UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 OPEN MEETING ON THE TWELFTH SERIES OF

 PROPOSED RULEMAKINGS UNDER THE DODD-FRANK ACT

 Washington, D.C.

 Thursday, February 24, 2011
 2

 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BART CHILTON, Commissioner

 5 MICHAEL V. DUNN, Commissioner

 6 JILL SOMMERS, Commissioner

 7 SCOTT D. O'MALIA, Commissioner

 8 Division of Clearing and Intermediary

 Oversight:

 9

 10 JOHN LAWTON

 11 PHYLLIS DIETZ

 12 ANANDA RADHAKRISHNAN

 13 BARBARA GOLD

 14 CHRISTOPHER CUMMINGS

 15 ANDREW CHAPIN

 16 CLAIRE NOAKES

 17 Division of Enforcement:

 18 ROBERT PEACE

 19 VINCE MCGONAGLE

 20 Office of the Secretariat:

 21 DAVID STAWICK

 22
 3

 1 PARTICIPANTS (CONT'D):

 2 Office of General Counsel:

 3 DAN BERKOVITZ

 4 STEVE SEITZ

 5

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 4

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

 2 (9:34 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 meeting will come to order. This is a public

 5 meeting of the Commodity Futures Trading

 6 Commission to consider issuance of proposed

 7 rulemakings under Dodd-Frank, the Wall Street

 8 Reform and Consumer Protection Act. We'll be

 9 taking up today requirements for prompt and

 10 efficient processing for clearing and for the

 11 transfer of customer positions. I know that

 12 Ananda, Phyllis and John are prepared to address

 13 that for me. And there are two sets of conforming

 14 amendments, conforming amendments to Part of 4 of

 15 Commission regulations and these regard commodity

 16 pool operators and commodity trading advisers.

 17 Then also conforming amendments to Part 3 of

 18 Commission regulations and these are with regard

 19 to intermediaries. We are in process where staff

 20 is reviewing many of the different parts to

 21 conform with Dodd-Frank and will also later in the

 22 year try to take up looking at the whole Rule
 5

 1 Book, but we'll be taking up more conforming

 2 amendments in the month of March and possibly into

 3 the spring.

 4 The Commission will not consider a

 5 proposed rulemaking today related to swap data

 6 recordkeeping and reporting requirements for

 7 preenactment and transition swaps as was

 8 originally advised in the meeting agenda and on

 9 our website, looking at the document we need a

 10 little more time and we're not ready. In addition

 11 to the proposed rulemakings, the Commission will

 12 consider an interpretive order regarding

 13 disruptive trading practices authority. The

 14 proposed interpretive order is one more step in a

 15 process with regard to this area that Congress

 16 addressed. Staff also is working on a

 17 recommendation of a proposed rule concerning

 18 testing and supervision requirements related to

 19 algorithmic trading based in part on the

 20 recommendations of the SEC-CFTC Joint Advisory and

 21 on recommendations from the CFTC's Technology

 22 Advisory Committee as well as many comments
 6

 1 received by the public and through various

 2 roundtables and the like.

 3 Before we hear from staff I'd like to

 4 once again thank Commissioners Mike Dunn, Jill

 5 Sommers, Bart Chilton and Scott O'Malia for all of

 6 their thoughtful work on implementing Dodd-Frank.

 7 I'd like to welcome members of the public, market

 8 participants and members of the media to today's

 9 meeting as well as welcome those listening to the

 10 meeting on the phone and watching this live on the

 11 webcast. I think this is our twelfth public

 12 meeting to consider Dodd-Frank rulemakings. We

 13 will be scheduling additional meetings for March

 14 mostly toward the end of March given the various

 15 travel schedules of the five of us, and we'll

 16 announce the agenda for those meetings on our

 17 website at least a week in advance.

 18 Each of the teams have worked very hard

 19 on the rulemakings that the Commission is

 20 considering today. They will present their

 21 recommendations for how the Commission can best

 22 apply the statutory obligations of Dodd-Frank and
 7

 1 we look forward to receiving public comment on the

 2 proposed rules we're considering. I think now

 3 I'll turn to Commissioner Dunn and other

 4 Commissioners for opening statements.

 5 COMMISSIONER DUNN: Thank you, Mister

 6 Chairman and I thank all of those who have joined

 7 us today for this important meeting regarding the

 8 implementation of the Dodd- Frank Act.

 9 I'm particularly interested in the

 10 proposed interpretive order regarding the

 11 Commission's antidisruptive trading practices

 12 authority. In reading the comments and letters we

 13 received in response to our Advanced Notice of

 14 Proposed Rulemaking, two things stood out to me.

 15 First, there was widespread support for the goal

 16 of eliminating disruptive trading practices from

 17 our markets. And second, most commentators called

 18 for greater clarity to help them understand how we

 19 interpret the concept of disruptive practices. I

 20 look forward to receiving the public's comments to

 21 see if the proposed interpretive order adequate

 22 addresses those concerns.
 8

 1 As I've mentioned in previous open

 2 meetings, the CFTC is under serious strain at its

 3 current funding level. We lack staff and

 4 technological resources to implement Dodd-Frank

 5 and continue to fulfill our pre-Dodd-Frank duties

 6 under the Commodity Exchange Act. Our staff's

 7 performance during this difficult time has been

 8 truly remarkable. They have worked long hours to

 9 essentially do two very big jobs at once.

 10 However, without additional funding the strain

 11 will only become worse in July when much of the

 12 Dodd-Frank goes into effect. At that point in

 13 addition to our traditional oversight of the

 14 futures industry, we will also begin regulating

 15 the swaps market, a market that has been estimated

 16 to be nine times larger than the futures market.

 17 Even at the Administration's requested funding

 18 level and with increased assistance from the SROs,

 19 this would be an Herculean task. More troublesome

 20 is the potential that the Commission may suffer a

 21 decrease in funding at this critical period. The

 22 House spending bill would cut the Commission's
 9

 1 already tight budget by nearly a third. The

 2 Commission is faced with the very hard choices of

 3 how to use your limited resources to enforce both

 4 Dodd- Frank and the Commodity Exchange Act. With

 5 further cuts in our budget, the Commission will

 6 have to abandon its principle-based regulatory

 7 regime and adopt a prescriptive or even a

 8 restrictive regime. I am fearful that this will

 9 have a negative impact on both the futures and

 10 swap industries in the United States. There would

 11 essentially be no cop on the beat and no one to

 12 ensure that our industry which was largely

 13 untarnished by the financial meltdown would not be

 14 blamed if another meltdown occurs. I would like

 15 once again to thank the staff of the CFTC for

 16 their hard work in regards to these very important

 17 proposed rules. Their dedication to our important

 18 work during this difficult time is what government

 19 service is all about. Thank you.

 20 CHAIRMAN GENSLER: Thank you,

 21 Commissioner Dunn. Commissioner Sommers?

 22 COMMISSIONER SOMMERS: Thank you, Mister
 10

 1 Chairman. Good morning. I want to say thank you

 2 to all the teams that have put in a lot of hard

 3 work for the proposals that we have in front of us

 4 today.

 5 Before I address the specific proposals,

 6 I'd like to talk about an issue that has become an

 7 increasing concern of me and that is our failure

 8 to conduct a thorough and meaningful cost-benefit

 9 analysis when we issue a proposed rule. The

 10 proposals are voting on today and the proposals we

 11 have voted on over the last several months contain

 12 very short, boilerplate cost-benefit analysis

 13 sections. The cost-benefit analysis section of

 14 each proposal states that we have not attempted to

 15 quantify the cost of the proposal because Section

 16 (a) of the Commodity Exchange Act does not require

 17 us to quantify the cost. Moreover, the

 18 cost-benefit analysis section of each proposal

 19 points out that all the Commission must do is

 20 consider the costs and benefits and we need not

 21 determine whether the benefits outweigh the costs.

 22 At the outset I ask how can we
 11

 1 appropriately consider the costs and benefits if

 2 we make no attempt to quantify what the costs are?

 3 But more importantly from a good government

 4 perspective, while it is true that 15(a) of the

 5 Commodity Exchange Act does not require the

 6 Commission to quantify the costs of a proposal or

 7 to determine whether the benefits outweigh the

 8 costs, Section 15(a) certainly does not prohibit

 9 the Commission from doing so. We have just simply

 10 chosen not to.

 11 Clearly when comes to cost-benefit

 12 analysis, the Commission is merely complying with

 13 the absolute minimum requirements of the Commodity

 14 Exchange Act. In my opinion that is not keeping

 15 with the spirit of the President's recent

 16 Executive Order on improving regulation and

 17 regulatory review. We owe the American public

 18 more than the absolute minimum. As we add layer

 19 upon layer of rules and regulations, restrictions

 20 and new duties, we should be attempting to

 21 quantify the costs of what we are proposing. And

 22 we should most certainly attempt to determine
 12

 1 whether the costs outweigh the benefits. The

 2 public deserves this information and deserves the

 3 opportunity to comment on our analysis. That is

 4 good government. Our failure to conduct a

 5 critical analysis of costs and benefits simply

 6 because we are not required to is not good

 7 government.

 8 Of the proposals we are considering

 9 today, I am most concerned about the proposed

 10 interpretive order relating to disruptive trading

 11 practices. When it was first suggested that

 12 Dodd-Frank would contain a section that outlawed

 13 disruptive trading practices, I and others at the

 14 Commission believed it was unnecessary because the

 15 Commission already had the authority to prosecute

 16 such activity and in fact had prosecuted such

 17 activity successfully in the past. When the draft

 18 language of Section 747 was first discussed among

 19 Commission staff, it was my view and the view of

 20 others in the building that the language was too

 21 vague. We suggested that in order to remedy the

 22 vagueness, the Commission would need to promulgate
 13

 1 rules to put the public and market participants on

 2 notice of what conduct was prohibited. I believed

 3 that we had consensus in the building around the

 4 view that if draft language was included in the

 5 final legislation, clarifying rules would be

 6 necessary and appropriate. That's also the

 7 message we received from the public in response to

 8 the ANPR and the roundtable that we held on this

 9 subject. I'm disappointed that we do not have

 10 proposed rules before us today and I do not

 11 believe that the proposed interpretive order is

 12 sufficient to take the place of rules. Disruptive

 13 trading practices statutory language is vague and

 14 this proposed does not cure that vagueness. And

 15 in many areas the order raises more questions than

 16 it answers and in my view when issuing rules or

 17 guidance related to prohibited conduct, the

 18 Commission's first priority must always be to

 19 provide the public and market participants with

 20 clear parameters distinguishing prohibited conduct

 21 from legitimate trading activity. The goal should

 22 not be to retain maximum flexibility for
 14

 1 Commission staff to investigate and prosecute

 2 alleged wrongdoing. This is what this order does

 3 and I cannot support that approach.

