1

 1 

 2 

 3 UNITED STATES OF AMERICA

 4 COMMODITY FUTURES TRADING COMMISSION

 5 

 6 

 7 

 8 

 9 

 10 PUBLIC MEETING OF ADVISORY COMMITTEE

 11 

 12 

 13 

 14 

 15 

 16 

 17 

 18 Washington, D.C.

 19 Wednesday, October 26, 2010

 20 

 21 

 22 
 

2

 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BART CHILTON, Commissioner

 5 MICHAEL V. DUNN, Commissioner

 6 SCOTT D. O'MALIA, Commissioner

 7 JILL E. SOMMERS, Commissioner

 8 Staff:

 9 ADRIANNE JOVES

 10 General Counsel

 11 

 12 BELLA ROZENBERG

 13 Division of Market Oversight

 14 

 15 JON DEBORD

 16 Division of Clearing and Intermediary Oversight

 17 

 18 EILEEN DONOVAN

 19 Division of Clearing and Intermediary Oversight

 20 

 21 ROBERT PEASE

 22 Division of Enforcement
 

3

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

 2 (9:30 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 meeting will come to order. This is a public meeting 

in

 5 the Commodity Futures Trading Commission to consider

 6 issuance of a number of proposed rules to further the

 7 Commissions' actions on the Dodd-Frank Reform and

 8 Consumer Product Act.

 9 Today we will be considering -- it's six, 

but

 10 let me list them. It's six rules, I think:

 11 Certification and Approval of Rules, and New Products 

for

 12 Designated Contract Markets, Derivative Clearing

 13 Organizations, Swap Execution Facilities, and Swap Data

 14 Repositories. These are rules that would have on how

 15 they move forward on their rules.

 16 Secondly, removing, as the Dodd-Frank Act

 17 asked us to do, any reliance on credit ratings in 

various

 18 Commission regulations.

 19 Thirdly, amending various regulations we have

 20 to provide greater protections for customer funds held 

by

 21 futures, commission, merchants, and derivative, and

 22 clearing organizations.

 

4

 1 Fourthly, I processed a review in the

 2 designation of swaps for mandatory clearing.

 3 Fifthly, enhancing the Commission's ability

 4 to protect against manipulation.

 5 And then sixth, an advanced notice of

 6 proposed rulemakings. This is not actually a proposed

 7 rule, but it's to ask the public -- I think it's 18

 8 questions -- advanced notice and proposed rulemaking on

 9 disruptive trading practices.

 10 Before we hear from the staff, once again I'd

 11 like to thank my fellow Commissioners for all of their

 12 hard work on the Dodd-Frank Act and all of our existing

 13 authorities.

 14 I believe that Commissioner Dunn, I just want

 15 to make sure, is tied in somehow through modern

 16 technology. Commissioner Dunn, are you with us?

 17 COMMISSIONER DUNN: I am here.

 18 CHAIRMAN GENSLER: Terrific.

 19 COMMISSIONER SOMMERS: He's on the video.

 20 CHAIRMAN GENSLER: He's on the video there 

in

 21 our Chicago office, if I understand it right. I would

 22 also like to welcome members of the public market
 

5

 1 participates and members of the media to today's 

meeting,

 2 as well as welcome those listening and watching by

 3 webcast.

 4 This is our third public meeting to 

consider

 5 Dodd-Frank rulemaking. And included in today's 

actions,

 6 I anticipate that we will have published two final 

rules;

 7 one of them called an "interim final rule." I think 

that

 8 we would have proposed 11 rules, if the rule count is

 9 correct, and published three advanced notices of 

proposed

 10 rulemakings.

 11 And while a great deal of effort is going

 12 into this, this is still likely to be about a quarter 

of

 13 the work that we have. And that's only a quarter in 

the

 14 first phase called proposals; because, of course, 

really

 15 the very importance of finalizing these rules next 

spring

 16 will be before us.

 17 We currently plan to have at least three

 18 public meetings in November and two public meetings in

 19 December. The dates and topics will be published, of
 20 course, in the Federal Register. And we're looking to

 21 our next meeting on the Dodd-Frank Act rulemaking on

 22 November 10.
 

6

 1 The arithmetic of course will show that

 2 this will be a very busy next seven weeks. And no 

doubt

 3 as we're human, some of these rules may slip.

 4 And there will be new stories, I guess, 

on

 5 whatever that may be. Butour goal is really to 

complete

 6 the proposal stage by mid December. And as you will 

see

 7 even on this disruptive trade practices, we'll probably

 8 have that proposal after mid December because we 

thought

 9 it was appropriate to go out to the public to get more

 10 information.

 11 I want to thank the staff for all of the

 12 work that they've put in drafting the rulemakings and

 13 consideration today. I thank them for their thoughtful

 14 recommendations how the Commission shall go forward. 

And

 15 we look forward to receiving the public comment which 

is

 16 really just enormously critical for us.

 17 These, again, are just proposals that we're

 18 considering. So each of these rules will have a 

serious

 19 of questions in them and seek public comment.

 20 We're also putting fact sheets and Q&As on
 21 our website, which I hope will help the public 

understand

 22 what we're doing.
 

7

 1 Before we turn to the staff, I would like 

to

 2 turn my fellow Commissioners for opening statements. I

 3 think Commissioner Dunn, if we can do this through the

 4 video conference.

 5 COMMISSIONER DUNN: Thank you Mr. Chairman.

 6 Is this working?

 7 CHAIRMAN GENSLER: Yes.

 8 COMMISSIONER DUNN: Can you hear me?

 9 CHAIRMAN GENSLER: We can hear you very 

well.

 10 COMMISSIONER DUNN: Fine. Today we will

 11 consider the next set of proposed rules that come 

before

 12 the Commission pursuant to the Dodd-Frank Act. As with

 13 other proposed rules, today's set of rules offer a

 14 glimpse into the resource-intense reengineering the 

CFTC

 15 will be doing throughout to provide regulatory 

framework

 16 to prevent many new -- to implement many new

 17 responsibilities under the Dodd-Frank.

 18 As I have previously stated, I am very

 19 concerned about the CFTC budget situation and possible

 20 attempts to thwart implementation of the Dodd-Frank by

 21 cutting off funding for this agency. There was just a
 22 piece in Reuters this morning indicating that that 

might
 

8

 1 be a strategy. Without the requisite level of funding, 

I

 2 see possibilities of several unfortunate outcomes as a

 3 result of that. Let me enumerate these.

 4 First, without the necessary human 

capital

 5 to review new SEFs, DCMs and DCOs applications, I can

 6 envision a long waiting periods for potential 

registrants

 7 before their applications are approved to conduct

 8 business in the markets we regulate.

 9 This inability to quickly and efficiently

 10 process applications, through no fault of the SEF, 

would

 11 undoubtedly prevent the immediate creation of a

 12 competitive market environment, at least in the OTC

 13 space. And may lead to greater systemic risk as 

portions

 14 become concentrated in the small group of SEFs, DCMs, 

and

 15 DCOs that are not versed to navigate the registration

 16 process.

 17 Similarly, the lack of adequate resources 

may

 18 undoubtedly affect the agency's ability to approve new

 19 products for trading. If the CFTC does not have the

 20 people to review new product applications to ensure 

they
 21 are not violative of the Act and are not readily

 22 susceptible to manipulation, the new products cannot be
 

9

 1 listed for trading.

 2 Again, I fear that a long queue will

 3 develop for new products waiting approval. And that 

the

 4 inability to get new products approved will prevent

 5 innovation and competition in our markets.

 6 Without adequate funding, the CFTC may 

need

 7 to delegate a substantial portion of its duties under

 8 Dodd-Frank to the industry established as SROs.

 9 If we cannot be the frontline regulator, it

 10 is incumbent upon the Commission to find someone who 

will

 11 be. Delegation of this oversight duties to the 

existing

 12 SROs will obviously be very costly to them, but

 13 necessary.

 14 And lastly, a principle-based regulatory

 15 regime only works if the regulator has the staff

 16 necessary to ensure that its regulatees are adhering to

 17 the principle. Without sufficient staff to conduct

 18 proper oversight, the CFTC may need to write a more

 19 prescriptive set of rules and rely more heavily on

 20 burdensome reporting requirements. Again, this

 21 undoubtedly will be very costly to the industry and

 22 market users.

 

10

 1 It is my hope the CFTC receive the 

necessary

 2 funding and allow us to continue to provide the quality

 3 oversight it's always provided. This oversight to

 4 following a principles-based approach in my opinion

 5 fosters an environment of compliance, competition, and

 6 innovation.

 7 Mr. Chairman, I want to thank you and I 

want

 8 to thank the staff for again hosting these series of

 9 meetings. I think this has been one of the most open

 10 processes that any regulators has ever had asked. And 

I

 11 appreciate all of the hard work that has gone into it.

 12 Thank you.

 13 CHAIRMAN GENSLER: Thank you, Commissioner

 14 Dunn for your remarks. Commissioner Sommers?

 15 COMMISSIONER SOMMERS: Thank you, Mr.

 16 Chairman. I want to say that I first agree with many 

of

 17 the comments made by Commissioner Dunn this morning

 18 regarding our resource restraints. And I hope that 

that

 19 gets worked out as Congress returns.

 20 I want to say thank you to the rulemaking

 21 teams for all of their hard work that have been put 

into
 22 these proposals that are before us today.
 

11

 1 And I guess I thought that with proposing 

our

 2 11 rule today out of 30 rulemaking teams, that we were 

a

 3 third finished, not a quarter finished.

 4 CHAIRMAN GENSLER: Commissioner Sommers, my

 5 math is not very good.

 6 COMMISSIONER SOMMERS: Okay. Good. I was

 7 thinking there's something I don't know about this.

 8 CHAIRMAN GENSLER: Well, I do have to admit

 9 that Sarah has broken her business conduct into 

numerous

 10 rules.

 11 COMMISSIONER SOMMERS: Right. There's more

 12 than we even know. Anyway, thank you very much. I 

look

 13 forward to discussing the important rules before us 

this

 14 morning.

 15 CHAIRMAN GENSLER: Thank you, Commissioner

 16 Sommers. Commissioner Chilton?

 17 COMMISSIONER CHILTON: Thanks, Mr. 

Chairman.

 18 I agree with the fiscal concerns that were raised by

 19 Commissioner Dunn and Commissioner Sommers and 

constantly

 20 by our Chairman and by our appropriations s staff, too.

 21 This is important because we're dealing
 22 with anti-disruptive practices and with manipulation.
 

12

 1 The law has been really weak in these regards over the

 2 years, which is why many of us fought to get it 

changed.

 3 And this rule, the proposal will help promulgate these

 4 things. And we will be better to enforce the rules to

 5 make more efficient, effective markets in the future

 6 I did want to take a moment to comment on

 7 precious metals, in particular silver. We've been 

having

 8 an investigation that's been going on 25 months now. 

And

 9 I've been urging -- not that there's any individual 

that

 10 has not agreed, but I've been urging that we say

 11 something publically at some point.

 12 I think that the public has been for two

 13 years asking about whether or not there's wide-spread

 14 manipulation in the markets. And it just seems to me

 15 that after a couple of years we should say something. 

We

 16 can say yes. We can say no. But it's time to say

 17 something.

 18 The legal definition, as I said, of

 19 manipulation is really hard to prove. It's a high bar.

 20 It's a much test. It's a much different test than what

 21 the average person if we walked out on the street might

 22 think of as manipulation; because you not only need to

 

13

 1 have a specific intent, but you also need to prove as a

 2 result of that intent and the market control that the

 3 adaptively caused an artificial price. And causing an

 4 artificial price is something that can be debated by an

 5 economist, so it's a really high bar. But what we're

 6 doing today will help in that regard.

 7 Attempted manipulation is a little easier 

to

 8 prove than manipulation. It requires the intent to

 9 manipulate and some overt act in furtherance of that

 10 intent.

 11 And then there are lesser violations, 

there's

 12 are several of them. And after we do disruptive 

trading

 13 practices, there will be even more. So we will be 

adding

 14 additional tools to sort of our tool box of things that

 15 can help in these markets.

 16 I do believe that there have been repeated

 17 attempts to influence price in the silver markets. 

There

 18 has been fraudulent efforts to persuade what I consider

 19 deviously control that price. And this is based upon

 20 what I have been told by members of the public and

 21 reviewed in pubically, available documents.
 22 I believe there are violations to 

Commodities
 

14

 1 Exchange Act that have taken place in the silver 

markets.

 2 And that any such violation should be en forcibly

 3 prosecuted by the government.

 4 Now, in saying this, I'm prohibited from

 5 divulging anything about ur investigation, about 

getting

 6 individual trader names, or about positions, and I'm

 7 specifically not doing. And I can't pre-judge anything

 8 that my colleagues and I may or may not do on this or 

any

 9 other matter.

 10 So I appreciate that we're going forward on

 11 this. I believe that disruptive trading and the

 12 anti-manipulation rule along with position limits will

 13 help not only the precious metal markets and fully

 14 implemented, but help all markets to make them more

 15 efficient and effective and avoid fraud, abuse, and

 16 manipulation. Thank you.

 17 CHAIRMAN GENSLER: Thank you, Commissioner

 18 Chilton. Commissioner O'Malia?

 19 COMMISSIONER O'MALIA: Thank you, Mr.

 20 Chairman. I would like to thank the teams for their 

many

 21 long hours developing these rules that we will consider

 22 here today. The staff has activity sought input from 

the

 

15

 1 Commissioners and worked cooperatively to approve each

 2 these rulemakings.

 3 I'd like to thank Bella Rozenburg and her

 4 team, Adrianne Joves, and Eileen O'Donovan and their

 5 respective teams. I would also like to thank Phyllis

 6 Dietz and John DeBord for their efforts.

 7 However, I'm quite concerned about the

 8 proposed rule with the investment customer funds. I

 9 think they're overly prescriptive, especially given 

that

 10 the Commission released an advanced notice of public

 11 ruling on this very issue in May of 2009.

 12 My main concern with this proposal is that

 13 the Commission is proposing to significantly revise the

 14 scope and f character of permitted investments of

 15 customer funds in the face of numerous public comments 

to

 16 the contrary.

 17 In fact, the concentration limits in 

today's

 18 proposed rule seem to suggest that the 2000 plus pages 

of

 19 the Dodd-Frank Act have done nothing to improve the

 20 safety and the liquidity of the money market funds.

 21 I strongly urge the public to comment on 

the
 22 reasonableness of the asset-backed concentration 

limits,
 

16

 1 especially the 10 percent limitation on money-market

 2 funds. I also question whether it is wise to allow 50

 3 percent of the allocation to be invested in one

 4 government-sponsored enterprise.

 5 I intend to oppose the rulemaking, as it

 6 fails to consider the public comments and fails to

 7 provide sufficient justification for the proposed

 8 allocations.

 9 Moving to the Anti-Manipulation. I'd like 

to

 10 thank Bob Pease and Mark Higgins for their efforts to

 11 present us with rules regarding an incredible

 12 controversial area of our law.

 13 In the vernacular of the futures 

industries,

 14 there is one term that stands out above all others.

 15 Manipulation. "M" is the Scarlet Letter of the futures

 16 market.

 17 When the Enforcement Division, traders, and

 18 the defense bar speaking of the big "M" they are 

thinking

 19 of a very specific kind of conduct. The intentional

 20 creation of an artificial price, as Commissioner 

Chilton

 21 pointed it out.

 22 It requires having the specific intent to

 

17

 1 affect prices in a manner that is not legitimately

 2 brought about by the forces of supply and demand.

 3 To fully comprehend the scope of this

 4 rulemaking and the advanced notice of proposed 

rulemaking

 5 on disruptive trading practices, one must understand 

the

 6 range of prohibited misconduct under the CEA.

 7 To do this, it helps to the think of the

 8 possible violations of the CEA on a continuum ranging

 9 from the trade price violations such as wash sales to

 10 full manipulation.

 11 New sections provided by the Dodd-Frank Act

 12 and provide additional points on the continuum in the

 13 form of disruptive trading practices and fraud-based

 14 manipulative schemes. The placement of these points on

 15 the continuum will be determined by these rulemakings.

 16 The foundation of the Commission's 

rulemaking

 17 authority is preserved on one end of the continuum to 

the

 18 new section 6(c)(3). These rulemakings mirror the

 19 statutory prohibition to clarify the Commission's

 20 interpretation of price manipulation is an intentional

 21 interference with the legitimate forces of supply and

 22 demand.

 

18

 1 It is important to know this will not 

change

 2 the Commission's enforcement under the existing 

9(a)(2).

 3 Fraud-based manipulative schemes described in new 

section

 4 6(c)(1) differs from big "M" manipulation in that the

 5 prohibited conduct may be intentional or reckless. And

 6 that there is no requirement for such conduct to result

 7 in artificial price.

 8 Taking one step back along the continuum,

 9 disruptive trading practices are also defined in some

 10 instances as reckless conduct.

 11 Accordingly, trade strategy that is 

executed

 12 under unpredictable, atypical market conditions could

 13 misfire and fall under the enumerated disruptive 

trading,

 14 practices.

 15 If the Commission determines that the

 16 strategy was engaged in recklessly, it could find that

 17 the strategy was manipulative even if the trader had no

 18 intent to impact market prices or disrupt the market

 19 itself. This would be an aggressive outcome, but it is

 20 entirely possible under this continuum.

 21 It is therefore incumbent upon this

 22 Commission to be clear about which type of activity is

 

19

 1 prohibited and how we intend to use our new 

authorities.

 2 Last week NFL Commissioner Roger Goodell

 3 notified players that striking an opponent in the head

 4 and neck will result far more significant discipline

 5 including suspension.

 6 When I read this, I realized that

 7 Commissioner Goodell's job is very similar to that of 

the

 8 Commission. He places a high priority on protecting 

the

 9 players from needless injury.

 10 The CFTC also places an equal value on

 11 protecting markets participants from manipulation, 

market

 12 disruptions, fraudulent behavior, and other abuse

 13 practices. The new statutory provisions charge us with

 14 defining controls to ensure that the trading is neither

 15 disruptive nor manipulative.

 16 These provisions also impose high penalties

 17 for conduct which may only be reckless. A rather low

 18 standard under the law to ensure that market 

participates

 19 are incentives to follow the rules. To the NFL's 

credit,

 20 it has been very specific about what it will and will 

not

 21 tolerate.
 22 However, in my opinion, this rulemaking
 

20

 1 will not provide, our rulemaking will not provide 

market

 2 participants with the same comfort or sufficient

 3 direction. This is especially true with regard to

 4 disruptive trade practices.

 5 One would think after requesting this

 6 language in the legislation, the Commission could 

provide

 7 some more details as to how it will interpret the

 8 language on spoofing or trading in the close.

 9 As a result, it is appropriate for the

 10 Commission to receive more feedback from the public to

 11 better refine these definitions and understand how they

 12 might, in fact, impact markets or the players affected.

