UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 OPEN MEETING ON THE TENTH SERIES OF

 PROPOSED RULEMAKINGS UNDER THE DODD-FRANK ACT

 Washington, D.C.

 Thursday, January 20, 2011
 2

 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BART CHILTON, Commissioner

 5 MICHAEL V. DUNN, Commissioner

 6 JILL SOMMERS, Commissioner

 7 SCOTT D. O'MALIA, Commissioner

 8 Presenters:

 8

 9 DON HEITMAN

 9 Division of Market Oversight

 10

 10 DAN BERKOVITZ

 11 Office of the General Counsel

 11

 12 ANANDA RADHAKRISHNAN

 12 Division of Clearing and Intermediary

 13 Oversight

 13

 14 RICK SHILTS

 14 Division of Market Oversight

 15

 15 WARD GRIFFIN

 16 Office of General Counsel

 17 JOHN LAWTON

 17 Division of Clearing and Intermediary

 18 Oversight

 18

 19

 20 * * * * *

 21

 22
 3

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

 2 (9:34 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 meeting will come to order. This is a Public

 5 Meeting of the Commodity Futures Trading

 6 Commission to consider issuance of I think it's

 7 two proposed rules today under the Dodd- Frank

 8 Wall Street Reform and Consumer Protection Act.

 9 One is with regard to agricultural swaps and

 10 commodity options. Secondly, a topic with regard

 11 to swap trading relationship documentation and

 12 that documentation related to termination

 13 provisions implicated under Title II of the

 14 Dodd-Frank Act which is the resolution provisions

 15 under the Federal Deposit Insurance Corporation.

 16 Before we hear from staff I'd like to

 17 thank Commissioners Mike Dunn, Jill Sommers and

 18 Bart Chilton who I think is on the phone today,

 19 and Scott O'Malia, for all their thoughtful work

 20 implementing the Dodd-Frank Act. I think this is

 21 our tenth public meeting on these matters. I'd

 22 like to also welcome the public, market
 4

 1 participants and member of the media today and

 2 those listening on the live webcast. Our next

 3 meeting will be January 26 and we'll schedule

 4 additional meetings in February. I think today

 5 we'll vote on that. On the 26th, we'll be taking

 6 up two rules, one a joint rule with the SEC. I

 7 think they're calling is Systemic Risk Reporting,

 8 but broadly speaking it's related to data

 9 collection from hedge funds and we have a rule

 10 side-by-side because we have something called

 11 Commodity Pool Operations we'll consider. I think

 12 the agenda for next Wednesday's meeting was posted

 13 yesterday on our website. Staff has worked very

 14 hard on these rulemakings. They'll present their

 15 recommendations and we look forward to receiving

 16 public comment and I think the rules that's

 17 putting out today there is as usual a 60-day

 18 comment period. With that I'd like to turn to my

 19 fellow Commissioners for any opening statements.

 20 Commissioner Dunn?

 21 COMMISSIONER DUNN: Thank you, Mr.

 22 Chairman. I want to thank everyone for us today
 5

 1 for this important meeting regarding the

 2 implementation of the Dodd-Frank Act. Today's

 3 meeting will address proposed rules regarding

 4 commodity options and agricultural swaps and swap

 5 trading relationships, documentation relating to

 6 the termination provisions implicated under Title

 7 II of the Dodd-Frank. The proposed rule regarding

 8 agricultural swaps is of particular importance to

 9 me. In September the Commission published an ANPR

 10 requesting comments regarding rules governing the

 11 trading of swaps in agricultural commodities. The

 12 comments received by the Commission were nearly

 13 unanimous in their support for treating

 14 agricultural swaps under the same regulatory

 15 scheme as other categories of swaps and the rules

 16 proposed today do just that.

 17 Among other things, I found the comments

 18 of the National Council for Farmers Cooperatives

 19 particularly helpful and useful. The rules we

 20 promulgate must not diminish the ability of farmer

 21 cooperatives to provide their products with

 22 risk-management tools -- their producers with
 6

 1 risk-management tools. I look forward to

 2 receiving comments on today's proposed rule so

 3 that we can be certain that the ultimate rule

 4 regarding swaps in agricultural commodities

 5 provides an appropriate framework for those

 6 important transactions.

 7 The proposed rule regarding

 8 documentation relating to termination provisions

 9 is also vitally important. The events of 2008

 10 demonstrate that our financial regulatory

 11 authorities lacked an orderly mechanism for

 12 resolving the insolvencies of certain large

 13 financial companies. Congress has sought to

 14 address that issue through the Dodd-Frank Act. It

 15 is important that swaps be included as part of the

 16 orderly liquidation process envisioned by the Act

 17 in the event the insolvency of a systemically

 18 important swap dealer or major swap participant.

 19 Today's proposed rule provides a mechanism for

 20 including swaps in this orderly liquidation

 21 process. I especially look forward to the

 22 public's comment on this proposed rule
 7

 1 particularly in regard to whether there are any

 2 unforeseen anticompetitive consequences that may

 3 arise from this application and that is one of the

 4 questions that we specifically ask.

 5 I would like once again to thank staff

 6 of the CFTC for all their hard work in regard to

 7 these very important rules. They have been

 8 working late at night and weekends in order to

 9 implement Dodd-Frank while simultaneously working

 10 to fulfill their existing duties under the

 11 Commodity Exchange Act. They do this against the

 12 backdrop of a budget crisis currently facing the

 13 CFTC. We continue to operate under a continuing

 14 resolution with funds insufficient in my opinion

 15 to implement and enforce the Dodd-Frank Act. In

 16 essence, we face an unfunded mandate, a situation

 17 where the CFTC has been given enormous

 18 responsibilities without the corresponding

 19 increase in resources necessary to fulfill them.

 20 My fear is that the only way to fulfill our duties

 21 under the law with our current budget constraints

 22 is to become a restrictive regulator rather than a
 8

 1 principle-based one. Such a change in our

 2 approach to regulations may be detrimental to the

 3 current swap industry. Our current staff knows

 4 the existing futures industry. In order to

 5 adequately understand the swaps industry at the

 6 same level, we need more staff and resources.

 7 Without adequate staff and resources, my fear is

 8 that applicants from entities we are unfamiliar

 9 with will take substantially longer than the

 10 application from entities we are familiar with.

 11 Once again, I would like to thank all of our staff

 12 for the hard work they've put in on these rules.

 13 Thank you.

 14 CHAIRMAN GENSLER: Thank you,

 15 Commissioner Dunn. Commissioner Sommers?

 16 COMMISSIONER SOMMERS: Thank you, Mr.

 17 Chairman. Good morning. I too would like to echo

 18 my thanks to the staffs of the rulemaking teams

 19 today, Don Heitman and his team for agricultural

 20 swaps. They've had a couple of different

 21 rulemakings with regard to these subjects and for

 22 the second rulemaking Sarah Josephson and her team
 9

 1 being represented by Ananda and John Lawton today

 2 in her absence. I've thanked Sarah before because

 3 she has a big task in the issues that she has

 4 under her, so thanks to her team for everything

 5 they've done on these rules.

 6 On the commodity options and

 7 agricultural swaps proposal, I think that the team

 8 did a find job working through the issues that

 9 were set out in the Advanced Notice of Proposed

 10 Rulemaking that the Commission voted on last fall.

 11 I'm concerned though about how we will be handling

 12 the agricultural co-ops, an issue that was raised

 13 in the comments to the ANPR and by many

 14 individuals and entities who have met with

 15 Commissioners and our staffs over the last few

 16 months. In this proposal the comments are

 17 mentioned in the preamble but the issue is

 18 disposed of as being outside the scope of this

 19 rule. I have questions on that and whether the

 20 issue is being considered by any other rulemaking

 21 teams and intend to clarify that today.

 22 On the second proposal, I'd like to
 10

 1 thank the team for separately addressing the issue

 2 of the termination provision from the

 3 documentation proposal relating to the orderly

 4 liquidation regime under Title II of Dodd-Frank.

 5 I know this was originally in one of last week's

 6 proposal, but many of us on the Commission had

 7 questions about it and needed more time to

 8 consider the aspects of this part of the proposal

 9 so that I want to say that it's presented now I

 10 support it and appreciate the extra week that we

 11 had to consider these issues. I look forward to

 12 the presentations of the teams today. Thanks.

 13 CHAIRMAN GENSLER: Thank you,

 14 Commissioner Sommers. Commissioner Chilton I

 15 believe is on the phone.

 16 COMMISSIONER CHILTON: Yes, I'm here,

 17 Mr. Chairman. I don't have any opening statement,

 18 but thank all of the staff for their work on these

 19 endeavors and I look forward to supporting them.