 4 Again I want to acknowledge all the

 5 teams that have worked on these proposals today.

 6 I think we all understand the kind of work and

 7 time and effort that you all put in extra hours to

 8 get these proposals ready for us and I want all of

 9 you to know how much we appreciate your work.

 10 Thank you.

 11 CHAIRMAN GENSLER: Thank you,

 12 Commissioner Sommers. Commissioner Chilton?

 13 COMMISSIONER CHILTON: Thanks, Mister

 14 Chairman. I don't disagree with what Commissioner

 15 Sommers said. I think it's important that we have

 16 these cost-benefit analyses. But particularly

 17 when we go to final you got to know what it's

 18 going to cost folks and whether or not it's

 19 justified. It did make me think while you were

 20 talking though, yesterday a group came in and at

 21 the end of their presentation they gave a list of

 22 all the things that we weren't required to do but
 15

 1 were going to do, two or three pages. I guess

 2 they were trying to impress me with we were

 3 overreaching. So these are things that we are

 4 choosing to do, at least three of the five of us,

 5 that we're not required to do. This however is

 6 something that we have chosen not to do so far,

 7 but I think you're right that we need to do it

 8 ultimately and I think probably all of us agree we

 9 know what this is going to cost before we

 10 certainly pass the final rule. I wouldn't mind

 11 having the stuff right now. I agree with you.

 12 I'm pleased we're doing the interpretive

 13 order, and without saying anything specific, I am

 14 pleased that the Chairman is such an excellent

 15 staffer today on another issue. He has found

 16 something that was very important for all of us

 17 and I commend you for that. But one of the

 18 questions we ask in our antidisruptive trading

 19 practice in the original proposal we had was about

 20 high-frequency traders, what I call cheetah

 21 traders they are so fast, and I don't mean cheetah

 22 with a Boston accent, and algo trading. We're not
 16

 1 addressing that in this interpretive order, we're

 2 only addressing the three things that were

 3 specified in the statute, but we do need I think

 4 to address in an additional rule at some point,

 5 I'm hopeful it will be at this meeting that we

 6 have in March, but at some point in the

 7 not-too-distant future, rules and regulations with

 8 regard to HFTs. I know Commissioner O'Malia's TAC

 9 committee is going to be talking about some of

 10 these things next week, but I think there needs to

 11 be some sort of basic testing, sort of a Jiffy

 12 Lube inspection if you will, to make sure that the

 13 10 points or whatever it is of HFTs, the cheetah

 14 traders and the algos, that they need some basic

 15 standard that these things are going to work when

 16 they put them into play and they don't roil

 17 markets. I also think there need to be some

 18 specific parameters for the cheetah traders with

 19 regard to the limit-up/limit-down rule. And

 20 thirdly, and I this is what the TAC is going to

 21 talk about next week, at least the subcommittee

 22 has been talking about, and that is pretrade
 17

 1 internal in-house transparency issues to ensure

 2 that they're playing by the rules. So I look

 3 forward to getting those things done in the

 4 future.

 5 But all of these things, all of the

 6 rules and regulations we've been working on now,

 7 maybe the thirteenth meeting actually, maybe they

 8 didn't mention it like they don't have a

 9 thirteenth floor, but the thirteenth meeting, all

 10 of the things that we've been doing and today on

 11 antidisruptive will mean nothing, they will mean

 12 squat, they will mean diddly if we don't do what

 13 Commissioner Dunn said and get the resources to do

 14 the job. We had this economic calamity. It was

 15 due in part to lax regulation. No individual

 16 person's fault, but lax regulation in general.

 17 And then the entities out there took advantage of

 18 it and we had this hideous bailout and we're just

 19 crawling our way of an economic mess and we got

 20 the bill that was passed by Congress and signed by

 21 the President but without the funds to look at

 22 this market. We're going from roughly $5 trillion
 18

 1 in annualized exchange trading to $600 trillion,

 2 and we're not going to get all of the $600

 3 trillion, but it's hundreds of trillions of

 4 dollars in oversight. To think that we can do

 5 that with not another cent is crazy. One of the

 6 things I need to point out because I don't it

 7 enough is that the regulated exchanges that

 8 Commissioner Dunn talked about have operated very

 9 well. There are a few little issues, speculation

 10 and we have differences on some of these things,

 11 but by and large nobody went down because of the

 12 regulated exchanges. So they have done a good job

 13 and we can oversee those markets. Under current

 14 funding we can continue to do that. But the OTC

 15 markets, the $600 trillion, we can't do unless we

 16 get additional resources.

 17 And now we find out with the House the

 18 other day that we would actually be cut by a

 19 third. That's very risky business. I want to be

 20 real clear. Commissioner Dunn talks about this

 21 all the time and I want to echo what he said and

 22 what the Chairman said. We will be particularly
 19

 1 vulnerable in the regulated futures markets to

 2 fraud, abuse and manipulation if we don't receive

 3 at least the current funding. If we get cut, we

 4 are going to be in a world of hurt. That won't be

 5 good for markets, it won't be good for consumers

 6 and it won't be good for the economic engine of

 7 our democracy. Thanks, Mister Chairman.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Chilton. Commissioner O'Malia?

 10 COMMISSIONER O'MALIA: Thank you, Mister

 11 Chairman. Let me thank the teams for their hard

 12 work in developing the four rulemakings and

 13 interpretive guidance before us today. Staff here

 14 at the CFTC is definitely working hard. As of

 15 today the Commission will put out 40 various

 16 proposals since August totaling over 975 pages in

 17 the Federal Register pages and those are those

 18 9-point fonts everybody enjoys reading. If you

 19 lay those pages end to end lengthwise, it would

 20 stretch over 892 feet. That's more than the

 21 height of the Statute of Liberty tip to torch and

 22 the Washington Monument balanced on top.
 20

 1 I remain concerned that we are moving at

 2 a pace that makes it very difficult if not

 3 impossible to dig out of the mountain of paper and

 4 piece all of these new requirements together in a

 5 meaningful way. For example, the proposal before

 6 us today regarding the requirements for

 7 processing, clearing and transferring customer

 8 positions illustrates how difficult it is for us

 9 to put out rulemakings at this punishing pace and

 10 get it right. At the end of January, just a

 11 little over a month ago, the Commission put

 12 forward a rule proposal that addressed Core

 13 Principle F for designated clearing organizations.

 14 Today's rulemaking reproposes a regulation

 15 interpreting Core Principle F to supplement the

 16 proposals made in January even though the comment

 17 period on the original proposal will not close

 18 until March 21. To comment on both proposals, the

 19 public will have to read both rules together and

 20 submit comments on both. Also the comment period

 21 for the proposed rulemaking before us today is

 22 only 30 days instead of 60 days. None of this
 21

 1 seems to make sense, nor does it seem to be

 2 keeping in pace with the spirit of the President's

 3 Executive Order on regulation that reminds us to

 4 seek meaningful public participation and afford

 5 comment period that should generally be at least

 6 60 days.

 7 As we come to the end of this stage of

 8 the Dodd- Frank rulemaking process, we are putting

 9 forward the Commission proposals. I think back

 10 over the past months and I've asked that moving

 11 forward we give thought to organizing the

 12 rulemaking process in a more responsible, cohesive

 13 fashion. The last time I raised the rulemaking

 14 process in the middle of December, I suggested an

 15 order for considering final rules and that we

 16 should receive feedback from the public on how we

 17 put that process together. I reiterate my

 18 concerns and desire to have the Commission put

 19 forth a public comment period for which the rules

 20 will be considered and how we're going to proceed

 21 in the spring.

 22 It is very important that we have a
 22

 1 roadmap for going forward and the public has the

 2 benefit of knowing which direction we are going.

 3 I'll be posting a list of all our proposed rules

 4 so that the public might sort through this list.

 5 I have handed out this list and I've included it

 6 in my statement today and I'll put on my website.

 7 For the last couple of weeks at every meeting I've

 8 handed this out and asked everybody to take a shot

 9 at reordering in their opinion which rule should

 10 come first and which should come second and I

 11 think I've been beginning to receive some positive

 12 feedback that people have been provided. I'm

 13 going to ask everybody today if you have an

 14 opinion about our rulemaking process, please

 15 comment on it. You can get the form on my website

 16 and please send us your comments. We'd like to

 17 have your thoughts on how we should proceed and

 18 what makes sense to the market. I do appreciate

 19 the efforts that the Chairman has made to have us

 20 all work together on the rulemaking process during

 21 the proposal stage and I look forward to

 22 continuing that work together through the next
 23

 1 stage.

 2 With regard to disruptive trading

 3 practices, we are issuing a proposed interpretive

 4 order to provide guidance on the scope of the

 5 statutory prohibitions set forth in antidisruptive

 6 trading practices in new Section 4(c)(A)(V) of the

 7 Commodity Exchange Act. The admittedly vague

 8 statutory prohibitions have presented some tough

 9 issues and we have spent long hours debating the

 10 appropriate course of action. We can do nothing

 11 and leave the statutory interpretation to market

 12 participants versus issuing regulations

 13 interpreting the statutory language to bind us all

 14 to concepts that we may not yet appreciate given

 15 changes in market structures and trade practices

 16 going forward. After one round of comments in a

 17 roundtable we have taken the middle ground and are

 18 issuing a proposed interpretive order to provide

 19 guidance as to the type of trading, conduct and

 20 practices that will constitute violations in the

 21 new 4(c)(A)(V). I am pleased that the Commission

 22 is recognizing the vital role that the exchanges
 24

 1 and self-regulatory organizations will play in the

 2 surveillance and enforcement of these practices.