 13 And I appreciate, Mr. Chairman, you going with advanced

 14 notice of proposed rulemakings to further flush these

 15 out.

 16 We must not lose sight of the technology

 17 investments such rulemakings might require. In order 

to

 18 effectively oversee trading schemes and practices, the

 19 Commission will need to reconstruct the order book and 

to

 20 understand how various bidding strategies have impacted

 21 market practices. Regardless if we apply intent of a

 22 reckless standard, all cases must be supported by the

 

21

 1 facts and empirical data.

 2 As we work through the particular

 3 rulemakings, it is critical to remember that our

 4 responsibility is broader than simply responding to the

 5 last crisis. Going forward, prevention and deterrence

 6 must be the twin goals that are furthered by

 7 anti-manipulation and disruptive trading rules.

 8 Stating upfront that the Commission may

 9 always go back to the instant replay to review the call

 10 does not provide market participants with a fair notice

 11 as to when their strategies will run afoul of the 

rules.

 12 It is my sincere request that the public

 13 provide input on the complicated rulemakings to ensure

 14 that everyone is in agreement of the boundaries and 

fair

 15 play. Thank you.

 16 CHAIRMAN GENSLER: Thank you, Commissioner

 17 O'Malia. I want to thank all of my Commissioners, 

fellow

 18 Commissioners for their comments. And I find my

 19 associating with each of you in a different way. So I

 20 hope it's a third, by the way.

 21 I definitely associate with Commissioner 

Dunn

 22 on the need for resources. I'm going to continue to be

 

22

 1 sort of a happy advocate for resources. And I truly do

 2 hope that when Congress comes back from the election,

 3 that we get the necessary resources to move forward.

 4 I do believe even our estimate of 400 new

 5 staff to incorporate Dodd-Frank may well end up being a

 6 low estimate given the markets that we're to oversee. 

We

 7 probably will have 300 to 400 new registrants. And the

 8 markets are presently seven to nine times the size of 

the

 9 markets that we currently oversee.

 10 And I find myself associating with

 11 Commissioners O' Malia and Chilton, though maybe a 

little

 12 bit different perspectives, on the need to have clearer

 13 rules of the road when handling manipulation an

 14 disruptive trading practices. I do think that we need 

to

 15 enhance or authorities in that regard, and Dodd-Frank

 16 gave us that.

 17 Let me turn over to the staff 

presentations.

 18 The first set of proposed rules that we are considering

 19 relate to something in our Commission which we call 

"Part

 20 40." Part 40 is just part of our rules. And these are

 21 about how we as the Commission approve or consider the
 22 various rules and new products of registrants, that's
 

23

 1 what Part 40 is.

 2 Bella Rozenburg with the Division of Market

 3 Oversight, I guess with support from her boss Rick 

Shilts

 4 at times is going to discuss these proposals.

 5 With that I think I might -- I think I'm

 6 supposed to go through and introduce everybody. So I

 7 will introduce everybody.

 8 The second set of proposals considered 

today

 9 will address the removal of the reliance on credit

 10 ratings and proposals, alternatives to this alliance

 11 reliance. So Adrianne Joves from our Division of the

 12 Office of General Counsel is going to prevent that.

 13 The third set the proposed rulings being

 14 considered relate to the investment of customer funds

 15 under regulations 1.25 and 30.7. And also in that set 

of

 16 rules we'll regard the use of credit rating agencies as

 17 well. And I believe that -- I see Phyllis sitting 

there.

 18 Are you going to present that?

 19 MS. DIETZ: Jon DeBord.

 20 CHAIRMAN GENSLER: So Jon Debord from out

 21 Division of Clearing an Intermediary Oversight will

 22 assist Phyllis and present that.

 

24

 1 The fourth set of proposal describe the

 2 process for reviewing swaps for mandatory clearing 

Eileen

 3 Donovan -- where is Eileen -- there on the second row

 4 will be doing that from the Division of Clearing and

 5 Intermediary Oversight.

 6 The fifth set will be addressing the

 7 discussion about the manipulation standards where I 

think

 8 Mark Higgins and Bob Pease will be coming to table from

 9 the Division of Enforcement.

 10 And then finally, there will be the 

proposals

 11 regarding disruptive practices, and Bob Pease will be

 12 doing that.

 13 In terms of the staff will present the

 14 proposal in each case. And in each these the floor 

will

 15 be open for questions and we will take a vote.

 16 So number one, Bella. I think then if you

 17 want to give a presentation and then we will do a 

motion.

 18 MS. ROZENBURG: Good morning, Mr. Chairman,

 19 Commissioners. Today's staff is recommending that the

 20 Commission approve a number of proposed rulemaking to

 21 implement new rules certification procedures for 

existing
 22 registered entities such as designated contract market
 

25

 1 and derivatives clearing organizations, and for new

 2 registered candidates such as Swap Execution Facilities

 3 and Swap Data Repositories.

 4 The proposed regulation also prohibits 

event

 5 contracts based on certain excluded commodities special

 6 procedures for certain rule changes proposed by

 7 systemically important derivatives clearing 

organizations

 8 or safe codes. And provide for the following of review

 9 periods for certain novel derivative products pending 

the

 10 resolution of jurisdictional determination. I will

 11 address major changes for Part 40.

 12 With respect to rule certification

 13 procedures, under the proposed rules, the Commission 

will

 14 have 10 business days to review certification or will

 15 amend them.

 16 If within 10 business days the Commission

 17 determines that the submission involves a novel or

 18 complex issue or is submitted with an inadequate

 19 explanation or is potentially inconstant with the Act,

 20 then the certification will be stayed for an additional

 21 90 days.

 22 The rule amendment will be certified upon

 

26

 1 expiration of the 90-day review period unless the

 2 Commission objects to the certification.

 3 Under the proposed rule, if the Commission

 4 stays the review for an additional 90 days, then the

 5 Commission will provide a 30-day public comment period.

 6 The Commission will provide notice of the comment by

 7 posting the notice and their submission on the

 8 Commission's website.

 9 With respect to certification procedures

 10 for submission of rules by the SIDCO, the proposed

 11 regulations will require SIDCO to provide the 

Commission

 12 with a 60-day advanced notice of any proposed change to

 13 its rules or procedures that could materially affect 

the

 14 nature or level of risk presented by the SIDCO.

 15 Under the proposed rules, changes that

 16 could materially affect the nature or level of risk are

 17 those that there's reasonable possibility that the

 18 changes could substantially affect the performance of 

the

 19 essential inquiry and settlement function or the 

overall

 20 nature or level of risk presented by the SIDCO.

 21 Such changes could include changes that

 22 materially affect financial resources, participates and

 

27

 1 product eligibility, risk managements, default

 2 procedures, system safeguards, and governance.

 3 The proposed regulation would allow SIDCO

 4 to implement the proposed rule change if the review

 5 period lapses without Commission action.

 6 The proposed rule would allow the

 7 Commission during the 60-day review period to extend

the

 8 review period for an additional 60 days if the proposed

 9 change raises novel or complex issues.

 10 With respect to event contracts, the 

proposed

 11 rule prohibits the listing, trading, or clearing of

 12 products that are based on certain excluded commodities

 13 and that involve, terrorism, assignation, war, gaming, 

or

 14 an activity that is unlawful under any State or Federal

 15 Law. These prohibited activities are specifically

 16 enumerated in the statute.

 17 In addition, the proposed rule provided 

in

 18 the product involved activity similar to that activity

 19 prohibited by the statute. And if the Commission

 20 determines such product to be contrary to the public

 21 interest, then the product will be prohibited in the

 22 future rulemaking.

 

28

 1 If during the review of a new contract, 

the

 2 Commission determines that such product may involve any

 3 of the prohibited activities, the Commission will 

request

 4 that the registered entity suspended the listing or

 5 trading of the product and will conduct a 90-day review

 6 to determine whether the product violates the

 7 prohibitions on certain event contracts. Upon 

completion

 8 of this review, the Commissioner will issue a

 9 determination order.

 10 Finally, under the proposed rules, if the

 11 registered entity submits a product that may have

 12 elements of both a security and a derivative, the

 13 Commission or the SEC may request a jurisdictional

 14 determination from the other agency.

 15 If a jurisdictional determination is

 16 requested, the Commission will toll the applicable

 17 product certification or approval review period until 

the

 18 issuance of a final determination order.

 19 If the Commission or the SEC seeks 

additional

 20 review of the jurisdictional determination, then the

 21 charge order as well as the review period for the 

product
 22 will be stayed until the United States Court of Appeals
 

29

 1 for the District of Columbia circuit issues a final

 2 determination. This review period will resume only 

upon

 3 a finding that the Commission has jurisdiction over the

 4 submission.

 5 That concludes my remarks. I will be happy

 6 to take any questions.

 7 CHAIRMAN GENSLER: Thank you, Bella. The

 8 Chair will now entertain a motion to accept the staff

 9 recommendation and issue the proposed rules regarding

 10 Part 40.

 11 COMMISSIONER O'MALIA: So moved.

 12 COMMISSIONER SOMMERS: Second.

 13 CHAIRMAN GENSLER: With the motion made and

 14 seconded, I would like to open the floor to my fellow

 15 Commissioners to ask any questions.

 16 I just have one, Bella. If you can help to

 17 clarify for the public. In terms of these rules as I

 18 under them, we have a different approach for rule 

review

 19 and product review. The presumption -- is that correct

 20 that product reviews would only happen in a small set 

of

 21 circumstances, but rule reviews might happen more 

often?

 22 MS. ROZENBURG: That is correct. We have

 

30

 1 different procedures for product approval and product

 2 certification versus rule approval and rule

 3 certification. Product certification procedures and

 4 products approve procedures remain largely the same.

 5 With respect to the rule approval 

procedures,

 6 would have this new requirement and applies to rule

 7 amendments, as well. We have this new requirement of 

10

 8 and 90 days.

 9 I just want to be clear that when the

 10 registered entity submits a contract that changes the

 11 terms and conditions of a contract, it is considered to

 12 be a rule amendment. And therefore, it has to follow 

the

 13 new rule amendment certification procedures for 10 and 

90

 14 days.

 15 CHAIRMAN GENSLER: I see. But the goal of

 16 Congress was to give these clearing house rules and 

maybe

 17 the designated market rules. We have 10 days. Most

 18 rules probably within the 10 days would not be novel or

 19 complex and they would go into being.

 20 MS. ROZENBURG: That is correct.

 21 CHAIRMAN GENSLER: And if staff then says 

no
 22 there is something novel, complex, or is systemically
 

31

 1 important clearing house, if it might be a different

 2 term, material, then we have further review in that

 3 period 90 extra days to review it?

 4 MS. ROZENBURG: That's right.

 5 CHAIRMAN GENSLER: Thank you.

 6 MR. SHILTS: And with the opportunity for

 7 public comment during that 90 days.

 8 CHAIRMAN GENSLER: Right. That's a good

 9 point. So if we put it out for the 90 days and we seek

 10 public comment by putting it right up on our website

 11 getting public comment?

 12 MS. ROZENBERG: That is correct. If we're

 13 going to stay, if the Commission is going to stay the

 14 review period for 90 days, then the Commission will

 15 publish a notice on the website along with this

 16 Commission. That will be available.

 17 CHAIRMAN GENSLER: Again, the presumption 

at

 18 the end of the 90 days is that the rule would go into

 19 effect unless the Commission determines by majority 

rule

 20 and so forth that it not go into effect?

 21 MS. ROZENBERG: That is correct.

 22 CHAIRMAN GENSLER: I didn't have anything
 

32

 1 further. Commissioner Dunn?

 2 COMMISSIONER DUNN: Thank you, Mr. 

Chairman.

 3 Bella, could you describe for me the difference in the

 4 procedures that we are currently operating versus the

 5 these proposed procedures on the timeline implementing 

a

 6 new product.

 7 MS. ROZENBURG: On the products or rule

 8 amendments or new rules? For products the procedure, 

as

 9 I said, remain the same. When a registered entity

 10 submits a knew product for certification, this product

 11 will be certified within one business day.

 12 If a registered entity submits a product 

for

 13 approval, they follow the standard procedures that are

 14 currently Part 40. The product will be approved within

 15 45 days or maybe expanded in the rules novel for 

complex

 16 issues.

 17 With respect to rule certification

 18 procedures, this process is different from what we have

 19 currently in Part 40. Right now under current

 20 regulation, when the registered entity submits a rule

 21 amendment or new rule by certification, this rule will 

go
 22 into effect within one business day. One business day
 

33

 1 after it submits the submission to us, provided

 2 submission to the Commission. This will change. Now 

the

 3 Commission will have 10 business days to review

 4 submission before it goes into effect.

 5 As I mentioned, many submission probably 

will

 6 go will -- become effective within 10 business days.

 7 However, is if the submission have one of those novel 

or

 8 complex issues, then the Commission may stay the review

 9 for an additional 90 days and the Commission will 

provide

 10 a notice of comment and post the notice on the 

Commission

 11 website.

 12 COMMISSIONER DUNN: As I understand on that

 13 procedure, we're going from immediate the next day to 

as

 14 long as 160 days. Is that --

 15 BELLA ROZENBERG: I'm sorry, would you 

repeat

 16 your question?

 17 COMMISSIONER DUNN: For a rule then instead

 18 of being certified and going into effect the next day, 

it

 19 will be at least 150 days or up to?

 20 BELLA ROZENBERG: No. The rule will go 

into
 21 effect once the registered entity submits -- once the

 22 Commission receiving a certification, then the 

Commission
 

34

 1 will have 10 business days to review the submission.

 2 If the Commission determines that, you 

know,

 3 it's just this regular submission. It didn't involve 

any

 4 novel or complex issue and it's complete, then the rule

 5 will go into effect upon expiration of 10 business days

 6 review period.

 7 However, within 10 business days Commission

 8 determines that there is a novel or complex issue or 

the

 9 submission is incomplete, then it will inform the

 10 registered entity that it will stay the review for an

 11 additional 90 days.

 12 And after that expiration of the 90 days, 

if

 13 the Commission didn't act on it or didn't inform the

 14 registered entity, the rule will go into effect unless

 15 the Commission notifies otherwise.

 16 CHAIRMAN GENSLER: Commissioner Dunn, I 

think

 17 what you're asking what the total review period would 

be

 18 for a submission that raises novel issues. It would be

 19 the 10 business days plus the 90 days. So around 105

 20 days or something like that, if that's what you're

 21 asking?
 22 COMMISSIONER DUNN: Then how is that
 

35

 1 different from current process?

 2 MS. ROZENBERG: Currently, rule 

amendments

 3 and rule certifications are effective within one 

business

 4 day. So there is 10 and 90 days.

 5 COMMISSIONER DUNN: Thank you.

 6 CHAIRMAN GENSLER: Thank you, 

Commissioner

 7 Dunn. Commissioner Sommers?

 8 COMMISSIONER SOMMERS: Thank you, Mr.

 9 Chairman. My questions are with regard to the review 

of

 10 event contract. If I understand correctly the process

 11 for self-certification of the event contracts they 

would

 12 follow the same procedures. That if you self-certify,

 13 they can go into effect the next business day as long 

as

 14 everything is in order.

 15 And my question is: What kind of review do

 16 we contemplate under 40.11 that would allow us the time

 17 to review an event contract within one business day?

 18 MS. ROZENBERG: Well, currently, under the

 19 Dodd-Frank Act there are certain contracts, event

 20 contracts that are explicitly prohibited that will be 

in

 21 Part 40. If a registered entity submits an even
 22 contract, and its opinion does not involve one of those
 

36

 1 prohibited activities, it will file a regular

 2 certification. It will the follow product 

certification

 3 procedures under 40.2.

 4 So during that staff conduct review of

 5 certifications or they become in effect within one

 6 business day, so during that review, the Commission 

staff

 7 determines that one of those contracts may involve one 

of

 8 prohibited activities, the Commission, the staff will

 9 request that the registered entity will suspend the

 10 trading of this contract and will conduct a 90-day 

review

 11 as required by Dodd-Frank Act.

 12 So within 90 days if the Commission

 13 determines that this contract involves the similar to 

one

 14 of the prohibited activities and is contrary to public

 15 policy, then the Commission will issue determination, 

and

 16 it will issue a rule prohibiting this type of a 

contract.

 17 So basically for now the procedure is going

 18 to be if the registered entity thinks that its contract

 19 does not involve one of the prohibited activities, that

 20 will fall under 40 the regular certification procedure.

 21 And it's the staff's responsibility to look for this
 22 contract and, you know, to see if, they may be 

prohibited
 

37

 1 understand 40.12.

 2 MR. SHILTS: Yes. There's no specific

 3 statutory stay or whatever for these types of 

contracts.

 4 So presumably, we get them in.

 5 For those that are enumerated are pretty

 6 clear as to what they mean. So it's mostly the staff

 7 have to look at them and say this is potentially 

similar

 8 to one of these. It raises questions. We immediately

 9 get back to the Exchange. And mostly likely they

 10 wouldn't list it until this determination is made with

 11 the 10-to-90-day provision for rule certification 

during

 12 the specific statutory provision for that. So it's

 13 something we have to work with the Exchange.

 14 But typically, if the Exchange has a

 15 contract that they think is questionable, as we've seen

 16 in the past, they usually talk to us in advance. And

 17 we'll have some notice about that.

 18 COMMISSIONER SOMMERS: And I assumed that.

 19 But I guess I just had some concerns about whether we

 20 were comfortable with that one day review.

 21 MS. ROZENBERG: Dodd-Frank didn't give us 

the

 22 authority to play any sort of stay on the review.

 

38

 1 COMMISSIONER SOMMERS: Okay. Thank you.

 2 CHAIRMAN GENSLER: And just for the public,

 3 these enumerated items are terrorism, war, gaming --

 4 MS. ROZENBERG: Assassination.

 5 CHAIRMAN GENSLER: -- assassination.

 6 MS. ROZENBURG: Any contract that my 

violate

 7 any State or Federal law. It's pretty clear.

 8 CHAIRMAN GENSLER: Hopefully, terrorism,

 9 assassination, these things are pretty clear, but there

 10 may have been some ambiguity at the time. Anything,

 11 Commissioner O'Malia?

 12 COMMISSIONER O'MALIA: So I'm clear, if the

 13 movie guys came in under this language and were not

 14 previously banned, we will have to certify them in one

 15 day?

 16 MS. ROZENBERG: Well, the contract will

 17 go into effect, but certifying doesn't mean approval.

 18 The Commission can come back anytime an ask them if we

 19 determined that one of the activities is involved in

 20 prohibited activity, we can request now under the new

 21 authority, we can request the registry and stop trade

 22 will conduct review.
 

39

 1 In my opinion, that will become -- fall 

under

 2 the issue of whether this event contract is gaming or

 3 not. But it's clearly not assignation or war that will

 4 be the most controversial issue to define what gaming 

is.