 20 Thank you.

 21 CHAIRMAN GENSLER: Commissioner O'Malia?

 22 COMMISSIONER O'MALIA: Thank you, Mr.
 11

 1 Chairman. Today we're considering our tenth

 2 series of proposed rulemakings under the

 3 Dodd-Frank Act and like my fellow Commissioners

 4 I'm grateful for the hard work of staff to produce

 5 these. I appreciate Sarah Josephson and her team

 6 and Don Heitman, Ryan Miller and their team for

 7 their work on these rules.

 8 Mr. Chairman, Tuesday the President put

 9 forward an Executive Order entitled "Improving

 10 Regulations and Regulatory Review." Right here in

 11 The Wall Street Journal on Tuesday there's a great

 12 story and a great editorial about the goals of

 13 what we were trying to achieve. I agree with the

 14 high standards that the President has directed

 15 federal agencies to comply with in setting the new

 16 rules. I imagine the President proposed these

 17 rules specifically to provide some direction to

 18 the implementation of the Dodd-Frank Act including

 19 improving our process. Unfortunately, staff

 20 informed me that this Executive Order does not

 21 apply to independent commissions like the CFTC. I

 22 believe we should make it Commission policy to
 12

 1 implement this Executive Order to all of our

 2 rulemakings, while I'll be asking the teams what

 3 steps they've taken to ensure that at the very

 4 least we're complying with the spirit of the

 5 Executive Order. I hope the Commission will adopt

 6 the standards embodied in the Executive Order

 7 entitled "Improving Regulation and Regulatory

 8 Review" as its own policy.

 9 With regard to ag swaps, I'm pleased

 10 that had put before us a propose rule that treats

 11 ag swaps and commodity options in the same manner

 12 it treats all other swaps. With that said, I'm

 13 concerned that this rulemaking does not provide

 14 sufficient clarity to the question of whether

 15 agricultural contracts are eligible for a forward

 16 exclusion. Today's proposal declined to answer

 17 whether cash contracts based on agricultural

 18 commodities or swaps and subject to regulation or

 19 if they are forwards and therefore excluded from

 20 regulation. Also many commenters asked this

 21 Commission to address whether agricultural

 22 cooperatives would be exempt from the definition
 13

 1 of swap dealer which my colleagues and I agree

 2 with. In order to fully comment on this issue I

 3 encourage that all commenters submit their

 4 comments on the swap dealer rulemaking and

 5 potentially the end-user rulemaking. With so many

 6 overlapping rulemakings, it's understandable that

 7 there may be some confusion about how all of these

 8 new requirements will work together, but at the

 9 very least it should be clear as to who is subject

 10 to the rules and regulations of this Act.

 11 With regard to the swap documentation

 12 requirements, I have some serious concerns about

 13 this proposal as the proposal seeks to put swap

 14 dealer or major swap participant on notice that in

 15 the event of a counterparty default or when there

 16 is even the danger of a default that the ability

 17 of parties to exercise certain rights under swap

 18 agreements may be stayed under Title II of the

 19 Dodd-Frank Act or by the Federal Deposit Insurance

 20 Act, FDIA. It may have been the goal of this

 21 rulemaking to reduce uncertainty and promote

 22 predictability, but unfortunately this rulemaking
 14

 1 results in more confusion and more questions in my

 2 mind. While neither Title II nor FDIA provides a

 3 specific role for the CFTC when the FDIC exercises

 4 its authority to address defaulting financial

 5 entities, we have been asked to use our authority

 6 under Title VII regarding swap documentation to

 7 prop up the flawed process in Title II and FDIA.

 8 If those were clear, there would have been no need

 9 for the CFTC to put forward the proposals before

 10 us today which leads me to believe that the FDIC

 11 apparently has some concerns regarding its own

 12 authority. I would also like to have a better

 13 understanding of the CFTC's role in overseeing our

 14 registrants under this new FDIC-led resolution

 15 process.

 16 With the numerous regulations that we

 17 are required to propose under Dodd-Frank, I don't

 18 believe it's in our best interests to adopt

 19 unnecessary requirements under the guise of Title

 20 VII authority that clearly exceed the broad

 21 authorities that Congress decided to provide the

 22 FDIC in Title II or FDIA. I believe this rule
 15

 1 would benefit from heeding the direction of the

 2 President's Executive Order, specifically Section

 3 2(c) entitled "Public Participation." This

 4 paragraph directs agencies to consult with the

 5 affected individuals before issuing a Notice of

 6 Proposed Rulemaking. This vast new resolution

 7 authority could have significant impact on

 8 bilateral deals which I don't believe have been

 9 properly considered.

 10 In closing, I'd like to recognize staff

 11 for its around-the-clock work to put forward a

 12 staggering number of rulemaking proposals and I'm

 13 grateful for their efforts. It is my hope that as

 14 the Commission works toward trying to understand

 15 the regulations and put them in place by the

 16 deadlines included in the Dodd-Frank Act that we

 17 don't put quantity before quality. To the end,

 18 let's commit to doing our best to make sure that

 19 the agency is complying with the spirit and the

 20 letter of the law of the recently amended

 21 Executive Order on rulemaking standards.

 22 CHAIRMAN GENSLER: Thank you,
 16

 1 Commissioner O'Malia. I think with that I'm going

 2 to turn it over to Rick and Don.

 3 MR. HEITMAN: Mr. Chairman,

 4 Commissioners, thank you. As is customary, I

 5 would like to start out by thanking my team.

 6 Unfortunately, however, we made an agreement at

 7 the outset of this process that they would do all

 8 the work and I would take all the credit.

 9 Section 723(c)(3) of the Dodd-Frank Act

 10 provides that swaps in an agricultural commodity

 11 are prohibited unless permitted under a rule,

 12 regulation or order adopted pursuant to Section

 13 4(c) of the Act, the Commission's general

 14 exemptive authority. Section 4(c) includes a few

 15 more regulatory bells and whistles than an

 16 ordinary and comment rulemaking, for example, a

 17 public-interest test. This reflects the fact that

 18 for reasons both historical and practical the Act

 19 has always devoted special attention to the

 20 agricultural commodities. Trading in those

 21 commodities indeed laid the foundation of modern

 22 futures markets.
 17

 1 This document includes a lot of pages

 2 but not a lot of issues. The issues really boil

 3 down to one primary question which the Commission

 4 raised in the Advanced Notice of Proposed

 5 Rulemaking that Commissioner Dunn mentioned last

 6 September. The question in that rulemaking is

 7 should swaps in agricultural commodities be

 8 treated any differently than swaps in any other

 9 commodities? With the exception of a couple of

 10 academics, the commenters including general farm

 11 organizations, commodity organizations,

 12 agribusiness firms, the FIA, ISDA, the CME, the

 13 commenters overwhelmingly favored treating ag

 14 swaps the same as swaps in other commodities.

 15 I think it was probably put best in a

 16 joint letter from a number of agricultural

 17 organizations who said, "We urge the Commission to

 18 treat swaps for all commodities harmoniously. We

 19 believe the comprehensive regulation should not be

 20 based on distinction among commodity types. The

 21 generally applicable protections under the

 22 Dodd-Frank Act such as reporting mandatory
 18

 1 clearing, mandatory trading of standardized swaps,

 2 minimum capital requirements and the CFTC's

 3 authority to impose position limits, determine

 4 which swaps are subject to clearing and trading

 5 and to exercise emergency powers, will protect ag

 6 swaps from fraud and manipulation."

 7 Consistent with both the commenters'

 8 recommendations and the staff's view of sound

 9 public policy, these proposed rules would amend

 10 the current rules governing the trading of

 11 agricultural swaps to provide that, one, swaps in

 12 agricultural commodities and, two, all commodity

 13 options including options on both agricultural and

 14 nonagricultural commodities other than options on

 15 futures may transact subject to the same rules as

 16 all other swaps.

 17 The amendments included in this package

 18 would affect the following regulatory sections in

 19 order of importance, and Part 35 is the most

 20 important clearly. That's the current ag swaps

 21 rules. Current Part 35 is inconsistent with the

 22 objectives of Dodd-Frank. For example, current
 19

 1 Part 35 prohibits clearing of ag swaps, whereas

 2 Dodd-Frank strongly favors clearing of swaps where

 3 feasible. The proposed rules would repeal current

 4 Part 35 and replace it with a provision that

 5 essentially says ag swaps are to be regulated the

 6 same as other swaps, proceed directly to the

 7 general swaps rules, do not pass go, do not

 8 collect $200.

 9 Part 32 if the general authority

 10 applicable to off-exchange options including

 11 off-exchange option on agricultural commodities.

