COMMODITY FUTURES TRADING COMMISSION

 SECURITIES AND EXCHANGE COMMISSION

 PUBLIC ROUNDTABLE TO DISCUSS

 SWAP DATA, SWAP DATA REPOSITORIES, AND REAL TIME

 REPORTING

 Washington, D.C.

 Tuesday, September 14, 2010
 2 

 1 PARTICIPANTS:

 2 CFTC:

 3 RICHARD SHILTS

 4 GABRIELLE SUDIK

 5 DAVID TAYLOR

 6 IRINA LEONOVA

 7 SUSAN NATHAN

 8 SEBASTIAN PUJOL

 9 THOMAS LEAHY

 10 JEFFREY STEINER

 11 JASON SHAFER

 12 GEORGE PULLEN

 13 ANNE SCHUBERT

 14 ANGIE LE

 15 SEC:

 16 ROBERT COOK

 17 JAMES BRIGAGLIANO

 18 BRIAN BUSSEY

 19 HEATHER SEIDEL

 20 JO ANNE SWINDLER

 21 DAVID MICHEHL

 22 MICHAEL GAW
 3 

 1 PARTICIPANTS (CONT'D):

 2 Panel One:

 3 ATHANASSOS DIPLAS

 Managing Director Deutsche Bank

 4 

 MARK DIXON

 5 Chief Operating Officer Evolution Markets

 6 JEFF GOOCH

 Chief Executive Officer, MarkitSERV Executive Vice

 7 President, Portfolio Valuations

 8 STEWART MacBETH

 Managing Director, The Depository Trust & Clearing

 9 Corporation (DTCC) General Manager, DTCC Trade

 Information Warehouse

 10

 JIRO OKOCHI

 11 Chief Executive Officer Reval

 12 RAF PRITCHARD

 Chief Executive Officer, North America TriOptima

 13

 CHESTER SPATT

 14 Pamela R. And Kenneth B. Dunn Professor of Finance

 Tepper School of Business Director, Center for

 15 Financial Markets Carnegie Mellon University

 16 BRUCE TUPPER

 Director, Market Development ICE eConfirm

 17

 Panel Two:

 18

 JEREMY BARNUM

 19 Managing Director, Investment Banking J.P. Morgan

 Chase

 20

 SUNIL CUTINHO

 21 Director, Clearing Solutions CME Group Inc.

 22 MARK DIXON

 Chief Operating Officer Evolution Markets
 4 

 1 PARTICIPANTS (CONT'D):

 2 JOSEPH R. GLACE

 Chief Risk Officer Exelon, representing Coalition

 3 for Derivatives End-Users

 4 STEWART MacBETH

 Managing Director, The Depository Trust & Clearing

 5 Corporation (DTCC) General Manager, DTCC Trade

 Information Warehouse

 6 

 ROBERT PICKEL

 7 Executive Vice Chairman International Swaps and

 Derivatives Association, Inc. (ISDA)

 8 

 RAF PRITCHARD

 9 Chief Executive Officer, North America TriOptima

 10 NICHOLAS THEMELIS

 Chief Information Officer MarketAxess Corporation

 11

 Panel Three:

 12

 PETER AXILROD

 13 Managing Director, New Business Development The

 Depository Trust & Clearing Corporation (DTCC) 

 14

 SHAWN BERNARDO

 15 Managing Director Tullett Prebon Americas Corp.,

 representing Wholesale Markets Brokers Association

 16

 TRABUE BLAND

 17 Director of Regulatory Affairs and Assistant

 General Counsel ICE Trust

 18

 JOHN GIDMAN

 19 Executive Vice President, Loomis, Sayles & Company

 Vice Chairman, SIFMA Asset Managers Group

 20

 JEFF GOOCH

 21 Chief Executive Officer, MarkitSERV Executive Vice

 President, Portfolio Valuations

 22
 5 

 1 PARTICIPANTS (CONT'D):

 2 GEORGE HARRINGTON

 Global Head of Credit Bloomberg

 3 

 STEVE JOACHIM

 4 Executive Vice President, Transparency Services

 Financial Industry Regulatory Authority (FINRA)

 5 

 MICHAEL W. MASTERS

 6 President Masters Capital Management, representing

 Better Markets Inc.

 7 

 LEE OLESKY

 8 Chief Executive Officer TradeWeb

 9 JIM TOFFEY

 Chief Executive Officer Benchmark Solutions

 10

 Panel Four:

 11

 MICHAEL W. MASTERS

 12 President Masters Capital Management, representing

 Better Markets Inc.

 13

 DEAN PAYTON

 14 Managing Director and Chief Regulatory Officer CME

 Group Inc.

 15

 PETER SHAPIRO

 16 Managing Director Swap Financial Group

 17 YUNHO SONG

 Managing Director/Senior Trader Bank of America

 18 Merrill Lynch

 19 CHESTER SPATT

 Pamela R. And Kenneth B. Dunn Professor of Finance

 20 Tepper School of Business Director, Center for

 Financial Markets Carnegie Mellon University

 21

 22
 6 

 1 PARTICIPANTS (CONT'D):

 2 CONRAD VOLSTAD

 Chief Executive Officer International Swaps and

 3 Derivatives Association, Inc. (ISDA)

 4 NEAL WOLKOFF

 Chief Executive Officer ELX Futures, L.P.

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 7 

 1 C O N T E N T S

 2 Agenda Item: Page

 3 Opening Statements 8

 4 Panel One: SDR registration, functions, 15

 and responsibilities

 5 

 Panel Two: Mechanics of data reporting

 6 

 Panel Three - Models for real-time

 7 transparency and public reporting

 8 Panel Four - Effect of transparency on

 liquidity: Block trade exception

 9 

 Adjournment

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 8 

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

 2 (8:47 a.m.)

 3 MR. SHILTS: Okay, if everybody could

 4 take their seats. We want to get started. Good

 5 morning. My name is Rick Shilts and I'm the

 6 Acting Director of the Division of Market

 7 Oversight here at the CFTC. I'm pleased to open

 8 the joint CFTC-SEC Public Roundtable to discuss

 9 issues related to swap and security-based swap

 10 data repositories and data recordkeeping and

 11 reporting requirements associated with swaps and

 12 security-based swaps. In addition today we plan

 13 to discuss issues related to the real-time

 14 reporting of swaps and security-based swap trades.

 15 We have a very full agenda that is designed to

 16 focus the discussion on what we believe are very

 17 pertinent issues. The discussion today will be

 18 divided into four panels. I'd like to thank all

 19 of our distinguished group of panelists for

 20 agreeing to participate and taking time out of

 21 their busy schedules to discuss these important

 22 subjects. I'd also like to thank the staffs of
 9 

 1 the SEC and the CFTC for their hard work in

 2 planning today's Roundtable.

 3 This Roundtable is the second one to be

 4 conducted. The first focused on issues related to

 5 governance and conflict of interest in the

 6 clearing and listing of swaps. In addition we

 7 have another tomorrow related to swap execution

 8 facilities. That earlier Roundtable and the ones

 9 today and tomorrow illustrate the collaborative

 10 relationship that the staffs at the two agencies

 11 have developed in our efforts to implement the

 12 various provisions of the Dodd-Frank Act. As you

 13 all know, the Dodd-Frank Act brings the

 14 over-the-counter derivatives under comprehensive

 15 regulation. Standardized derivatives will be

 16 traded on transparent trading plan platforms and

 17 cleared by regulated central counterparties. This

 18 will increase transparency as information on swaps

 19 and security-based swap trades will be available

 20 to regulatory authorities and transaction data

 21 will be available to the public on a real-time

 22 basis. The overarching goal is to reduce the
 10

 1 overall risk in our economy which will greatly

 2 benefit the American public.

 3 Key elements of the Dodd-Frank Act

 4 include the reporting of swaps and security-based

 5 swaps to a registered entity, the establishment of

 6 swap and security-based swap data repositories to

 7 accept data on swap trades, and procedures for

 8 real-time reporting of key data on executed swaps

 9 and security-based swaps. The purpose of this

 10 Roundtable today is to hear the opinions and

 11 advice of persons with diverse interests,

 12 experience, and points of view on these various

 13 aspects of the legislation. The CFTC and SEC

 14 staffs look forward to hearing the thoughts and

 15 analyses of those on the panels today. The

 16 Roundtable should assist both of our staffs in

 17 implementing the Dodd-Frank Act.

 18 For the record, I'd like to note that

 19 all statements and opinions that may be expressed

 20 and all questions asked by CFTC staff are those of

 21 CFTC staff and do not represent the views of any

 22 commissioner or the Commission collectively.
 11

 1 And before I turn it over to my

 2 colleague, Robert Cook, I need to note some

 3 housekeeping items. I want to point out that this

 4 is not the only opportunity for interested parties

 5 to have input on these issues. Both the CFTC and

 6 SEC have mail boxes into which anyone can submit

 7 public comments and supporting materials. These

 8 comments will be read by staff and will help us

 9 get diverse input with respect not only to the

 10 specific rulemakings we will addressing today, but

 11 all the rulemakings related to implementation of

 12 the Dodd-Frank Act.

 13 Everybody should know that the meeting

 14 today is being recorded. The microphones are in

 15 front of you. Please press the button and you'll

 16 see the red light. That means you can talk and

 17 speak directly into the mike. When you're

 18 finished, please press the button to turn off the

 19 microphone. And we ask that you refrain from

 20 putting any blackberries near the mike or cell

 21 phones near the microphones as they've been known

 22 to cause interference with our system.
 12

 1 And now I'd like to invite some comments

 2 from my colleague, Robert Cook.

 3 MR. COOK: Thank you, Rick, and good

 4 morning. I'm Robert Cook. I'm the Director of

 5 the Division of Trading and Markets at the SEC.

 6 I'd just like to very briefly echo some of the

 7 comments that Rick just made.

 8 First, to thank the staff at the CFTC

 9 for their hard work in preparing for this panel

 10 and hosting it and for the collaboration and

 11 cooperation that you've shown to our staff at the

 12 SEC, and also thanks to the staff at the SEC for

 13 their work in helping to put together this panel.

 14 And we'll look forward to hosting you over at the

 15 SEC tomorrow for the panel on sets.

 16 Secondly, I'd like to thank the

 17 panelists for joining us today and again, as Rick

 18 mentioned, your insights and contributions to this

 19 discussion will be very important to us as we seek

 20 to implement the provisions of the Dodd-Frank Act.

 21 The topic today can be technical, but I

 22 think it's -- we'd all recognize it as extremely
 13

 1 important to fulfilling some of the core goals of

 2 the Dodd-Frank Act, including enhancing

 3 transparency, creating better market efficiency

 4 and liquidity, promoting standardization, reducing

 5 systemic risk, and enhancing the ability of

 6 regulators to monitor and regulate the currently

 7 OTC derivatives markets.

 8 So with that in mind, I'd like to also

 9 echo Rick's comments that this is not the only

 10 opportunity for anyone to participate and offer

 11 their comments in this dialogue. The mail boxes

 12 that Rick mentioned are very useful to us to get

 13 comments from people from various different

 14 backgrounds on these issues. And the rules that

 15 we will adopt under the Dodd-Frank Act will first

 16 be proposed for public comment, and we strongly

 17 encourage everyone who has interest to submit

 18 their comments on those rules. And we look

 19 forward to receiving them, and we will take those

 20 comments very seriously.

 21 And then finally, I'd like to make the

 22 same hedge clause, statement, that Rick just made
 14

 1 which is that any comments, questions, lines of

 2 inquiry that you may hear from SEC staff today

 3 really reflect their own views, not those of the

 4 SEC, any of the individual commissioners on the

 5 SEC, or their colleagues on the SEC staff.

 6 So with that I'll hand it back to Rick.

 7 MR. STILTS: Thanks, Robert. Before we

 8 start the first panel, I'd like to go through the

 9 agenda. As I mentioned, we have scheduled four

 10 panels today. The first panel is going to discuss

 11 swap data repository functions and

 12 responsibilities, and it will run from 9:00 to

 13 10:45. The second panel concerns the mechanics of

 14 reporting data on swaps which will go from 11:00

 15 to 12:45. Our third panel today concerns

 16 real-time reporting and the data elements to be

 17 disseminated and that will go from 1:45 to 3:30.

 18 And lastly, our fourth panel concerns the effect

 19 of transparency on liquidity and the block trade

 20 exception and that will run from 3:45 to 5:30.

 21 And we plan to conclude the Roundtable at 5:30

 22 p.m. I'll be the designated timekeeper and try to
 15

 1 make sure that we stay on time today.

 2 So I'd like to get started with the

 3 first panel. As I noted, Panel 1 will focus on

 4 registration functions and responsibilities of

 5 swap data repositories. Some of the topics we

 6 want to discuss today on this panel include the

 7 scope of a swap data repository's core repository

 8 functions, any other regulatory functions which

 9 SDRs should perform with respect to data in their

 10 possession, the mechanics of regulators' access to

 11 this data both for foreign regulators and domestic

 12 regulators, and any jurisdictional and

 13 information-sharing issues which might arise

 14 around foreign swap data repositories.

 15 To begin the discussion, I'd first like

 16 to go around the table and have all the panelists

 17 introduce themselves and just let us know where

 18 they're from.

 19 MR. GOOCH: Thanks, Rick. My name's

 20 Jeff Gooch from MarkitSERV. We're an electronic

 21 trade confirmation provider for OTC derivatives.

 22 I'm Chief Executive.
 16

 1 MR. SPATT: My name is Chester Spatt.

 2 I'm a professor at Carnegie Mellon University.

 3 From 2004-2007 I also happened to serve as the

 4 SEC's chief economist. I'm currently a member of

 5 the Shadow Financial Regulatory Committee that

 6 meets quarterly.

 7 MR. TUPPER: Bruce Tupper,

 8 Intercontinental Exchange or ICE. I manage the

 9 ICE eConfirm Trade Repository for Commodities and

 10 Energies.

 11 MR. MACBETH: Stewart MacBeth from DTCC.

 12 I'm the General Manager of DTCC's Trade

 13 Information Warehouse.

 14 MR. PUJOL: Good morning. My name is

 15 Sebastian Pujol. I work in the CFTC's Division of

 16 Market Oversight.

 17 MS. NATHAN: Hello. I'm Susan Nathan.

 18 I'm a Senior Special Counsel in the CFTC Division

 19 of Market Oversight.

 20 MS. SWINDLER: Good morning. My name is

 21 Jo Anne Swindler. I'm in the Division of Trading

 22 and Markets at the Securities and Exchange
 17

 1 Commission.

 2 MR. PRITCHARD: Hello. My name is Raf

 3 Pritchard. I'm the head of TriOptima North

 4 America. We provide portfolio compression,

 5 exposure management, and intertrade trade

 6 repository to the OTC swap market.

 7 MR. OKOCHI: Hello. My name is Jiro

 8 Okochi. I'm the CEO and cofounder of Reval. We

 9 provide a web-based solution for corporate end

 10 users and banks using over-the- counter

 11 derivatives.

 12 MR. DIXON: Good morning. I'm Mark

 13 Dixon with Evolution Markets. We're an

 14 over-the-counter derivatives broker.

 15 MR. DIPLAS: Good morning. I'm

 16 Athanassios Diplas. I'm from the global credit

 17 trading side of the business and I'm in charge - 

 18 I'm the global head of systemic risk management.

 19 I also co-chair the Credit Steering Committee

 20 under ISDA.

 21 MR. STILTS: Thank you very much. We're

 22 going to be asking some questions from the SEC and
 18

 1 CFTC staff, and we would like to give everyone an

 2 opportunity who wants to respond to a particular

 3 question the chance to give us their opinions and

 4 if it goes on too long, I may be forced to try to

 5 shorten the response so that we can go through all

 6 the topics we want to discuss today. And I guess 

 7 we'll kick if off with the first question from the

 8 SEC.

 9 MS. SWINDLER: Thank you, Rick. Let me

 10 start off and just ask you, if you could address a

 11 fairly broad question but one very important to

 12 our responsibilities. In your views, what are the

 13 best ways to address the core duties of SDRs? And

 14 if you could, in particular, focus on the

 15 confirmation obligation. Thank you.

 16 MR. MACBETH: This is Stewart MacBeth

 17 from DTCC. In terms of core duties, clearly the

 18 reporting of GTs is key. To do that, though,

 19 there is a series of underlying requirements that

 20 are needed including data, particularly trade

 21 data, trade event data, that are held as positions

 22 and other data attributes associated with those
 19

 1 positions that can be reported externally both to

 2 regulators based on that regulatory ambits and

 3 also to the public at a level of aggregation and

 4 anonymity. In terms of structure to provide that,

 5 various levels of infrastructure would be required

 6 including practices around business continuity,

 7 strong governance over the offering ordered in

 8 compliance procedures. So the function as a whole

 9 primarily focused on reporting but with supporting

 10 infrastructure to ensure that reporting is of high

 11 quality and appropriate.

 12 MR. STILTS: Anybody else?

 13 MR. OKOCHI: I'd like to echo what

 14 Stewart just said, but also add that I think it's

 15 not just about the data that the SDR holds, it's

 16 what to do with that data. So looking at future

 17 risks through analyzing current valuations,

 18 whether that's theoretical valuations or credit

 19 adjusted valuations to liquidate the positions,

 20 making sure the SDR is flexible to add new

 21 products pretty quickly, on top of all the

 22 security and redundancy disaster recovery that
 20

 1 should also be required. So I think it's really

 2 -- not just thinking about what to do with current

 3 and past trades, but how to grow with the market

 4 because I think our duty is to make sure that the

 5 markets continue to perform and grow along with

 6 complying with the regulations.

 7 MR. GOOCH: If I could add to that. I

 8 think this topic of confirmation SDRs comes up

 9 quite a lot in discussions. It's pretty worth

 10 backing up for a moment to say why are we talking

 11 about two things at the same time. Clearly to

 12 fulfill the roles that Stewart Jiro have commented

 13 on, you need - SDRs need a source of accurate data

 14 that's complete, agreed on by market participants,

 15 and timely. And confirmation is a good source of

 16 supplying that in a sense you have habit

 17 transactions being electronic, both parties have

 18 agreed. You have all the legal details. Most

 19 people are motivated to complete that as quickly

 20 as possible. And really, confirmations is the

 21 baseline that feeds SDRs, feeds CCPs, feeds all

 22 the transparency requirements. So it's a very
 21

 1 important part of the end game structure, I think,

 2 in terms of the OTC markets. Whether you call

 3 that an SDR function, whether you call that a SEF

 4 function, whether you call it something else, I'm

 5 not sure that that is important frankly. I think

 6 you have to call it something, and that's probably

 7 something for the Commission to decide on the

 8 right naming. But I think confirmations

 9 themselves have an important part of the ecosystem

 10 if this whole reform is going to be successful in

 11 terms of making sure we get high-quality data out

 12 to the right people.

 13 MR. SPATT: One particular issue with

 14 respect to the composition of data that I think is

 15 particularly important to flag is the arrangements

 16 for posting collateral and how collateral evolves,

 17 which might vary quite a lot because ultimately

 18 the assessment of credit exposures -- and

 19 obviously it's credit kinds of issues and systemic

 20 risk that are motivating much of the reform -- the

 21 assessment of that depends on the fine detail of

 22 the contract. So I think it's very important that
 22

 1 that information be specifically captured and be

 2 readily available to the regulators. That was

 3 clearly a crucial problem several years ago.

 4 MR. DIPLAS: I think if I can follow up

 5 on that point, I think we were discussing some of

 6 the core functions of the data repositories and

 7 that is best captured along with the confirm. But

 8 then we have all of these ancillary functions of

 9 the thing are important. Now collateral in

 10 particular is a thing to be associated currently

 11 as we stand with a specific report because those

 12 are organized on an asset class basis while

 13 collateral is actually collected on a legal entity

 14 basis most of the time or several different

 15 entities together that might have actually have

 16 cross netting agreements, et cetera. So I think a

 17 single report would not be able to individually

 18 fulfill that function, but that information is to

 19 be obviously accurate to let the regulators go to

 20 multiple ones sometimes to collect that but also

 21 they have to go individually to specific firms

 22 that participate to get the full picture.
 23

 1 MR. STILTS: Are you saying that the SDR

 2 would have to go to the individual firms?

 3 MR. DIPLAS: No, no. The regulator will

 4 have to actually get that systemic risk picture

 5 basically. But the other thing that is important

 6 was the report, it varies by asset class and is

 7 that it provides other functions that are perhaps

 8 known that the seller demanded by the legislation

 9 but they're actually equally important. So asset

 10 class such as credit, they contain right now

 11 information that help us actually deal with things

 12 like credit events, to be able to actually settle

 13 the contracts in case there's a bankruptcy, et

 14 cetera. So a lot of that information might not be

 15 mandated by the legislation, but at the same time

 16 is very important in the design of the report.

 17 The second thing that is fundamental

 18 from our perspective is a market participant. And

 19 I think is similar to what regulators have is to

 20 have a single report per asset class so that all

 21 that information can be contained in one place and

 22 we don't have actually information falling through
 24

 1 the gaps. Part of the problem in the past has

 2 been that information was fragmented and that

 3 caused the actual problems.

 4 MR. PRITCHARD: This is Raf from

 5 TriOptima. I agree with both of those points

 6 there. I think just to mention the systemic risk

 7 monitoring point and really the key is to make

 8 sure that a repository has a comprehensive view of

 9 all the swaps and standing live contracts. And

 10 there's a broad landscape there. Our exposure

 11 management service see 6 million trades across

 12 many asset classes, credit, equity, FX, exotics,

 13 commodity, et cetera, and it's many different

 14 instrument types within that simple, high- volume

 15 vanilla trades, forwards and swaps, but also

 16 complex trades and structures. And what's really

 17 important for a repository is that it has

 18 comprehensive coverage. It captures the whole

 19 universe of trades out there and uniquely. It

 20 doesn't double count anything. So the approach

 21 taken should really focus on that goal because

 22 that's where the systemic risk monitoring benefit
 25

 1 can be best realized.

 2 MR. PUJOL: Excuse me. I'd like to

 3 follow up on a few things that have been said here

 4 because it seems like we're drawing -- there's a

 5 little bit of distinction between the data that

 6 people agree should be in it in order for the

 7 repository to be of use and the functions, and I'd

 8 to explore just a little bit more the ones that

 9 you think the SDRs must perform with respect to

 10 that data and that no one else in the market is

 11 going to be in a position to perform. If you

 12 could just give us a little bit more of a sense of

 13 assuming that the position data is there and the

 14 valuation data is there and all that information

 15 gets there, is there something that the SDR has to

 16 do with respect to that data, or is it optional?

 17 Somebody has to do it but not necessarily SDRs.

 18 MR. MACBETH: So the key thing the SDR

 19 has is this potential completeness of data. So

 20 others have already commented on this, but this

 21 fragmentation point is key. The current

 22 environment that we work in and we live in, the
 26

 1 information is there. It is available to

 2 regulators. The problem is an aggregation and

 3 consolidation one. And what the repositories

 4 really are going to provide is a solution to that

 5 problem and that in reality is the key

 6 differentiator for repositories. Now the thing

 7 that makes hard is the structural elements of how

 8 you then put that kind of model in place because

 9 there's potentially -- and there's a risk here

 10 that we blend into the panel to some extent -- the

 11 different actors and different service providers

 12 start overlapping in some of their roles, or

 13 there's many service providers providing an SDR

 14 function and then the aggregation responsibility

 15 falls on a Commission to aggregate and then in the

 16 public domain, it's potentially impossible to

 17 aggregate. So things like the net open interest

 18 in certain contracts can only be determined by a

 19 level of detail which won't be available to the

 20 public and the counterparties won't be disclosed

 21 to the public, therefore, the net position won't

 22 be correctly able to be netted. And we can see
 27

 1 that in our data at DTCC even looking at some of

 2 the information across clearers if you try to

 3 aggregate that. Some of our netting actually

 4 produces lower numbers than they might publish.

 5 So the true net open interest in the market, some

 6 of the trading activity that goes on in the

 7 market, is only really visible from this single

 8 vantage point of a repository in an unfragmented

 9 mode. So that to my mind is the big

 10 differentiator about a repository. We agree --

 11 there were some comments made in effect about

 12 different consumers, people talked about systemic

 13 risk and the value of collateral and information

 14 about where collateral is held, that's clear. The

 15 asset class specialism of repositories as a

 16 provider is very useful because each contract form

 17 and potentially some of the additional processing

 18 provided does have its own peculiarities. It's

 19 very difficult, I think, to play across everything

 20 in the whole space successfully and move at the

 21 pace that the market does. So from a provider

 22 perspective, concentrating in a market and
 28

 1 delivering to that market, is a good model.

 2 In terms of -- we talked a little bit

 3 about additional services. Athanassios mentioned

 4 those. So from a DTCC perspective, that's very

 5 important to us. We do offer some additional

 6 services. We take in confirmed trades. Jeff

 7 Gooch mentioned that. But from there, we do

 8 maintain a record and we actually perform life

 9 cycle event processing on that record, date things 

 10 for succession events. So if you imagine the

 11 underlying corporates that go through mergers,

 12 acquisitions, they restructure, we maintain that.

 13 So that if a regulator wants an actual position,

 14 and understanding in terms of market exposure and

 15 the market today, they can get that readily. So

 16 confirmations alone -- confirmation is the best

 17 source, but confirmation alone isn't all a

 18 repository will need. It will need some

 19 capability to maintain those contract records

 20 thereafter. And market participants themselves

 21 enjoy that centralized data base. That was the

 22 history of DTCC's trade information repository.
 29

 1 It really was about mitigating ops risk and

 2 producing efficiencies by being a central data

 3 base. The world before was a very confused,

 4 bilateral reconciliation world. There was

 5 multiple bilateral reconciliation points that

 6 happened. And the value proposition of the

 7 warehouse was really to be a central data base so

 8 that each participant could go and reconcile to

 9 that record and not have to deal with the

 10 bilateral complexity. So I think it has been kind

 11 of a powerful model and is a well proven model.

 12 But it's interesting as we go through this reform,

 13 there are some threats again with the other

 14 participants that are becoming actors in this

 15 space. And clearly there's some of the

 16 requirements currently that -- we've enjoyed some

 17 ability to grow business over a period, but

 18 whether there are threats from things like ICCPs

 19 average stringers as SDRs, providing some of the

 20 same data, they could be at the expense of

 21 ultimately the public interest where that net

 22 position needs to be presented, is some of the
 30

 1 issues in implementing regulation we're going to

 2 have to try and manage.

 3 MR. TUPPER: Bruce Tupper with ICE

 4 eConfirm. Just to follow on, I think it's

 5 important we take a step back and just look at

 6 within Dodd-Frank the duties of an SDR and just to

 7 paraphrase those there, to accept data, to

 8 confirm, maintain the data, and provide the

 9 Commission with access. And the Commission would

 10 establish automated reports, monitoring screening,

 11 and analyzing data. Just speaking for Energies

 12 and Commodities, we've operated this service for

 13 eight years and our warehouse holds 5.1 million

 14 trades. One of the biggest challenges I believe

 15 to accomplishing the analyzing and position

 16 reporting in these ancillary services is first to

 17 build the system that has the connectivity to all

 18 the market participants. When you look at

 19 Energies, it's a very diverse group of

 20 participants. It's made up of banks, energy

 21 companies, producers, hedge funds. So there was a

 22 real challenge when we set out to build the
 31

 1 warehouse for Energies was to figure a way how to

 2 connect all these people into one central

 3 repository. That really is going to be key and

 4 working with the Commission to create the rules

 5 around people's access to that system, how they

 6 should connect, just pretty much the rule book to

 7 an SDR. I believe once that's accomplished and

 8 the industry understands what they need to do, the

 9 fallout of that will be a very robust data base

 10 that the Commission then could put these ancillary

 11 services on that were mentioned by other panel

 12 members. You can margin the collateral, but until

 13 you kind of accomplish step one which is the first

 14 part of the duties, you're really not going to

 15 achieve your goal. I would say working with the

 16 Commission is that there's a lot of components

 17 that we were able to achieve or build with the

 18 industry, especially with Energies it's very

 19 diverse as I mentioned. So I think having or

 20 working with the numerous standards bodies -- the

 21 BN-1, there's the EEI in Energies, there's LEAP

 22 which is for physical oil -- you really need to
 32

 1 engage each of these standards bodies to really

 2 get them onboard so that their costs -- the

 3 industry would accept that SDR. So, for example, 

 4 if you're after gaining oil trade data, you're

 5 going to want to work and standardize all those

 6 terms so that all of the, let's just say non-large

 7 volume participants, would accept that and then

 8 submit you the data. Once you have the confirmed

 9 trade data in, and then as mentioned earlier, life

 10 cycle events is very important. To date, our

 11 experience has been our customers haven't really

 12 had a demand in Energies for life cycle events. I

 13 would really attribute that to probably OTC

 14 clearing or clearing of swaps. So once that

 15 service came to market, there was a really

 16 diminished amount of I'd say open interest out

 17 there or risk, real concern. A lot of those, just

 18 say, risky participants were moved quickly into

 19 the clearinghouse. So what you were really left

 20 with was this kind of pool of trades where it was

 21 either large dealers or you had producers and they

 22 were helping them hedge. Right? Which is -- and
 33

 1 a lot of those trades really weren't candidates

 2 for clearing because of the cost of collateral to

 3 post. What the producers were -- really just as

 4 many people -- probably pretty much -- their

 5 production to be produced is really the

 6 collateral. So it's not a cash collateral so to

 7 speak. So we work very closely with a lot of

 8 these smaller producers to build functionality

 9 where they're not very technically savvy to help

 10 them come on to the system and then aggregate all

 11 of them. So I guess in summary there's a lot of

 12 building blocks which I think are really well

 13 described in the bill. In Dodd-Frank they

 14 describe the duties and then once that's

 15 accomplished, this Section 5 really starts

 16 speaking about the reports and analyzing the data.

 17 I think you're really well positioned to do that.

 18 But I think really the goal is just really to

 19 establish that first part. Thank you.

 20 MR. DIPLAS: I would think -- I mean, we

 21 focus a lot of the discussion obviously on the

 22 more electronically confirmed trades which is
 34

 1 important. Obviously we would love all the trades

 2 to be such. But there's also trades that are not

 3 electronically confirmed and legacy trades, et

 4 cetera, those are small counterparty. I think we

 5 need to also think as we design the framework that

 6 we create a framework where it can accommodate

 7 both. One of those things -- this is kind of the

 8 approach we took, for example, on the credit side

 9 where we have kind of the gold records which is

 10 basically the electronically confirmed trades, but

 11 at the same time we have created the concept of

 12 the copper records which is basically a more

 13 distilled set of information which has been agreed

 14 with the regulators. We created a few different

 15 buckets of information where different trades can

 16 fall in. And then we have a process by which we

 17 can agree what needs to be transmitted to the

 18 regulators. And I think that's important, that

 19 that kind of concept is expanded and that's where

 20 it can also allow for new products to come onboard

 21 and it also allows or gives the time to the

 22 providers to develop basically the electronic
 35

 1 confirms as needed, et cetera.

 2 MR. PRITCHARD: I'll pick up on that. I

 3 think that's a very good point, Thanasas. There

 4 is a proportion of trades out there. There is

 5 more complex legacy, exotic for whatever reason,

 6 and not electronically confirmed. And I think if

 7 we bear in mind the comprehensiveness goal of the

 8 repository, then it's really key to go to the

 9 source of the trades and that's the parties

 10 themselves, that they should submit the trades

 11 direct to the repository rather than some

 12 intermediary, very successful electronic

 13 confirmation or whatever platform. But the

 14 parties themselves have a strong interest in doing

 15 their own risk management across their entire

 16 portfolios. And thus they've got the best view of

 17 these trades and they're the best place to be the

 18 source of it for repositories.

 19 MR. SPATT: I'd like to follow up on the

 20 last couple -- this is Chester Spatt. I'd like to

 21 follow up on the last couple of remarks.

 22 I think it's very important, too, what
 36

 1 the data repositories would be doing, that their

 2 sphere is potentially beyond clear and

 3 standardized trades. And I think the last couple

 4 of comments really highlight that issue and what's

 5 some of the crucial nuances there. One shouldn't

 6 think of this in terms of some equivalence between

 7 data repositories and clearing. It seems to me

 8 the scope for data repositories is much -- is

 9 broader.

 10 And, again, if you think back to the --

 11 you know, I think we sometimes kind of lose sight

 12 of what some of the particular issues were that

 13 kind of motivated kind of where we are now. And

 14 I'm not suggesting that we kind of narrowly link

 15 to the details of what happened a few years ago,

 16 but we also ought not to forget what happened a

 17 few years ago. But, you know, situations like the

 18 types of derivative contracts that AIG entered

 19 into, these are probably -- in many cases, these

 20 would not have been sufficiently standardized.

 21 These probably would not have been cleared kinds

 22 of contracts. The parties that were on the other
 37

 1 side of these trades were interested in customized

 2 exposures. The issues of understanding systemic

 3 risks are intimately linked to those types of

 4 instruments as well as the instruments that can be

 5 offset.

 6 The systemic risk issues weren't really

 7 as directly associated with contracts that were

 8 being netted. You know, and I think that -- you

 9 know, that point I think is understood. But

 10 obviously there's tradeoffs with respect to the

 11 scope for clearing, and I'm not advocating

 12 universal clearing. But I do think the data

 13 repository issue, the margin for the use of the

 14 repositories is much broader than with respect to

 15 standardization and clearing.

 16 MR. GOOCH: Can I make a couple of

 17 comments on that? I think -- first of all, I

 18 agree, you need -- for repositories to work, you

 19 need 100 percent trade population. And if you

 20 look at electronic trade confirmation today in the

 21 credit market, it's about 99 percent of trades are

 22 electronically confirmed. In the interest rate
 38

 1 market about 80 percent are confirmed and about 90

 2 percent could be if everyone used the available

 3 platforms. So with 1 percent or 10 percent there

 4 is definitely a gap. And it's important those

 5 transactions are collected electronically.

 6 Clearly they can't be collected in a format as a

 7 full legally binding, ISDA-type confirmation.

 8 But, you know, there needs to be a fee for those

 9 on the same basis.

 10 I think going back to this question of

 11 what the repository should do with that data, I

 12 think in terms of "must do" the only thing they

 13 must do is report it to regulators and the public.

 14 And, you know, the toughest reporting varies

 15 whether you're talking about they exist versus

 16 systemic risk perspectives, which will be about

 17 positions; or whether it's market surveillance

 18 perspectives, which means you need a full

 19 independent audit trail on every trade. And

 20 that's the sort of decision for the commissioners

 21 to take.

 22 But probably what repositories should do
 39

 1 is use that data for something else as well. I

 2 don't think it matters too much what that

 3 something else is. But the truism in almost any

 4 system you built within a firm or in a regulatory

 5 environment, if you fire data into a black hole

 6 with no feedback, generally the quality

 7 deteriorates. And you see that with transaction

 8 reporting in Europe where firms for many years

 9 have had a requirement to report derivatives and

 10 cash products to regulators. They fire them every

 11 day into this black hole. They never know whether

 12 they got it right. And every few years, people

 13 get very large fines for having missed literally

 14 millions of transactions that are misreported.

 15 And I think an important thing about,

 16 you know, what Stewart does at DTCC and what some

 17 other people around this table do is they collect

 18 the data for a purpose which the participants then

 19 use, whether it's settlement, whether it's

 20 reconciliation, whether it's something else. If

 21 it's wrong, it affects their own business

 22 processes and they will fix it probably much
 40

 1 faster than a regulator will spot a failure to

 2 report trades.

 3 So I do think that SDRs fulfill their

 4 primary function of creating regulatory

 5 transparency. But if they're going to be

 6 accurate, then it needs to be something that the

 7 industry itself is using them for. And also that,

 8 I think, positions them more as a benefit to the

 9 industry as opposed to a regulatory burden in

 10 terms of reporting.

 11 MR. SHILTS: We'd like to move on to the

 12 next question. We may try to come back a little

 13 bit later.

 14 MS. NATHAN: Thank you. Given the

 15 highly confidential nature of SDR information,

 16 what are some of the actions that an SDR might

 17 take or the rules in SDR might implement that will

 18 help to maintain the privacy of all swap

 19 transaction information? Particularly, what

 20 internal processes and safeguards should an SDR

 21 establish to protect the confidentiality of swap

 22 data in its possession.
 41

 1 MR. OKOCHI: Well, certainly you can

 2 start by having high levels of security protocols

 3 for encrypting the data from the outside. I think

 4 internally you can set up code bases for

 5 protecting the individual counterparties as well

 6 as their activities with whoever's on the other

 7 side of the ticket.

 8 So, you know, I think, again, it should

 9 be fairly comprehensive to be able to implement

 10 that. I think most of us around the table already

 11 have those levels of security around, you know,

 12 their own day-to-day businesses. So I think it's

 13 just really taking that to the next level,

 14 allowing, you know, regulators to come in and also

 15 view.

 16 You know, we also would have to be able

 17 to provide access and proof that the regulators

 18 looking in are indeed authorized. So having the

 19 proper administration tools with each regulator

 20 and getting the proper approvals for access to the

 21 system would be key.

 22 You know, I think on that note of being
 42

 1 able to access the information, you know, clearly

 2 given the global coordination of trying to get the

 3 reform in place there should be a mechanism for

 4 global access easily. You know, clearly using the

 5 Internet would be an advantage and there are

 6 certain protocols that would allow for secure

 7 access over the Internet.

 8 MR. DIPLAS: I would agree with those

 9 comments. Athanassios Diplas from Deutsche Bank.

 10 Obviously for us as participants the protection of

 11 that information is paramount. We want to ensure

 12 that it doesn't fall in the wrong hands.

 13 We also, flipping kind of the privacy

 14 question that you just mentioned, we also believe

 15 that the parties that need to know have to have

 16 access to that, and that means the various

 17 regulators. And we've been working on this topic

 18 obviously, actually for the last couple of years.

 19 One of the issues that we have is basically kind

 20 of different laws across the globe that sometimes

 21 inhibit that access of the various regulators. I

 22 think the regulatory committee has been doing a
 43

 1 lot of work to try to actually create a framework

 2 that actually enables the parties that need to

 3 know to have access to that information legally. 

 4 But right now, a lot of us as participants are

 5 hamstrung by different laws in the various

 6 jurisdictions that doesn't allow us to fully

 7 rebuild the counterparty names, et cetera. So I 

 8 think we need the help with the regulator to

 9 actually overcome some of these issues.

 10 MS. NATHAN: Along those lines, how do

 11 you think U.S.-registered SDRs should meet the

 12 indemnification requirements of Section 21(d)(2)?

 13 MR. OKOCHI: Well, that would entail

 14 every provider of data to the SDR indemnifying

 15 each SDR, so there would have to be a legal

 16 contract negotiated with each data provider. And

 17 presumably, they would have permission to present

 18 that data to the SDR.

 19 MR. MASTERS: Yeah, I think this is an

 20 important issue. And, you know, obviously the

 21 indemnification standard hasn't been determined.

 22 But clearly there's global interest in data and
 44

 1 repositories. And, you know, they're not

 2 restricted by national borders in terms of these

 3 markets. They are global markets. So, you know,

 4 security underlyings, U.S.-issued securities may

 5 be referenced in credit derivative transactions.

 6 They may be between two European participants.

 7 The SEC would have an interest in that dataset.

 8 But that dataset is really a European one by

 9 domicile of those participants.

 10 You know, reciprocally, there's European

 11 situations where U.S. firms will be trading on

 12 European underlyings, and Europeans will want that

 13 data. So this indemnification issue is important.

 14 You know, like the -- at DTCC, you know,

 15 currently we're pre-legislation this regulation in

 16 this regard. We are actively sharing data

 17 throughout the globe. We have a set of working

 18 standards that we've agreed with the OTC

 19 derivatives regulators forum for that sharing and

 20 it determines different types of regulators and

 21 potentially different interests. So certain

 22 information that is systemic risk data that is
 45

 1 shared in aggregates within certain jurisdictions,

 2 their interested in some of the more significant

 3 financial institutions in those jurisdictions, but

 4 also people who are writing contracts related to

 5 those financial institutions we share in

 6 aggregate. To prudential supervisors throughout

 7 the world we will share data from their regulatees

 8 and to markets regulators we will share data

 9 relating to the domicile of the underlying. And

 10 the parties where both parties -- or one party's

 11 within the market domicile for that market's

 12 regulator.

 13 Now, you know, what we've done at DTCC

 14 in part to manage, you know, a number of issues,

 15 so there's issues -- you know, clearly there's a

 16 sense that -- from other countries that data needs

 17 to be resident on shore. There's some of the

 18 privacy issues that Thanasas referred to. And

 19 there's, you know, this indemnification issue.

 20 So, you know, as a repository, where we are today

 21 is that, you know, we have a European entity as

 22 well as a U.S. entity. And, you know, we intend
 46

 1 that the European entity will share data, you

 2 know, locally to those regulators and will use,

 3 you know, the U.S. vehicles in the U.S.

 4 So, you know, there are some things that

 5 can be done via the repositories to, you know,

 6 manage some of those issues in terms of their

 7 corporate structure. But I think, you know, some

 8 of the real test is to -- as to the

 9 indemnification standards (inaudible). 

 10 MR. TUPPER: This is Bruce Tupper with

 11 ICE. I think this topic would be a great one to

 12 engage the standards bodies, especially energies

 13 (inaudible). There's a body called the Contract

 14 Drafting Committee that resides in the EEI and

 15 it's composed of mainly industry attorneys. I

 16 would recommend the Commission work with that

 17 group to pretty much detail what is that

 18 indemnification agreement and how to -- you know,

 19 the topics that were mentioned earlier with

 20 jurisdictions.

 21 In energies, many of the participants

 22 will create separate entities obviously by
 47

 1 location. So especially with large majors and

 2 financial institutions they'll create a, you know, 

 3 U.S., London, and Asian branch, and each of those

 4 will actually be legal entities that they confirm

 5 their trades under. So there are arrangements in

 6 place how they share data and how they interact.

 7 And I think formalizing that with this Contract

 8 Drafting Committee would be a great start.

 9 The implementation agreement, and I just

 10 speak quickly about a similar issue we had where

 11 we needed to implement kind of a multilateral

 12 agreement so customers would recognize electronic

 13 confirmations. When we began in energies eight

 14 years ago, there really wasn't a provision for

 15 that. So we worked closely with ISDA and industry

 16 attorneys to develop an annex-type agreement that

 17 was multilateral. That works very well in

 18 energies because of the just number of

 19 participants. So then once this agreement's

 20 actually legalese is defined and everyone's in

 21 agreement with what they want, the actual

 22 implementation of that should be done via a
 48

 1 standards body and be multilateral in nature. I

 2 think that will lead to very quick adoption of the

 3 indemnification terms.

 4 MR. PRITCHARD: It's Raf from TriOptima.

 5 If I could just echo some of Thanasas' and

 6 Stewart's points. Obviously the financial data,

 7 it's very sensitive and especially when a large

 8 amount of it is aggregated into one place. And as

 9 a commercial provider of central service to the

 10 OTC swap market we've, over the years, had to

 11 balance the needs for our customers' sensitivity

 12 and privacy of their data with the value of the

 13 service that we're providing. And, you know,

 14 we've managed to solve that to the point where

 15 we've got 6 million live contracts under

 16 reconciliation. And I think that shows, to

 17 Stewart's point, that technologically the security

 18 can be solved. It's really the legal question of

 19 how the regulators and the entities that want to

 20 see this data appropriately can agree with each

 21 other how to achieve that as a regulatory legal

 22 structure.
 49

 1 MR. SHILTS: Any other comments on that?

 2 Then we'll move on.

 3 MS. SWINDLER: Let me move to the area

 4 of sort of the commercial aspect of the SDR

 5 running its business and, in particular, what

 6 kinds of fees, if any, should SDRs be permitted to

 7 charge for various services, and any other

 8 commercial aspects that you might like to comment

 9 on. So, DTCC's model's relatively simple. We're

 10 an at-cost utility model and our, you know, our

 11 fee structure is based on the real costs of

 12 providing the service.

 13 MR. PRITCHARD: Oh, yeah, we would echo

 14 that. I think the fee is really the service of

 15 complying with the regulatory requirements in the

 16 case of a swap data repository. And really as a

 17 service provider our goal would be to fulfill the

 18 requirements from the industry and the regulators

 19 on the swap data repository on a cost-based fee

 20 charge. And I think the balance that we found is

 21 that some sort of relation to the amount of live

 22 contracts that a party has for the basis of the
 50

 1 fee strikes a reasonable balance.

 2 MR. SPATT: I think there may be some

 3 delicate kind of issues in this context,

 4 particularly if there wind up being competing swap

 5 data repositories. It does seem to me

 6 fundamentally it's going to be an awkward issue

 7 for -- this is an awkward issue for regulators

 8 because I think traditionally regulators don't

 9 really want to be -- I think financial regulators

 10 have traditionally not wanted to be in the

 11 price-setting or price-fixing business. And, you

 12 know, on the one hand, I see real advantages to

 13 there being -- at least in specific spaces --

 14 single data repositories for particular asset

 15 classes. And there was earlier discussion about

 16 this.

 17 But then also keep -- and I think that

 18 probably is a desirable model. But then there are

 19 pricing issues that the financial regulators are

 20 going to need to confront as with other utility

 21 and monopoly kind of models, you know. And I

 22 think this is an important issue to highlight
 51

 1 because over time, you know, the business of

 2 exchanges, for example, in other spaces has become

 3 very different. It's become -- it's not become

 4 kind of a business about collecting -- specialists

 5 kind of making money by doing trading themselves.

 6 It's been -- these businesses have kind of

 7 transformed themselves into data businesses and

 8 into businesses with different kind of products

 9 and specialized kind of products.

 10 So I think there are other kind of

 11 issues that one will need to think about with

 12 respect to what are the ways in which the swap

 13 data -- what kind of swap data repositories do

 14 with the data beyond the functions that you

 15 specifically will mandate them to do and that you

 16 obviously want them to do per the statute. Can

 17 they, for example, forms of their data as

 18 value-added products to selective buyers? I think

 19 these are real issues with a lot of economics

 20 involved. And, well, they're not sort of directly

 21 on the radar screen today.