 5 MR. SHILTS: Typically, as with those, the

 6 Exchanges don't certify them and list them immediately.

 7 They wouldn't want the legal uncertainty of not knowing

 8 what the Commission is going to do.

 9 So even though I guess conceivably that 

could

 10 happen, our experience is that if they think there's 

any

 11 sort of a question, they walk talk to the staff and the

 12 Commission as to what they think, with respect to these

 13 new rules, whether they think they might violate, the

 14 Commission my have some concerns for them.

 15 COMMISSIONER O'MALIA: So your 

recommendation

 16 to the events contracts entity people might be 

proposing

 17 event contracts and then expect a 90-day review?

 18 MR. SHILTS: If it relates to some of those

 19 and anything that's listed in that list. It wouldn't 

be

 20 something else like a cropped deal or something or

 21 whatever.
 22 CHAIRMAN GENSLER: Rick, I understand --

and
 

40

 1 I think it's a very good question. I understand that

 2 today, prior to Dodd-Frank, if one of the designated

 3 contracts markets of the Chicago Mercantile * Exchange

 4 had decided to do a movie future, they could selfcertify

 5 it in one day.

 6 But, you know, it was just because of the

 7 unique circumstance where somebody is coming in for a

 8 both, they were both setting up a new exchange and 

doing

 9 a new product. Is that right?

 10 MS. ROZENBERG: That's right.

 11 CHAIRMAN GENSLER: As they say, timing is

 12 everything. But now those are banned. Any other

 13 questions? There's a motion on the floor and seconded.

 14 So I would like to just, if there are no further

 15 questions, thank the staff and for their presentation.

 16 And I will say I do support this rule. I

 17 will have my little statement published in the Federal

 18 Register, but I do support the rule. I think it does

 19 give market participants clarity on how we will do 

this.

 20 The Dodd-Frank Bill set up the 10 and 90

 21 day procedure and it systematically imported contract

 22 clearing organization 60 and 60. But I think the rule 

is

 

41

 1 an excellently drafted trying to give market 

participants

 2 the clear procedures to do that. But I didn't know if

 3 anybody else wanted to say anything.

 4 COMMISSIONER CHILTON: I'd like to thank 

the

 5 staff for doing a great job on this. We appreciate it.

 6 CHAIRMAN GENSLER: So if there are no other

 7 views, all those in favor say "Aye"?

 8 (Chorus of ayes.)

 9 CHAIRMAN GENSLER: Any opposed? The ayes

 10 having it, we'll send it long to the Federal Register.

 11 With that, I think we might have swap out of some folks

 12 here. Adrianne Joves I think will present with the

 13 General Counsel's office with regard to credit rating

 14 agency.

 15 As I understand the Dodd--Frank Act, I 

can't

 16 remember. It must have been Title 9 said we have to 

stop

 17 relying on that in any of our rules. Being the first 

to

 18 review to see where we relied, Adrianne will tell us

 19 probably the seven places we do that.

 20 And Adrianne Joves is assisted by our 

Deputy

 21 General Counsel. And his entire staff have been
 22 tirelessly working on all of the rules because he heads
 

42

 1 up the regulatory piece from the General Counsel's

 2 office. Adrienne?

 3 MS. JOVES: Thank you, Chairman Gensler.

 4 Before I provide a brief summary on our proposal and

 5 credit rating, I don't want to recognize and thank our

 6 other team members. Jon DeBord, who will shortly give

 7 you another proposal and another rulemaking, for all of

 8 the efforts he attributed to on a proposal that we will

 9 be discussing on credit rating.

 10 I also wanted to briefly thank the other

 11 federal financial regulators who provided some very

 12 valuable feedback on this issue for us, especially the

 13 Securities and Exchange Commission and the FDIC.

 14 Title 9 of the Dodd-Frank Act, as you know,

 15 included findings that credit ratings are of systemic

 16 importance. And it also found that, in the recent

 17 financial crisis, inaccurate credit ratings contributed

 18 significantly to the mismanagement of risks by 

financial

 19 institutions and by investors. As a result, Congress

 20 found that increased accountability on the part of 

credit

 21 agencies is necessary.

 22 Title 9 contains several provisions that 

are

 

43

 1 designed to improve the accountability of credit rating

 2 agencies including Section 939A.

 3 939A requires all federal agencies to do

 4 three things: All federal agencies are required to

 5 review the regulations for any assessment of the

 6 credit-worthiness of the security or money market

 7 instrument and your reliance on that kind of 

assessment.

 8 It requires that all federal agencies to

 9 remove those references ands replace them with the

 10 substitute standard that the agencies deem as

 11 appropriate.

 12 And the third requires a report to Congress

 13 at the end of that process.

 14 Upon completing our required review of our

 15 relations, we found five instances that contained

 16 reference to credit ratings in relation to financial

 17 instruments. I will briefly identify the regulations

 18 that we are proposing to remove those references to

 19 credit ratings and the substitute standards that we're

 20 proposing along with those.

 21 First, our required review identified two

 22 regulations that addressed in what foreign depositories
 

44

 1 future commission merchants and designated clearing

 2 organization may place customer funds.

 3 Commission regulation 30.7 and 1.49

 4 currently permit FCMs or DCOs to place customer funds 

in

 5 foreign depositories that holds either in excess of $1

 6 billion of regulatory capital or whose commercial paper

 7 or long-term debt instruments is rated in one of the 

two

 8 highest rated categories by at least one credit rating

 9 agency. We are proposing to amend both of those

 10 regulations in concert albeit in two separate

 11 rulemakings.

 12 Jon is going to be discussing another

 13 proposal related to Commission Regulation 30.7 shortly.

 14 Our proposal for 1.49 includes removing the

 15 reference to credit rating and substituting the 

standard

 16 the foreign depositories must hold in $1 billion in

 17 regulatory capital.

 18 The proposal also requests comments

 19 specifically on whether a leverage ratio or capital

 20 adequacy ratio requirement consistent with or similar 

to

 21 the standards that have been included in the recent

 22 accords would be an appropriate additional standard to

 

45

 1 include in our regulations.

 2 Next, our review identified a third

 3 regulation that referenced credit ratings for financial

 4 instruments.

 5 Commission Regulation 4.24 requires 

Commodity

 6 Pool Operators to disclose the type of commodity 

interest

 7 or other interest in which the pool will be trading,

 8 including by disclosing the investment rating of the

 9 pool's interest.

 10 We are proposing to remove the reference to

 11 investment ratings for 4.24 and replace it with the

 12 phrase "credit-worthiness." The proposal requests

 13 comment on this alternative standard.

 14 Finally, the last two regulations that we

 15 identify that contain some reference to credit rating 

as

 16 they relate to financial institutions or financial

 17 instruments -- sorry -- will no longer make any 

reference

 18 to credit-worthiness due to other unrelated proposed

 19 amendments that we are going to be noticing in other

 20 proposed rulemakings.

 21 As we mentioned a couple of times, Jon

 22 DeBord will be discussing the wholesale amendments to

 

46

 1 Regulation 1.25 that the staff is going to proposing.

 2 And as a result of those amendments, those proposals,

 3 there will no longer be any need to reference credit

 4 rating in Commission Regulation 1.25.

 5 Similarly, the proposal that Bella just

 6 walked through on Part 40 contained reference to the 

word

 7 "rating" in Appendix A Guideline 1 as a way to help

 8 disclose the characteristics of the certain contracts

 9 listed on DCMs.

 10 Because Part 40, the Appendix say that Part

 11 40 will be removed in its entity by Bella's proposal,

 12 also don't have to make any changes to that regulation 

in

 13 this proposal. Thank you. And I will be happy to 

answer

 14 any questions you have.

 15 CHAIRMAN GENSLER: Thank you very much,

 16 Adrianne. With that, I would entertain a motion.

 17 COMMISSIONER SOMMERS: So moved.

 18 COMMISSIONER O'MALIA: Second.

 19 CHAIRMAN GENSLER: And then I just have one

 20 question because I keep thinking there were seven

 21 references and you referred to five, so my math has 

been

 22 faulty today.

 

47

 1 MS. JOVES: You were correct that there

 2 were seven total references. So all of our regulations

 3 that talked about any reference to credit rating.

 4 Dodd-Frank required us to look for assessments of

 5 credit-worthiness related securities or money market

 6 instruments. There were only five references in our

 7 regulation that talked about the financial investments 

or

 8 those types of things.

 9 CHAIRMAN GENSLER: I see. And between 

your

 10 proposed rule and Jon's proposed rule and maybe the 

Part

 11 40 rule that we just voted on, do we address all seven 

or

 12 just five?

 13 MS. JOVES: We addressed five.

 14 CHAIRMAN GENSLER: So there are two that

 15 we're not actually addressing?

 16 MS. JOVES: The two that we're not 

addressing

 17 are related to the credit-worthiness of counter parties

 18 and not relating to the types of investment vehicles or

 19 those kind of things, which is required under DoddFrank.

 20 CHAIRMAN GENSLER: I see. So the math

 21 again is there are seven references, but through these
 22 three different rules today, we're addressing the five
 

48

 1 that the Dodd-Frank Act requires?

 2 MS. JOVES: That's correct.

 3 CHAIRMAN GENSLER: Thank you. 

Commissioner

 4 Dunn?

 5 COMMISSIONER DUNN: I have no questions 

on

 6 this.

 7 CHAIRMAN GENSLER: Thank you. Seeing 

that

 8 there are no further questions, and I will throw a 

little

 9 statement in the Federal Register why I support it. If 

I

 10 can could hear all those in favor say "Aye"?

 11 (Chorus of ayes.)

 12 CHAIRMAN GENSLER: Any opposed? The ayes

 13 being unanimous, we will send yours along to Federal

 14 Register, as well, for public comment. How many days 

for

 15 public comment is yours?

 16 MS. JOVES: We have a 30-day public 

comment

 17 period.

 18 CHAIRMAN GENSLER: On the first one it 

was

 19 probably 60. So the first one was 60 days public

 20 comment. Thank you.
 21 With that, we're going to move forward to

 22 the next rulemaking. So John you can come up. I 

expect
 

49

 1 there will be a few more questions on this one. Jon 

will

 2 be ably supported by his boss or his boss' boss Phyllis

 3 Dietz, who was also the team leader on the Clearing 

Rules

 4 and Ananda Radhakishnan, who runs the whole Clearing an

 5 Intermediary Oversight Division. Jon?

 6 MR. DEBORD: Good morning. I'm Jon 

DeBord

 7 with DCIO. I'm pleased to recommend that the 

Commission

 8 approve the publication in the Federal Register, the

 9 Federal Register notice questioning public comment for

 10 rules opposing, for proposed rules regarding investment

 11 customer funds and secured funds of Regulation 1.25 and

 12 30.7. I will go over the background of the rule and 

then

 13 an overview of the proposal and then take any 

questions.

 14 Under Section 4(d)(a)(2) of the Commodity

 15 Exchange Act, customer segregated funds may be invested

 16 in the obligations of the United States and obligations

 17 fully guaranteed as the principal and interest by the

 18 United States such as treasuries and general 

obligations

 19 of any State or any political subdivision thereof.

 20 Municipal securities. In December 2000 and
 21 again in 2004 and 2005, the Commission amended 

Regulation

 22 1.25 to include additional permitted investments such 

as
 

50

 1 GSE Securities, CDs, commercial paper, corporate l 

notes

 2 and bonds, foreign sovereign debt, and interest in 

money

 3 market mutual funds.

 4 Our amendments also include additional

 5 safeguards such as credit ratings requirements, issue 

of

 6 base concentration limits, or requirement that all

 7 investments be readily marketable and sufficiently

 8 liquid. Amendments regarding new purchase agreements 

and

 9 certain requirements regarding in-house transactions, 

as

 10 well as other changes.

 11 In 2007 DCIO wants to review to learn 

more

 12 about the nature and extent by FCMs and DCOs. It was

 13 voluntary. We received an overwhelming response from

 14 FCMs that were very helpful. It helped shape our views

 15 as lead to our proposal.

 16 As we were wrapping up 2008 that review, 

we

 17 experienced a financial crisis. This also helped shape

 18 our views on the safety and liquidity of certain

 19 permitted investments during times of market 

volatility.

 20 In May of 2009, the Commission issued a
 21 name regarding this topic seeking public comment

 22 regarding regulatory requirements that might better
 

51

 1 safeguard customer funds. We received 12 comment 

letters

 2 and reviewed them and relied on them as well to 

formulate

 3 our proposal.

 4 As noted, this is not technically a

 5 Dodd-Frank rulemaking. However, this is a link to

 6 Dodd-Frank. And as Adrianne mentioned, which is the

 7 Section 939A required the review and removal of credit

 8 rating. She mentioned several credit ratings appear in

 9 1.25 and 30.7. That's the background.

 10 Our proposal is as follows: First, I 

will

 11 run through the list of permitted investments.

 12 First, we're proposing no changes to treasuries. We'll

 13 be leaving them safe as liquid and we're not going to

 14 limit them in the proposal.

 15 We propose that municipals remain a 

committed

 16 investment. However, due to liquidity and volatility

 17 concerns, we are recommending proposing a 10 percent

 18 asset-based concentration limit. That means that an 

FCM

 19 can invest the maximum of 10 percent of their total

 20 assess in segregation municipals.

 21 Third, GSE Securities. Currently, the 

term
 22 "GSE Securities" incorporates two different types of
 

52

 1 entities. The first is the GSE, which is a privately

 2 owned and operated entity charted by Congress. It has 

an

 3 implicit guarantee of the federal government; examples

 4 might be Fannie Mae Freddie Mack.

 5 Second, public agency -- I'm sorry. U.S.

 6 Agency. U.S. Agency is an entity of the Federal

 7 Government. It has explicit guarantee. We're prosing 

to

 8 limit written investments into just U.S. Agency

 9 obligations in the second type. We're also proposing a

 10 50 percent asset-based concentration for those

 11 investments.

 12 CDs. A CD is another investment type 

that

 13 include for our purposes two categories that we will

 14 distinguish between. The first is non-brokerage CDs.

 15 The second is brokerage CDs.

 16 Non-brokerage CDs is what people 

typically

 17 think of when they think of a CD. An FCM purchased 

from

 18 the bank. A CD has a maturity date that the FCM wants 

to

 19 redeem early, it simply goes to the bank and redeems 

it.

 20 Any penalty is limited to a penalty involved in the

 21 interest.
 22 An non-broker CD in my opinion is a very
 

53

 1 different instrument. It's purchased on large size by 

a

 2 broker and sliced up and sold individually to 

purchasers.

 3 If the purchaser chooses to redeem early,

 4 it cannot go directly to the bank. Its only option is 

to

 5 go into the secondary market, which can often be

 6 illiquid.

 7 Therefore, we're proposing to limit CDs 

to

 8 just non-brokerage CD's. We're also proposing a 25

 9 percent asset-based concentration limit to that

 10 investment.

 11 Commercial paper, corporate notes and 

bonds,

 12 we're proposing to limit those to only commercial paper

 13 and corporate notes and bonds that are guaranteed by 

the

 14 Temporary Liquidity Guarantee Program as administered 

the

 15 by the FTIC.

 16 Commercial paper, we're proposing a

 17 commercial paper having a 25 percent asset-based

 18 concentration limit. We're also proposing that 

corporate

 19 notes and bonds up to 25 percent asset-based

 20 concentration.
 21 We're also proposing to eliminate foreign

 22 sovereign debt. First, over the last few years its
 

54

 1 experienced certain instances of volatility. And 

second,

 2 it's been negligently used by instruments by FCMs.

 3 Eight. Money market mutual funds. We're

 4 proposing to maintain money market mutual funds

 5 investment 1.25. However, due to the safe and 

liquidity

 6 certain during periods of market volatility, we're

 7 proposing a 10 percent asset-based concentration limit.

 8 We're also proposing a two percent

 9 issuer-based concentration limit for families of funds.

 10 Additionally, filing of those permitted

 11 investments, CD's, corporate notes and bonds, 

commercial

 12 paper, municipals -- is that five? And GSE agencies 

all

 13 have certain requirements regarding credit ratings. As

 14 Adrianne mentioned, we're proposing to eliminate all of

 15 those.

 16 A few other notes regard 1.25. We're

 17 proposing to eliminate in-house transactions.

 18 We're proposing to eliminate the purchase

 19 agreements with affiliates.

 20 We're proposing a five percent 

counterparty

 21 concentration limit for repurchase agreements. The

 22 situation we're trying to avoid there is where a FCM

 

55

 1 re-certification or repurchase agreement takes a 100

 2 percent of its cash into a repo and then the 

counterparty

 3 default. This will limit that to a five percent

 4 counterparty concentration. So we have a safeguard

 5 against that situation. The additional technical

 6 amendments to 1.25 I can discuss if you want me to.

 7 30.7 regards customers investing in 

foreign

 8 futures. Currently, there's not an enumerated list of

 9 investments that customer are limited to rather than

 10 saying a more general obligation to investment in only

 11 liquid investments that are submitted to meet 

obligations

 12 to customer. We're proposing today to limit 30.7 funds

 13 to the investment limitations of 1.25.

 14 We're also, as Adrianne mentioned, are

 15 proposing to eliminate references to credit agreements

 16 along with a couple of other amendments to 30.7.

 17 This concludes the overview. Thank you. I

 18 will be happy to answer any question.

 19 MR. RADHAKISHNAN: Just to add one point.

 20 1.25 goes to what a FCM and a DCO can do. Once it gets

 21 money or securities from a customer, what are you 

allowed

 22 to do with the assets that you get from the customer.

 

56

 1 1.25 does not go towards what an FCM can take of its

 2 customers. That is usually guided by Exchange rules.

 3 For example, the CME, for example, has a 

rule

 4 that it direct to its member FCM as to what they can

 5 accept from its customers. So I want to make sure this

 6 information is once you get the money in, what can you

 7 do.

 8 CHAIRMAN GENSLER: Thank you Jon and Ananda

 9 and Phyllis for supporting it. With that, I will

 10 entertain a motion to accept the staff's 

recommendations.

 11 COMMISSIONER SOMMERS: So moved.

 12 COMMISSIONER CHILTON: Second.

 13 CHAIRMAN GENSLER: With that, there are 

some

 14 discussions. Ananda, as I under it, this is only if 

that

 15 futures commission merchant or the clearing 

organization

 16 takes cash, what he can do with the cash. Is that what

 17 you're saying?

 18 MR. RADHAKISHNAN: Either cash or any other

 19 type of collateral that it allow to accept. For 

example,

 20 a customer may give treasuries to an FCM. We're

 21 proposing to allow them to engage in reversals in doing
 22 repos.
 

57

 1 CHAIRMAN GENSLER: But if the Exchange 

allows

 2 them to take what I will a non-permitted asset here, 

this

 3 rule will not force them?