 3 The Commission is simply not technologically

 4 equipped to monitor the markets at this time and

 5 as the markets and trade practices evolve, it is

 6 imperative that we work cooperatively with the

 7 individuals and entities on the frontlines. I

 8 believe staff has worked to respond to the many

 9 comments and concerns raised thus far and while

 10 this proposal may not be perfect, it is a modest

 11 step to seek additional comment on a more specific

 12 proposal. This especially so because market

 13 participants and the public will now have the

 14 opportunity to tell us whether interpretive

 15 guidance is simply enough.

 16 I identify with the desire to have

 17 clear-cut rules and definitions and I've come to

 18 understand that there is value in providing some

 19 flexibility. For example, the rule makes clear

 20 that the onus is on market participants to "assess

 21 market conditions and consider how their trade

 22 practices and conduct affect the orderly execution
 25

 1 of transactions during the closing period." This

 2 seems pretty basic. However, how will this apply

 3 to market participants using a trading algorithm?

 4 If the algorithm is not programmed to asses market

 5 conditions in the manner that we believe is

 6 necessary, who will be liable if we have another

 7 May 6? I'd like for staff to answer that question

 8 today and I have a few more questions for them to

 9 answer before I commit to a vote on this.

 10 Finally, I know that all the teams have spent long

 11 hours working on these proposals and I'm grateful

 12 for their efforts. Thank you.

 13 CHAIRMAN GENSLER: Thank you,

 14 Commissioner O'Malia. Now staff will present

 15 their proposals. I think the public knows Ananda,

 16 Phyllis and John who have been here a number of

 17 times in the past.

 18 MS. DIETZ: Thank you, and good morning,

 19 Mister Chairman and Commissioners. I'm pleased to

 20 recommend for publication in the Federal Register

 21 a proposed rulemaking that would establish

 22 requirements for processing and clearing
 26

 1 transactions and the transfer of customer

 2 positions.

 3 This proposed rulemaking has two primary

 4 objectives. The first objective is to establish

 5 appropriate timeframes for the submission and

 6 acceptance for clearing of swap transactions that

 7 are eligible to be cleared by a derivatives

 8 clearing organization which I will refer to for

 9 simplicity as a DCO. The second objective is to

 10 require a DCO to carry out the prompt and seamless

 11 transfer of customer positions from one clearing

 12 member of the DCO to another clearing member of

 13 the DCO upon customer request. These proposals

 14 supplement earlier proposed rulemakings approved

 15 for publication by the Commission. While the

 16 proposed rules before you would establish

 17 requirements for swap dealers, major swap

 18 participants, FCMs, swap execution facilities and

 19 designated contract markets. The primary focus is

 20 on DCOs and the rules to implement core principles

 21 applicable to DCOs regarding participant and

 22 product eligibility and treatment of funds.
 27

 1 I would note as has already been

 2 mentioned the earlier proposed rulemaking for

 3 these Core Principle regulations is still open for

 4 comment until March 21 and the comment periods for

 5 the original and the supplemental rulemakings will

 6 therefore overlap. Hopefully this will enable

 7 commentors to consider both proposals at the same

 8 time and consolidate their comments.

 9 Turning to the substance of the rules,

 10 there are two components that we've considered in

 11 proposing appropriate timeframes for clearing.

 12 They relate to, first, the timing for submission

 13 of a transaction and, second, the timing for a

 14 DCO's acceptance of a transaction for clearing.

 15 In developing proposed timing standards for

 16 submission of transactions, staff has attempted to

 17 take into account the different factual

 18 circumstances under which transactions,

 19 particularly swaps, are going to be cleared. Thus

 20 we propose three different timeframe requirements.

 21 First, for SEFs, swap execution facilities and

 22 DCMs, designated contract markets, they would have
 28

 1 to submit swaps for clearing immediately upon

 2 execution. Second, for swaps not executed or

 3 subject to the rule of the SEF or DCM but subject

 4 to mandatory clearing, a swap dealer, major swap

 5 participant or FCM would have to submit the swap

 6 for clearing as soon as technologically

 7 practicable following execution but not later than

 8 the close of business on the day of execution.

 9 Then third for swaps not executed on or subject to

 10 the rules of a SEF or a DCM and not subject to

 11 mandatory clearing, if these swaps are going to be

 12 cleared, the swaps would have to be submitted for

 13 clearing not later than the next business day

 14 after execution of the swap or the next business

 15 day after the agreement to clear if that's later

 16 than execution.

 17 The regulations that would apply to DCOs

 18 again would make a distinction between different

 19 factual circumstances. First, for transactions

 20 executed on or subject to the rule of a SEF or a

 21 DCM, a DCO would have to accept for clearing

 22 immediately upon execution all transactions listed
 29

 1 for clearing by the DCO. For swaps not executed

 2 on or subject to the rules of a SEF or DCM but

 3 subject to mandatory clearing, a DCO would have to

 4 accept for clearing upon submission to the DCO all

 5 swaps that are listed for clearing by the DCO.

 6 Then last, swaps that are not executed on or

 7 subject to the rules of the SEF or DCM and not

 8 subject to mandatory clearing, a DCO would have to

 9 accept for clearing not later than the close of

 10 business on the day of submission to the DCO all

 11 swaps that are listed for clearing by the DCO.

 12 Before moving to our next topic for

 13 rulemaking, I would like to note briefly that

 14 there are other provisions relating to DCOs that

 15 are covered by the supplement. For example, staff

 16 is recommending approval of a proposed regulation

 17 that would prohibit a DCO from requiring that one

 18 of the original executing parts to a swap must be

 19 a clearing member in order for the transaction to

 20 be eligible for clearing. This is a proposed rule

 21 that would further implement core principles for

 22 participant and product eligibility. Lastly, the
 30

 1 issue of prompt transfer of customers positions

 2 and related funds upon customer request. In

 3 response to industry concerns about portability,

 4 staff is recommending that the Commission propose

 5 a rule to implement DCO Core Principle F,

 6 treatment of Funds, requiring a DCO to have rules

 7 providing that upon the request of a customer and

 8 subject to the consent of the receiving clearing

 9 member, a DCO must promptly transfer customer

 10 positions and related funds from the carrying

 11 clearing member of the DCO to another clearing

 12 member of the DCO without requiring closeout and

 13 rebooking of the positions prior to the transfer.

 14 The requirement that the DCO not require closeout

 15 and rebooking eliminates a source of unnecessary

 16 delay and market disruption and conforms with

 17 current futures industry practices.

 18 This concludes my formal presentation

 19 and my colleagues and I will be happy to answer

 20 any questions. Thank you.

 21 CHAIRMAN GENSLER: Thank you to the team

 22 that's worked on this, and Phyllis for your
 31

 1 presentation. I had a question as to how clearing

 2 works right now in the futures marketplace. Are

 3 there provisions for the exchanges or

 4 clearinghouses to do this prompt and efficient

 5 clearing that we're recommending here in the swaps

 6 marketplace?

 7 MS. DIETZ: Yes. This would be subject

 8 to the DCO rules and we are aware of at least one

 9 DCO that has rules relating to this, so this is

 10 the standard practice.

 11 MR. LAWTON: I would add that on some of

 12 the electronic trading systems they would have

 13 what they call open offer which means that the

 14 clearing arrangements are set up in advance so

 15 that when the trade is executed it immediately

 16 goes to clearing, that the arrangement has already

 17 been set up as to who the clearing member is going

 18 to be.

 19 CHAIRMAN GENSLER: I will be in support

 20 of this rule because as I understand it it lowers

 21 risk in the system that transactions will not be

 22 batched and wait until the end of the week to
 32

 1 clearing, but if they're on a swap execution

 2 facility or on a designated contract market, that

 3 those SEFs and DCMs would have a arrangements with

 4 the clearinghouses to in essence have

 5 straight-through processing or send the

 6 transactions directly to be novated to the

 7 clearinghouses. Is that right?

 8 MS. DIETZ: That's correct.

 9 CHAIRMAN GENSLER: I gather that it is

 10 staff's view that it lowers risk. I think it's at

 11 the core of what Dodd-Frank was doing in lowering

 12 risk was to send transactions to clearinghouses.

 13 MR. RADHAKRISHNAN: That's our view,

 14 yes.

 15 CHAIRMAN GENSLER: Thanks. Commissioner

 16 Dunn?

 17 COMMISSIONER DUNN: Thank you, Mister

 18 Chairman, and I look forward to hearing how this

 19 affects current clearing from comments from the

 20 public on this. I note, and if I can get our

 21 General Counsel to respond here because this is

 22 something I had asked in the past, Phyllis, you
 33

 1 note that there is an overlapping regulation that

 2 is out there and I want to have assurance here

 3 that when folks write in a comment on a regulation

 4 if it is pertinent to other regulations that we

 5 will treat it as if it is a comment on the other

 6 regulation.

 7 MR. BERKOVITZ: Yes, Commissioner.

 8 Staff has been directed to do exactly that, that

 9 if a comment comes in on one rulemaking that

 10 refers to another rulemaking that is pending that

 11 that comment should be sent over to the other

 12 rulemaking team for their consideration so that

 13 that is a matter of staff practice.

 14 CHAIRMAN GENSLER: I didn't ask for a

 15 motion for this and I was supposed. Is there a

 16 motion to accept staff recommendation on

 17 straight-through processing?

 18 COMMISSIONER DUNN: So moved.

 19 COMMISSIONER SOMMERS: Second.

 20 COMMISSIONER DUNN: For final

 21 clarification. Even if that comment period on

 22 that other proposed regulation is closed, it will
 34

 1 still be accepted as if it came in in a timely

 2 manner?

 3 MR. BERKOVITZ: If the comment in an

 4 open comment period refers to a proposed rule for

 5 which the comment period is closed, as a general

 6 matter it would still go over to the other

 7 rulemaking team for their consideration. The

 8 teams have the discretion to consider late-filed

 9 comments so they would have the discretion to

 10 consider it. The Chairman has indicated with

 11 respect to the swaps entities definition proposed

 12 rule making that if commentors are commenting on

 13 the entity's definition and the comment related to

 14 a prior rulemaking that had closed that was

 15 dependent or related to an entity definition such

 16 as some of the perhaps business conduct standards

 17 or another rulemaking period that had closed to

 18 the closure of the entity's definition rulemaking

 19 that staff should exercise its discretion and

 20 consider that comment so that in those cases those

 21 comments will be considered under staff's

 22 discretion. In the future with respect to other
 35

 1 rulemakings, it will be within staff's exercise of

 2 discretion to consider such comments in the other

 3 rules.