 22 You know, I think as the staff sort of
 52

 1 introspect about the history of platforms like the

 2 New York Stock Exchange, for example, where these

 3 issues became -- and in equity spaces where these

 4 issues became more and more important over time, I

 5 think the analogies to this context are

 6 potentially important ones.

 7 MR. DIXON: If I could. Mark Dixon,

 8 Evolution Markets. Just to build on that point,

 9 it raises the real question, which is who owns the

 10 data and, therefore, what you can do with it. Is

 11 it the market participant licensing the repository

 12 for its purposes? And so I think it gets very

 13 complex.

 14 And I wanted to build on one other point

 15 from an earlier question, which is as we get into

 16 cross-border discussions around security and

 17 access control, the data that is going from one

 18 host station to another shouldn't go to a lesser

 19 standard or lesser quality. And I think that's

 20 something that we need to ensure remains at the

 21 highest level possible.

 22 MR. DIPLAS: If I could follow up on
 53

 1 what Chester mentioned. We had thought long and

 2 hard (inaudible) the actual model for the SDRs.

 3 The market even before the legislation came into

 4 existence had made sort of selections of asset

 5 classes such as credit rates, et cetera. We had

 6 gone down the utility route because we wanted to

 7 ensure that -- because it is a fundamental

 8 function that we thought we should not be

 9 necessarily subject to competition, and it was

 10 done as a Request for Proposal. But there are

 11 other elements off the framework that we thought

 12 are actually important to be opened for

 13 competition. For example, execution is in that

 14 realm; clearing is in that realm; et cetera. But

 15 the repository function is one (inaudible) that

 16 should be centralized. It should be done

 17 effectively at cost market participants. Now I

 18 think even more with the legislation being enacted

 19 and having the requirement to have it there, it

 20 makes it even more important that basically market

 21 participants will be subject to a monopoly type

 22 kind of conducive environment. And I think that
 54

 1 clearly the model works very well in that respect.

 2 MR. MacBETH: Yeah, I don't think, you

 3 know -- I think a lot of the comments are very

 4 valid, right. We don't, as DTCC, see that we're

 5 in the business to try and commercialize the data

 6 we have. We think, you know, the utility model is

 7 a good model. We talked about fragmentation

 8 earlier. So this idea of at-cost seems to come

 9 with the recognition that this service shouldn't

 10 be overly fragmented. And some of the decisions,

 11 you know, we made in our corporate history have

 12 involved us, you know, preserving some of the

 13 services alongside the repository that we think,

 14 you know, are a horizontal offering and not, you

 15 know, really benefit from a level of scale and fit

 16 very directly with the repository offering and

 17 some other services.

 18 You know, people may know this, but the

 19 original service started as a confirm service that

 20 also had a disassociated centralized database.

 21 And we've, you know, separated that confirmation

 22 service. And that now operates in a more
 55

 1 competitive landscape, you know, separately from

 2 the repository and the repository can sit there

 3 more as, you know, as a utility offering.

 4 MR. SCHOTT: Mark, you mentioned the

 5 question of who owns the data and, Stewart, you

 6 talked about commercializing the data. Are any of

 7 you that are likely to be repositories, do you

 8 foresee any use that you think you would make of

 9 the data or would legitimately make of the data

 10 without the permission of the data owner? Even if

 11 it's sort of aggregated and so forth where you're

 12 not revealing parties, but any use at all.

 13 MR. OKOCHI: Well, I think, to address

 14 your point on in previous points, one, I think to

 15 induce market competition by allowing any party to

 16 register, whether they get approved or not is up

 17 to the Commission. But I think allowing for

 18 competition would help level the playing field in

 19 terms of pricing.

 20 In terms of the actual data itself, I

 21 think one of the goals of the reform is to allow

 22 more transparency and efficiency in the
 56

 1 marketplace, and probably some of the criticisms

 2 of the over-the-counter derivative markets in the

 3 past have been sort of behind the black curtain.

 4 So I would have thought that having some way to

 5 publicize the data, whether its', you know,

 6 ticker-type approach as to what, more recent

 7 trades or high, you know, last trade volumes, that

 8 sort of data that you currently can get from the

 9 exchanges with you have the benefit to the public

 10 and to the marketplace.

 11 MR. TUPPER: In regards to data, what we

 12 do, basically, is Egland Energies is, is there's

 13 not a lot of commercial value to the data, okay,

 14 so we confirm about 25,000 transactions a week.

 15 Really, the only commercial value I

 16 really see is used, when you're dealing with this

 17 number of participants and the diversity of

 18 technical expertise, if you're really getting down

 19 to the point is how quickly can these participants

 20 submit the information to you. The value really

 21 is you're looking at real-time data, end-of-day

 22 reports. If that data is not received or
 57

 1 typically is not quick enough into the system to

 2 them be crossed, so it's really not a system issue

 3 from a central provider but really receiving and

 4 translating everything.

 5 So, really, the only values we're really

 6 seeing with the data is for Energies really is the

 7 bid week data and natural gas. They're doing an

 8 assessment over the -- for all those who aren't

 9 familiar, they're the last three trading days, and

 10 then the following month you're able to add to any

 11 type of indices for first of the month natural gas

 12 indexes.

 13 Really, short of that, I don't really

 14 believe there's going to be a lot of commercial

 15 value with NSDR for Energies.

 16 It really -- we haven't seen that at

 17 all. I think as far as -- just take a step back

 18 -- I know we did talk a lot about security and how

 19 that's done. I know there's a lot of standard

 20 processes in the industry, I think really just

 21 formalizing those and making them very transparent

 22 is probably the best way to go. You know, we
 58

 1 follow a very rigid security process because

 2 pretty much everybody at the table here does. We

 3 make available our audits to our customers.

 4 I know that gives them a lot of comfort,

 5 you know, so they can actually see what we're

 6 going and what we commit to, and then the results

 7 of those audits. I'd recommend that as well.

 8 MR. SCHOTT: Steward, you mentioned that

 9 DTCC has sort of formed a separate Reval entity

 10 for some of the services you provide. Is that a

 11 model that others agree is the correct model?

 12 MR. MACBETH: In just a -- I guess the

 13 one thing I would say about it again, you know, we

 14 positioned the warehouse to be this open access

 15 vehicle. So, you know, we want, you know,

 16 wherever a kind of execution happens or the legal

 17 wrappers have put around trades, events how we'd

 18 like to source trades.

 19 To the extent we can, you know, comments

 20 about the cycle of copper records, the ones that

 21 can't be further described electronically, but

 22 again, you know, we'd like to see those prematched
 59

 1 up from in some electronic form fairly early in

 2 the last cycle. And so, you know, this is a

 3 little bit refers back to the confirmation point.

 4 But the other thing we're doing, you

 5 know, the other part of our model is we allow our

 6 users to permission the data we have for use, so,

 7 yeah, there are -- there are, yeah, for example,

 8 we have a feeder data to TriOptima, all right,

 9 which exists in their portfolio rec service. So,

 10 you know, so that's the other thing. So if our,

 11 you know, if our users want us to provide the data

 12 to another service, you know, we will do that.

 13 So, you know, we are trying to position

 14 ourselves in this, you know, open utility position

 15 to have, you know, a fully set of services a

 16 little bit. It started with my name, but the

 17 question is to everybody else.

 18 MR. SCHOTT: Yeah, the question might 

 19 actually be sort of to others. Is that the model

 20 that should be followed, or are other models

 21 equally acceptable?

 22 MR. DIXON: This is Mark Dixon with
 60

 1 Evolution. I would say with absolute certainty

 2 there is a potential for commercialization of the

 3 dataset. I would also say that you could have

 4 cooperatives such as Steward's suggesting wherein

 5 this can be done at, we'll call it, at cost,

 6 wherein the participants who are providing the

 7 data and license that data for its own purposes or

 8 for other purposes to meet regulatory obligations

 9 can be done in such a way that you don't have this

 10 runaway model that somehow stiffens [sic] market

 11 activity.

 12 But I would say that something's going

 13 to have to be looked at very carefully, so I think

 14 the market participants are going to take the view

 15 that it's their data. The repository will

 16 probably take the view that its data. And so, you

 17 know, therein comes the rub.

 18 MR. SCHOTT: Yeah, I'd agree with those

 19 points. I think, as Jiro mentions the

 20 interoperation point, and I think that's a

 21 worthwhile example to mention that with the

 22 correct legal framework, then data can be
 61

 1 exchanged between venues for the benefit of the

 2 mutual subscribers. And there's some strong

 3 examples of that. We exchange a large amount of

 4 data with DTCC, and that enriches the exposure

 5 management and valuation that we're doing.

 6 In terms of separate legal entrys, we'd be receptive

 7 to guidance as to if that's the best way to proceed.

 8 I think as a commercial service that has built an

 9 exposure management service, really for us it's about

 10 balancing, delivering value to the subscribers to the

 11 service alongside with respecting that it's their data

 12 that we're working with. But it's really the value

 13 that we deliver justifies them submitting it to us and

 14 having it aggregated and getting the value back on it.

 15 And so it's really delivering that value that has

 16 enabled us to assemble that, that data and to see the

 17 six million live contracts.

 18 MR. SPATT: So I think -- I think

 19 another related facet that strikes me as really

 20 crucial with respect to data is who's going to be

 21 the recipient of the data. And, you know, we've

 22 kind of -- we're kind of circling around this
 62

 1 issue a little bit. We kind of have in mind, I

 2 think, kind of a couple of alternatives. The

 3 legislation clearly is most directly focused upon

 4 the CFTC, the SEC, and the Federal Reserve, et

 5 cetera, with the government financial regulators

 6 as being the downstream recipient of all the data

 7 at least in key forms that come from the swap data

 8 repositories with the exception perhaps of some

 9 simple aggregates being made publicly available.

 10 And, clearly, with respect to what's

 11 publicly available, obviously there's issues about

 12 confidentiality and the like. But it also seems

 13 that there are potentially categories in between,

 14 you know, in some of the discussion about the

 15 value of the data and the possibility of

 16 value-added services, it sort of points out that

 17 there might be categories of data that might be in

 18 between that interested parties -- maybe asset

 19 managers or certainly the financial intermediaries

 20 might be very interested in.

 21 I think also the ability to provide the

 22 data, there's a kind of a whole other dimension as
 63

 1 well, which is the ability to provide the data to

 2 the public. Potentially, that increases with

 3 longer legs, or you can potentially provide more

 4 -- this type of data might be more and more

 5 relevant to provide to the public with longer

 6 legs. I think sometimes the vision of collecting

 7 the data is that the data is not only going to be

 8 provided to the government officials, and in some

 9 ways that might not be the only way to try manage

 10 systemic risk.

 11 One of the real problems that we had in

 12 2007 and 2008 was, arguably, some of the officials

 13 charged with the responsibilities, you know,

 14 didn't, you know, have difficulty separating what

 15 was systemic risk from what wasn't systemic risk,

 16 and there was sort of almost no information that

 17 was sort of out there about underlying mortgage

 18 exposures to the investing public. And I think

 19 one of the ways in which the government officials

 20 can be helped is by providing more information to

 21 the public to the extent that it can be. This was

 22 one of the severe problems in 2007 and 2008.
 64

 1 You know, there was a period of about a

 2 year where it was completely unclear who was

 3 holding these underlying mortgage exposures.

 4 People knew in the aggregate there were exposures

 5 but how they would distribute it and what the

 6 systemic risk implications of this was completely

 7 murky.

 8 So I think there's a number of aspects

 9 about data. I think it's not simply about what in

 10 the most aggregated way might be public versus,

 11 then, what in an obviously and all the detail

 12 would be made available to the official -- to the

 13 regulators, but also, then, how over time,

 14 especially with some reasonable lags what could be

 15 provided.

 16 CHAIRMAN SHIILTS: Okay, just is there

 17 one more -- anything on this? Make it quick so

 18 then I can move on to the next.

 19 MR. GOOCH: Sure. I kind of feel like

 20 everyone's avoided answering the question that

 21 Sebastian originally set.

 22 Say, to make clear in my view, is that
 65

 1 (inaudible) by the participants, and therefore SDR

 2 or conferences, or anybody else should only be

 3 disclosing information for one of two reasons:

 4 The regulations required it, or the

 5 participants gave permission for it to be

 6 disclosed. I don't think there is any sense we

 7 should -- ownership should move in the sense.

 8 I agree with Chester some of the

 9 information has valued. I think the post-trade

 10 stuff is truly doesn't have a great value in the

 11 sense you could charge a big, big fat fee to

 12 sending out to people but it has value to the

 13 public, in that it was sheared of weekly in the

 14 CDS data. I think that's very healthy for the

 15 public, very healthy for the health of the

 16 markets, even though, frankly, poorly done would

 17 pay a lot of money to receive that fee if it

 18 wasn't publicly available.

 19 MR. DIPLAS: Yeah, very quickly, as a

 20 user, I wold agree with those comments. We

 21 believe the data is ours. We pay for the storage

 22 in that environment, and we need to work obviously
 66

 1 with the regulators in terms of what is the

 2 appropriate sort of data to be disseminated to the

 3 public for those system risk reasons that Chester

 4 mentioned.

 5 CHAIRMAN SHIILTS: Thank you. We'll go

 6 on to the next question.

 7 MR. SCHOTT: But not before thanking

 8 Jeff for the last point.

 9 So we're going to switch gears, but this

 10 will dovetail with something that Chester was

 11 mentioning. The Commission's use of the data and

 12 one of the statutory requirements is that SCRs

 13 provide, quote, "direct electronic access" to the

 14 data.

 15 I would just like to hear some thoughts,

 16 especially again from the potential SDR's

 17 perspective, how do you envision direct electronic

 18 access? At a mechanical level, what does that

 19 mean? Is that reports from you whenever we want

 20 it? Does it mean that we have direct pipe into

 21 your systems with our own interface? Does it mean

 22 that we have access to the very tools that your
 67

 1 own staff might be using? How do you see that

 2 working?

 3 MR. OKOCHI: Well, currently, we've

 4 provided similar sort of access to auditors of our

 5 clients, the Big-4 audit firms, and we get

 6 permission from our clients to -- and we get

 7 requests from our clients to allow them access.

 8 So the way that mechanism currently works could be

 9 passed on postreform. So, basically, you know, if

 10 you get read-only access, (inaudible) access, so

 11 easily to access from here in D.C. or by the EC in

 12 Europe, you know, our vision would be to provide

 13 specific reporting that would be tailored to what

 14 the regulators would want to view in terms of

 15 large positions, potential risk, et cetera, but

 16 then allow flexible reporting to slice and dice

 17 all of this data, this comprehensive data the way

 18 the regulators want to look at it.

 19 So I think there needs to be that

 20 combination of, you know, templated reporting that

 21 all regulators are looking at as well as if

 22 related to real time, or at least on-demand
 68

 1 flexibly analyze this data.

 2 MR. SCHOTT: You may have said this, but

 3 just to be clear, before you give it to auditors

 4 the access you provide is, are they creating the

 5 interface that they see your data through, or they

 6 using your own interface?

 7 MR. OKOCHI: Well, we're, you know, we

 8 provide an interface so they can log in, you know,

 9 through Internet Explorer and quickly access trade

 10 detail to comprehensive reports, to stress testing

 11 and those types of analytics. So it really is

 12 more of a solution, not just a data warehouse.

 13 MR. MACBETH: Yeah, and I think the

 14 answer is, is all of the rule of the forms are and

 15 admissible ways of getting data, and you will need

 16 an inflexibility in accessing data, then. Like,

 17 you know, we've currently got as far as

 18 commissioning regulators through a web interfacing

 19 some scheduled reports, and that's as, you know,

 20 as far as we've got. But, you know, we certainly

 21 envisage it going further, and we envisage giving

 22 you, you know, defined, clearly access.
 69

 1 One of the problems, you know, just

 2 roaming around our database a little bit is you

 3 have to understand the data.

 4 So, you know, like, it needs to be

 5 formatted and, you know, fall back to you in a

 6 meaningful way. A lot of the record, you know,

 7 again, right, we, you know, we were trying to

 8 receive the whole audit trail associated with the

 9 trade, it's whole life cycle. Yet not every

 10 version of every message we've got is valid to any

 11 point in time. So sifting through some of those

 12 issues.

 13 And to deal with the audit trail we have

 14 in our system, you know, you probably need some

 15 support, you know, from us and our side of the

 16 rule data. But, you know, I think we still

 17 imagine that you will be able to receive that data

 18 electronically and manipulate it, you know,

 19 yourself and potentially directly clearly. But

 20 there will still be something outside just to make

 21 sure the data, you know, comes to you in a clean

 22 and sensible manner.
 70

 1 MR: PRITCHARD: Um, yes, from

 2 TriOptima's perspective, we'd agree with those

 3 comments, I think. We built our repository

 4 industry, repository service out of our exposure

 5 management service and to the requirements that

 6 were given to us by the industry and the

 7 regulators in conjunction. So requirements would

 8 be really valuable to start off with.

 9 But I think, you know, fundamentally,

 10 the model that we based it on, assuming that the

 11 regulators had access to the raw data, the

 12 line-item-by-line-item data, that's one level; but

 13 also I think the systemic risk-monitoring point

 14 some -- from page where you can actually see the

 15 highest level aggregation is going to be really

 16 valuable. And then in between those two the

 17 opportunity to filter and sort and drill into the

 18 data. And those are all services that currently

 19 provide on our exposure management platform quite

 20 successfully. And, as we say, with some guidance

 21 about the requirements I think we could be

 22 producing some quite interesting opportunities to
 71

 1 get into the data in more detailed level.

 2 MR. TUPPER: This is Bruce from ICE. I

 3 think it is a fault to access, based on meetings

 4 we've had with the DMO over at the CTCC, we heard

 5 a lot of feedback in regards to aggregation of

 6 data. So, I mean I believe creating reports from

 7 the front end, and giving the Commission access in

 8 how they'd like to see it, that's a pretty simple

 9 task I think can be accomplished by probably --

 10 there's a competency at this table to do that.

 11 I think the big question is aggregating

 12 the data amongst energy clearing houses and also

 13 the OTC data. Is that a responsibility that the

 14 Commission wants to have, or is that something of

 15 the repository? Because in order to get that

 16 holistic view, you know, there is a lot of clear

 17 transactions that have been developed out of the

 18 OTC market over the past six years. So, you know,

 19 just take natural gas for example as a number of

 20 basis contracts that, you know, were never

 21 cleared.

 22 They had high liquidity and then
 72

 1 obviously the clearing houses created their list

 2 of liquidities and started developing those.

 3 The way you're going to want to view

 4 that, you know, it would be easy enough to create

 5 your report that would just show you what is the

 6 open interest of the basis contracts at a

 7 particular point, but now you have to deal with

 8 you also have open interests in two different

 9 clearing houses. So that effective netting of the

 10 three, you know, how you want to accomplish that.

 11 I heard that regularly when we had meetings with

 12 the DMR, and I want to achieve that. It's a

 13 question of whether the systems are here to do it

 14 or that's of a duty of the repository for us. It

 15 would be a pretty straightforward thing to take in

 16 and aggregate, because that's what we do today.

 17 But that's not difficult. So I think

 18 that's a big consideration. I think whatever ends

 19 up coming out of it, I just would say working with

 20 the staff who's going to be using these reports

 21 and helping them develop screens and interfaces,

 22 that would help them achieve their job, this
 73

 1 probably would solve that.

 2 MR. GOOCH: I think one thing just to

 3 keep in mind with this is, there's a big

 4 difference with the information in data, and we

 5 need to work as we'll see information that's

 6 actually useful to the Commission as to do their

 7 job.

 8 I want to give you sort of an order of

 9 scale, a minimum of labor we do about 20 million

 10 transactions per year through our systems, which

 11 presumably most of which would be of interest to

 12 people around this table. The audit trail for the

 13 interest rate market alone is 80 million records,

 14 which is what we hold.

 15 We don't have quite everything so that

 16 there's a few that they list towards -- I've seen

 17 enormous amounts of information, and when you look

 18 into that, an awful lot of the activity in the

 19 market does not result in price-falling events.

 20 It's new with as to clearing houses. If trades

 21 that were done ITC subsequently cleared, trades

 22 that were compressed with the (inaudible)
 74

 1 tomorrow.

 2 Others, there's a variety of things that

 3 happens to trades, to the life cycle which is

 4 important to understand, and I think we can do a

 5 much better job at saying, okay, what type of

 6 information is used for what purpose and finding

 7 why the extracting lapped. It's all technically

 8 doable. I think you around this table can do it.

 9 It's not just a question -- I think somebody will

 10 see it and think it's a question of having six

 11 million compositions or 20 million transactions or

 12 whatever, whichever number everyone's holding and

 13 handing them over. It's a little more complex

 14 than that. It's solvable, but there's real work

 15 to do.

 16 MR. DIPLAS: I think Bruce highlighted

 17 kind of the issue of what happens in the

 18 fragmented infrastructure between ODC, different

 19 clearing houses, et cetera, and the need for, I

 20 think, I would be guessing that they're not a

 21 class level.

 22 I think that that is fundamental, and
 75

 1 the problem that Jeff highlighted, of course, is

 2 still you're going to have an issue with too much

 3 information not too little information, and

 4 actually trying to use that in a way that you can

 5 get something out of it is fundamental.

 6 Obviously, and also your own needs as regulators

 7 note, you need to leave. The systemic-risk issues

 8 are different; they're relying much more on the

 9 intelligent aggregation, but the market

 10 surveillances are completely a much more granular

 11 task. And the repository has to be able to

 12 provide more, basically.

 13 But I want to highlight a lot of the

 14 system-risk issue. The intelligent aggregation is

 15 the most fundamental point.

 16 MR: PRITCHARD: I'd just like to pick up

 17 on what Jeff and Sebastian said. Jeff made an 

 18 excellent point. There is also as well as getting

 19 the live contracts that you're saying is the time

 20 dimension, that's the history of all the previous

 21 submissions that you've had and providing a

 22 reporting access to that. In our experience
 76

 1 providing an exposure management service, that's

 2 been one of the most valuable features that the

 3 subscribers have benefitted from is the ability to

 4 see the state of the transactions on previous

 5 dates and graph that and watch that other history.

 6 And so that's another extremely important

 7 dimension to the requirements, because once you

 8 start accumulating this data on a regular basis,

 9 you just develop more and more needs for

 10 reporting. And that's one of the values.

 11 But it's also one of the challenges is

 12 just to satisfy those requirements.

 13 MR. DIXON: I would echo that on the

 14 data retention that that's going to grow as a

 15 challenge over time. I would also suggest that

 16 once the Commission's decided on what they need,

 17 then it becomes a little more straightforward for

 18 people to provide complete, accurate, timely, and,

 19 more importantly, actionable information.

 20 Otherwise, you're just caught up in a mire of data

 21 that isn't actionable. And you can also start to

 22 raise questions around the integrity of that data,
 77

 1 and that becomes a distraction from the main

 2 effort, I think.

 3 CHAIRMAN SHIILTS: Any more --

 4 MR. SCHOTT: Thank you.

 5 MS. SWINDER: I'd like to move on to one

 6 of the core principles identified in Dodd-Frank,

 7 in particular governance.

 8 I'd be interested in your views as to

 9 governance structures that might be appropriate

 10 with a view to giving full access to market

 11 participants.

 12 MR. MACBETH: So DTCC's model is a user

 13 governance. You know, we certainly thing that

 14 makes sense in the environment that we're in and

 15 for the services we're providing. Now, some of

 16 that needs some kind of diversity as well in terms

 17 of the wider public interest, and they also should

 18 be represented, and, yeah, the main board, DTCC

 19 has some independent board members, and it has,

 20 you know, buy and sell sort of members. And that's

 21 the, you know, the structure that we would

 22 advocate.
 78

 1 MR. OKOCHI: Well, at Reval we have

 2 actually currently put in place a chief compliance

 3 officer with pretty extensive experience in both

 4 the derivative marketing-making experience and, on

 5 the buy side, his current path would be to report

 6 in to independent board members of Reval.

 7 Actually, I should also add that in

 8 addition, that additional governance, there are

 9 certifications like a SAS 70 Type II where an

 10 external audit firm can come in and audit your

 11 controls and processes around how the SDR is, you

 12 know, functioning that can cover, you know, a wide

 13 range of processes from the data verification to

 14 evaluation. So I think that's another aspect that

 15 could be considered.

 16 MR. COOK: Can I maybe just to amplify

 17 the question a little bit, because we -- they had

 18 a whole, another roundtable on conflicts in

 19 governance with respect to SAS and clearing

 20 agencies, and spent a lot of time talking about

 21 the nature of the conflicts that could arise that

 22 might inform our policy choices about what types
 79

 1 of government structures to promote.

 2 So my question, I think, to begin, but

 3 you don't answer the question, is what are the

 4 policy issues here around governance that we

 5 should be taking into account? Are there the same

 6 types of concerns that there are with the SEFs and

 7 the clearing agencies, at least as drivers of the

 8 requirement that we study that issue under the

 9 statute? Or is a data repository a different

 10 animal?

 11 MR. DIPLAS: I would think it is a

 12 different animal. I mean we haven't seen this

 13 type of conflicts. I mean I know that a lot of

 14 conflicts have been mentioned with respect to

 15 (inaudible) CCBs, but on the report story,

 16 especially being around these utilities, we have

 17 not had any issues of conflicts, and I think the

 18 model has worked well with the users kind of

 19 participating in that respect.

 20 But we -- definitely, it is open. It's

 21 mandated by law for it, but to actually put the

 22 trades in there, and they don't even have the
 80

 1 right to, I think, to turn anybody away.

 2 So we have not experienced this type of

 3 conflicts before, and I don't expect to experience

 4 in the same way. For once, it might be an easier

 5 situation.

 6 MR. TUPPER: Yeah, I'll echo that. I

 7 believe it is a different animal when you look at

 8 the nature of a clearing house versus that of a

 9 swap data repository processing post-trade events,

 10 you know, the conflicts of interest that you have

 11 on an SDR really are much different than that of

 12 clearing house.

 13 I believe the earlier panel members

 14 pretty much said, you know, usually you'll create

 15 a governance board of your participants. Some

 16 type of procedures got around that with

 17 restrictions around how that could be changed, and

 18 then, obviously assess 70 Type II audit

 19 afterwards. That process has worked well for us

 20 for eight years, and, you know, if a customer does

 21 want to make a change, obviously it requires a

 22 majority of users to agree that process had been a
 81

 1 change in the audit, and that everybody kind of

 2 sees it.

 3 So I think the self-governing kind of

 4 governance structure for SDRs has worked well in

 5 energies. We could formalize it with the

 6 Commission, but there hasn't been any issues today

 7 with it.

 8 MR. MACBETH: There was a -- the main

 9 comment is that the rules are relatively

 10 prescriptive in terms of better share.

 11 So, you know, I think that is valid.

 12 But there was earlier a conversation about

 13 commercializing data, and, yeah, although it's a

 14 lesser dynamic, it, you know, if that were a

 15 dynamic, that does have, you know, some degree of

 16 --

 17 MR. SPATT: You know, I'd agree. I'd

 18 agree with that, too. You know, I think my

 19 inclination is the same as many of the panelists

 20 that it's not obvious that there are going to be

 21 severe governance problems here. But, you know,

 22 at the same time I think one also wants to be
 82

 1 sensitive to the possibility that government

 2 problems might arise. I'm not suggesting being

 3 overly prescriptive with respect to how this issue

 4 is approached, but I do think that the analogy to

 5 who a clearing organization is not completely

 6 inappropriate. One of the issues here that we

 7 discussed earlier was the importance of the swap

 8 data repository dealing with nonelectronic data

 9 that comes in, in the context of a customized

 10 contracts. Now, one could imagine issues about

 11 the pricing for dealing with those versus dealing

 12 with the cleaner, smoother, electronic data where,

 13 for example, quality, just like in the context of

 14 clearing, there would be kind of competitive

 15 issues, vis-a-vis the dealers who would be

 16 competing on the customized margin the same --

 17 exactly the same economics it seems to me to be at

 18 least potentially apply.

 19 And I think that could -- that, at least

 20 in principle, could be a context in which there is

 21 a first-order conflict.

 22 Now, I don't want to overemphasize that,
 83

 1 but I think at least it is possible, certainly,

 2 that there would be -- that there would be real

 3 governance -- that there could be some governance

 4 conflicts.

 5 MR. GOOCH: I think a lot depends on

 6 what the other rules have SDRs. I mean maybe I'll

 7 be able to sort of more or less conclude it that

 8 SDRs as covering visage don't present major

 9 conflict of interest issues. But that's largely

 10 because they're talking about a utility, not

 11 for-profit model. We're talking about open-access

 12 model. We're talking about something that's

 13 unbundled from other services. We're talking about

 14 a data service made available because for users'

 15 sake can be altered if the regulations require it.

 16 If those things are all there, then I think the

 17 SDRs are probably relatively safe in terms of

 18 conflicts.

 19 If you imagine a very different world

 20 with for-profit SDRs, bumbling (inaudible) without

 21 the commercial offerings, certainly, and to the

 22 data may you would have issues. But I think, you
 84

 1 know, it's probably best not to have (inaudible),

 2 and have both fixes, but if we go to them, you

 3 know, the things we talked about earlier on, then

 4 that probably gives you quite a lot of guarantees.

 5 MR: PRITCHARD: Oh, I can say from

 6 TriOptima's perspective, you know, our expenses

 7 are commercial provider of our exposure management

 8 system, we've obviously been totally relying on

 9 satisfying the needs of our subscribers. And so

 10 they've had a strong voice in the way the

 11 (inaudible), but since we've operated the interate

 12 trade repository, we've organized that with a

 13 governance committee from the industry alongside

 14 the regulators, and as we're regulated in Europe,

 15 we have a compliance function there, too. And I

 16 think we've succeeded first of all to implement

 17 the regulations and the rules that are written

 18 there, and then to take that forward.

 19 I'm just at Chester's point. In our

 20 exposure management service, we already are

 21 reconciling between the parties to the trades a

 22 large amount of those exotic and nonelectronically
 85

 1 confirmed trades on a regular basis, so we have a

 2 successful experience with that, also.

 3 MR. COOK: Can I just follow up on

 4 Jeff's point quickly, because I think it's an

 5 interesting question in and how the fees relate to

 6 it in our model of -- what do we have in mind?

 7 What are our assumptions about the

 8 activities over the trade repository. And in some

 9 ways I think you were setting up a choice that you

 10 could worry a lot about governance, or you could

 11 restrict the activities of a repository to

 12 unbundled services, form a utility model and the

 13 like. And I want to make sure I understood you

 14 correctly.

 15 MR. GOOCH: The thing that I was

 16 supporting, but I'm not saying one company can't

 17 do both, and (inaudible) giving the example where

 18 he runs both models side by side with some

 19 separation of governments and structures. I think

 20 he didn't say that one company can't do more than

 21 one thing, but I think he didn't say SDRs are sort

 22 of a mandatory thing in terms of the regulation.
 86

 1 And then you have to preserve protections around

 2 them in terms of making sure that they don't abuse

 3 that position.

 4 I think some -- you either go down the

 5 government's route, but the government is kind of

 6 a blunt instrument fix. Some of the problems I

 7 think are (inaudible) on conflicts in terms of

 8 their (inaudible) is probably a safer route to go

 9 down.

 10 MS. NATHAN: I'd like to go back for a

 11 minute to Jiro's comment and to the last question.

 12 Reval has a chief compliance officer, presumably,

 13 with enumerated duties. SDRs would be required

 14 under the statute to designate a CCO, and I'm

 15 wondering if the other panelists can discuss any

 16 specific regulatory functions that you all believe

 17 a CCO might perform or oversee.

 18 Or not.

 19 MR. TUPPER: Uh, I mean that role, we

 20 have a person who does that. There's a -- it's

 21 kind of an executive role where they overview our

 22 processes. The role, typically, I'd say it's a
 87

 1 person who manages the SAS 70 Type II audit that

 2 was mentioned earlier. So you going to work with

 3 the Commission and the participants to draft the

 4 procedures that are acceptable to run an SDR, and

 5 then managing that, that audit process thereafter,

 6 and working with the auditors to make all the

 7 statements and then follow-up validation that

 8 you're doing what you said you would do in your

 9 audit.

 10 I think that person also could liaison

 11 with the Commission as a follow-up of any needs or

 12 requirements that they would want in that audit

 13 and just give assurances. I think anyone who's

 14 operating this type of service, you know, it gets

 15 to be current to continental exchange. We offer a

 16 lot of exchange services. We operate the eConfirm

 17 service in a very independent manner, separate

 18 staff, the SDR, the hardware is its own, nothing

 19 else runs on it.

 20 The developers, if you port the access

 21 to the data only works for this SDR. You know,

 22 there's this -- I don't want to get too granular,
 88

 1 but there are certain procedures I think that are

 2 practiced that you would want in that audit.

 3 Things that may come out of the rulemaking process

 4 would have to also be added as well.

 5 MR. MACBETH: And so, you know, we are a

 6 regulated entity, so, and we will at least find

 7 our in-compliance officer, KYC-ANO we have a, you

 8 know, a customer base we do that with, and they're

 9 very interested in the governance model, and the

 10 GTs of the various structures within our

 11 organization, so the board responsibilities, the

 12 executive management responsibilities, some of the

 13 connectivity between them. And they focus on this

 14 issue, so, you know, how we've documented and

 15 managed our processes and, you know, and clearly

 16 they actually engaged, took me to a regulator.

 17 MR. OKOCHI: I think I'd just like to

 18 add some of the other reasons why we think -- some

 19 of the other roles that the chief CCO could have

 20 with the -- to help evaluate all of the trade that

 21 don't make it into the swap data repository and

 22 sit on the Commission's desk to figure out is
 89

 1 there a process -- what is the process to get

 2 those trades into a swap data repository? So it's

 3 going to be, obviously, all of the uncleared

 4 trades and customized trades that, you know, could

 5 grow over time.

 6 There's another section in the

 7 Frank-Dodd bill that -- the Dodd-Frank bill that

 8 has the SDR's responsibility to check on the

 9 end-user clearing exemption, so I think that again

 10 is another detailed process that the chief

 11 compliance officer will have to work with the

 12 Commission's help to understand how to vet that

 13 process.

 14 MR. SCHOTT: Let me follow up a little

 15 bit on that and borrow a little bit from our sort

 16 of models that exist in the futures exchange

 17 world. We sort of have the separate compliance

 18 departments. There's usually an executive in

 19 charge of that, and they're sort of -- they're not

 20 a silo, but they're their own organizational group

 21 within the Exchange.

 22 Do you envision that a CCO or an SDR
 90

 1 would be something similar that they have sort of

 2 a staff, and that they are their own sort of

 3 center within the SDR? Or are they more one or

 4 two people who are sort of, you know, managing

 5 conversations and relationships with outside

 6 groups.

 7 MR. OKOCHI: I think it would be very

 8 difficult for -- well, if you're going to be

 9 chief, it implies you have somebody to be chief

 10 of.

 11 MR. SCHOTT: All right.

 12 MR. OKOCHI: So, yeah, I think there

 13 would be a staff that would help, you know, with

 14 the day to day. I mean it's going to be a very

 15 important and big task to, you know, help govern

 16 all these trades whether it's, you know, one SDR

 17 per SC class or multiple. I think it's pretty

 18 challenging.

 19 MR. SCHOTT: But it wouldn't be just

 20 sort of outside, for example, your auditors you

 21 would use, that you were working with. You would

 22 envision that there is a lot happening in house in
 91

 1 terms of monitoring or verifying compliance by the

 2 SDR with whatever obligations and nothing imposed.

 3 MR. OKOCHI: I don't think there is as

 4 much importance to trade that Chinese wall and

 5 separate the duties so much since it is

 6 post-trade, as other panelists have mentioned.

 7 But again I think there should be some pretty

 8 strict and clear guidelines as to, you know, what

 9 the compliancing can do with the data, access to

 10 that data. So, certainly, some separation on that

 11 front.

 12 MR. GOOCH: I think there is two

 13 different sources of compliances that we need to

 14 think about. One is SDR is a regulated entity.

 15 We'll need to have a compliance function.

 16 We should be independent. All the

 17 things that any finance institution or serious

 18 market infrastructure has to date, certainly has

 19 marketSERV that would regulate to the UK, for

 20 examples, however, a compliance officer and a

 21 weekly compliance meeting, and we have endless

 22 policies and rules and regulations about things
 92

 1 and all that kind of stuff we think is important.

 2 I think one interesting question you get

 3 into is if the new regime is going to work

 4 effectively, who's ensuring the industry itself is

 5 compliant, in the sense that if someone doesn't

 6 report a set of trades to the SDR or misreports

 7 them, what happens with that in terms of

 8 follow-up, ultimately, and who levies fines on the

 9 individual participant that go back to the

 10 Commissions? In other markets, obviously, it goes

 11 back to an SRO. The things with the very serious

 12 questions that are around, I think just have the

 13 SDR manage itself, but then how does the whole

 14 framework manage itself, and, you know, who's

 15 having those functions? I'm not entirely sure the

 16 SDR should be the SRO, but when you think about

 17 how they interaction with work, and that's

 18 probably something more complex to set up.

 19 MR. SPATT: Yeah, and I think, you know,

 20 it would be, to follow up on Jeff's observations,

 21 I think the issue of the scale of this function is

 22 going -- it depends, obviously intimately, on the
 93

 1 responsibility if it's simply the compliance of

 2 the swap data repository with respect to its own

 3 rules, kind of in a relatively mechanical level

 4 and interfacing with the regulator, that might

 5 suggest a need for a relatively modest staff.

 6 If on the other hand there's a more

 7 activist role with respect to either upstream

 8 kinds of issues as from the SRO in one extreme, or

 9 even to deal with those -- the nonelectronic

 10 orders and making sure that these are being

 11 handled in the appropriate way, that could

 12 suggest, you know, again significantly more

 13 staffing kind of need.

 14 So I think the scale of the staff of the

 15 chief compliance officer would depend very much

 16 upon the model of what is the role with respect to

 17 those kind of issues.

 18 CHAIRMAN SHIILTS: Okay. Well, let's

 19 move on.

 20 MS. SWINDER: I'd like to go back to the

 21 issue of other duties or responsibilities that an

 22 SDR might have that might need to have that aren't
 94

 1 necessarily set forth in Dodd-Frank, and, in

 2 particular, your views as to whether SDRs should

 3 have a market surveillance function.

 4 MR. GOOCH: I think a little bit there

 5 depends on how you define market surveillance.

 6 I'm not trying to avoid answering the question. I

 7 think in terms of generating reporting to monitor

 8 the market, I think given the earlier comments we

 9 had about the amount of data that were out there

 10 and the complexity, I think it will (inaudible) to

 11 create the right reports to spot things.

 12 Market surveillance is about more than

 13 regional reports though. I think a good market

 14 surveillance department is investigating issues,

 15 looking at market rumors, everything else, and

 16 that's where I think this question about does the

 17 SDR do that, does the CFTC and SEC do it, is there

 18 some SRO that does it? That's the only thing that

 19 needs to get decided about how that follow-up

 20 works. I think if you read the act, it would sort

 21 of imply the commissioners are doing that

 22 themselves, in which case the SDR is very much
 95

 1 providing information to support that function

 2 rather than launching its own investigations, but,

 3 well, I just think --

 4 MR. PRITCHARD: I think that when it

 5 gets to market surveillance, going back to the

 6 original point about an SDR having a comprehensive

 7 view of all the trades in the OTC swap market,

 8 that's one sort of approach from the point of view

 9 of developing a software service to cover that.

 10 Market surveillance, on the other hand, tends to

 11 be asset class specific. You're going to end up

 12 looking for specific things in specific asset

 13 classes, and so it's somewhat important to be

 14 clear, and given SDR a set of functions that are

 15 cohesive and providing comprehensive reporting

 16 across the whole of the OTC swap market, all asset

 17 classes and all instrument types is one value, and

 18 then providing market surveillance, which could

 19 get into different things meaning different things

 20 to different asset classes, because there are some

 21 pretty diverse asset classes within the OTC swap

 22 mandate that could end up a rather broad mandate
 96

 1 for a repository.

 2 MR. TUPPER: I think at ICE we really

 3 didn't view the SDR as being a policing function

 4 for the industry. I think we, you know, agreed in

 5 reading Dodd-Frank you look at the duties and it

 6 seems like it more or less provides the facility

 7 for, obviously, the Commission to do that. I can

 8 say today in energies I don't believe there's any

 9 expectation that the procedures and rules of the

 10 SDR would have a market surveillance aspect to

 11 them. I think, though, that the energy

 12 participants do expect it. The SDR would provide

 13 the Commission with that ability to view that data

 14 and make their decisions on, you know, what's

 15 happening in the OTC market. So, obviously,

 16 having a robust, you know, regulatory

 17 functionality within the system would allow the

 18 Commission to do that. But it can speak -- there

 19 really aren't any rules or procedures in place

 20 today at least for energies market that you could

 21 build on. It really isn't there.

 22 MS. SWINDLER: Yeah, let me just
 97

 1 qualify, because perhaps my use of the phrase

 2 "market surveillance" took us in a different

 3 direction than I really intended, because

 4 Dodd-Frank refers to monitoring, screening, and

 5 analyzing data. And that's really what I was

 6 trying to get at. So, if you could speak to

 7 whether you think that's an area that SDRs should

 8 undertake some obligations and if so what is your

 9 view as to what that means?

 10 MR. TUPPER: Yeah, to summarize --

 11 MR. SCHOTT: If I could add -- because

 12 that same provisions speaks to end-user exemption

 13 claims, so as part of your answers if you could

 14 just also give your opinion as to specifically

 15 that function and what you see as the SDR's role

 16 they are in terms of monitoring those claims.

 17 MR. TUPPER: Okay, so the first part --

 18 I believe I kind of summarized that -- would be

 19 pretty much providing this regulatory

 20 functionality or user log, and that would have all

 21 these reports that provide the Commission with

 22 that ability.
 98

 1 The end user -- that's an interesting

 2 one, especially in industry commodities, because

 3 there are -- there would be effectively, I

 4 believe, a lot of participants seeking that

 5 category.

 6 Today, a number of our customers are

 7 what I'll classify as end users, or they make up a

 8 high percentage. Many of them do use the service

 9 or what their -- they seek a lot of benefit with

 10 electronic confirmations in general. So, if you

 11 start to say why would an end user use a

 12 confirmation service, to them it's -- you know,

 13 it's a reduction in back office costs. You know,

 14 they can leverage a lot of the technology that the

 15 large dealers use already, and they can receive

 16 their confirmations electronic, so it's quicker,

 17 and there's just a general efficiency garnered

 18 from electronic confirmations.

 19 How that's going to work with the

 20 Commission as far as these requirements to

 21 continue to use the system I think would need to

 22 be, you know, evaluated. There is a significant
 99

 1 number of price -- there's a (inaudible) price

 2 discovery, especially in certain points where

 3 there are a high percentage of end users, which --

 4 that would take it out of the equation, may make

 5 it a little more difficult to realize what's going

 6 to happen in that particular delivery location or

 7 that market. So, it's going to be a balance as

 8 far as the requirements for all end users to, you

 9 know, report. I think there's a lot of ways that

 10 the industry could leverage technology to help

 11 them report. I think a lot of them don't have the

 12 sophistication of many of the other asset classes.

 13 So, it's going to be a balance.

 14 MR. OKOCHI: Well, I think the question

 15 really is: Is it up to the swap dealer of major

 16 swap parts who've been providing the data to also

 17 provide data that verifies that the other side of

 18 the trade qualified for the end user exemption is

 19 not a financial entity hedging commercial risk, or

 20 is it up to the SDR to go out and get that

 21 information. You know, the way the Bill is

 22 currently written, only one side produces the
 100

 1 trade, so if the SDR is tasked with, you know,

 2 matching, confirming the trade to the details of

 3 what was on the other side of the trade as well as

 4 the end user exemption, then it would go beyond

 5 just collecting the data. We would have to have

 6 access to the counterparty information, speak to

 7 the counterparty, and confirm that they indeed

 8 qualified. So, you know, it would be quite a big

 9 additional task if that was the intent. 

 10 MR. PRITCHARD: Yeah, I think -- getting

 11 back to the fundamentals of it -- following the

 12 rulemaking, the SDR, from a technology

 13 perspective, really is receiving all those line

 14 items of data and providing reports back to the

 15 regulators on it, and to the extent that from that

 16 data that's collected every time and the history

 17 of that data, valuable reports can be produced to

 18 flag out potential noncompliances or -- then that

 19 could be a function of the SDR, but that's really

 20 the extent of it from our perspective.

 21 MR. DIPLAS: I'm no sure, though, how

 22 the SDR would be expected to perform some of this.
 101

 1 Some of the information you mentioned abut the end

 2 users the SDR doesn't really have. Frankly,

 3 neither does the dealer. You can never know

 4 whether the end user really is doing this for the

 5 reason they said they did. I mean, that's sort of

 6 thing that comes down to the regulatory and that

 7 end user. It's very -- I think it's going to be

 8 an impossible task to expect either the SDR or the

 9 dealer to perform.

 10 MR. GOOCH: I think one other practical

 11 thing is it's not true today that all repositories

 12 even know who the counterparties are to all of the

 13 trades, so I'm thinking one very basic thing we

 14 need to take care of is making sure that people

 15 can put their information into repositories before

 16 we even worry about what we might do with that

 17 information later on. That's not a stray thought

 18 to do in many jurisdictions.

 19 MR. DIPLAS: Yeah, that goes back to the

 20 issue of the privacy law issues that we're talking

 21 about. So, you need to solve that end of the

 22 puzzle as well, basically, before you can of
 102

 1 course do the next one, because what Jeff

 2 mentioned -- in some jurisdictions we cannot

 3 reveal the name of the counterpart without

 4 committing a felony basically.