 12 Because all commodity options other than options

 13 on futures are now defined as swaps under

 14 Dodd-Frank, the proposed rules would confirm that

 15 all agricultural options, again other than options

 16 on futures, would be regulated the same as every

 17 other swap.

 18 Two provisions of Part 32 deal

 19 explicitly with options on agricultural

 20 commodities. Section 32.13 which governs

 21 agricultural trade options in the enumerated

 22 commodities is for the most part moot and would be
 20

 1 repealed since there are no registrants as

 2 agricultural trade option merchants. The only

 3 provision of Section 32.13 that currently has any

 4 effect is the exemptive provision in 32.13(g)

 5 which requires the buyer to be a commercial and

 6 both parties to the ag trade option to have a $10

 7 million net worth. The exemption would

 8 effectively be replaced by the less-stringent

 9 requirement under the general swaps rules that

 10 both parties to the ag trade option must be

 11 eligible contract participants.

 12 Under the Act's ECP definition, and

 13 there are obviously a number of different

 14 categories of ECPs, but the one most likely to be

 15 used by agricultural interests provides that a

 16 commercial entity that is hedging needs only a

 17 million-dollar net work so that that give a

 18 greater number of agricultural interests access to

 19 ag trade options. And Rule 33.13 which is the

 20 registration provision for Adams would likewise be

 21 repealed as moot.

 22 Section 32.4, the other part of 32 that
 21

 1 directly addresses agricultural commodities,

 2 governs trade options in other physical

 3 commodities including both the non- enumerated

 4 agricultural, such as coffee, sugar and cocoa, as

 5 well as other physical commodities such as energy

 6 and metals. And 32.4 would also be amended to

 7 clarify that such options would be regulated the

 8 same as other swaps, thus only ECPs could

 9 participate in such transactions.

 10 Parts 32.8 and 32.9 dealing with options

 11 fraud and misrepresentation would be retained to

 12 apply to swaps that are options. The rest of Part

 13 32 would include a scope provision in 32.1 and a

 14 grandfather provision in 32.10 for preexisting

 15 transactions. Other than those two, the rest of

 16 Part 32 would be repealed and the repeal

 17 provisions largely deal with off-exchange retail

 18 options and much of that has been obsolete for

 19 quite some time actually.

 20 Then the third section that we're

 21 amending is Part 33. Current Part 33 covers both

 22 exchange-traded options on futures which are
 22

 1 excluded from the Dodd-Frank swaps definition and

 2 exchange-traded options on physicals which are

 3 swaps under Dodd-Frank and are to be regulated as

 4 such so that the amendments to Part 33 would

 5 remove references to exchange-traded options on

 6 physicals from Part 33 making it clear that such

 7 transactions are to be regulated like other swaps.

 8 That's an overview and I'd be happy to answer any

 9 questions.

 10 CHAIRMAN GENSLER: With that I'd

 11 entertain a motion to accept the staff's

 12 recommendation on ag swaps and commodity options.

 13 COMMISSIONER DUNN: So moved.

 14 COMMISSIONER SOMMERS: Second.

 15 CHAIRMAN GENSLER: Thank you. First I

 16 want to thank the whole team but particularly Don

 17 who was kind enough in the fall when he was

 18 thinking about maybe retiring that he said, no,

 19 and help us. I know it's several days a week

 20 rather than full time, that you'd help get us

 21 through all of this and it shows in the work.

 22 It's just terrific work so that I wanted to extend
 23

 1 my personal thanks to you, Don.

 2 I wanted to mention something that came

 3 up across all of the Commissioners' statements

 4 about agricultural markets. One of the things

 5 that occurs is there are many cash-and-forward

 6 contracts or forward arrangements that are entered

 7 into this marketplace that are not regulated and

 8 haven't been regulated since the 1930s nor do we

 9 have the intention to regulate the

 10 cash-and-forward markets. We're going to

 11 specifically address that in the product

 12 definition rule that we've much waited for, and it

 13 is has also come to our attention that sometimes

 14 participant enter into forward arrangements for

 15 the delivery of milk products, dairy products and

 16 other agricultural products through an ISDA

 17 agreement, through a derivatives agreement, and

 18 we're going to seek to clarify and put out to

 19 public comment that even if you're using a

 20 derivative contract if it still by its nature is a

 21 forward delivery, that's not to be regulated as a

 22 derivative and that seems to be consistent with
 24

 1 the intent of Congress, but we're still working

 2 through all of that.

 3 In terms of the issue with regard to

 4 farm co-ops which all of us are pretty familiar

 5 with, we really look forward to public comment

 6 both to the definition rule that was put out, the

 7 swap dealer definition rule where we had a whole

 8 section of questions on that, but I think we'll

 9 end up with another set of questions again in the

 10 product definition rule. I know that in our

 11 private conversations I've expressed that we

 12 really want to get public comments and get this

 13 right to ensure that producers, handlers,

 14 merchants and processors all have the ability to

 15 hedge using these products which I think this rule

 16 today helps them along that path, but I agree with

 17 the Commissioners that we want to get this thing

 18 aligned with I would say the three rules. The

 19 end-user rule I think is already proposed and is

 20 out there and it's very clear that these

 21 producers, handlers and merchants are as Congress

 22 intended exempt commercial end-users, but we'll
 25

 1 look forward to public comment if we somehow

 2 didn't get that right.

 3 So I just wanted to comment about the

 4 comments up here. I don't think I have question,

 5 though, for you, Don. I'm going to just pass is

 6 on to Commissioner Dunn.

 7 COMMISSIONER DUNN: Thank you, Mr.

 8 Chairman. We're going to make an Aggie out of you

 9 yet.

 10 CHAIRMAN GENSLER: I'm trying.

 11 COMMISSIONER DUNN: You brought up the

 12 importance of the product definition rule which I

 13 think is incumbent upon participant who are

 14 looking at this rule to look at this not in a

 15 vacuum but holistically. Certainly we try to do

 16 that in the Commission and staff tries to do that

 17 as we're doing these things of what comes first

 18 here. It becomes sometimes very, very cloudy but

 19 it is important in that product definition rule

 20 that folks pay attention to that and have their

 21 comments in on it so that we can get the right

 22 nomenclature that we need.
 26

 1 I'd like to take off where Commissioner

 2 O'Malia has left off on this review of regulations

 3 and how we go about it. I hate to spring this on

 4 our General Counsel, but I have talked to him

 5 about this in the past. Even though we are exempt

 6 from Executive Orders as independent agencies,

 7 there are other specific laws such as the cost-

 8 benefit analysis requirement, the Paperwork

 9 Reduction Act and regulatory flexibility analysis

 10 that we are required by law specifically to

 11 address. Is that not true?

 12 MR. BERKOVITZ: That is correct,

 13 Commissioner. Under the Commodity Exchange Act

 14 and other statutes you have mentioned we have

 15 specific regulatory and statutory obligations.

 16 COMMISSIONER DUNN: As I read over the

 17 Executive Order it impressed me that what we do

 18 already by law encompasses a large part of that,

 19 but then it really is incumbent upon us as

 20 independent Commissioners at an independent agency

 21 to embrace those same issues. I have as we've

 22 gone on with this process said many times that I
 27

 1 think at some point in time we have got to do an

 2 analysis of the efficacy of what we're proposing

 3 here be it 12 months or 18 months down the line.

 4 CHAIRMAN GENSLER: I concur with that,

 5 and I would say even further to Commissioner

 6 O'Malia's point, it's only 2 days since the

 7 Executive Order and the opinion piece so that we

 8 haven't had an opportunity to get all together on

 9 this. I do believe that the spirit of what was

 10 there is something that this agency does embrace

 11 and should continue to embrace. One key piece of

 12 it is the review of all of our rules. We're

 13 unique in a sense because Dodd- Frank just passed,

 14 but we're going to have a series of what we call

 15 conforming rules that look at the whole rule book

 16 and ask where should be changes in it because of

 17 the Dodd- Frank Act but also consistent with the

 18 spirit of the President's Executive Order looking

 19 through the whole rule book. In February,

 20 hopefully, we'll start on that with regard to

 21 intermediaries so that Part 1, Part 3 and Part 4

 22 of our rule book which largely relates to these
 28

 1 intermediaries we'll do. I've had conversations

 2 with the heads of the divisions already and have

 3 said we need to go through the entire rule book

 4 systematically. Today Don told me I think we're

 5 repealing 68 pages of rule text.

 6 MR. HEITMAN: We're repealing about 75

 7 percent of Part 35 and 80 percent-plus of Part 32

 8 and if you go with 250 words a page, it's like 40

 9 pages-plus.