 4 COMMISSIONER DUNN: I don't know if that

 5 completely satisfies me or not. I would like it

 6 to be something very uniform and maybe we can

 7 discuss this later as a procedural.

 8 CHAIRMAN GENSLER: I concur with you,

 9 Commissioner Dunn. I think that we're in a

 10 natural pause right now. We have whatever work we

 11 do today and will put out for proposal. Our next

 12 public meeting of the Commission is likely to be

 13 toward the end of March. Of the 30 original

 14 teams, 27 have been here and the thirty-first team

 15 is now here too for the conforming amendments.

 16 But we have a natural pause and that if the public

 17 has comments on a rule that's closed, they've been

 18 still sending them in. There have been meetings.

 19 I'm sure all five of us have been asked to take

 20 meetings and I certainly know that in the meetings

 21 I'm in I try to have somebody take the ex parte

 22 notes and put them in the comment file and make
 36

 1 sure that all five Commissioners have the benefit

 2 of what I'm hearing in those meetings. As General

 3 Counsel Berkovitz has said, I've said this to the

 4 public that if they have a comment and it comes in

 5 and it's during this pause right now, and this

 6 pause is not going to be just a few days. We just

 7 naturally have a period of time where staff is

 8 looking through I think we've gotten probably

 9 somewhere between 1,300 and 1,500 comments already

 10 and staff is looking through those comments

 11 summarizing them. They done a lot of work to

 12 summarize those comments, make staff

 13 recommendations and then this Commission will work

 14 as Commissioner O'Malia said to think of a

 15 schedule as to how to take these up in the spring

 16 and summer. And as I've often noted, we're human

 17 and some of these things will be passed the July

 18 15 date because we want to get these right and

 19 balanced and that's what's important. As to the

 20 pendency, I think I agree with Commissioner Dunn.

 21 Staff and we have some discretion to continue to

 22 get these comments in the right files.
 37

 1 COMMISSIONER DUNN: With that, Mister

 2 Chairman, I have no further questions. I would

 3 ask the public to send in their comments on this.

 4 I will keep an open mind and review those comments

 5 accordingly.

 6 CHAIRMAN GENSLER: Thank you.

 7 Commissioner Sommers?

 8 COMMISSIONER SOMMERS: I'd like to

 9 follow-up on this conversation if I can with

 10 regard to staff's discretion. What will the

 11 process be if staff decides not to consider a

 12 comment letter? Do they notify the party that

 13 they have decided not to consider it? I guess I'm

 14 a little confused at staff's discretion.

 15 MR. BERKOVITZ: When the Commission sets

 16 forth a deadline in the proposed rule, the agency

 17 must consider the comments before the deadline,

 18 and as I mentioned and you referred to in the

 19 question, it is within staff's discretion that it

 20 may be considered and it may not be considered.

 21 There is not a process for notifying a commentor

 22 saying we are considering your comments. If the
 38

 1 comment is considered and the commentor raises an

 2 issue, at that point the agency has an obligation

 3 to respond in the rulemaking to that comment. So

 4 ultimately when the agency publishes a final rule,

 5 it must address all the comments in the final rule

 6 so that at that point the commentor could read the

 7 final rule and see whether that comment was

 8 addressed or not. But there is actually no

 9 process of notification that says we're

 10 considering your comments presently.

 11 COMMISSIONER SOMMERS: Thank you. I

 12 would say that it would be my hope that if there

 13 is not a process for notifying the party if

 14 they've commented after the comment period has

 15 closed and staff makes a determination that we're

 16 not considering that comment that maybe then there

 17 would be a process for at least the Commission to

 18 be notified that we have decided to not consider

 19 those comments because they're after the comment

 20 has ended.

 21 MR. BERKOVITZ: I think that's something

 22 we certainly can do. I'd also note that although
 39

 1 there isn't a formal process for notifying people

 2 whether their comments are considered or not, it's

 3 been my experience with a number of these

 4 instances so far, and I can't speak for all the

 5 rulemaking teams on this, often times commentors

 6 who are either anticipating they will be late who

 7 actually are late will call up and say we're going

 8 to be filing late. Will you consider our

 9 comments? So that there is an informal discussion

 10 between staff back and forth and sometimes the

 11 commentors are informed that, yes, we will

 12 consider their comment. So it's not necessarily a

 13 black box and although there isn't a formal

 14 notification process, there is that informal

 15 discussion back and forth on this. But we can

 16 certainly notify when there is a date that staff

 17 says here is the cutoff date. We're just not

 18 going to be accepting any. It's beyond the point

 19 where if we take more comments it's going to

 20 interfere with the promulgation of the final rule

 21 or something like that. We could do that if

 22 that's what the Commission would like.
 40

 1 COMMISSIONER SOMMERS: Thank you, Dan.

 2 I have a couple of different questions to clarify

 3 to make sure you've clarified for me but making

 4 sure that the public is aware that the transfer of

 5 customer funds that is dealt with in this proposal

 6 is within a single DCO, not between DCOs.

 7 MR. RADHAKRISHNAN: That is correct,

 8 Commissioner. It's meant to make sure that if I

 9 am a customer and I have an account with Phyllis

 10 who is the clearing FCM and I have positions at X

 11 DCO and I want to transfer my positions to John

 12 who is also a clearing member and that DCO must

 13 facilitate that transfer.

 14 COMMISSIONER SOMMERS: Thank you. My

 15 second question to clarify is with regard to the

 16 treatment of funds and the permitted investments,

 17 to clarify that the funds a DCO holds that are not

 18 4D funds are not subject to 1.25.

 19 MR. RADHAKRISHNAN: That is correct,

 20 Commissioner. Rule 1.25 only goes to the

 21 investment of customer segregated funds, yes.

 22 COMMISSIONER SOMMERS: Thank you.
 41

 1 CHAIRMAN GENSLER: Thank you,

 2 Commissioner Sommers. Commissioner Chilton?

 3 COMMISSIONER CHILTON: I'm curious if

 4 we're expecting any resistance to the timeframes

 5 for submitting swaps for clearing or for DCOs to

 6 clear. And also if you think we will get any

 7 resistance to a customer funds transfer proposal.

 8 MR. RADHAKRISHNAN: We may get

 9 resistance from the dealer community. For

 10 example, there is a clearing organization that's

 11 not regulated by this Commission that does

 12 clearing on a weekly basis, on batch basis and so

 13 people may resist because they're used a

 14 particular way of doing business. Also I think

 15 the dealer community may object to this transfer.

 16 They say you don't have to close our your position

 17 and reestablish your position just to move from

 18 one clearing firm to another. That doesn't make

 19 any sense at all. But perhaps the current

 20 practice allows people to make more money so that

 21 if we're potentially taking away a source of

 22 revenue, people might resist.
 42

 1 COMMISSIONER CHILTON: Thank you.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner Chilton. Commissioner O'Malia?

 4 COMMISSIONER O'MALIA: Thank you. Let

 5 me follow- up on the comment questions. I don't

 6 know if it was ever answered why we went with a

 7 30-day or over a 60-day comment period for this

 8 rule.

 9 MS. DIETZ: The reason we were going

 10 with a 30- day was because this rulemaking is

 11 fairly limited and focused and we felt that that

 12 was an appropriate timeframe. It also with the

 13 overlap of the earlier proposed rulemaking would

 14 enable us to proceed and go final with the entire

 15 participant product eligibility rule and the

 16 entire treatment of funds rule at the same time.

 17 CHAIRMAN GENSLER: May I help you on

 18 that one a little bit?

 19 COMMISSIONER O'MALIA: Sure.

 20 CHAIRMAN GENSLER: But if we had a

 21 longer comment period, couldn't we possibly do a

 22 great deal of what we do in clearing in the spring
 43

 1 or into the summer and this straight-through

 2 processing could possibly be done in a separate

 3 final rule? It is pretty targeted. Isn't that

 4 possible as well?

 5 MS. DIETZ: Yes, it certainly could be

 6 done separately just as it is being done now. I

 7 think that one thing to take into consideration

 8 which I know has been discussed and there isn't a

 9 final decision on it is how we consolidate and put

 10 together all the different rulemakings. It's an

 11 issue of mechanics more than anything else because

 12 once all the comment periods close, we will have

 13 the full breadth of the public comments. So it's

 14 just a matter of making sure that everything is

 15 sown together neatly and fits together. But this

 16 is as I think you will see free- standing so that

 17 if we went out with other rules and then did this

 18 separately, it's certainly possible.

 19 CHAIRMAN GENSLER: So I would say to

 20 Commissioner O'Malia that this one might end up

 21 being free-standing and I'd be open to making this

 22 60 days as well.
 44

 1 COMMISSIONER O'MALIA: I was going to

 2 follow-up in my next part. I think we have shown

 3 some flexibility and I think that the DOJ letter

 4 that we received on our governance came in 38 days

 5 after the comment period and we accepted so that

 6 if 38 days is our new standard then I'm okay with

 7 that. I want to put that out there.

 8 I have a question on Section 39.12. As

 9 the Chairman noted, the rule seeks to conform

 10 swaps and futures markets. The rule now reads

 11 that "A derivative clearing organization shall

 12 select contract units sizes and other terms and

 13 conditions that maximize liquidity, facilitate

 14 transparency in pricing, promote access and allow

 15 for effective risk-management." The preamble also

 16 explicitly states that the goal of the other terms

 17 and conditions language is to clarify that when a

 18 DCO is establish products and templates it must

 19 select termination or a maturity period,

 20 settlement features and cash-flow conventions.

 21 The Chairman made a compelling argument for risk

 22 reduction, et cetera. On Tuesday we received a
 45

 1 letter from Representative Barney Frank and in

 2 that letter he mentioned to the Commission that

 3 swaps are very different products than those

 4 currently traded in the "highly evolved equities

 5 and futures market." I think we should listen to

 6 that advice because these markets are different

 7 and they have quite frankly not evolved in the

 8 same way that Congressman Barney Frank has pointed

 9 out. My question is to John and Phyllis, are you

 10 absolutely certain that by forcing the

 11 termination, settlement and cash-flow conventions

 12 on swaps that this is the current solution for the

 13 swaps market?