 5 MR. TUPPER: Just to summarize, I mean,

 6 what we see is about around 25 percent of the

 7 trades we process are -- have a dealer associated

 8 with it, so that leaves 75 percent of the deals

 9 that really are not -- you know, someone has

 10 mandated a report, so it's really going to, I

 11 think, be up to the Commission to kind of provide

 12 guidance around what are going to be the

 13 requirements of end users or non-dealers to report

 14 in order to get you the data -- to provide the

 15 dataset you'd be looking for.

 16 MR. SHILTS: Anything more on that?

 17 Okay. Thanks.

 18 MR. SCHOTT: This next question is -- I 

 19 think I'll call it half -- a half-formed question,

 20 but as we read the statute, we see that there

 21 might be a need for SDRs to establish emergency

 22 procedures, emergency rules not only in the event
 103

 1 of sort of outside natural disaster or other types

 2 of manmade events but really market events, and we

 3 have rules, certainly, in the clearing, in the

 4 market, and in the exchange space about market

 5 events that might require the exchange to use

 6 special authority that it wouldn't otherwise be

 7 able to use. In the SDR context, do you see a

 8 similar need? Are there market events that might

 9 require the SDR to act? What might those events

 10 be, and what sort of authorities should the SDR

 11 have in that context? And if answer's "there's

 12 nothing," that's fine, too.

 13 MR. OKOCHI: Well, certainly, if there's

 14 another potential credit event or significant

 15 downgrade of a swap dealer on a real-time basis,

 16 the Commission may need to come in and view the

 17 data, so I think -- in a later panel, you're going

 18 to discuss real time, but if, you know, I think

 19 it's certainly a better -- bigger, better set now

 20 than it was in, say, two years ago where it was

 21 hard to even understand who had the risk. So,

 22 clearly a credit event could be one aspect.
 104

 1 I think the other -- you know, what is

 2 systemic risk? There's the to-big-to-fail type of

 3 systemic risk, but I think also there's, you know,

 4 regional systemic risk, product-related systemic

 5 risk so if everyone is doing certain direction in

 6 a trade and your own dollar goes to 90 cents or

 7 something -- you know, again, could be a market- 

 8 driven-event. So, interest rate, foreign exchange

 9 commodity, credit, equity events could drive --

 10 MR. SCHOTT: What would be the SDRs'

 11 unique role? What would they have to step in to

 12 do if one of these events occurs, if anything?

 13 MR. OKOCHI: Yes, I think, you know, how

 14 stale is the data that has come into the SDR, so

 15 if the requirements for the data providers would

 16 be, you know, every five minutes or at the end of

 17 each day, I think that's one of the requirements

 18 that you would have to consider -- how frequent do

 19 you need it -- and then in the event that you need

 20 it in between, you know, the time that someone's

 21 submitted the data, then, you know, what rights do

 22 you have to all of a sudden upon all the dealers
 105

 1 to refresh their data, you know, midday or middle

 2 of the night?

 3 MR. SPATT: So, I think this raises an

 4 interesting point to the -- you know, I've been

 5 stricken in recent years by the extent to which in

 6 other contexts interim final rules are used when a

 7 regulator is kind of pulling out of the gate on an

 8 issue and basically, to some degree, perhaps even

 9 arguably skirting the notice and comment process.

 10 Now, clearly in the kind of context we're talking

 11 about and sort of following up on the last

 12 comments, there could certainly be situations,

 13 whether it be on the one hand actual disasters and

 14 kind of 911 types of things or market kind of

 15 dislocations. And here I think not so much about

 16 May 6 but more about what happened in 2007/2008

 17 where there could be some needs. But I would

 18 caution -- even here I would caution that I think

 19 better -- to some degree, better rules are rules

 20 that aren't simply sort of slapped in place over

 21 some weekend or at 6 a.m. some morning, which is

 22 sort of what in various spaces happened in
 106

 1 September of '08 in a whole variety of financial

 2 regulatory spaces. I mean, we basically had short

 3 sales banned on huge numbers of financial stocks,

 4 which caused all kinds of adverse consequences for

 5 example.

 6 I seems to me that what one would like

 7 to do is to define, to the extent one can -- and

 8 one may not be always able to fully do that, and I

 9 kind of appreciate that in the context of a crisis

 10 -- but one should try to step back during this

 11 type of process and try to identify what would be

 12 the types of circumstances that, for example,

 13 following up on Jiro's comments, would necessitate

 14 a speedup in the provision of data -- what would

 15 be those types of circumstances? -- and then maybe

 16 frame some parameters as to what that speedup

 17 might be. And, you know, that's not to take away

 18 necessarily all emergency authority kind of

 19 incremental to that, but I think to the extent

 20 that that's kind of built in to the

 21 ex-anti-framework, that's a much healthier system

 22 than the types of situations that we observe both
 107

 1 at a transactional level and in a rulemaking

 2 context by the financial regulators and

 3 supervisors in 2008. So, I think building it in

 4 to the fabric as best as one can is a much better

 5 way to go, and obviously, you know, it's sort of

 6 like an -- it's kind of like an option or it's

 7 like a trigger or something like that, but I think

 8 building that in so that then that has the

 9 advantage that market participants understand, to

 10 some extent, the rules of the game in advance of

 11 that in a contingent way. But understanding the

 12 rules of the game in advance, even if it -- and in

 13 a contingent way -- strikes me as sort of very

 14 important and I think likely to produce both

 15 better rules and better reactions by the market

 16 participants.

 17 MR. DIPLAS: I would fully agree with

 18 that. I mean, the -- I can't stress enough the

 19 importance with kind of legal certainty, a context

 20 certainty, especially in a stress period. I think

 21 the most problematic kind of reaction from market

 22 (inaudible) we have seen resulted from (inaudible)
 108

 1 certainty, especially with emergency powers. I

 2 know it was mostly (inaudible), for example, with

 3 (inaudible) actually encounter emergency type

 4 situations (inaudible) fundamental for us to

 5 actually deal with those kind of with a scalpel as

 6 opposed to a sledge hammer in order to actually

 7 ensure that the conduct, the sanctity is

 8 preserved, and if there are times that the

 9 emergencies need to take -- to be dealt with but

 10 the economic context or the conduct need to be

 11 preserved or need something, sometimes with

 12 respect to timing -- there might be delays

 13 (inaudible) to deal without the emergencies

 14 (inaudible), but that should not affect the

 15 underlying context. I mean, we start with that

 16 premise, I think we're okay, and we just adjust

 17 the flexibility in the system to deal the

 18 emergencies, but we don't undermine the system.

 19 MR. GOOCH: I think the problem with

 20 emergencies is it's very hard to know what they're

 21 going to be and how to deal with them. So, I

 22 think there's only two things you can probably do,
 109

 1 practically speaking. One is to have the

 2 repositories themselves as real time (inaudible)

 3 information content as possible to maximize the

 4 chance that any information regulated needed to

 5 deal with emergency was actually there at the time

 6 it happened.

 7 The other thing is about the SDR itself

 8 in terms of BCP coverage how to region support,

 9 that kind of stuff, to make sure the SDR isn't the

 10 cause of a problem or isn't actually impacted by a

 11 problem. Something -- the SDR is something that

 12 is probably very dull and boring and unnecessary

 13 most days of the week. Occasionally we're here to

 14 really need it and just need to make sure on that

 15 day it has the information you wanted and is

 16 actually available when it's happened.

 17 MR. PRITCHARD: Yeah, we did totally

 18 agree with those points. I think the value of an

 19 SDR is the data that's already there when a crisis

 20 strikes and, you know, about to let you change

 21 what it does in a hurry, and our exposure

 22 management service was up and running in 2008 and
 110

 1 a lot of the firms that had already got data and

 2 history on it were able to derive significant

 3 value, and we saw a huge uptake and usage of it

 4 particular weekends of the crisis, and I think I'd

 5 agree with the point that it's the data that's

 6 already there that is going to be valuable.

 7 MR. TUPPER: I think the best thing the

 8 SDR can do in times of stress is availability.

 9 You know, availability is building, you know,

 10 (inaudible) redundancy, back-office facilities, DR

 11 sites into your system.

 12 To echo the point, you know, most days

 13 of the week, a confirmation -- SDR services are

 14 pretty boring. Utility-like product but all of a

 15 sudden when there is a stress event, you know.

 16 Like around Lehman, we received a lot of calls

 17 making sure that we were going to be up. All the

 18 trades are historically available, all that's

 19 done. I mean, that's pretty much a -- I would

 20 say, having just technical requirements of a

 21 global, scalable system would have that redundancy

 22 built into it in order to always be available in a
 111

 1 time of stress.

 2 MR. SCHOTT: Thank you.

 3 MS. NATHAN: I think we have time for

 4 maybe one more question.

 5 How do you all believe that the

 6 application and registration process for

 7 designating or registering an SDR should be

 8 structured? For example, in what technological

 9 compliance, resource, and other areas should an

 10 SDR be required to demonstrate competence and

 11 proficiency in order to be registered?

 12 MR. OKOCHI: Well, I think certainly

 13 having a track record of being able to house this

 14 type of data, including the ability to understand

 15 the different trade types, book, value process,

 16 report on these trade types is key, track record

 17 for showing, up-time, you know, strong, sort of

 18 (inaudible) agreements, all of the security backup

 19 information that's required. So, you know, I

 20 think, you know, on the one hand you want to

 21 encourage as many potential SDR registrants as

 22 possible so you have some choice as you go through
 112

 1 the actual selection process, but clearly you want

 2 to manage that a little bit and have some key

 3 requirements around the technology, ability to

 4 really deliver software because it's not just

 5 about delivering a database, a software that can

 6 analyze the data, provide the reporting, and

 7 providing the access.

 8 MR. GOOCH: You guys are pretty more

 9 expert at this than we are. I imagine if I was

 10 sitting in your shoes I'd worry about compliance

 11 functions, at the early conversation, whatever the

 12 minimum requirement is to make sure that's in

 13 place. I think BCP and security is incredibly

 14 important to make sure whoever filling SDR

 15 function has that. And then the final thing is

 16 are they able and committed to providing you the

 17 data you've decided you needed to see, wherever

 18 that ends up being, making sure they're not -- and

 19 don't have legal impediments or systemic

 20 impediments to provide that data.

 21 A lot of other things you could talk

 22 about, but this has to be in place by July next
 113

 1 year. There's not going to be a lot of time.

 2 MR. TUPPER: I would say in addition to

 3 the system providing such a service probably

 4 demonstrated expertise in a particular market

 5 type, the systems can function great. But

 6 obviously having a track record working with the

 7 industry to provide standardization, you know,

 8 around changes in industry events -- you know,

 9 energy is always an evolving market, so being able

 10 to work with industry participants to develop

 11 those standards and then list them effectively on

 12 a system. Also I would say a proven track record

 13 of working with outside vendors, especially in

 14 energy. That's very popular. Many of the

 15 connections are provided by outside vendors.

 16 Connectivity to the market participants, you know,

 17 demonstrated track record. That's important,

 18 because, really, an SDR is only as good as its

 19 ability to aggregate and receive data. So, that's

 20 another consideration in addition to all the

 21 system requirements I think, which are pretty

 22 standardized.
 114

 1 MR. SHILTS: What about some sort of

 2 financial resource? 

 3 MR. TUPPER: Yeah, we -- we -- to

 4 confirm -- that's a great question. We actually

 5 carry an operational on the OP policy, so I would

 6 think obviously, you know, we carry a policy of

 7 $10 million per event, so if, you know, if a trade

 8 is matched in error, you know, participants are

 9 (inaudible), that would probably be a requirement

 10 as well.

 11 MR. SHILTS: That's a good point.

 12 MR. PRITCHARD: I think we talked about

 13 the comprehensive coverage at the beginning, and

 14 that's key, because one of my colleagues mentioned

 15 a provision in the act submitting trades that

 16 wouldn't be accepted by any repository directly to

 17 the Commission, and that's probably something you

 18 don't want to get. So, comprehensive coverage

 19 across the whole OTC swap landscape is important,

 20 and also scale. We see six million trades on a

 21 regular basis, so once this rules come into effect

 22 -- I know there are some periods of sort of phase
 115

 1 in, but you are potentially going to get a huge

 2 amount of data, and then you're going to get it on

 3 a periodic basis, so capability to handle the

 4 entire market is an important consideration.

 5 MS. NATHAN: We do have one last

 6 question. Oh, I'm sorry. Please, Mark, go ahead.

 7 MR. DIXON: Just add to what the

 8 gentleman said. I would think there's probably

 9 more similarities than there are dissimilarities

 10 between the infrastructure and operations of a DCO

 11 or a DCM in principle, applying best practices. I

 12 think staffing competency would also be key to add

 13 to the things that Bruce had just mentioned, which

 14 means there's going to have to be some face time 

 15 between the regulator and the entity.

 16 MR. SCHOTT: So, one last question on a

 17 slightly different topic. We've spoken a lot

 18 about the Commission's being able to reach into

 19 SDRs and form pictures, you know, of an aggregate

 20 marketplace. Do you foresee any need for SDRs to

 21 communicate with each other? Should there be any

 22 requirement or voluntary agreements for SDRs just
 116

 1 to share information?

 2 MR. OKOCHI: Well, I think it's in the

 3 best interest of everyone to work together no

 4 matter how many SDRs there have been, in

 5 particular with the SDRs that are internationally

 6 based. So if, again, you're trying to get a

 7 global view of risk, just having, you know, an

 8 efficient SDR program in the U.S. doesn't really

 9 solve the problem. So, I think it's really the

 10 ability to coordinate within the U.S. And then

 11 certainly offshore.

 12 MR. SPATT: Even from a process point of

 13 view, I would imagine that the SDRs are going to

 14 face similar types of issues and challenges across

 15 -- both across countries and across product

 16 spaces, and certainly there's going to be some

 17 scale economy just in -- certainly at least

 18 allowing and encouraging the SDRs to share with

 19 each other the benefits of their expertise on the

 20 process side. And I don't mean just computer

 21 process, but even with respect to kind of perhaps

 22 substantial regulation or market kind of oriented
 117

 1 issues that they're going to face, which are going

 2 to have some connection across these contexts.

 3 MR. DIXON: Just to add to that, I'd say

 4 differently, which would be nothing to prohibit

 5 that cooperation I think would be helpful.

 6 MR. GOOCH: I sense here another trade

 7 association being set up.

 8 MR. SHILTS: Okay, we want to end in a

 9 few more -- in about five minutes, but I had one

 10 question and kind of -- and I apologize if this

 11 was answered, but maybe I didn't get the -- from

 12 the discussion what most people's thoughts were,

 13 but do you -- and just to very quickly kind of go

 14 around -- do you view a core function of the swap

 15 data repository to include confirmation of trades

 16 as well monitoring for life- cycle events? I know

 17 there was discussion about that, but I would just

 18 -- what -- just very quickly.

 19 MR. GOOCH: I think it depends what your

 20 mean by core function. I think confirmation is

 21 incredibly important. It should be a (inaudible)

 22 activity. I feel strongly (inaudible) and SDR
 118

 1 function or set function or something else. It

 2 just needs to fit in somewhere into the act.

 3 Whether the same entity needs to do both things I

 4 think is -- hardly none of the offerings work on

 5 that basis. So, I don't know if it has to be the

 6 same company, but there always needs to be some

 7 sort of registration and confirmation.

 8 MR. SHILTS: Can you -- oh.

 9 MR. MACBETH: Yeah -- no, I would say

 10 the life- cycling event there is important. So,

 11 there certainly -- you talk about credit

 12 derivatives when there's a credit event. They

 13 terminate. You know, succession events, the

 14 underlyings change their names. There's very much

 15 a life cycle that actually informs the position.

 16 You know, and you have follow that life cycle, and

 17 not all these events are yet confirmable in a

 18 legal contract sense. I think -- you know,

 19 sometimes -- like, with -- a lot of the comments

 20 that refer to the trade confirmation service --

 21 and that -- and that -- you know, and Frank

 22 Foreman limping and linking things to wrappers.
 119

 1 You know, I think we've talked more widely about

 2 some other means of getting trade dates of two

 3 repositories of -- you know, it's obvious from

 4 their acts that there's an obligation for the --

 5 to confirm with both parties, and confirmation

 6 vehicles are great ways of doing that. But the

 7 repository -- you know, from our perspective -- is

 8 about aggregating that dataset and maintaining,

 9 you know, that dataset and making sure what gets

 10 reported is an accurate and valid position. And

 11 life-cycle events can't be totally ignored from

 12 that.

 13 MR. SHILTS: Okay, and just very

 14 quickly.

 15 MR. TUPPER: I believe there's a core

 16 component, but in addition to operating the

 17 warehouse for the energy commodities, it's one's

 18 part. So, confirmations -- that's a first step.

 19 You need to make sure you've confirmed trades.

 20 Usually third parties doing that is probably the

 21 best way to achieve that, but then once you

 22 receive -- it makes it way into the warehouse,
 120

 1 maintaining life-cycle events is going to be the

 2 next step for position reporting.

 3 MR. PRITCHARD: Yeah, I mean, there's

 4 obviously multiple duties on a contract, and

 5 confirming them is one, and reporting it to an SDR

 6 is another, and there are many successful pieces

 7 of infrastructure around in the market, and we

 8 just believe that that decision -- it might be

 9 right to use one particular (inaudible) to do

 10 both, but it should be left to the market and the

 11 participants rather than the rules.

 12 MR. OKOCHI: I believe the intent of the

 13 confirmation aspect in the Bill is to confirm the

 14 trade details sent by the swap dealer, the major

 15 swap participant is accurate, not to confirm that

 16 the trade between the dealer and, say, the end

 17 user is matched and confirmed. So, if it's the

 18 former, absolutely the SDR; if it's the latter, we

 19 need both sides of the trade.

 20 MR. DIXON: I would just echo Ralph's

 21 comments.

 22 MR. DIPLAS: Yeah, I agree with that. I
 121

 1 think this (inaudible) should be asset class

 2 specific. I don't think it can be mandated. For

 3 example, in credit, 99 percent of the (inaudible)

 4 outcome from there (inaudible) percent cannot be

 5 there, because that functionality does not exist.

 6 So, the reporter has to be able to get a larger

 7 set of data than that. The life-cycle events --

 8 again, in credit we designed this (inaudible)

 9 because it was needed. But in other asset classes

 10 it is not needed, so therefore I don't think we

 11 need to mandate it. So, we need to be a bit more

 12 asset class specific in that respect.

 13 MR. MACBETH: Can I just come up -- back

 14 on.

 15 MR. SHILTS: Very quickly.

 16 MR. MACBETH: Yeah, it's an -- the only

 17 comment is that what they've essentially done by a

 18 repository I think is a separate question in terms

 19 of this life-cycle maintenance, which may be the

 20 credit model where it is centralized as opposed to

 21 some decentralized and some messaging around --

 22 well, I think there are opportunities there. But
 122

 1 I think the real point I'm trying to make is to

 2 have accurate data you have to understand

 3 life-cycle rates.

 4 MR. SHILTS: Chester, do you want to say

 5 anything?

 6 MR. SPATT: Well, you know, I would just

 7 echo so many of the comments of the participants.

 8 You know, to the extent that there's sort of an

 9 economic issue with respect to confirmations, it

 10 seems to me the main issue is simply making sure

 11 that the data -- you know, the follow-up on

 12 storage point to make sure that the data integrity

 13 is there, which a confirmation -- at some level

 14 pieces of the confirmation process are important

 15 to, but then I think that the more ministerial

 16 aspects of the confirmation process -- those

 17 really ought to be associated with comparative

 18 advantage, and I think a number of the panelists

 19 pointed to aspects of the confirmation,

 20 particularly if they said they involve end users,

 21 don't necessarily lead to involve the SDR. So, it

 22 seems to me that where the opportunity is for the
 123

 1 commissions operating under Dodd-Frank is to be

 2 clear about which aspects of the confirmation

 3 process need to be linked to the SDRs.

 4 MR. SHILTS: Okay. Thank you very much,

 5 and I want to thank all the panelists. It was

 6 very a very interesting and helpful discussion.

 7 We'll end this panel and we'll start up again at

 8 11 o'clock with Panel 2. Thank you again very

 9 much.

 10 (Recess)

 11 MR. SHILTS: If everyone wants to come

 12 in and take a seat, and we'll get started. Okay,

 13 let's get going. We're going to start with our

 14 second panel today. This is going to focus on the

 15 mechanics of reporting, and data on swaps. And

 16 some of the topics we want to discuss with this

 17 panel are the types of data to be reported, the

 18 parties that would be responsible for reporting,

 19 and the reporting of life-cycle events.

 20 Again, my name is Rick Shilts. I'm

 21 acting director of our Division of Market

 22 Oversight at the CFTC. And joining me is Robert
 124

 1 Cook from the Securities and Exchange Commission,

 2 and as we -- to begin this, why don't we go around

 3 the table and each of the panelists can introduce

 4 themselves and say where they're from. And then I

 5 think we have one that will be identifying himself

 6 from New York. So press the button there and the

 7 red light will go on.

 8 MR. THEMELIS: Nick Themelis, CIO,

 9 MarketAxess. We're an institutional electronic

 10 trading venue for fixed- income product, specific

 11 focus in credit.

 12 MR. GLACE: Joe Glace, chief risk

 13 officer for Exelon Corporation. I'll be providing

 14 the end-user viewpoint.

 15 MR. PICKEL: Bob Pickel, executive vice

 16 chairman of ISDA, the International Swaps and

 17 Derivatives Association.

 18 MR. MACBETH: Stewart MacBeth, DTCC,

 19 general manager of the Trade Information

 20 Warehouse.

 21 MS. LEONOVA: Irina Leonova, CFTC,

 22 Division of Market Oversight.
 125

 1 MR. TAYLOR: David Taylor, the team lead

 2 for the Data Recordkeeping and Reporting

 3 Requirements Rulemaking at CFTC.

 4 MS. SEIDEL: Heather Seidel, Division of

 5 Trading and Markets at the SEC.

 6 MR. MICHEHL: David Michehl, Division of

 7 Trading and Markets at the Securities and Exchange

 8 Commission.

 9 MR. PRITCHARD: Raf Pritchard, head of

 10 TriOptima North America.

 11 MR. DIXON: Mark Dixon, chief operating

 12 officer of Evolution Markets.

 13 MR. CUTINHO: Sunil Cutinho, CME

 14 Clearing House.

 15 MR. SHILTS: And lastly, from New York

 16 --

 17 MR. BARNUM: Jeremy Barnum from J.P.

 18 Morgan.

 19 MR. SHILTS: Thank you. And as I noted

 20 for the first panel, we'd like everybody to have

 21 an opportunity to comment on each of the questions

 22 raised. But if we go on a little too long, I'll
 126

 1 try to cut that short so we do get all the

 2 questions in during the -- for this panel

 3 discussion, which we hope to end at 12:45.

 4 So with that, I think David will kick it

 5 off with the first question.

 6 MR. TAYLOR: And I want to just briefly

 7 set a little background for this and some of the

 8 other questions. I was thinking listening this

 9 morning, living in Washington I suppose rubs off

 10 on you after a little while, but I will try not to

 11 put this question absolutely into the

 12 Congressional category.

 13 But we might want to usefully remember,

 14 as we do all these questions this morning, I think

 15 the repositories are going to need three basic

 16 stages or types of data, and we might separate

 17 these as we talk. Certainly they're going to need

 18 initial deal or transaction data. You might call

 19 this "transaction event data." They're going to

 20 need post deal data, some would say life-cycle

 21 data, events, over the existence of the swap. You

 22 could call this "transaction state data" if you
 127

 1 like. They're probably going to need counterparty

 2 position data, mark-to-market data, collateral

 3 data, that sort of thing.

 4 And one thing that's been driving our

 5 thinking about the data that should be reported

 6 and how it should be reported is the use that

 7 regulators need to make of the data at the end of

 8 this process, in a way it all -- what data should

 9 be reported all derives from there. Worth

 10 remembering, regulators will need to do market and

 11 trade practice surveillance enforcement,

 12 prudential supervision. Some will have resolution

 13 authority, monetary or currency authority,

 14 macro-prudential systemic risk supervision,

 15 real-time reporting, and position limit

 16 supervision. To serve those purposes and some of

 17 the fundamental purposes of the legislation,

 18 including transparency and systemic risk

 19 mitigation, we have been considering the possible

 20 use of three unique identifiers regarding each

 21 swap. Another way to say that would be a unique

 22 required way of expressing data in three key
 128

 1 fields in the data structure, a unique deal or

 2 transaction ID for this particular swap that would

 3 follow it over its whole life, a unique

 4 counterparty ID for each counterparty to a swap,

 5 and a unique product ID to say which bucket does

 6 this swap belong in?

 7 So having said that, a three-part

 8 question: How could we best create these three

 9 types of unique ID? Who might be the entity that

 10 would create each of them? How would they be

 11 given to all the entities involved in the swap:

 12 The counterparties, the SEFs, the DCMs, the DCOs,

 13 the SDRs? And what are the benefits or potential

 14 obstacles to trying to create a system of unique

 15 IDs?

 16 MR. CUTINHO: Thanks, David. I am

 17 speaking from our experience as a clearinghouse

 18 and as an exchange. We have had to address these

 19 challenges as well. When we talk about

 20 transaction identifiers, there are identifiers

 21 associated with different stages of the

 22 transaction. There is the execution part, and
 129

 1 then there is the clearing part, and then each

 2 client on the two sides of the transaction would

 3 also like to trace these transactions to their own

 4 risk systems. So when we talk about transaction

 5 ID and uniqueness, I think the challenges one

 6 should consider are there are not just one

 7 identifier, there are several.

 8 What is important is an identifier that

 9 we would use as a clearinghouse for our purposes,

 10 and there would be a similar notion, I suppose, in

 11 a swap data repository for uncleared stuff. From

 12 the participant standpoint, it's very important

 13 for us to know the end participant as well,

 14 especially for cleared-only transactions. We

 15 record this. We actually maintain positions for

 16 these participants, and we provide multilateral

 17 netting within the clearing system. So it was

 18 almost essential for us to have this concept.

 19 From this perspective, we have to understand

 20 challenges of asset managers or money managers who

 21 are actually managing funds for multiple accounts.

 22 So it's important to address those challenges.
 130

 1 And the third important thing is product

 2 identifier. Now for the listed stuff or a large

 3 part of standardized stuff, this is actually quite

 4 simple. We have a mechanism of actually

 5 templating or creating contracts that predefine

 6 the standardized terms, and then we identify those

 7 terms that are negotiated. As we move into the

 8 over- the-counter space, there are a lot more

 9 flexible elements, so templating or contract

 10 creation becomes a challenge. So one way to

 11 address that is actually to type-class your

 12 derivatives into different classes and then within

 13 those asset classes, go specifically into those

 14 areas that are treated by the market participants

 15 as a standard. So they're not negotiated.

 16 They're kept in tact, but the negotiated aspects

 17 are the ones such as coupon or start date,

 18 termination date, et cetera. The industry itself

 19 has encouraged this effort, so we see that

 20 happening in credit.

 21 We have adopted the same standards for

 22 rates. We see the market transacting in such a
 131

 1 manner so we've created a templating mechanism

 2 that helps us actually classify those derivatives.

 3 Again, what I'm trying to communicate here is not

 4 as easy as to come up with just one identifier for

 5 a product. We need to actually take into account

 6 how the transactions take place. And then in a

 7 cleared world, that happens almost automatically

 8 because we have to standardize a few terms in

 9 order to process them in a standard manner. But

 10 for an uncleared world, there can be a few

 11 parameters that are actually negotiated.

 12 MR. PRITCHARD: I think that's a great

 13 point, mentioning the cleared world, David,

 14 because we find ourselves a bit coming together

 15 with the exchange listed cleared world and the OTC

 16 swap world. I mentioned in the last panel the

 17 diversity of the landscape across all the

 18 different asset classes and all the different

 19 instrument types within that. And that's really

 20 the challenge facing the product ID part of this

 21 question. I think in our interest rate

 22 repository, we see 3.6 million live contracts
 132

 1 outstanding. And we see a rate of new interest

 2 rate swaps coming in of around 3,600 a day, and of

 3 those about -- the most popular currency is

 4 dollars -- and that's about a third of them with

 5 1,200 dollar swaps. And then about half of those

 6 are on round dates and half of them are forward or

 7 odd dates, so that's getting down to the most

 8 popular forward date is the 10-year swap. We see

 9 about 200 of those a day, and then even there,

 10 there is as someone mentioned different rate bases

 11 or tenors that you can put them on. So there's

 12 really only 100 or so completely identifiably

 13 standard 10-year swaps going on on a particular

 14 day. And I think it's worth just observing that

 15 contrast between the listed markets and the OTC

 16 swap markets when we address these challenges of

 17 trying to provide standard product IDs.

 18 MR. MACBETH: So can I -- I'd say in

 19 terms of the unique deal, you need to put that up

 20 front. That needs to be created at the point of,

 21 or as near to, execution as you can. And so

 22 there's the SEF vehicle potentially for doing
 133

 1 that. There's the confirmation wrap-up vehicle.

 2 The SEF may use a confirm service itself directly.

 3 That unique reference could be applied there.

 4 Also, we talked in the earlier panel

 5 about this idea of some of those trades that 

 6 aren't electronically confirmable being linked,

 7 and again, we talked high in the chain. The same

 8 providers, I think, that provide confirmation

 9 services would want to support those kinds of

 10 transactions and provide some of the confirmation

 11 services that exist today, had origins as checkout

 12 platforms. And I think they're very valid points

 13 to start creating unique identifiers for a

 14 transaction that then can be carried down the

 15 transaction stack through layers of

 16 infrastructure. And currently we provide one when

 17 it gets registered in the warehouse that is well

 18 used because that is the value of the unique ID.

 19 There's this sense of a common reference, and that

 20 is being used throughout the market for individual

 21 transactions. But the essence to my mind is you

 22 have to do this early if everybody's going to
 134

 1 share that. It has to be high, high in the

 2 process. SDRs could do it, but also these

 3 confirmation providers and execution facilities.

 4 So, sorry, I was going to --

 5 MR. TAYLOR: As people go on with that,

 6 let me add one extra aspect to what you were just

 7 saying and others could respond. If the idea is

 8 to get one unique -- let's start with the deal ID

 9 -- used by everyone in the swap space, obviously a

 10 question is, who creates it and how is it

 11 transmitted to everybody who has to use it? For

 12 instance, is it workable for the data repository

 13 to do that? And if so, is that early enough in

 14 the process? And how do they send it back out?

 15 Just add that to the question as you go forward.

 16 MR. MACBETH: So that practically is

 17 what happens in the credit market today. The

 18 issue we will have to contend with is how we would

 19 link that back to the SEF if the SEF sits above

 20 that. Having said that, there are some back

 21 population techniques that are used, it's not a 

 22 technically impossibility. So again, it could be
 135

 1 done at the SDR level. The SDR, hopefully, will

 2 have advantages of completeness. So again, to the

 3 uniqueness point, actually being the kind of

 4 golden source of that, yeah, that is a

 5 possibility.

 6 But I also want to kind of mention those

 7 confirmation and middleware providers that are

 8 really at the tie-up point to the extent that's

 9 not itself considered an SDR. So -- and I think

 10 personally, it's quite a big change for people to

 11 flow that information through. In general, yeah,

 12 there is practice I know. Jeff Gooch was in the

 13 earlier panel. His service -- he has references

 14 in his service. He uses those. They're

 15 marketware IDs as well. And people do internalize

 16 those and use them as the common reference when

 17 they bilaterally trade and bilaterally process

 18 thereafter through their life. So some of that

 19 exists and it is usable.

 20 Unique counterparty is important. It's

 21 difficult, I think. There's clearly a lot of data

 22 providers in the counterparty world but when you
 136

 1 -- I guess my experience with the regulators as an

 2 SDR has kind of suggested that they do want

 3 relatively rich counterparty information. Clearly

 4 we need proper validation for who that is, but the

 5 actual task goes beyond that and starts talking

 6 about who is affiliated with that party, even goes

 7 to credit support and ex-terms or guarantees

 8 between companies. So it's a very complex

 9 reference dataset. I suspect, therefore, it's a

 10 different data service. Again, practically, we've

 11 addressed it by having contracts with our

 12 customers.

 13 And when we talk about the compliance

 14 thing I talked about, kind of KYC and AML staff,

 15 we do feel the need to know our customers and we

 16 have data on them which we use. We've got about

 17 1,700 clients, 17,000 accounts. That's not going

 18 to get you the whole derivative market, but it

 19 gets somewhere. But there is going to need to be

 20 a source. Now, how you resolve what source that

 21 will be, I think, is a complex question. There's

 22 a lot of commercial interest to that. I'm
 137

 1 probably not the best person to establish creating

 2 that. I can -- DDTC has a counterparty reference

 3 data business. I can promote that, but I think

 4 it's kind of a complicated world.

 5 And then he talked about unique product

 6 identifiers, and I think that's a question of

 7 actually what level of granularity you want to go

 8 to. At some level there are probably some

 9 standard contracts that are known. So with

 10 Themelis in the room, there's these kind of

 11 standard, North American contracts for credit

 12 derivatives. Most people know what that default

 13 is and has a strong market meaning. There

 14 certainly is a strong position in terms of setting

 15 those standards. I guess I've seen a slightly

 16 different level -- and it depends a little bit on

 17 the use -- trades or products characterized almost

 18 by attributes they carry.

 19 So if a product had exposure to credit

 20 underliers, it would be put in a credit category.

 21 You'd have a product type. So between OTC,

 22 exchange, securities, you'd have a series of
 138

 1 attributes that basically build product

 2 descriptors, but you have a defined set of

 3 attributes and a set of values that people use.

 4 And that tends to enable any product to fit

 5 somewhere on that matrix because the problem

 6 always is the nonstandard product. So whereas the

 7 standard trade has a market name, tend to have a

 8 product name issued by their marketing firms and

 9 less standardization.

 10 MR. PICKEL: Yes, I was going to say

 11 that I think you've certainly identified the key

 12 pieces of the identifiers, but in effect it's

 13 really a string of all that information that

 14 identifies it, particularly in the pure,

 15 bilateral, non-cleared world what that particular

 16 trade is. Once you put it into a clearinghouse,

 17 one of those variables, if you will, is more or

 18 less fixed for that transaction. You can look at

 19 cross-transactions for trades with that

 20 clearinghouse of a certain type, et cetera, et

 21 cetera. So I think that's the notion that you'd

 22 have to think of.
 139

 1 And that's I think different from -- and

 2 I know people talked about CUSIP-type numbers,

 3 that type of thing. It is not a standardized

 4 number in that sense. I mean, every particular

 5 trade effectively will have a different

 6 identifier, and that's been an issue that for the

 7 past, I would say 10 years if not more, either the

 8 dealers and their customers or some of the vendors

 9 that have developed, such as the ones around the

 10 table and others, have tried to wrestle with how

 11 we go about that. So there's a lot of learning,

 12 there's a lot of scars there I suspect that you

 13 can draw from to understand how to best put

 14 together a deal identifier that is meaningful,

 15 giving you the right level of information.

 16 I think to Stewart's point, you could

 17 find yourself getting into an awful lot of detail

 18 on the products themselves that frankly at the end

 19 of the day isn't necessarily all that much useful.

 20 If you know it's a credit deal of a certain type

 21 broadly speaking. So I think it's finding that

 22 right mix is the right focus.
 140

 1 MR. GLACE: Having an unambiguous

 2 identifier is just ideal because if it's issued at

 3 the time by the SDR, it's sort of

 4 contemporaneously issued by the SDR, it also helps

 5 with the person doing the reporting, saying I've

 6 fulfilled my reporting duty or obligation because

 7 I have your identifier number back, and I'm

 8 stirring it now as my trade ID, your trade ID.

 9 That really helps end users communicate with

 10 everybody.

 11 MR. BARNUM: I think one of the things

 12 that hasn't been mentioned yet, which I think is

 13 an important piece of it, although I think Stewart

 14 alluded to it a little bit, is the sort of

 15 question of the balance between timeliness and

 16 completeness and precision. And so if you go back

 17 to the three purposes if not more that are related

 18 to the reporting, one is the post rate

 19 transparency, post rate price transparency

 20 mandate. And then there are requirements also

 21 related to systemic risk oversight, essentially

 22 the ability of regulators with systemic risk
 141

 1 mandates to look into the SDRs for purposes of

 2 really performing almost like an independent risk

 3 management function for the market. And the

 4 requirements for those two functions are quite

 5 different, and I think many of us in the market

 6 have struggled at different points to try to do

 7 the same -- those two different things out of the

 8 same data source. So I think being clearer I

 9 think collectively in our minds about that

 10 distinction is going to be very important.

 11 So what I mean by that specifically is

 12 that, I imagine that when the rulemaking is done

 13 for the most liquid, most heavily traded products,

 14 the post rate reporting requirement is likely to

 15 look sort of not dissimilar to what trace looks

 16 like today for corporate bonds. Meaning it's

 17 going to be on the order of an hour or less after

 18 the trade is done if not significantly faster.

 19 And so I think all of us know that there are

 20 certain aspects of the post rate enrichment

 21 process that don't get done until much later in

 22 the day, and if we design the process so that it
 142

 1 is a requirement that all of those things be

 2 populated before the post rate reporting can be

 3 done, then you're going to have the policy

 4 effectives come into conflict. So you have to

 5 design a paradigm that allows the post rate

 6 transparency reporting requirement to be met kind

 7 of quickly with a somewhat reduced set of data,

 8 which is really in reality the only data you're

 9 likely to care about for that purpose which is

 10 basically size and price and the thing that traded

 11 and then allow for further enrichment later in the

 12 workflow.

 13 And I would argue for not trying too

 14 hard to try to reconcile the flow data that comes

 15 out of the post rate reporting with the ultimate

 16 kind of goal position data that you're going to

 17 use for risk management. I think you just have to

 18 accept that there occasionally are going to be

 19 differences. And you have to trust that if

 20 institutions are using the SDRs for their own

 21 reconciliation purposes for risk management, then

 22 that should suffice for the regulatory community
 143

 1 because otherwise you might create a huge amount

 2 of overhead around that reconciliation for

 3 relatively little benefit.

 4 MR. SHILTS: Mark?

 5 MR. DIXON: I think there are a couple

 6 questions and the first one is whether or not --

 7 what's the minimum dataset you need? And I think

 8 one of the things to consider is the asset class

 9 and the type of transaction. In particular,

 10 allowing for uniqueness and allowing for some

 11 supplemental data to be added to that to help

 12 clarify. And I think an interesting point was

 13 just raised, which is when do you actually need

 14 that data? Because at certain times of the day

 15 you may need one dataset and at the end of the

 16 day, post reconciliation, you may need another

 17 dataset.

 18 And the last thing I would say is some

 19 type of standard is going to be essential. You

 20 have two challenges. You have legacy products,

 21 that's one. That's going to be a heavy lift. And

 22 then the new products, I think, are much more
 144

 1 straightforward and no small part will come as an

 2 outcome of trying to kick the legacy can around

 3 for awhile to come up with the right solution.

 4 MR. PRITCHARD: I will just add one

 5 little point to that. I think -- I totally agree

 6 with what Jeremy said, but it's also on a

 7 practical note a lot of the identifiers that are

 8 in use at the moment. I suppose in our risk

 9 management service we've got cleaned up thousands

 10 of legal entities as we received that data and

 11 practical steps have been taken to address these

 12 problems in the market. One thing that does

 13 happen quite a lot is that when data gets passed

 14 around, the identifiers from the venues that are

 15 out there are used a lot. We get a lot of DTCC

 16 IDs in our data room. We pass outside, drop some

 17 IDs back out to the market. So in terms of -- you

 18 can refer to a trade by one of the identifiers

 19 that is already electronically -- a venue

 20 identifier adds a lot of value and can provide a

 21 practical solution to some of these

 22 standardization problems.
 145

 1 MR. TAYLOR: Let me ask one follow-up --

 2 go ahead.

 3 MR. BARNUM: No, I was just going to add

 4 quickly to what Raf said, just to echo that really

 5 across almost all of the questions that have been

 6 asked is that I think it's important to realize

 7 the degree of evolution that certain segments of

 8 the OTC market have undergone in, say, the last

 9 two and a half or three years. Such that, in

 10 fact, I would say about 80 or 90 percent of these

 11 questions have in one way, shape, or form already

 12 been answered reasonably robustly. There's

 13 probably some cleanup that needs to be done around

 14 certain issues and some centralization and some

 15 specification of universal standards, but to what

 16 you might find to be a surprising extent, many of

 17 these issues have already been sort of resolved

 18 maybe in some cases in a commercial way that

 19 creates certain standards conflicts, but less than

 20 what you might think. So there are already

 21 solutions in the wild in many cases.

 22 MR. TAYLOR: Let me ask one follow up 
 146

 1 before we leave this, specifically on counterparty

 2 ID. If we set up a unique ID for the two legal

 3 entities that are the two counterparties to the

 4 swap so that that field could be expressed in a

 5 unique way, as Stewart and I think a couple of

 6 other folks alluded to earlier, one of the things

 7 regulators are going to need to do is going to be

 8 able to aggregate up to the parents or affiliates

 9 of the two counterparties in order to do various

 10 kinds of systemic risk management. Is it workable

 11 to get -- separately from that one unique ID of

 12 the counterparty -- to get affiliation data into

 13 the SDR? It would be in different parts of the

 14 data structure, but it would be there so that

 15 regulators could do aggregation. Or is there a

 16 better way to do that? How do you deal with also

 17 getting the affiliation data? And it's -- here we

 18 have both potential or existing repositories, and

 19 we also have counterparties. So it would be nice

 20 to hear from both sides of that.

 21 MR. GLACE: Generally speaking, we don't

 22 try to make the code itself intelligent. If 
 147

 1 there's a counterparty and parent relationship,

 2 it's usually some other software that tries to

 3 aggregate the relationship. Also typically, the

 4 counterparty ID is just an unambiguous single tag

 5 for a counterparty that the trading systems or

 6 some other aggregation hierarchy assembles and

 7 somebody else has to declare what the

 8 relationships are between the parent and the sub.

 9 So again, from our standpoint, generally speaking,

 10 we just usually don't try to make a string code

 11 that identifies it within the code. That's

 12 usually difficult.

 13 MS. LEONOVA: But may I follow up?

 14 Sorry, but based on what level of legal entity

 15 reporting, you assign a unique ID. You actually

 16 invent how they do aggregation. You could do it

 17 on top parent level. Do it on legal entity level.

 18 You could do it on trade and desk level.

 19 MR. MACBETH: So we operate on legal

 20 entity level in terms of our data. We do have a

 21 set of reference data around counterparties that

 22 we use. In the short term, we expect we would
 148

 1 have to enrich that to something like that. We

 2 have a family grouping so we can roll some of the

 3 data up within a family and present that. But we

 4 don't have an exhaustive dataset of all affiliates

 5 or the nature of their relationship or ownership.

 6 And practically, that really sounds like to me a

 7 service that you will have to in effect subscribe

 8 to really to keep that current. So that is the

 9 way I see that counterparty legacy.

 10 But there are certain things I think

 11 we're going to have to keep, and so certainly

 12 knowing who our customers' regulators are and,

 13 therefore, who we can report certain data to and

 14 have a dollar with is relatively close to us and,

 15 therefore, almost proprietary to the business we

 16 do. But I think ultimately there's a sense of

 17 external pricing, external sourcing, for that, for

 18 some of this data.

 19 The other question is who exactly will

 20 aggregate at what level. So if the SDR is

 21 aggregating or the commissions decide that they

 22 will appoint somebody to be an aggregator amongst
 149

 1 the SDRs, you would then expect that SDR to

 2 actually be sourcing all over that data and

 3 probably consolidating on that basis and

 4 presenting it to the commission. I'm sure the

 5 commission will have access to its own

 6 information, but it is slightly a function of the

 7 model. Again, without repeating the earlier panel

 8 when we talked about fragmentation and all those

 9 kinds of issues, and they moved the burden

 10 somewhat between the commissions and the SDR

 11 potentially.

 12 MR. CUTINHO: Actually, we in some ways

 13 have to maintain or understand the relationships

 14 from two purposes, from two perspectives. One is

 15 from a risk management perspective. We have to

 16 understand the relationship between entities. And

 17 if they're affiliates, we have to look at their

 18 aggregate first. And the second would be from a

 19 market surveillance perspective because we have

 20 certain obligations to our regulator, and we have

 21 to report on that. So from these two

 22 perspectives, we do monitor relationships, and we
 150

 1 do aggregate at different levels.

 2 MR. PRITCHARD: I think TriOptima --

 3 sorry, but I'll echo what DTCC's -- our experience

 4 is very much of -- our exposure measures at

 5 working at the legal entity level and I think in

 6 terms of crisis that's what people are interested

 7 in, what is specifically linked to the exposure.

 8 It's very important to say exactly what you mean

 9 if you are aggregating it across the market and

 10 what is the basis for doing that.

 11 MR. SHILTS: Okay. If no more questions

 12 or comments in that one, I'll turn it over to

 13 Heather for the next question.

 14 MS. SEIDEL: Thank you. This question

 15 sort of goes to -- we've touched on it in several

 16 of your answers. There's a requirement in the act

 17 that information be reported. And I guess sort of

 18 one of the baseline questions is, what type of

 19 information should be required to be reported?

 20 And sort of across asset classes, different asset

 21 classes, cleared versus uncleared. Maybe your

 22 thoughts on sort of what happens today and how can
 151

 1 that translate into a rule that will be in place,

 2 talking about the types of information that would

 3 be reported. And here I'm not talking about sort

 4 of real-time reporting out to the public, but

 5 reporting into the depository.