 10 CHAIRMAN GENSLER: About 40 pages?

 11 MR. HEITMAN: No, plus another 28 pages

 12 of forms that are no longer necessary like the ag

 13 trade option merchant forms. Those are in the

 14 rule book, too.

 15 CHAIRMAN GENSLER: I'm sorry. I

 16 hijacked part of Commissioner Dunn's point so that

 17 I want to hand it back, but obviously we're adding

 18 pages, too. I think staff was already aware

 19 before the President's Executive Order but I've

 20 told them again that we need to go through the

 21 entire rule book given the new law and see what

 22 needs to be revised, changed, or is in the
 29

 1 circumstance like today, actually repealed.

 2 COMMISSIONER DUNN: I'm thinking out

 3 loud here, Mr. Chairman, but it might be well for

 4 us to keep a running tab somewhere on our website

 5 of how many pages we've added.

 6 CHAIRMAN GENSLER: Definitely added

 7 because we had a new law that says that we're

 8 supposed to add, yes.

 9 COMMISSIONER DUNN: Mr. Chairman, when I

 10 served as under secretary for marketing and

 11 regulatory programs I had the responsibility of

 12 implementing the Regulatory Reduction Act which

 13 required all the agencies to take a look at their

 14 regulations as to which ones were superfluous and

 15 needed to be taken out and which ones had been

 16 done forever. To your credit, Mr. Chairman,

 17 you've had these Clean Plate initiatives where

 18 you've asked staff to go through and take a look

 19 at no action letters, guidance, et cetera, some

 20 that had been around for decades and update those.

 21 What struck me when I was undertaking the

 22 Regulatory Reduction Act and what it took for you
 30

 1 to do the Clean Plate initiative is that this

 2 takes a great deal of time and effort by staff to

 3 do that.

 4 I hate to be harping on this all the

 5 time, but the lack of sufficient funding is going

 6 to have a great deal of an impact on our ability

 7 to put out regulations that will allow the

 8 industry to be as innovative and as quick to act

 9 as they have in the past. We have to, I'm afraid,

 10 by necessity, move from the principle-based

 11 regulatory regime not only to one that's a

 12 prescriptive regime, but, as I'm saying now, a

 13 restrictive regime. And our ability to do the

 14 types of things that I feel were captured in that

 15 Executive Order, to a large extent, are going to

 16 be based on what human and fiscal resources we

 17 have to do that.

 18 As you may not know or you may know, it

 19 is incumbent upon the Chairman to run the

 20 day-to-day operations of the Commission. The

 21 other four of us simply make policy to make his

 22 life miserable. It's a tough, tough job to do and
 31

 1 the policies that I think we want to do in this

 2 particular Commission having worked with all four

 3 members for some time now I think are in line with

 4 what the President has asked for in that Executive

 5 Order, it's in line with the principle-based

 6 regulatory regime, but the reality is we may not

 7 have the luxury to be able to do that.

 8 CHAIRMAN GENSLER: Thanks, Commissioner

 9 Dunn. You're getting off, Don. Commissioner

 10 Sommers?

 11 COMMISSIONER SOMMERS: You really are

 12 because I'm just going to make a comment.

 13 I want to say thank you to the Chairman

 14 for clarifying and confirming that our concerns

 15 about both ag co-ops being captured under the

 16 definition as a dealer as well as the contracts

 17 being forwards will be clarified in other

 18 rulemakings, so I appreciate confirming that.

 19 Thanks.

 20 CHAIRMAN GENSLER: Thank you,

 21 Commissioner Sommers, and thank you for working

 22 together because I think we all want to get this
 32

 1 one right. Commissioner Chilton?

 2 COMMISSIONER CHILTON: Thanks, Mr.

 3 Chairman. To chime in briefly on the reg thing,

 4 it is part of our standard operating procedure to

 5 find the least-burdensome path so I don't think

 6 that that changes. But the most paramount thing

 7 is to make sure that the Chairman talks about a

 8 lot is that we're doing what's in the public

 9 interest and what's in consumers' interests. This

 10 is a balancing act we have all the time and I'm

 11 sure we'll continue to strive to reach that

 12 balance and do the right thing. I don't have any

 13 questions. Staff has done a good job on it and I

 14 plan to support it. Thank you.

 15 CHAIRMAN GENSLER: Thank you,

 16 Commissioner Chilton. Commissioner O'Malia?

 17 COMMISSIONER O'MALIA: I just have one

 18 question, but before I get to that let me

 19 reiterate my appreciation for your intention to

 20 clarify both the products definition and the swap

 21 dealer definition how these products and

 22 participants will be treated. It's very
 33

 1 important.

 2 One question, Don, I have for you is the

 3 ECP issue. You touched on it briefly but I want

 4 to make sure I'm clear on this. For those who

 5 want to trade swaps, there is the ECP requirement.

 6 MR. HEITMAN: Right.

 7 COMMISSIONER O'MALIA: It comes with a

 8 $10 million or a million-dollar litmus test to

 9 qualify. I want to ask you if you're confident

 10 that these litmus tests, these requirements, will

 11 not prevent small farmers who are not ECPs from

 12 continuing to trade OTC swaps and options to hedge

 13 their exposure to price volatility.

 14 MR. HEITMAN: Small farmers can't use

 15 agricultural swaps now because they come with a

 16 $10 million net worth requirement on both sides so

 17 that the proposed rules before you would make it

 18 easier for smaller farmers to use swaps but

 19 clearly they wouldn't necessarily apply to

 20 everybody. There are some who won't be able to

 21 meet the million-dollar net worth test, and we

 22 specifically have questions in the proposal to ask
 34

 1 are there people who would need to use these

 2 hedging mechanisms who couldn't and should we do

 3 something differently to address the interests of

 4 those smaller producers.

 5 COMMISSIONER O'MALIA: I assume that

 6 small guys usually go to their co-op and if we

 7 make the co-ops a dealer than we've made the

 8 transaction price on this a lot more expensive I

 9 would assume.

 10 MR. HEITMAN: I would assume so. That

 11 is beyond the scope of our rulemaking but we got a

 12 number of comments from co-ops, from the Dairy

 13 Farmers of America and from the National Council

 14 of Farmer Co-ops and we're keenly aware of this

 15 problem. The ag swaps team has had half a dozen

 16 meetings with the definitions team and we have

 17 shared our comments that we received that were

 18 relevant to their issues so that I'm confident

 19 that they're fully aware of this and that they

 20 will address this in their rulemaking. When we

 21 looked at it, even assuming that you could do

 22 something in these rules to say that somehow an
 35

 1 agricultural swap when it's offered by a co-op is

 2 some kind of a different instrument and give it

 3 some kind of a different treatment, it still

 4 wouldn't solve all the co- ops' problems because

 5 they do swaps with their members for propane and

 6 diesel fuel and so forth that clearly are not

 7 agricultural commodities and there's nothing we

 8 could do about that. So the appropriate way to

 9 address this is through the product definitions

 10 and the participant definitions and we've as I say

 11 been cooperating with the definitions in making

 12 sure that those issues are addressed.

 13 CHAIRMAN GENSLER: If I could clarify,

 14 on the ECP definition, producers, merchants,

 15 processors, anyone in the agricultural space,

 16 actually is moving down from just a $10 million --

 17 MR. HEITMAN: There's $10 million on

 18 both sides to ECP on both sides, and as you know,

 19 there are a lot of different categories of ECPs.

 20 CHAIRMAN GENSLER: So that it's a little

 21 bit --

 22 MR. HEITMAN: It lowers the bar right
 36

 1 now, yes.

 2 CHAIRMAN GENSLER: I see. With that,

 3 Mr. Stawick, if you want to call the roll.

 4 MR. STAWICK: Commissioner O'Malia?

 5 COMMISSIONER O'MALIA: Aye.

 6 MR. STAWICK: Commissioner O'Malia, aye.

 7 Commissioner Chilton? Commissioner Chilton?

 8 COMMISSIONER CHILTON: Aye, Dave. I'm

 9 sorry.

 10 MR. STAWICK: Commissioner Chilton, aye.

 11 Commissioner Sommers?

 12 COMMISSIONER SOMMERS: Aye.

 13 MR. STAWICK: Commissioner Sommers, aye.

 14 Commissioner Dunn?

 15 COMMISSIONER DUNN: Aye.

 16 MR. STAWICK: Commissioner Dunn, aye.

 17 Mr. Chairman?

 18 CHAIRMAN GENSLER: Aye.

 19 MR. STAWICK: Mr. Chairman, aye. Mr.

 20 Chairman, on this question the ayes are five, the

 21 nays are zero.