 14 MR. RADHAKRISHNAN: If you accept the

 15 proposition that swaps need to be cleared, I think

 16 you got to give the clearinghouse the most

 17 flexibility in determining how to clear a product.

 18 Otherwise what you're going to get is, the worry

 19 that you're going to have is, as between the

 20 customer and its clearing firm you have one

 21 contract, between the clearing firm and the

 22 clearinghouse you're going to have another
 46

 1 contract. That's not what happens in the futures

 2 industry. Everybody has the same contract so

 3 that, one, it facilitates an E.D., an easy

 4 movement of positions. Let's say if a firm is

 5 having financial difficulty, it facilitates easy

 6 movement and the reason we proposing contract size

 7 constraints or that we propose this contract issue

 8 is you want to make it easy for the clearinghouse

 9 to determine how to clear a particular transaction

 10 because once it's cleared it's not a bilateral

 11 transaction anymore. It's a transaction between

 12 the clearing member and the clearinghouse. So we

 13 believe that smaller lot sizes will facilitate

 14 liquidity thereby allowing these products to be

 15 listed on a DCM or a SEF, and also it will help in

 16 default management because it may be easier to

 17 either liquidate or assign or move positions to

 18 different clearing members. So far experience has

 19 been in an instance of financial difficulty one

 20 firm takes the whole book or buys the whole book,

 21 but that may not be necessarily so. You may have

 22 two firms agreeing to take a portion of a
 47

 1 particular book of a clearing and that's why we

 2 proposed this.

 3 COMMISSIONER O'MALIA: Can you think of

 4 a scenario in which this rule might constrain the

 5 swaps market?

 6 MR. RADHAKRISHNAN: I cannot, but I

 7 think that's why hopefully if there is something,

 8 we'll get some public comment on it.

 9 COMMISSIONER O'MALIA: In talking with

 10 some of the buy-side asset managers, they raise

 11 the issue of breaking up block trades and

 12 allocating them to the clients prior to clearing.

 13 They're trying to solve both operational risk and

 14 counterparty risk. I'm trying to understand.

 15 This straight-through processing rule has this

 16 immediate requirement. Would that undermine the

 17 ability of an asset manager to reallocate all of

 18 their trades to their clients before clearing

 19 because they're not the clearing member, their

 20 clients are dealing with this. Will that mess up

 21 that process? Will it make it more expensive? Do

 22 we inject operational risk versus counterparty
 48

 1 risk? What do you think?

 2 MR. RADHAKRISHNAN: I don't think so,

 3 but we've asked a question to that effect as to

 4 whether there will be something detrimental. But

 5 the way I look at it is very similar to how bunch

 6 orders are treated in the futures world. The

 7 issue of allocation is one that takes place after

 8 execution and after clearing because what you want

 9 to make sure is you allocate positions. Let's say

 10 you're a money manager and you've got 10 clients.

 11 You execute say a block of 1,000 contracts and

 12 you're going to give 100 to each of them. In my

 13 view what has to happen first is clearing. After

 14 clearing then you as the money manager can decide

 15 which of your clients get the trade. So I don't

 16 see how clearing will affect the allocation

 17 process, but we have asked the question. Maybe

 18 we're missing something.

 19 COMMISSIONER O'MALIA: But that's not

 20 the way it's done now though. Right? You've met

 21 with these folks in the swaps world and they come

 22 in and they say we have this and we allocate it to
 49

 1 our customer in a bilateral deal.

 2 MR. RADHAKRISHNAN: In the uncleared

 3 world.

 4 COMMISSIONER O'MALIA: It's uncleared.

 5 MR. RADHAKRISHNAN: Right.

 6 COMMISSIONER O'MALIA: But if they're

 7 going to clearing, there is no reason why

 8 standardization of terms and conditions in the

 9 previous question, we're going standardize these

 10 products and we're going to have a lot more

 11 cleared products. How do they manage that

 12 relationship that they currently have today in

 13 this new environment?

 14 MR. RADHAKRISHNAN: The difference

 15 between the uncleared world and the cleared world

 16 is this. In the uncleared world, let's say you're

 17 a money manager.

 18 COMMISSIONER O'MALIA: I understand the

 19 relationship today. I'm saying what are the

 20 consequences going forward and how will this

 21 relationship change and have we thought of that?

 22 MR. RADHAKRISHNAN: The consequence
 50

 1 going forward is that once it's cleared you have a

 2 central counterparty, the clearinghouse. So as

 3 between the customer, the customer will have a

 4 relationship with the clearing firm and according

 5 to Dodd-Frank unless the money manager is also an

 6 FCM, the money manager must have a relationship

 7 with a clearing FCM so that in this case the money

 8 manager will be functioning as a CTA. Probably

 9 will have to be a CTA. The key difference is that

 10 you've got a clearinghouse in between. You don't

 11 have say 10 counterparties. You got one clearing

 12 member, one clearinghouse. We don't see, in fact

 13 we think this will make it easier to do the

 14 allocation process because let's say you do a

 15 1,000 lot trade, I'm the money manager and I give

 16 it to Phyllis who is a clearing member so this

 17 clears it with John. It's done. Clearing takes

 18 place. Then Phyllis will tell me you're done and

 19 now go ahead and allocate how you want to

 20 allocate. Of course Phyllis needs to know because

 21 the clients that I allocated to are also Phyllis's

 22 clients because they're all customers. So I think
 51

 1 that this will make allocations much easier just

 2 as it has done in the futures world.

 3 COMMISSIONER O'MALIA: So in a default

 4 situation with a clearinghouse and you've cleared.

 5 MR. RADHAKRISHNAN: I'm the money

 6 manager?

 7 COMMISSIONER O'MALIA: You're the money

 8 manager and you've cleared with the clearinghouse.

 9 MR. RADHAKRISHNAN: I have a

 10 relationship with the clearinghouse.

 11 COMMISSIONER O'MALIA: But you just

 12 cleared with the clearinghouse and then you just

 13 unloaded it on your customer. Who does the

 14 clearinghouse now have the relationship with?

 15 MR. RADHAKRISHNAN: The clearinghouses?

 16 If the position does not belong to me, I'm just

 17 the manager?

 18 COMMISSIONER O'MALIA: But you cleared

 19 it. You and the clearinghouse have now done the

 20 deal.

 21 MR. RADHAKRISHNAN: Actually what

 22 happens is I have to tell all my customers to open
 52

 1 an account with the clearing FCM. Unless I am the

 2 clearing FCM, I cannot engage, I cannot clear, I

 3 cannot act as a clearing member for customers with

 4 a clearinghouse unless I'm an FCM. So if I choose

 5 just to be a money manager which happens right

 6 now, I choose just to be money manager, I will

 7 tell my clients whoever I manage the money for, to

 8 open an account with an FCM, whichever FCM they

 9 choose just like it happens in futures. So the

 10 relationship is between the client and the FCM and

 11 the FCM and the clearinghouse. I'm just the

 12 adviser.

 13 COMMISSIONER O'MALIA: So to my original

 14 question how will this change, I think you've just

 15 identified that that's how it will change.

 16 MR. RADHAKRISHNAN: Yes, it will change.

 17 In fact, I think it will make it much more

 18 rational and it will introduce the clarity in the

 19 futures world to the cleared swaps world.

 20 COMMISSIONER O'MALIA: Thank you.

 21 CHAIRMAN GENSLER: That change to which

 22 you just referred and it's part of why we're
 53

 1 reaching out to talk about implementation phasing

 2 because these changes for money managers, for

 3 asset managers and ultimately financial end users,

 4 not the nonfinancial, but for the financial end

 5 users, over time Dodd-Frank says that if it's

 6 cleared you have to clear through a futures

 7 commission merchant. Am I right?

 8 MR. RADHAKRISHNAN: Correct. Dodd-Frank

 9 says that if a swap has to be cleared or in fact

 10 if it's voluntarily cleared at a DCO, it must be

 11 done through a registered FCM. As far as a

 12 customer is concerned, only a registered FCM can

 13 clear the transaction at a clearinghouse for a

 14 customer.

 15 CHAIRMAN GENSLER: This rule is not

 16 doing that. That's done by statute.

 17 MR. RADHAKRISHNAN: That's right.

 18 That's right.

 19 CHAIRMAN GENSLER: So the change to

 20 which you refer, there is a statutory

 21 construction.

 22 MR. RADHAKRISHNAN: Right. I look upon
 54

 1 it as a processing change because right now in the

 2 bilateral world there is no clearinghouse and

 3 there is no clearing member, so the money manager

 4 executes swaps with a counterparty, but he or she

 5 is doing it for the people who they manage money

 6 from and I would imagine that after the execution

 7 is done, the money manager will then have to

 8 identify to the counterparty who its counterparty

 9 is because that's what the money manager does

 10 unless the money manager is choosing to act as a

 11 counterparty.

 12 COMMISSIONER O'MALIA: Do you have a

 13 sense of what this would do the cost relationship?

 14 The paradigm with having all these pension funds

 15 and worker's money in this and they go to an asset

 16 manager and they manage this fund, and now you're

 17 breaking up that relationship and changing that.

 18 What impact will that have on the individual

 19 pension fund?

 20 MR. LAWTON: I would make one point. I

 21 think that currently the individual parties would

 22 have to have a relationship with whoever the
 55

 1 counterparty is and going forward they would have

 2 to have a relationship with an FCM. They wouldn't

 3 have to have a direct relationship with the

 4 counterparty anymore because it's going to

 5 clearing.

 6 CHAIRMAN GENSLER: In my meetings with

 7 some large asset managers, regardless of this rule

 8 they've said we know that we need to do this

 9 documentation, we hope that we have enough months

 10 and that you will work into the implementation

 11 process because of their customers will have to go

 12 from ISDA agreements to agreements with futures

 13 commission merchants and I think that that's

 14 regardless of this why it's very helpful to hear

 15 from the public on these documentation issues

 16 because I think it will affect our implementation

 17 schedules, and it certainly influences my thinking

 18 on implementation.