 6 MR. BARNUM: Well, I think -- go ahead

 7 Raf, go ahead.

 8 MR. PRITCHARD: I think that question

 9 starts with the comprehensive view of the swap at

 10 the repository. It is -- we think of it, the OTC

 11 swap landscape, as a two- dimensional sort of plot

 12 with the asset class category going across the

 13 top, say Credit, Equity, Rates. And then the

 14 instrument type vertically with Simple Swaps and

 15 More Complex Options and Hybrids and Structures.

 16 And it's really important as we've discussed that

 17 it's comprehensive and every trade in the OTC swap

 18 world has a place on that landscape and can be

 19 captured by an SDR and aggregated together. And

 20 so it's important to catch some data that is the

 21 key financial details of all those swaps across

 22 the landscape. And then where there are more
 152

 1 standardized trades where templates exist, capture

 2 that data or reference to that data at another

 3 electronic venue. But I believe capturing

 4 something across -- some key financial terms for

 5 every trade across the whole landscape, no matter

 6 where it is, is an important piece of designing

 7 the data that an SDR should receive.

 8 MR. BARNUM: So, I can't --

 9 MR. MACBETH: Sorry -- Jeremy, did you

 10 want to go ahead?

 11 MR. BARNUM: No, the only thing that I

 12 was going to say is I think there's some of these

 13 arenas where there are tensions between different

 14 benefits that we're trying to achieve and there

 15 are some of them where there aren't. And those

 16 are the easy ones, and we should sort of celebrate

 17 those. So I think in the case of reporting to

 18 regulators that have an enforcement mission or a

 19 systemic risk oversight mission, when that

 20 information is kept confidential and is simply

 21 being consumed by that regulator for the purpose

 22 of performing their regulatory function, then I
 153

 1 think the answer to the question, what information

 2 should be supplied, is quite simple? It's

 3 everything. And the only really contrary weight

 4 there is where there's superfluous garbage that

 5 just makes the job harder, but that's a fairly

 6 low-level technical issue.

 7 I think fundamentally, if you just take

 8 the credit markets as an example right now, the

 9 DTCC has a whole bunch of stuff in there all of

 10 which arguably most of the time most people

 11 wouldn't care about. But for the purpose of doing

 12 systemic risk oversight, which has to really get

 13 down to the actual core economic contractually

 14 binding terms of the deal, you have to err on the

 15 side of completeness. And the cost of doing that

 16 in my view is relatively low since there's no real

 17 risk of accidentally disclosing things that could

 18 be damaging to market liquidity, et cetera.

 19 So I think the carve-out of the post

 20 rate transparency reporting in Heather's question

 21 is critical. When you reintroduce that, then you

 22 have some interesting things that you have to
 154

 1 weigh.

 2 MR. MACBETH: So it's -- our experience

 3 has been the different regulators have asked for

 4 different data. The markets' regulator is very

 5 detailed data. And in essence they've needed

 6 complete confirmation-style records because they

 7 really want -- some of the work -- the impression

 8 I've got is they've been looking at some liquidity

 9 aspects in the market and we've had to -- we've

 10 done some public disclosure about some liquidity

 11 analysis, but we've had to get to a fair level of

 12 degree of specificity in separating pools of

 13 contracts to say that actually those are a

 14 grouping that go together. So we found that some

 15 of the markets' regulators' needs are very, very

 16 granular.

 17 They've also at times have had kind of

 18 high-level needs, wanting to understand positions

 19 and transactions, not necessarily at the level of

 20 price sensitivity which maybe the liquidity

 21 analysis was trying to look at, but just really

 22 understanding who's holding positions and how they
 155

 1 move over time. Prudential regulators have

 2 typically come in and asked us for information

 3 about positions for their regulatees or positions

 4 relating to an entity that they oversee in some

 5 way or exposures amongst a group of entities that

 6 they oversee relating to a reference entity. And

 7 then the systemic stuff we've seen or the stuff to

 8 central banks has again been the more aggregate,

 9 less specific. And the latitude -- the emphasis

 10 on the mark-to- market probably is more important

 11 so that prudential and systemic risk regulators

 12 wanting to understand the total exposures. And

 13 again, that links back into the collateral

 14 conversation that was had earlier. So that's been

 15 the practical experience from us.

 16 And so I think when you are kind of an

 17 SDR, you kind of have to go to the deepest

 18 requirement and work up. So we think trade event

 19 feeds that are sourced from very high quality

 20 records are important, and we think some of the

 21 daily mark-to-market valuation stuff is important.

 22 MR. CUTINHO: From our perspective, we
 156

 1 do have a division within the CME Group dealing

 2 with regulations. So from our perspective, I

 3 think we have an existing relationship with our

 4 regulator. The kinds of information are what,

 5 who, when, and where. That is at the transaction

 6 time. It's very important to track that. So we

 7 monitor that ourselves to make sure our markets

 8 are functioning very well and to preserve market

 9 integrity.

 10 Then from a post rate perspective, I

 11 think most important thing is ownership,

 12 transfers, where do the trades go, the state of

 13 the trade.

 14 And then finally from a risk

 15 perspective, the mark-to-market or at the end of

 16 the day, what are the monies actually settled. So

 17 we provide this function within the CME, and we

 18 share this with our regulator.

 19 As far as swap data repositories are

 20 concerned, I do understand the challenge where

 21 these are for uncleared swaps for this population.

 22 I would think that you would have similar
 157

 1 requirements, especially from the transaction

 2 side. You would need to know where and how and

 3 who actually executed the transaction. Of course,

 4 it's subject to all the confidentiality issues or

 5 privacy issues across jurisdictions which Tanasus

 6 was talking about in the previous panel.

 7 As far as the positions or the owners of

 8 the trade, I think again the challenges are who is

 9 the counterparty and one issue with repositories

 10 is they're maintained as trades. We in the

 11 clearinghouse find it very easy because we do

 12 multilateral netting. We can actually communicate

 13 net position risk or net risk. So those are the

 14 challenges you deal with.

 15 MR. PICKEL: To echo a bit of what has

 16 been said, especially what Jeremy said, the fact

 17 of the matter is this data has traditionally

 18 existed. It's been available in many cases to the

 19 individual regulator of the regulated entity to

 20 the extent you're talking about a bank or other

 21 regulated entity. The goal as I understand is to

 22 allow a regulator, whether it's a market regulator
 158

 1 or a systemic risk regulator, to have the

 2 information to connect the dots, to see trends and

 3 trading that might be relevant from an enforcement

 4 standpoint, and to see buildup in risks that would

 5 certainly be relevant from a systemic risk

 6 standpoint. So I think certainly in the

 7 conversations I've been involved in with

 8 regulators over the last few years, there's been a

 9 real willingness to provide access to that

 10 information for those two purposes. And so we can

 11 build on that utilizing the structure that's been

 12 put in place now across credit, interest rates,

 13 and more recently equities from the data

 14 repositories.

 15 MR. COOK: If I could jump in. I wanted

 16 to connect this discussion to what I think is a

 17 broader question that is relevant to a lot of what

 18 this panel is going to be talking about, and

 19 frankly the other panels as well, which is how we

 20 connect the dots as you're talking about not just

 21 within the derivatives markets but across other

 22 markets. And how -- to what extent can we develop
 159

 1 a system at the end of which we're able to look

 2 across markets where underliers are the same and

 3 to look at issues of control where you have -- and

 4 this is getting back to the earlier line of

 5 questioning -- where you have parties who are

 6 under common control even if they are separate

 7 legal entities. That might be of interest from a

 8 regulatory surveillance perspective. And in the

 9 equity markets we have a number of initiatives,

 10 including a large trader reporting initiative and

 11 a consolidated audit trail initiative. And one

 12 thing that might be interesting is to think about

 13 how to connect up the data elements we're talking

 14 about here to those other initiatives, recognizing

 15 that time is short and we can't create the perfect

 16 system all at once.

 17 So I think one question I'd raise is

 18 assuming we know where we want to get eventually,

 19 what can we be doing now to make sure that even if

 20 we can't create the perfect system out of the box,

 21 that we're able to get there efficiently in a

 22 relatively short period of time to be able to have
 160

 1 the facility to surveil across markets and so that

 2 we don't have to spend another two years or three

 3 years dealing with the lack of interoperability,

 4 for example, between different reporting systems

 5 because we didn't think of it at the beginning.

 6 I'd be interested in your -- how that feeds into

 7 your thinking about what types of data we ought to

 8 be soliciting at the beginning of this process.

 9 MR. PICKEL: I guess I'll jump in there

 10 and see where things go. It's a daunting task.

 11 It's daunting enough to get the information to the

 12 derivatives world in a consistent format. In

 13 fact, I think we're farther along than other

 14 markets are likely to be.

 15 If you looked at the Lehman Brothers

 16 report from Valucas, can you look for information

 17 aspects on OTC derivatives, he said the two -- the

 18 only two things he said about OTC derivatives --

 19 first of all, he said their records for OTC

 20 derivatives were actually far better than existed

 21 in other product classes. So in a sense they were

 22 further ahead. And further they commented that
 161

 1 the tension that exists in the bilateral

 2 relationship, particularly where collateral is

 3 involved, creates a natural competitive tension

 4 between those two parties and as a result their

 5 risk is more effectively managed. That's almost

 6 as an aside -- it's not really relevant to the

 7 data point. But I think the key thing is that the

 8 information in Lehman Brothers on OTC derivatives

 9 was better than other areas.

 10 We could -- and I think part of the

 11 discussion with this panel later on, they get into

 12 some questions of standards and obviously we can

 13 talk a little bit about the FpML standard which

 14 provides some of that consistency, a large part of

 15 it, but I think you also want to make sure that if

 16 people have in place other mechanisms that provide

 17 information in an effective way you don't

 18 undermine what currently exists. So those are a

 19 couple of thoughts.

 20 MR. BARNUM: I think the question was

 21 asked, what can we do to achieve more, faster?

 22 And at the risk of being a little bit
 162

 1 controversial here, I think frankly the tension

 2 that no one has yet mentioned explicitly is the

 3 tension between the transcommunication of who's

 4 going to pay for it? And what I mean by that is

 5 that a lot of people are on the table have alluded

 6 to the fact that a lot of these problems have

 7 largely or in some cases completely been solved,

 8 and in some cases by more than one commercial

 9 provider. And at the same time, a lot of these

 10 kinds of questions are questions that large banks

 11 ask for themselves everyday. So the question of,

 12 I need to do multi-asset class, high-level

 13 aggregate risk management, is of course a question

 14 that every single large bank has to do everyday as

 15 part of their risk management function.

 16 And the kinds of technology challenges

 17 and reference data challenges and legal entity to

 18 affiliate mapping questions -- I mean, these are

 19 questions that all of us who've been part of that

 20 kind of stuff over the last 10 or 20 years have

 21 lived with quite painfully in many cases for a

 22 long time. And there have been, as is well known,
 163

 1 initiatives created in the market. 

 2 One random example is the RED initiative

 3 surrounding the standardization and kind of

 4 certification of legal entity names for usage in

 5 the credit derivatives market, but there are many

 6 other similar examples. And the question that

 7 just comes out of that is if you kind of re- 

 8 specify it and rebuild it from scratch in the sort

 9 of context which is regulatory compliance, you're

 10 kind of going to be crowding out all of the

 11 existing private sector solutions and it will take

 12 you much longer.

 13 On the other hand, if you embrace the

 14 existing private sector solutions, you are getting

 15 into the game of potentially picking winners among

 16 sort of commercial competitors which is also very

 17 tricky. So I don't have an answer to that

 18 question, but I think that if the priority is to

 19 get more done faster, the focus should be on

 20 finding a way to leverage the existing commercial

 21 solutions in a way that's kind of fair for lack of

 22 a better term because there are many solutions
 164

 1 there and the profit motive does produce fast

 2 innovation and better solutions faster.

 3 MR. MACBETH: The comment I was going to

 4 make is actually I don't think for credit

 5 derivatives or other derivatives, it's too

 6 difficult from a perspective of instrument

 7 identifiers. They do exist, and I think they can

 8 be fairly readily aggregated across markets. I

 9 think the complexity is really going to be about

 10 understanding the derivative and understanding

 11 what that might mean about pricing potentially.

 12 So I don't think the cross market's view, as long

 13 as you've got access to the full set of data, is

 14 the issue but having -- the harder issues

 15 potentially are the completeness of the data.

 16 Particularly again, global markets not all traded

 17 within the U.S. boundaries. There's a stretch to

 18 get there and the aggregation is probably the

 19 challenge more than actually the attribute

 20 relating to a security. That's probably not the

 21 challenge.

 22 MR. PRITCHARD: I'd agree with what
 165

 1 Jeremy said. I think the truth is that the banks

 2 have largely solved a lot of the counterparty

 3 identifier and relationship problems for

 4 themselves. They've had to do that as part of

 5 their effective counterparty risk management. Now

 6 naturally they've, like a lot of the OTC space,

 7 they've all done it themselves differently,

 8 adopting their own conventions or with their own

 9 piece of technology. But there is a lot of value

 10 there already in the market and finding ways to

 11 leverage that is probably going -- you'll benefit

 12 getting this solved quickly.

 13 MR. SHILTS: Anything more on this?

 14 We'll move on to the next question. David?

 15 MR. TAYLOR: Let me tee up something

 16 that's maybe at the heart of the data reporting

 17 thing which is, what data should we ask people to

 18 report? Let me pose the question this way: If

 19 the commission, rules of the two commissions,

 20 ended up requiring reporting of all the fields

 21 needed to fully confirm the trade or the deal --

 22 and by confirm I mean I guess in the classic sense
 166

 1 of both sides have matched every detail of the

 2 deal including at least a minimum specified list

 3 of fields -- do you all think that would be

 4 sufficient to fulfill the regulatory and other

 5 purposes for which the data is needed? If that's

 6 not the way to do it, what's a better way?

 7 MS. SEIDEL: Can I just add to that

 8 question as you're answering? That also raises

 9 the question of when should the reporting occur

 10 and sort of should it occur when a trade is done?

 11 After confirmation, the full loan confirmation

 12 that David was talking about? Or some other time?

 13 So as you're thinking through, I guess that's one

 14 of the other questions as to -- given the purposes

 15 of reporting, when should it occur?

 16 MS. LEONOVA: It is also based on when

 17 the transaction happens as it's cleared and

 18 executed or whether it is bilateral and negotiated

 19 as action.

 20 MR. GLACE: In response to the kind of

 21 when, the leaner the data, the faster you can get

 22 an accurate report out. The richer the dataset
 167

 1 you require, the more risk you have of

 2 misreporting data too early because it hasn't gone

 3 through some econ from process or something else

 4 that helps you validate that you have a good trade

 5 and it's not an out-trade. So if you go too fast,

 6 you run the risk of a lot of out-trades getting

 7 resolved or sort of a lot of adjustments to the

 8 transactional dataset. But once you -- if you

 9 wait and traditionally -- I don't think it's any

 10 more than 2-4 business days for standard products

 11 that you can have a fairly complete confirmed

 12 trade that you can, in fact, submit. Now again,

 13 this goes to the level of sophistication of the

 14 entity because again, from the end- user

 15 perspective, some people -- you could have a deal

 16 with a municipality where you have to wait until

 17 the commission meets next week to get a

 18 transaction confirmed. I mean, going to the

 19 extreme, that's sort of -- but a standard trade in

 20 sort of standard products should be just a couple

 21 of business days and you can get a fairly complete

 22 robust dataset that's confirmation quality I
 168

 1 think. But again, to the extent that it's --

 2 you're dealing with further and further away from

 3 people who sort of transact on a daily basis or a

 4 high-volume basis, now you're looking at a totally

 5 different class of participant who may have to

 6 have the lawyers figure out the rest of the

 7 contract details before they can adequately fill

 8 out a form. But again, I think there are a lot of

 9 different worlds here.

 10 MR. TAYLOR: I should maybe clarify one

 11 aspect of the question. I didn't mean to imply,

 12 although it's an interesting question, should each

 13 deal be fully confirmed before it comes into the

 14 SDR? That's worth answering, too. But I meant

 15 more was, should each party be required to report

 16 all of the fields that would be needed to do

 17 confirmation? I'm not getting yet to the question

 18 of has it been done yet? If that makes sense?

 19 MR. DIXON: I think to that point,

 20 though, it's important to answer. We have to

 21 understand where that is to answer the when. You

 22 run the risk -- and there's a price to pay for
 169

 1 that -- that if you get it too early, you don't

 2 have the information you need. There's a price to

 3 pay or penalty if you will if you get it too late

 4 because it's not actionable. And then what do you

 5 do in between which is a reconciliation process

 6 where you say, oops, that's an erroneous

 7 transaction. Now we just squared it away. It's

 8 correct. And so it seems to me that you go kind

 9 of as late in the life cycle as possible where you

 10 say there are reasonable assurances here that this

 11 has been done. Then the dataset can float up.

 12 It also poses an interesting question if

 13 you're trying to do it in more real-time, and

 14 you're trying to actively run a liquid and

 15 transparent market. Then what is the intervention

 16 of the regulator in the middle of that trading

 17 activity for lack of a better way to describe it.

 18 And then now what? And what's the trickle-down

 19 effect of uncertainty that you don't know that

 20 someone's going to reach in. So I think the

 21 market participants who understand the rule sets,

 22 particularly at exchange bases for such because
 170

 1 each exchange runs it a little bit differently,

 2 being familiar with that is helpful. And I think

 3 it goes back to asset classes again and the types

 4 of transactions. And that's probably the best

 5 place to start because each one of those tends to

 6 be a little bit different.

 7 MR. PRITCHARD: I think going back to

 8 the earlier point about the two sort of competing

 9 objectives of price transparency versus systemic

 10 risk monitoring, and from the perspective of a

 11 software service provider, it's really important

 12 to be clear what the requirement is. If we're

 13 trying to design the data architecture and answer

 14 these questions, those two requirements set up the

 15 most amount of tension to try to solve both of

 16 those with the same set of answers to the same

 17 questions. And I think from TriOptima's

 18 perspective, we're more on the sort of systemic

 19 risk monitoring end. And answering the question

 20 in that scope, we would then work backward from

 21 what aggregation -- what's the top-level

 22 aggregation report you want to see, that's the
 171

 1 important data to capture for every single trade

 2 across the landscape. Then, if it is a

 3 standardized trade, capture a reference to another

 4 electronic venue where it's matched to all that

 5 full dataset. Then any other identifiers that it

 6 has in other venues around the market are very

 7 valuable to capture as references.

 8 MR. MACBETH: I think this --

 9 MR. BARNUM: Just one brief thing, sorry

 10 --

 11 MR. COOK: Go ahead, Jeremy.

 12 MR. BARNUM: Sorry, Rob. One more brief

 13 thing. I think the question was asked, what

 14 should each party be required to submit? And I

 15 think one thing that we feel strongly about, which

 16 we think should be relatively uncontroversial just

 17 for the sake of efficiency, is that individual

 18 market participants should be able to satisfy

 19 their reporting requirements by leveraging some

 20 piece of market infrastructure which is serving

 21 some other purpose and have that piece of market

 22 infrastructure do the reporting for them. So I
 172

 1 think there was some mention before of middleware

 2 confirmation services. If that service provides a

 3 reporting facility, then it should be possible to

 4 meet the reporting requirement by establishing the

 5 use of miniature trade to that service in the same

 6 way that those services often submit to the SDRs

 7 and similarly that should constitute satisfying

 8 the requirement. I assume that's obvious, but I

 9 thought it was worth saying since obviously that

 10 will avoid a lot of duplication of submission and

 11 will leverage existing insufficiencies in the

 12 market.

 13 MR. CUTINHO: For cleared trades, what

 14 we do is -- we do -- at submission time, we

 15 capture the trades. We also capture its life

 16 cycle throughout the process of clearing. And we

 17 maintain a holistic view from that standpoint, and

 18 we provide it to our regulator. So I think we see

 19 ourselves continuing to do that for the cleared

 20 world.

 21 For the uncleared world, I do agree that

 22 to make it efficient for market participants, it's
 173

 1 best to actually use not just one but any

 2 execution platform if you have one. If they can

 3 report, then that essentially captures the match.

 4 For things that are done over paper or more

 5 manual, that becomes an issue. So I think that's

 6 where the crux of the question is. What do you --

 7 where does the match happen for paper-related

 8 transactions? I suppose that's where you were

 9 coming from, whether they should report -- each

 10 party should individually report because there's

 11 no electronic.

 12 MR. MACBETH: So I'd just say -- I think

 13 we said this with the full legal record and the

 14 minimum. It sounds very plausible, I think, to

 15 Jeremy's point, using existing infrastructure

 16 makes a lot of sense. Then when Irina came in and

 17 talked about whether it was -- how it was executed

 18 -- and I think you'll find that some of these

 19 services are actually used even by electronic 

 20 execution venues. In essence, they will have the

 21 venue submitting almost a pre- match record. They

 22 very much think they're then in the rooting and
 174

 1 legal wrapper business, not so much in the

 2 matching business. And so you will see almost

 3 autonomous through that process. And in general,

 4 the latency in the confirmation process is

 5 relatively low and pretty compliant with the

 6 non-real-time requirement.

 7 I think the reason -- another thing as

 8 well, we've talked a little bit and maybe someone

 9 else talked about cleared and uncleared separately

 10 and the requirements are I think fairly consistent

 11 in the act across the two. They should go through

 12 the same types of reporting process and reporting

 13 requirements, although now I think CCPs can

 14 register as SDRs. I rather think there was a

 15 statement in the act somewhere. So there are --

 16 again, back to the overall model, again, some of

 17 these providers that act as these middlewares will

 18 feed clearing platforms and audible clearing

 19 platforms potentially, so that model can also

 20 accommodate some cleared trades, too.

 21 MR. PICKEL: Yeah, I was going to add

 22 that at some level, the easiest thing is just to
 175

 1 dump the confirmation details on you, but that

 2 raises the question of too much data in your laps

 3 and how do you weed through that and get the -- if

 4 we accept that it's -- that we're going to be

 5 looking at enforcement and systemic risk

 6 monitoring, how do you weed through that to get

 7 the right information? So I think it's almost a

 8 question back to you. What do you need?

 9 Particularly where we've got systems like the DTCC

 10 system on credit derivatives, the reconciliations

 11 that TriOptima has, anything that gets developed

 12 in a SEF-type platform. The information, as we

 13 say, the data's going to be there. The question

 14 really is, what is the meaningful information that

 15 you want to have?

 16 MR. MacBETH: Could I add one final

 17 thing, just something that has come up with some

 18 regulators with RCs? The idea of a quality

 19 standard on the data. So you could -- you know,

 20 you talked about when we get a potentially

 21 prematched, you know, our repository would

 22 actually flag the trade as unmatched at that point
 176

 1 and, you know, that could be communicated to the

 2 regulator so they understood that the quality of

 3 beta they had. And, potentially, you know, any

 4 kind of matching that had been done to a point of

 5 time, just to the add-on.

 6 MR. TAYLOR: One quick follow-up to a

 7 point somebody made earlier talking about paper

 8 transactions. It is a small point but may be an

 9 important one. I think we've sort of been 

 10 assuming that -- I don't know if this category

 11 exists -- but that even, you know, if a

 12 counterparty is doing swaps in his basement in his

 13 bathrobe, he's going to have a PC, and he's going

 14 to keep records in it so that in fact all of the

 15 reporting by everybody, no matter how they spoke,

 16 can be electronic and just would be electronic

 17 even if it's from a PC over the internet to the

 18 SDR.

 19 Is there anything wrong with that

 20 assumption? I mean can we assume that there

 21 literally is not any paper?

 22 MR. PICKEL: Well, I guess it depends on
 177

 1 what your meaning of electronic is. Yes, I think,

 2 you know, yes. These days a lot of the if not all

 3 -- and generally -- and the others can talk more

 4 specifically in terms of how they run their

 5 business. Yeah, I mean the communication, the

 6 e-mails, PDFs, the information goes back and forth

 7 and may ultimately be a signa-telectronic

 8 signature on that confirmation. So there is that

 9 type of electronic record.

 10 I guess what we're trying to -- what

 11 we're anticipating, and I think we've done work

 12 on, as ISDA and the repositories, and the clearing

 13 houses and others have done it as well, is to, you

 14 know, go to that next level of rich electronic

 15 information that is actually usable and

 16 manipulable so that you can run reports and

 17 analyze it.

 18 So, yes, it is -- I think for the vast

 19 majority you will have electronic records. People

 20 may print those out, put them in a file somewhere,

 21 but there is that electronic back and forth. But

 22 I think the real focus would be to go to the next
 178

 1 level with electronic.

 2 MR. MacBETH: Yes, I think that the PDF

 3 comment is kind of well made, right. So, you

 4 know, some contracts can be confirmed

 5 electronically in non-fields; some, you know,

 6 contracts exist as hundred-page documents. But in

 7 general they're sent by fax, and at that point

 8 they turn into something electronic. And so, you

 9 know, but really to actually have data that you

 10 can analyze, yeah, you know, you will need to pull

 11 out some fields from those and potentially that

 12 isn't, you know, a process that runs on that today

 13 in the market necessarily.

 14 MR. PRITCHARD: Sorry, we were just,

 15 yeah, add to that. We totally agree that, you

 16 know, the tail of the market where the highly

 17 bespoked trades are. For example, our exposure

 18 management solution allows you to actually upload

 19 the PDF of the components so the other side of the

 20 trade can view it online. And that's honestly not

 21 ideal, but that works for the very, very exotic

 22 end of the business.
 179

 1 MR. SHILTS: Okay, I think we'll move on

 2 to the next question.

 3 MS. SEIDEL: I guess it's sort of a

 4 follow-up and what we just sort of got into, the

 5 question about if all report -- if reporting was

 6 required to be in an electronic form and not PDF,

 7 as you noted, but some sort of manipulable, usable

 8 electronic form, you know, how would that impact,

 9 you know, the current practice, and is that

 10 something that, you know, should be required.

 11 And, if so, how does that sort of fit into the

 12 different types of transactions?

 13 MR. TAYLOR: And if I can add one aspect

 14 to that and ask Raf to start with it, because I

 15 think we had an earlier conversation about this.

 16 If it's -- how to put this -- if it is possible

 17 for the repositories to accept data in whatever

 18 form it's sent so long as there's, you know, every

 19 line of text is a different field, is that a

 20 potential solution to this?

 21 MR. PRITCHARD: Okay, yeah, that's a

 22 couple of questions there. I think to the earlier
 180

 1 point where you're covering the whole landscape,

 2 you know, some trades are electronically confirmed

 3 in large volumes on very bold platforms; others

 4 are traded in much smaller numbers and more

 5 complex, and may still be on a PDF.

 6 But our experience looking at the 6

 7 million trades that we regularly reconcile, of

 8 course, the market is that there is a core set of

 9 key financial identifiers that you can capture in

 10 all cases, just the motion of the trade and the

 11 currency of the trade, and the tenor of the trade,

 12 that sort of thing. And that can be record-based

 13 electronic capture. If it's a very complex trade,

 14 then you might have some unstructured form for the

 15 rest of the data. And that's, you know, how we

 16 covered the -- how we managed to combine both the

 17 standardized trades and the more complex ones in a

 18 single central platform for exposure management.

 19 And then the second part of the question

 20 that it is where you then request those fields to

 21 be captured. Can you allow some flexibility in

 22 how that the party, the respondent submits then.
 181

 1 And our experience of that is, is but you can, you

 2 have to tell him he can't send it as a PDF. There

 3 has to be some fort of record-based, one row

 4 line-item based submission, but the advantage is

 5 to get it to leverage in order to make it a piece

 6 of infrastructure that they already have. And,

 7 typically, it's actually advantageous to get an

 8 ultimated extract from an existing piece of

 9 infrastructure rather than something that has been

 10 manually massaged with the potential for

 11 introducing errors that that brings.

 12 MR. CUTINHO: From our perspective I

 13 think our concerns are necessarily the reporting;

 14 our concerns are essentially, if there is a data

 15 repository, then it's open, fair and transparent

 16 access. It's, I think, very important.

 17 The second thing is, we don't want the

 18 data repository in effect to impede on innovation.

 19 So things that a clearing model can do always can

 20 provide services so we don't want an external, if

 21 there is a data repository, to impede that.

 22 And in order to be less disruptive, I
 182

 1 think if there is a data repository it should be

 2 open to receiving multiple formats. There is a

 3 different between reporting things into the data

 4 repository versus providing a view to the

 5 regulators, so from the regulators' standpoint, of

 6 course you want everything to be easy to access,

 7 view, and analyze. But as far as preventing

 8 disruptions to the marketplace, it should actually

 9 be open to accepting multiple formats rather than

 10 imposing one on them.

 11 MR. GLACE: And I also think that any

 12 complex deal that may really reside at best in a

 13 PDF. You know, if you have to satisfy some

 14 requirement of putting a notional out there, at

 15 least there's some kind of safe harbor that this

 16 is your best estimate of fulfilling that

 17 requirement so that somebody doesn't come long

 18 later and say, well, I reread the contract, and

 19 that notion that you put down really does not meet

 20 the requirements.

 21 So again, from an end-user standpoint

 22 where things can get really complicated, you'd
 183

 1 also like to have sort of a best efforts safe

 2 harbor, for lack of a better word, that says

 3 you've attempted to model this thing, given the

 4 framework limitations to satisfy the reporting

 5 obligation.

 6 MR. DIXON: I'd just like to dove on

 7 that point because I think it's very important

 8 that certain transactions are going to be subject

 9 to delivery, and delivery can be adjusted. And

 10 that doesn't mean that that was an erroneous or

 11 improper behavior of the transaction. It kind of

 12 is that it is. And so, therefore, you need some

 13 type of audit trail, if you will, that can link

 14 modifications to certain data fields, particularly

 15 volume as one example, that you have a look-back

 16 where you can go in and adjust the volume.

 17 That can also be a bit difficult when

 18 those transactions become quasitransparent.

 19 Someone is now acting on that information thinking

 20 that it isn't subject, and therefore you can get

 21 some distortions in the market wherein somebody

 22 thinks something was, quote/unquote "mispriced."
 184

 1 So I think it's' important to take a

 2 category and kind of park that in a box and say

 3 really whatever you want to do until it's done and

 4 dusted. And maybe it is you don't do anything

 5 with it other than go on record to say that this

 6 is subject to change. And once it is delivered,

 7 then I think it's straightforward.

 8 Again, I would just say the audit trail

 9 of modification might be important, but then that

 10 just increases the dataset that you have to look

 11 at as well.

 12 MR. MITCHELL: Kind of along the lines

 13 of what Mark was just talking about, for what life

 14 cycle events should be captured in the SCR, and

 15 are there any life cycle events that would not

 16 need to be captured? And what timeframes should

 17 those be input into the ASVR?

 18 MR. PICKEL: I think it's important in

 19 any life cycle event -- and we had talked about

 20 this when we came down to meet a couple of weeks

 21 ago -- is a broad concept, and I think we need to,

 22 you know, maybe parse out a little bit.
 185

 1 There are any trade has a number of

 2 events during its life. Most, you know,

 3 typically, and interest rates go up, we'll have

 4 many resets over the life of the trade. Those are

 5 events that are fully anticipated in the terms of

 6 the transaction, when the transaction is done.

 7 And I don't that, you know, you don't need a, I

 8 don't think, update for the LIBOR fixing every

 9 quarter because that's out of the marketplace,

 10 widely available. Anybody can, you know, apply

 11 that.

 12 There are on the other hand, and this is

 13 particularly true in the creditory space, somewhat

 14 true in other product areas, there are those

 15 events that really go to the very core fundamental

 16 nature of the transaction. Does it exist? Does

 17 it exist in the same form that it existed before

 18 that event? So the credit events which actually

 19 lead to a termination and settlement at the trade,

 20 a succession event which leads to a change in the

 21 underlying reference entity identity. And there

 22 are a few other things that might occur.
 186

 1 In other product areas, you may have

 2 force majeure type events which will lead often to

 3 a termination, maybe to a different pricing,

 4 reference for a trade, those types of events.

 5 Those are probably more going to the core of

 6 fundamental nature of the trade as opposed to the

 7 ordinary course, events that are anticipated in

 8 the original terms of the trade. And I think it's

 9 important to distinguish between those two because

 10 otherwise you'll be getting -- you know, you'll be

 11 getting tens of thousands of resets on a weekly

 12 basis that come in just by virtue of the number of

 13 interest rates swaps that are out there,

 14 resetting, you know, whatever the LIBOR rate is

 15 today.

 16 MR. MacBETH: So there -- and there is a

 17 related point, and easy, you know, the resets, I

 18 think, had a level of two granula. But there is a

 19 point that any fixing, you know, transaction has

 20 some implications of its valuation. So it's

 21 something that's been determined in the past has

 22 an valuation impact. And so, you know, that is a
 187

 1 piece of data that is required, you know, to

 2 evaluate transactions. 

 3 So again, the valuation model, you know,

 4 the market discussion in terms of the data,

 5 whether the needs to be independently sourced or,

 6 you know, is provided by the participants and,

 7 yeah, may determine some of those requirements at

 8 a veto level. But I, you know, I agree absolutely

 9 that they're not the events that are the traded

 10 events that are really subject to some of the

 11 surveillance activities. But I think, you know,

 12 to really answer the detail question about some of

 13 the real granular datafields, you have to answer

 14 some of the questions about how you might source

 15 evaluations of products.

 16 MR. PRITCHARD: I think it goes back a

 17 little bit so the contrast is in the listed

 18 markets and the OTC swap market. And in the OTC

 19 swap market we have a much, as we've seen, lower

 20 turnover of new trades, but we have trades that

 21 last a lot longer in terms of years or decades,

 22 and we can see the, you know, in the IAG crisis,
 188

 1 you know, those trades have been around for

 2 sometime. They weren't recently put in, they'd

 3 been around for years.

 4 And so, you know, potentially the issue

 5 across the whole landscape of post-trade events is

 6 one that needs to be fully covered by anything

 7 monitoring systemic risk. And in our experience,

 8 providing exposure management is that it's

 9 challenging to enumerate exhaustively all the

 10 potential post-trade events that could happen,

 11 especially on the more complex trades that are out

 12 there, and the way in which for the purposes of

 13 exposure management on the firm and party level we

 14 have worked with that, is by having the parties

 15 resubmit because the trades come from an automated

 16 source. It's relatively cheap and easy to

 17 resubmit the population from the core books and

 18 records of the firms on a regular basis. And that

 19 way obviates the need to exhaustively enumerate

 20 all potential events that you need to be notified

 21 of.

 22 MR. CUTINHO: From the -- one of the
 189

 1 things to note, just to add -- I think Bob raised

 2 a very good point about what is an event, and it

 3 is important to define that. Some of the things

 4 to note are things like resets, things like credit

 5 event processing, and within a cleared world is

 6 actually important to be internalized within the

 7 CCP. It cannot be external to it. It has to be

 8 internal because the guaranteeing process and

 9 you're managing the risk.

 10 But in an uncleared world, of course

 11 it's very important -- I mean, whatever services

 12 are provided by external private parties are for a

 13 private benefit, which is essentially resolving

 14 the event in a normal manner.

 15 So if you needed the information, you

 16 could always find the information you wanted that

 17 are -- if the events are essentially transfer of

 18 trade or transfer of ownership, you know, for a

 19 regulated market or for a cleared market regulated

 20 by a regulator, we do provide that information. I

 21 think you would require the same thing for a swap

 22 (inaudible) or prospect.
 190

 1 MR. TAYLOR: Let me pose a slightly

 2 different question. There are various parts of

 3 Dodd-Frank that talk about which party should

 4 report, depending on the status of the parties.

 5 You know, if you have swap dealer and the other

 6 party is not a swap dealer, the swap dealer

 7 reports, and there's a sort of priority system.

 8 Some of our -- I won't say we have

 9 experts in swaps, but people who know a little

 10 more than some of us to begin with and some of our

 11 data people are telling me that there might be

 12 lots of advantages to having both parties report

 13 either with respect to initial, you know, data at

 14 the time of the initial transaction or life cycle

 15 data. And I'd like ask -- I mean here we have

 16 counterparties and repositories -- what would be

 17 the advantages and disadvantages of having one

 18 party take on the reporting obligation versus

 19 getting reports from both parties?

 20 MR. BARNUM: I'll take a crack at that

 21 one. I think that first, I think almost all of

 22 these questions need to be broken down into the
 191

 1 answer which is the best answer for the purpose of

 2 SDRs, in terms of big-picture aggregate oversight,

 3 especially for systemic risk purposes on the one

 4 hand. And on the other hand, the answer which is

 5 best for the purposes of the real time post-trade

 6 price transparency mandate.

 7 So I'm not sure where the notion that

 8 two people submitting independently might be

 9 useful comes from, but if I were to guess, one

 10 thing I would imagine is that people might say if

 11 your objective, if you take trays for corporate

 12 bonds as an example, which obviously the SEC is

 13 quite familiar with, by virtue of the fact that

 14 both side have the obligation to report, whoever

 15 reports sooner creates your kind of, well, that

 16 must have been the latest the trade was done, and,

 17 therefore, if the other person reports essentially

 18 later than that, then that establishes that that

 19 person has reported late.

 20 So I think that's one argument I can see

 21 in favor of independent reporting for the purposes

 22 of that requirement. I think for all other
 192

 1 purposes, I think independent reporting carries a

 2 significant risk in essentially duplicating a

 3 version of the process that the DTCC does, that

 4 (inaudible) is quite familiar with, which is the

 5 kind of double-blind matching confirmation model,

 6 which is, frankly, really painful, because almost

 7 invariably the information gets reported as very

 8 rich. Some subset of that is information that

 9 people who don't really care about very much and

 10 don't keep sufficiently precise records. And as a

 11 result, you get a lot of spurious breaks in the

 12 independent submissions which are of really no

 13 significance for regulatory purposes.

 14 So I guess I would refer back to my

 15 earlier comments, which is it would be really much

 16 more efficient if people were allowed to satisfy

 17 the requirement by essentially outsourcing the

 18 submission to a middle or lower provider, and from

 19 the perspective of dealing with the timeliness

 20 issue, you obviously wouldn't want to create a

 21 situation where people could avoid the requirement

 22 to do post-trade public reporting in a timely
 193

 1 fashion by sort of nefariously conspiring to not

 2 affirm the trade soon after it was done.

 3 That's easily addressable since those

 4 services nonetheless require each party to

 5 interact with it independently, that if one of the

 6 two parties hadn't engaged within the time window,

 7 then you could get single- sided submission for

 8 post-trade transparency purposes.

 9 MR. TAYLOR: And I think on that last

 10 point it's likely that business conduct standards

 11 are going to come down on people who don't report

 12 it in a timely fashion anyway.

 13 MR. MacBETH: But, say, the thing, you

 14 know, we value from the idea of both parties being

 15 involved is this quality control, but, you know,

 16 the statement that that can come in matched or,

 17 you know, affirmed if that's the model of one

 18 party, and it submits, another party attests to

 19 that, and that comes down as a match trade, or it

 20 comes, you know, from something higher up, and

 21 it's a safe. But again, it's prematched. You

 22 know, to ask that is, that is the highest quality,
 194

 1 you know, dates that we can receive, and we think

 2 that is very valuable. How that then ties to the,

 3 you know, construct within Dodd-Frank of who's

 4 reported that, I'm not sure. But, you know,

 5 there's huge value.

 6 And there is, you know, there's huge

 7 value of having participants in the system in

 8 terms of identifying who they are and dealing with

 9 some of the data privacy issues. And again, if

 10 you're going to operate this globally, and you

 11 care about things that impact your markets that

 12 are outside, you know, again the United States,

 13 you will need provisions like that to aggregate

 14 all that data because you will hit data privacy

 15 concerns that can only be dealt with by

 16 contracting with some of the polities, and some of

 17 them can't be dealt with.

 18 So, yeah, the other -- this is the

 19 second advantage I learned of by the quality is

 20 potentially the data completeness.

 21 MR. GLACE: Excuse me, please. You

 22 know, the important part for us again is have
 195

 1 users who are satisfying the reporting

 2 obligations, and so, therefore, I would sort of

 3 again recommend it. If we've used an outsourced

 4 provider, we've talked about, you know, separate

 5 outside confirmation processes as well, it would

 6 be nice from an unusual perspective to say, you

 7 know, okay that lot is then reported, and, you

 8 know, we've got documentation and process behind

 9 it. So again, you know, to me to have that

 10 process go on, which is a useful business process,

 11 and then to duplicate it again in some other

 12 fashion is just an additional cost.

 13 It may not be, you know -- it may just

 14 continually adding to the cost and to the quality

 15 of the total reporting burden has been satisfied

 16 because, you know, some compliance officer or risk

 17 manager has to ultimately say we've satisfied our

 18 reporting obligations, and here's our checklist

 19 and here's how we've gone about it.

 20 MR. PRITCHARD: As a software solution

 21 provider, obviously it's beneficial to get two

 22 records that you can match together. You can, you
 196

 1 know, from the software point of view, do more

 2 verification. And, for example, the counterparty

 3 standardization that we talked about, it's easier

 4 if you're getting both sides of the trade to make

 5 that mapping and translation.

 6 But to Jeremy's point, this is very much

 7 focused at the sort of systemic risk end of the

 8 function of the repository rather than the

 9 real-time reporting.

 10 MR. MacBETH: I've also experienced the

 11 MIFID regime, not in the current role I'm in, but,

 12 you know, in Europe. And we've, you know, we

 13 found it difficult to control that process as a

 14 party submitting to that simply because there

 15 wasn't the -- a feedback loop from it. And so,

 16 you know, in talking to the using existing

 17 mechanisms that have, you know, in effect feedback

 18 loops, so if you don't confirm to your

 19 counterparty, your counterparty will provide you

 20 the feedback, whereas, you know, typically under

 21 MIFID, if you admit to report, you admit to

 22 report. And, you know, you may or may not find
 197

 1 out about that later.

 2 But, you know, it's very difficult to

 3 order and control that, that stand alone reporting

 4 process. And, you know, I actually think maybe

 5 three times I've found myself doing a full review

 6 of our MIFID reporting at various times, you know,

 7 and I kind of, you know, like for my former life.

 8 So it's difficult.

 9 MR. PICKEL: And I think you want to get

 10 the -- if you want to get those two strands to

 11 come together, you know, with all the information

 12 you're going to provide and all the other things

 13 you need to do, I would think that this is one

 14 area where you can probably leverage off of what's

 15 been built in the industry where there are those

 16 platforms where people come together, whether they

 17 be SEFs or some of the providers around the table,

 18 and take that information and then not, you know,

 19 not have to take that burden on among the many

 20 ones you're taking on.

 21 MR. SHILTS: Moving on to the next

 22 questions, I guess following up on some comments
 198

 1 that have been discussed already, but just

 2 generally I think somebody had made the comment

 3 about providing flexibility for the repositories

 4 to take in data in various different formats,

 5 maybe to get some more thoughts on the

 6 practicalities of that given sort of where the

 7 industry is today, and then sort of, is there the

 8 ability to take the guide in all different formats

 9 and sort of -- I don't know the right, correct

 10 term -- but standardizing, right, not in terms of

 11 being able look across the various -- all of the

 12 information coming in to standardize it?

 13 MR. PICKEL: And I guess that here

 14 again, similar to my last points, you know, there

 15 are these factories, these processing bits,

 16 whether it's TriOptima or DTTC, or the SEFS that

 17 are taking some of this information in and, you

 18 know, producing some output. And I think you

 19 should be most focused on what the output from

 20 those processes are and largely leave it up to the

 21 infrastructure to, you know, building something

 22 that they think is effective to produce the output
 199

 1 you need.

 2 You know, again I could talk about it a 

 3 financial products markup language which is one

 4 possible means of that output, but, you know,

 5 again it's these infrastructure components that

 6 have put a lot of work and effort into being able

 7 to be responsive to their clients in taking in

 8 information in whatever format the clients may

 9 have. That may, you know, that may evolve with

 10 FPML all over time, which is a pretty rich

 11 standard. But we know that there are platforms

 12 that utilize the information in other formats.

 13 MR. PRITCHARD: I think, fundamentally,

 14 in the OTC swap landscape, there are going to be

 15 some contracts out there where it's going to be

 16 frankly subjective as to how to submit them. And

 17 that's just the reality that the comprehensive

 18 nature of the SRD faces. I think from our

 19 experience providing exposure management, we do

 20 what we call normalization whereby we allow the

 21 parties to submit in a format that has certain

 22 rules about it, but it's as free as possible so
 200

 1 that we can get data from their automated services

 2 and leverage these other platforms.

 3 But, truthfully, what allows us, a great

 4 part of what allows us to make that work, is the

 5 fact that we're seeing both sides of the trade,

 6 and that it's kind of like the Rosetta stone: You

 7 get is in another language, and you can work out

 8 what the translation is. And so to a degree it's

 9 based on that, but it does allow the parties to

 10 use their existing automated systems and not have

 11 to build to new prescribed formats, which is

 12 costly and needs maintaining going forward.

 13 MR. TAYLOR: I think I'm hearing an

 14 answer to that question, but let me just confirm

 15 that I am. If we -- if the rules contemplated a

 16 setup where we did not prescribe to the

 17 counterparties, what data standard or what

 18 language they should be using to report to the

 19 SDRs, if all we said was the regulators want to

 20 get from the SDRs using this data standard is that

 21 most workable for everyone, I think I'm hearing

 22 the answer to that is yes. But --
 201

 1 MR. BARNUM: Yeah, I think the answer is

 2 yes, but I think that SCRs should be, I would

 3 think that SCRs should be permitted if it winds up

 4 being most efficient to require that the

 5 submissions to them be in a certain format.

 6 In other words, there's kind of three

 7 choices, right? One is regulator says when you

 8 submit to the SCR, it must be in this format.

 9 That sounds like a bad idea. The next option is

 10 SDR can just -- can consult with its

 11 constituencies and agree a format. That seems

 12 pretty reasonable to me. The third option is SDR

 13 is forbidden from proscribing a format to its

 14 constituency. That seems like it's requiring a

 15 degree of flexibility on that part of the SDR

 16 which may not economically in the interest of the

 17 community at large. It may be sort of satisfying

 18 one particular party's desire to submit a certain

 19 format and that expense is going to wind up being

 20 shared among everyone, I think for very little

 21 collective benefit.