 22 CHAIRMAN GENSLER: Thank you. With the
 37

 1 vote appearing unanimous, we'll be sending it to

 2 the Federal Register and also putting it on our

 3 website when we send it to the Federal Register.

 4 I thank the team for coming back yet for another

 5 Business Conduct Standard. I guess we call it a

 6 Business Conduct Standard. This is on

 7 documentation, and specifically the documentation

 8 that swap dealers including a provision related to

 9 the orderly liquidation of the swap dealer itself

 10 if a swap dealer ends up being a covered financial

 11 institution and has to be for some reason

 12 liquidated. Ananda, John and team?

 13 MR. RADHAKRISHNAN: Thank you, Mr.

 14 Chairman. The proposed rule is promulgated under

 15 Section 4s(i) of the CEA which relates to the

 16 timely and accurate confirmation, processing,

 17 netting, documentation and valuation of all swaps.

 18 What it seeks to do is to require swap dealers and

 19 MSPs to include in their documentation with each

 20 of their counterparties a provision that confirms

 21 both parties' understanding of how the new orderly

 22 liquidation authority under Title II of the
 38

 1 Dodd-Frank and the current Federal Deposit

 2 Insurance Act may affect their portfolios of

 3 uncleared over-the-counter bilateral swaps.

 4 As part of this resolution authority

 5 both under Title II and under the FDIA for insured

 6 depository institutions, the FDIC is given a

 7 one-business-day period in which to transfer swaps

 8 and certain other contracts to a solvent

 9 third-party financial institution, and for this

 10 transfer authority to be effective, a one-day stay

 11 on the ability of the counterparties to terminate,

 12 liquidate or net is necessary. The proposed

 13 regulation will ensure that both counterparties,

 14 not just the swap dealer but the other

 15 counterparty who may not be a swap dealer,

 16 understand that under specified circumstances if

 17 one of the counterparties defaults, the

 18 non-defaulting party's positions could be

 19 transferred to a new solvent counterparty by the

 20 FDIC and the non-default party may not be able to

 21 terminate its claims against the defaulting

 22 counterparty until 5:00 p.m. Eastern Time on the
 39

 1 business day following the day the FDIC is

 2 appointed receiver.

 3 This stay would facilitate the FDIC's

 4 orderly liquidation of the defaulting

 5 counterparty's swap positions. Staff believes it

 6 is critical because it will allow the FDIC the

 7 requisite time to transfer the defaulter's

 8 open-swap positions, claims and collateral with

 9 the objective of avoiding widespread market

 10 disruption in the form of fire sales and contagion

 11 risk. The proposed regulations would also require

 12 that each party in the documentation consent to

 13 the transfer of swaps by the FDIC to a performing

 14 third party.

 15 This provision can only be invoked if

 16 one of the parties to the documentation or to the

 17 swap is deemed to be a covered financial company

 18 under Title II of Dodd-Frank or is an insured

 19 depository institution as defined by the FDIA and

 20 the FDIC is appointed as receiver. So for our

 21 purposes, a swap dealer or MSP that is registered

 22 with the Commission could fall under Title II's
 40

 1 definition of covered financial company only upon

 2 a specific determination by the Secretary of the

 3 Treasury after consultation with the President of

 4 the United States.

 5 The inclusion of this type of provision

 6 in the documentation for swap trading

 7 relationships used by swap dealers and MSPs could

 8 promote legal certainty for market participants

 9 and lower litigation risk during times of

 10 significant market stress. I must mention that we

 11 had very heavy consultations with the FDIC on this

 12 particular matter and we believe that what this

 13 proposal making would do is clarify and state what

 14 the state of the law is. Thank you.

 15 CHAIRMAN GENSLER: Thank you, Ananda and

 16 team. I'll entertain a motion to accept the

 17 recommendation of staff on this documentation

 18 rule.

 19 COMMISSIONER DUNN: So moved.

 20 COMMISSIONER SOMMERS: Second.

 21 CHAIRMAN GENSLER: Let me start. I

 22 support this proposed rulemaking and I'll have a
 41

 1 statement for the record. I think what it does is

 2 establish through documentation a notice in

 3 essence that counterparties know that the law,

 4 this law, this is what Congress debated, has a

 5 provision in Title II that says that there is some

 6 circumstance that that swap dealer in a bilateral

 7 swap might be in a resolution process with the

 8 FDIC and that swap dealer if it's in a resolution

 9 process with the FDIC, Congress decided, again

 10 Congress made the decision, I happen to think it

 11 was a good decision but nonetheless Congress made

 12 the decision that these things can be resolved,

 13 that we Americans will be less subject to the risk

 14 of too big to fail, that the FDIC could go in and

 15 take over these large institutions. This rule is

 16 not about what Congress did. This rule is just a

 17 documentation rule saying all the counterparties

 18 need to be on notice that the Dodd-Frank Act did

 19 this and the related rules under FDIC. Is that

 20 not correct?

 21 MR. RADHAKRISHNAN: That is correct,

 22 sir.
 42

 1 CHAIRMAN GENSLER: To me I think this is

 2 a good thing because it puts everybody on notice

 3 that if you're dealing with one of these swap

 4 dealers, the swap dealer may at some point in time

 5 be in this process where upon its liquidation, the

 6 liquidation of the swap dealer, you might have to

 7 wait one day until the FDIC either transfers the

 8 whole book of business or then you can liquidate

 9 net out the transaction. Is that correct?

 10 MR. RADHAKRISHNAN: That's correct.

 11 CHAIRMAN GENSLER: I think it lowers

 12 litigation risk, I guess you would say in a sense

 13 lowers overall risk, in the heart of a crisis as

 14 to what happens in the midst of that crisis. I

 15 remember from my own experience a dozen years ago

 16 or so visiting Long-Term Capital Management and

 17 wondering what would happen to their $1.3 trillion

 18 swap book. There was no resolution authority and

 19 the Secretary asked me when I called him that

 20 Sunday night after visiting Greenwich,

 21 Connecticut, and he asked, What would happen? I

 22 said, I don't really know, sir. I said, even
 43

 1 worse, it's under Cayman Island law and no one

 2 knew at that moment what the swap book under

 3 Cayman Island law would do. So I think what we're

 4 doing here is saying it's under U.S. law because

 5 Congress passed it and we're saying, by the way,

 6 U.S. law says there's a one-day stay and you

 7 should know that and be aware of it.

 8 MR. RADHAKRISHNAN: That's right.

 9 CHAIRMAN GENSLER: Thanks.

 10 COMMISSIONER DUNN: Thank you, Mr.

 11 Chairman. I think as you watch lawmakers go

 12 through and make laws in the Dodd-Frank it was

 13 carried on and on and on, but short of having us

 14 set up an insurance package here similar to FDIC

 15 or giving us authority to print off $100 bills in

 16 the basement, resolution has to take place when

 17 this fails and this to me appears a logical way to

 18 do it in providing that notification of the folks

 19 who are under our law what will happen to them.

 20 Ananda, how does this orderly

 21 liquidation process compare to the liquidation

 22 process of other nations?
 44

 1 MR. RADHAKRISHNAN: I'm not sure. I'll

 2 check with the Office of International Affairs.

 3 I'm not sure if they have a similar process in the

 4 banking laws of other nations so that I'll have to

 5 find out and get back to you on that.

 6 COMMISSIONER DUNN: One of the things

 7 that we have in this proposal is a definition even

 8 though it's not under the Definition Rule and that

 9 is the determination that swap dealer or major

 10 swap participants under the Regulatory Flexibility

 11 Act have a designation here similar to what we

 12 have with DCMs. Could you elaborate a bit on

 13 that?

 14 MR. RADHAKRISHNAN: You're talking about

 15 the RFA part of the rule?

 16 COMMISSIONER DUNN: Yes, and the fact

 17 that they are not entities engaged in a de minimis

 18 level.

 19 MR. RADHAKRISHNAN: I'll get

 20 confirmation from our general counsel, but I think

 21 the advice we got from our general counsel was

 22 that previously the Commission had determined that
 45

 1 large traders are not small entities for RFA

 2 purposes and I think the advice we were given is

 3 that major swap participants and swap dealers are

 4 not considered small entities for the purposes of

 5 the Regulatory Flexibility Act, but I'll defer to

 6 Dan as to what happens if you are.

 7 COMMISSIONER DUNN: Good guess. Ananda,

 8 in my opening statement I stated that I had a fear

 9 that without adequate staff and resources that

 10 applications from entities that we are unfamiliar

 11 with will perhaps take substantially longer than

 12 applicants with entities. Is that an unfounded

 13 fear or do you share that concern?