 4 MR. RADHAKISHNAN: Correct. It will not.

 5 CHAIRMAN GENSLER: They can do that?

 6 MR. RADHAKISHNAN: Sure.

 7 CHAIRMAN GENSLER: If the Exchange says you

 8 can take municipals or corporate --

 9 MR. RADHAKISHNAN: Correct.

 10 CHAIRMAN GENSLER: -- or money market funds

 11 created in 10 percent --

 12 MR. RADHAKISHNAN: Correct.

 13 CHAIRMAN GENSLER: -- they can continue to 

do

 14 that?

 15 MR. RADHAKISHNAN: Correct.

 16 CHAIRMAN GENSLER: This is basically --

well,

 17 what do you with it?

 18 MR. RADHAKISHNAN: Once you bring it in, 

what

 19 can you do with it. Once the FCMS accepts something.

 20 CHAIRMAN GENSLER: Right. Basically, 

that's

 21 cash, then?
 22 MR. RADHAKISHNAN: Yes.
 

58

 1 CHAIRMAN GENSLER: The other question for 

Jon

 2 as I understand maybe it's five -- I might be counting 

it

 3 wrong. I've been counting poorly today -- but that 

there

 4 may have been four or five areas where we had to 

address

 5 this because it relates to ratings, rating agencies in

 6 sovereign debt, rating agencies from municipals, that 

how

 7 we find ourselves in this position. Is that correct?

 8 MR. DEBORD: That is correct.

 9 CHAIRMAN GENSLER: And in some instances 

like

 10 sovereign, you say there's such negligible use of it

 11 occurring, we don't have a ready alternative to 

ratings.

 12 MR. RADHAKISHNAN: Right. And the other

 13 issue with sovereign is you have two risks. You've got

 14 liquidity risks and the currency risk, as well.

 15 CHAIRMAN GENSLER: Nonetheless, we don't 

have

 16 a good alternative.

 17 MR. RADHAKISHNAN: Correct. We don't.

 18 CHAIRMAN GENSLER: Your staff 

recommendation

 19 is that it's not used that much?

 20 MR. RADHAKISHNAN: Correct.
 21 CHAIRMAN GENSLER: But then getting to an

 22 area where Commissioner O'Malia spoke to and I'm
 

59

 1 supportive of this proposal -- and it's just that, a

 2 proposal -- but I think the public should commence on 

it.

 3 Why did you decide to limit money market funds to 10

 4 percent that Commissioner O'Malia raised?

 5 MR. RADHAKISHNAN: Our big concern was with 

a

 6 significant money market fund or reserve fund broke the

 7 bank. That was described in government money market

 8 fund. But, as we found out, funds that are described 

as

 9 government money market funds do not necessarily have 

to

 10 invest all of their money in government securities. So

 11 that fund had significant holdings of Lehman commercial

 12 paper.

 13 One our rules said that if you want to be a

 14 money market that wants to participate in our program,

 15 you've got to allow for next-day redemption. The SEC

 16 rules allow for seven-day redemptions. But we say 

that's

 17 nice. If you want to participate in our rule, you must

 18 allow for next-day redemption and you're offering

 19 documents have to show that.

 20 Two things happened. That fund broke the

 21 bank and applied to the SEC for a waiver of the nextday
 22 redemption. In fact, the SEC I think said you don't 

have
 

60

 1 to redeem it.

 2 So we were left with the situation where 

FCMs

 3 had significant investments in that particular money

 4 market fund. And there was a lot of confusion as to 

when

 5 that fund was able to return money to customers.

 6 We were working on a daily basis with staff

 7 of the SEC to find out the answer to when is this fund

 8 going to pay the customer back, and how much is it 

going

 9 to pay back.

 10 As I said before, I guess in this was an

 11 issue that hadn't confronted the SEC staff for so some

 12 time. So there was a lot of confusion. It was clear 

the

 13 value of the fund was not zero. That asset value was 

not

 14 zero because they had a lot of investments. The issue

 15 was what was the value and when did you realize it.

 16 And, eventually, we began to make 

decisions

 17 as to how to value that fund. And we issued a 

redemption

 18 letter. Basically, a graduating scale downward toward

 19 where we said after a particular point in time value it

 20 90 cents to the dollar.

 21 And that was based on the value, the market
 22 value of investments the fund did have, which were not
 

61

 1 under water. The Lehman stuff, zero value. But the 

rest

 2 of the stuff, it was sold. Finally, there was a

 3 resolution. And I think people got more than 90 cents 

on

 4 the dollar.

 5 But the object of the story is: Once what

 6 people thought were very safe investments are not

 7 necessarily so. And, to our knowledge, there is no

 8 government guarantee. There is a Temporary Grantee

 9 Program for money market funds. But to this day, we 

are

 10 not aware of any money market fund that has a guarantee

 11 of that name.

 12 So basically we want to make sure that --

 13 these are investments that other people make for 

customer

 14 money. I think that needs to be born in mind. This is

 15 not what the customer tell you to do. This is what the

 16 FCM and the DCOs does with customer funds. And our

 17 regulations permit FCMs and DCOs to keep the spread.

 18 They're not obliged to give their earnings back to the

 19 customer. So we want to make sure that investments are

 20 of customer money are made very safe. And that's why

 21 we're proposing the limitation to on money market 

funds.

 22 MS. DIETZ: I would also just add, putting

 

62

 1 this into a broader context, there is an overarching

 2 requirement that the FCM or DCO investment be objective

 3 of preserving principal and maintaining liquidity.

 4 And, technically, the reserve primary fund

 5 met all of the requirements of 1.25. It had next-day

 6 redemption. It was a 2(a)(7) fund. There was nothing

 7 wrong with the investment. But, as it turns out, it

 8 didn't meet the overarching requirements.

 9 And liquidity is particularly important, 

and

 10 we just made a judgment as to what we thought an

 11 appropriate threshold would be for what we now 

understand

 12 to be the nature and characteristics of money market

 13 mutual funds at this point.

 14 CHAIRMAN GENSLER: I think that you 

included

 15 -- we have documents, but you included it. I can't 

find

 16 it. Do we have a specific set the questions about 

money

 17 market funds? We way we request comments on money 

market

 18 funds investments should be limited to treasuries or

 19 those, et cetera , et cetera. But do we actually,

 20 specifically ask about this 10 percent limit?

 21 MS. DIETZ: Yes.
 22 CHAIRMAN GENSLER: We do. Okay. We do. I
 

63

 1 have one other question that came up. And I didn't

 2 follow the discussions on GSEs. I understand that GSEs

 3 are not guaranteed by the government and all that. But

 4 what is the limit that in the rule? And maybe this is

 5 off of Commissioner O'Malia's question, but what are we

 6 say specifically on GSEs?

 7 MR. DEBORD: Do you have the asset-based

 8 concentration limit? The asset-based concentration 

limit

 9 for U.S. Agency obligation is 50 percent. There's

 10 already --

 11 CHAIRMAN GENSLER: Five zero?

 12 MR. DEBORD: Five zero. There's already a 

25

 13 percent issuer-based limitation. So, at most, an FCN 

can

 14 have two 25 perfect investments totaling 50 percent in

 15 U.S. Agency obligations.

 16 CHAIRMAN GENSLER: So it's not we have a 50

 17 percent limitation, it's just that you're saying that 

we

 18 have a 25 percent limit because there's two, Fannie Mae

 19 Freddie Mac?

 20 MR. RADHAKISHNAN: No. That's not true. We

 21 actually proposing a 50 percent limit. Right now under

 22 the current law there is no limit. So 100 percent of

 

64

 1 your investments can be in GSEs.

 2 We're proposing two things: These 

entities,

 3 GSE government corporations, they must be fully,

 4 explicitly backed, by the Full Faith & Credit Act of

 5 United States.

 6 CHAIRMAN GENSLER: But they're not.

 7 MR. RADHAKISHNAN: That is right. There is

 8 one.

 9 MR. DEBORD: The important distinction

 10 between GSEs and their private entities and U.S.

 11 agencies, which ae entities for the Federal Government.

 12 The first is having implicit backing of the United

 13 States. So Fannie Mae and Freddie Mac are not actually

 14 explicitly guaranteed.

 15 U.S. agencies like Ginnie Mae, small 

business

 16 administration are federal entities. They are 

explicitly

 17 backed by the Full Faith & Credit Rating by the United

 18 States. That's the distinction that we made. On top 

of

 19 that we add 50 percent asset-backed concentration limit

 20 and a 25 percent issuer-based limit

 21 So, Commissioner O'Malia -- if we're

 22 allowed to deliberate -- you're thinking it should be

 

65

 1 less than 50 percent, just so I can learn more here?

 2 COMMISSIONER O'MALIA: No. I think these

 3 rules are overly prescriptive. We have a limit of 10

 4 percent on money markets. We have a 50 percent limit 

on

 5 these GSEs, but one only GSE actually qualifies. So

 6 we're putting -- you're allowed to put 50 percent of 

your

 7 money into one entity based on Ginnie Mae, I believe.

 8 MR. RADHAKISHNAN: True. But on the flip

 9 side, that entity is explicitly backed by the Full 

Faith

 10 & Credit of United States Government.

 11 COMMISSIONER O'MALIA: Why don't we just 

put

 12 it all in treasuries and Ginnie Mae and just get over 

it.

 13 Money markets are, you know, I'm concerned that you're

 14 saying that money markets are not some place where 

people

 15 should not put their money anymore.

 16 MR. RADHAKISHNAN: I don't think that we 

are

 17 saying that. I think what we are saying is that --

 18 COMMISSIONER O'MALIA: This may be news to

 19 the Fed, by the way.

 20 MR. RADHAKISHNAN: I think what we're 

saying
 21 is want you want to do with your money is your 

business.

 22 But if you're investing other people's money, it should
 

66

 1 be safe. That's the overarching message because the 

time

 2 when you need it the most, as we saw in 2008, you know,

 3 there's a flight to equality, and that' that where you

 4 have issues. Tether

 5 We want to make sure that in a time when 

FCM

 6 or a DCO needs to get access to -- and this is

 7 tessentially marginal -- that there be no instances in

 8 which untethered access to liquid assets, that there's 

a

 9 minimalization as to when there is a barrier.

 10 CHAIRMAN GENSLER: So, as I understand it, 

I

 11 find myself -- I mean, I'm voting for this rule. I 

sense

 12 you might not be. But it's a proposal, and we'll get

 13 comments. Is that I'm very interested on the public 

view

 14 on this 10 percent. It's really that which, the GSE

 15 thing, now that we've clarified it, that Ginnie Mae can

 16 be up to half of that portfolio?

 17 MR. RADHAKISHNAN: Right.

 18 CHAIRMAN GENSLER: That's not Fannie and

 19 Freddie?

 20 MR. RADHAKISHNAN: No. It's not Fannie and

 21 Freddie because Fannie and Freddie are not explicitly
 22 guaranteed. Now, the reason we left a reference to 

GSE,
 

67

 1 there might be in the future, the Federal Government 

may

 2 explicitly back the dead instrument.

 3 CHAIRMAN GENSLER: But they haven't now.

 4 MR. RADHAKISHNAN: But they haven't now.

 5 That's right. And we admit that.

 6 CHAIRMAN GENSLER: Phyllis?

 7 MS. DIETZ: I would just like to clarify on 

a

 8 couple of points. As far as GSEs, Government Sponsored

 9 Enterprises, that was a term that we use and use

 10 currently. And we have become aware now since the 

Fannie

 11 and Freddie problems that there are two different types

 12 of agency securities, as Jon mentioned.

 13 There are U.S. government corporations like

 14 Ginnie Mae. And then there are technically GSEs that 

are

 15 Fannies and Freddies. But there's actually -- and I

 16 believe its Title 31 -- an enumerated list of U.S.

 17 government corporations. And the idea is there is a 50

 18 percent limit on U.S. government agencies, what we're

 19 calling agency securities that are backed by the Full

 20 Faith & Credit of the U.S.

 21 So as an opposite, that's only the Ginnie 

Mae

 22 type corporations, but we include within the definition

 

68

 1 of GSE. So at such time we don't have an implicit, but

 2 an explicit guarantee, if that should happen, those 

would

 3 be encompassed within our regulation. We don't have to

 4 go back and amendment it.

 5 There is, however, a 25 percent issuerbased

 6 concentration limit and today we're not changing that.

 7 So indeed even though up to 50 percent of a portfolio 

of

 8 total assets segregation could be in these government

 9 agencies securities only 25 percent of total assets can

 10 be in securities of one issuer.

 11 So there are different types of 

concentration

 12 limits: There's issuer-based and that which goes to

 13 credit risk. And then there is asset-based or

 14 instrument-based which goes to the category of the

 15 investment.

 16 So, for example, with money market mutual

 17 funds, there is a 10 percent asset-based limit, which

 18 would apply to total assets and say, you know, any 

money

 19 market mutual fund. And then there is a two percent

 20 issuer-based limit related to family of funds.

 21 CHAIRMAN GENSLER: I think I understand 

now.
 22 I'm supporting the rule. I think Commissioner Dunn
 

69

 1 sometimes says that it's more liberal when you're

 2 supporting proposals.

 3 I think this is a necessary rule because of

 4 the credit rating piece. There's like if five or six

 5 place that we have to, in essence, clean up 1.25 for 

that

 6 reason.

 7 In addition, I think it's appropriate to

 8 address ourselves to what happened if the 2008 crisis

 9 around Government Sponsored Enterprises and money 

market

 10 funds. My question is similar to Commission O'Malia

 11 rather 10 percent is too tight. But we will hear from

 12 the public. Commissioner Dunn?

 13 COMMISSIONER DUNN: Thank you, Mr. 

Chairman.

 14 I think that safeguarding customer funds is one of the

 15 basic functions of the Commodity Futures Trading

 16 Commission. I applaud the staff for their actions in

 17 this area. I have some concerns very similar to

 18 Commissioner O'Malia on the limitations.

 19 And I'm wondering, Jon, do we have an idea 

of

 20 how much is currently invested this these various

 21 categories?

 22 MR. DEBORD: Our 2007 survey address that;

 

70

 1 although it's been three years since then. Certainly,

 2 there's some that have been used.

 3 As I mentioned, foreign sovereign debt 

barely

 4 used it all. It seems like treasuries and money market

 5 funds were the two largest categories. And then,

 6 frankly, not very much in municipals, minimal amounts 

in

 7 commercial paper and corporate notes.

 8 I think just from, antidotally, I think

 9 there's a larger percentage in CDs now than there was a

 10 few years ago. That's just antidotal, so I don't have

 11 set figures, just my impression.

 12 MR. RADHAKISHNAN: Basically, cash, money

 13 market fund, and some agencies. But the others were 

not

 14 that heavily used.

 15 COMMISSIONER DUNN: But it's very difficult

 16 for us to determine if these are high or low or just

 17 right because we don't really have a handle how much

 18 you're currently invested in these various assets

 19 classes.

 20 One other thing I'd like to bring out are 

the

 21 GSEs. Two GSEs that are very near and dear to my heart

 22 Farmer Mac and the Farm Credit System. It's my

 

71

 1 understanding if we adopt this proposed rule as is, 

they

 2 would not be eligible classes for investment.

 3 MR. RADHAKISHNAN: They're not if their 

debt.

 4 If the issue is not explicitly backed by the Full Faith 

&

 5 Credit of the United States, then they would not be

 6 eligible.

 7 Again, for municipalities and others 

there

 8 is this fold in the realm of unintended consequences. 

I

 9 would hope that the commentary on here give us some 

type

 10 of insight as to what the effect of that this proposed

 11 rule is on.

 12 As the Chairman said, I'm liberal on 

proposed

 13 rules. I look forward for the public to give us 

comments

 14 and the industry to give us comments to help us to 

direct

 15 these financial rules that will make sure that we

 16 safeguard the customer funds because I think that's

 17 paramount. But to make sure that we're not doing

 18 something else that will have some impact that would 

not

 19 like to follow. Thank you.
 20 CHAIRMAN GENSLER: I think Phyllis was 

about

 21 to speak.

 22 MS. DIETZ: Yes. I want to add that -- I'm
 

72

 1 looking through my draft now. But we did do the 

advanced

 2 notice of proposed rulemaking, so we did get some more

 3 up-to-date data. I think that the consensus was that 

the

 4 investments were mostly in treasuries and money market

 5 mutual funds. I can't find my place right now, but we 

do

 6 have we some more up-to-date data.

 7 Also, the survey that we did at the end of

 8 2007 I think is still useful in that it reflects a more

 9 normal and stable market situation. So there were

 10 dramatic changes of course after September 2008. And,

 11 presumably, slowly but surely, people are resuming 

normal

 12 investment practices.

 13 So I think that even though we don't have,

 14 you know, empirical data as of today, I think we have a

 15 pretty good sense based on our survey, based on the

 16 comments we've got from the ANOPR, and based on filings

 17 that we get from our FCM registrants, and questions 

also

 18 that I get informally; phone calls asking questions 

about

 19 permitted investments. So we have a pretty good idea 

in

 20 what people are investing in.

 21 CHAIRMAN GENSLER: Commissioner Sommers?
 22 COMMISSIONER SOMMERS: Thank you, Mr.
 

73

 1 Chairman. I have a question with regard to what I

 2 understand may have been a change in Second 627 of

 3 Dodd-Frank to remove the prohibition on payments of

 4 interest on demand deposits.

 5 And I was just wondering what kind of 

impact

 6 that change may have had on decisions that you made for

 7 what is permitted or not permitted in the future.

 8 MR. RADHAKISHNAN: I think certainly that

did

 9 have a variance. That did have some influence because

 10 historically the reason why nobody thought to cash

 11 because you couldn't get interest, because we said when

 12 you bought cash, it has to be in a demand-deposit

 13 account. And there was a prohibition against paying

 14 interest on a demand-deposit accounts.

 15 So if we see as a result of 627 the 

allowance

 16 in, commercial banks paying interest on demand-deposit

 17 accounts, you might see a move to money being put in

 18 demand-deposit accounts; although, given the interest

 19 that's currently being paid on demand-department

 20 accounts, there may be some sort of reluctance. But 

that

 21 certainly would have a varying.

 22 For example, if you look at in the U.K. 

after

 

74

 1 Lehman, there was huge move to toward cash. And in the

 2 U.K. they've never had this prohibition.

 3 At one point, the London Clearing House 

staff

 4 told me that they had 25 billion euro in cash because

 5 people were not trusting any other form of instrument.

 6 Now, that's change since then, so there might be a move

 7 towards cash.

 8 COMMISSIONER SOMMERS: I guess my question

 9 was more as to whether demand, interest on demanddeposit

 10 accounts could be seen as a substitute for anything 

that

 11 we are now prohibiting.

 12 RADHAKISHNAN: It could be. It could be.

 13 And I don't think so because I think if you look at

 14 interest rates -- may be substituted for CD's because 

you

 15 don't have, you know, assuming that a CD had a penalty

 16 for every withdrawal of interest, so people might put

 17 more in a demand-deposit account instead of CDs. But I

 18 believe historically, the other instrument tended to 

pay

 19 a better rate of return then demand fund accounts.

