markets if you start 

allowing

 19 me to bundle clearing and, you know, trading in some 

way. You 

 20 say oh, if a clearinghouse access, if you trade through, 

you 

 21 know, this particular SEF, you know, I'm going to give 

you a 

 22 discount, I think that defeats the purpose of the -- you 

can't

 23 allow that kind of bundling. Neither can I think you 

can 

 24 allow differentiation of information in some way.

 25 Now with any auxiliary services, I don't know. 

It
 

132

 1 seems to be very clear that all the participants in the 

SEF

 2 should receive from the SEF itself the same information. 

 3 There can't be these kind of inducements to kind of 

bundle

 4 clearing and trading.

 5 MR. HARDING: Julian Harding. I would echo 

that

 6 entirely. The existing over the counter marketplaces 

and

 7 especially those operated by the IDBs do not have 

anything

 8 like you're mentioning to date. The example I mentioned 

of

 9 the energy markets in the last seven or eight years 

having

 10 transitioned into a different sort of framework, there 

is no

 11 sign of that either. So, there is new entrance that 

came in. 

 12 We're not -- I'm not in any way disadvantaged. It's not

 13 something that would ever come up.

 14 And frankly, I think, in a proper genuine

 15 marketplace, the totality of market participants all 

expect

 16 certain standards to be met. And they are uniform 

standards. 

 17 And I don't think, in a genuine multiple to multiple

 18 marketplace, you could have anything less than that.
 19 MR. DIPLAS: I think that -- I would agree 

that in

 20 terms of the access to information, it's a business 

that's

 21 going to drive the fact that you cannot differentiate

 22 customers with different information. Everybody would 

want

 23 to have that. So, I think that takes care of itself. 

 24 In terms of pricing, I think we need to be 

flexible

 25 in terms of what people do with their pricing. In the 

current
 

133

 1 exchanges right now, I think most participants have 

different

 2 prices that they can negotiate depending on their 

volume. 

 3 And I think that the inter-dealer broker, it is 

definitely

 4 the case. I mean, it will be -- I cannot think that 

there is

 5 anybody that has the same price with their broker than

 6 anybody else. I don't even know what the other banks 

pay. 

 7 People negotiate these things individually. So, I think 

to

 8 the extent that this is a private business, you should 

be

 9 able to negotiate these things.

 10 MR. HARDING: Sorry. I thought you were 

referring

 11 to within one SEF the notion that certain people have

 12 different access and certain have different information. 

 13 That's what I was referring to. But between the SEFs, 

there

 14 is going to be -- it's a competitive marketplace, and 

there's

 15 going to be differences in approach and in pricing and

 16 various things, but -- 

 17 MR. DIPLAS: Sorry. Athanassios Diplas. Just 

to

 18 clarify, perhaps I didn't understand you. What I'm 

saying,
 19 if we go currently to, to a broker, let's say that

 20 that broker, just for argument sake, is a SEF itself. 

 21 Currently, I don't know, we pay totally different price 

than

 22 someone else does. And I don't know how you determine 

that

 23 price. Part of it is negotiation, part of it is the 

volume

 24 that you bring to the business, et cetera. 

 25 So, you don't have an environment right now 

that
 

134

 1 we all pay the same price. So, I don't see how in the 

SEF it

 2 might necessarily be the case. It might be. That could 

be

 3 the model that you choose. I would prefer not to 

prescribe it

 4 to you that that is your only choice.

 5 MR. HARDING: What I'm getting at, I guess is 

if

 6 you, as you say, for instance, go to two or three 

brokers,

 7 you're going to choose the best price to operate that. 

I 

 8 don't understand when you say I'm going to get the same 

price

 9 as someone else, you'll -- 

 10 MR. DIPLAS: Perhaps I wasn't clear. Within 

your

 11 own brokerage -- let's take an example. I'm not picking 

on

 12 you. Within your brokerage, I don't think all your 

clients

 13 get the exact same price for brokerage. Most people --

from

 14 what I understand, most people have different prices.

 15 MR. HARDING: Are you talking about 

commissions?

 16 MR. DIPLAS: Yes.

 17 MR. HARDING: Oh.
 18 MR. DIPLAS: That's what I mean. I mean, 

that's

 19 the price that -- the SEF charge.

 20 MR. HARDING: I'm sorry, Riva. Were you 

referring

 21 to commission schedules? I didn't realize that at all.

 22 MS. ADRIANCE: No. Actually, I was referring 

to

 23 looking at one SEF, since we were talking about 

regulation of

 24 SEFs, can a SEF if, you know, since they have this

 25 responsibility to provide open, impartial access, can 

they
 

135

 1 charge differently for different participants, can they

 2 provide different bandwidths for different participants, 

can

 3 they, in a sense, provide some different information. 

 4 If it can -- what does impartial access mean. 

I'm

 5 trying to get down to besides its overall term, okay, 

we've

 6 got to have clear standards and let people in under 

clear

 7 standards, can they -- is there any kind of 

differentiation

 8 of how a SEF can treat the different traders on that 

SEF.

 9 MR. COOK: Yes. I think we're talking about 

 10 commissions but by another name. So differential fees

 11 for differential services even though once they meet 

some

 12 across the board objective access requirement.

 13 MR. WEISBERG: To be economically viable, and 

I 

 14 think everybody wants economically viable SEFs, I think 

they

 15 have a responsibility to set objective access criteria 

and

 16 disclose what those are. So, that may mean they can't 

decide

 17 a particular person couldn't fall in that class, but 

once
 18 they define that objective criteria and say okay, if we 

want

 19 to have a class of participants that are market makers 

and

 20 they're going to uphold a responsibility to be on a 

price all

 21 the time, those people obviously have different 

bandwidth

 22 requirements than people who trade intermittently,

 23 infrequently. 