 14 MR. RADHAKRISHNAN: That is not an

 15 unfounded fear, Commissioner Dunn. In the context

 16 of swap dealers and MSPs, the registration process

 17 will be a sort of demonstration of compliance with

 18 the regulations and I think what we're proposing

 19 to do is have the NFA do it for us. But what I do

 20 fear is that if we don't get the resources, the

 21 Commission will have a lot of registrants and we

 22 will not know who they are meaning we will not
 46

 1 have any familiarity with these registrants. As I

 2 mentioned to you privately, we're going to get

 3 registrants certainly that DCIO will be

 4 responsible for that we've never dealt with

 5 before. We're familiar with FCMs, we're familiar

 6 with DCMs, DCOs, CPOs, because the Commission has

 7 been regulating them for a long time. This is the

 8 first time we will be regulating swap dealers,

 9 major swap participants, SDRs and so on and while

 10 the concept of a dealer is not new, the concept of

 11 a dealer in our space is new so that that is what

 12 I'm worried about, that if we don't have the

 13 resources and we're not able to examine them, we

 14 will have a whole set of registrants that we have

 15 no knowledge about and I don't think that's

 16 satisfactory.

 17 COMMISSIONER DUNN: Thank you.

 18 CHAIRMAN GENSLER: Thank you,

 19 Commissioner Dunn. I want to clarify. These are

 20 just on the bilateral or non- cleared swaps. Is

 21 that right?

 22 MR. RADHAKRISHNAN: Correct.
 47

 1 CHAIRMAN GENSLER: Commissioner Sommers?

 2 COMMISSIONER SOMMERS: Thank you, Mr.

 3 Chairman. In the proposal there's a provision

 4 that says that swaps appear to be subject to the

 5 orderly liquidation regime under either Title II

 6 or FDIA since the liquidation regime applies to

 7 qualified financial contracts including swap

 8 agreements, securities contracts, commodities

 9 contracts and any other contract determined by the

 10 FDIC to be a qualified financial contract. It is

 11 also recognized that there could be a potential

 12 for regulatory arbitrage if certain swaps are not

 13 subject to this regulatory regime. Is the

 14 proposal means to ensure that all swaps are

 15 subject to the Commission's jurisdiction under

 16 Title VII that they will meet the definition of

 17 qualified financial contract and be subject to

 18 this orderly liquidation regime?

 19 MR. RADHAKRISHNAN: I don't think that's

 20 the intention of this rulemaking but that's

 21 certainly a question. The issue is this only

 22 applies if the entity is either a covered
 48

 1 financial company or the President and the

 2 Secretary that determination or it is what's

 3 called an IDI, a back fall for want of a better

 4 word. So if that's the case then I think it would

 5 be not a good outcome if only some of their swaps

 6 and not all of their swaps are covered and I think

 7 that's what we're trying to get to. I think that

 8 if you look at the definition of a qualified

 9 financial contract, I think what staff believes is

 10 that all of their swaps will be covered.

 11 COMMISSIONER SOMMERS: How are we going

 12 to make sure that all of those swaps are covered?

 13 MR. RADHAKRISHNAN: The FDIC has to make

 14 that determination. Is that correct?

 15 MR. GRIFFIN: Right. The intent behind

 16 this rule isn't to expound upon what should or not

 17 be covered within Title II or within the Federal

 18 Deposit Insurance Act. This is merely reflective

 19 of what is already in existence there. To the

 20 extent that there is any potential for regulatory

 21 arbitrage or disconnect between our definition of

 22 swap and the definition of swap agreement within
 49

 1 the context of Title II and FDIA, that would

 2 probably be something that would be better suited

 3 for the Definitions Team. But we do ask a

 4 question in the proposal or in the preamble I

 5 should say which asks, Are there any swaps as

 6 defined under Title VII of the Dodd-Frank Act that

 7 should not be considered to be qualified financial

 8 contracts as that term is defined in Title II and

 9 FDIA? Again trying to get at exactly that

 10 question as to whether there is any disconnect

 11 between the swap agreement definition under Title

 12 II and FDIA and the swap definition under Title

 13 VII.

 14 COMMISSIONER SOMMERS: To confirm, we

 15 will continue to work on this issue with other

 16 teams and with the FDIC to make sure that there is

 17 no regulatory arbitrage there.

 18 MR. RADHAKRISHNAN: Yes.

 19 COMMISSIONER SOMMERS: One additional

 20 question. It is also noted that the inclusion of

 21 the termination provision in swap-trading

 22 relationship documentation could help bring about
 50

 1 equivalence in the treatment of swaps globally.

 2 Could you explain what is meant by that?

 3 MR. GRIFFIN: Again, we're not in any

 4 way through this rulemaking attempting to -- the

 5 Commission does not have rule-writing authority

 6 under Title II so again what we're trying to

 7 ensure is that our registrants, the swap dealers

 8 and major swap participant, are incorporating

 9 within their documentation sufficient notice and

 10 agreement to provide the clarity on the front end

 11 of the transaction so that all parties are well

 12 aware of the statutory obligations under Title II

 13 of Dodd-Frank and under FDIA so that again there

 14 is clarity well in advance of when the problems

 15 come up when there are high levels of market

 16 stress that there isn't a scramble at that period

 17 of time. To the extent that the global issue

 18 comes up again, Title II does direct the

 19 Comptroller General to examine that issue a bit

 20 more fully and I think that is also something that

 21 as we move forward will be an issue that the

 22 Commission likely will want to continue
 51

 1 considering with respect to this rule and I

 2 imagine in a variety of rule contexts.

 3 COMMISSIONER SOMMERS: Thank you very

 4 much.

 5 CHAIRMAN GENSLER: Thank you,

 6 Commissioner Sommers. Commissioner Chilton?

 7 COMMISSIONER CHILTON: Thank you, Mr.

 8 Chairman. Ananda, you refer I think it's on page

 9 13 to our role with respect to the potential

 10 transferees of QFCs in the event of a default

 11 resolution proceeding. How would we handle that?

 12 As I understand it now, when an FCM gets into

 13 trouble we work with the Futures Exchange to

 14 transfer contracts to a healthy FCM, but I'm

 15 wondering how the process might work for swaps,

 16 for particularly non-cleared swaps and what the

 17 plans in that regard?

 18 MR. RADHAKRISHNAN: Thanks, Commissioner

 19 Chilton. I think in the current environment for

 20 futures, there is an insolvency regime in the

 21 bankruptcy code that has worked well and the

 22 Commission is authorized to write rules to augment
 52

 1 the provisions of the bankruptcy code. The

 2 objective has always been to the extent that we,

 3 we meaning the industry, can find a clearing firm

 4 that's willing to take on the positions and the

 5 participants from the firm that's going through

 6 bankruptcy that our role has been to clarify what

 7 the law is and to appear before the bankruptcy

 8 court to support the arguments of the trustee that

 9 the judge should order a movement of positions and

 10 a movement of money. The last time we did this

 11 was in 2008 when Commission staff appeared before

 12 the bankruptcy judge in the Lehman broker-dealer

 13 FCM liquidation.

 14 I'll be honest with you, we're dealing

 15 with a new world here because in the context of

 16 Title II or FDIA resolution authority, it's the

 17 FDIC which will be in the driver's seat because

 18 the FDIC has resolution authority and we don't. I

 19 think the FDIC, Commissioner Chilton, is required

 20 to consult with us before the Commission and I'm

 21 just trying to think what the conversation would

 22 be like and I would imagine that part of the
 53

 1 conversation would be they may ask us, Do you know

 2 who might be willing to take over these positions?

 3 Because I think assuming that we have advanced

 4 knowledge or notice that somebody is going to be

 5 in financial trouble, we can call around and say

 6 it's common knowledge this firm is going to be in

 7 trouble. Are you willing to take over the

 8 positions? That's what the conversation is all

 9 about. Of course we have to make sure that we

 10 don't disclose confidential information so that

 11 there is a delicate balance there.

 12 I see that as our role maybe identifying

 13 possible white knights for want of a better word,

 14 but I don't know whether our role can be further

 15 than that because as I'd mentioned before, the

 16 FDIC has the authority and I think the FDIC has

 17 the money. They can create a bridge company and

 18 all that kind of stuff. We just don't have that

 19 kind of capability. I know that's not a very

 20 satisfactory answer, Commissioner Chilton, but

 21 that's the best I have.

 22 COMMISSIONER CHILTON: Thank you.
 54

 1 CHAIRMAN GENSLER: Ananda, may I

 2 clarify? Staff is recommending and we may propose

 3 today is very narrow.