 20 But, on the other hand, there might be 

people

 21 because they perceived, because of liquidity and safety
 22 demand, don't put money into that account.
 

75

 1 COMMISSIONER SOMMERS: I just have one 

other

 2 question. The chart that you're working of, is this

 3 included in the proposed rule? I guess I'm wondering 

if

 4 it could be posted with the proposed rule.

 5 MR. RADHAKISHNAN: We actually had just 

done

 6 that as an aid for the Commissioners.

 7 COMMISSIONER SOMMERS: I think it's really

 8 helpful.

 9 MR. RADHAKISHNAN: We can put it on the

 10 website. Sure. Sure.

 11 COMMISSIONER SOMMERS: Thank you.

 12 CHAIRMAN GENSLER: Thank you. I think 

that's

 13 a good suggestion on putting that on the website.

 14 Commissioner Chilton?

 15 COMMISSIONER CHILTON: I don't have any

 16 questions. Thank you.

 17 CHAIRMAN GENSLER: Commissioner O'Malia,

 18 adding to our colloquies?

 19 COMMISSIONER O'MALIA: For us growing up on

 20 farm there's an old saying there's no second education 

in

 21 kick of a mule. Or, there's no education in the second

 22 kick of a mule, actually.

 

76

 1 I'm a little frustrated with this 

rulemaking

 2 because we did do an advanced notice proposal. And we

 3 did receive comments that said put it in treasuries. 

Put

 4 it in money markets and we completely ignored that.

 5 I think that if we've done anything, I hope

 6 that Dodd-Frank has at least restored some stability to

 7 our banking system and the financial integrity therein.

 8 And I do believe that your analogy on it is fine. It 

was

 9 a real concern. That was a problem. That was a

 10 breakdown if our financial system.

 11 After 2000 pages of Dodd-Frank, I hope we

 12 fixed that. And I think we should be able to put money

 13 back. And I think we ought to raise these numbers

 14 significantly. And I'm just going to leave it at that.

 15 CHAIRMAN GENSLER: If I might. I can't

 16 remember our procedures. I would like to propose one

 17 amendment and see if I have support. But it's an

 18 amendment to have an explicit question because I just

 19 can't find it on Page 17. But have an explicit 

question

 20 about the 10 percent limit money market funds. And to

 21 have a variation on it to say; one, is this appropriate

 22 level given the events of 2008 and the passage of

 

77

 1 Dodd-Frank. And second, if not, what other level might

 2 be appropriate. And thirdly, that if it was a higher

 3 level, might there be limits per issuer.

 4 MR. RADHAKISHNAN: Issuer-based.

 5 CHAIRMAN GENSLER: Issuer-based.

 6 MR. RADHAKISHNAN: So what would be the

 7 appropriate number?

 8 CHAIRMAN GENSLER: Yes. Yes. If there's

 9 some other number other than 10 percent, maybe there's

 10 some set of issuer-based. So I'd like to offer that as

 11 an amendment. It's really just questions but important

 12 questions. I think I have to see whether there's a

 13 second to my amendment.

 14 COMMISSIONER O'MALIA: Second.

 15 CHAIRMAN GENSLER: So I will take a vote on

 16 the amendment and then I'll take a vote on the 

underlying

 17 rules. So first we'll take on the amendment. All aye?

 18 (Chorus of ayes.)

 19 CHAIRMAN GENSLER: Any Opposed? And now on

 20 the underlying rule as amended. All in favor say 

"Aye."

 21 (Chorus of ayes.)

 22 CHAIRMAN GENSLER: Any opposed?
 

78

 1 COMMISSIONER O'MALIA: Naye.

 2 CHAIRMAN GENSLER: I think it's 4-1 on the

 3 proposal sending it to the Federal Register as amended

 4 and I thank you all. And this is very helpful. The

 5 debate is very helpful, too. I thank you Phyllis and 

Jon

 6 and Ananda.

 7 And now I think we're turning the fourth 

rule

 8 set. Eileen Donovan of the Clearing Intermediary

 9 Oversight will now present proposed rules on the 

propose

 10 for swaps to be determined to be mandatory clearing.

 11 MS. DONOVAN: Good morning.

 12 CHAIRMAN GENSLER: Good morning, Eileen and

 13 Ananda.

 14 MS. DONOVAN: The staff is recommending 

that

 15 the Commission approve for publication in the Federal

 16 Register a notice of proposed ruling on the process for

 17 reviews of swaps for mandatory clearing.

 18 The rulemaking is divided into four parts.

 19 The first part concerns the eligibility of a DCO to 

clear

 20 swaps. Section 745(b) of the Dodd-Frank Act directs 

the

 21 Commission to put to criteria conditions over rules 

under
 22 which the Commission will determine initial eligibility
 

79

 1 or continuing qualification of DCO to clear swaps.

 2 Under the proposed rule, a DCO will be

 3 presumed eligible to accept for clearing any swap that 

is

 4 within a group, category, or type or class of swaps 

that

 5 the DCO already clears.

 6 The DCO that plans to accept for clearing 

any

 7 swap that is not within a group category, type, or 

class

 8 of swaps that the DCO already clears would be required 

to

 9 request a determination by the Commission of its

 10 eligibility to clear the swap.

 11 To receive such a determination, a DCO 

would

 12 have to file a written request with the Commission that

 13 addresses its abilities to maintain compliance with the

 14 DCO core principles if it accepts the swap for 

clearing.

 15 In particularly, the sufficiency of its

 16 financial resources and its ability to imagine the 

risks

 17 associated with clearing the swap, especially if the

 18 Commission determines that the swap is required to be

 19 cleared.

 20 The second part of the rulemaking concerns
 21 submission of swaps to the Commission. Section

 22 7(23)(a)(3) of the Dodd-Frank Act provides that it 

shall
 

80

 1 be unlawful for any person to engage in a swap unless

 2 that person that submitted such swap for clearing to a

 3 DCO that is registered under the CEA or a DCO that is

 4 exempt from registration under the CEA if the swap is

 5 required to be cleared.

 6 Section 723(a)(3) requires the Commission 

to

 7 adopt the rules for the review of the swap group,

 8 category, type, or class of swaps to make a 

determination

 9 as to whether the swaps should be required to be 

cleared.

 10 The proposed rule requiring the DCOs

 11 submitting swaps to the Commission to provide certain

 12 information to assist the Commission in its review

 13 including a statement that addresses the five specific

 14 factors that the Dodd-Frank Act requires the Commission

 15 to take into account when reviewing swaps for 

submission.

 16 Those five factors are: First, the 

existence

 17 of significant outstanding notional exposures, trading

 18 liquidity, and adequate pricing data.

 19 Second, the availability of rule framework,

 20 capacity, operational expertise and resources, and 

credit

 21 support infrastructure to clear the contract on terms
 22 that are consistent with the materials terms and 

trading
 

81

 1 conventions on which the contract has been traded.

 2 Third, the effect of the mitigation of

 3 systemic risk taking into account the size of the 

market

 4 for such contract and for the resources of the DCO

 5 available to clear the contract.

 6 Fourth, the effect on completion, including

 7 appropriate fees and charges applied to clearing.

 8 And, finally, the existence of reasonable

 9 legal certainty in the event of the insolvency of the

 10 relevant DCO or one or more of the clearing members 

with

 11 regard to the treatment of customer and swap 

counterparty

 12 positions, funds, and property.

 13 The DCO would also be required to provide a

 14 description of the manner in which the DCO provided

 15 notice of its members and a summary of any opposition

 16 expressed by members.

 17 As required by Dodd-Frank, the submission

 18 would be posted for a 30-day public comment period. 

And

 19 the Commission would make its determination no later 

than

 20 90 days after receiving a complete submission unless 

the

 21 DCO agrees to an extension.
 22 The third part of the rulemaking concern
 

82

 1 Commission-Initiated Reviews of Swaps. The Dodd-Frank

 2 Act requires the Commission on an ongoing basis to 

review

 3 swaps that have not been accepted for clearing by a DCO

 4 to make a determination as to whether the swaps should 

be

 5 required to be cleared.

 6 If no DCO has is accepted for clearing 

swaps

 7 that the Commission finds would otherwise be subject to 

a

 8 clearing requirement, the Commission would investigate

 9 the relevant facts and circumstances within 30 days of

 10 the completion of its investigation, issue a public

 11 report containing the results of the investigation.

 12 The Commission would take such actions as 

it

 13 determines to be necessary and in the public interest,

 14 which may include establishment of margin or capital

 15 requirements for parties to the swaps.

 16 And finally the last part of the rulemaking

 17 concerns the Stay of Clearing Requirements. After 

making

 18 a determination that a swap is required to be cleared,

 19 the Commission, on application of a counterparty to a

 20 swap or on its own initiative, my stay the clearing

 21 requirement until it completes a review of the terms of 

a
 22 swap and the clearing arrangement.
 

83

 1 If the Commission decides to issue a stay, 

it

 2 would have 90 days to complete its review of the 

clearing

 3 of the swap unless the DCO agrees to an extension.

 4 Upon completion of its review, the 

Commission

 5 could determine, subject to any terms and conditions as

 6 the Commission determines to be appropriate, that the

 7 swap must be cleared, or that the clearing requirement

 8 will not apply but clearing may continue on a non

 9 mandatory basis. Thank you. I will take any 

questions.

 10 CHAIRMAN GENSLER: Thank you, Eileen. I 

will

 11 entertain ae a motion?.

 12 COMMISSIONER SOMMERS: So moved.

 13 COMMISSIONER O'MALIA: Second.

 14 CHAIRMAN GENSLER: With the motion made and

 15 seconded just a couple of question. As I understand,

 16 Eileen -- I support this proposal. I think it's very

 17 important process rule. But as I understand, we are

 18 earlier on under Dodd-Frank asked each of the clearings

 19 organizations that currently clear swaps to wait a 

little

 20 while until their swaps are submitted under this 

process
 21 from. Can you walk us through, just walk us through 

how

 22 that relates to the rule?
 

84

 1 MS. DONOVAN: Sure. Under Dodd-Frank, 

those

 2 swaps that are already being cleared deemed submitted 

to

 3 the Commission for review. So the Commission has 90 

days

 4 to review those swaps unless the DCO has agreed to an

 5 extension.

 6 We requested that all DCOs agreed to an

 7 extension. They did agree. So that once these rules

 8 become final, which we're hoping will be in April, the

 9 Commission could begin its 90 days of those swaps 

meaning

 10 a determination on the varying requirement could be 

made

 11 by July, which would be the effective date of the

 12 legislation.

 13 CHAIRMAN GENSLER: If I remember, I think

 14 there were eight or so.

 15 MS. DONOVAN: It was eight DCO'S that

 16 currently cleared OTC products that may or may not be

 17 swapped.

 18 CHAIRMAN GENSLER: Again, so those eight

 19 clearing organizations under the statute, it was deemed

 20 that they were submitted unless they agreed to an

 21 extension. They've all agreed to an extension, all

 22 eight?

 

85

 1 MS. DONOVAN: That's correct.

 2 CHAIRMAN GENSLER: And the goal of the

 3 staff, one that I endorsed, is that we try to complete

 4 this rule before the 360 days, but complete it at 270 

or

 5 so days by next April 15 tax day. I think it's also

 6 Pete's birthday. But by tax day so we can run the 90-

day

 7 process. Is that's what your thinking is?

 8 MS. DONOVAN: Yes. That's correct.

 9 CHAIRMAN GENSLER: Okay. Thank you. I

 10 don't have any questions. Commissioner Dunn?

 11 COMMISSIONER DUNN: I have no questions 

on

 12 this. I think the taxing point is that staff and the

 13 Commission to be able to do these review.

 14 CHAIRMAN GENSLER: Commissioner Dunn, I

 15 agree with you. In terms of just some of the figures, 

we

 16 don't know how we'll group these. But the largest

 17 interest rate swap clearing house LCH in some 

discussion

 18 with them, they have in the interest rate space I think

 19 nearly three quarters of a million contracts that they

 20 clear. And some of their non-interest rates it adds up

 21 to about a million. Is that right?

 22 MR. RADHAKISHNAN: Yes. That's correct.

 

86

 1 CHAIRMAN GENSLER: Presumably, IT will be

 2 grouped by class and so forth. But next spring, we 

might

 3 be putting out the public comments this nearly three

 4 quarters of million interest rate swaps that they

 5 currently clear. Hopefully, it will boil down to

 6 hopefully dozens of categories. But I share your 

views.

 7 Without staff, it's going to get clogged up pretty 

fast.

 8 Commissioner Sommers?

 9 COMMISSIONER SOMMERS: Thank you, Mr.

 10 Chairman. Just to walk through that type of example 

that

 11 he used with LCH. LCH or another clearing house that 

may

 12 want to clear interest rates swaps applies to clear a

 13 class of swaps and tells the Commission that they 

intend

 14 to clear 300,000t different interest rate swaps, what 

is

 15 the process for that from our point of view?

 16 MS. DONOVAN: Well, each of those swaps 

have

 17 to be submitted. But there is a provision in the rule

 18 that requires that they specifically can do so if they

 19 group them by class, type, or category. And it also 

give
 20 es the Commission the right under the rule to group 

those

 21 appropriately for review.

 22 COMMISSIONER SOMMERS: And if they submit
 

87

 1 them as a group, them from our point of view, the 

process

 2 is to go through 300,000 different interest rate swaps.

 3 Do we then make a determination that 200,000 of them 

are

 4 okay but 100,000 are not?

 5 MR. RADHAKISHNAN: That's possibly. That

 6 could be a possible outcome. Although, I would think

 7 that, without pre-judging the issue, if clearing houses

 8 are already successfully clearing swaps, then we would

 9 have, the staff would have to have good reasons to

 10 recommend to the Commission that, let's say it was

 11 300,000, 200,000, 100,000 either should not be cleared,

 12 or there should not be a determination they should be

 13 cleared.

 14 But, Commission come as you are pointing to

 15 the enormity of tasks, and I will not tell you 

otherwise.

 16 It is an enormous task. It could be that one group is

 17 U.S. dollar-based fixed-payment and fixed-flowing. And

 18 the flowing is liable and the fixed-rate, depends on 

the

 19 day, a five-year swap. So that would be easier to

 20 evaluate. But we will really know what our task is 

once

 21 we start investments. Hopefully that the public 

comment
 22 period will help the Commission help the staff making
 

88

 1 recommendations.

 2 COMMISSIONER SOMMERS: That was my next

 3 question really. For final rules in the this area, do 

we

 4 expect that there will be more specific information 

about

 5 exactly what the process is going to be and how,

 6 especially in a situation where you may have a clearing

 7 house that already clears a million different contracts

 8 in interest rates swaps, but a new clearing house that

 9 wants to clear the exact same, what's process of 

deciding

 10 whether or not that new clearing house is eligible, or

 11 how do we decide, you know? Will there be more 

substance

 12 in that final rule?

 13 MS. DONOVAN: Well, a new clearing house 

that

 14 wants to clear would first have to go to the first 

part,

 15 the review eligibility under 745(b).

 16 COMMISSIONER SOMMERS: I guess I was just

 17 assuming that a new clearing house that has already 

been

 18 approved to clear.

 19 MR. RADHAKISHNAN: Clear swaps or a new 

DCO?

 20 I think Eileen is talking about if a DCO has not 

started
 21 clearing swaps and wants to clear swaps, then it will

 22 have to apply to us for eligibility to clear swaps.
 

89

 1 So basically they will tell us what does it

 2 want to clear. What it's marginal regime is. What the

 3 ongoing risk management is. What the default 

procedures

 4 are. Basically, a demonstration to the Commission that

 5 it is qualified to clear and price the swap.

 6 COMMISSIONER SOMMERS: So that approval 

will

 7 be by asset class?

 8 MR. RADHAKISHNAN: Yes. It will be by 

asset

 9 class. It depends on what it wants to clear.

 10 COMMISSIONER SOMMERS: I'm sorry, I have 

one

 11 other question regarding the stay. If you could 

explain

 12 what a reason would be for a counterparty to apply for 

a

 13 stay, and what would be a reason that we would grant a

 14 stay to the counterparty.

 15 MS. DONOVAN: The rule doesn't go to that.

 16 We just ask that they provide explanation and why. I'm

 17 sure the presumption would be one of those five 

factors.

 18 But I list that for some reason the Commission's 

decision

 19 is on any of those factors that the counterparty is

 20 disputing the finding on those. We could ask that in 

the
 21 proposal.

 22 It's possible, based on comments we got in
 

90

 1 response to the proposal that we would define that in 

the

 2 final rule.

 3 COMMISSIONER SOMMERS: And then the

 4 determination approval of that stay would have an 

affect

 5 on all other swaps of that category? If a particular

 6 counterparty applied and said they requested a stay, 

that

 7 stay would be applicable to that class?

 8 MS. DONOVAN: Right. All swaps would fall

 9 under that requirement, yes.

 10 COMMISSIONER SOMMERS: Thank you.

 11 CHAIRMAN GENSLER: Thank you, Commissioner

 12 Sommers. I think this highlights -- and I can only 

speak

 13 for one Commissioner -- I believe that's the only way

 14 this is going work is if it's done by class, group, or

 15 contracts. There is no way. We don't have the

 16 resources, nor does the public through a 30-day period.

 17 LCH, for instance, currently clears 

interest

 18 rate swaps for a group of currencies, and let's say

 19 that's 15 or 20 different currencies.

 20 Ananda used the example of U.S. dollar 

swaps,

 21 that they would somewhat submit to us their U.S. dollar
 22 swap business may be broken down by three or four or 

five
 

91

 1 or maybe 10 or 20 categories, but not the hundreds of

 2 thousands of contracts.

 3 I think that's the only way we can do it.

 4 And I think it's the best way for the public to react.

 5 But I can't predict how they'll submit it. They could

 6 submit next April in a way that we ask them. I think

 7 under this rule, we could ask them to re-categorize 

this

 8 right. This gives us permission to regroup and

 9 re-categorize.

 10 MR. RADHAKISHNAN: Yes, it does.

 11 CHAIRMAN GENSLER: And it's correct that if

 12 it were approved for one swap clearing house one 

clearing

 13 house it relates to others. If there's another 

eligible

 14 interest rate clearing house they, too, would be able 

to

 15 do it. Is that right? I mean once you're eligible in

 16 that category?

 17 MR. RADHAKISHNAN: Once you're eligible in

 18 that category, once you've already been approved to 

clear

 19 the swaps.

 20 CHAIRMAN GENSLER: So we're not try to pick

 21 amongst them?

 22 MR. RADHAKISHNAN: No.

 

92

 1 CHAIRMAN GENSLER: Even though Commissioner

 2 Sommers -- I'll use as an example -- is trying to pick

 3 amongst them?