 22 MR. TAYLOR: We touched on this question
 202

 1 before, but again as a follow-up various pieces of

 2 our discussion here have talked about, you know,

 3 the utility, for instance, of letting

 4 counterparties satisfy their reporting obligations

 5 through using a third-party confirmation service

 6 that, you know, then would report to the SDR,

 7 would, point taken on that one.

 8 You carry that a little further, we

 9 raised the question earlier and I don't think

 10 entirely answered it: Should only confirmed

 11 trades come into the SDR? And this, obviously,

 12 you know, there's a time aspect to this, and the

 13 time aspect is probably most urgent, if you like,

 14 the more bespoke the transaction is. I mean

 15 something that's executed on a platform or

 16 cleared, that data will come quickly. In any

 17 case, it may come less quickly, you know, if it's

 18 truly bilateral OTC and some confirmation has to

 19 be done.

 20 What are the ups and downs of should

 21 only confirmed trades come into the SDR?

 22 MR. MacBETH: So I think nonconfirmed
 203

 1 trades should come in, and again we talked about

 2 this in a quality standard. The reason I think

 3 they should is because they're information, and

 4 they could be very materially information to the

 5 picture that the SDR presents with respect to

 6 training positions.

 7 Now, you know, there might have to be a

 8 caveat associated with that record to say that it

 9 isn't as secure as others.

 10 Now again, the problem is this then

 11 becomes an opening of the confirmation process to

 12 the SDR, and there is, you know, there is noise in

 13 that confirmation process. There's messages that

 14 are sent that were sent in error. They weren't,

 15 you know, they need to be amended, and there needs

 16 to be some ability to cut out that noise. But I

 17 think at a certain point in time, the SDR should

 18 take unconfirmed trades if it's coming from a

 19 platform into the SDR, and have that information

 20 available to report, because potentially that

 21 single trade could be material to the information

 22 given.
 204

 1 MS. LEONARD: But does it mean that you

 2 either also have to have some system of error

 3 resolution of the confirmation finally arrives to

 4 you?

 5 MR. MacBETH: You would have to be --

 6 have to cancel any, any other arrangement.

 7 MS. LEONARD: Do you have this type of

 8 systems? Do you have experience in dealing with

 9 that?

 10 MR. MacBETH: Today that happens. You

 11 know, that happens. We have access to unconfirmed

 12 trades as well as confirmed trades, and we can

 13 report on that, and we have an (inaudible) cancel

 14 and correct methodology that can work. But I do,

 15 you know, I do want to caution, I don't think, you

 16 know, where transactions were clearly, they were

 17 quickly corrected. I'm not sure they should all

 18 be watched through entirely. So again, it will

 19 point to the timeliness, point towards the SDR.

 20 You know, the real-time situation will need a

 21 different model than that. But the, you know,

 22 core reporting in the SDR I think should be
 205

 1 informed potentially by unconfirmed events to

 2 allow accurate data.

 3 MR. PICKEL: I might just ask a question

 4 of both Steward and David. By "unconfirmed

 5 trades," I mean there are the trades with the DTC

 6 warehouse, there are the trades that are actually

 7 confirmed through the system and go in as the

 8 so-called gold copy. There are other trades that

 9 go in there that are not those types of trades,

 10 but they are -- nevertheless a confirmation exists

 11 of those trades, and it is, you know, I think

 12 you're probably aware with the efforts made by the

 13 industry over the last five years working with the

 14 New York Fed, the time between execution and

 15 confirmation has been drastically reduced across

 16 certainly credit, interest rates, and even in

 17 other areas.

 18 So that the number of trades for which a

 19 confirmation, meaning both parties has signed off

 20 on the confirmation, doesn't exist is a relatively

 21 small number. And I guess my own personal

 22 reaction is sounded out that the membership on
 206

 1 this is that better to wait that extra day or two

 2 to get a properly, fully confirmed trade available

 3 to go into the warehouse than to take in

 4 information today that might need to be corrected

 5 the next day and the next day before it's finally

 6 confirmed. But that's just my reaction. That's

 7 distinct from, you know, the confirmed trades that

 8 go in which are in your case very rich in

 9 information.

 10 MR. TAYLOR: And I take it part of your

 11 point is that any downside in timeliness or of

 12 delay has in a sense already been minimized

 13 because of the majority of trades are being

 14 confirmed quickly anyway.

 15 MR. PICKEL: Oh, that's right. And,

 16 furthermore, again distinguishing, using the

 17 Barnum distinction if you will, between the trade

 18 information, you know, about the pricing, the

 19 real-time price reporting versus the information

 20 about systemic risk. I mean keep in mind AIG did

 21 not put those trades on over the course of three

 22 days; they put them on over the course of several
 207

 1 years and the risk built up. So you'll be able to

 2 see that build-up and risk.

 3 MR. BARNUM: Just one very brief thing,

 4 because I'm not sure if a question is going to be

 5 asked that's kind of a loss for address, and I

 6 actually think it's quite critical, which is that

 7 it is important for the regulators to engage with

 8 the SDRs and the various providers, especially in

 9 connection with post-trade transparency, but also

 10 generally on the question of price-forming versus

 11 nonprice-form trades and the related question of,

 12 like, events switch which are trades and events

 13 which are not trades. And we're not going to have

 14 time to discuss that in detail here, but I think

 15 that those two questions are ones that we as an

 16 industry have struggled with quite a bit, and I

 17 think people like Steward at savvy for having an

 18 intimately familiar with the challenges that they

 19 create.

 20 But I think from the perspective of

 21 avoiding a signal to noise ratio problem in the

 22 regulatory community, especially in connection
 208

 1 with surveillance, it's going to be very important

 2 to think carefully about that question and ensure

 3 that the standards that emerge include this kind

 4 of attribute which is

 5 price-forming/nonprice-forming and, you know, a

 6 post-trade event which is actually the same

 7 economically as a trade, like, for example, an

 8 unwind or a partial unwind versus post-trade event

 9 which is not a trade, like, for example, an

 10 amendment of a fee that was booked erroneously.

 11 MR. SHILTS: And, Bob, just a quick

 12 question. You had mentioned you thought the

 13 majority of the deals are confirmed quickly. Just

 14 like in a time frame, what did you mean by that?

 15 MR. PICKEL: You know, I don't have -- I 

 16 could get you the statistics that are reported on

 17 a regular basis to the regulators, but, in, you

 18 know --

 19 MR. BARNUM: Actually, Bob, sorry to

 20 interrupt. Sorry to interrupt --

 21 MR. PICKEL: Yes?

 22 MR. BARNUM: -- I just happen to have an
 209

 1 answer to that question. I think the guys --

 2 Steward, you may have this as well -- but some

 3 work was done to look at the question in rates,

 4 what was the time lag between submission and

 5 confirmation? Were people using the, I guess, the

 6 whatever you want to call it, the swaps wire

 7 workflow and rates, and apparently the average

 8 time from execution to confirmation was something

 9 like 11 minutes.

 10 MR. PICKEL: Yeah, we can get a lot of

 11 deep information and data to you on that from the

 12 efforts of the last five years with the New York

 13 Fed.

 14 MR. PRITCHARD: I don't want to answer

 15 that specific question, but going back to the

 16 earlier point, I think if you get data, then you

 17 need to be able to get corrections. That's just

 18 the reality. We get 6 million trades on a regular

 19 basis, another 4 million a day, and you just got

 20 to be able to handle corrections, and you've got

 21 to be able to handle lots of them. So that's a

 22 separate requirement, I think, on the repository.
 210

 1 So, you know, and if you want

 2 confirmations, there's lots of good initiatives

 3 that happened around speeding up confirmations,

 4 and you've heard about the benefits of that. But

 5 from our experience of exposure management,

 6 parties want to get on with that task

 7 independently and have the confirmations

 8 proceeding. It may be already done, it may not be

 9 already done, but we wouldn't see the benefit of

 10 making submission to the repository dependent on

 11 confirmation having already happened.

 12 MR. SHILTS: We're nearing the end, just

 13 a couple of minutes left, so if anyone has any

 14 other final comments or observations to make?

 15 MR. CUTINHO: I think there is a

 16 distinction between affirmation and confirmation.

 17 There is electronic affirmation taking place in

 18 some clearing models such as ours. We don't

 19 require a legal confirmation before the trade is

 20 submitted for clearing, especially if it's a new

 21 trade. So we need electronic affirmation, and

 22 then the legal confirmation is the one that is
 211

 1 disseminated by the clearing house.

 2 So it's very important to distinguish

 3 the two. An affirmation is bring two people

 4 together and you can actually have a match in that

 5 case; and all circumstances for bilateral trades

 6 there is an extra step of confirmation which

 7 actually goes the legal document enforcement.

 8 MR. TAYLOR: Is that the -- excuse me,

 9 is that the --

 10 MR. BARNUM: I would just briefly like

 11 to chime in there.

 12 MR. TAYLOR: Go ahead.

 13 MR. BARNUM: Sorry, I just -- I'm of the

 14 opinion -- it's really of a personal one, but the

 15 distinction between affirmation and confirmation

 16 is to some degree a distinction without a

 17 difference. And so I think that, you know,

 18 actually it's an important question for the

 19 regulatory community to think about because I

 20 wonder whether this has ever been tested, but in

 21 practical terms it's a legal matter. If we're

 22 saying that affirmation effectively represents
 212

 1 full de facto agreement between the parties, then

 2 the distinction between that and conformation

 3 becomes moot, and there's an argument that we

 4 shouldn't be building on an infrastructure that

 5 presumed to be the existence of two distinct

 6 processes.

 7 MR. TAYLOR: I'd just ask a sort of a

 8 wrap-up question which is how long will this take?

 9 And I know you may be reluctant to answer that

 10 because you might think we're going to cut

 11 whatever number you give us in half. But maybe to

 12 avoid kind of giving it a number, we've been

 13 hearing a lot about existing systems off of which

 14 we can leverage, and I think that's been very

 15 helpful to think along those lines. But if you

 16 have a view about implementation time frame, that

 17 would be helpful.

 18 But also if you have a view about what

 19 we could do to resolve some of the issues that

 20 will facilitate quick implementation -- in other

 21 words, I know a lot of this will be the answer is

 22 going to be it depends on what you're -- how long
 213

 1 will it take, it depends on what the system looks

 2 like. Are there basic design elements of the

 3 system that would be helpful to address sooner

 4 rather than later, even if all the details aren't

 5 worked out, to help facilitate your planning and

 6 the more speedy implementation? I'm just trying

 7 to be brief.

 8 MR. DIXON: I'll take a stab at it. And

 9 the first one would be, what do you need and when

 10 do you need it by? And the second comment would

 11 be, what's readily available. So if it's readily

 12 available, then that makes it a lot more

 13 straightforward, and then the discussion could be

 14 around how and when that gets delivered.

 15 When we get in to the greenfields of

 16 trying to understand what's next and what's new, I

 17 think we need to be very cautious and probably

 18 take our time and, you know, crawl, then walk, and

 19 then run. But I think that if you look at the

 20 legacy of systems and legacy of work that's been

 21 done in the industry, there certainly are some

 22 answers available there in the shorter term.
 214

 1 I think if we attempt to boil the ocean

 2 and look at everything, it'll take forever, and we

 3 won't end up where we want to be.

 4 MR. CUTINHO: Um, sorry. I think the

 5 important question and scope of the what is the

 6 true scope, and the second would be, how does a

 7 regulated market or clear group (inaudible)

 8 MR. PRITCHARD: A real quick, then, just

 9 I think it's just two parts. One is as a provider

 10 what requirements you're putting on us as a

 11 solution provider; and secondly, from the industry

 12 point of view, the respondents, what they need to

 13 do in order to get ready to meet those. Really, I

 14 don't think you probably want to get the provider

 15 to do -- to make it easy for the respondent.

 16 MR. PICKEL: I guess I'd point to a

 17 little bit of recent experience, namely, the

 18 process that's been going on over the last five

 19 years with the New York Fed where -- and I'm not

 20 suggesting it's five years is the answer -- but I

 21 mean that's what a very effective collaborative

 22 effort between the industry, broadly speaking, and
 215

 1 the global regulators. And if you look at where

 2 we were in September of 2005 versus where we are

 3 in September of 2010, you'll see a completely

 4 different world. And so I think there is some,

 5 you know, some hope that this can move along very

 6 quickly with a, you know, a commitment across the

 7 industry and working very collaboratively with the

 8 regulators.

 9 MR. MacBETH: Yeah, the elapsed time

 10 delay that the warehouse was about -- was about a

 11 year, and it was a very concerted effort fairly

 12 managed by a group of the external consultants

 13 and, obviously, by the lower resources from the

 14 participants themselves.

 15 So there was a pretty -- you know,

 16 that's one asset class that was trying to get

 17 into, you know, high- quality dataset where they

 18 could say it was their official legal records for

 19 those trades. That it was a practical experience,

 20 and the level setting and the expectations and the

 21 requirements, I think, is the key, because I

 22 think, as, like, for a service provider, I think
 216

 1 might have different perceptions about, you know,

 2 where we're trying to get to. So I think -- I 

 3 think that's absolutely key.

 4 And then, you know, there is some

 5 tensions about what the right solutions are and

 6 which components to use and reuse. You know, I

 7 think it's important we don't throw away what

 8 (inaudible) exists, and, you know, we do -- we do

 9 build from that. So those are the points for me.

 10 MR. SHILTS: Any other --

 11 MR. BARNUM: Yeah, I would say -- yeah,

 12 my answer to the question would be, 1, apply an

 13 8020 rule, do the easy stuff first so that we can

 14 -- there'll be, you know, it will be easy stuff.

 15 There will be lessons to be learned which will

 16 then make the difficult stuff less difficult, and

 17 it will allow significant progress to be made on

 18 the easy stuff, which I think will be helpful for

 19 everyone.

 20 And the second point I would say is that

 21 to facilitate speed, an early decision, you know,

 22 I would argue should be made to create a construct
 217

 1 that allows private sector solutions to meet the

 2 requirements so that people feel like they have

 3 commercial incentives to pursue solutions. That

 4 will speed things up much more than if everyone's

 5 waiting around to be told what to do.

 6 MR. SHILTS: With that, thank you very

 7 much, and we thank all the panelists for

 8 participating today. We're going to take a

 9 one-hour break, and we'll start back here on Panel

 10 3 at 1:45. Thanks again, everyone.

 11 (Recess)

 12 MR. SHILTS: All right, if everyone

 13 wants to take their seats, we can get started.

 14 Okay, if everyone takes a seat, and

 15 we'll get started here.

 16 All right. Well, then, let's get going.

 17 I want to welcome everyone to the Panel 3 for

 18 today's roundtable, and this panel is going to

 19 focus on models for real-time transparency in

 20 public reporting. Some of the things we want to

 21 discuss on this panel are the benefits of real- 

 22 time, public reporting, the entities that would be
 218

 1 responsible for such reporting, assuring the

 2 anonymity of market participants and the

 3 appropriate media for real-time reporting. I'd

 4 like to start out by going around the table and

 5 letting each of the panelist identify themselves

 6 and where they're from. And, also, just press the

 7 button. See the red light on, and you're able to

 8 talk. Now, as we go through the panel, when

 9 someone is speaking, if they could just say their

 10 name so that others that are watching I'll know

 11 can identify you as you're speaking because they

 12 can't always see the name card and things.

 13 So, with that, and, again, I'm Rick

 14 Shiltz, director of the Division of Market

 15 Oversight at the CFTC.

 16 MR. COOK: Hi, I'm Robert Cook, director

 17 of Trading and Markets at the SEC.

 18 MR. SHILTS: All right, and, with that,

 19 let me start going around the table, if everyone

 20 could identify themselves and who they're

 21 representing.

 22 MR. MASTERS: Sure, I'm Michael Masters
 219

 1 with Masters Capital Management, and representing

 2 Better Markets.

 3 MR. HARRINGTON: Hi, I'm George

 4 Harrington with Bloomberg. I look after

 5 Bloomberg's global credit trading business.

 6 MR. BERNARDO: Shawn Bernardo. I work 

 7 at Tullet Prebon, and I'm representing the

 8 Wholesale Market Brokers' Association.

 9 MR. AXILROD: Pete Axilrod, DTCC. I

 10 look after our derivative services and business

 11 development.

 12 MR. TOFFEY: Jim Toffey, Benchmark

 13 Solutions, we focus on pre-trade transparency

 14 solutions for institutional investors.

 15 MR. STEINER: Jeff Stiner with the CFTC,

 16 Division of Market Oversight.

 17 MR. LEAHY: Tom Leahy, CFTC, Division of

 18 Market Oversight.

 19 MS. SEIDEL: Heather Seidel, Division of

 20 Trading and Markets the SEC.

 21 MR. GAW: Michael Gaw, SEC Division of

 22 Trading and Markets.
 220

 1 MR. GIDMAN: John Gidman with Loomes

 2 Sayles, and representing the Association of

 3 Institutional Investors.

 4 MR. OLESKEY: I'm Lee Olesky, CEO of

 5 TradeWeb.

 6 MR. JOACHIM: I'm Steve Joachim, the

 7 executive vice president for Transparency Services

 8 and FINRA. I'm responsible for TRACE.

 9 MR. JOACHIM: Jeff Joachim, CEO of

 10 MarkitSERV.

 11 MR. BLAND: Trabue Bland,

 12 Intercontinental Exchange.

 13 MR. SHILTS: And we'll start by asking

 14 some questions, and we'd like to give everyone an

 15 opportunity to respond, but if it goes a little

 16 long that we finish by the 3:30 finishing time, I

 17 may ask you to cut it short so that we can stay on

 18 schedule.

 19 With that, we'll start out with our

 20 first question.

 21 MS. SEIDEL: Thank you to everyone. I

 22 guess the first question is sort of a broad
 221

 1 question in terms of, in your opinion, what does

 2 the optimal system for public reporting look like

 3 for these types of products? And then in what

 4 ways can real-time reporting be most beneficial to

 5 the market participants and the market?

 6 MR. SHILTS: Anyone can start.

 7 MR. OLESKEY: Oh, I'll start off. Lee

 8 Olesky from TradeWeb. I would start off by saying

 9 I think that electronic trading venues are a good

 10 starting point for focusing on how to capture and

 11 then ultimately deliver to the marketplace price

 12 transparency and pricing into the market. And

 13 that, certainly, we've had an awful lot of

 14 experience doing that over the last 12 years of

 15 so, starting with the U.S. Treasury Market and

 16 other markets, and that capturing trades

 17 electronically is a way to get closest to

 18 real-time electronic trading.

 19 In terms of the dissemination of those

 20 prices, I think the challenge will be in the 

 21 derivative space, in particular, the wide variety

 22 of different instruments that we have and the best
 222

 1 way of making sense out of them and capturing them

 2 in a collective manner. And I don't have a

 3 solution for you there, unfortunately.

 4 MR. JOACHIM: I'm Steve Joachim, and let

 5 me talk about because people have mentioned TRACE

 6 a couple of times, and let me talk about what we

 7 think of TRACE and the environment that's required

 8 to make a transparency facility work effectively

 9 in the marketplace overall, and there's a number

 10 of components that take place. And I'm talking

 11 about post-trade transparency, and I think you can

 12 separate the conversation of transparency into

 13 pre-trade and post- trade transparency because

 14 TRACE is a post-trade transparency facility. And

 15 there's a number of components that we think are

 16 critical to making it work.

 17 This morning, in the first panel,

 18 somebody talked about the requirement to ensure

 19 that data and swap data repositories were data

 20 that people used to ensure that it was accurate.

 21 Our experience has been that, with transparency

 22 facilities in particular, that there are a number
 223

 1 of components that have to be in place to make

 2 sure that transparency works effectively.

 3 First is authority to compel people to

 4 report the transactions. And that can come from

 5 rules or some kind of rule-making, but, certainly,

 6 our experience has been people have not

 7 voluntarily reported transactions without the

 8 force of rules behind them.

 9 Second is you need an efficient

 10 methodology for collecting and disseminating the

 11 transaction, but when you have that information,

 12 you need to be sure that you comprehensive and

 13 accurate information, meaning you have to be sure

 14 that all the data is reported because partial data

 15 can be a problem as much as anything. And we can

 16 tell you that through our experience with TRACE

 17 and corporate bonds is that we discovered even

 18 with the force of rules in place a number of

 19 people that missed the rule or didn't report the

 20 transaction initially, and it required an

 21 examination routine, an ability to go back and

 22 enforce and to ensure that people were actually
 224

 1 remembering to report their transactions and get

 2 them to us for dissemination on a timely basis.

 3 A third form of accuracy issues that we

 4 need to worry about is that are all the data

 5 reported and is the data that's reported accurate?

 6 And, for that, you need some kind of real-time

 7 data-cleaning exercise in place that ensures that

 8 the information is complete and accurate and

 9 verifiable so that when market participants are

 10 depending any transaction information in the

 11 marketplace that they have a sense that the

 12 information is reliable and fair. That doesn't

 13 mean that there aren't corrections made to data as

 14 time goes on, but that you need all of those

 15 components in place to ensure that you have an

 16 effective regime in place.

 17 In terms of the timeliness of what is

 18 real-time and how does it work, and I think a lot

 19 of that depends on the marketplace. I think where

 20 there are underlying instruments, in securitized

 21 swaps, for example, I think that there is a strong

 22 interest to keep the timing of that as close to
 225

 1 the timing of transparency on the underlying

 2 instruments because I think there is an interplay 

 3 between the two. I think where there aren't

 4 underlying instruments, I think that there is a

 5 question as to exactly what is real-time and how

 6 real-time is has to be to make it effective for

 7 market participants, and I think that's something

 8 that we should look at instead.

 9 MR. AXILROD: I guess I'd also take sort

 10 of the reverse view of this, which is there are

 11 certain things that we absolutely should not do.

 12 Today, more than just prices get reported. Today,

 13 there's public reporting of open interest, there's

 14 public reporting of turnover. Some portfolio

 15 managers have told me that open interest is more

 16 important to them than price information, and, in

 17 any event, it's all important that the public -- I 

 18 will guarantee you that the reporting will turn

 19 out to be inaccurate if it's fragment.

 20 I know you've heard this before, but

 21 particularly open-interest reporting, we did a

 22 quick look at the most liquid credit default swap
 226

 1 index traded, it would look like today we reported

 2 or awhile ago reported the open interest at

 3 somewhere around $50 billion at some point. If

 4 clear trade open interest, and unclear trade open

 5 interest were reported separately, the open

 6 interest would have looked like it was $100

 7 billion, which was inaccurate because there are

 8 legs in and legs out, and you might say well, that

 9 will all go away when all of the indices are

 10 cleared. That actually isn't true because there

 11 are multiple clearing locations, and a lot of

 12 times, it's one party or another gets to decide

 13 where something is cleared. Again, if all the

 14 trades were cleared, but what are unclear today

 15 were cleared at some place different, then where

 16 the clear trades are cleared today, it would still

 17 look like you're pretty much misstating the open

 18 interest by a factor of two, and especially when

 19 you get to things that are more important

 20 systemically, like single names that somebody

 21 about to go under, what's the open interest in

 22 mortgages, things like that, radically overstating
 227

 1 the open interest tends to instigate panic, so

 2 forth, and so on. So, I guess what I would urge

 3 whatever public reporting mechanism is set up, you

 4 need to make sure that everything that gets

 5 publicly-reported is going to be publicly-reported

 6 accurately, and there are just a lot of ways in

 7 which non- aggregated reporting will make it

 8 inaccurate.

 9 MR. GIDMAN: This is John Gidman from

 10 Loomes Sayles. I mean, I couldn't agree more with

 11 Peter's point. When we balance the tensions

 12 between real-time access to data and the data

 13 being correct and authoritative, investigators,

 14 and we think the public overall, are much better

 15 served by having gold records that we can rely on,

 16 particularly at the aggregate level of the market

 17 and the markets.

 18 MR. BERNARDO: Shawn Bernardo with the

 19 Wholesale Market Brokers' Association.

 20 All of the brokers have the capability

 21 to report trades to the regulators in a timely

 22 fashion. To go back to what Steve said as far as
 228

 1 TRACE is concerned, we have a track record of

 2 reporting those trades efficiently, and we have

 3 the systems in place to do that, along with the

 4 various means. I mean, we can do that voice, we

 5 can do it electronically, we can do it as hybrid

 6 as far as the execution, but we send those trades

 7 electronically to them in a timely fashion.

 8 MR. TOFFEY: This is Jim Toffey. I just

 9 wanted to add an additional point. I think TRACE

 10 is a great foundation model as you guys think

 11 about the reporting mechanism going forward.

 12 They've dealt with a lot of issues very well in

 13 bouncing out liquidity and transparency and

 14 timeliness. There's one other component though

 15 that should not be lost, and Steve went out of his

 16 way to say that it's a post-trade, transparency

 17 mechanism. But there's an important feedback loop

 18 back into pre-trade transparency, and the

 19 timeliness of post-trade and the feedback into

 20 pre-trade makes the market more transparent. And,

 21 so, I just wanted to point that out.

 22 MR. GOOCH: I think one thing with these
 229

 1 conversations, we tend to very quickly move to how

 2 it should be done, which is very important, but I

 3 think sometimes we lose sight of why we're trying

 4 to do it in the first place. And different people

 5 have different views on that, so, I'm not sure

 6 it's definite, but I think when you talk to most

 7 fund managers, what they're hoping to get out of

 8 this is cheaper execution. But when you drill

 9 into that, I think what cheap execution actually

 10 means is not the most obvious thing. You can go

 11 to the equity markets, which a lot of stuff done

 12 on exchange, very transparent, most fund managers

 13 will look at the cost of execution, and not just

 14 being the commission or the bid offer on the

 15 exchange or the commission from the dealer.

 16 They'll look at the market impact of the trade and

 17 say how much did it cost me to put that trade into

 18 the marketplace? How much did it move during

 19 execution, everything else? And I think here with

 20 any regime that we design here, the objective

 21 should be to get that total cost as low as

 22 possible. It does mean there's an interplay
 230

 1 between the size of the order, the liquidity on

 2 the low market, how much price has moved if you're

 3 trying to move the position. So, I think it's a

 4 little more complex than say all dates are out,

 5 real-time, aggregated, and all these other things

 6 you need to talk about. We need to make sure we

 7 create something that actually gives benefit to

 8 the industry and tends to reduce in cost rather

 9 than to increase in cost, but reducing equity in

 10 certain areas. You'll get (inaudible) bid offer,

 11 but then bigger market moves and (inaudible) is a

 12 little more complex.

 13 MR. HARRINGTON: I'd actually agree with

 14 Jeff on that point, so, when we're speaking to our

 15 customers on both the buy side and sell side,

 16 obviously, the reporting issue is certainly at the

 17 forefront of their minds, and it really comes down

 18 to market efficiency. So, while the idea of

 19 real-time reporting obviously seems to have great

 20 benefits, I think that when you look at overall

 21 market efficiency and especially when you'll get

 22 the client to dealer market, and then, obviously,
 231

 1 the inter-dealer market, there can actually be

 2 sort of a wave of effects that can occur as you

 3 move reporting closer to the time of execution.

 4 Secondly is when you look at the larger

 5 effect of the markets, and especially in the

 6 derivative space where there's different kinds of

 7 reporting that can take place, while there is

 8 block execution that occurs, and there's obviously

 9 the post-trade events regarding allocation and the

 10 actual legal counterparties to the trade, which

 11 are not always identified at execution, so, there

 12 will be some time lags between the two. So, I

 13 think that those issues really need to be sorted

 14 out before we sort of move forward.

 15 MR. SHILTS: And that was George

 16 Harrington.

 17 MR. HARRINGTON: Sorry.

 18 MR. SHILTS: If you could just remember

 19 to say your name before you speak.

 20 MR. JOACHIM: Let me just add a couple

 21 of things because I think that you raise some

 22 interesting questions, and I think that there are
 232

 1 a lot of things that transparency does, and some

 2 of it, particularly trade transparency, can do

 3 more than just provide benchmark pricing at the

 4 moment in time. It has a positive impact in terms

 5 of looking at price evaluations for consistency of

 6 price evaluations in a marketplace that sometimes

 7 pre-trade transparency provides some indication,

 8 but it doesn't always tell you how to value a

 9 instrument. Instead, it's another data point that

 10 can be essential for creating consistent marks in

 11 terms of people's portfolios and almost any

 12 instrument across marketplaces.

 13 I think your point in terms of -- and,

 14 by the way, this is Steve Joachim. I just

 15 reminded myself. I'll remember.

 16 I think you're absolutely right, Jeff.

 17 I think that transparency can mean different

 18 things for different instruments. We should look

 19 very carefully at fungibility of the pricing data.

 20 If an instrument is a one-off instrument that

 21 doesn't really trade very often or doesn't have

 22 much activity in it, it doesn't trade, it's so
 233

 1 complex that it's not similar to any other

 2 instrument in the marketplace, putting out a

 3 pricing instrument may not be a value in the

 4 marketplace at that time. So, I think we need to

 5 look at the underlying factors that effect

 6 instruments and determine when is a "real-time"

 7 transparency regime going to be valuable to the

 8 marketplace overall, and it doesn't have to be

 9 uniform in terms of that.

 10 MR. SHILTS: Anyone else want to comment

 11 on that?

 12 MR. LEAHY: I actually have a follow-up

 13 question. It sounds to me like what I'm hearing

 14 is that you all like the idea of, perhaps, some

 15 kind of consolidation of this data.

 16 What do you think would be appropriate

 17 for steps to get there?

 18 MR. GOOCH: I think to think about, and

 19 we had a bitter experience in Europe with the

 20 MIFID Regime where this went horribly wrong. You

 21 can take cash equity, which is a very simple

 22 product compared to what we're talking about this
 234

 1 afternoon. Under the MIFID Regime, post-trade

 2 transparency, everyone had to publish, everyone

 3 did their own thing. Market group did the

 4 (inaudible) service with 25 percent of the market

 5 versus exchanges published, and what ended up

 6 happening was, yes, all the data was available,

 7 but, in practice, no one could use it because some

 8 venues published data with condition code so you

 9 could tell if they're price-forming events or not.

 10 Others didn't put the trade time on, they just did

 11 the reporting time. That proved almost impossible

 12 to bring out data together. So, I think the first

 13 thing, which is the step that was missed in Europe

 14 was say exactly what is the dataset that needs to

 15 be reported, then back into who's doing the actual

 16 reporting? I think it went the other way around

 17 in Europe, but I think that's something they're

 18 working very hard now to (inaudible) in the MIFID

 19 review at the moment.

 20 MR. OLESKY: I'll just go back to the

 21 point that a few people raised. I think there is

 22 a real difference when we think about what are the
 235

 1 purposes here, and the purpose in post-trade

 2 reporting, the regulatory purpose, the systemic

 3 risk purpose associated with capturing this data

 4 in a way that people can analyze it, to a certain

 5 extent, it may not be real-time, it may be

 6 necessary to be absolute real-time versus a

 7 pre-trade process, which is more about price

 8 formation, getting the best price for the

 9 customer, and liquidity, and I think each of those

 10 two different ideas need to be somewhat addressed

 11 separately. They're related, but they need to be

 12 addressed separately because the amount of

 13 information where you structure things, I think

 14 it'd be very different for a post-trade

 15 environment where you're looking at it for one

 16 reason versus a pre-trade environment, where

 17 you're looking at it for a price formation,

 18 liquidity, and actual customers interacting in the

 19 marketplace. And it's different bits of

 20 information and different organizational approach

 21 to those two things that we should keep in mind

 22 when structuring this because I think they are
 236

 1 very different ideas. And that's been reflected

 2 in a number of the comments. I don't think that's

 3 anything new. I'm sure that's been talked about

 4 today previously.

 5 MR. AXILROD: I guess I'd like to make a

 6 further distinction about what's

 7 publicly-reported. I mean, it seems things are

 8 publicly-reported, so, investors particularly,

 9 ultimate investors and users have an idea about

 10 what's going on in the market and can make

 11 informed decisions. But I think it's important to

 12 distinguish this sort of tape or consolidated tape

 13 type thing, exchange type thing from another type

 14 of reporting. I mean, that may give you execution

 15 prices at certain times, but it won't tell you

 16 what's really going on in the market, right? Are

 17 positions just swapping around or is open interest

 18 really increasing? All of that stuff. So, you've

 19 got another piece of public reporting, which is

 20 giving you another picture of the market, which

 21 is: Is the turnover creating new, open interest?

 22 That sort of thing, and I think that has to be
 237

 1 consolidated in order to be meaningful because,

 2 otherwise, you'll get something inaccurate. It's

 3 not clear that the sort of tape reporting has the

 4 same imperative to be consolidated, but it would

 5 be better if there was some sort of consolidated

 6 tape.

 7 With respect to the open interest,

 8 turnover, and that sort of stuff, I think the

 9 repositories are a natural place to report that

 10 because they're holding the information, but there

 11 probably has to be some sort of aggregator if

 12 there's more than one repository per asset class,

 13 and people have to work that through.

 14 In terms of the sort of consolidated

 15 tape, I would echo what Jeremy Barnum said in the

 16 last panel, that people already have to do

 17 something very close to the point of trade to get

 18 it so it's a legal trade, and it seems to me that

 19 those are the natural venues to have that sort

 20 of -- whatever real-time reporting one does, it

 21 seems like that's the natural venue to do it is a

 22 sort of middleware or confirm facility type places
 238

 1 so people don't have to go twice.

 2 MR. BERNARDO: Shawn Bernardo. I guess

 3 from the brokers' perspective, we actually have

 4 the systems now in place that if you wanted to see

 5 pre-trade pricing or price formation, we could

 6 provide you with the view-only screen so you could

 7 see those prices real-time being put on the

 8 screen, whether they're live bids and offers or

 9 whether it's indications of interest. So, we

 10 could give you that, to the regulators.

 11 And, as far as the post-trade, we could

 12 do that, as well. As long as the trades are

 13 coming through us, we could disseminate that

 14 post-trade feed directly to you guys, and you

 15 could have a blotter similar to what a trader has

 16 in front of them, and you can see okay, these are

 17 the details of the trade so you can monitor what

 18 is going on.

 19 MR. SHILTS: And you're talking about

 20 transparency to the regulator, not public

 21 reporting?

 22 MR. BERNARDO: Correct.
 239

 1 MR. OLESKY: This is Lee Olesky. If I

 2 could give an example, U.S. Treasury Market, which

 3 is a market we started 12 years ago, so, how does

 4 that work in terms of pre-trade transparency and

 5 actual transparency of execution?

 6 We actually have a screen that shows a

 7 bid and offer that is fairly indicative of the

 8 marketplace. Eighty-five percent of the

 9 transactions occur electronically within that bid

 10 and offer, and then once the trade occurs, the

 11 price pops up on the screen and is available for

 12 people to see what the price is. It's also

 13 available in a feed that customers can pay us for

 14 and acquire.

 15 So, using the Treasury Market as an

 16 example in terms of pre-trade transparency or

 17 transparency at the time of the trade, you have

 18 both an indication of where the market is, which

 19 is very good information, you have absolute

 20 information on what the last trade was, and it's

 21 very focused on the asset classes and the users

 22 that care about the market that were in, for
 240

 1 example. So, if you want to apply that to other

 2 markets, this is why my opening comment was that

 3 electronic marketplaces, I think, are the best

 4 place to focus on for pre-trade transparency. You

 5 have in the Treasury Market an example of absolute

 6 certainty on what the price was and the last

 7 five-year note.

 8 What we don't give information on is the

 9 absolute size of the transaction, and the reason

 10 we don't do that is because that starts to

 11 interfere with the formation of liquidity and the

 12 risk associated with the trade. So, by not

 13 showing the size, what you're doing is you're

 14 giving someone a sense of where the market traded

 15 on a price level, but you're protecting the

 16 marketplace from the information that it might be

 17 a very large transaction.

 18 Our typical interest rate swap

 19 transactions that we do in the U.S. in dollars

 20 average $40 million a trade. So, you need to be

 21 careful, depending on the market you're in, the

 22 pre-trade transparency can absolutely impact the
 241

 1 ability to access liquidity because these are

 2 markets that are principle markets. So, there's

 3 always someone who owns each side of that

 4 transaction and the risk associated with that

 5 transaction.

 6 MR. MASTERS: This is Mike Masters. I

 7 would just clarify that you're talking about

 8 pre-trade rather than post-trade. Clearly,

 9 post-trade doesn't have an issue. If I see a

 10 block trade, I want to see the block trade. After

 11 the fact, pre-trade (inaudible) bids and offers,

 12 people (inaudible) and so forth, but after the

 13 fact, I want to see that post-trade liquidity in a

 14 block print in some form or fashion than

 15 quantified. Just I think that's the point you

 16 were making.

 17 MR. OLESKY: I'm not sure that's exactly

 18 the point I was making. But, I mean --

 19 MR. MASTERS: (inaudible) my point.

 20 MR. OLESKY: I'm not sure I understand

 21 your point in terms of --

 22 MR. MASTERS: (inaudible) I'm just
 242

 1 saying there's a big difference between pre-trade

 2 transparency and post- trade transparency --

 3 MR. OLESKY: Well, yes --

 4 MR. MASTERS: From the standpoint of --

 5 MR. OLESKY: Well, what I would say --

 6 right, and what I was trying to say before with

 7 the difference in what you need to see pre-trade

 8 and at the time of the trade to prepare yourself

 9 to trade, there's a different set of factors and

 10 information, and you might want to have

 11 collectively in a place where regulators

 12 post-trade can access systemic risk and what the

 13 exposures are across many different instruments.

 14 The challenge here, I think a few people have

 15 touched on this already, is there's a wide

 16 diversity of instruments that we're talking about,

 17 and to pool them together in some sort of

 18 consolidated way and say well, here's an equity

 19 derivatives trade, here's an FX trade, here's a

 20 commodity, here's an interest rate swap, I don't

 21 know how you'd make sense out of that in a sort of

 22 pre-trade environment. Post-trade, you have to
 243

 1 pool it together in a universal way so it can be

 2 interpreted and used to access systemic risk and

 3 where you have risks among counterparties and

 4 players in the marketplace.

 5 MR. TOFFEY: But to Michael's point, I

 6 think it's important that if you look at corporate

 7 bond market, a very disparate market, and 97

 8 percent of the market is dark throughout the day.

 9 There was no real-time good price on 97 percent of

 10 the issues. When an investor wants to trade, the

 11 first thing they'd go and look at is TRACE before

 12 they look at anything else. And, so, it's a

 13 valuable tool and it is the lifeblood of a good,

 14 efficient marketplace and it's something that, as

 15 you explore, it's a very good model for the swaps

 16 and derivatives market going forward.

 17 MR. JOACHIM: This is Steve Joachim. I

 18 had to remember to say my name first. It's not an

 19 advertisement.

 20 I actually think a lot of people said a

 21 lot of great things here. I think the first thing

 22 that has to get done is the CFTC and the SEC have
 244

 1 to decide what are the goals they're trying to

 2 achieve through real-time transparency? I think

 3 the legislation is a little bit vague on exactly

 4 what they're trying to achieve through it, and I

 5 think we have to define what those goals are. And

 6 they may be different for different segments of

 7 the marketplace. It doesn't have to be uniform

 8 for the same because the characteristics of the

 9 instruments are different. And once you identify

 10 what the goals are that you're achieve, then I

 11 think what Jeff said earlier is absolutely

 12 correct, is that we have to create a set of rules

 13 that define the path that people have to follow

 14 because it won't happen naturally. It needs to be

 15 defined in a way that market participants know

 16 exactly what they've got to do and they can do it

 17 consistently and that, again, I think that there

 18 needs to be an enforcement regime of some kind

 19 that will ensure that people are following the

 20 rules of the game because I think, in general,

 21 most people do, but there's always the exceptions

 22 that can create distortions.
 245

 1 I think what Pete said is right, it's

 2 that there's a whole other segment of data that's

 3 incredibly important to the marketplace that needs

 4 to look entirely differently in terms of its

 5 transparency value. Open interest, it may not

 6 compute on a real-time basis. It may be good at

 7 the end of the day. If you're just looking for

 8 evaluation and for evaluation data, end of day

 9 prices might be fine for that. I think we have to

 10 look at exactly each different kind of data and

 11 define what those goals are and then define what

 12 kind of transparency regime makes sense for those

 13 across the marketplace overall. And I think it's

 14 the interplay of all those data elements that

 15 defines a transparent marketplace. It's

 16 pre-trade, post-trade, it's the indicative data,

 17 it's other kinds of factors that will make the

 18 marketplace be more efficient and more effective

 19 overall.

 20 MR. HARRINGTON: It's George Harrington,

 21 and following-up on Steve's comments, I think that

 22 what this really comes down to is what the venue
 246

 1 selection will end up being as far as where the

 2 reporting will take place. So, as we step back

 3 and look at sort of the SDF that we're having on a

 4 broader basis here today, it seems obvious that

 5 there more likely than not be multiple players in

 6 that space, and, therefore, I think Jeff alluded

 7 to in MIFID, Bloomberg's been waiting a long time

 8 for MIFID data to come out so we could provide it

 9 to our customers, and that's still not there. If

 10 we get into a similar situation where there's

 11 multiple SDFs and while there may be differences

 12 between them, if the models are similar, you could

 13 have a possible aggregator either sitting on top

 14 or sitting behind them. But I think that the key

 15 is that, from a regulatory standpoint, if we can

 16 point towards a single source and the providers in

 17 the space, like Bloomberg and my colleagues around

 18 the table all have open and direct access to that

 19 source and they're able to basically pass that

 20 data back to our end-users. I think that's really

 21 sort of a day one requirement so we can all access

 22 and distribute the data on a fair basis.
 247

 1 MR. SHILTS: Any other comments on this

 2 question?

 3 MR. GOOCH: The only comment I would

 4 make, and I'd echo what George says, I think it's

 5 an important thing to get right in the sense

 6 everyone talks about -- I'm as bad as everybody

 7 else talking about the problems from transparency.

 8 There's also a lot of evidence there that you can

 9 take some benchmark products, make them

 10 transparent, and that will grow the size of the

 11 overall market. I mean, a lot of people believe

 12 the interest market at the size it is, because

 13 it's a very effective futures market. And,

 14 certainly, as I've done over many years sitting in

 15 banks, you listen to the tapes of conversations of

 16 customers, half the time, they're talking about

 17 the futures prices and when it takes over on the

 18 exchange, and, therefore, is the swap properly

 19 valued, et cetera? So, there's a strong feedback

 20 between transparent markets and overall OTC

 21 markets, and if you get that right, it could be

 22 very beneficial to everybody. And to George's
 248

 1 point, that (inaudible) about getting

 2 straightforward data out to a wide group of people

 3 in a very accessible form on certain parts of the

 4 market that can eliminate some of the other things

 5 that are happening.

 6 MR. SHILTS: All right, thank you. I

 7 think we'll then turn to the next question.

 8 MR. LEAHY: So, what data elements

 9 should be reported? And I know this will depend

 10 on the asset class.

 11 MS. SEIDEL: And if I can just frame

 12 sort of what we're asking for here, what we're

 13 talking about is the real-time reporting, and the

 14 statute has in it references, data relating to the

 15 transaction, including price and volume

 16 information with respect to a transaction that has

 17 been executed.

 18 MR. MASTERS: I'd just to make sort of a

 19 broad statement in terms of what I think your

 20 intent is or the intent of the Dot Frank. It

 21 seems to me with all these various products, we've

 22 got people speaking French, Japanese, Chinese, and
 249

 1 Italian, and we're trying to convert them to some

 2 standard language, and one of the first things in

 3 sort of the standardization of this market, if you 

 4 will, is to try to standardize the terminology in

 5 the sense of how do we convert everything that's

 6 over-the-counter into sort of a listed equivalent,

 7 if you will, as much as we can do it? So, when

 8 we're talking about an interest rate swap, there's

 9 a certain hedge that a trader does with an

 10 interest rate swap that has a certain delta

 11 equivalent and so forth. And, so, in my view,

 12 maybe one of the more practical ways of doing this

 13 would be, and we're going to need to do this for

 14 position limits and so forth with regard to other

 15 parts of the legislation, is to convert everything

 16 into some equivalent that everyone can understand

 17 from a hedge perspective.

 18 And, again, it's not like this is cold

 19 fusion. I mean, people are doing this anyway

 20 because anybody that's doing these trades, any

 21 swap dealer that's doing these trades is

 22 converting it into an equivalent so they do a
 250

 1 hedge. They have two choices, they can either

 2 find another customer, at which point they have to

 3 equivocate and figure out what their exposure is,

 4 or they're going to do it on a listed market. So,

 5 I think as much as we can, if we can put this

 6 stuff, bring it down to a least common denominator

 7 so we can add fractions, I think we're going to be

 8 in a lot better situation with regard to whatever

 9 product we're doing.

 10 So, if someone is doing a certain kind

 11 of a swap, if it's converted into some delta

 12 equivalent, then the regulators know exposures

 13 from credit exposures, market participants can

 14 compare apples to apples. You don't get in the

 15 problem you had in Europe where you had a

 16 situation where some people were reporting one

 17 thing and other people were reporting other

 18 things. The more standardization we can bring

 19 this, because one of the reasons we're doing

 20 clearing to begin with is to bring standardization

 21 to a non-standard market, an over-the-counter

 22 market, to allow customization, but to bring
 251

 1 standardization with that. And the only way we

 2 can do that is we're all speaking sort of the same

 3 language from a market participant standpoint.

 4 So, that's just sort of my broad thought, and I'll

 5 leave it.

 6 MR. OLESKY: Yes, Michael. This is Lee

 7 Olesky. I absolutely agree with what you're

 8 saying. I think taking some sort of risk-based

 9 approach here could work on a number of different

 10 levels. So, if you apply a risk-based approach to

 11 the instrument, you can start to say okay, well,

 12 if it's a certain size risk, it needs more of a

 13 delay in terms of time in which it hits the

 14 marketplace because if it's between two

 15 principles, there's a lot of risk associated with

 16 that trade, and if it's made public immediately,

 17 it's going to affect the willingness of either of

 18 the counterparties to want to enter into that

 19 transaction. And, so, that gets sort of to the

 20 block issues and trades on the phone versus

 21 electronic trade. So, I think the concept though

 22 of thinking about things in terms of the risk
 252

 1 associated with the instrument and putting things

 2 on a common language at delta or something that

 3 everyone understands what the risk is associated

 4 with it, it's an interest rate swap or whatever it

 5 is, I think is a good starting point and would

 6 apply to a number of different places in terms of

 7 trade reporting and price transparency block

 8 rules, et cetera. So, we agree with that.