 19 COMMISSIONER O'MALIA: That is a great

 20 point, Mister Chairman. The relationship is

 21 changing and it is a huge documentation challenge

 22 and I'm glad you recognize that and we're going to
 56

 1 accommodate that.

 2 CHAIRMAN GENSLER: There is a cumulate

 3 effect of all the rules and what Congress passed

 4 was to help promote transparency and lower risk,

 5 but it's got to be implemented over time, some

 6 things sooner, some things later.

 7 COMMISSIONER O'MALIA: Just keep in mind

 8 that these are pension funds, people who are

 9 trying to find the most cost-effective way to

 10 manage their money and get the best return, and

 11 for us to change that relationship or increase the

 12 cost is going to hurt.

 13 CHAIRMAN GENSLER: But I'm hearing from

 14 Ananda, Phyllis and John that this particular rule

 15 here isn't what causes that, those documentation

 16 issues.

 17 COMMISSIONER O'MALIA: Agreed, but this

 18 is the opportunity I took to highlight the

 19 paradigm shift.

 20 CHAIRMAN GENSLER: I'm glad you did.

 21 Did you feel you needed a change on the comment

 22 period? No. If there are no further questions.
 57

 1 MR. STAWICK: Commissioner O'Malia?

 2 COMMISSIONER O'MALIA: Aye.

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

 4 Commissioner Chilton?

 5 COMMISSIONER CHILTON: Aye.

 6 MR. STAWICK: Commissioner Chilton, aye.

 7 Commissioner Sommers?

 8 COMMISSIONER SOMMERS: Aye.

 9 MR. STAWICK: Commissioner Sommers, aye.

 10 Commissioner Dunn?

 11 COMMISSIONER DUNN: Aye.

 12 MR. STAWICK: Commissioner Dunn, aye.

 13 Mister Chairman?

 14 CHAIRMAN GENSLER: Aye.

 15 MR. STAWICK: Mister Chairman, aye.

 16 Mister Chairman, on this question the ayes are

 17 five, the nays are zero.

 18 CHAIRMAN GENSLER: The vote being

 19 unanimous, we'll be looking forward to sending it

 20 to the Federal Register and look forward to

 21 hearing public comment on this. Then we turn to,

 22 I can't remember of it's Part 3 or Part 4 first.
 58

 1 Part 4 of the Commission regulation's conforming

 2 amendments.

 3 Chris Cummings and Barbara Gold, it's

 4 good to see you again. You've done excellent work

 5 and have presented here before on registration and

 6 other matters. Chris worked on the FX rules as

 7 well. They are going to present the first of what

 8 I suspect will be not just two considerations

 9 today, but a number of considerations over the

 10 next several months about conforming amendments,

 11 looking through our whole Rule Book to ensure that

 12 it aligns with the financial reform bill passed

 13 last year, but this will be the first one I'll

 14 turn it over to Ananda, Chris Cummings and Barbara

 15 Gold.

 16 MR. CUMMINGS: Thank you, Mister

 17 Chairman, Commissioners, ladies and gentlemen. My

 18 name is Chris Cummings and I'm an attorney with

 19 the Division of Clearing and Intermediary

 20 Oversight.

 21 The rulemaking we are recommending to

 22 you today proposes to make conforming and
 59

 1 technical changes to Part 4 of the Commission's

 2 regulations. It has been nicknamed the Part 4

 3 Cleanup and not without some reason. Part 4

 4 governs the operations and activities of commodity

 5 pool operators and commodity trading advisers.

 6 The Dodd-Frank Act expressly included swaps in the

 7 activities that bring persons within the CPO and

 8 CTA definitions. Accordingly, the cleanup process

 9 this proposed rulemaking involved reviewing the

 10 existing regulatory text in Part 4 and making sure

 11 that it accomplishes the intended customer

 12 protection goals with respect to swap activity

 13 undertaken by CPOs and CTAs. To the extent we

 14 found that changes were called for, we have

 15 developed proposed amendments for Commission

 16 consideration.

 17 For the most part, the proposed changes

 18 are not substantive. They include inserting the

 19 word swap or swap transaction or similar wording

 20 where the existing regulation refers to

 21 transactions or instruments as to which a CPO or

 22 CTA must for example disclose information, make
 60

 1 reports or keep records. They also including swap

 2 dealer among the persons with respect to which a

 3 CPO or CTA must provide information or disclose

 4 conflicts of interest.

 5 Three of the proposed changes could be

 6 characterized as substantive but too are simply

 7 necessary adjustments to accommodate the

 8 provisions of the Dodd-Frank Act. The first of

 9 these changes results from the fact that in Part 4

 10 the term commodity interest is used as a shorthand

 11 term for the instruments currently regulated under

 12 the Commodity Exchange Act, namely futures

 13 contracts, commodity options and off-exchange

 14 retail foreign exchange contracts. In order to

 15 ensure that swaps are considered in the various

 16 places where the term commodity interest is used

 17 in relation to the activities of CPOs and CTAs, we

 18 recommend that Part 4 be amended to contain a

 19 definition of the term commodity interest that

 20 includes swaps.

 21 The second of the substantive changes

 22 concerns Regulation 4.30 which currently prohibits
 61

 1 a CTA from accepting customer margin money in the

 2 CTA's own name unless the CTA is registered as for

 3 example a futures commission merchant. Because

 4 swap dealers generally will come within the

 5 statutory definition of commodity trading advisers

 6 and because a swap dealer engaged in uncleared

 7 swap transactions may be accepting funds or other

 8 property from its counterparties as variation and

 9 initial margin payments, we are recommending that

 10 the Commission amend Regulation 4.30 to exclude a

 11 registered swap dealer from the regulation's

 12 prohibition in connection with a swap that is not

 13 cleared through a derivatives clearing

 14 organization. In connection with this

 15 recommendation and at the request of the General

 16 Counsel, we have included the following text in

 17 the preamble, "The Commission intends to address

 18 the circumstances in which nonbank swap dealers

 19 may be required or permitted to accept margin

 20 payments in uncleared swap transactions in a

 21 future proposed rulemaking. Accordingly, this

 22 proposed amendment to Regulation 4.30 should not
 62

 1 be interpreted to impose or authorize any such

 2 margin requirement."

 3 The third and final substantive change

 4 we are recommending is deletion of Regulation 4.32

 5 which deals with trading by a registered CTA on or

 6 subject to the rules of a derivatives transaction

 7 execution facility or DTEF. Since the Dodd-Frank

 8 Act does away with DTEF, this provision no longer

 9 served a purpose.

 10 That's about all there is to say about

 11 this proposal. We would be happy to answer any

 12 questions you have.

 13 CHAIRMAN GENSLER: At this time I'll ask

 14 for a motion to accept the staff recommendation on

 15 Part 4 on conforming amendments.

 16 COMMISSIONER DUNN: So moved.

 17 COMMISSIONER SOMMERS: Second.

 18 CHAIRMAN GENSLER: I don't have any

 19 particular question. For the public as Chris

 20 said, these are cleanup but they're on really

 21 important rules, Part 4. It has been in place for

 22 some time. Maybe I should ask for how long. Some
 63

 1 of it probably predates our Commission. Is that

 2 right? When did this go into effect?

 3 MS. GOLD: Commodity pool operators and

 4 commodity trading advisers were added to the

 5 Commission's jurisdiction when the Commission

 6 itself was established in 1974. Rules to regulate

 7 CPOs and CTAs I believe first came out around 1977

 8 and the regulatory scheme we're working with was

 9 first adopted and issued by the Commission in

 10 1979.

 11 CHAIRMAN GENSLER: What I understand

 12 you've done is you've looked through all of Part 4

 13 and said given that the Dodd-Frank Act now

 14 includes in the definition of commodity pool

 15 operators and commodity trading advisers advising

 16 or pooling swaps, you've looked through it and as

 17 you say you've done this conforming or cleanup.

 18 Is that right, Chris?

 19 MR. CUMMINGS: That is correct.

 20 CHAIRMAN GENSLER: It would be helpful

 21 also from the public's perspective if we hear any

 22 comments on Part 4, not just related to swaps.
 64

 1 These are 30-plus-year-old rules. Are there

 2 comments?

 3 MS. GOLD: I would agree, but I would

 4 note that they are 30-plus-year-old rules. From

 5 time to time over the course of the past 30 years

 6 they have been amended.

 7 CHAIRMAN GENSLER: Of course. They

 8 might be 30 years vintage, but they've been

 9 refreshed. Thank you. Commissioner Dunn?

 10 COMMISSIONER DUNN: Thank you, Mister

 11 Chairman. I don't have any problems with this,

 12 but I'm going to ask on Part 4 and Part 3 as well,

 13 will these cleaned-up versions be put on our

 14 website so that the public will have an

 15 opportunity to see what it looks like after

 16 everything is put together at the end of the day?

 17 Usually we wait until somebody prints one of those

 18 books that gives us all our regulations and I'm

 19 wondering how will the public be able to access

 20 this before such publication?

 21 MS. GOLD: I will tell you. Perhaps 10

 22 years ago the Code of Federal Regulations started
 65

 1 publishing on its website an electronic version

 2 and when you access the Commission's rules through

 3 our website, that link is to the electronic Code

 4 of Federal Regulations and the great thing about

 5 that is it says right across the top "These

 6 regulations are current as of" and typically the

 7 regulations are current within two or 3 days of

 8 the website's date.

 9 COMMISSIONER DUNN: Thank you. Barbara,

 10 you're just a great source of knowledge.

 11 CHAIRMAN GENSLER: Commissioner Sommers?

 12 COMMISSIONER SOMMERS: I don't have any

 13 questions. Thank you.

 14 CHAIRMAN GENSLER: Commissioner Chilton?

 15 COMMISSIONER CHILTON: Just a quick one.

 16 I know this isn't an attention-grabbing headline

 17 thing, but these are important day-to-day

 18 operations and I'm curious if you think there will

 19 be any major pushback on anything from industry on

 20 these.

 21 MR. CUMMINGS: We're not expecting any

 22 kind of controversy at all on these. This is just
 66

 1 simple reflex cleanup of things that are direct

 2 results of the enactment of the Dodd-Frank Act.