 4 MR. RADHAKISHNAN: Correct.

 5 CHAIRMAN GENSLER: Commissioner Chilton?

 6 COMMISSIONER CHILTON: I have no questions.

 7 CHAIRMAN GENSLER: Not having any further

 8 questions, I will call a vote. All in favor?

 9 (Chorus of ayes.)

 10 CHAIRMAN GENSLER: Any opposed? It being

 11 unanimous 5-0. I think, Eileen and Ananda, we'll send 

it

 12 off to the Federal Register. And so what do we have

 13 next?

 14 So we have one proposed rule and one 

proposed

 15 set of questions called "An Advanced Notice of Proposed

 16 Rulemaking on Anti-Manipulation and Disruptive Trading

 17 Practices."

 18 Bob Pease has been the team lead with Mark

 19 Higgins, but they will be assisted by Vince McGunagle,

 20 who is the acting head of the Division of Enforcement.

 21 And you're not Ananda, but Brad Berry is Deputy 

Director

 22 of our general counsel and appellate litigation there.

 

93

 1 So Bob or whomever is taking the lead on this one.

 2 MR. HIGGINS: Good morning, Mr. Chairman

 3 and Commissioners. In section 753 of Dodd-Frank 

amended

 4 section 6(c) the Commodity Exchange Act. The team

 5 presentation today is proposing anti-manipulations 

rules

 6 concerning two subsections.

 7 New section (c)(1) expands the authority 

of

 8 the Commission to prevent any person from using or

 9 attempting to use any manipulative or deceptive device.

 10 Section (c)(1) is patterned after Section

 11 10b of the Securities and Exchange Act of 1934, which

 12 courts interpreted as a broad, anti-fraud, catch-all

 13 designed to reach intentional or reckless conduct the

 14 deems or defraud market participates.

 15 New section (c)(1) is also similar to

 16 anti-manipulation authority granted to the Federal

 17 Regulatory Commission in 2005 and the Federal Trade

 18 Commission in 2007.

 19 FERC and the FTC have promulgating rules

 20 based on SEC Rule 10b-5 with an appropriate 

modifications

 21 to their Regulatory Commission.

 22 The first two proposed rules before you 

today

 

94

 1 under Section 753 are also modeled on SEC Rule 10b-5 

with

 2 tailoring that reflects not only the distinct regularly

 3 mission of the CFTC, but also CFTCs own experience and

 4 precedent policing market manipulation and fraud.

 5 In Section 753, Congress also created a new

 6 section (6)(c) entitled "Other manipulation."

 7 The second proposed rule before you today

 8 mirrors the text of new Section (6)(c)(3). The purpose

 9 of this rulemaking is to affirm certain legal practices

 10 and principles relevant to the CEAs prohibition against

 11 price manipulation of any swaps or any commodity in

 12 intrastate commerce for future delivery.

 13 Separately, Section 753 also provides for a

 14 prohibition manipulation by false reporting that 

affects

 15 or tends to affect the price of any commodity.

 16 This provision is entitled "Special

 17 Provision by Manipulation by False Reporting," and no

 18 rulemaking is needed to implement it.

 19 Section 753 also protects against good 

faith

 20 mistakes that result in false or misleading or 

inaccurate

 21 information being transmitted to a price reporting

 22 service.

 

95

 1 753 also prohibits any person from making 

any

 2 false or misleading statements of material fact to the

 3 Commission.

 4 As with the false reporting provision

 5 previously mentioned, no rulemaking is needed to

 6 implement this Section.

 7 Finally, Section 753 expressly preserves 

the

 8 applicability of the anti-manipulation found in CEA

 9 Section 9(a)(2).

 10 Last, as stated in Section 754 of

 11 Dodd-Frank, the prohibitions in 753 that require no

 12 rulemaking will become effective in 360 days after the

 13 date of enactment of Dodd-Frank.

 14 The proposed rules before you, should they

 15 become final rules, will become effective 60 days after

 16 the final rules are publish for 360 days from the date 

of

 17 enactment whichever is later.

 18 In the course leading up to this note

 19 proposed rule, we received one public comment.

 20 Before concluding my presentation, I would 

be

 21 remiss if I did not give acknowledge the individuals

 22 contributions to the Assistant General Counsel, Ralph

 

96

 1 Avery, Counselor Mary Connelly, and Enforcement 

Attorney

 2 Brian Walsh to drafting these proposed rules, as well 

as

 3 the outstanding administrative support of Yolanda Smith

 4 and the leadership of Bob Pease. That concludes my

 5 presentation.

 6 CHAIRMAN GENSLER: Thank you, Mark. I 

will

 7 entertain a motion on the staff recommendation on the

 8 rule related to -- it's one rule, right? You mentioned

 9 two.

 10 MR. HIGGINS: Under 753 there are two

 11 rules: One under subsection (c)(1)

 12 CHAIRMAN GENSLER: Again, two motions?

 13 MR. HIGGINS: They're contained within 

one

 14 document.

 15 CHAIRMAN GENSLER: All right. Thank you. 

I

 16 will entertain a motion?

 17 COMMISSIONER CHILTON: So moved.

 18 COMMISSIONER O'MALIA: Second.

 19 CHAIRMAN GENSLER: With discussion. I just

 20 had one question. And sorry I didn't have anything

 21 prepared for this one, but when you mentioned the SEC
 22 Rule of 10b-5 and their statute provision 10b, you 

remind
 

97

 1 me of insider trading. That that is how over at the 

SEC

 2 many cases have been brought.

 3 Can you just walk us through how you would

 4 address that theory and so forth?

 5 MR. HIGGINS: Right. The CFTC, as you

 6 know, does not have a prohibition on insider trading. 

So

 7 a market participate that is trading or hedging their

 8 crops or their expected production would still be able 

to

 9 continue to do so. The rule does not upset any of the

 10 Commissions long-standing precedence in that regard.

 11 CHAIRMAN GENSLER: And is that because the SEC

 12 put that in rule 10b-5 and you've not done that here?

 13 MR. HIGGINS: That is true. 10b-5-1, I

 14 believe is specific prohibition on insider trading. 

More

 15 fundamentally, the SEC's regulatory mission about the

 16 disclosure. And part of that, it's not allowing market

 17 participates to trade on inside information.

 18 We're about product integrity of the market

 19 recognizing that for people to hedge and for price to

 20 discovery to occur, people will be trading on knowledge

 21 that they have that's not public

 22 CHAIRMAN GENSLER: I'm going to just say I

 

98

 1 support this proposed rulemaking today. I think that' 

it

 2 really helps the Commission broaden our ability to 

police

 3 markets as the statute says to make sure fair and

 4 equitable trading.

 5 Congress granted the Commission this

 6 authority in addition to the disruptive trading 

practices

 7 authority. And I think this brings new under the first

 8 half of it, which is called the "first rule" to police

 9 for fraud-based manipulation. Whereas, this Commission

 10 has had I guess what you call the other one price-based

 11 manipulation in the past.

 12 I would be remiss without thanking Senator

 13 Cantwell for her leadership. She worked with Senator

 14 Lynn I know in making sure that this part of their

 15 statutory regime. Commissioner Dunn?

 16 COMMISSIONER DUNN: Thank you, Mr. 

Chairman.

 17 I greatly appreciate saying this as a part of the

 18 Dodd-Frank Act and the Commission acting on this. I

 19 share the frustration of my fellow Commissioner Chilton

 20 in his opening remarks.

 21 It often times looks to us that things are

 22 very apparent. When we get into the case law and

 

99

 1 determining what is it manipulation, we find that our

 2 hands are often tied. I think this goes a long way and

 3 in helping our Enforcement Division.

 4 I would want to make sure that 

clarification

 5 that everyone understands when we talk about any

 6 manipulative or deceptive devise or contrivance, that

 7 would also include any electronic, algorithmic-driven

 8 trading. Is that correct?

 9 MR. HIGGINS: If the elements of the rules

 10 are satisfied, it matters not the vehicle by which the

 11 person perpetrated the fraud.

 12 COMMISSIONER DUNN: Thank you. I think 

that

 13 again issued a real challenge to both or Surveillance

 14 Division and Enforcement Divisions to recruit folks 

that

 15 have a strong understanding of how these devices 

operate.

 16 Thank you, Mr. Chairman.

 17 CHAIRMAN GENSLER: Thank you, Commissioner

 18 Dunn. Commissioner Sommers?

 19 COMMISSIONER SOMMERS: Thank you, Mr.

 20 Chairman. I just have a couple of questions with 

regard

 21 to the new authority. The fact that we're all familiar

 22 with the elements of proof of manipulation that we work

 

100

 1 with under 9 (a)(2).

 2 And if you could, first of all, answer if 

you

 3 know what kind of difference there would be under the 

new

 4 authority between a false reporting case or brought 

under

 5 9 (a)(2) and under this new authority.

 6 MR. HIGGINS: Sure. Under 9(a)(2) as you 

all

 7 know is a four-part test. I won't recite all of those

 8 elements except to say artificial price is a key 

element

 9 in that test.

 10 Artificial price is not a required element

 11 under (c)(1). So a false reporting case could be 

brought

 12 under (c)(1). And assuming it's not within the false

 13 reporting that's already specifically defined 

underneath

 14 (c)(1) special provision for prohibition by false

 15 reporting.

 16 But let's just say it didn't fit in that

 17 bucket and it was going to brought under (c)(1), the

 18 elements, required elements would be that you prove up

 19 the fraud, which would be the false report. That is as

 20 done with intent. And now intent can be satisfied by

 21 showing recklessness.
 22 So unlike C(3) claim or the old 9(a)(2)
 

101

 1 claim, there to requirement for specific intent under

 2 (c)(1). Recklessness is enough.

 3 And the last element would be that is has 

to

 4 be, the fraud has to in connection with a 

jurisdictional

 5 products. So a swap or a commodity in intrastate

 6 commerce or a commodity for future delivery.

 7 COMMISSIONER SOMMERS: Do you think that

 8 there's any case that comes to mind for you that you

 9 would be able to bring under this new authority that we

 10 were not able to bring under 9 (a)(2)?

 11 MR. HIGGINS: It's hard for me in the

 12 abstract to think of the fact pattern that a person 

that

 13 the Commission could not have reached under one of its

 14 prior authorities.

 15 I will say though, harkening back to

 16 Commissioner O'Malia's opening comment , that there 

were

 17 several prohibitions. This is an additive. This

 18 supplements the Commission's existing anti-fraud and

 19 anti-manipulation regimes.

 20 And it's additive in the sense that for the

 21 first time you have a manipulation rule that prohibits

 22 fraudulent conduct. And so in that way it's different

 

102

 1 and it's additive. Now you can get a market 

manipulation

 2 by fraud. And you can get there by proving that the

 3 intent element at least by recklessness.

 4 So it's new and it's additive in the sense 

we

 5 can now have manipulation by fraud.

 6 COMMISSIONER SOMMERS: Thank you, Mark.

 7 MR. MCGUNAGLE: Commissioner, if I could 

just

 8 expound a little bit on Mark's comment without going 

back

 9 to the cases that we filed or didn't make 

recommendations

 10 on, but look at the types of conduct at interest and 

how.

 11 I think Commissioner O'Malia hit it correctly about 

this

 12 continuum, how we evaluate our cases when we're looking

 13 at manipulative device, say illegal activity, wash

 14 trading, or pre-arranged trading. For example, how 

that

 15 is going to work in our evaluation in determining

 16 potential liability under 6 (c)(1).

 17 So conduct like, for example, where someone

 18 says that are testing the market on how the facts and

 19 circumstances evaluation during or investigation, what

 20 does that actually mean to test the market and what 

steps
 21 we're actually taken in furtherance.

 22 So under 6(c)(1) we're looking at
 

103

 1 manipulative devices where we're looking at the conduct

 2 that we see first as whether there's other violations 

to

 3 the Act like wash trading or pre-arranged or false

 4 statements that has been enhanced through this

 5 rulemaking.

 6 False statements to the Commission.

 7 Someone, for example, isn't up-front about the status 

of

 8 ownership of accounts. And that information might be

 9 useful in terms of getting a true picture of what

 10 actually the trading strategy is. As well as looking 

at

 11 what otherwise would have been legitimate devices as we

 12 do in manipulation cases. But for intent become

 13 illegitimate vehicle getting toward manipulative

 14 activity.

 15 So I think that the framework of the

 16 evaluation is in place, but we now have additional 

tools

 17 to assist us in doing that evaluation.

 18 COMMISSIONER SOMMERS: Thank you, Vince.

 19 CHAIRMAN GENSLER: I think there's a little

 20 bit of aversion. The document that we probably looked 

at

 21 last night said exactly what Vince said. It was

 22 basically to use or employ or attempt to use or employ

 

104

 1 any manipulative device, scheme, or artifice to 

defraud.

 2 I want to confirm that's what we're talking

 3 about. Not that we're worried about what will go out 

of

 4 this building, but right now we have another document

 5 that might have gotten pulled of a share point site

 6 internally that didn't have the final orders in it.

 7 MR. MCGUNAGLE: You are correct.

 8 CHAIRMAN GENSLER: I just want to confirm

 9 that because I have same share point site here.

 10 Commissioner Chilton?

 11 COMMISSIONER CHILTON: Mr. Higgins said

 12 exactly what I wanted to make a point on, but I will 

put

 13 a little bit finer point on it. And it went 

Commissioner

 14 Sommers' question.

 15 This doesn't make the standard that existed

 16 that exists currently, the manipulation standard that I

 17 spoke about that's referred to, it doesn't change that.

 18 It is additive. So it's a new thing that we could go

 19 after folks for along with the disruptive trade 

practice.

 20 So we've got more tools, but there's still

 21 that high standard that we've only had one successful

 22 manipulation case in 35 years, correct.

 

105

 1 MR. HIGGINS: That is correct. In the

 2 absence of fraud, you have a pure (c)(3) case. That

 3 standard doesn't change.

 4 COMMISSIONER CHILTON: A lot of folks have

 5 asked me why don't they get on with it and put this 

stuff

 6 in place. One, we've been getting it on for a long 

time.

 7 The Chairman set this whole process up on the rules 

even

 8 before the bill passed. You all and everybody else

 9 that's been in this building and Chicago and New York 

are

 10 working very hard on these rules. So we are moving

 11 forward on them.

 12 I also want to point out and I guess I'll

 13 make it a question. We're prohibited by law 

implementing

 14 this until next July. Is that correct?

 15 MR. HIGGINS: That is correct. The statute

 16 in Section 754 I, which I mentioned in my presentation,

 17 prohibits the Commission from giving affect to any rule

 18 or provision before 360 days from enactment.

 19 COMMISSIONER CHILTON: Okay. Even it's all

 20 done today, we couldn't implement it and couldn't start

 21 working?

 22 MR. HIGGINS: Yes.

 

106

 1 COMMISSIONER CHILTON: Mr. Chairman, are we

 2 waiting to go around on the disruptive practices, or do 

I

 3 do that now? What would you prefer. I had a question

 4 about destructive practice.

 5 CHAIRMAN GENSLER: It's meant to be

separate.

 6 COMMISSIONER CHILTON: Okay.

 7 CHAIRMAN GENSLER: Commissioner O'Malia?

 8 COMMISSIONER O'MALIA: Mr. Chairman, I have 

a

 9 lengthy list of questions.

 10 CHAIRMAN GENSLER: That's why we're here.

 11 COMMISSIONER O'MALIA: And I would be happy

 12 to ask them if somebody wants to interrupt and take 

some

 13 turns going around, I'd be happy to break them up.

 14 CHAIRMAN GENSLER: Do you want us to ask 

some

 15 of your questions for you?

 16 COMMISSIONER O'MALIA: We might divide it. 

I

 17 have several pages and I can give everybody one. I 

just

 18 want to be respectful to other Commissioners. And if 

you

 19 have a question and you want to jump in, please don't

 20 hesitate to cut me off. I will keep asking question
 21 until I run out of paper.

 22 I do appreciate the team's efforts here.
 

107

 1 We've worked very hard to make this a better product. 

I

 2 especially want to thank Laura Gardy, my senior counsel

 3 whose done an outstanding job to approve this product, 

as

 4 well. I appreciate you all working with her.

 5 As I note in my statement, I think that we

 6 would all benefit, that Mark would benefit, we as

 7 Commissioners, and Enforcement Division would benefit 

by

 8 understanding what processes are going to be allowed or

 9 not allowed. That's a lots of flavoring in my 

questions.

 10 CHAIRMAN GENSLER: I was just going to say that

 11 disruptive trading practices are separate. We can do

 12 them all together, but I have to give Commissioner

 13 Chilton a chance, too, on disruptive trading practices

 14 COMMISSIONER O'MALIA: I'm happy to break

 15 them up.

 16 CHAIRMAN GENSLER: Thank you.

 17 COMMISSIONER O'MALIA: I just wanted to get 

a

 18 better understanding. 6(c)(1) the violation, is it

 19 $140,000 per violation or a million dollars? I'm 

trying

 20 to understand this conduct is manipulation (6)(c) (1)

 21 what would be the penalty be ?
 22 MR. HIGGINS: 6 (c)(1) is styled "The
 

108

 1 prohibition on manipulation." So if you violate the 

rule

 2 promulgated under that, the penalty set forth is up to 

$1

 3 million dollars in Section 753.

 4 COMMISSIONER O'MALIA: In order to satisfy 

a

 5 violation of 6 (c)(1) you must prove that there was,

 6 quote, "manipulative or deceptive device or 

contrivance."

 7 How would we prove that? What make something

 8 manipulative or deceptive?

 9 MR. HIGGINS: Those words, manipulative

 10 device or contrivance, were first interpreted by the

 11 Supreme Court. In that case, the Supreme Court said

 12 those words were terms of art that the meaning could be

 13 found only in the statute.

 14 In so doing -- and this is under 10b law --

 15 they interpreted those words to mean fraud. So to

 16 violate (c)(1) and the rule proposed rule promulgated

 17 thereunder, should it become final rule, you would have

 18 to show fraud existed.

 19 Now, in the preamble -- I'm sure your next

 20 question will be what is fraud -- in this context 

fraud

 21 is a term of art. Fraud it's not associated with all 

the
 22 common law element of fraud that you would have in 

state
 

109

 1 law action.

 2 Here, fraud in the preamble we propose to

 3 mean any conduct that impairs, obstructs, or defeats a

 4 well-functioning market or the integrity of the market.

 5 COMMISSIONER O'MALIA: Would a individual

 6 trade strategy me manipulative because each bid and 

offer

 7 will feed a price trend? How will we look at that?

 8 Would we look at it by bid and offer, or we look at a

 9 kind of scheme?

 10 MR. HIGGINS: Here's where it's difficult

 11 from where I stand because these cases are really fact

 12 and circumstance specific. So to -- and I'm going 

leave

 13 you wanting, I think, with your question because 

without

 14 those facts and circumstances, it's hard to give 

meaning

 15 to these words. They don't mean much in isolation. 