 9 I guess the challenge is we would also

 10 advocate trying to keep it as simple as possible,

 11 and, so, there's a lot of elements that we

 12 certainly applaud with respect to TRACE, where

 13 it's a very simple, clear-cut okay, if it's over

 14 $5 million then it applies. I mean, there's a lot

 15 of value and simplicity to here. So, we like that

 16 idea, too. So, maybe if it's over something, then

 17 it's in one category. If it's below something,

 18 it's another category.

 19 MR. AXILROD: It's Pete Axilrod. I

 20 guess I'd like to make a plea for people to be

 21 careful with commodities. It's a little bit of a

 22 different market than what most people have been
 253

 1 talking about. There are delivery points all over

 2 the country, there are load- serving entities,

 3 many of them all over the country, there are

 4 producers all over the country, and if you force

 5 people to specify a particular delivery point all

 6 the time, people are pretty much going to know

 7 who's making those trades. So, whatever you do in

 8 terms of what commodities data is reported

 9 publicly, you have to leave room for some

 10 flexibility in terms of anonomization. So, if the

 11 delivery points are too specific, you may never

 12 get much anonomizing of trades, but if you allow

 13 the geographical area to be expanded or to have

 14 some anonymity criteria and perhaps pick the set

 15 of delivery points that meets the anonymity

 16 criteria, something like that needs to be done. I

 17 think if you try to standardize too much in the

 18 commodities area exactly what has to be reported,

 19 you'll end up either with everybody knowing

 20 everything, who's doing what are not terribly much

 21 useful reporting. I don't have an answer to that

 22 question, but you have to be careful with the
 254

 1 commodities reporting.

 2 MR. STEINER: Is that an issue for other

 3 asset classes, too, or just primarily --

 4 MR. AXILROD: I do think it gets to be

 5 not in quite the same way because there isn't sort

 6 of geography binds the participants and the

 7 delivery points, but when you get into anything

 8 with a single name underlying, something that's

 9 not a commodity in a broad sense, but if you look

 10 at credit default swaps, the data we publish,

 11 they're really no more than 20 or so

 12 non-sovereign, single names that trade more than a

 13 handful of times a week. So, if somebody's

 14 calling around for prices or doing whatever needs

 15 to be done, and, all of a sudden, a trade shows

 16 up, even at the end of the day, everyone will know

 17 who did it. And especially with long-term buy and

 18 hold investors, if exit strategies are important,

 19 and to the extent that the market knows who has

 20 this stuff, exit strategies become very, very

 21 difficult, and that hurts pension funds and things

 22 like that. So, I'd be careful there, too.
 255

 1 MR. TOFFEY: This is Jim Toffey. You

 2 asked about what type of data should be reported

 3 in these trades and how it should all work.

 4 There's the obvious stuff, trade size amount, and

 5 you create rules for how and when that's

 6 disseminated. One lynchpin that I think you'll

 7 find as you go through this that is fundamental is

 8 the reference data, and I think as a customer of a

 9 lot of reference data have observed, there is no

 10 golden copy, there is no clear standard, and if

 11 you're going to create a consolidated tape

 12 underneath for the industry, I think the

 13 regulators have to take a stronger look at how to

 14 clean that up and come up with real standards

 15 around the underlying entity and the reference

 16 entity so that you can have accurate, consolidated

 17 trade reporting.

 18 MR. MASTERS: Yes, just to be clear,

 19 just to make the point again, I mean, what I'm

 20 really talking about, risk-based measures here so

 21 that we can -- again, I mean, I understand the

 22 point of delivery and so forth. I mean, I get
 256

 1 that, but, I mean, what I'm really talking about

 2 at a risk level. In other words, if you traded --

 3 in a commodity example, I mean, equivocated back

 4 to the closet contract, use a listed equivalent

 5 where now we can understand it. Because people

 6 are already doing that. I mean, dealers are

 7 already doing that themselves to get their risk

 8 right. And, so, what we're really trying to do is

 9 sort of standardize their risk process so that

 10 other folks can see that, which gives us more

 11 transparency as market participants, and, clearly,

 12 regulators need it to certain things that they're

 13 required to do under Dot Frank.

 14 MR. JOACHIM: This is Steve Joachim.

 15 Michael, I think you're right that if the best

 16 thing we could do as we're looking at the

 17 transparency regime is to find ways to represent

 18 evaluations or pricing in a way that the industry

 19 can relate to, but I think it's sometimes much

 20 less uniform than market participants often find

 21 out, and I'll give you an example of that.

 22 When we launched TRACE, we looked at
 257

 1 trying to provide prices that spreads over

 2 treasuries which way most investment grade

 3 instruments trade. Until we started talking to

 4 the participants and said well, which Treasury

 5 prices are you looking at and what's the benchmark

 6 Treasury prices and which spreads are you talking

 7 about? And you found out pretty quickly that

 8 those were not uniform. And I think, in

 9 retrospect, as we look at TRACE, I would say I

 10 would rather put out prices that spreads over

 11 treasuries if there was uniformity and agreement

 12 across the industry as to how to do that, and the

 13 question is: Can you get to the stage where you

 14 can create a benchmark that is something that

 15 everybody can agree to or do you have to put out

 16 the basic pieces for people to do so they can

 17 compute it in their own fashion? And, so, I think

 18 that's a great goal. I think whether you can

 19 achieve that or not in any timely fashion or not I

 20 think depends on how consistent it really is

 21 across markets overall.

 22 A second thing I'd like to talk about a
 258

 1 little bit is anonymity, and I think we have to

 2 recognize that when we're talking about

 3 transparent in marketplaces that if we want to

 4 pursue the goal of transparency, that trading in

 5 transparent markets is different than trading in

 6 opaque markets, that you lose some anonymity no

 7 matter what happens. There will not be total

 8 confidentiality. The examples that Pete talked

 9 about are no different than they are in the

 10 corporate bond marketplace. We listened to all

 11 those concerns, and we monitored them very

 12 carefully for the last eight or nine years and

 13 have not seen any damage to liquidity as a result

 14 of the transparency that's been brought to the

 15 marketplace, and, in fact, we see lots of evidence

 16 that liquidity has been enhanced as rules of the

 17 transparency in marketplace in liquid as well as

 18 liquid portions of the marketplace. So, although

 19 it is very hard to prove. I don't want to say

 20 it's a QED, it's one of those things that's really

 21 out there.

 22 But I do think that you just have to
 259

 1 recognize that it will not be the same market if

 2 you have transparency after it than it was before.

 3 And I think regulators have to look at, again,

 4 those goals that they're trying to establish, and

 5 if you achieve the goals you're trying to

 6 establish and recognize that there are some

 7 changes that will happen, and I think that's one

 8 thing that we recognize as we stage implementation

 9 of TRACE over a number of years was to get -- the

 10 biggest single thing we achieved by doing that was

 11 giving people time to adjust, to learn how to

 12 trade differently in a different marketplace so

 13 they could protect their positions and protect

 14 their interest as much as they possibly could.

 15 MR. GIDMAN: This is John Gidman. I

 16 think one of the major concerns that investors had

 17 in the rollout with TRACE was that we would

 18 quickly move from price transparency to trade

 19 transparency and really affect our overriding goal

 20 of being able to get liquidity. And I think the 

 21 phase in that you referred to was really

 22 important, but I think the reasonable delay also
 260

 1 is finding the right balance between the goals of

 2 real-time dissemination of information and not

 3 being so quick as to affect liquidity, which is

 4 really our overriding goal.

 5 MR. HARRINGTON: So, George Harrington.

 6 I think the other thing that we need to consider

 7 especially with these products is stepping back

 8 and looking at what the difference is between

 9 TRACE and treasuries where there's reporting, as

 10 well. The fact that these are synthetic products,

 11 these are an inventory-based product. There's not

 12 a finite amount of a particular bond that's out

 13 there, and, therefore, there's physical securities

 14 moving back and forth. Because it's a synthetic

 15 security, that's really created at the time of

 16 execution. That does have a different market

 17 dynamic to it, and, therefore, I think Pete's

 18 example regarding commodities is something to

 19 consider, as well, because there are only certain

 20 users or end-users that will actually execute in

 21 their weights in the credit markets on certain

 22 securities in size and certain securities. And,
 261

 1 therefore, the market impact can be much, much

 2 greater because of the fact that it's a synthetic

 3 underlying, and that should be examined very, very

 4 carefully as far as a price efficiency standpoint,

 5 and, once again, in the client to dealer and the

 6 inter- dealer markets.

 7 MR. BLAND: I think I'm going to pick on

 8 this point about phase implementation because all

 9 the answers to this question depend on how

 10 (inaudible) and sort it all out. I mean, I think

 11 one of the problems the ACC market has, and I

 12 think in one of the earlier panels, we talked

 13 about the interest rate market, and you can take

 14 vanilla 10-year interest rate swaps. Almost 50

 15 percent of those products have something

 16 non-standard about them (inaudible) nothing very

 17 complicated, but they're just not the straight

 18 vanilla trade. That creates enormous problems, I

 19 think, on a public tape if like Steve mentioned,

 20 people want to back our pricing, then you need to

 21 know what that forward start date was and what the

 22 additional details were in order to understand the
 262

 1 prices being printed.

 2 If you take Michael's approach, which I

 3 think is a very sensible one, I should say, I

 4 actually don't want to know you did a 10-year

 5 trade with a forward start date. They want to

 6 understand the risk you traded and how that risk

 7 was priced. Then that has enormous advantages in

 8 terms of normalizing the data across a whole

 9 variety of different trading activities, and I

 10 think helping more transactions look more

 11 transparent, and, therefore, will look more

 12 liquid, and, therefore, make transparency a little

 13 bit safer.

 14 The trouble is, in terms of the

 15 timeframes, to do that for everything from

 16 interest rate swaps to swaptions to credit trades,

 17 credit indices, to equity variance swaps, evidence

 18 else that we need to cover, that's an enormous

 19 undertaking to get everyone to agree how to do

 20 that. Steve struggled on U.S. corporate bonds,

 21 which are pretty straightforward by comparison.

 22 I'm sure he has some good people working on it.
 263

 1 That's a multi-year effort. So, I think some of

 2 it says that the right solution, and is this

 3 solution going to be practical in the timeframe, I

 4 think a little bit depends on how much we're

 5 trying to achieve, how quickly, and on what range

 6 of products?

 7 MR. AXILROD: This is Pete Axilrod. If I

 8 could jus add to what Jeff said and tie it back to

 9 the original point, what I would take back from

 10 that to answer the question how much data should

 11 be put out there, I take it from an implication

 12 from what Jeff was saying, is most of the trade

 13 details that you would need to confirm a trade

 14 that have to do with pricing, and that's a lot of

 15 them. It's more than people think, as Jeff

 16 pointed out. Probably ought to be out there, or,

 17 otherwise, people won't know what to make of the

 18 price and make take the wrong lesson from it. So,

 19 again, this is something where I would err on the

 20 side of providing more details. It doesn't hurt

 21 anybody to have details. If it takes 30 fields to

 22 confirm a trade, it may not hurt everybody to see
 264

 1 all 30 fields or all 60 fields. They can pick out

 2 the ones they want to pay attention to, but if you

 3 err on the other side, people will start getting

 4 upset because they'll think something means

 5 something that it doesn't. So, I guess to start,

 6 I would err on the side of more fields rather than

 7 less and work it back from there.

 8 MR. STEINER: Just a follow-up on that

 9 point, specifically for bilateral transaction

 10 where the price could have other things,

 11 collateral, credit, worthiness of a counterparty,

 12 specifically what types of fields would capture

 13 that as to still ensure the anonymity of the

 14 counterparties, but, yet, provide some valuable

 15 data?

 16 MR. AXILROD: Well, I mean, you put your

 17 finger on something, which is in the bilateral

 18 world or even in a cleared world where the CCP

 19 doesn't have to take the trade, which probably is

 20 the way a lot of this is starting out, if there's

 21 a moment in time when something isn't clear,

 22 you're taking a counterparty risk for no matter
 265

 1 how long, part of the price is going to have a

 2 credit component, and that's just going to be

 3 very, very hard to understand that part of the

 4 price.

 5 MR. BLAND: Yes, I mean you're certainly

 6 going to get a variation because of

 7 counterparties. Unavoidable, it's a natural part

 8 of the market, and I was talking to (inaudible)

 9 one of the dealers last week, and he was saying

 10 he's going to price differently depending on which

 11 CCP the counterparty uses, not on a systemic basis

 12 because he prefers one over the other, but said

 13 when he takes a specific trade, he puts it into

 14 one CCP or reduces initial (inaudible) offsetting

 15 risk. He puts it into the CCP, it's going to

 16 increase it. He's going to price differently

 17 based on that decision, and the very next trade,

 18 he may take the opposite decision about which is

 19 the more cost- effective CCP.

 20 So, you are going to get variation

 21 because of counterparty, and I think that's

 22 unavoidable. I think to try and model who they
 266

 1 were trading with, why they took that decision,

 2 it's just not practical. I think the sums of

 3 marginal (inaudible) we're all going to have to

 4 live with on these prices.

 5 MR. MASTERS: And I would just say that,

 6 again, going back to the whole -- this is where I

 7 think the pre and post-rate regime is so

 8 important. I mean, post-trade, we're seeing a lot

 9 of stuff that we're not seeing pre- trade. So,

 10 there's things that I have access to as a market

 11 participant post-trade that I don't have access to

 12 pre-trade, and, again, transparency -- Steve made

 13 this point. I mean, if you want a transparent

 14 market, you give up some opacity. That's just the

 15 nature of it, and I think that we went through a

 16 situation where we even decided collectively that

 17 we'd like more transparency in our markets. And,

 18 so, yes, there is an issue, but, again,

 19 post-trade, there's a lot of stuff that can be

 20 done reporting-wise and so forth. I have a pretty

 21 good idea if someone's trading in jet fuel swap

 22 that it's an airline.
 267

 1 (Laughter) I mean, maybe it's not, but, at the end

 2 of the day, I'd like to see that converted into

 3 its notional equivalence just so I can say okay,

 4 well, that means X for heating oil and so forth,

 5 and I'd break it on down. And I know the dealer

 6 is doing that anyway. And, so, that's the whole

 7 idea.

 8 MR. JOACHIM: This is Steve Joachim

 9 again. I am trying to remember.

 10 And one thing that Pete said though I

 11 think I have to respectfully disagree you with on,

 12 I actually think that you have to be very careful

 13 what you put out there. And more is not always

 14 better because once you put it out on the

 15 marketplace, you can't stop disseminating it. So,

 16 once it's made transparent, it is transparent

 17 forever. I guess you could always say you could

 18 always change your mind, but it's pretty hard once

 19 you've put out pieces of information that you're

 20 going to try to collect it or stop disseminating

 21 it at a later point in time. So, I think we

 22 really have to think very carefully at what we're
 268

 1 doing, and, again, I think staging is a good

 2 process. I think you want to err on the side of

 3 transparency if you can, but I think you have to

 4 be very, very cautious how you approach it and be

 5 sure you think through what people are going to do

 6 with each data element, why they need it, and it

 7 really will provide value because too much

 8 information can be a negative, also.

 9 MR. AXILROD: Yes, I take your point on

 10 that. Thanks.

 11 MR. GIDMAN: Yes, this is John Gidman.

 12 I think if you err, you do want to err on the side

 13 of greater transparency. There's certainly an

 14 issue that I think the staging component, as

 15 you've described it, or aggregation, as it's

 16 previously been described, it's critical that

 17 you're able to get a holistic view of the market.

 18 The danger that I could see happening is in

 19 fragmentation of the market and the rush to

 20 provide real-time information, you actually have

 21 misleading, substantially-overstated or

 22 understated information, which, in fact, doesn't
 269

 1 serve the public interest.

 2 MR. BLAND: Yes, I'll echo Steve and

 3 John here and also add that the more fields you

 4 add to public reporting, the more complex it's

 5 going to be for the aggregator itself, whether

 6 it's a clearinghouse exchange or the CFTC. It's

 7 something to think about. It adds an additional

 8 level of complexity and actual technical

 9 underpinnings of this reporting.

 10 MR. GOOCH: There's probably one other

 11 thing we've not talked about, sorry Jeff Gooch, is

 12 what types of transactions should get reported at

 13 all? And I think people talk a lot about large

 14 transactions, and there's a panel on that later

 15 on, so, we won't talk about that, but, also, a lot

 16 of transactions that exist in the marketplace are

 17 not price-forming events.

 18 In the credit market, I think almost half of all

 19 transactions are not price-forming events. Either

 20 compression runs that reduce the size of their

 21 portfolio, innovations to clearinghouses on new trades

 22 or back-loaded trades. There's an awful lot of
 270

 1 information out there which can just be confusing for

 2 the public, and the first thing to do is work at how

 3 to actually sift that stuff out.

 4 I think the other thing is where in our price

 5 disclosure you pick up the transactions? For example,

 6 in client business for fund managers, most will break

 7 them down into sub-allocations. Is it useful to know

 8 that there's 50 allocations and $1.5 million each or

 9 do you need to know it's a $75 million trade done at a

 10 particular price?

 11 I think in most cases, the public information should

 12 be the $75 million number, not the 50 times $1.5

 13 million number. And that causes a problem in a number

 14 of OTC markets, where they look more liquid now

 15 because people see the allocations rather than the

 16 blocks. So, I think this needs a little bit of

 17 thought around where in the process flow you pick

 18 things up and how you bring those things together.

 19 You don't want a situation where the trading platform

 20 reports and the CCP reports or the SDR reports and the

 21 confident-provider reports. We need to make sure that

 22 the work we've done, you're bulletproof against double
 271

 1 counting or missing a trade, and, also, you missed the

 2 right trades in terms of ones that should be going out

 3 to the public.

 4 MR. JOACHIM: I couldn't agree with you

 5 more, Jeff, in terms of a lot of the things you

 6 just said.

 7 A couple of things I think that you hit

 8 on that I think that I want to emphasize. One is

 9 accountability, for getting the data accurately to

 10 you is a critical issue. I think you have to find

 11 who are the critical parties, and, my person

 12 belief, it's the counterparties have to be owners

 13 of that. The mechanics of how that information

 14 gets from the counterparty to you could be in many

 15 different ways, but, ultimately, the

 16 counterparties have to own the quality of the

 17 information that gets to you. They may have an

 18 agency deliver it to you to make it as an

 19 efficient as possible. We've talked before, and I

 20 think that works great, but I think you have to be

 21 sure that you have the proper accountability so

 22 that you can identify the accuracy of the
 272

 1 information overall.

 2 I think that you have to very careful

 3 about the information once you get it, and I think

 4 Jeff is right, is that you do need to be able to

 5 filter what you put out in the marketplace. But I

 6 think whoever the aggregator is needs to have 

 7 everything, and that aggregator has to make those

 8 decisions because if you have 1,000 different

 9 points making 1,000 different judgments, no matter

 10 how good your rules are, those judgments are going

 11 to be inconsistent, and you're not going to be

 12 quite sure what you get. So, you'd be a whole lot

 13 better off I think as you approach this as having

 14 whoever that aggregator is, whatever that entity

 15 is is collecting information, filter out the

 16 information that you don't want to have, and, from

 17 a regulatory perspective, I think the regulator

 18 needs to see everything in its raw form to be able

 19 to manage and oversee the marketplace effectively.

 20 And you may put out some re- information or

 21 benchmark information or risk-based information,

 22 but the aggregator itself can create that
 273

 1 information for you.

 2 MR. SHILTS: Okay, I think we'll move on

 3 to the next --

 4 MR. LEAHY: Not yet. (Laughter)

 5 MR. SHILTS: Go ahead.

 6 MR. LEAHY: Well, who should an

 7 "aggregator" be?

 8 MR. BLAND: ICE. 

 9 MR. LEAHY: I mean, what we're hearing

 10 is we should have an aggregator. Yes, ICE. We

 11 should have an aggregator. I'm hearing that we

 12 should avoid fragmentation, and I think on one

 13 day, I don't think we can have it a single

 14 aggregator yet. So, how do we mitigate the

 15 effects of fragmentation when these rules go into

 16 effect?

 17 MR. MASTERS: I would just go back to

 18 the same point. I mean, if you're going to

 19 establish an aggregator, and this is Mike Masters.

 20 Sorry. If there's multiple aggregators or there's

 21 one aggregator, whatever, we all speak English, we

 22 all speak the same language. It doesn't mean we
 274

 1 have to know the whole dictionary, but we have to

 2 know certain phraseology so that we can

 3 communicate with each other, so we can communicate

 4 with the regulators, and so we can communicate

 5 with different market participants. So, in my

 6 view, there has to be some standardization of the

 7 terminology and whatnot, and I think that comes

 8 from the regulator.

 9 In other words, the regulator says if

 10 you want to say things a certain way, you say them

 11 this way, in this phraseology, and then there's no

 12 debate. Someone initially, I mean, we're in a

 13 democracy, but, in this case, with

 14 standardization, someone has to say something,

 15 this is how it's going to be at first, and then we

 16 can all do what we need to do. And, of course,

 17 that's with input from our participants and so

 18 forth. I mean, it does have input, but there has

 19 to be an initial force it's X, Y, and Z, and this

 20 is how we say it.

 21 MR. STEINER: Are you talking

 22 standardization across asset classes or within
 275

 1 asset classes?

 2 MR. MASTERS: I'm saying, well, there'd

 3 be some of both. I mean, I think across asset

 4 classes, there needs to be a risk space

 5 standardization in terms of convert everything

 6 into a delta equivalent. In terms of the nearest

 7 listed delta equivalent. So, if we're trading

 8 apples, we can -- and, in some cases, you're not

 9 going to be able to do that, and you come up with

 10 some other regime, but, in many cases, most swaps,

 11 you're going to be able to convert them based on

 12 the (inaudible).

 13 With regard to specific asset classes, I

 14 mean, obviously, reporting for commodity swaps is

 15 going to be different from interest rate swaps.

 16 MR. GIDMAN: The comment was raised

 17 about who should the aggregator be? I think it's

 18 clear that the facility that provides market-wide

 19 views needs to be one that doesn't pick winners

 20 and losers among market participants. I think

 21 market participants large and small, the public

 22 interest, and objectives of regulators are
 276

 1 well-served by very open access to all the

 2 information that's in that repository.

 3 MR. BLAND: So, following-up on that and

 4 the panels this morning, I mean, SDRs would be a

 5 logical candidate to provide reporting based on

 6 the model that you've outlined, and thinking about

 7 it both from a business perspective and in a

 8 systematic risk perspective, they have all the

 9 data. There was a consensus of running it more

 10 like a cost plus utility, which is consistent

 11 about going into reporting.

 12 In terms of standardization, I

 13 absolutely agree there should be standardization,

 14 but, I mean, we could do this in an afternoon.

 15 It's not that hard. You do fix and FpML. The

 16 language exists, and you create the tags, and

 17 you're done. It's not that hard.

 18 MR. JOACHIM: Yes, I agree with what Jim

 19 just said, is that -- this is Steve Joachim again.

 20 Is I think the mechanical problem isn't the

 21 problem. The problem is getting the

 22 infrastructure in place to do this and do it
 277

 1 consistently, and I think what I heard everybody

 2 saying, and I kind of agree with, is that I think

 3 the regulator has to own -- you need a neutral

 4 party in the middle that needs to own this process

 5 that has the authority to make the rules and has

 6 the enforcement, the muscle to ensure that people

 7 follow the rules of reporting. The technology

 8 that's required to get the data into one place and

 9 out is easy. It's all the other pieces of that

 10 that are hard to do.

 11 MR. SHILTS: What do you mean the

 12 technology is "easy?" You mean it wouldn't take

 13 long to implement, or what do you mean by that?

 14 MR. JOACHIM: Well, the technology

 15 itself, there's a lot of technology in the

 16 marketplace today that, quite frankly, the volumes

 17 you're talking about here are not high. You might

 18 think they are, but look at the equity markets.

 19 Equity markets are multiples of these volumes on a

 20 daily basis. So, the technology for collecting,

 21 aggregating, and disseminating the data, assuming

 22 you're going to use -- current infrastructures are
 278

 1 in place, use market data vendors to put it out

 2 there, but. just as an aggregator, there are

 3 plenty of technologies that can allow that to work

 4 pretty efficiently.

 5 There's work to be done. It doesn't

 6 mean it can get done tomorrow. There's work, but

 7 the real heavy lifting gets done around the rules,

 8 ensuring that the rules of what gets reported and

 9 how it gets reported is consistent and equally

 10 well understood.

 11 And I'll give you an example of what I

 12 mean. We're going through now at FINRA plans to

 13 just collect securitized property information,

 14 asset-backed and mortgage-back information the

 15 first half of next year, February 14 is the date

 16 that we're focused on. And a great analogy of

 17 looking at securitized property, which probably is

 18 very parallel to the structure we're looking at

 19 here, was the gun who actually runs TRACE is a guy

 20 named Olen Person, who said to me that -- he's

 21 Swedish, and he looking at securitized property as

 22 compared to corporate bonds is like looking at
 279

 1 German versus looking at French. And I said, what

 2 do you mean? He said, well, I'm European, so, I

 3 look at things differently than you probably do.

 4 But in German, there are 1 million rules and 1

 5 exception, and in French, there is 1 rule and 1

 6 million exceptions, and that's much more like what

 7 asset-back and mortgage-backed securities are

 8 like, and I think that's very much what this is

 9 going to be about is defining the rules of what

 10 gets reported, how it gets reported, what do you

 11 mean by an execution time, what price is it,

 12 what's the delta, what are those elements? That's

 13 where the heavy lifting -- and the time to build

 14 the technology infrastructure to get that done is

 15 much smaller than it is the time to define how you

 16 want people to do it and report it, and I think

 17 that's what we're talking about. 

 18 MR. HARRINGTON: This is George

 19 Harrington. So, Richard, I think to your question

 20 regarding the technology and not being hard, per

 21 se, I mean, I think there's a number of firms

 22 represented here around the table who are really
 280

 1 networking firms, so, we connect counterparties,

 2 we connect clearinghouses, we connect a lot of

 3 different providers. So, I think that the

 4 connectivity is there.

 5 What seems most logical to us is that if

 6 we're looking at these swap data facilities

 7 that'll be created and they will gain clearance

 8 from the commissions to actually act in that role,

 9 is somewhere in the back of that process is where

 10 you would actually get the data. I think because

 11 of the nature of these markets where (inaudible)

 12 execution doesn't occur until the actual

 13 counterparties are known, that's when the clearing

 14 process would start. Then the trade actually

 15 clears, and then you actually have a trade that

 16 would go to an SDF or, if it's traditional, OTC

 17 would go through some sort of SDF-like process,

 18 where you actually have known information that you

 19 could take.

 20 Off the back of that, and I think Jim's

 21 right, the market standards are there. We all at

 22 our firms work in protocols that are relatively
 281

 1 standard, but there's obviously differences among

 2 them, but the ability is there to take multiple

 3 feeds. If there is an ace, a designated

 4 aggregator, to take multiple feeds and commingle

 5 those and actually come up with what a picture of

 6 the feed looks like. So, I think that it's not at

 7 trivial effort. It's obviously something that

 8 would be done, but I think because of the networks

 9 that exist in the market today, I think that the

 10 ability is there to deliver.

 11 MR. OLESKY: Lee Olesky. The other

 12 thing maybe to keep in mind here is the rest of

 13 the rules are going to be coming out, and the

 14 categories that are being established with respect

 15 to SEF, what's a standardized contract, and

 16 between the SEFs and exchanges, it looks like a

 17 lot of the activity is going to run through these

 18 vehicles electronically. So, if a lot more

 19 derivative activity that's going to be running

 20 through SEFs, whatever they may be, exchanges, and

 21 these vehicles will capture this information and

 22 this content because the very nature of what
 282

 1 they're doing is they're matching counterparties

 2 with enough detail and information to establish a

 3 trade. We're doing that today in interest rate

 4 swaps and credit default swaps. So, and that's

 5 contemporaneous. Boom, that happens, a match

 6 happens, there's enough content that's exchanged

 7 between the two parties for a binding transaction

 8 to occur. That data then gets routed, as George

 9 said, as everyone's been saying, we all have

 10 networks. Boom, we can send it to a clearing

 11 corp, we can send it to a depository, we can send

 12 it anywhere instantaneously effectively with

 13 enough information to establish what the trade

 14 was, which, in theory, should be around enough

 15 information to be a part of this whole

 16 transparency process.

 17 And in terms of the technical languages,

 18 I agree. I think that that's something that can

 19 be sorted out very, very quickly. But the

 20 content, capturing the content and the actual

 21 trade is going to start to occur as we read things

 22 in SEFs and exchanges. More and more of the
 283

 1 market is going to be -- and that's probably the

 2 part to focus on first: What's standardized?

 3 What's in there? What's going to be captured

 4 there, and focus on that as a starting point for

 5 building things.

 6 MR. BLAND: Yes, this definitely isn't a

 7 technology issue in a sense. I mean, you just

 8 look at the markets (inaudible) we probably have 

 9 90 percent of the whole U.S. market on (inaudible)

 10 electronically and (inaudible) in the system. So,

 11 in that sense, yes, it's all captured, 47 percent

 12 missing that would need to get fixed somehow. But

 13 the data is there and can be more accessible in a

 14 reasonable and timely basis. But the real

 15 challenge is which subset of that data is actually

 16 wanted, and, again, what kind of delays and what

 17 kind of structure? Because dumping entire

 18 database out to the public, it's just going to be

 19 pointless in terms of information content. So, I

 20 think I have to agree, the much bigger challenge

 21 is who.

 22 Secondly, my impression, going around
 284

 1 the table, is not surprising. There are lots of

 2 people who want to publish this information. I

 3 suppose lots of people are going to publish the

 4 information and probably shouldn't be stopped from

 5 doing that. The question is: How do you deal

 6 with the duplication, and does there need to be

 7 like an official non (inaudible) feed of data

 8 which doesn't stop everyone else publishing what

 9 they have got (inaudible) back to their users if

 10 that's useful. But I don't think we should

 11 prevent them from using their own data.

 12 MR. JOACHIM: I think the one place that

 13 we do have to ask a careful question about though

 14 is, depending on the timeliness of reporting

 15 requirement, we listened to the conversation this

 16 morning. I think the SDRs were not really

 17 thinking about close to real-time reporting. I

 18 mean, there was some discussion around that, but

 19 there was some concern around it. So, if we are

 20 talking about a real-time reporting regime, there

 21 may need to be automation much more at the point

 22 of sale or the point of transaction than exists
 285

 1 today, and that is a stage process that does take

 2 time to put in place. But I think what we're

 3 talking about here is this is an essential

 4 infrastructure required to move it from the point

 5 of execution to the point of actually

 6 dissemination, where it gets into the hands of

 7 investors is the infrastructure is mostly in place

 8 in the U.S., certainly.

 9 MR. BLAND: This is Trabue Bland with

 10 ISA. Just (inaudible) this and it's a topic for

 11 tomorrow's panel, but it's going to be critically

 12 important at least from a clearinghouse

 13 perspective to know what a SEF is, and the closer

 14 that SEF is, and it looks to an exchange, the

 15 easier it is for the clearinghouse to receive data

 16 in a consistent format and a consistent time, too.

 17 MR. BERNARDO: It's Shawn Bernardo.

 18 Just on the back of what you just said, we do want

 19 to have open access to that clearinghouse. We

 20 want it non-discriminatory, as it's written in the

 21 legislation currently. So, we don't want the

 22 clearinghouse, who may also own a trading venue,
 286

 1 to be able to discriminate.

 2 MR. GIDMAN: That's absolutely correct.

 3 I mean, if the trades have to go through a

 4 clearinghouse, all market participants should find

 5 access to that market directly.

 6 MR. AXILROD: This is Pete Axilrod. I

 7 just wanted to clarify one thing. Not our equity

 8 repository, but our credit repository does update

 9 positions in real time, assuming we get the trades

 10 close to point of trade. So, the trick is, right

 11 now, the infrastructure's in place. If we can get

 12 the trade data quickly, then all the position data

 13 will update in real time, and, in theory, whatever

 14 part people wanted to be disseminated publicly

 15 could be.

 16 MR. COOK: Just a question. How

 17 important is it that everyone has access to the

 18 information at the same time, whatever the

 19 aggregated information is, how high should that be

 20 on our ranking of first order priorities when

 21 we're designing this system?

 22 MR. GOOCH: I think that needs to be
 287

 1 very high up.

 2 MR. GIDMAN: I think it should be among

 3 the highest priorities. If information delayed is

 4 information access differed, by that nature, it

 5 picks winners and losers in the market.

 6 MR. COOK: And I want to hear from

 7 others on that, too, but, also, what do you think

 8 will be the biggest challenges to achieving that

 9 goal, would be helpful to hear, as well.

 10 MR. HARRINGTON: This is George from

 11 Bloomberg. I think that for end-user community on

 12 the buy side and the sell side, as long as the

 13 access point is direct, in other words, we have

 14 the ability to go directly to the CCP, the SDF,

 15 whoever the ultimate designed aggregator or the

 16 multiple aggregators that we have the ability to

 17 access directly in real-time, I think that that

 18 will satisfy that, and I think that, also, it

 19 really would be good for the competitive

 20 environment and it will inspire innovation. So,

 21 obviously, our firm and firms represented around

 22 the table will work very hard to deliver a
 288

 1 value-added solution to our customers, whether

 2 it's single or multiple, as long as we're not put

 3 in an encumbered point where we can't get directly

 4 into the data and deliver it back to our

 5 end-users, I think we're very comfortable that we

 6 can compete, and, also, very comfortable that

 7 they'll be a lot of good solutions that the market

 8 will innovate towards in that environment.

 9 MR. GOOCH: Yes, I think it is very

 10 important that whoever puts the data out gets it

 11 to all participants at the same time. If they're

 12 going to go by market data, vendors like

 13 Bloomberg, Markit, or Reuters, or whether they're

 14 going to go onto the trading (inaudible) at the

 15 SEF or onto the CCP screen or wherever they're

 16 going to go, they should be advantaged by choosing

 17 one method over the other. I think that's one of

 18 the risks here, is you're going to get

 19 information, a delay advantage by going directly

 20 to a source being on the trading screen, for

 21 example, versus on a market data vendor. So,

 22 people will add value that was entered in
 289

 1 different ways, and that's understandable, but,

 2 yes, the time (inaudible) available at the same

 3 point in time to everybody. And, technically,

 4 that's quite challenging. It's doable, and lots

 5 of markets do it, but it's not something that

 6 happens automatically.

 7 MR. COOK: Are you saying one of the

 8 risks is that the market participants would get it

 9 before it got to the aggregator?

 10 MR. GOOCH: There's potentially a risk

 11 if you're sourcing -- I'll make an example up, say

 12 one of the SEFs is going to publish a big chunk of

 13 the data, you don't want a situation where going

 14 to the SEF's own screen gets you the data faster

 15 than going to the public access data on that

 16 piece. A pre-trade, that might be different, but

 17 in post- trade, you want to feel like wherever

 18 you're running your analytics, whichever vendor

 19 you've chosen to do that, you're on a level

 20 playing field.

 21 MR. TOFFEY: Yes, I agree with Jeff in

 22 terms of market structure. Regardless of where
 290

 1 you do the trade, that aggregator needs to display

 2 that trade back out through all channels,

 3 Bloomberg, Markit. I mean, the technology does

 4 exist, and it's a little hard, but it's very

 5 doable, and then you have a completely level

 6 playing field for all investors, and I think

 7 that's the right way to go.

 8 MR. OLESKY: I'd just make one comment.

 9 And, Jeff, you alluded to this. I think there is

 10 a difference here between pre-trade and post-trade

 11 information. So, pre-trade, I absolutely agree,

 12 everyone should have equal access, direct access.

 13 That should not be a competitive issue. It's

 14 critical that we can all get into the same flow at

 15 the same time. Pre-trade, it should be up to the

 16 individual platform, and, in my opinion, because

 17 that's part of price formation, so, for our

 18 business at TradeWeb, we're showing bids and

 19 offers on our screen. We have to be able to show

 20 those business offers to our customers or we don't

 21 have a business, and we can't broadcast that to

 22 the whole world.
 291

 1 So, in terms of price formation and the

 2 actual trade occurring, and a sort of pre-trade

 3 part, I think that should be up to the individual

 4 entity, whether it's a SEF or an exchange or

 5 whatever it is, post-trade, we want to have equal

 6 access, and similar to the access of the clearing

 7 corps, we should all be -- not a competitive point

 8 for any one entity that owns that function,

 9 whether it's central clearing or it's a repository

 10 for the information.

 11 MR. HARRINGTON: I just want to make one

 12 more point. Sorry, George from Bloomberg again.

 13 Another key point I think that can really sort of

 14 assure that the goals that we're all talking about

 15 (inaudible) happens is regarding the independence.

 16 So, if you do have a designated aggregator or if

 17 you have a designated group of aggregators, if

 18 independence is a key tenet, and, of course, part

 19 of the legislation calls for that anyways, but as

 20 long as there's no favoritism involved in that

 21 process, and, therefore, while it's part of the

 22 role you don't even introduce a specter of having
 292

 1 non-independence, and, therefore, not fair access

 2 and dissemination of the data.

 3 MR. GIDMAN: And this actually goes back

 4 to the previous roundtable, which discussed some

 5 of the tensions of governance, and a lot of the

 6 thread from this morning, it's really all the same

 7 issue.

 8 MR. MASTERS: I'd just make one final

 9 point. I mean, this goes to the whole idea of HFT

 10 and co-location, which I know the agency is very

 11 sensitive about right now, and that is even having

 12 this data a millisecond before someone else,

 13 there's a potential for a lot of problems. So,

 14 we've sort of been there and done that, and we've

 15 got the opportunity to create a new marketplace

 16 without those issues. We should try to do that,

 17 just sort of the last point on it.

 18 MR. SHILTS: I'm going to move on to

 19 some of the other topics.

 20 MR. GAW: I want to return to a point

 21 that Steve raised a few minutes ago, which is:

 22 What is real time? We're talking a lot about how
 293

 1 to construct a system for real-time dissemination

 2 of trades and swaps and security- based swaps, and

 3 we haven't talked about what this very key term

 4 means. So, the Dot Frank Act puts a bit of a

 5 gloss on it. It says that real-time public

 6 dissemination has to be made as soon as

 7 technologically practicable after the time of

 8 execution. So, I invite the panelists' views on

 9 what "real time" means.

 10 MR. GIDMAN: I wouldn't want to

 11 legislate it. (Laughter) It used to be real-time

 12 was T + 3. (Laughter)

 13 MR. MASTERS: I'm not going to try to

 14 necessarily answer the question directly.

 15 (Laughter) But I'll give a version.

 16 So, the reason that I was trying to make

 17 the point earlier about everyone speaking English

 18 is that to report from different SEFs and other

 19 places, there has to be a common language, a

 20 common thread so that the data can be synched, so

 21 all that data can be synched, so then, as soon as

 22 the data is synched into some standardized format,
 294

 1 then the data can be released. But if even if

 2 it's reported in real time, and let's say the risk

 3 of the position wasn't reported, while all I have

 4 to do is take my calculator out, I can figure out

 5 the risk before someone else does, and I can do

 6 the hedging or whatever. So, I mean, to a certain

 7 extent, I would assume, and I'm making this

 8 assumption, but I assume this is going to be sort

 9 of like the ways people used to do the block

 10 trades with equities where you would go Autax -- I 

 11 don't know if Autax exists anymore. But, any

 12 rate, you would go to one of these vendors, and

 13 you'd see an advertisement, and, of course, you

 14 don't know if they're real or whatever. But, I

 15 mean, everybody's fishing, but the pre-trade, you

 16 would go and you do the trade. You would do the

 17 trade upstairs, and as soon as the trade was done,

 18 you would print the trade on the floor.

 19 In this case, we'd be printing it over

 20 the counter in some synched, universal fashion.

 21 As soon as the trade's done, it's done. Now, does

 22 that mean everyone has done their hedge already
 295

 1 and whatnot? I mean, I don't know, but I would

 2 assume that they did in many cases because someone

 3 has to print the trade, and I think there's some

 4 discretion there.

 5 MR. OLESKY: Yes, I think, Michael,

 6 you're raising a critical point which gets the

 7 variety of different risks associated with

 8 different instruments when we're talking about

 9 derivatives, and, in a principle-based market when

 10 one counterparty is doing trade with another

 11 counterparty, the more risk associated with that

 12 trade, meaning the fewer natural holders there are

 13 of that trade, the longer it takes for the person

 14 or the entity to hedge that exposure from having

 15 made the commitment to provide liquidity, the

 16 greater they're going to be at risk if that comes

 17 out quicker. And, so, it really does get to real

 18 time, I think, should be correlated to the type of

 19 transaction it is, and it gets to the block rules

 20 and it gets to the timeliness of real time really

 21 should protect the ability for risk-takers to

 22 actually extend and take on that risk of a
 296

 1 transaction with sufficient time to hedge the

 2 transaction. Otherwise, what we'll end up with is

 3 they won't do that, although, price it in, and,

 4 so, you won't have entities willing to commit the

 5 capital to take the risk or they'll price it in

 6 significantly because they run the chance that

 7 they're going to have to have a harder time

 8 hedging their position because something becomes

 9 immediately public.

 10 And, so, I think that is the balance

 11 here, and I think it's very much, I think, tied to

 12 the type of instrument we're dealing with, and

 13 it's hard to be universal and say it's the same

 14 for everything.

 15 MR. GOOCH: Yes, I'd agree with that. I

 16 think part of the problem is the conversations are

 17 in so many different markets all at once,

 18 commodities to equities to raise the credit, and

 19 it's very hard to draw a black and white rule that

 20 applies to all of those markets.

 21 I think from a technology perspective,

 22 the vanilla interest rate trades, for example, I
 297

 1 think it was mentioned on the earlier panels here,

 2 we pick out within eight minutes of execution, on

 3 average, so, you could say a TRACE-type

 4 functionality would work, but this issue about the

 5 interplay with how quickly those trades are

 6 re-hedged is important. So, I think they ought to

 7 look at not so much the technology of grabbing the

 8 data or making it available, but the technology of

 9 taking the risk and removing the risk and saying

 10 it's safe to print out.

 11 MR. BERNARDO: It's Shawn Bernardo.

 12 From the brokers' perspective, however you tell us

 13 to send those straight to you, whatever the

 14 timeframe is, we're able to do that, whether it's

 15 done voice, whether it's done electronic, or

 16 whether it's done hybrid. So, we'll accommodate

 17 whatever you come out with as far as regulations.

 18 MR. GOOCH: And from ICE's perspective,

 19 I mean, it would be a millisecond or microsecond.

 20 So, this should be (inaudible) from ICE. So, as

 21 soon as technologically practicable, that's the

 22 way we read it.
 298

 1 MR. HARRINGTON: George from Bloomberg.

 2 I just want to reiterate because of the products,

 3 and we were intimately involved when we started

 4 clearing of CDS back in December of last year,

 5 because of the nature of the product, I think you

 6 really need to look at sort of the lifecycle

 7 before a trade has actually occurred, and it goes

 8 also back to the sort of the misinformation

 9 standpoint, and we don't want to be publishing

 10 about a trade just occurred when it's still stuck

 11 with the DCM someplace, who's considering whether

 12 or not to accept the trade, and then the trade may

 13 fall back into and OTC process or the trade will

 14 break and will fail. So, I think we just need to

 15 be very careful of misinformation in the market,

 16 and, therefore, while there's a tacit agreement

 17 that a trade is going to take place, there are a

 18 number of steps to get to before you actually have

 19 a legally-binding transaction.

 20 So, I think walking through some steps

 21 in the process will be helpful as far as

 22 determining when real time actually is, and, for
 299

 1 my experience, it's not necessarily when the

 2 counterparties are on the phone or when they're

 3 eon the screen.

 4 MR. GIDMAN: This is John Gidman. I

 5 just want to agree with Lee's point earlier. The

 6 tension between a noble desire for real-time

 7 dissemination of data and the potential impact of

 8 substantially harming market liquidity and

 9 operation is real.

 10 MR. OLESKY: And the equity markets were

 11 facing it today. I mean, this is the issue of

 12 will someone commit? As I said, our average trade

 13 size and interest rate swaps is $40 million.

 14 That's small. It can be a lot larger, and I know

 15 we're talking about block rules later, but this is

 16 a real issue across every single market, and it

 17 gets to the characteristics of the marketplace

 18 itself. Are there a lot of users? Are there a

 19 lot of transactions? Is this the type of

 20 transaction where there are only 10 firms out 

 21 there that are willing to take the risk of an

 22 emerging market, CDS, single name?
 300

 1 There are only 10 guys who do that who

 2 will hold that risk, and if there's a certain size

 3 trade that occurs, everyone's going to know who it

 4 is and everyone's going to know what happened.

 5 It's less likely those counterparties are going to

 6 be willing to commit to the risk of that trade.

 7 And, so, that is a real challenge, and I think it

 8 needs to be framed by the characteristics of the

 9 market. How many end-users are there? How

 10 frequently does the instrument trade? What is the

 11 delta associated with it? What is the risk size

 12 of the trade, the risk characteristics of the

 13 trade?

 14 MR. COOK: Some of the points that are

 15 being made echo a little bit back to the

 16 discussions around TRACE, real time, and what does

 17 it do for liquidity. And, Steve, I wanted to

 18 invite you to jump in a little bit on what your

 19 experience has been as you've had a chance to kind

 20 of test some of those arguments in that market,

 21 which understandably may be a different market.