 3 COMMISSIONER CHILTON: Thank you.

 4 CHAIRMAN GENSLER: Thank you,

 5 Commissioner Chilton. Commissioner O'Malia?

 6 COMMISSIONER O'MALIA: I have one

 7 question. I'm curious. In Rule 4.24, General

 8 Disclosures, we require CPOs and CTAs to disclose

 9 "any fees, costs or fees included in the spread

 10 between bid and ask prices for retail Forex or swap

 11 transactions." We've added swap transactions to

 12 this language that's already existing. How will

 13 that work? What costs are we thinking about?

 14 Then for things that are transacted on a SEF, how

 15 is that going to work? I'm just trying to figure

 16 out what costs might be out there and how will

 17 they be disclosed.

 18 MR. CUMMINGS: This provision was

 19 introduced initially to cover the retail Forex market

 20 where it's the bid- ask spread or points or PIPs

 21 over or above and that sort of thing for

 22 calculating what the customer pays and what the
 67

 1 counterparty who is the dealer at the same time

 2 receives for income. The idea here is to try to

 3 capture that the pool operator knows about that

 4 amounts to a fee or cost to the customer that may

 5 or may not be contained in a quoted bid-ask spread

 6 or otherwise.

 7 COMMISSIONER O'MALIA: Is the SEF and

 8 the retail Forex relationship completely analogous?

 9 MR. CUMMINGS: Certainly not because a

 10 SEF would be an exchange and the retail Forex is

 11 basically a counterparty-to-customer relationship.

 12 MR. RADHAKRISHNAN: But to the extent

 13 that you have bilateral transactions, I think

 14 that's analogous because in an exchange

 15 environment you have the bid-ask spread and then

 16 there will be a separate or commission or whatever

 17 it is and to the extent the CPO knows about it,

 18 has to disclose it. But sometimes in bilateral

 19 transactions there is the price plus something

 20 else. So the extent the CPO knows about it, he or

 21 she should disclose it.

 22 MR. CUMMINGS: If it would help, we can
 68

 1 add to the language any costs or fees included if

 2 known.

 3 COMMISSIONER O'MALIA: That would be

 4 helpful I think. Thank you.

 5 CHAIRMAN GENSLER: I'd ask for unanimous

 6 consent. Not hearing any objection, so moved.

 7 COMMISSIONER O'MALIA: Thank you very

 8 much. Maybe Mr. Stawick if you'd call the roll

 9 and by the time we figure out Robert's Rules he'll

 10 be back in.

 11 MR. STAWICK: Commissioner O'Malia?

 12 COMMISSIONER O'MALIA: Aye.

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

 14 Commissioner Chilton?

 15 COMMISSIONER CHILTON: Aye.

 16 MR. STAWICK: Commissioner Chilton, aye.

 17 Commissioner Sommers?

 18 COMMISSIONER SOMMERS: Aye.

 19 MR. STAWICK: Commissioner Sommers, aye.

 20 Commissioner Dunn?

 21 COMMISSIONER DUNN: Aye.

 22 MR. STAWICK: Commissioner Dunn, aye.
 69

 1 Mister Chairman?

 2 CHAIRMAN GENSLER: Aye.

 3 MR. STAWICK: Mister Chairman, on this

 4 question the ayes are five, the nays are zero.

 5 CHAIRMAN GENSLER: It having passed, I

 6 look forward to send this one to the Federal

 7 Register as well. Ananda, we'll move to Part 3.

 8 Thank you, Barbara, and thank you, Chris.

 9 Excellent work.

 10 MR. RADHAKRISHNAN: Mister Chairman and

 11 Commissioners, Andrew Chapin, Associate Director

 12 in DCIO, and Claire Noakes, Special Counsel, will

 13 be presenting on registration of intermediaries.

 14 MR. CHAPIN: Thank you, Ananda. Good

 15 morning, Mister Chairman, good morning to the rest

 16 of the Commissioners. As an opening thought, I

 17 will say that it's not my intent to simply recite

 18 each of the provisions that are addressed in the

 19 proposal. Many of these provisions are technical

 20 in nature or otherwise self-explanatory. Instead

 21 I would like to more broadly discuss the intent

 22 and purpose behind this proposal.
 70

 1 As likely has been mentioned numerous

 2 time, Title VII of the Dodd-Frank Act amended the

 3 Commodity Exchange Act to establish a

 4 comprehensive new regulatory framework to reduce

 5 risk, increase transparency and promote market

 6 integrity within the financial system by among

 7 other things providing for the registration and

 8 comprehensive regulation of swap dealers and major

 9 swap participants. The Notice of Proposed

 10 Rulemaking that we are here to discuss today sets

 11 forth proposed regulations to further implement

 12 these new statutory provisions consistent with

 13 other Commission rulemakings and to make other

 14 improvements to Part 3 of the regulations

 15 regarding the registration of intermediaries.

 16 The Commission's existing registration

 17 process for futures, commotion options and retail

 18 foreign-exchange intermediaries, their associated

 19 persons, floor brokers and floor traders is set

 20 forth in Part 3. Currently Part 3 does not

 21 address the categories of swap dealers and major

 22 swap participant. Nor does it reference swap
 71

 1 execution facilities, a new market category for

 2 swap transactions created by Dodd-Frank.

 3 The proposed revisions would provide

 4 generally that the mechanics for registration

 5 applicable to intermediaries engaged in certain

 6 commodity interest transactions such as futures,

 7 commodity options and retail foreign exchange

 8 would similarly extend to the intermediaries

 9 engaged in swap transactions. In other words,

 10 this proposal would amend Part 3 to conform the

 11 regulations regarding the mechanics of

 12 registration by incorporating references to swap

 13 dealers, major swap participants and SEFs where

 14 appropriate.

 15 As a result, swap dealers and major swap

 16 participants would for example be required to file

 17 the same types of registration documents, be

 18 required to maintain accurate identifying

 19 information and follow the same procedures for the

 20 withdrawal of their registration as any other

 21 derivatives registrant. It is worth noting that

 22 this regulation also would delete references to
 72

 1 derivatives transaction execution facilities or

 2 DTEFs from Part 3. As was previously mentioned,

 3 this term was abolished as a market category by

 4 Dodd-Frank.

 5 In addition to these conforming

 6 amendments, the proposal today sets forth certain

 7 modernizing and technical amendments. In

 8 anticipation of an influx of new registrants

 9 unfamiliar with the Part 3 requirements, the

 10 proposal would improve Part 3 to make it more user

 11 friendly. Among other improvements, the proposal

 12 will amend Part 3 to reflect current registration

 13 practices of the National Futures Association and

 14 clarify the standard under which a registrant may

 15 simply amend its registration rather than

 16 withdrawal and reregister due to changes to a

 17 legal name or form of organization in conjunction

 18 with a change in principles. It will consolidate

 19 multiple references currently contained in various

 20 provisions of Part 3 into a single appropriate

 21 location. It would improve the consistency of

 22 terms across Part 3. Lastly, it will update
 73

 1 cross-references to other regulations.

 2 With that I will conclude my remarks and

 3 we are prepared to answer any questions. Thank

 4 you, Mister Chairman.

 5 CHAIRMAN GENSLER: I'll entertain a

 6 motion on accepting the staff recommendation on

 7 conforming amendments on Part 3.

 8 COMMISSIONER DUNN: So moved.

 9 COMMISSIONER SOMMERS: Second.

 10 CHAIRMAN GENSLER: I too will be

 11 supporting this rule. As I understand it beyond

 12 the sort of the cleanup and technical, the main

 13 thing is to move the words swap dealer and major

 14 swap participant in where it's appropriate. Is

 15 that the main thrust of this?

 16 MR. CHAPIN: That is correct.

 17 CHAIRMAN GENSLER: Because this part,

 18 Part 3, is largely about intermediaries. How does

 19 Part 3 work with the business conduct and other

 20 rules that we've proposed and not yet moved to

 21 final on?

 22 MR. CHAPIN: Part 3 simply deals with
 74

 1 the mechanics of registration in how the firm must

 2 identify itself to the Commission and to the

 3 National Futures Association as it becomes a

 4 registered entity.

 5 CHAIRMAN GENSLER: So that Part 3 is not

 6 a set of affirmative obligations, it's more about

 7 if I might call it process and procedure.

 8 MR. RADHAKRISHNAN: Correct. And then

 9 you go to Part 22 I guess.

 10 CHAIRMAN GENSLER: Part what?

 11 MR. RADHAKRISHNAN: The new part that

 12 deals with business conduct. Once you are

 13 registered as a swap dealer or an MSP, look at

 14 this part and follow those rules.

 15 CHAIRMAN GENSLER: Thank you.

 16 Commissioner Dunn?

 17 COMMISSIONER DUNN: I have no questions.

 18 CHAIRMAN GENSLER: Commissioner Sommers?

 19 COMMISSIONER SOMMERS: I don't have any

 20 questions.

 21 CHAIRMAN GENSLER: Commissioner Chilton?

 22 COMMISSIONER CHILTON: No questions.
 75

 1 CHAIRMAN GENSLER: Commissioner O'Malia?

 2 COMMISSIONER O'MALIA: There is language

 3 in the proposal that discusses exempting

 4 individuals from registration as a swap dealer or

 5 an MSP if they're employed by a swap dealer or

 6 MSP. How many individuals have we potentially

 7 identified who could become swap dealers or MSPs?

 8 MS. NOAKES: I think that proposal is

 9 intending to ensure that due to the broad nature

 10 of the definition of swap dealer and MSP, arguably

 11 if I as an employee, an associated person with a

 12 swap dealer, look at the definition, I might

 13 arguably fit into it. So this is just to

 14 affirmatively state we are not intending those

 15 persons to fall into that category if they are in

 16 fact associated persons of a swap dealer or major

 17 swap participant.

 18 COMMISSIONER O'MALIA: I certainly don't

 19 disagree with your characterization of a broad

 20 definition.