 4 MR. RADHAKRISHNAN: It's very narrow.

 5 CHAIRMAN GENSLER: The FDIC has this

 6 whole Title II.

 7 MR. RADHAKRISHNAN: Absolutely. They've

 8 got their rules.

 9 CHAIRMAN GENSLER: This is saying Title

 10 II and the Federal Deposit Insurance Act says that

 11 the FDIC might put you on a one-day notice or

 12 one-day stay. You'd better know about it, and not

 13 only know about it, but it's part of the

 14 agreements of the swap dealers.

 15 MR. RADHAKRISHNAN: Everything else is

 16 the FDIC. What we are seeking to do is to let the

 17 whole world know that this is the state of the law

 18 and it might happen to you. We think it's good

 19 practice that if it's put in the documentation,

 20 everybody will know that that's the state of the

 21 law.

 22 CHAIRMAN GENSLER: Commissioner O'Malia?
 55

 1 COMMISSIONER O'MALIA: Orderly

 2 liquidation is kind of the title of this thing.

 3 MR. RADHAKRISHNAN: Yes.

 4 COMMISSIONER O'MALIA: I think it's

 5 obviously more aspirational since it's never been

 6 done. Right? We haven't done this. The FDIC has

 7 no experience in liquidating bilateral contracts.

 8 Right?

 9 MR. RADHAKRISHNAN: I'm not sure. I

 10 know they have done a lot of liquidation of banks.

 11 I'm not sure whether it involves swaps.

 12 COMMISSIONER O'MALIA: We have a

 13 proposal that puts Title II and FDIA, the Federal

 14 Deposit Insurance Act, and you're saying we've got

 15 this documentation and this is the state of the

 16 world, but it's very unclear what the state of

 17 that world actually looks like. I think a lot of

 18 our swap contracts will say here is your orderly

 19 liquidation. You have 24 and hours you can't do

 20 anything with it. But what happens once this

 21 bridge corporation or the FDIC gets ahold of it?

 22 What's orderly about that? What does that state
 56

 1 of the world look like? Can they terminate

 2 contracts? They could terminate a swap contract

 3 under this authority?

 4 MR. GRIFFIN: I believe the FDIC does

 5 have some measure of repudiation capabilities and

 6 there's a component I believe there for the award

 7 of damages as well.

 8 COMMISSIONER O'MALIA: So in the 24-hour

 9 period if you're captured and it's totally unclear

 10 who these people because it simply says covered

 11 financial company --

 12 MR. RADHAKRISHNAN: That is correct.

 13 That is the statutory provision.

 14 COMMISSIONER O'MALIA: What is a covered

 15 financial company?

 16 MR. RADHAKRISHNAN: First of all, you

 17 have to be a financial company as defined in the

 18 statute so that that's Section 201(a).

 19 Essentially it's a bank-holding company, a nonbank

 20 financial company supervised by the board so that

 21 everybody knows what it is. Then number three is,

 22 any company that is predominantly engaged in
 57

 1 activities that the board of governors has

 2 determined are financial in nature or incidental

 3 thereto for purposes of Section 4(k) of the Bank

 4 Holding Company Act.

 5 Then there's a further provision that

 6 says no company shall be determined to be

 7 predominantly engaged in activities that the board

 8 of governors has determined are financial in

 9 nature or incidental thereto if the consolidated

 10 revenues of such company from such activities

 11 constitute less than 85 percent of the total

 12 consolidated revenues of such company.

 13 COMMISSIONER O'MALIA: That seems

 14 totally clear to me. In these swap agreements

 15 will it say I'm a financial company?

 16 MR. RADHAKRISHNAN: No.

 17 COMMISSIONER O'MALIA: It will not say

 18 that?

 19 MR. RADHAKRISHNAN: It would not say

 20 that. Essentially the FDIC has make a

 21 recommendation to the Secretary of the Treasury

 22 that in the FDIC's board's view they believe that
 58

 1 Company XYZ is a covered financial company and I'm

 2 assuming that the FDIC will detail why they

 3 believe it is a covered financial company. And it

 4 asks the Secretary to take certain steps.

 5 COMMISSIONER O'MALIA: The CFTC is not

 6 mentioned in Title II or FDIA anywhere in that

 7 statute based on what I've seen.

 8 MR. RADHAKRISHNAN: Except with the

 9 requirement that if we're the primary regulatory

 10 to consult with us.

 11 COMMISSIONER O'MALIA: Do we have a

 12 memorandum of agreement on what involves? Do we

 13 want to have a role in this responsibility? What

 14 obligation do we have to our registrants that are

 15 captioned under this?

 16 MR. RADHAKRISHNAN: I think we would

 17 want to find out what the FDIC wants to do and

 18 we'll want to make sure that there is no

 19 disruption in the market. We'll want to know

 20 where the FDIC intends to send the contracts over.

 21 Again I hate to be crass, we don't have the money

 22 so that if we want to play a greater role, we
 59

 1 don't have the power nor do we have the money.

 2 And Congress has decided that's not our role.

 3 COMMISSIONER O'MALIA: Let me go back to

 4 the point I started on earlier. Requiring

 5 counterparties in their swap documentation to

 6 agree that if a covered financial company defaults

 7 then that non-defaulting party will not exercise

 8 any right it has to terminate, liquidate or net

 9 any swap seems to go beyond requiring parties to

 10 document their relationship. We've all talked

 11 about this as just a simple documentation, but

 12 what this actually means and I hope parties doing

 13 these bilateral deals will look at when this

 14 regulation comes out or this proposal comes out,

 15 what rights they have and do not have under this

 16 agreement.

 17 Obviously it says here that if they're a

 18 party to this and we've given them some warning,

 19 it does say that they can't terminate, liquidate

 20 or net any swap within the 24-hour period. What

 21 it doesn't tell you is what happens when you go

 22 into the process and what the FDIC can do to you.
 60

 1 Shouldn't we have something in our regs saying the

 2 potential that they could invalidate your contract

 3 and terminate these swaps or transfer them, all of

 4 these things, shouldn't that also be in this rule

 5 so that people clearly understand, was it the

 6 state of the world? I'm confused as to what these

 7 people should expect going forward by simply

 8 including this documentation into their swap

 9 agreement.

 10 MR. GRIFFIN: In this respect, rather

 11 than restating everything that is in Title II and

 12 FDIA that could impact a counterparty that's

 13 affect here for a particular swap or in this case

 14 swap agreement, again I believe the intent here is

 15 to place the parties on notice and specifically

 16 address the rights that they would potentially

 17 otherwise have within their contract, again how

 18 Title II and how FDIA could impact those rights

 19 under operation of the statute under Title II and

 20 under FDIA. But as far as other elements of Title

 21 II or FDIA, hopefully those parties would have an

 22 awareness based on this notice that there are
 61

 1 other statutory structures beyond just what we

 2 have under Title VII that could impact their

 3 rights with respect to this should a financial

 4 company become a covered financial company by

 5 virtue of the Secretary of the Treasury in

 6 consultation with the President making those

 7 determinations.

 8 MR. RADHAKRISHNAN: And potentially the

 9 FDIC issues regulations and we hope that this

 10 provision would give them the notice that you've

 11 got another entity out there that's got statutory

 12 points so that you should be aware that they could

 13 issue regulations as well.

 14 COMMISSIONER O'MALIA: This title is

 15 over 20 pages long. I understand we get you on

 16 the hook with this page-and-a-half rulemaking, but

 17 it puts you into a whole new universe and I'm not

 18 sure everybody is that sophisticated. If you do a

 19 deal with a covered financial and say you're a

 20 co-op and now you have to have this documentation

 21 in your rule, a small co-op, you should have an

 22 understanding of what Title II is going to do to
 62

 1 you, or FDIA. Right? Because that's our new

 2 regulator.

 3 MR. RADHAKRISHNAN: Yes. I think what

 4 it says is that it's like caveat emptor or a

 5 derivation thereof. You should know who you're

 6 dealing with and you should know that the person

 7 you're dealing with, Mr. Co-Op, could be a covered

 8 financial company under Title II.

 9 CHAIRMAN GENSLER: Not the co-op. The

 10 co-op can't be.

 11 MR. RADHAKRISHNAN: That's right.

 12 COMMISSIONER O'MALIA: But by virtue of

 13 having this in their documentation they're in the

 14 same process.

 15 MR. RADHAKRISHNAN: It works both ways

 16 because while the assumption is that the dealer is

 17 the covered company, there may be an instance

 18 where the non-dealer, the counterparty who is not

 19 the dealer, could be a covered financial company.

 20 Of course that's highly unlikely, but they could

 21 be.