 22 MR. JOACHIM: Yes, we've studied the
 301

 1 impact of TRACE in the marketplace in as many ways

 2 as we can. In fact, we invite market participants

 3 to come to us, and we have over the last nine

 4 years, to come raise issues with us so that we

 5 could investigate them empirically and discover

 6 whether there was any validity to the concern

 7 because the last thing we'll do is do damage to

 8 the marketplace overall.

 9 And factually based, of all the concerns

 10 that people raise in the last nine years, not one

 11 has played out as being valid, where we could

 12 empirically show that there was damage to

 13 liquidity or damage to the marketplace from

 14 (inaudible) a transparent marketplace. Probably

 15 the most prominent one was when the credit crisis

 16 took place. A number of market participants came

 17 to us and said we think that TRACE is exacerbating

 18 the liquidity crisis in the marketplace, that

 19 there was liquidity in the marketplace and that

 20 people are not trading corporates because they say

 21 the prices are transparent, and there's enough

 22 liquidity there, and it's getting worse.
 302

 1 So, we actually had a perfect

 2 experiment. We had 144A issues, which we do not

 3 disseminate, but we collect the transactions on,

 4 and compared the change in liquidity between 144A

 5 transactions and the publicly-disseminated portion

 6 of the marketplace, and exactly the (inaudible)

 7 was happening, that liquidity was actually holding

 8 up much better in a publicly-disseminated portion

 9 of the marketplace and dramatically different. It

 10 was the publicly-disseminated portion of the

 11 marketplace that declined about 80 percent year

 12 over year versus the 144a market had declined

 13 about 45 percent.

 14 So, now, there are a lot of differences

 15 between those markets, so it's not, again, QED,

 16 but there was just no evidence that supported

 17 those concerns, and, in fact, what I would say is,

 18 in general, as we look at the history of TRACE and

 19 looked at what people believed would happen prior

 20 to the launch of TRACE and what did happen, there

 21 were dramatic differences, and I think largely

 22 because people just didn't understand. They don't
 303

 1 know, and when you change a market from it's

 2 operating in one direction to operating in a very

 3 different environment, there's no question that

 4 transparent marketplaces are very different, and

 5 it takes market participants time to adjust to

 6 learn how to operate in those markets.

 7 But we just have not been able to find

 8 any concrete negative evidence of effect in the

 9 marketplace, and, in fact, we found positive

 10 incident. One study was done that looked at marks

 11 to market in mutual fund portfolios prior to the

 12 launch of TRACE after the launch of TRACE, and

 13 found a dramatic reduction in the dispersion of

 14 those marks in people's portfolios afterwards.

 15 So, even though people don't depend on TRACE

 16 purely as an evaluation tool, it is one data

 17 point, but by having post-trade transparency,

 18 it'll have the effect of narrowing and making

 19 those marks much more consistent in the

 20 marketplace, which, in retrospect, probably would

 21 have been incredibly valuable and probably was

 22 incredibly valuable during the credit crisis.
 304

 1 MR. TOFFEY: I think there's just one

 2 other component to also add. Obviously, there's

 3 discussion and debate about transparency versus

 4 liquidity and the tradeoff, and Steve's point are

 5 valid. There's also the point about best

 6 execution and fairness to all investors, and a

 7 more transparent market always will lead to a

 8 better best execution market for all investors.

 9 MR. OLESKY: I think also with TRACE, I

 10 mean, we support TRACE as a structure for doing

 11 things. I think the devil is in the detail with

 12 these things, and one of, I think, the good

 13 characteristics of TRACE that has helped stop it

 14 from being a problem with respect to liquidity is

 15 the fact that over certain sized transaction,

 16 you're not putting the specific number and the

 17 size of the transaction, and I would encourage

 18 looking at things like that as ways of limiting

 19 the risk to liquidity, and it's those details that

 20 are so, so critical, and it's different by each

 21 instrument, and I'm sure TRACE would be a very

 22 good model for looking at how to do this in the
 305

 1 derivative space, but applying the unique

 2 characteristics of the derivatives markets and

 3 each of the different instruments into that kind

 4 of concept, just so I can clarify.

 5 MR. JOACHIM: And just to clarify for

 6 people that don't know is that when we disseminate

 7 the transactions in TRACE, we cap certain sized

 8 transactions. So, if it's an investment grade

 9 bond and it's over $5 million, we just post it as

 10 $5 million plus. I think we look at this

 11 periodically, and is the right threshold, is it

 12 the wrong threshold, should it be higher, and

 13 whether that's the right threshold long-term or

 14 not is a question mark, but the concept is a good

 15 concept. And we do look at the largest

 16 transactions because one of the things we were

 17 concerned about was that one of the things we

 18 heard consistently from the industry was that

 19 large pieces wouldn't trade anymore, that the

 20 trades wouldn't get done. We know from talking to

 21 people that they're done differently than they

 22 were prior to the launch of TRACE. They tend to
 306

 1 be done over a longer period of time, that people

 2 get them all done, but actually the percentage of

 3 transactions that are done over $25 million as a

 4 percentage of the trades over $1 million. So,

 5 institutional-sized trades, trades that are over

 6 $25 million has actually been incredibly stable

 7 over the 9-year period. So, TRACE really has an

 8 impact, and it's almost like a ripple. If

 9 anything, slightly increased, but it's pretty

 10 stable. So, again, it was more evidence that

 11 we've just not seen any of the adverse impacts

 12 that people had forecast.

 13 MR. OLESKY: And this is Lee Olesky. At

 14 the same time, kind of accomplish probably all of

 15 the policy objectives of establishing

 16 transparency. Anyone can look on TRACE and figure

 17 out what a price of a bond is, and without sort of

 18 impairing the highly institutional side of the

 19 market, where someone might want to be trading to

 20 $500 million or $1 billion of an instrument. But

 21 it accomplishes the goal and the policy goal,

 22 which I would say we should always keep our eyes
 307

 1 on of what are we trying to accomplish here with

 2 this transparency? And I think you can do it, and

 3 I think this is a good model for it.

 4 MR. GIDMAN: This is John Gidman. Yes,

 5 I think the TRACE model is actually a very good

 6 prototype for this, and that the policy objective

 7 was clear and noble. The approach was practically

 8 measured, and the different requirements of

 9 different market participants were well-managed.

 10 MR. SHILTS: Any one else want to

 11 comment on this?

 12 MR. JOACHIM: Let me just say one more

 13 comment.

 14 MR. SHILTS: Sure.

 15 MR. JOACHIM: And then I'll be quiet.

 16 Is that the one thing that I would say is that if

 17 you asked all market participants on the buy side, 

 18 you wouldn't get a uniform answer from everybody.

 19 Those players who believed in an opaque market

 20 believe that they have an information advantage,

 21 believe that transparency is a negative. And I

 22 think that's one thing that we're pretty
 308

 1 comfortable on. And there are a lot of people who

 2 believe that, and -- 

 3 MR. OLESKY: Not just buy side.

 4 (Laughter)

 5 MR. JOACHIM: Well, the sell side, by

 6 definition says that, but, actually, it is

 7 something you just have to recognize that that

 8 doesn't mean everybody is the same

 9 pre-transparency and post-transparency. It means

 10 that it levels the playing field and it changes

 11 the dynamics in the marketplace significantly in

 12 the way people have to trade.

 13 MR. GOOCH: Jeff Gooch. I think it's

 14 very hard when you look at the stats around TRACE

 15 and its success because everyone has different

 16 views. And you have half the dealers saying one

 17 thing and half the buy side thinks another. All

 18 the academic studies and most of them seem to back

 19 up Steve's conclusions. I think one of the reason

 20 it's hard to conclude, over that nine-year period,

 21 there's a massive increase in the focus on credit

 22 markets as an asset class generally. So, the
 309

 1 growth of the CDS market among other things at the

 2 same time.

 3 So, it's really very hard to draw

 4 absolute conclusions, but I think was important

 5 about TRACE was, A, it was phased in, it does have

 6 these exemptions for larger trades to reduce the

 7 impact on the marketplace, and it clearly has been

 8 beneficial for certain segments of the market. I

 9 think even if people just say it's been a bad

 10 thing, wouldn't say it's been a bad thing across

 11 the board, and I think we've got to think about

 12 parts of the market that can be actively

 13 encouraged and through transparency and then make

 14 sure we would mitigate the issues in other areas.

 15 MR. GIDMAN: This is John Gidman again.

 16 I think the other prototype to point to would be

 17 the rapid development of the trade information

 18 warehouse, and while it was influenced by policy

 19 objectives, it was also influenced by practical

 20 considerations, and it was kind of the invisible

 21 hand of market forces which made it very quickly

 22 address a longstanding problem that hadn't yet,
 310

 1 thankfully, gotten to the headline.

 2 MR. SHILTS: Okay, we've got about 10

 3 minutes left so we can move on to the last

 4 question.

 5 MR. GAW: What do you see as some of the

 6 potential costs of a trade reporting regime beyond

 7 the effects on liquidity, which we'll continue to

 8 address in the next panel? So, I'm thinking sort

 9 of operational costs, your sense of whether

 10 technology platform sort of like at the dealer,

 11 counterparty level will need upgrading in order to

 12 support real-time dissemination?

 13 MR. BERNARDO: It's Shawn Bernardo.

 14 From the brokers' perspective, we already have

 15 these systems in place for 99 percent of these

 16 products already in some way, shape, or form. So,

 17 as far as upgrading them, we're upgrading the

 18 systems on a regular basis. So, I think, again,

 19 we can accommodate the needs that you have, and we

 20 currently do a lot of the reporting and

 21 (inaudible) processing with the firms that we're

 22 speaking of.
 311

 1 MR. JOACHIM: I think that some of the

 2 costs will depend on, again, the product we're

 3 talking about, as to how much automation people

 4 have in place at the point of sale, and I think

 5 that's typically where it's hardest to get your

 6 arms around exactly what the cost structure is

 7 because you have a lot of market participants in

 8 there, and everybody has a different environment

 9 (inaudible) tremendous amount of automation. Not

 10 everybody is going to have the same level of

 11 automation so people are going to have to build

 12 automation in place.

 13 You're going to have the cost of

 14 creating a system in place that's going to

 15 aggregate it unless you can piggyback on other

 16 environments, but that's something you have to

 17 face is how you get the data together, the rules

 18 of how they report, how the system will collect it

 19 if. If you're going to put risk in place, you're

 20 going to have to build models in place to generate

 21 those measures for people. So, they're going to

 22 be operating costs from a technology side. On an
 312

 1 ongoing basis, you've got to maintain technology,

 2 you're got to update it. Typically what happens

 3 is the market gets faster as automation gets in

 4 place and transparency gets in place, so, you're

 5 going to have to accommodate faster, more trading,

 6 different trading. They talked this morning about

 7 the creation of new rules. You don't want your

 8 transparency regime to slow down the innovation

 9 process, so, you want to be able to facilitate

 10 that, and you need to be sure you build technology

 11 that's flexible enough, and it's modified on an

 12 ongoing basis to accommodate markets as quickly as

 13 you can.

 14 Those are all real cost to do that.

 15 There will be enforcement costs. I mean, we

 16 talked before about if you create a set of rules,

 17 you've got to enforce those rules, you got to be

 18 able to go out and visit the counterparties and

 19 see what they're reporting and be sure they're

 20 there. So, that's going to be an expensive

 21 proposition in terms of getting people out in the

 22 marketplace to ensure that the trades are being
 313

 1 reported adequately and in place.

 2 So, that's just some of the costs.

 3 There's probably more if I think about it.

 4 MR. GIDMAN: Yes, this is John Gidman.

 5 I mean, in my view, it's much more about the

 6 choreography and really starting from the back and

 7 then going forward. And, so, getting the data

 8 repository right in terms of the aggregation,

 9 getting that right first can help inform what the

 10 front needs to be able to do and how it plugs in.

 11 Getting the zymology, the universal identifiers

 12 for the deal and the counterparties is critical

 13 because then you begin to have at least the

 14 framework for a common language that can evolve

 15 over time.

 16 MR. GOOCH: Jeff Gooch here. I think

 17 the cost of collecting the information will vary

 18 by asset class. Some asset classes (inaudible)

 19 had an interest rate and credit market, but

 20 inter-dealer markets, these dealer-brokers find

 21 information out very quickly. Most (inaudible)

 22 heavily automated, I think cost implication,
 314

 1 there's going to be a relative delay if you reuse

 2 existing market infrastructure. Another asset

 3 class is like equities, and commodities is more

 4 work to do. Parts of those markets are very

 5 automated parts. So, I think the collecting is

 6 going to vary. I think one cost people don't

 7 think enough about is the cost of the end-user

 8 community of actually making use of this public

 9 information.

 10 One thing this is not going to be like

 11 is TRACE. TRACE is a very easy thing to

 12 understand. I'm a dumb (inaudible). I couldn't

 13 understand a TRACE ticker or the screen. I see

 14 the bond and I see the (inaudible) see the price,

 15 I know I did a good trade. An OTC derivative is a

 16 lot more complex. Some of these trades have 100

 17 fields. These are very complex things to

 18 simulate, and by making that data

 19 publicly-available, everyone who plays in those

 20 markets has to be able to understand that ticket,

 21 what it means for them in order to do the best

 22 execution to protect their clients at the end of
 315

 1 the day. So, I do think there's going to be a

 2 substantial cost in terms of the industry

 3 absorbing this transparency and actually using it

 4 for something. Because the option of sitting as a

 5 fund manager and saying I'm not going to look at

 6 any information, but I can still show my clients

 7 I'm doing a good job is going away.

 8 So, there's going to be several thousand

 9 institutions that are going to have to spend a lot

 10 of money, and, hopefully, the vendors around this

 11 table or somewhere else, trying to actually

 12 understand this feed and make use of it, and

 13 that's probably a cost we never seem to talk

 14 about, but I think it's a very real one.

 15 MR. JOACHIM: The other thing I'd say

 16 about that, Jeff, is that the buy side is the one

 17 place where they probably also get the benefits in

 18 terms of level playing field and the transparency

 19 and the limited information. So, the cost of

 20 digesting that information for the buy side is

 21 probably very small compared to the value and

 22 benefits they get immediately. The sell side has
 316

 1 often much more mixed feelings about it.

 2 MR. GOOCH: Yes, I think (inaudible) if

 3 we focus on getting cheaper execution to buy side,

 4 then that balance works. If we create a regime,

 5 because liquidity impacts, I think, doesn't give

 6 them a cheaper execution, and the numbers are not

 7 going to stack up. Honestly, I think transparency

 8 is a good thing, but it's important part to focus

 9 on.

 10 MR. HARRINGTON: It's George Harrington

 11 from Bloomberg. I think this is an area where you

 12 can actually look at the TRACE model. One of the

 13 things that we do is we provide to the sell side

 14 order (inaudible) functionality, and most of the

 15 major dealers actually in the credit markets will

 16 use us for that, and, therefore, for Steve, we

 17 have a number of different feeds for TRACE rates

 18 that are going directly. I think this discussion

 19 will almost come back, and I know we've been on

 20 this before, to the collection point.

 21 So, in other words, if we say okay, now

 22 we're going to have all of this data that's going
 317

 1 to need to go from the sell side or the

 2 inter-dealer market down to all the SDFs, all the

 3 regulators, you're going to have all these new

 4 feeds that are going on. That's going to be a lot

 5 of work. So, in other words, yes, we can all do

 6 it. We'll have to do individual feeds for. Now

 7 you have the IRS, the CDS does equities, FX

 8 commodities. So, you're talking about laying a

 9 lot of new ground. Obviously, there'd be some

 10 work that can be redone. Versus if we end up

 11 saying that okay, now we're going to either go

 12 down the role of an aggregator, someone who's

 13 going to take it in or we're going to go down the

 14 road of saying the SDFs are the right place for

 15 these data to be aggregated and pulled in from,

 16 then it's a little bit easier.

 17 Yes, the decimals still have to do

 18 delivery to get the ultimate trades down there,

 19 but as far as dissemination goes and displaying

 20 that data out to the end- users across the

 21 different vendors who obviously compete it that

 22 space, it's going to be a little bit of an easier
 318

 1 process. Either way, it's going to take work from

 2 all of us to get there. But I think that if we

 3 either go central or a few places where we

 4 actually have to pick up data from to give back to

 5 the user community or to the public then that

 6 would make it a little bit smoother process.

 7 MR. AXILROD: This is Pete Axilrod. I

 8 just wanted to add at the risk of maybe repeating

 9 myself that it's really the total market picture.

 10 We've spent a lot of time focusing on price.

 11 That's important, but other aspects of the market

 12 are equally important, and it's important to make

 13 sure that that data is also disseminated

 14 appropriately on an equal opportunity basis to

 15 everybody. And I think for end-user portfolio

 16 managers in particular, the more of an overall

 17 picture of the market that is out there, the

 18 better off they are. So, again, let's not focus

 19 entirely on price, but other aspects of the

 20 market, as well.

 21 MR. GIDMAN: This is John Gidman. I

 22 mean, open interest collateral implications are 
 319

 1 every bit as important as price.

 2 MR. SHILTS: We just have a couple of

 3 more minutes. Any last-minute comments from

 4 anyone?

 5 MR. MASTERS: I'd just make one final

 6 point very cynically about your point, John. I

 7 mean, I think sometimes banks, they say well,

 8 we're not using this specific customer data, we're

 9 just using (inaudible) whether it be prime

 10 brokerage data or whatnot. I mean, that's more

 11 valuable. It's not less valuable. I would rather

 12 see the aggregate than the specific customer data.

 13 That's how valuable it is to me.

 14 So, in terms of this data, we absolutely

 15 have to see all of it, and it's critical that we

 16 see all of it, and then that swap dealers and

 17 other people that are doing trades report all of

 18 it, again, in a consistent English language

 19 format.

 20 MR. GIDMAN: Yes, all of it in a

 21 consistent way as of the same time.

 22 MR. SHILTS: Okay. With that, I want to
 320

 1 thank all the panelists. This was a very

 2 interesting discussion, and we ended about right

 3 on time. So, we're now going to have a 15-minute

 4 break. We'll start again at 3:45. Thanks again,

 5 everyone.

 6 (Recess)

 7 MR. SHILTS: If we could get people to

 8 please take seats so we can start. If everyone

 9 could take their seat, please, so we can get

 10 started.

 11 I think most everyone is here, so we can

 12 try and get started. This our last panel of the

 13 day. This is going to focus on effect of

 14 transparency on liquidity and the block trade

 15 exception.

 16 So, at this panel, we want to get some

 17 input on defining block trades and large

 18 transaction sizes, determining the appropriate

 19 delay for reporting block trades and large

 20 notional swap transactions and the affects of

 21 transparency on post-trade liquidity. And as we

 22 have done with the prior panels, we can start by
 321

 1 going around the table and everyone can introduce

 2 themselves and say where they're from.

 3 Again, I'm Rick Shilts, director of our

 4 Division of Market Oversight here at the CFTC and

 5 Robert Cook is to my right, director of Trading

 6 Markets at the SEC. With that, let's go around

 7 the table quick.

 8 MR. MASTERS: I'm Michael Masters with

 9 Masters Capital Management. I'm representing

 10 Better Markets.

 11 MR. WOLKOFF: I'm Neal Wolkoff. I'm the

 12 CEO of ELX Futures Exchanges.

 13 MR. SHAPIRO: Peter Shapiro, Swap

 14 Financial Group. We advise end users of

 15 derivative products.

 16 MR. SPATT: Chester Spatt. I'm a

 17 professor of finance at Carnegie Mellon. In the

 18 middle part of the decade, I served as chief

 19 economist at the SEC. I'm also currently a member

 20 of the Shadow Financial Regulatory Committee.

 21 MR. STEINER: Jeff Steiner from the CFTC

 22 Division of Market Oversight.
 322

 1 MR. LEAHY: Tom Leahy, Division of

 2 Market Oversight, CFTC.

 3 MS. SEIDEL: Heather Seidel, Division of

 4 Trading and Markets, SEC.

 5 MR. GAW: Michael Gaw, SEC, Division of

 6 Trading and Markets.

 7 MR. PAYTON: I'm Dean Payton. I'm the

 8 managing director of Market Regulation at CME

 9 Group.

 10 MR. VOLDSTAD: I'm Connie Voldstad. I'm

 11 the CEO of the International Swap and Derivative

 12 Association.

 13 MR. SONG: My name is Yunho Song and I'm

 14 a senior staff member and a senior trader on the

 15 Swaps Desk at Bank of Merrill Lynch.

 16 MR. SHILTS: Okay, and we're going to

 17 try to end this as 5:30 sharp. So, as we have

 18 done with the other panels, we will start off with

 19 some questions from the staff and then everyone

 20 should have an opportunity if they want to make

 21 any comments on that particular issue or question

 22 and, again, if it goes a little too long, I might
 323

 1 try to remind people to be a little bit brief, but

 2 we hope to get all the comments in. So with that,

 3 let's start with the first topic.

 4 MR. LEAHY: I think I'll start fairly

 5 basic. How should we define large notional swap

 6 transactions and block trades for swaps and

 7 security-based swaps?

 8 MR. VOLDSTAD: I won't be bashful.

 9 Connie Voldstad. You know there are a lot of

 10 different markets that derivatives are executed

 11 in. I think one has to take a very, very careful

 12 approach, look at each of the asset classes, look

 13 at each of the products within the asset classes,

 14 look at each of the maturities that the instrument

 15 is associated with. I think you need to look at

 16 the number of participants in the marketplace.

 17 Many, many fewer participants in derivatives than

 18 there are in most exchange-traded products. I

 19 think as well you need to look at the frequency of

 20 trading. Even in the most liquid markets, you'll

 21 find that even in the most liquid -- let's say --

 22 interest rate swap, products worldwide, you might
 324

 1 only see one trade every five minutes or so. Some

 2 sort of a 10-year interest swap in dollars. So I

 3 think you have to look at each of those products.

 4 I think each of those factors and then determine

 5 at what point we start influencing liquidity if

 6 you have to reveal price and size information.

 7 MR. SPATT: You know to follow up on

 8 that -- to follow up on the -- this is Chester

 9 Spatt of Carnegie Mellon. To follow up on the

 10 last point, it seems to me that the most important

 11 aspects for defining a large size transaction is

 12 at what point does the size of the transaction

 13 really start to move the market? So, to some

 14 extent -- and that's going to then difference --

 15 obviously, that's going to pick up differences

 16 across markets. To some extent do they even

 17 suggest perhaps differences over time?

 18 Some of the academic literature on the

 19 equity -- on equity trading, at some point, kind

 20 of got stuck and because, at some point,

 21 historically 10,000 shares was a big trade, the

 22 academic literature on equity trading, at some
 325

 1 point, kept using 10,000 shares as if it was sort

 2 of the key -- a particularly key number. But I

 3 think for the kind of purposes that you're

 4 interested in, what I think really determines size

 5 is to what extent is there -- to what extent is

 6 there market impact? And especially at what point

 7 does market impact really take off in a nonlinear

 8 fashion? So I think looking empirically at price

 9 impact is potentially very, very important.

 10 MR. SHILTS: Just as people comment on

 11 that, how do you focus on that given the large

 12 variety and number of different types of swaps?

 13 So that -- I mean, if you looking at market

 14 impact? Is it -- are you looking at it for like

 15 something kind of an on the run type of instrument

 16 say of an interest rates? Or when you look at all

 17 the different spoke-type instruments, how do you

 18 make that determination? I mean it makes sense,

 19 you know, theoretically. But how do you do it

 20 practically?

 21 MR. SPATT: Well, I think I would start

 22 with the most -- I would be inclined to start with
 326

 1 the most liquid instruments. Sort of see what we

 2 can learn about that in terms of the size and

 3 scale, and the perhaps you try to look at other

 4 instruments that might be representative. And it

 5 may be that issues like the numbers of trades and

 6 the volume of trades and the like may provide kind

 7 of indicators, but, you know, I simply wouldn't

 8 look at the most liquid instrument. I would be

 9 inclined to look across instruments. And it seems

 10 to me that one can potentially approach this issue

 11 of price impact precisely because you have all of

 12 the transaction data, so it makes it potentially

 13 possible to use econometric methods to try to

 14 piece this issue out.

 15 MR. SHAPIRO: I think, Professor Spatt

 16 -- or should I say Chester or whatever -- his best

 17 is spot on. I think it's exactly what you're

 18 going to have to look at, which is the market

 19 moving implications within the specific product

 20 that you've got. We've tried to play with -- I 

 21 should have said Peter Shapiro is my name. We've

 22 tried to play with ways of doing that for specific
 327

 1 kinds of instruments. Our business works advising

 2 end users in the -- principally in the interest

 3 rate swap area.

 4 Because we handle a lot of tax exempt

 5 borrowers -- that is both governmental and

 6 nonprofit -- we're often in a -- in interest rate

 7 derivatives that involve the SIFMA index. The

 8 SIFMA index, you know, one of the principal

 9 benchmark in the tax exempt market and there's

 10 limited liquidity in that market pretty much

 11 across the entire yield curve. A lot of the

 12 transactions -- because they're looking at long

 13 live borrowings -- will be out as long as 30

 14 years. But even if it's 10, 15, 20 years, we will

 15 see liquidity effects that are there.

 16 The size of the borrowings -- because

 17 remember -- and it's important to focus on this.

 18 When we're thinking about the end user's interest,

 19 which is where we come from -- when we think about

 20 the end user's interest, we're thinking about the

 21 fact that what is the end user doing? That end

 22 user, in this case, is borrowing a lot of money to
 328

 1 finance a public improvement -- something which is

 2 part of the public good. And those borrowings can

 3 be easily $100 million, $200 million -- or in the

 4 case of one of the examples I was thinking of --

 5 we worked on one transaction recently that was 1.8

 6 billion in SIFMA. Huge market moving potential on

 7 that. How long would it take that to settle

 8 through the market in an orderly way? The metric

 9 that we would tend to look at is how much volume

 10 is there in the market in that instrument of that

 11 maturity in any given day?

 12 And if we wanted to take a billion

 13 dollars and say that there was -- if we could put

 14 a hard number in and say that there was 200

 15 million of volume in that market in a day, then

 16 we'd say it would take 5 days for that dealer to

 17 be able to settle his hedges. If he had to be

 18 exposed to real-time reporting in a public manner,

 19 during that five day period or at the onset of the

 20 transaction entered into between my client and

 21 that dealer, the dealer would either say no or he

 22 would say you, Mr. Counterparty, you, Mr. End
 329

 1 User, you public agency are going to have to pay

 2 more to cover my risk. And that's not the result

 3 that we want here.

 4 The result that we would hope for in the

 5 public good here would be beneficial transparency

 6 not harmful transparency. Not transparency that

 7 would result in frontrunners being able to get out

 8 and position themselves in a way to try to make

 9 money off the fact that a public agency was trying

 10 to hedge something, but rather giving what -- in

 11 the case of the actual transaction I'm talking

 12 about -- a quiet period for the dealer to be able

 13 settle his hedges in order for the end user -- the

 14 issuer of the debt in this case -- to be able to

 15 get his transaction done at a better price.

 16 So I think about it in terms of

 17 everything numerator and denominator -- if there's

 18 a volume that we can measure versus size. If the

 19 size of the deal is five times today's volume,

 20 make it a five-day delay.

 21 MR. MASTERS: This is Mike Masters. I

 22 just wanted to make one point, which I made in the
 330

 1 earlier panel, which I think is probably more

 2 applicable to this panel than it was prior but --

 3 the whole notion of post -- pre- and post-trade.

 4 Pre-trade, you know, there's a negotiation period.

 5 There's a -- so forth. There's the amount of

 6 hedging that has to take place. And then there's

 7 post-trade, which is a dealer prints the trade. I

 8 really don't see any reason why post-trade

 9 reporting can't happen -- you know -- basically a

 10 standardized, which I described in the earlier

 11 panel, a format of reporting that's, you know, in

 12 some delta equivalent that easy to get accessible

 13 to regulators and to the broader public.

 14 But there's -- but in terms of

 15 post-trading, the transparency requirements are

 16 much more lenient. There's a much wider gap for

 17 transparency. There's a much greater public need

 18 for transparency in post-trade reporting.

 19 The pre-trade reporting is a different

 20 issue completely. You know, pre-trade reporting

 21 is almost an oxymoron. I mean I'm not -- you

 22 know, the trade hasn't happened. And so you're
 331

 1 negotiating -- yeah, I mean, I don't want people

 2 to see that, but once the trade is done -- and I

 3 understand the need for hedging and so forth --

 4 there's some sensitivity there. But there needs

 5 to be public access to that data in some regular

 6 form, which we can all see -- again as I said in

 7 the earlier panel -- in an English format -- a 

 8 risk based or a delta equivalent nationality to

 9 the trade.

 10 So I just wanted to make that point.

 11 MR. VOLDSTAD: And you're happy if the

 12 public body has to pay an extra 10, 20, 30 basis

 13 points because they'll get a worse price?

 14 MR. MASTERS: I think that -- and

 15 someone made this point in the past panel. I

 16 believe it was the gentlemen from TRACE. There is

 17 a cost to transparency. Opacity -- we know the

 18 cost with opacity. We just went through that. So

 19 there is going to be some cost. There's a

 20 balance. There's no doubt. And is it going to be

 21 slightly more costly? I might be at the margin.

 22 But at the end of the day, I would argue that
 332

 1 having more transparency gives a benefit in terms

 2 of bid and offers and so forth tighter over a

 3 longer period of time.

 4 MR. SPATT: So just to follow up on that

 5 as well, in the three years that I was at the SEC,

 6 was basically coincided with the three years after

 7 much of the implementation of TRACE. And while

 8 folks from industry repeatedly came in and pressed

 9 the point that spreads were wider, they never

 10 presented to us in any format a convincing

 11 empirical study and nor am I aware of any

 12 empirical study in the academic community that

 13 shows those effects. So I do think it's incumbent

 14 upon critics of post-trade disclosure to point to

 15 and identify convincing empirical evidence of

 16 these effects. And I think that's extremely

 17 important to the regulators as they go forward,

 18 but I must say, I'm not aware of that evidence

 19 right now.

 20 MR. VOLDSTAD: No -- I'm sorry.

 21 MR. SONG: If I may comment on that -- I 

 22 think one of the distinctions we have is a market
 333

 1 that may be more smaller in retail based versus a

 2 market that is with far small number of

 3 participant and that's institutional based. So,

 4 you may not be able to, for example, find who was

 5 doing a specific trade looking at trace report so

 6 it has a marginal impact on the marketplace. But

 7 as Mr. Shapiro was point out, if you saw a print

 8 go through for $1.8 billion against an illiquid

 9 index, you can narrow down to a handful of people

 10 who could possibly have done that.

 11 MR. SPATT: This is Chester Spatt again.

 12 So I fully -- I would fully accept that, but, you

 13 know -- I fully accept that example and I also

 14 fully accept that derivatives are sort of very

 15 different than the bond markets and, indeed, to

 16 reinforce your point, where the empirical evidence

 17 of anything was even stronger was in the municipal

 18 bond market as compared to the corporate bond

 19 market. The municipal bond market customers were

 20 really getting hosed in the prior environment.

 21 The municipal bond market is perhaps the only

 22 market that I'm familiar with in which the spreads
 334

 1 were substantially wider for tiny transactions

 2 than they were for large transactions.

 3 But I also think -- but I think also the

 4 phrasing of the arguments that are now being

 5 presented in the derivatives context, it's

 6 important to keep in mind that those were exactly

 7 the arguments that were brought to bear in the

 8 bond market context. Of course, then one wasn't

 9 saying that the bond markets are different than

 10 bond markets -- obviously a point you couldn't

 11 argue that. But it does seem to me that the

 12 absence of evidence in the bond markets does kind

 13 of suggest some initial -- some at least some

 14 initial buyers and it's important to try to at

 15 least create the natural -- it's I think going to

 16 be at least important for regulators -- and this

 17 is maybe something they might want to consider --

 18 to perhaps setup some natural experiments.

 19 You know, I think the natural experiment

 20 that the Commission did in the context of the

 21 short sale regulation really was terrific because

 22 it allowed careful identification of the empirical
 335

 1 effects and maybe it's possible to do something

 2 like that in -- do that in some of these markets

 3 and not other of these markets and then do before

 4 and after and difference types of comparisons.

 5 MR. VOLDSTAD: Chester, there is a

 6 difference. TRACE is a $5 million limit. After

 7 that, there isn't really disclosure other than is

 8 5 million. If you were going to trade a

 9 billion-eight of a corporate, and you had to 

 10 publish that through TRACE, you're going to move

 11 the market. It's -- I -- if you look at what the

 12 Europeans are suggesting with respect to credit

 13 default swaps, which I think are very close to

 14 corporate bonds. They're saying there should be

 15 real-time disclosure of prices for 5 million and

 16 below. That is the retail side.

 17 In fact, very little transactions will

 18 go through at 5 million euros or below or below 5

 19 million euros. But then they have different

 20 categories of disclosure for 5 to 10 million euros

 21 and for over 10 million euros. I don't think

 22 we're arguing about small transactions, which is
 336

 1 what TRACE is all about. We're arguing about a

 2 billion-eight kind of muni swaps.

 3 MR. SPATT: I think my point was mainly

 4 to just argue for the importance of empirical

 5 evidence. The empirical evidence was extremely

 6 important, I think, in the assessment of bond

 7 studies. And I would call upon the regulators to

 8 look to and encourage the development of empirical

 9 evidence and potentially even to do natural

 10 experiments to help sort these issues out and to

 11 maybe do so -- you know, and one of the things

 12 that I thought was very impressive about how the

 13 NASD went about the implementation of TRACE as the

 14 prior panelists described was they rolled it out

 15 in a gradual way. Because at each stage they were

 16 looking -- on the one hand, at each stage they

 17 were looking for problems that might arise, so

 18 they did a gradual rollout.

 19 But then it also facilitated empirical

 20 comparison across stages and it seems to me, you

 21 know, to the extent that there's agreement that $5

 22 million trades aren't big and -- you know, so are
 337

 1 $10 million trades too big? You know, those

 2 issues -- let's put those issues to the side. But

 3 you could imagine you could kind of gradually --

 4 one could gradually adapt the rules and change the

 5 lines and try to understand the issues.

 6 MR. SHAPIRO: I think there's a way to

 7 accommodate both needs here that's really very

 8 sensible. And I'm not -- I'm just concerned about

 9 looking for empirical evidence may be very

 10 difficult to do given the multifaceted nature of

 11 this market, how many different pieces there are

 12 that we could spend a decade doing that and you

 13 obviously don't have a decade to put out these

 14 rules. Thinking about this, I don't think anybody

 15 would be arguing that there should be no

 16 disclosure.

 17 I think the only question is when

 18 something is a big enough block, how much of a

 19 delay is reasonable in disclosure on it. And it's

 20 important, I think, to think back through what the

 21 structure of the transaction is that you have. In

 22 the case I'm describing, the end user dealing on
 338

 1 an over-the-counter basis on a bespoke product

 2 with the dealer. And then the dealer is laying

 3 off the hedge on a -- in chunks over time in order

 4 to make it so that the market is working in an

 5 orderly way in the dealer's interest -- which, in

 6 effect, if it's in the dealer's interest, should

 7 be passed along to the client if things are

 8 working correctly. If we think about the

 9 reporting that would go on in the sequence that

 10 I'm describing, because I wanted to deal with what

 11 Mike was saying there. This would be -- there

 12 would be a trade that would occur between the end

 13 user and the dealer. Then we have a post- trade

 14 environment to use the wording you were using

 15 there at that point. At that point, you wouldn't

 16 have the disclosure in real time because it would

 17 be a market moving transaction -- assuming the

 18 size parameters that we've described.

 19 Immediately after that, the dealer would

 20 begin his hedging process. And the dealer would

 21 be hedging in that case in interdealer markets, in

 22 exchange traded markets -- all of which would be
 339

 1 being reported contemporaneously. So in other

 2 words, his subsequent hedging trades would all be

 3 being reported. All of the laying off of the

 4 hedges that he did would be being reported so that

 5 there would be the real-time price discovery

 6 that's the public good that we're trying to get

 7 at.

 8 The only public good or the only

 9 transparency that would be missing here would be

 10 the instantaneous real- time reporting on the

 11 market moving original trade between the end user

 12 and the dealer. I'm not saying that would never

 13 be reported. I'm saying that would be reported

 14 after a reasonable delay. The question is how

 15 much of a delay would be there.

 16 MR. SONG: Well, if I may add or just

 17 build on what you said, Peter, because I think

 18 you're spot on. I think there's -- if I could put

 19 this concept before everyone to think about is

 20 maybe one of the ways we should report this,

 21 because no one is disputing whether we should

 22 report these trades, instead of reporting the
 340

 1 exact size of the transaction, maybe what we

 2 should agree is that we agree to like what TRACE

 3 does is with a greater than concept. So, let's

 4 say the median-sized trade -- I'm just using these

 5 as an illustration -- is $10 million. And if you

 6 go to -- I don't know, this is something we could

 7 look after this committee -- but 75th to 90th

 8 percentile trade is say $30 million. So then the

 9 reporting requisite is you have so many minutes to

 10 report a trade that you have done a trade greater

 11 than $30 million. So like in the illustration

 12 that you used for public finance, you know, the

 13 dealer would report -- let's say the block trade

 14 definition would have been 50 million. He just

 15 reports we did a trade greater than $50 million.

 16 And that's it. And so the information is

 17 disseminated. There is a block trade going down,

 18 but the exact specific structure and size is not

 19 given so that it also protects the interest of the

 20 largest end users.

 21 MR. SHAPIRO: In the muni bond market,

 22 to take Chester's illustration before -- EMMA --
 341

 1 the electronic disclosure system that's run by the

 2 MSRB, which is an excellent system, has a very

 3 similar device where if it's over a certain size

 4 it just reports.

 5 MR. SONG: It's over a certain size,

 6 right?

 7 MR. SHAPIRO: It's over a certain size.

 8 Later, I think they do update that. What I would

 9 think would be good here would be to have an

 10 initial report that could then subsequently be

 11 updated as to size when there was a reasonable

 12 period of time to allow clearing.

 13 MR. SPATT: I'm certainly very

 14 comfortable with that. And that's also consistent

 15 with the TRACE design as well.

 16 MR. MASTERS: I'd just say there is one

 17 issue, I mean, in the sense of it I'm not --

 18 there's a balance here. I mean, obviously, I

 19 understand there is a cost element to, you know,

 20 putting a giant trade on the tape and then having

 21 everybody under the sun front run the trade. I

 22 get that. On the other hand, I would say in most
 342

 1 circumstances -- and when we had the block trading

 2 process of equities to go back and look at. When

 3 I mean blocks, I mean, you know, half-million,

 4 million, you know, decent size blocks. There is

 5 some time allowed to get -- to do a hedge, but

 6 there's not forever. I mean, it's not as long as

 7 -- it's certainly not a week or anything like

 8 that. I mean, you're talking about hours.

 9 And I would argue to your point, Peter,

 10 if you're saying okay, well, you know, you're

 11 going to see some of it -- you know, some of it

 12 goes and you'll see it in the overall market or

 13 what not. You know, to a certain extent, I'm --

 14 you know -- I'm arguing the same thing in a

 15 different manner in the sense of as soon as that

 16 trade is negotiated, the hedger knows what his

 17 hedge is, you know. Or the swap dealer knows what

 18 the hedge is. I mean, there's a level risk of

 19 risk that he has to hedge and the idea is to

 20 equivocate that into its normal listed

 21 counterpart.

 22 That's the whole notion is to bring this
 343

 1 down to an equivocated to its nearest listed

 2 counterpart so that we can look at it as market

 3 participants and not be -- or look at it is

 4 regulators -- look at it on a level playing field,

 5 look at the information and know that the

 6 information -- the trade is -- has a certain

 7 delta. It has a certain delta equivalent to some

 8 listed counterpart. And now we can compare apples

 9 to apples. Now we can do that.

 10 But with regard to the actual trading,

 11 I'm not so sure if you do that when you're

 12 reporting a trade that you're not getting the same

 13 thing because if the trade is actually going

 14 through other markets in terms of the hedge and

 15 the dealer is laying off hedges and so forth -- I 

 16 get that, but it's not forever. I mean, there

 17 needs to be -- it needs to be pretty quick, I

 18 mean, because the public suffers the longer the

 19 delay is. I mean, there is other market

 20 participants and whatnot. So there's a balance

 21 here, but I would argue that it needs to be

 22 quicker rather than later.
 344

 1 MR. VOLDSTAD: I think we probably

 2 started with a bad example. I think more to the

 3 point would be in the interest rate word --

 4 interest rate swap world. You'd probably start by

 5 making a comparison to the futures world where you

 6 get -- you have the block trading. You do have a

 7 block trading exemption, but you have five minutes

 8 to report. I don't -- I would think you'd need

 9 probably a bit more in the interest rate swap

 10 world because it's a little different. It's not a

 11 continuous market. It certainly doesn't trade

 12 nearly as frequently, but you'd start with, you

 13 know, a very, very finite period of time --

 14 nothing like hours or days.

 15 MR. SONG: You know, again, for this

 16 committee, I had -- I want to just put a concept

 17 on the table. And I'm speaking specifically for

 18 like the interest rate swap market -- is I've been

 19 giving this a lot of thought. And I was thinking

 20 what we need is like a matrix reporting schedule

 21 because the trades get more difficult if the

 22 maturity is longer. So, for example, I mean,
 345

 1 obviously, a 50-year swap is far less liquid than

 2 a 2-year swap. So I would say -- without delving

 3 into the minutia or the details here -- that we

 4 should think about that. We have a scale, like a

 5 matrix. So you say if you do a one-year trade,

 6 you have five minutes. And if you do a 30-year

 7 trade, as an illustration, you have 3 hours

 8 because the liquidity and the time it takes for

 9 people to work itself out. It's not the same.

 10 It's -- you know, it's not only size, but it's

 11 also maturity dependent. And as -- again, as

 12 Peter mentioned, it's also index dependent.

 13 And I'm not sure if this is the right

 14 format, but we also need to contemplate maybe

 15 carving some products outside of this requirement.

 16 And the only reason I mention that is because it

 17 could be so difficult. There could be so many

 18 nuances. Like when you look at, like, interest

 19 rate options, caps and floors, European swaps can

 20 fit into manageable grids. But you're getting to

 21 these customized options with, you know, knock-ins

 22 and knock-outs and double no touches and Bermudans
 346

 1 and I don't know how you would implement something

 2 like that because there would be too many tangents

 3 coming out. And as long as, you know, what we're

 4 trying to do is we're trying to capture the body

 5 of the market, the essence here, right. And the

 6 big plain vanilla markets do that.

 7 MR. MASTERS: You know, I'd just make

 8 the point, I mean, obviously, you know, with any

 9 of those trades, you know pretty quick what your

 10 hedge is going to be. You know, obviously for an

 11 option or a (inaudible) or any kind of product

 12 within any optionality, you're going to know your

 13 delta, your gamma, your theta, your vega -- all

 14 those kind of things pretty quickly or you're

 15 going to be able to estimate those. So, I mean,

 16 that's not something that's really rocket science.

 17 I mean, I made this point in an earlier --

 18 MR. SPATT: No, but it could take you

 19 two weeks to work out up a position, though.

 20 MR. MASTERS: That's -- you know, that's

 21 a different issue. The issue is the

 22 standardization of the language.
 347

 1 MR. SPATT: I think some of us at the

 2 table might be somewhat uncomfortable with a two

 3 week carve out. But, you know, I -- you know,

 4 while I'm not unsympathetic to you're -- to the

 5 grid notion, I guess I would caution that then the

 6 examples that you cite, to the extent that they

 7 don't fit very well within the grid concept,

 8 doesn't mean that there should be a carve out for

 9 them. They should still be held to some set of

 10 standards. And I think that's sort of very, very

 11 important. While probably my preferred way of

 12 organizing this wouldn't be in terms of a grid

 13 concept, it would be more in terms of the -- in

 14 terms of what kind of sizes move markets as I

 15 explained before.

 16 You know, if one did a grid concept, you

 17 certainly shouldn't exempt things from the

 18 restriction -- from the parameters just because

 19 they don't fit the grid very well. If anything,

 20 that kind of suggests the other way -- that the

 21 safe harbor ought to be just the reverse. Then if

 22 they don't fit the grid very well, you know, then
 348

 1 they get the worst treatment. That seems to me

 2 sensible.

 3 MR. SONG: No, all I'm basically saying

 4 is that we need to -- I think all would like to

 5 implement rules that are readily enforceable and

 6 also that people can follow. That the problem

 7 with the challenge web with derivatives is that

 8 there's so many myriad of products and tangents

 9 that I just want to be careful where two percent

 10 of the product slow down 98 percent of the

 11 process. That's all.

 12 MR. SPATT: Well, I think the exotic

 13 products though are very important. And they are

 14 very important because, you know, if we look --

 15 and I don't think we want to form, you know,

 16 everything we do with respect to policy by what

 17 happened in '07 and '08, but one of the things

 18 that happened in '07 and '08 is that there were

 19 some failures in derivatives. But those failures

 20 really weren't in the standardized -- the failures

 21 weren't in the standardized products. They were

 22 in the exotics. They were in kind of -- they were
 349

 1 in the kind of products that AIG was working with.

 2 They weren't on the kind of products that were on

 3 the organized exchanges or the types of contracts

 4 that were sort of standardized -- kinds of

 5 contracts that were trading bilaterally.

 6 MR. WOLKOFF: Right, but -- I'm sorry. 

 7 MR. VOLDSTAD: I talk too much.

 8 MR. WOLKOFF: Not at all. You've said

 9 good things. You know, I think it's important to

 10 note, one, a lot of the statute provisions on this

 11 stuff does not require that exotic instruments be

 12 traded. So, you know, one of the problems you

 13 could say was that they weren't cleared either.

 14 So there was no after the fact position reporting.

 15 There was no margining. There was no open

 16 interest reporting. There was no identification

 17 of a trade with a particular entity, whether it

 18 was an intermediary or a principal.