They

 16 mean something when they're enveloped by any given 

case.

 17 So I really, I defer to others, but I don't have

 18 a good answer for you without factual record around 

which

 19 to apply the rule.

 20 CHAIRMAN GENSLER: Are there cases? 

Because
 21 really what happened with Senator Cantwell worked to

 22 insure that FERC had these authorities FTC had these
 

110

 1 authorities, and now we have these authorities as the 

SEC

 2 has over decades. So maybe if there is guidance from

 3 other cases. Brad or Vince?

 4 MR. MCGUNAGLE: I do I think, as Mark said,

 5 this will be a case-by-case development.

 6 When I was speaking earlier to Commissioner

 7 Sommers, I focused on, for example, activity that we've

 8 already found to be illegal because I think that making

 9 the arguments in front of the courts with respect to 

the

 10 activity that already violates some aspect of the

 11 Commodity Exchange Act. That working an evaluation

 12 statute saying in furtherance of it's a manipulative

 13 device or deception, that that will be, should be

 14 persuasive to the court.

 15 As we talk about other areas of trading

 16 activity, where arguably, you know, it might otherwise

 17 appear to be legitimate trading, you know, on the 

market.

 18 But we're offering that there is a

 19 manipulative scheme in play. And so the actual trade

 20 strategy that's being employed constitutes a 

manipulative

 21 or deceptive device under 6 (c)(1). And the courts 

will
 22 help guide us in terms of how those issues get decided 

as
 

111

 1 we go forward.

 2 So I don't think there's going to be a

 3 hard-and-fast rule coming out of the applicability of 6

 4 (c)(1) after the effective date. There will be a lot 

of

 5 discussions in the cases just going forward.

 6 CHAIRMAN GENSLER: I'm sorry. I'm just

 7 trying to hep. But wouldn't the Courts -- and maybe

 8 Brad, because you're an appellate litigator, wouldn't 

the

 9 courts look to a lot of the law that's been established

 10 by the courts around the Securities And Exchange

 11 Commission enforcing the same words?

 12 MR. BERRY: Yes, they would. And the

 13 proposed ruled acknowledges that talk about the fact 

that

 14 there's been a lot of case law developed under Section

 15 10b and 10b-5.

 16 And that, in many respects, the we're

 17 proposing that this provision be guided by the law that

 18 has developed around 10b and 10b-5) with appropriate

 19 modifications.

 20 CHAIRMAN GENSLER: Commissioner O'Malia?

 21 COMMISSIONER O'MALIA: Thank you, Mr.

 22 Chairman. The manipulative or deceptive devise must 

be,

 

112

 1 quote, "Used in connection with a jurisdictional

 2 transaction," correct?

 3 MR. BERRY: That's correct.

 4 COMMISSIONER O'MALIA: Can you help me

 5 understand how the SEC is interpreted this and how 

we're

 6 interpreting this in our rulemaking? And maybe any

 7 flavor you can -- is there a nexus between the conduct

 8 and the jurisdictional transaction?

 9 MR. HIGGINS: Right. So the Supreme Court

 10 again has weighed in on this specific issue in 

connection

 11 with the SEC versus Sanford case, which can came down 

in

 12 200w.

 13 In that case, the Supreme Court breathed

 14 light in the three-words phase "in connection with" by

 15 saying: So long as the fraud coincides with the SEC

 16 jurisdictional transaction, there is that sufficient

 17 nexus, as you said.

 18 Now, the Court was careful in that case to

 19 not be unlimited. I believe it's footnote 4 of that 

cas

 20 the Court went on to say -- this was a 9-0 case, by the

 21 way. I think it was unanimous. The Court said: When

 22 we're saying "in connection with," it's not limitless.

 

113

 1 So they gave the example of a stockbroker 

who

 2 steals cash. Not a money-market fund, but cash from a

 3 client's account and uses that cash to buy real estate.

 4 There is a not a sufficient nexus. And you would not

 5 violate 10b-5 under that fact pattern.

 6 So it's broad, is as the entire rule. It's

 7 meant to be flexible, but it's not limitless.

 8 COMMISSIONER O'MALIA: I think I'm done 

with

 9 my disruptive trading practices questions.

 10 CHAIRMAN GENSLER: Manipulative questions.

 11 COMMISSIONER O'MALIA: Right. Yes.

 12 CHAIRMAN O'MALIA: I gather, and I think

 13 Commissioner O'Malia's questions are very helpful, 

we're

 14 not alone in this because there's a tremendous amount 

of

 15 case law, I think. There's a tremendous amount of case

 16 law, and that's what I understood, at least I 

understand

 17 was the intent of Congress here. So if we have new

 18 fraud-based manipulation, it wouldn't be, as you say,

 19 unfounded because it would be grounded in this case 

law.

 20 And you've answered a very important second

 21 question, Mark, is that we're not trying to incorporate
 22 the insider trader piece in that case law, but if you
 

114

 1 could you answer those two pieces to the questions

 2 MR. HIGGINS: Yes. Justice Renquist said 

of

 3 10b-5: That from a egg corn a new oak has grown.

 4 CHAIRMAN GENSLER: Which Justice was that?

 5 MR. HIGGINS: Renquist. So he's making a

 6 point in this statement there is a huge body of case 

law

 7 under 10b-5 that we can avail ourselves to. And I'm 

sure

 8 the courts will too as they interpret it. So yes, we

 9 will be guided by but tailored to our specific mission.

 10 As far as insider trading, just to 

reiterate

 11 this rule does not prohibit insider trading, nor does 

it

 12 impose any new duty of disclosure on any market

 13 participants.

 14 There's a specific provision in 753 that 

says

 15 you do not have to divulge inside or confidential

 16 information to the public before you trade. However, 

if

 17 you do speak, you must speak fully and completely and 

not

 18 be misleading in your statements.

 19 CHAIRMAN GENSLER: Other questions?

 20 COMMISSIONER O'MALIA: Thank you, Mr.
 21 Chairman. Your question did bring up in what I think

 22 will be helpful is helping everybody understand how 

this
 

115

 1 continuum works as I noted. 9(a)(2) in our statute,

 2 obviously, and we're not getting rid of that. Do you

 3 want to elaborate on what that relationship is?

 4 MR. HIGGINS: Yes. I think it's status 

quo,

 5 as far as 9(a)(2). So I think today, just as we have 

in

 6 the past, a person, depending on the right facts and

 7 circumstances could conceivably be charged with 

multiple

 8 (c)(1) violation and a 9(a) (2) violation.

 9 Congress was explicit that 753 would not

 10 upset 9(a)(2) or the applicability of 9(a)(2).

 11 COMMISSIONER O'MALIA: Now, you've showered

 12 praise on the SEC 4 and FERC for their new authorities.

 13 We are not without our own fraud authorities. How will

 14 those be -- and in case law therein. So how are we

going

 15 to use our case law? Are we going to band in it, or 

are

 16 we going to just go with SEC, or stand by it?

 17 MR. HIGGINS: No. We do not and we're 

clear

 18 in the preamble and I tried to make clear in our

 19 precedence, this is new authority. It's new. But we

 20 have decades of precedent in policing fraud 

manipulation.

 21 We have no intention amending that.
 22 I think any manipulation case that was
 

116

 1 brought before could still potentially be used in

 2 guidance in cases going forward on.

 3 COMMISSIONER O'MALIA: So now we have the

 4 SEC, FERC, our fraud, 9(a)(2), obviously this is

 5 extraordinarily complicated. We've given you 

significant

 6 tools. Congress has given us significant tools 

obviously

 7 with fraud and manipulation in changing the price 

element

 8 a little bit here.

 9 Now how do we form the industry of how

 10 they're going to be charged what the rules are going to

 11 be going forward and what applies? Are they going to 

be

 12 a 6(c)(1)? 6(c)(3)? 9(a)(2)? Fraud versus

 13 manipulation?

 14 You did dodge the 140 versus milliondollar

 15 question earlier on whether it will be fraud or

 16 manipulation because it has that reckless standard in

 17 there. What's the market to think about all of this?

 18 How can we give them the confidence, or what bin they

 19 will be bucketed? There's no confidence.

 20 MR. HIGGINS: Again, I'm not trying to 

dodge

 21 your questions. I'm simply saying that this area of 

the
 22 law is extremely fact and circumstance dependent. So 

to
 

117

 1 tell you today how somebody would be charged tomorrow 

is

 2 foolish from where I sit. So, you know, in that 

respect

 3 or with that caveat, everything is still on the table 

and

 4 it always will be.

 5 If a specific fact person merits a 4b 

charge

 6 but not (c)(1) charge, that would be something that the

 7 Commission would consider.

 8 And a fact patten that may fit that 

profile

 9 is where you have somebody that is perpetrating a 

fraud,

 10 they have requisite intent, but there in not a 

sufficient

 11 connection through a connection jurisdictional

 12 transaction. If they're selling widgets or something

 13 like that that aren't jurisdictional, maybe you have a 

4b

 14 fraud and not a (c) (1) fraud.

 15 So as you can see with every new fact 

there's

 16 a new permientation and new analysis that goes into 

this.

 17 MR. BERRY: Can I add just one comment?

 18 CHAIRMAN GENSLER: Please.

 19 MR. BERRY: The one thing that I would hope
 20 that would be of comfort to the industry is that most 

of

 21 the provisions that you just recited, Commission 

O'Malia,

 22 requires specific intent or intent to defraud.
 

118

 1 So in most instances, with the exception

 2 recklessness under (c)(1)if you are acting without

 3 fraudulent intent or without specific intent to

 4 manipulate to effect the price, you should be okay. 

It's

 5 when you are acting with that intent that you can get

 6 into trouble.

 7 MR. HIGGINS: And just one other point with

 8 recklessness. I want to be real clear on this. It's 

not

 9 your standard tort definition, recklessness. The 

courts

 10 are very clear in securities context and we are in our

 11 rulemaking and in our preamble in the cases we cite.

 12 When we say "recklessness," we mean a lesser showing of

 13 intent. We don't mean a higher degree of negligence. 

I

 14 hope that's eliminating. I just want to make that 

point.

 15 People aren't, I don't think, are going to

 16 stumble into a (c)(1) violation. You have to have the

 17 requisite of that intent.

 18 COMMISSIONER O'MALIA: Thank you, both.

 19 CHAIRMAN GENSLER: I can tell we have four

 20 extremely, accomplished, and knowledgeable lawyers. I

 21 didn't go to law school, but I followed most of that.

 22 COMMISSIONER CHILTON: Mr. Chairman?

 

119

 1 CHAIRMAN GENSLER: Yes, Commissioner 

Chilton.

 2 COMMISSIONER CHILTON: I would just want to

 3 compliment, and I appreciate Commissioner's O'Malia's

 4 questions. I think they're good questions.

 5 As I think all of us here know, 

particularly

 6 the Chairman, this language was sort of a compromise 

that

 7 was sort of banged out at the 11th hour of the

 8 conference. And, well, people may write if differently

 9 from one person or another. Congress wrote it, and 

it's

 10 the law. And so this is what we're left with. And I

 11 think you all have done a really spectacular job in

 12 putting a lot of meat on the bone.

 13 I do look forward to the comment we will 

get

 14 on this because I. Do think there's some legitimate

 15 questions. But I compliment you on the work that 

you've

 16 done so far.

 17 CHAIRMAN GENSLER: Again, if there are no

 18 further questions, I will entertain a call of the

 19 question. All that's in favor say "Aye"?

 20 (Chorus of ayes.)

 21 CHAIRMAN GENSLER: Any nayes? It being
 22 unanimous 5-0, we'll send this one, as well, to the
 

120

 1 Federal Register. Some of you can stay, or all of you

 2 can stay for disruptive trading practices.

 3 Brad, don't go anywhere. We have four 

great

 4 lawyers here. I don't want to give you up. So Bob, 

are

 5 you going to present this one?

 6 MR. PEASE: Yes, Mr. Chairman. Good 

morning,

 7 Mr. Chairman. Good morning, Commissioners. I would 

like

 8 to introduce our team member with the anti-manipulation

 9 and disruptive trading practices, the matter we're

 10 discussing today.

 11 As you can see from Mark's presentation a 

lot

 12 of hard work and very high qualify work was put into

 13 these efforts. Ralph Avery, Mary Connolly, Maria 

Godell

 14 from the Office of the General Counsel. William Pennet

 15 from DCIO. Christine Sorenson and Michael Pennet from

 16 OCE. James Goodwin and Dave Taft from DMO. And Mark

 17 Higgins, of course, Brian Walsh and Jeremy C. From

 18 Enforcement.

 19 I would also like to thank John Mark B., 

Brad

 20 Berry, and Andre C. For their invaluable assistance in

 21 these matters.
 22 Today we're here to discuss an advanced
 

121

 1 notice of proposed rulemaking concerning Section 747 of

 2 Dodd-Frank which prohibits, among other things, 

specific

 3 trading practices disruptive that are disruptive of 

fair

 4 and equitable trading.

 5 Separately and not part of our proposed

 6 rulemaking, Section 747 also makes it unlawful for any

 7 for any person to enter into swap knowing they're 

acting

 8 in reckless disregard the fact that its counterparty 

will

 9 use the swap as part of their device to scheme or

 10 artifice to defraud any third party.

 11 Section 747 under Dodd-Frank, in Section 

747

 12 under Dodd-Frank, Congress expressly prohibits certain

 13 trading practices that it determines is disruptive to

 14 fair and equitable trading.

 15 Congress made it unlawful to violate bids 

or

 16 offer demonstrate intentional or reckless disregard for

 17 the orderly execution of transactions during the 

closing

 18 period, or is of the character of, or is commonly know

 19 the trade as "spoofing." And spoofing is defined as

 20 bidding or offering with the intent to cancel the bid 

or
 21 offer before execution.

 22 Dodd-Frank Section 747 grants the 

Commission
 

122

 1 optional rulemaking authority to promulgate such rules

 2 and regulations as in the judgment of the Commission 

are

 3 reasonably necessary to prohibit trading practice

 4 enumerated and any other trading practice this is

 5 disruptive to fair and equitable trading.

 6 The prohibition on the three disruptive

 7 trading practices specified in Section 4c(a) become

 8 effective 360 days after the enactment of the DoddFrank

 9 Act.

 10 In this proposed advanced notice proposed

 11 rulemaking, the staff requests comments to 18 questions

 12 ranging from the Commission to promulgate additional

 13 guidance on the three enumerated statutory provisions.

 14 Promulgation prohibition against additional

 15 disruptive trading practice, supervision, and 

monitoring

 16 requirements, and applications of rules to electronic

 17 trading and algorithmic automated trading systems.

 18 For example, some of the questions 

contained

 19 in ANOPR are: Should the Commission provide additional

 20 guidance as to the nature of the conduct that is

 21 prohibited by the specifically enumerated paragraphs

 22 practices in the statutes.

 

123

 1 How should the Commission distinguished

 2 spoofing as articulated the statute from a legitimate

 3 trading act where an individual enters an order larger

 4 than necessary with the intent to cancel part of the

 5 order to ensure his or her order is filled.

 6 Does a partial fill of an order or series 

of

 7 orders necessarily exempt that activity from being

 8 defined as spoofing.

 9 Should there be obligations to supervise

 10 against prohibited trading practices.

 11 Similarly, should executorial brokers have

 12 affirmative obligation under the rules to ensure that

 13 customer trades are not disruptive.

 14 Should the Commission consider promulgating

 15 rules to regulate the use of algorithmic trading to

 16 prevent disruptive trading practices. And, if so, what

 17 kind of rules should the Commission consider.

 18 Should the Commission consider promulgating

 19 rules to regulate the design of algorithmic or 

automatic

 20 trading systems to prevent disruptive trading 

practices.

 21 Should the Commission consider promulgating

 22 rules to regulate the supervision and monitoring of

 

124

 1 algorithmic or automatic trading systems to prevent

 2 disruptive trading practices.

 3 And should the Commission promulgate

 4 additional rules specifically applicable to the use of

 5 algorithmic trading programs, front trading

 6 methodologies, and programs reasonably necessary to

 7 prevent such systems from disrupting fair and equitable

 8 markets.

 9 The staff is recommending a 60-day comment

 10 period for this advanced notice. The staff also 

intends

 11 to hold a public roundtable discussion on December 2,

 12 2010, to provide a forum to discuss questions contained

 13 in the ANOPR, as well as other issues prospective

 14 commentators may raise. Thank you. I'll will be happy

 15 to answer any questions.

 16 CHAIRMAN GENSLER: I think I'm supposed to

 17 first entertain a motion. So I'll entertain a motion.

 18 COMMISSIONER SOMMERS: So moved.

 19 COMMISSIONER CHILTON: Second.

 20 CHAIRMAN GENSLER: With that just questions

 21 on this I don't have really have. I just want to say 

I'm

 22 supporting the proposed advanced notice of proposed
 

125

 1 rulemaking.

 2 I think that Congress in granting us these

 3 additional authorities on disruptive trade practices 

they

 4 listed three. And you pointed to the questions A. B. 

C.

 5 But I think it is helpful to ask the public how to best

 6 give meaning to those three points, give specificity to

 7 those three points.

 8 Not everybody in the marketplace knows what

 9 it is to, quote, "violate a bid or offer," but it's in

 10 the statute now. And not everybody knows what spoofing

 11 is. So I'm glad that we would ask questions.

 12 I was more helpful in the last three months

 13 we would get more public comments. How many comments

 14 have we gotten into our e-mail boxes on this?

 15 MR. PEASE: On disruptive trading, we did 

not

 16 receive any.

 17 CHAIRMAN GENSLER: So I'm really hopeful 

that

 18 market participants understand that it is at least this

 19 Chairman's intent to move forward on rulemaking.

 20 I think it is incumbent to do rulemaking to

 21 give greater meaning to first three points violating 

bids

 22 and offers and spoofing and so forth. But also to

 

126

 1 consider whether we had a D or E or F as the provisions

 2 provide.

 3 In the 18 questions, we asked a series of

 4 questions also with regard to automated trading. We 

will

 5 have a staff roundtable I think it will be December 2.

 6 We had a lot other staff roundtables, so this will

 7 probably take a similar format. But when there are 

busy

 8 schedules for November, this is just frankly the first

 9 time we got those. I think I think that will be very

 10 helpful.

 11 In moving forward, these possible comments

 12 will also be informed by the Joint Advisory Committee,

 13 the CFTC. The Joint Advisory Committee, the CFTC has a

 14 Joint Advisory Committee. November 5 is our next 

meeting

 15 with that. But during this period of time, I wouldn't 

be

 16 surprised we have some comments and advise back from 

the

 17 committee and additional meetings.

 18 So I think all of this public comment 

period

 19 on these 18 questions, the Joint Advisory Committee, I

 20 hope that market participates. They're also busy.

 21 They're busy making markets and hedging their risks and
 22 so forth. They're business trying to racket to our 

rules
 

127

 1 and the SECs rules, but I hope they would help us on 

out

 2 on this one. But I don't have any specific questions.