 22 MR. BERKOVITZ: Excuse me. If I may add
 63

 1 to the discussion in response to the

 2 Commissioner's question in terms of what rights

 3 the parties may have and what the effect of this

 4 language is, the language in the rule regarding

 5 the parties may not exercise any right that such

 6 counterparty that is not the covered party has to

 7 terminate is essentially the statutory language,

 8 that the language of the rule in the proposed

 9 repeats the statutory language regarding the party

 10 will not exercise any right that the party may

 11 have.

 12 COMMISSIONER O'MALIA: I get that, but

 13 what it also presents is another 20 pages in Title

 14 II that they ought to probably be aware of as well

 15 as because this is their new state of the world I

 16 guess are your words.

 17 MR. RADHAKRISHNAN: Maybe we could look

 18 upon it as at least we're giving people notice

 19 that a particular law applies as opposed to they

 20 don't have notice and the FDIC comes knocking on

 21 the door and says guess what, I got this power.

 22 COMMISSIONER O'MALIA: It's probably the
 64

 1 least we could do. There is an element in here,

 2 this new romanette(iii) down at the very end of

 3 the rulemaking says, "explicit versus implicit

 4 consent." Where in the statutory language is the

 5 requirement that the counterparty that is not the

 6 covered financial company explicitly consents to

 7 any transfer? This language in romanette(iii)

 8 inserts FDIC interpretation of the "or incidental

 9 to" language in their statutory authority but that

 10 requirement is not in either statute. This seems

 11 to go beyond what is in the statute that we just

 12 discussed with Mr. Berkovitz.

 13 MR. GRIFFIN: Yes, Commissioner, as you

 14 alluded to in your question, that reflects what

 15 the FDIC has communicated to us their

 16 interpretation of the provision that we were just

 17 discussing with respect to the impact of

 18 termination rights within FDIA and within Title II

 19 and within the FDIA context because again the FDIC

 20 has been operating under that statute for some

 21 time now. Again, our understanding from what

 22 they're communicated to us is their long-time
 65

 1 interpretation of that provision reflects what is

 2 in romanette(iii) of the proposed rule. To our

 3 understanding it's not something that is expressly

 4 stated in FDIA or in Title II, but the relevant

 5 provisions in each of those statutes which again

 6 are substantively parallel to the extent that it

 7 is addressed in FDIA, the FDIC's longstanding

 8 interpretation is that this is one of the results

 9 of that language.

 10 COMMISSIONER O'MALIA: I didn't think I

 11 was going to quote from the President's Executive

 12 Order today in terms of rulemaking, but this seems

 13 appropriate: "Before issuing a Notice of Proposed

 14 Rulemaking, each agency where feasible and

 15 appropriate shall seek the views of those who are

 16 likely to be affected including those who are

 17 likely to benefit from and those who are

 18 potentially subject to such rulemaking."

 19 This kind of sounds like we should have

 20 put this out as an Advanced Notice of Proposed

 21 Rulemaking to warn companies and participants of

 22 this new state of the world and what the new
 66

 1 orderly liquidation regime is before we come up

 2 with a rulemaking because it says specifically,

 3 "before issuing a Notice of Proposed Rulemaking."

 4 I think we're getting ahead of ourselves here and

 5 we need to work with the market a little bit to

 6 make sure that they clearly understand what's

 7 going to happen to them. That was from Section

 8 2(c) of the President's Executive Order. I think

 9 we're getting ahead of ourselves and I'm going to

 10 vote no on this.

 11 CHAIRMAN GENSLER: As I had said

 12 earlier, I support this and I know there's a

 13 difference here and I appreciate the full

 14 discussion of it. I think this is a documentation

 15 rule that does as Ananda said put people on

 16 notice. Congress enacted, yes, 20 pages of Title

 17 II which even if this rule never happened, for

 18 some reason we didn't propose it and it didn't go

 19 final, they're subject to Title II, they're

 20 subject to the FDIC Act. I think this helps lower

 21 risk in the system because at the point of crisis

 22 it's right there in the documents if there's
 67

 1 support among the Commissioners and why I support

 2 it. We'll put out for public comment and we'll

 3 get comments on all of these including

 4 romanette(iii), and to the President's Executive

 5 Order I appreciate your point. We have had over

 6 500 meetings, maybe not on romanette(iii), I know,

 7 but we have so many people coming in to us and

 8 they will continue to come in to us and we invite

 9 that from the public.

 10 COMMISSIONER O'MALIA: I have one more

 11 question. May I? I see that we've added a

 12 question about the use of swap and cross-default

 13 provisions that reference affiliates and whether

 14 to include these affiliates of entities that may

 15 become covered financial companies under Title II

 16 or the subject of FDIA in this regulation. Is

 17 this proposed requirement anywhere in Title II or

 18 FDIA? Ward, I think this might be up your alley.

 19 And would the FDIC have the authority to propose

 20 this requirement on their own either under Title

 21 II or FDIA?

 22 MR. GRIFFIN: I think at this point in
 68

 1 time at best that that is unclear. It's clear so

 2 that at this point in time we thought it prudent

 3 to include a question and see what kinds of

 4 comments we get back and if need be down the road

 5 address it as appropriate under the statute.

 6 MR. RADHAKRISHNAN: That's why we asked

 7 the question as opposed to putting it in the

 8 language, because as Ward said, there is no

 9 clarity. In fact, we also asked the question

 10 whether the Commission has the legal authority to

 11 do such a thing so that I think it would be very

 12 illuminating to get comments on that.

 13 MR. STAWICK: Commissioner O'Malia?

 14 COMMISSIONER O'MALIA: No.

 15 MR. STAWICK: Commissioner O'Malia, no.

 16 Commissioner Chilton? Commissioner Chilton?

 17 COMMISSIONER CHILTON: Yes, Dave. Yes.

 18 MR. STAWICK: Commissioner Chilton, aye.

 19 Commissioner Sommers?

 20 COMMISSIONER SOMMERS: Yes.

 21 MR. STAWICK: Commissioner Sommers, aye.

 22 Commissioner Dunn?
 69

 1 COMMISSIONER DUNN: Aye.

 2 MR. STAWICK: Commissioner Dunn, aye.

 3 Mr. Chairman?

 4 CHAIRMAN GENSLER: Aye.

 5 MR. STAWICK: Mr. Chairman, aye. Mr.

 6 Chairman, on this question the ayes are four, the

 7 nays are one.

 8 CHAIRMAN GENSLER: Thank you, Mr.

 9 Stawick. With that I have one administrative

 10 thing and one technical thing. I'll ask unanimous

 11 consent to allow staff to make technical

 12 corrections to the documents voted on today prior

 13 to sending them to the Federal Register. Not

 14 hearing objection, that's taken.

 15 Then also we expect to hold two open

 16 meetings in February, on the 11th of February and

 17 the 24th of February, both of them beginning at

 18 9:30 a.m. here at the CFTC. We'll entertain a

 19 motion to publish in the Federal Register a notice

 20 consistent with the Government's Sunshine Act

 21 announcing such open meetings. Do I hear a

 22 motion?
 70

 1 COMMISSIONER SOMMERS: So moved.

 2 COMMISSIONER O'MALIA: Second.

 3 CHAIRMAN GENSLER: All those in favor?

 4 GROUP: Aye.

 5 CHAIRMAN GENSLER: Are there any

 6 opposed? We'll have two more meetings. Now I

 7 think I need a motion to adjourn the meeting.

 8 COMMISSIONER DUNN: So moved.

 9 COMMISSIONER SOMMERS: Second.

 10 CHAIRMAN GENSLER: All those in favor?

 11 GROUP: Aye.

 12 CHAIRMAN GENSLER: Are there any

 13 opposed? I adjourn the meeting.

 14 (Whereupon, at 10:57 a.m., the

 15 PROCEEDINGS were adjourned.)

 16 * * * * *

 17

 18

 19

 20

 21

 22
 71

 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Christine Allen, notary public in and

 4 for the District of Columbia, do hereby certify

 5 that the forgoing PROCEEDING was duly recorded and

 6 thereafter reduced to print under my direction;

 7 that the witnesses were sworn to tell the truth

 8 under penalty of perjury; that said transcript is a

 9 true record of the testimony given by witnesses;

 10 that I am neither counsel for, related to, nor

 11 employed by any of the parties to the action in

 12 which this proceeding was called; and, furthermore,

 13 that I am not a relative or employee of any

 14 attorney or counsel employed by the parties hereto,

 15 nor financially or otherwise interested in the

 16 outcome of this action.

 17

 18

 19 -----------------------------------

 20 Notary Public, in and for the District of Columbia

 21 My Commission Expires: January 14, 2013

 22