 19 And I think that one of the issues that

 20 we're -- we really need to keep in mind --

 21 certainly you guys and the ladies and gentlemen

 22 here -- need to keep in mind is that you're
 350

 1 beginning a process where right now you're at

 2 zero. All right. It's not like you're at 80 and

 3 you're looking to fill in the last 20. You've got

 4 futures contracts, which serve as benchmarks.

 5 They're references.

 6 About -- close to 20 years ago, the OTC

 7 market developed because, in large measure, the

 8 futures exchanges were unwilling to accommodate

 9 the types of products and practices that they

 10 wanted and so, as a result, they left the

 11 exchanges. And right now, what you're looking to

 12 do is to bring products within a regulatory

 13 structure. Some of them, if they're liquid and

 14 meet other criteria, will be traded. They'll be

 15 actively traded. You're asking what the block

 16 threshold should be. And it's to those products

 17 whether they're traded as swaps, whether somehow

 18 they are able to make their way onto DCMs,

 19 contract markets as futures contracts.

 20 The policies need to incent those

 21 products to come into the regulated marketplace

 22 and not to adopt new criteria that keep them
 351

 1 outside the regulated marketplace and make them

 2 less vanilla then they are. I don't get the

 3 feeling that the dealers -- and certainly the buy

 4 side -- really are looking to play games with us.

 5 I think people are looking to be wary of the

 6 unintended consequences and being forced into

 7 money-losing propositions in the name of -- in the

 8 name of transparency.

 9 So when trades are done, how do you

 10 incent the marketplace? I don't think you take

 11 the same kind of restrictive block trading

 12 policies that the exchanges have taken. I think

 13 you are less restrictive, even for liquid

 14 products. I think your quantities should be

 15 lower. I think your reporting of the trade should

 16 be longer and then they should be reported. And I

 17 think you'd deal with less liquid, or what we're

 18 calling exotic instruments, on a completely

 19 separately level and let the market develop. And

 20 as the market develops, hopefully certain

 21 instruments will become standardized enough that

 22 exchanges themselves will have a role as long as
 352

 1 they're not regulated out of this market -- which

 2 is certainly one of the concerns that I have is

 3 that we will be the exhausted SEF and not really

 4 allowed to compete in this marketplace. But I

 5 think as the market develops, you'll come up with

 6 greater and greater standards.

 7 But right now, just remember, you're at

 8 zero. You're not in a developed market. You're

 9 dealing with a hypothetical where no one knows

 10 exactly how this is going to go and the only piece

 11 of empirical evidence that I have is that

 12 originally when the market wanted to innovate and

 13 the exchanges said no, the markets left the

 14 exchanges. Right?

 15 So markets have a tendency to go where

 16 they want to go, where business can get done in

 17 the best possible way and, yes, there's probably

 18 some aspects of that didn't develop so well over

 19 time. But if we're looking to address the major

 20 pieces of this market and there are a number of

 21 interest swap transactions that are relative

 22 straightforward, I think the marketplace would be
 353

 1 happy to trade some of them. There would be new

 2 entrants. But I think lenient policies as far as

 3 block trading, post-trade reporting are critical

 4 in getting the market to develop in the way you

 5 want it to develop as opposed to finding ways to

 6 stay away from the regulatory environment.

 7 MR. SONG: Oh, and Chester, I just want

 8 to clarify. When I mean a carve out, I don't mean

 9 exempting these products forever. It's the point

 10 that you raised, which I think was a very good

 11 one. It's like what they did with TRACE. They

 12 did it in steps. So as an initial step, I would

 13 encourage everyone to think about maybe getting

 14 the plain vanilla products on first and then up

 15 the scale of the more difficult and nuanced

 16 products. It's not to ignore them believe me.

 17 MR. SHAPIRO: I would just say I think

 18 that disclosure -- and that detailed disclosure is

 19 important. I think that all of them could be

 20 disclosed. The only question really is how much

 21 of a reasonable delay that you want to have. And

 22 that -- I don't think there's anybody that -- I 
 354

 1 don't know if you're arguing in that there should

 2 be a forever delay in disclosing (inaudible).

 3 Yeah.

 4 MR. SONG: No, no. It's not a forever

 5 delay. It's just thinking about the practical

 6 implementation. As we said, is -- we just -- if

 7 we do this and which we agree with -- just step by

 8 step go out.

 9 MR. SHAPIRO: To take --

 10 MR. SONG: Because the disclosure issue

 11 is how much do you disclose? So, it could -- you

 12 know, it's like even with structured products. If

 13 you say, okay, you got to disclose this by the end

 14 of the month or end of the quarter exactly what

 15 you've done. I don't see any problems with that

 16 at all.

 17 MR. SHAPIRO: Yeah, I -- and I don't

 18 think we have to wait that long. I honestly

 19 don't. Someone in the prior panel said, and I

 20 think they were describing it in terms of fields.

 21 They were saying of all the fields that should be

 22 disclosed, all the details of the trade. I think 
 355

 1 that's the right model to look for. You want to

 2 have as much disclosure so people can figure out

 3 what is going out as much as possible.

 4 The worst thing, frankly, is when there

 5 is disclosure and people try to de-engineer and

 6 can't figure it out and come to wrong conclusions.

 7 You want as much accurate conclusion making that

 8 you can have. But to take -- to build upon

 9 Chester's point before, which is the standard --

 10 if the standard is what's going to move the

 11 market, what's going to move it in a negative way,

 12 I think there's a way to design an approach here

 13 which would work organically as the markets

 14 mature.

 15 Dodd-Frank is going to create

 16 maturation. It's going to create more

 17 transparency, more exchange trading, brining this

 18 market more out into the open in the ways which

 19 are all good and laudable and what the public

 20 purpose is supposed to be. If we look at the way

 21 -- if we were looking at -- to take my

 22 illustration before -- if even to reduce it in
 356

 1 size, a $200 million SIFMA swap. If we could see,

 2 by looking at an exchange, that 100 million trades

 3 in a day, we could say, all right, we'd measure

 4 that would be a reasonable delay to delay

 5 disclosure of that $200 million OTC trade by 2

 6 days. If 2 years from now, we see that they're

 7 $200 million trading in day because the markets

 8 are maturing, that delay will naturally move.

 9 If five years from now, obviously, it's

 10 trading a billion a day, there's no reason for

 11 there to be any kind of significant delay. The

 12 market itself can help provide the guidance as it

 13 does develop under the -- under the new regime

 14 which is going to be put in place thanks to the

 15 work that you folks are all doing.

 16 MR. VOLDSTAD: I would point again to

 17 the futures market. There actually is a grid

 18 there interest rate-wise. It might have been

 19 determined based upon market movements, but there

 20 is a grid for euro dollar contracts, two-year

 21 notes, five-year notes, and so on. And those

 22 limits are reviewed and I don't know the whole
 357

 1 history of it, but I'm sure the exemptions now are

 2 much, much higher than they were five or ten years

 3 ago. And that's how -- which I'm agreeing

 4 entirely.

 5 MR. PAYTON: Just a function of

 6 liquidity, right?

 7 MR. VOLDSTAD: Yeah, exactly.

 8 MR. PAYTON: I mean, you're measuring

 9 the depth of market and saying okay what's going

 10 to move the market? You know, where do we want to

 11 make that balance, right, between price

 12 transparency and competitive execution versus

 13 being able to do something away from the

 14 marketplace. And, you know, I think to Peter's

 15 earlier point -- I mean, there are two different

 16 issues here because it really is a question in

 17 some respects of the type of product that you're

 18 trading. You know, when you're dealing with a

 19 situation where you've got some bespoked product

 20 that is not in and of itself really a price

 21 discovery contract, right? What relevance, right,

 22 does every exotic, you know, over-the-counter
 358

 1 transaction have to the marketplace? I think what

 2 Dodd-Frank was trying to do, right, was to really

 3 address more fundamental concerns right, about

 4 actually having disclosure of those transactions,

 5 right. The regulators need to understand what

 6 those transactions are and that's a different

 7 issue than price discovery necessarily.

 8 Right, so I think that when you actually

 9 think about the way that, you know, these

 10 transactions work in the futures environment,

 11 right, I mean it's very clear. I mean, when we

 12 list a new palm oil product that has very little

 13 liquidity, I mean, our block size is 10 contracts,

 14 right. In euro dollars, right, it's 4 billion.

 15 So, I mean, there's -- you know, a very

 16 significant difference there. But you also have

 17 to be careful because to try and think about the

 18 complexity of defining block levels for the array

 19 of products that are covered under this

 20 legislation is mind-boggling.

 21 So I think to the point that was made

 22 earlier, you know, you need to start with, you
 359

 1 know, where there's liquidity and where there's

 2 price discovery and build, right, from that.

 3 And, you know, just the other point I'd

 4 mention to Peter's point earlier, that, you know,

 5 you can't necessarily look at those products in a

 6 vacuum either, right. Because there are products,

 7 you know, particularly in the world that we live

 8 in today, where you've got look- alike swaps,

 9 right, that are, you know, trading adjacent to

 10 regulated futures markets, right. And, you know,

 11 you have to make sure that there's a level playing

 12 field so that you're not siphoning liquidity from,

 13 you know, the more liquid price discovery market

 14 in that context.

 15 MR. GAW: So if could ask a follow-up

 16 question, how do we as regulators distinguish

 17 between the true exotics and other instruments

 18 that are slightly unstandardized that are pretty

 19 close substitutes to standardized instruments?

 20 And this gets back to a point that Neal was making

 21 before. If I understood you correctly, you were

 22 advocating a different block trade regime for the
 360

 1 exotic instruments. And -- but -- if the CFTC and

 2 SEC took that approach, are we in danger of giving

 3 people an incentive to stay with the more exotic

 4 instruments and not go to more standardized

 5 instruments?

 6 MR. WOLKOFF: Well, Michael -- this is

 7 Neal Wolkoff -- I actually think it's the

 8 opposite. I think people will go where the market

 9 demand is and I mean, dealers need customers.

 10 They're not trading with each other. So what they

 11 want is only relevant as long as their customers

 12 want the same thing. I think that the move to

 13 exotics would only happen if the regulatory regime

 14 became so painful for standardized or more

 15 standardized instruments that the incentive is

 16 killed to really participate actively. And I see

 17 no movement afoot to make that -- to make that

 18 happen on the part of the trading -- on the part

 19 of the trading community. So, you know, I mean

 20 it's an interesting question -- how do you do the

 21 research?

 22 I think one way would be to go find some
 361

 1 dealers and some customers and look at what their

 2 books look like and talk to their traders and I'm

 3 sure they'll be open about what, you know, they

 4 trade and trade quickly. I think that if

 5 everything took hours and was hundreds of pages of

 6 -- is the documentation -- to document you would

 7 have very few transactions. I tend to think that

 8 there are some transactions that you'll see over

 9 and over and over again on a set of, you know,

 10 books and records and some transactions that

 11 you'll see with an infinite amount of fields to

 12 accommodate all of the variations of the type of

 13 customized negotiation in terms and conditions

 14 that the customer probably demanded and the dealer

 15 had to figure out how to price accordingly.

 16 MR. PAYTON: And the cart, I think, is

 17 just a little bit before the horse because you've

 18 got this, you know, entire new regulatory

 19 paradigm, right, that's being promoted. The SEFs

 20 are developed yet. You haven't seen how these

 21 trading structures are going to work. You haven't

 22 seen if central order books are going to develop,
 362

 1 how liquid they're going to be, how these markets

 2 are going to trade and to try to and, you know,

 3 define all of this upfront before you see how the

 4 markets evolve, you know, to me is a little bit of

 5 shooting in the dark.

 6 MR. VOLDSTAD: You should take a look at

 7 the TriOptima report on the interest rate swaps.

 8 I think they're now reporting about $450 trillion

 9 worth of interest rate derivatives and that's just

 10 from the G-14. And you'll see -- I don't have the

 11 report here with me now I'm afraid -- but I think

 12 the aggregate amount of what they call exotic

 13 swaps and exotic options are probably 10 trillion

 14 out of 450 trillion.

 15 Furthermore, I think within each of the

 16 categories, you should try and start off with the

 17 most standardized transactions -- plain vanilla

 18 swaps -- that, you know, have a spot start, that

 19 are not done with upfront payments and so on. And

 20 then you gradually get more and more reporting as

 21 everybody gets comfortable with the regimen of

 22 what it all means and you start product by product
 363

 1 then saying okay, this is, A, standardized and, B,

 2 here's what the -- what the block trade exemption

 3 would be. But the vast, vast majority of stuff

 4 could get, A, reported and, B, subject to block

 5 limits I think, you know, within a year or 18

 6 months.

 7 MR. SHILTS: Is it more likely that the

 8 larger trades that would qualify under some block

 9 exemption would be the more standardized?

 10 MR. VOLDSTAD: Absolutely. Absolutely

 11 -- I'm sorry.

 12 MR. SONG: Oh, no, yeah, I mean the

 13 standardized products as we've discussed is like

 14 98 percent of the volume. And I think, as we

 15 discussed earlier, I think the step by step

 16 approach is really a sensible one. And then you

 17 see what the effects are, see how everybody

 18 follows through, and just keep layering in. And

 19 any of these rules adapt, they're going to

 20 dynamic. They're not going to be fixed in time.

 21 And so, as we discussed, as the markets mature and

 22 the products mature, the limits will change.
 364

 1 MR. PAYTON: And keep in mind that, you

 2 know, more and more of this is going to be

 3 cleared, right. The regulators are going to have

 4 access to this information irrespective of whether

 5 it's immediately price reported to the

 6 marketplace. And to a lot of the issues that we

 7 talked about occurring in 2008, right, those were

 8 issue that, you know, would have seen the light of

 9 day had, you know, more of this information been

 10 cleared, right, dealing with some of systemic risk

 11 issues and disclosed to regulators.

 12 MR. MASTERS: Again, I just want to make

 13 a point about the all notion or the information --

 14 what is reported. So in terms of an interest rate

 15 swap, there is an notional -- there is a delta

 16 equivalent to every single swap and so it's a

 17 situation where that has to be reported as a

 18 function of the transparency. It's not just the

 19 swap. It's got to be the notional equivalent,

 20 because otherwise I can't compare apples to

 21 apples. And a regulator can't compare apples to

 22 apples. That's the whole key is to allow
 365

 1 regulators and the general public to understand

 2 what the notional equivalent is of any of these

 3 trades. I've got to be able see this as a

 4 regulator and with regard to commodities, I've got

 5 to be able to do that to assign position limits.

 6 I've got to be able to do that to literally take

 7 someone's aggregate position that they have with

 8 swap and compare it to a CME position or

 9 proposition they have on with another customer via

 10 swap. You know, how do you get all that back down

 11 to, you know, the least common denominator? And

 12 that's the whole -- I keep bringing that up, but

 13 --

 14 MR. PAYTON: And to the extent that --

 15 I'm sorry. To the extent that it's going to be

 16 cleared, right, all that stuff is going to come

 17 into a clearing house, right. That is going to

 18 exactly take it down to that least common

 19 denominator, right.

 20 MR. VOLDSTAD: Number one, the

 21 regulators will get all the information regardless

 22 of what is publicly transmitted. I would argue
 366

 1 that something that has a DVL1 of $1,000 is a lot

 2 different if that's a one month instrument or a

 3 ten year instrument. And you've got to have some

 4 other hook to put on your data information than

 5 just the DVL1. You've got to know that this is a

 6 five year swap against three month LIBOR, five

 7 year swap against six month LIBOR, five year swap

 8 against three month LIBOR, that it's cleared or

 9 uncleared and so on. There's a lot of

 10 information. Some of that stuff will move the

 11 market for that particular instrument. You've got

 12 to be careful. That's all.

 13 MR. MASTERS: And again post-trade is --

 14 it's a different issue. I mean the more I can see

 15 post-trade, the better off I am. And I get the

 16 point, but I mean -- yeah, I want to see all that.

 17 Look, I want to see everything I can see. And not

 18 only do I want to see the specific trade, I want

 19 to see the aggregate trades as well. I want to

 20 see all the stuff as quickly as I can as a market

 21 participant. That being said, you know, I've got

 22 to be able to see it in a uniform standard and I'm
 367

 1 -- what I'm -- I keep going back to is someone has

 2 to say this is the way we're going to do it so

 3 that people can follow along and say, okay, we'll

 4 report this way.

 5 MR. WOLKOFF: One of the -- it's Neal

 6 Wolkoff. But, I mean, one of the benefits of

 7 clearing is that at some point -- and that point

 8 is the submission to the clearing house, right?

 9 There is by necessity a standardization. It may

 10 not be as broad a standardization as a benchmark

 11 futures contract. It may be narrower. It may be,

 12 you know, a certain coupon rate against the

 13 certain duration of LIBOR in a certain term with a

 14 certain settlement date and that could be fairly

 15 narrow, but not narrow enough that it doesn't

 16 already contain hundreds, if not thousands, of

 17 like contracts. So I think the only thing I would

 18 be a little hesitant about if I were a policymaker

 19 is to require that any kind of trade secrets or

 20 proprietary models be disclosed as part of the

 21 transparency or reporting process because

 22 eventually you do have a level playing field and a
 368

 1 levelizing as Dean mentioned with trades once they

 2 become cleared transactions.

 3 MR. SHILTS: Okay, I want to move on to

 4 some other questions and topics.

 5 MR. LEAHY: Sure. Touching on something

 6 that Chester said earlier, should there be a

 7 consistent methodology across markets and

 8 contracts or to determine what an appropriate

 9 block size is or a large transaction size? Or

 10 should a methodology be specified for each

 11 particular market?

 12 MS. SPATT: Well, I think -- well, based

 13 on my comments before, I certainly think it makes

 14 sense to try to use a common methodology to the

 15 extent that that's possible. I'm not sure that

 16 would necessarily -- I mean, there might be

 17 disagreement around the table about the

 18 particulars of the methodology that I'd laid out,

 19 but suspect that probably most of the panelists

 20 would probably agree that there ought to be some

 21 sort of overall (inaudible). I'm not sure if I

 22 quite understand what alternative you have in
 369

 1 mind, unless you have in mind just trying

 2 different things for different instruments and

 3 seeing what's sort of better. But I'm not sure if

 4 I really kind of understand what the alternative

 5 would be.

 6 MR. LEAHY: Well, I think what we're

 7 thinking here is maybe if there is some sort of

 8 algorithm that would be used to determine what an

 9 appropriate block size is. You know, if there was

 10 an algorithm, could such an algorithm be developed

 11 that could be applied across asset classes and

 12 contracts? Or do you have to look at each market

 13 individually and make assessments and perhaps a

 14 different type of analysis that would apply to,

 15 you know, this -- asset class one would require or

 16 interest rate swaps would require one sort of

 17 analysis. Commodity, you know, energy commodity

 18 swaps would require a different sort of analysis.

 19 Or could the same type of analysis be applied?

 20 MS. SPATT: Weil, I guess my starting

 21 place would be to start with the same type of

 22 analysis. But, you know, I guess I'd -- you know,
 370

 1 I'd want -- you know, I could be informed by the

 2 particulars of the context if that common

 3 framework was sort of missing something. But, you

 4 know, I -- the reason I sort of laid out the

 5 framework that I did earlier was that I think a

 6 lot of the issues with respect to the nature of

 7 size are relatively generic across different types

 8 of products. Not to say that the levels -- not to

 9 say that the right levels are the same, but the

 10 sort of considerations that would go into size, I

 11 think, are likely to be pretty common across

 12 markets, but obviously very different levels, very

 13 different sensitivities and the like.

 14 MR. SHAPIRO: It's Peter Shapiro again.

 15 I think it's a question really of standard versus

 16 methodology. I think Chester's standard is the

 17 right one. Is it market moving? Then you get to

 18 the question of what's the methodology to

 19 determine if it is market moving? One of the

 20 methodologies I threw out would be the idea of

 21 measuring transaction size versus market volume.

 22 Market volume, however, is something that will be
 371

 1 difficult to measure in many of these instruments.

 2 To the extent that there is an exchange traded 

 3 market for the instrument or a comparable

 4 instrument, you could measure it by looking at

 5 that disclosed market volume on an exchange trade

 6 basis. That would be one methodology for doing

 7 it.

 8 But I -- at least I would recognize that

 9 you're not going to have that methodology for

 10 everything and, you know, there may be other

 11 methodologies that you'd use that would still

 12 share the same standard, which I think Chester

 13 lays out correctly.

 14 MR. PAYTON: I think the standard or the

 15 idea, right, behind a particular methodology is

 16 important, but you have to appreciate the

 17 complexity of what it is that you're dealing with

 18 all these different products. Even within

 19 products at CME Group, we have different block

 20 thresholds for U.S. hours, London hours, Asian

 21 hours because there's different measures of

 22 liquidity during different times of the day and,
 372

 1 you know, we -- when we develop our block

 2 thresholds, are also trying to balance the issue

 3 of complexity to the marketplace. You can't come

 4 up with a methodology that's so complex that it's

 5 difficult for people to comply and difficult to

 6 enforce, right. So there has to be a balance

 7 there and I think it's going to be very difficult

 8 to, you know, articulate a true one size fits all

 9 application of this that cuts across asset

 10 classes, time zones.

 11 MR. VOLDSTAD: I would sort of I guess

 12 say something similar. I think Chester is talking

 13 about an outcome. And how do you get to that

 14 outcome? How do you know what the price is -- the

 15 volume is that's going to move the market? And I

 16 think you've got to look at a variety of different

 17 variables -- the size of the trade relative to

 18 turnover. You look at the complexity of the

 19 transaction, the number of participants, the

 20 amount of volatility that the product has.

 21 There's a whole -- there will be a whole variety

 22 of different variables that you need to put into
 373

 1 examining -- and a lot of it is going to be common

 2 sense as well. You can use analogy from other

 3 markets and I think it's going to be an art. I'd

 4 do it one product at a time and do the most liquid

 5 products at a time and keep checking them off

 6 until you've got 95 percent of the market or

 7 whatever your goal would be.

 8 MR. SHILTS: Who would the panelists

 9 envision making these determinations? Do they

 10 think this is something that should be done by the

 11 regulators or exchanges, SEFs, DFMs or whomever?

 12 SPEAKER: You should handle that.

 13 MR. PAYTON: I guess there's a couple of

 14 issues from my perspective. One, I think that in

 15 the interest of, you know, creating level playing

 16 fields, I think that the kinds of standards that

 17 we are talking about ought to be minimum standards

 18 and I think the regulator can establish those

 19 minimum standards and methodologies. But I think

 20 that marketplaces ought to be free to determine

 21 what's in the best interest of their marketplace

 22 -- preserving liquidity, transparency,
 374

 1 competitiveness in their markets -- and be able to

 2 make that determination.

 3 MR. VOLDSTAD: And I would think that

 4 would be the SEFs or the exchange, plus buy-side

 5 and sell-side participants.

 6 MR. WOLKOFF: You know I think it's a

 7 different issue than it is in futures markets,

 8 because, you know, here you have the open access

 9 requirements and so you're dealing with a

 10 fundability that you don't have in futures. And I

 11 think it would be -- I'm unsure -- let me start

 12 with that. It's -- Neal Wolkoff being unsure.

 13 I'm unsure what the right answer is, but I know

 14 that it's a -- it's potentially a bit confusing,

 15 possibly maybe even chaotic if different execution

 16 venues have different standards. And I know even

 17 in futures, you know, it's difficult that there's

 18 -- you know, you guys are relatively hands-off,

 19 pretty hands-off on block levels and sometimes

 20 that has an impact on competitive issues and the

 21 like.

 22 So, you know, I'd like to opine later
 375

 1 after thinking about it, but I'm not so sure that

 2 this is the same type of transaction where it

 3 should be open to everyone as opposed to more

 4 like, you know, securities where you have a

 5 threshold. It may not make any sense to anyone

 6 anymore, but you have a standard. Everybody knows

 7 the standard and that's how business is done.

 8 MR. MASTERS: This is Mike Masters. I

 9 would just say that someone -- as I mentioned

 10 before -- someone has to determine the initial

 11 standard and that's in my view the regulator. I

 12 mean there has to be some initial standard that

 13 people can sort of come -- get their arms around.

 14 And then the other thing I would say

 15 with regard to the question is that if you could

 16 classify -- you divide out by class of transaction

 17 and then you -- again, your goal is to normalize

 18 it into its nearest listed counterparty. So if

 19 you've got commodities (inaudible), that's pretty

 20 easy. Or if you've got interest rate swaps, I

 21 mean you're delta equivocating it back to its

 22 nearest listed equivalent. Then you've got sort
 376

 1 of a quick, you know, comparison and

 2 classification scheme where you can compare

 3 over-the-counter markets to listed markets and

 4 sort of make some sense out of it.

 5 MR. COOK: Let me ask in terms of

 6 methodology, it's been argued by some to us that

 7 there are certain markets where there's a social

 8 size of trade or fairly standardized level of

 9 trading that could be used as a part of a building

 10 block or measuring -- measurement of a block trade

 11 and others where there aren't. I would just ask

 12 if, in your experience, there are generalizations

 13 that can be drawn and, if so, what product

 14 categories do you think would lend themselves most

 15 to that type of approach to the issue?

 16 MR. SONG: Well, I'll have a go at this.

 17 It's relatively the easiest for the most liquid

 18 products say like interest rate swaps because you

 19 can get data from banks and brokers as to -- like

 20 data mining. How many trades have you done? What

 21 is the maturity profile? What is the median

 22 ticket size? What ticket size will put you in the
 377

 1 top tenth percentile? Those, I think, you would

 2 have the relatively the least amount of hurdles to

 3 derive those number scientifically.

 4 Where it gets difficult is with the

 5 products that might trade, like, once a month,

 6 because then you've got the issue with these lumpy

 7 trades, right. It could be very illiquid. Well,

 8 you may not trade for a few months. You do this

 9 gigantic trade and then you do very little trades

 10 again and then another gigantic trade. But for -- 

 11 again for the bulk of the over-the-counter

 12 derivative market, for interest rate swaps and

 13 plain vanilla options, I believe that that data is

 14 relatively readily available.

 15 MR. VOLDSTAD: I would think the same is

 16 true for (inaudible) credit default swaps as it is

 17 for various indices.

 18 MR. SHILTS: Any other comments on that?

 19 MR. SHAPIRO: This is going back one

 20 step and that is the -- there would be a -- in

 21 terms of the reporting obligation and like,

 22 obviously there needs to be some adjustment for
 378

 1 where it's strictly over the counter between -- on

 2 a bilateral basis, not going through exchange. So

 3 you have to look at that as part of this. 

 4 MR. SHILTS: Keep moving on. Go ahead.

 5 MR. GAW: The Dodd-Frank Act requires

 6 the Commissions to take into account how public

 7 dissemination of transactions will materially

 8 affect liquidity. So and not just with respect to

 9 block trades, but the whole public dissemination

 10 regime in general. So, we welcome your thoughts

 11 on that particular issue and in particular what

 12 other market structure changes you might see

 13 resulting from the introduction of a post-trade

 14 dissemination regime.

 15 MR. SHILTS: Anybody want to take a stab

 16 at that?

 17 MALE VOICE: You go first, Chester.

 18 MS. SPATT: I'll go first and then

 19 everybody will shoot at what I say, but -- I think

 20 the introduction of a post-trade dissemination

 21 regime would be a major change to the market. And

 22 I think a very desirable change. And, you know, I
 379

 1 agree with the consensus of the panelists that it

 2 does need to be phased in, but I would probably

 3 actually counsel against trying to implement too

 4 many types of structural changes all at the same

 5 time because obviously there are important issues

 6 -- as many of the panelists have commented on --

 7 about how market participants can learn to adapt

 8 to the new regime. And I did think in the case of

 9 TRACE that the approach that was taken both by the

 10 NASD and then kind of analogously the approach

 11 that the municipal securities rulemaking board

 12 took in sort of gradually rolling these initiative

 13 out, both made a lot of sense and actually turned

 14 out to be quite successful.

 15 You know, part of the reason I also

 16 think in terms of -- and I think these issues are

 17 very important ones. I think they're important in

 18 part for facilitating competition in these

 19 markets. So much -- in the past, so much of the

 20 attention of the financial regulators has really

 21 been focused on the equity markets and to some

 22 extent at times looking at kind of the most tiny
 380

 1 of trading cost differences. I think it's kind of

 2 healthy to be taking kind of more seriously market

 3 structure issues in other venues. But I do see

 4 the issue of post-trade reporting as a big and

 5 important issue.

 6 Now, in some cases, you know, to the

 7 extent that one goes to -- to the extent that

 8 there's sort of evolution, I mean, you know, may

 9 over time there's -- although I don't see this

 10 happening so much in the near term. It may make

 11 sense over time for there to be more move toward

 12 exchange-types -- even more moves toward

 13 exchange-types exchange clear -- more use of

 14 exchange clearing. I mean, so far a lot of the

 15 initiatives seem to be more in terms of clearing,

 16 but not necessarily in terms of exchange trading.

 17 I mean, that'll, I think, be an important issue

 18 down the road. But I see that as sort of down the

 19 road and I think -- you know, I think if the

 20 public reporting regime works well and maybe

 21 there's not even necessarily large benefits to

 22 doing that.
 381

 1 MR. SONG: The only thing I'd like to

 2 add is it may be worthwhile for this committee

 3 also to perhaps assemble a group of major buy-side

 4 participants who are the largest users and whose

 5 trades are often times block and to get their

 6 input and feedback into this process because

 7 clearly the post-trader fact is going to have the

 8 most dramatic effect on that group of end users.

 9 MR. VOLDSTAD: We've done a fair amount

 10 of that and especially with the very large firms.

 11 They are concerned about block trading, inhibiting

 12 liquidity and letting the freeloaders get able to

 13 front run trades and so on. If I go back to your

 14 original question, I think if the block trading

 15 exemptions, if the post-trade transparency rules

 16 are set out carefully with a lot of thought, I

 17 think it will benefit public. If, on the other

 18 hand, you destroy liquidity because you're too

 19 strict, you're going to ruin the markets. So I

 20 think this is sort of an approach that most of us

 21 are advocating. Take a slow, careful approach.

 22 Get a lot of feedback. Put the block trading
 382

 1 limits in, see how they're doing. Review them

 2 every quarter or whatever it is. And you should

 3 have a pretty good product.

 4 MR. MASTERS: I would just say just in

 5 terms of buy side and I'm on the buy side -- in

 6 terms of transparency, that's a very big

 7 consideration with everybody. Obviously, there is

 8 a need for people's ability to get things done,

 9 but there's also a huge need for transparency that

 10 pretty much every institutional investor I talked

 11 to agrees with that, you know, we've got to have

 12 transparency. We've got to have a level playing

 13 field. We can't have people having advantage over

 14 other people in terms of trade reporting and so

 15 forth. You know, the recent HFT issue of

 16 collocation and all that. That's just been one

 17 more issue for them to deal with where they feel

 18 like they're being taken advantage of. So

 19 transparence is really critical.

 20 MR. SONG: If I may just add one -- it's

 21 kind of a corollary point to this. Is the

 22 development that's going to help transparency
 383

 1 significantly is actually a corollary to what

 2 we're talking about. It's not necessarily

 3 directly here. It's the development of a liquid,

 4 widely- participated, electronic trading format in

 5 like the swap execution facilities. So that if

 6 you go to your screen, you can see 20 prices on

 7 the bid side, 20 prices on the offered side for

 8 200 million up. And that means that you will know

 9 you can get 4 billion done with a click of a

 10 button on one side or the other. That is

 11 transparency and liquidity. It's -- to me that is

 12 singularly the most powerful thing that delivers

 13 price discovery information. I actually don't

 14 believe that the reporting of the block trades --

 15 it's important, but I believe this is actually

 16 more important because this is what you see, this

 17 is where the transactions predominantly occur and

 18 this is what affects 99 percent of the

 19 participants.

 20 MR. SHILTS: Are you saying the trades

 21 wouldn't be done as a block then? They'd be done

 22 -- they'd be broken up or?
 384

 1 MR. SONG: Oh, no, no, no. What I'm

 2 saying is that if you go into an electronic -- a 

 3 liquid electronic -- like a swap execution

 4 facility that has a lot -- a number of

 5 participants. And so, you know, you see a number

 6 -- 20 people, 20 market participants on the bid

 7 side, 20 participants on the offer side for a

 8 large size. Then you got all the information you

 9 need right there. That gives -- that levels the

 10 playing field immensely for players in the

 11 marketplace. Because --

 12 MR. PAYTON: And that's true for liquid

 13 products, right? Not every product is going to

 14 build that kind of liquidity, right? I mean,

 15 we've listed plenty of products that we've put on

 16 a central limit order book, right, and the

 17 liquidity didn't develop in that particular market

 18 using that market mechanism. It's not to see that

 19 there's not interest in trading that type of

 20 market, but not every type of instrument is

 21 necessarily best suited for central limit order

 22 book if there isn't that massive liquidity to
 385

 1 create that nice deep market that you're talking

 2 about.

 3 MR. SONG: No, no. I agree with that.

 4 MS. SPATT: I certainly agree that -- I 

 5 think of that as sort of a huge form of -- a drift

 6 form a pre-trade transparency and obviously that

 7 would be -- you know, that's wonderful for the

 8 markets where that can arise. You know, it does

 9 seem to me at the same time that for markets where

 10 that -- it seems to me these issues of price

 11 reporting are probably much more significant for

 12 markets where you don't have that sort of

 13 pre-trade liquidity.

 14 I mean, one of things that is striking

 15 -- now it's obviously a different kind of market,

 16 but one of the things that is striking in the

 17 studies of both municipal bonds and corporate

 18 bonds was that the introduction of the TRACE and

 19 analogous steps by the municipal securities

 20 rulemaking board had the effect of improving price

 21 discovery in those markets and in a sense,

 22 post-trade -- in those contexts, post-trade
 386

 1 reporting was very helpful because it told the

 2 customer -- now, keeping in mind that many of the

 3 relevant customers were retail customers. But it

 4 told them basically where the market -- it gave

 5 them kind of an idea where the market was and so

 6 it allowed them to kind of negotiate much better

 7 with the dealers on the other side of the market.

 8 MR. VOLDSTAD: I'm sorry for talking so

 9 much. I think, again, one needs to remember that

 10 the derivatives market is an institutional market

 11 typically doing very, very large size. Typically,

 12 they'll also ask several people for prices. I do

 13 think though that say if you're looking at a

 14 five-year, five-year forward in the interest rate

 15 world, you might not be able to swap -- do that

 16 transaction on one of these interdealer broker

 17 screens, but you might also might also be able to

 18 do this -- there was a fellow here from TradeWeb,

 19 where they could probably put that kind of screen

 20 with a request for bid and actually get prices for

 21 that. So I think that would be a -- and that

 22 probably would have a different block size issue
 387

 1 to it and so on. But I think as the market mature

 2 more and more, as more and more electronic

 3 platforms come to be, I think, you know, you're

 4 going to get this improvement in transparency.

 5 MR. SHAPIRO: Just to pick up on a

 6 point, because one of the things that I often find

 7 in discussion on these issues is that when we're

 8 thinking about the public end user, too often

 9 we're -- too often the example gets given to the

 10 institutional investor. So much of what we're

 11 really talking about end users here are members --

 12 are public entities, nonfinancial corporations,

 13 nonprofit entities like universities that are

 14 looking to finance a facility, that are looking to

 15 issue a significant amount of debt that they want

 16 to put a hedge in place on, that they want to

 17 convert from floating to fixed, that they know

 18 they're going to borrow five years from now and

 19 want to lock in today's interest rate environment

 20 or anything of that kind. There's a public good

 21 being served here. It's an important public good.

 22 If that cost goes up significantly because, as I
 388

 1 think Connie put it correctly, because there's

 2 information that's being put out there that people

 3 can pick off. That, you know -- information is

 4 being disseminated that really is principally

 5 there benefiting professional traders or hedge

 6 funds or proprietary trading desks. It's going to

 7 hurt the end user who is trying to hedge and

 8 important need and make his costs higher.

 9 The important thing is trying to balance

 10 that good. And when I think at least of balancing

 11 the public goods that are out there, the public

 12 good of the university trying to build a major new

 13 facility, of the state of Illinois trying to

 14 finance new schools, of a -- of any of those kinds

 15 of things, in some ways should outweigh the public

 16 good of professional traders wanting to get that

 17 information a day earlier. So that if there --

 18 if, when it's a large block -- and these are going

 19 to be where the large blocks that we're talking

 20 about often will come from -- a major new facility

 21 being financed.

 22 Somebody who is going to come into the
 389

 1 markets with something major all at once that

 2 giving a little bit of the benefit of it out there

 3 -- a one-day delay, a two- day delay or, in the

 4 example I used before, as much as a five-day delay

 5 if it were truly huge is something where there is

 6 public good, which is probably more significant

 7 than the other public good of giving professional

 8 traders a jump on being able to take advantage of

 9 that -- of knowing that position.

 10 MR. SHILTS: Are you mainly talking

 11 about interest rate swaps when you talk about the

 12 one, five-day delay?

 13 MR. SHAPIRO: The overwhelming portion

 14 of our work is in the interest rate swap markets.

 15 And that's, frankly, the overwhelming proportion

 16 of the market as a whole when you look at it

 17 statistically. So I think that's really where

 18 we're looking at it. We're looking at hedging --

 19 looking at people wanting to protect themselves

 20 from risk or entities that are trying to protect

 21 themselves from risk, not ones who are trying to

 22 take a view.
 390

 1 MR. VOLDSTAD: But, Peter, you're

 2 talking about an illiquid part of the interest

 3 rate world -- relatively illiquid (inaudible).

 4 MR. SHAPIRO: When it gets to big enough

 5 size, I think we get the liquidity limits on an

 6 awful lot.

 7 MR. SHILTS: Is it mainly size or is it

 8 the duration or?

 9 MR. SHAPIRO: I think it's size relative

 10 to instrument and relative to duration. I think

 11 the other professionals would probably agree on

 12 that.

 13 MR. MASTERS: I think it's a bit of a

 14 slippery slope. I mean, you know, certainly, you

 15 know, hedges are important to a marketplace.

 16 Speculators are important to the marketplace as

 17 well. I think it is a slippery slope where

 18 prioritizing one group over the other, there is

 19 the chance, perhaps, that with enough

 20 transparency, that one of those other participants

 21 could potentially provide the liquidity to that

 22 same institution that wasn't one of the current
 391

 1 participants. And so I think one of the ideas of

 2 transparency is to incent other participants in

 3 the market.

 4 You know, it's hard to incent people in

 5 a market when you're seeing data 5 days, 6 days

 6 later and so that theoretical growth of the

 7 market, which, you know, 200 million is not a big

 8 trade 5 years hence or 2 years hence or whatnot

 9 because the size of the market has gone to a

 10 billion only really happens if, in fact, there's

 11 enough transparency to attract market participants

 12 to bring in enough other people where they decide

 13 that they want to trade that market and it doesn't

 14 -- it's not an exclusive club. So one of the --

 15 and it's hard to measure that in terms of, you

 16 know, right away. But one of the long-term

 17 benefits of transparency is to incent other

 18 participants other banks and swaps dealers and so

 19 forth to get in these markets so that it's not a

 20 small club. So there's a variety of other people

 21 that can be involved.

 22 MR. SHAPIRO: You know, to just continue
 392

 1 the debate a little on that point, though --

 2 remember the end user trading to the dealer is

 3 going to result in the dealer trading to the rest

 4 of the market. That the dealer is almost never

 5 going to host that position as his proprietary

 6 position going forward. They don't do that. They

 7 trade that out to the rest of the market on a

 8 basis that starts instantaneously and continues

 9 over the time that they'll need to hedge. So that

 10 those other participants should gain that

 11 information that will provide the incentive

 12 structure that you're talking about.

 13 What's more, we're not talking about 

 14 closing it off permanently. We're talking about

 15 closing it off for a short time as was -- as I

 16 believe was envisioned by the drafters of this

 17 legislation when they put that block trade

 18 exception in there. That was the idea, I believe,

 19 behind that -- to recognize the liquidity effect

 20 of certain amounts of size and illiquid

 21 instruments. You know, at least in our

 22 experience, if we see an end user who does
 393

 1 something and there is somebody else in the market

 2 who says boy, that was a -- I could have done this

 3 a whole lot better for you. Somebody will knock

 4 on their door -- whether it's two days later or

 5 three days later of five days later. It won't

 6 make a difference that they didn't know about it

 7 in one minute.

 8 MR. MASTERS: I understand. Maybe we're

 9 splitting hairs, but just -- and not to belabor

 10 the point, but there's no implicit reason why the

 11 institution or the hedger can't trade directly

 12 with another institutional investor just like they

 13 do on the CME or anywhere else. It doesn't matter

 14 whether you're trading with a bank or you're

 15 trading with anybody else. And the whole idea, I

 16 think, of the Dodd-Frank legislation -- or one of

 17 the ideas -- is to make that a wider, more

 18 transparent market so that people don't have to

 19 rely on the banks and balance sheets and the banks

 20 don't have to grow to such giant levels because

 21 they're the only players in town and so that other

 22 people can do those transactions. And the only
 394

 1 way that's going to happen is for there to be a

 2 certain amount of transparency.

 3 And while I may want to do the trade a

 4 week later or whatever, you know, or I can do the

 5 trade after the dealer has taken his profit out of

 6 the trade as a middle man, I would rather do it

 7 directly as a customer than after the dealer has

 8 taken out his bid offer and I bet I can narrow bid

 9 offers for everybody down the road.

 10 MR. VOLDSTAD: I think we're again

 11 talking about something that's very unusual for I

 12 think there to be a requirement for a multi-day

 13 delay in reporting transaction. I -- there may be

 14 a few situations in the municipal swap land. I

 15 was around the derivative market for a long, long

 16 time and don't know of that many unusual trades

 17 that would be damaged by having a weeks -- well,

 18 by having to have a weeks delay. There may be

 19 some transactions -- unusual indices and

 20 commodities and so on -- but I think the vast,

 21 vast majority of stuff could easily get reported

 22 on in some fashion the same day. The vast, vast
 395

 1 majority of interest rate products could be

 2 reported on very, very quickly.

 3 I think the transactions that Peter is

 4 talking about you couldn't do because they're not

 5 clearable and they're going to be years and years

 6 before they're clearable. And an awful lot of the

 7 exotic stuff -- the stuff that caused the crisis

 8 -- is never going to be clearable and you've got

 9 to recognize that. You can't figure out what the

 10 value of an NRCDO is -- CDL or CDOs. These things

 11 just are not -- you know, you can't price it ahead

 12 of time.

 13 MR. MASTERS: Which gives some social

 14 aspect to their benefit in the first place I

 15 imagine. I mean, the need to do them in the first

 16 place from the standpoint of being on a bank's

 17 balance sheet or whatnot.

 18 MR. LEAHY: We're plum out of questions.

 19 MR. SHILTS: Does anybody have any --

 20 since we have a few more minutes, anybody have any

 21 other comments they want to make or we can end

 22 this one a little early. Go ahead.
 396

 1 MR. SHAPIRO: Just one quick one, and

 2 again on my colloquy back and forth with Mike and

 3 that is that if you looked the typical

 4 transactions that we see with end users, whether

 5 they're universities or hospitals or city

 6 governments. They typically are ones that have

 7 extensive amortization, specific matching to dead

 8 issuance, all sorts of tailoring that make them

 9 particularly ill-suited to trading on a one-to-one

 10 basis with a, you know, with a hedge fund or with

 11 a proprietary trader. It might occasionally

 12 happen. I would welcome it and I think that one

 13 of the things that makes sense is that as

 14 transparency grows, maybe you'll start to see

 15 that. But it would be disingenuous to sort of

 16 leave it hanging to think that it would be likely

 17 for a hedge fund to, you know, approach the

 18 Fayetteville, North Carolina, Public Works

 19 Commission and say we're going to purchase

 20 something that will exactly match your new debt

 21 issuance for your new water and sewer plant.

 22 MR. SHILTS: Okay with that.
 397

 1 MR. VOLDSTAD: I'll say one thing if I

 2 may. Just I think my big push on this is that one

 3 has to realize what the market is about. It's

 4 about sophisticated large institutions by and

 5 large much, much smaller in terms of participants

 6 than you'd have in an exchange-traded marketplace.

 7 Typically, we're not dealing with widgets,

 8 especially in things like credit default swaps.

 9 You'll have at least 40 different contracts for

 10 every single named corporate. And, indeed, you

 11 could multiply that by the number of coupons that

 12 the markets are trading and whether they're having

 13 restructuring provisions or not.

 14 On the other hand, I think there are a

 15 lot of very, very liquid transactions --

 16 marketplaces like in the interest rate world.

 17 They'll be much less liquid, much less continuous

 18 than the futures world, but something where I

 19 think you can get some very good social benefits

 20 out of swap execution facilities and out of the

 21 post-trade transparency.

 22 MR. SHILTS: All right. Well, thank you
 398

 1 very much. And thanks to all the panelists and it

 2 was a very good discussion today and I guess this

 3 will end the roundtable. Tomorrow we have the SEF

 4 roundtable at the SEC.

 5 (Whereupon, the PROCEEDINGS were

 6 adjourned.)

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 1 CERTIFICATE OF NOTARY PUBLIC

 2 I, Carleton J. Anderson, III do hereby

 3 certify that the witness whose testimony appears

 4 in the foregoing hearing was duly sworn by me;

 5 that the testimony of said witness was taken by me

 6 and thereafter reduced to print under my

 7 direction; that said deposition is a true record

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

 9 neither counsel for, related to, nor employed by

 10 any of the parties to the action in which these

 11 proceedings were taken; and, furthermore, that I

 12 am neither a relative or employee of any attorney

 13 or counsel employed by the parties hereto, nor

 14 financially or otherwise interested in the outcome

 15 of this action.

 16 /s/Carleton J. Anderson, III

 17

 18

 19 Notary Public in and for the

 20 Commonwealth of Virginia

 21 Commission No. 351998

 22 Expires: November 30, 2012