 3 Commissioner Dunn?

 4 COMMISSIONER DUNN: Thank you, Mr. 

Chairman.

 5 I have no specific questions on this. I do look 

forward

 6 to that roundtable on it. I appreciate the hard work 

in

 7 there. And I would implore the public to take part.

 8 I also would like to thank all of the staff

 9 and the participants in the roundtables that we have 

been

 10 having. I think last Friday was a very, very good

 11 roundtable event. And I really appreciate the hard 

work

 12 that goes into that and what's coming out of it.

 13 CHAIRMAN GENSLER: Commissioner Sommers?

 14 COMMISSIONER SOMMERS: Thank you, Mr.

 15 Chairman. I would just like to say that I agree 

entirely

 16 with what you were just saying about these rules and

 17 being able to get public comment because this 

rulemaking

 18 -- although this rulemaking is optional, I do think 

that

 19 the practices that are expressly prohibited under 

Section
 20 747 the A. B. C are less than clear. And I would 

suggest

 21 that any sort of rulemaking that we would do our -- 

our

 22 goal through any sort of rulemaking here would be to 

make
 

128

 1 them as clear as possible.

 2 I know this is enormously complex. And 

that

 3 working through these sort of complicated issues is not

 4 easy. And I want to say how much I appreciate this

 5 team's effort in this area. But that the public needs 

to

 6 understand that this roundtable on December 2 is really

 7 important for us.

 8 I think, let's see, if we put the rule out

 9 today, they will have about three weeks after that

 10 roundtable to get their comments in under a 60-day 

extent

 11 period.

 12 So just to suggest to the public that if 

they

 13 have certain sections with regard to the ability for us

 14 to make these rules very clear, that they participate 

in

 15 this process.

 16 CHAIRMAN GENSLER: Thank you. Actually,

 17 we'll probably get an extra week. It always takes 

about

 18 a week between us and the Federal Register.

 19 That, by the way, for the press is not us.

 20 We usually hit the send button shortly or within 24

 21 hours. But the Federal Register has a process to get
 22 into the Federal Register that's been taking six or 

seven
 

129

 1 days. Commissioner Chilton?

 2 COMMISSIONER CHILTON: Thank you, Mr.

 3 Chairman. That last point that Commissioner Sommers 

was

 4 making about making things as clear as possible, I 

think

 5 is important.

 6 But what we've learned is that we also want

 7 to preserve some discretion in the future because you

 8 either look at what people are thinking now about 

robotic

 9 trading like algorithmic trading had the Flash-Trade

 10 Report come out nine months ago instead of after the 

bill

 11 was passed, maybe there would have been a provision in

 12 the law that would sort of outlaw algorithm anomalies.

 13 So I think we just need to be cognizant that

 14 this authority can change in future if we see something

 15 else.

 16 Folks are always looking for ways around 

the

 17 laws and regulation. And this, while I agree with

 18 Commissioner Sommers, to be clear, it also allows us to

 19 possibility change things in the future.

 20 There was an old Styx song Mr. Roboto. Do

 21 you remember what it said there: The problem is plain 

to
 22 see. Too much technology.
 

130

 1 Now, I don't think there's too much

 2 technology, but we've definitely seen instances this 

year

 3 where algorithms go wild and it costs people money. 

And

 4 it's not acceptable for the trader to just say sorry. 

My

 5 bad. To me it seems like that should be punished in 

some

 6 way.

 7 The Chairman and Commission Sommers talked

 8 about not getting a lot of comments on this. I gave a

 9 talk yesterday in Las Vegas to 200 engineer traders. 

And

 10 they were not asking many questions, so I asked them 

some

 11 questions. By the way, the first question is: Is 70

 12 percent of a market too much? People raised both 

hands.

 13 The other question where I go unanimity

 14 was: Should algorithmic traders and algorithmic 

programs

 15 that wild and impact royal markets, should they be held

 16 accountable? Everybody raised their hand.

 17 Now, that's not an official, public 

comment,

 18 but it seems to me even though you asked those four

 19 questions in here 15 through 18 about algorithmic

 20 traders, do we really want to add one more.
 21 I don't know if my colleagues would agree,

 22 but something should algorithmic traders who impact 

royal
 

131

 1 markets be held accountable. And, if so, in what 

fashion

 2 or something like that. And if the staff would like to

 3 fine-tune my question, or if the Chairman would like to

 4 second.

 5 CHAIRMAN GENSLER: I would be glad to 

second

 6 if you change royal to disrupt. I think that's what 

this

 7 is a disruptive trading practice.

 8 COMMISSIONER CHILTON: Yes.

 9 CHAIRMAN GENSLER: That's an amendment that

 10 we'll go to at the proper time.

 11 COMMISSIONER O'MALIA: Yes, I would like to

 12 associate myself with Commissioner Chilton's remarks on

 13 this. This is a good question to ask.

 14 COMMISSIONER CHILTON: I will move my

 15 question.

 16 CHAIRMAN GENSLER: All in favor of the

 17 amendment to add the question?

 18 (Chorus of ayes.)

 19 CHAIRMAN GENSLER: Any opposed? I think 

it's

 20 unanimous. We have Commissioner O'Malia's rest of the

 21 list of two pages.

 22 COMMISSIONER O'MALIA: Right. I'd like

 

132

 1 associate myself with Commissioner Sommers' comments on

 2 this issue. These are complicated. The specifics

 3 matters and we're asking some questions. But, again, I

 4 will try to inquire with the staff how to some of these

 5 are being treated going forward.

 6 Obviously, under 4c(a) of our current

 7 authority, the first three A through C might be 

covered.

 8 How do you respond to that? Is this redundant with

 9 4c(a), or not?

 10 MR. Yes: Are you asking whether -- can you

 11 repeat the question? I'm sorry, I didn't follow it.

 12 COMMISSIONER O'MALIA: Disruptive trading

 13 practices, are they're covered under 4c(a) already?

 14 MR. PEASE: Yes.

 15 COMMISSIONER O'MALIA: The disruptive 

trading

 16 practices described in Section 747 is described in the

 17 e-mail for generally prescribed pre-trade conduct.

 18 Absent in the ad hoc how analysis, how will the

 19 Commission monitor for these violations?

 20 MR. PEASE: Monitor in advance?

 21 COMMISSIONER O'MALIA: Monitor at all. 

Pre.

 22 Post.

 

133

 1 MR. PEASE: We've been working with the DMO

 2 and we will continue to work with them to come up with

 3 different markers that they would be able to use to try

 4 to figure out whether that would be violations. But I

 5 think it's a little bit premature to say what they 

would

 6 use for the surveillance activities. That's the 

purpose

 7 of this ANOPR to get more comments. As the 

Commissioner

 8 would say: Put more clarity around these terms.

 9 And as we get more clarity, then I think we

 10 can build some surveillance programs to be able to look

 11 at those type of practices in advance.

 12 COMMISSIONER O'MALIA: Great. What are the

 13 civil monetary penalties attached with each of these

 14 violations?

 15 MR. PEASE: If they would be brought

 16 understanding Section 747 alone, they would be $140,000

 17 plus restitution, as well.

 18 COMMISSIONER O'MALIA: If the $1 million

 19 dollar a day applies only to manipulation, could these 

be

 20 viewed as a scheme and therefore be subject to $1 

million

 21 dollar a day?

 22 MR. PEASE: There could be circumstances.

 

134

 1 Depending upon the facts and circumstances, conduct 

that

 2 may also violate is 747 would be a manipulation.

 3 COMMISSIONER O'MALIA: With regard to the

 4 bids, the violation of bids or offer, what are the

 5 elements of a violation of this provision? What is the

 6 level of intent, specifically, are we looking for?

 7 MR. PEASE: That's exactly what we're 

seeking

 8 comments on. Right now the statute doesn't state what

 9 the intent would be for violating bids and offers. I

 10 think we would be looking at both specific intent and

 11 recklessness behavior.

 12 COMMISSIONER O'MALIA: Are there any

 13 instances that you can think of where a trader may bid

 14 for over but not be in violation of this provision?

 15 MR. PEASE: I would rather not speculate on

 16 various fact patterns there. Again, it's very fact and

 17 circumstance specific.

 18 COMMISSIONER O'MALIA: How about a

 19 hypothetical? What if a price at NYMEX and Globex they

 20 pick a price that might have been lower on one rather

 21 than the other. Would be that be considered bidding to

 22 the offer? With all these steps coming into play, how 

we

 

135

 1 would deal with that?

 2 MR. PEASE: We would have to look at the

 3 totality of the circumstances at look at the intent.

 4 MR. BERRY: Can I interject?

 5 COMMISSIONER O'MALIA: Sure.

 6 MR. BERRY: Before you get too far done 

your

 7 list, I want to call to your attention.

 8 I'm looking at 4c(a) in my green book, and

 9 it's not clear to me how that intersects with the

 10 disruptive practices in 747.

 11 I think one of the question that you've ask

 12 whether disruptive practices that Congress spelled out 

in

 13 747 are already cover in Section 4c(a). And I don't 

see

 14 that they are in the terms that Congress used.

 15 It may be that for the provision that 

you're

 16 referring is a broad provision that could encompass 

some

 17 of those, but I don't see -- for example, 4c(a), I 

don't

 18 see anything about violating bids or offers or 

spoofing.

 19 So I wanted to -- I'm not sure that when Bob answered

 20 that question, he's seems to say -- I think he meant

 21 4c(a), right?
 22 MR. PEASE: As I understand your question,
 

136

 1 Commissioner, the statutory requirement in A. B. and C,

 2 no rulemaking is needed to give effect to those. And

 3 then we are promulgating the rule that reflects those,

 4 that mirrors those already enumerated provision and

 5 giving more meaning to them, if that was your question.

 6 COMMISSIONER O'MALIA: Right. That was my

 7 question. Thanks. With regard to the reckless intent

 8 that the orderly execution, the disregard for orderly

 9 execution of the close, do we have any thoughts on how

 10 you might define ordinarily execution?

 11 MR. PEASE: That particular area we're

 12 seeking comment on. We're also seeking comment on what

 13 action defines closing period, good activity in advance

 14 which has been executed during period, what all would 

be

 15 encompassed to cover those terms. They're not defined 

at

 16 all and there's little, if any, legislative history.

 17 I'm a little concerned about the vagueness 

of

 18 this probation that might prevent people from trading 

in

 19 the close.

 20 We have these trade and settlement &

 21 contracts on the Exchanges. How will those be treated?

 22 MR. PEASE: That will be an opportunity in

 

137

 1 the next roundtable to be able to make -- clarify those

 2 issues and address them specifically. We won't be

 3 looking at here; although it doesn't use those type

 4 words. Market and close. That's type of activity that

 5 we're trying to prohibit here, not legitimate behavior

 6 during the closing period.

 7 MR. MCGUNAGLE: Certainly with respect to

 8 using TAZ, the TAZ trading activity is subject 

impending

 9 Commission compliance against an entity by the name of

 10 Optibor. But in promulgated the rules with the 

Exchange

 11 and in conversations with the Exchange about conduct

 12 that's otherwise disruptive on the market and what that

 13 the Exchange is doing to ensure that there is 

sufficient

 14 liquidity during the closing range to accomplish the 

goal

 15 of the close to get an appropriate or meaningful

 16 settlement price and how is that activity that there

 17 isn't attraction by -- distraction during the closing

 18 range when we're effecting what the closing price 

should

 19 be.

 20 COMMISSIONER O'MALIA: And question 12, 

it's

 21 a disorderly execution question. How are we defining
 22 that? Are you asking for definition? Do you have a
 

138

 1 sense what the definition might be? Do you have an

 2 opinion on that?

 3 MR. MCGUNAGLE: No. Again, this would be

 4 another -- this is a fact and circumstances. I think 

the

 5 analysis that we will have getting some input certainly

 6 from industry about where they would wee maybe there's

 7 markers currently activity that disorderly, but the

 8 expectation is that we're going to be developing this 

in

 9 cases as we evaluate the trade strategies and make the

 10 recommendations and have discussion with these traders

 11 about whether we see conduct as being violative.

 12 CHAIRMAN GENSLER: Let me just jump in,

 13 Commissioner O'Malia. I think this is an amendment, 

but

 14 question 12 can you add -- and it's an amendment to see 

I

 15 support it -- if so because you have an if so, what 

size?

 16 Well, you do have it. You do have it. How should it

 17 distinguish between orderly and disorderly?

 18 COMMISSIONER O'MALIA: To the size 

question,

 19 my question is how are we going define particularly 

large

 20 orders?

 21 MR. PEASE: That's one of the things we're
 22 seeking comment on. What we're trying to do is get
 

139

 1 objective criteria that we can use for what would

 2 consider a large trade. So it would vary over the

 3 circumstances.

 4 And there are regulations that say what 15

 5 (0)(3) in our regulations right now which have some

 6 guidance, but that may not be appropriate in this

 7 circumstance. So we're looking to see to get comments

 8 what would constitute a large trade. And then once we

 9 have a large trade, when it's as the questions are 

asking

 10 for concerning disorderly execution of those, does that

 11 vary over time. Does it very under circumstances of

 12 market conditions.

 13 We're looking for comments along those

 14 directions because it can be -- a large trade can go in

 15 at a certain time of the market and not cause a

 16 disruption, other times depending on facts and

 17 circumstances. Should there be a monitoring question.

 18 We're asking another question where you're monitor this

 19 large trade as it's come into the market. And taking

 20 into account and consideration such as what's changed

 21 during the day and what's changed when they made the

 22 decision to execute that transaction. All different
 

140

 1 factors we want to look at.

 2 We're asking the question should there be

 3 additional controls when you're having a large trade

 4 which would have the potential to disrupt the market.

 5 COMMISSIONER O'MALIA: Well, you have a 

very

 6 difficult job in defining this with regard to 

technology

 7 and the Advisory Committee. And we've asked many of

 8 these questions. We either get different definitions, 

or

 9 different ideas about what's the definition means for

 10 various strategies. Good luck.

 11 MR. PEASE: We look forward to working with

 12 your committee to try help solve this problem.

 13 CHAIRMAN GENSLER: Thank you, Commissioner

 14 O'Malia for your thoughtfulness on this. If there are 

no

 15 further questions on disruptive trading practices

 16 advanced notices for proposed rulemaking, I will then

 17 call the question. All in favor say "Aye"?

 18 (Chorus of ayes.)

 19 CHAIRMAN GENSLER: Any opposed? The ayes

 20 being unanimous, we will send this on to the Federal

 21 Register. Let me find the right thing to read from 

here.

 22 If I'm allowed to do this, this is

 

141

 1 housekeeping in trying to set up a new meeting schedule

 2 and so forth. But first I need a unanimously consent 

on

 3 something.

 4 The Sunshine Act Commission rule requires

 5 one-week notice of the subject matter to be considered 

at

 6 a public meeting. And I actually asked a lawyer

 7 yesterday could we consider today what our next meeting

 8 is. Apparently, we didn't notice the public that we'd

 9 just be talking when our next meeting is.

 10 So I would like a vote to approve that,

 11 though we didn't notice that we would vote on when our

 12 next meeting was, that we just vote to pick our next

 13 meeting.

 14 So consequently, I guess in order to ensure

 15 that we conduct this meeting, and in accordance with 

the

 16 Sunshine Act, the Chair will entertainer a motion that

 17 the business of the Commission requires a change in

 18 todays agenda so we actually discuss when our next

 19 meeting is.

 20 COMMISSIONER SOMMERS: So moved.

 21 COMMISSIONER O'MALIA: Second.

 22 CHAIRMAN GENSLER: All in favor say "Aye"?

 

142

 1 (Chorus of ayes.)

 2 CHAIRMAN GENSLER: Any opposed? We did 

that

 3 administrative thing. Now, in terms of our next 

meeting

 4 -- we always want to be in accordance with the Sunshine

 5 Act. In terms of the next meeting, I think that 

Deborah

 6 Ridgeway, who does all this scheduling between us, I 

said

 7 three dates in November. One of them might end up 

being

 8 December 1.

 9 December 10 -- we'll put this all in 

Federal

 10 the Register. December 10 -- November 10. November 10

 11 from 1:00 to 4:00 in the afternoon. November 19, which

 12 must be all day thing, but it's 9:30 to 5:30. I think 

we

 13 have a calendar here internally six or seven of these

 14 things.

 15 And then December 1, actually, even though 

we

 16 were trying to do November 30. I think somebody wasn't

 17 available December 1 again in the morning 9:30 to 

12:30.

 18 So I would like offer a motion that those 

are

 19 our next three meetings. And, of course, as we have 

been
 20 seven days before putting it on our website the actual

 21 agenda items of the meeting. Do I hear a second?

 22 COMMISSIONER SOMMERS: Second.
 

143

 1 CHAIRMAN GENSLER: All in favor say 

"Aye"?

 2 (Chorus of ayes.)

 3 CHAIRMAN GENSLER: Any opposed? No

 4 opposed. That is carried unanimously that are next 

three

 5 meetings are the 10th, 19th, and December 1st.

 6 I do think we still, just for the press,

 7 we're sort of anticipating two meetings after the

 8 December 1st one. We're human. Some of this is going 

to

 9 slip, inevitably.

 10 I know we're getting down to the crunch 

time,

 11 so there will be somebody inevitably, because we're

 12 coordinating a lot with the SEC, the Federal Reserve, 

and

 13 other others, as well.

 14 Do I need to also do a unanimous consent 

for

 15 any technical corrections? So I have one last thing to

 16 do on the script.

 17 At this point, I also ask unanimous consent

 18 to allow staff to make technical corrections to 

documents

 19 voted on prior today prior to sending them to the 

Federal

 20 Register. And I will make that motion.
 21 COMMISSIONER SOMMERS: Second.

 22 CHAIRMAN GENSLER: All in favor, "Aye"?
 

144

 1 (Chorus of ayes.)

 2 CHAIRMAN GENSLER: Again, I want to thank

 3 everybody. I don't know if my fellow Commissioners 

have

 4 closing remarks. But we've done 30 topics areas that

 5 we're plowing through. Whether we're through a quarter

 6 or a third, we know that this an lawful lot to get 

done,

 7 but we're trying to get these out so the public can

 8 comment.

 9 We'll change the final rules that will be

 10 given in the proposals all in accordance with the

 11 Administrative Procedures Act. But I look forward to

 12 seeing you all back here on November 10.

 13 Any other closing? No. With that, I

 14 guess I need a motion to adjourn the meeting.

 15 COMMISSIONER SOMMERS: So moved.

 16 COMMISSIONER O'MALIA: Second.

 17 CHAIRMAN GENSLER: All in favor say 

"Aye"?

 18 (Chorus of ayes.)

 19 CHAIRMAN GENSLER: The meeting is

 20 adjourned. Thank you.

 21 ( Whereupon, the PROCEEDINGS were adjourned.)

 22 * * * *