 24 And your economics are different. People who 

buy a

 25 lot of things from you oftentimes get different prices 

than
 

136

 1 people who buy occasionally just because the economics 

of

 2 serving them are different. So, I think it should be 

okay 

 3 for a SEF to define those classes of participants so 

long as

 4 they're disclosed, and that they can objectively apply 

 5 those criteria uniformly across all of their clients. 

 6 And I think those criteria may be different 

from

 7 SEF to SEF because they may have slightly different 

economic

 8 models, slightly different operating models, slightly

 9 different market mechanisms. In some cases, the 

information

 10 requirements could be different, but we shouldn't 

prohibit

 11 somebody from going from one class to another so long as 

they

 12 meet, you know, those criteria. 

 13 And I think it is super important for people 

to

 14 recognize there are likely to be many more SEFs than 

DCOs,

 15 that there is a lot more risk sitting in DCOs than are 

in

 16 SEFs. The capital requirements could very well be 

different

 17 between a DCO and a SEF. And what that's going to mean 

if
 18 you want to create a competitive SEF market with fewer 

DCOs,

 19 that, you know, you have to make sure that it's not just

 20 bundling of price access, but access to the APIs, access 

to

 21 technical environments, access to the quality assurance

 22 departments, those types of things, that all need to be

 23 opened up, so that any SEF could successfully send a 

trade to

 24 a DCO.

 25 MR. SCHOTT: You mentioned different classes 

of
 

137

 1 participants. But within a class, assuming they are

 2 providing or receiving the same service, would you still

 3 allow different pricing?

 4 MR. WEISBERG: I don't think that's an 

absolute

 5 requirement. It is -- we try to make ours as uniform as

 6 possible and I think it would be possible for SEFs, to 

make

 7 them uniform.

 8 MR. SCHOTT: I should have turned that the 

other

 9 way around. Would you allow for diverting pricing.

 10 MR. WEISBERG: I don't think it's a 

requirement

 11 that there is.

 12 MR. DE LEON: You know, what Athanassios was

 13 alluding to and we've seen in the markets, different 

dealers

 14 for even something as generic as equities will charge

 15 different prices depending on your access point, what 

the

 16 type of trade is, whether it's voice, whether it's

 17 algorithmic driven, whether or not you're getting 

research. 

 18 Some people do soft dollars. 

 19 There are a whole host of things that are 

involved

 20 with the pricing of getting access to trading. And the
 21 market bears what it bears and people negotiate and do 

those

 22 things. But I think what the important thing is, that 

the

 23 market will drive prices to where they go for the thing, 

but

 24 everyone should have access to it as long as they meet 

the

 25 certain minimum standards required to show that they're
 

138

 1 responsible traders.

 2 Just like you have KYWC, you have, you know, 

your

 3 client issues in terms of equity and opening an account 

or

 4 fixed income or anything, you'll have similar issues

 5 associated with SEFs and people have access to SEFs and 

to

 6 DCOs, the pricing or commissions, to be blunt, will be 

driven

 7 by what people think is fair and it will be competitive. 

And

 8 I don't see a problem with that as long as it's not 

gouging.

 9 MR. YELVINGTON: I agree with that. I mean, 

having

 10 the ability for different SEFs to, you know, tailor 

their

 11 businesses to their clients is a good thing and, you

 12 know, although it's maddening sometimes, I think there 

are a

 13 lot of things that we all buy that we all pay different

 14 prices for, depending on who we are. It helps the 

businesses

 15 to grow to have that ability.

 16 You have to, when you're setting this up, from 

a 

 17 purely regulatory perspective, however, balance that 

with
 18 what does that do with your reporting lines and what are 

you

 19 not seeing. What is being, you know, traded opaquely 

that

 20 you're not seeing the data on. If certain benefits are 

given

 21 at two different prices, there is going to be a reason 

why. 

 22 And I think the businesses have the rights, SEFs have 

the 

 23 right to charge two different prices. From a regulatory 

 24 perspective, however, you have to ask am I giving up 

some 

 25 information here and what am I not seeing.
 

139

 1 MR. COOK: Ok. Thank you. So we've reached the 

end 

 2 of our time. I think we should bring this to a close. 

Rick any 

 3 final comments you want to make? 

 4 MR. SHILTS: I wish to thank everyone for the great 

 5 discussion. 

 6 MR. COOK: I want to thank everyone for your 

 7 participation today. I just remind everyone that we do 

have 

 8 open mailboxes on our website so anyone who has an 

interest 

 9 in these topics please submit your thoughts in writing. 

We 

 10 would be -- look forward to reading them. Thank you. 

 11 (Whereupon, at 12:30 p.m., the roundtable was 

concluded.) 

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 1 PROOFREADER'S CERTIFICATE

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 3 In the Matter of: JOINT SEC-CFTC ROUNDTABLE

 4 File Number: OS-0915

 5 Date: September 15, 2010

 6 Location: Washington, D.C.

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 9 undersigned), do hereby swear and affirm that the 

attached

 10 proceedings before the U.S. Securities and Exchange

 11 Commission were held according to the record and that 

this is

 12 the original, complete, true and accurate transcript 

that has

 13 been compared to the reporting or recording accomplished 

at

 14 the hearing.

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