 21 CHAIRMAN GENSLER: Thank you. Mr.

 22 Stawick?
 76

 1 MR. STAWICK: Commissioner O'Malia?

 2 COMMISSIONER O'MALIA: Aye.

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

 4 Commissioner Chilton?

 5 COMMISSIONER CHILTON: Aye.

 6 MR. STAWICK: Commissioner Chilton, aye.

 7 Commissioner Sommers?

 8 COMMISSIONER SOMMERS: Aye.

 9 MR. STAWICK: Commissioner Sommers, aye.

 10 Commissioner Dunn?

 11 COMMISSIONER DUNN: Aye.

 12 MR. STAWICK: Commissioner Dunn, aye.

 13 Mister Chairman?

 14 CHAIRMAN GENSLER: Aye.

 15 MR. STAWICK: Mister Chairman, aye.

 16 Mister Chairman, on this question the yeas are

 17 five and the nays are zero.

 18 CHAIRMAN GENSLER: Thank you, Ananda,

 19 Claire and Andrew. With the vote being unanimous,

 20 we'll send this one to the Federal Register as

 21 well. Ananda, I guess you get to step up and

 22 we'll have the group with regard to interpretive
 77

 1 guidance with Bob Pease. Who else is coming up?

 2 Vince is coming up? Is Steve also going to be

 3 here?

 4 MR. PEASE: Yes, Steve will be here.

 5 CHAIRMAN GENSLER: Does he speak first?

 6 MR. PEASE: No. I'm going to go first.

 7 CHAIRMAN GENSLER: Then we're going to

 8 keep moving.

 9 MR. PEASE: Good morning, Mister

 10 Chairman and Commissioners. Staff is recommending

 11 that the Commission issue a proposed interpretive

 12 order providing guidance on the three disruptive

 13 trading practices in new Section 4(c)(A)(V) of the

 14 Commodity Exchange Act.

 15 CHAIRMAN GENSLER: Let me mention, Bob,

 16 that you might move the mike closer because I

 17 don't know if it's going to be picked up.

 18 MR. PEASE: The first prohibition of

 19 Section 4(c)(A)(V) makes it unlawful to violate

 20 bids or offers. Persons must transact at the best

 21 available economic price. This prohibition on

 22 violating bids and offers applies in any trading
 78

 1 environment where a person exercises some control

 2 over the selection of bids or offers. This

 3 prohibition applies to the specific trading

 4 environment where the trading takes place. It

 5 does not require market participants to search

 6 multiple trading platforms for the best bid or

 7 offer. This section does not apply where a person

 8 is unable to violate a bid or offer such as an

 9 exchange automated matching engine. This

 10 prohibition again does not apply to block trades,

 11 bilateral noncleared swap transactions or exchange

 12 for physicals provided that the transaction

 13 complies with the rules of the DCM or SEF on which

 14 it is traded.

 15 The second prohibition of Section

 16 4(c)(A)(V) prohibits anyone from intentionally or

 17 recklessly disregarding orderly execution of

 18 transactions during the closing period. This

 19 proposed order interprets the closing period to be

 20 generally defined as the period in the contract or

 21 trade when the daily settlement price is

 22 determined under the rules of the trading
 79

 1 facility. For example, with an IMEX natural

 2 contract the closing period is defined as the last

 3 30 minutes of the last day of trading, while with

 4 CBOT treasuries it is defined as the last 60

 5 seconds.

 6 While the proposal interprets the

 7 prohibition in Section 4(c)(A)(V)(b) to accomplish

 8 any trading, conduct or practices occurring inside

 9 the closing period that affects the orderly

 10 execution of transactions during the closing

 11 period, potential disruptive conduct outside that

 12 period may nevertheless form the basis for an

 13 investigation or potential violations under this

 14 section. The proposed interpretive order reaches

 15 bids or offers as well as executed orders.

 16 The final provision of 4(c)(A)(V)

 17 prohibits conduct that is or is of the character

 18 of spoofing. Under the Act, spoofing is defined

 19 as bidding or offering with the intent to cancel

 20 the bid or offer before execution. The proposed

 21 order identifies the following examples of the

 22 character of spoofing: submitting or cancelling
 80

 1 bids or offers to overload the quotation system of

 2 a registered entity; submitting or cancelling bids

 3 or offers to delay another person's execution of

 4 trades; and submitting or cancelling multiple bids

 5 or offers to create an appearance of false market

 6 depth. This proposed interpretive order provides

 7 that orders, modifications or cancellations will

 8 not be classified as spoofing as they were

 9 submitted as a legitimate, good-faith attempt to

 10 consummate a trade. As an intent-based violation,

 11 the Commission may look to patterns of trading

 12 activity to examine whether the trading

 13 constitutes spoofing. Spoofing does not cover

 14 nonexecutable market communications. This

 15 proposed order provides for a 60-day comment

 16 period on all aspects of the proposed order. An

 17 interpretive order once it becomes final agency

 18 action would have the same force and effect as a

 19 final rule.

 20 Before concluding we would like to thank

 21 the members of the antidisruptive trading teams,

 22 Mark Higgins and Jerry Kuzamano from Enforcement,
 81

 1 Steve Seitz, Ralph Avery and Mary Connolly from

 2 the Office of General Counsel, Christian Sonenson

 3 and Mike Penneck from OCE and Dave Cass and Jim

 4 Goodwin from DMO. With that we'd be happy to

 5 answer any questions you may have.

 6 CHAIRMAN GENSLER: First I'd entertain a

 7 motion on the staff recommendation on an

 8 interpretive order on Section 747, Disruptive

 9 Trading Practices.

 10 COMMISSIONER DUNN: So moved.

 11 COMMISSIONER SOMMERS: Second.

 12 CHAIRMAN GENSLER: Thank you to the

 13 team. I have a number of questions. My first

 14 relates to scope. How does this relate to first

 15 futures, and then my next question is swaps and my

 16 third if bilateral versus traded? I'm trying to

 17 understand. I think I do understand it, but if

 18 you can help the public understand what is the

 19 scope of disruptive trading practices?

 20 MR. PEASE: The scope would apply to all

 21 of the above.

 22 CHAIRMAN GENSLER: It applies to futures
 82

 1 and swap?

 2 MR. PEASE: Yes.

 3 CHAIRMAN GENSLER: Does it only apply to

 4 on- exchange traded futures and on-exchange or SEF

 5 traded swaps?

 6 MR. PEASE: The statute would apply to

 7 trading or any trading subject to the rules of the

 8 registered entity if that's what you're asking.

 9 CHAIRMAN GENSLER: A registered entity.

 10 I guess my question is are bilaterals not covered

 11 by 747?

 12 MR. PEASE: Bilaterals and noncleared as

 13 we said at the beginning would not be covered.

 14 CHAIRMAN GENSLER: So the scope is

 15 futures and the scope is swaps that are on a

 16 registered entity, thus bilaterals are not

 17 covered.

 18 MR. BERKOVITZ: That's correct.

 19 CHAIRMAN GENSLER: That's the scope.

 20 I'm now going to ask a little bit about what you

 21 just said about this has the same force and

 22 effect. I want to follow-up on those words and
 83

 1 what you meant by that.

 2 MR. PEASE: An interpretive order should

 3 it become final has the same force and effect as a

 4 final rule. The order is given the same weight by

 5 the courts as a preamble to a final rule. An

 6 interpretive order is thus the same as any other

 7 order issued by the Commission and is guidance

 8 that the public can reply upon once that order

 9 becomes final agency action.

 10 CHAIRMAN GENSLER: Then if somebody is

 11 doing a bilateral swap, they're not covered by

 12 747. That was my first question. This question

 13 is if you're trading on a swap execution facility

 14 or on a designated contract market, you can rely

 15 on this once we go final and based on public

 16 comment, but you can rely on it and if you're

 17 doing the things in here that we say are okay,

 18 you're fine.

 19 MR. PEASE: That's correct.

 20 MR. BERKOVITZ: I would agree that that

 21 is correct.

 22 CHAIRMAN GENSLER: Now my third question
 84

 1 is that I think this has addressed many of the

 2 comments, maybe not all of the comments, but many

 3 of the comments we heard in the roundtables and in

 4 the letters. I think was somewhere close to 30

 5 comment letters that came in. Would it be fair to

 6 say that this in effect narrows the number of

 7 things that could be considered to be a violation

 8 of the statute?

 9 MR. PEASE: Yes. The statute would

 10 become effective regardless of any action by the

 11 Commission 1 year after the date of the enactment.

 12 By putting parameters on it and providing this

 13 guidance, we are narrowing the scope of these

 14 rules.

 15 CHAIRMAN GENSLER: I think it's

 16 appropriate and I support this because to use as

 17 an example, I've heard from some commentors in

 18 their letters and in the roundtable that if they

 19 sent an order to an exchange and they planned to

 20 by 100 contracts but they send a 200-contract

 21 order, they were concerned somehow somebody could

 22 say that would be an intent to cancel, and we've
 85

 1 clarified that that's not going to be.

 2 MR. PEASE: That's correct. You have to

 3 have the intent to cancel bids or offers prior to

 4 them being executed. If your intent was to get a

 5 partial fill of a better offer, that would not be

 6 covered.

 7 CHAIRMAN GENSLER: Partial fills are not

 8 a violation?

 9 MR. PEASE: A partial fill with the

 10 intent to consummate a trade is not a violation.

 11 CHAIRMAN GENSLER: One other area and I

 12 know staff is still working on it which I think is

 13 very important is that we not only look here, but

 14 we review more broadly supervision and testing. I

 15 know that the Joint Advisory Committee last week

 16 recommended that we take a close look at that.

 17 Also, and I know Commissioner O'Malia has worked

 18 closely with staff on this, that in the designated

 19 contract market and the SEF, proposed rules that

 20 there be a lot of responsibility there to make

 21 sure the integrity of their markets if I can

 22 paraphrase. I know Commissioner Chilton has
 86

 1 raised this, I think all five of us are really

 2 looking forward to hear staff's recommendations on

 3 supervision and testing as it relates to these

 4 practices but then more broadly with regard to

 5 algorithmic trading in the modern world.

 6 MR. PEASE: Those are your next steps,

 7 Mister Chairman.

 8 CHAIRMAN GENSLER: Thank you.

 9 Commissioner Dunn?

 10 COMMISSIONER DUNN: Thank you, Mister

 11 Chairman. Let me refer to page 12 of the copy I

 12 have. I'm working off of one I had last Friday so

 13 I don't know if that's still relevant of not. It

 14 says, "In sum the Commission believes the market

 15 participant should assess market conditions and

 16 consider how their trading practices and conduct

 17 affects the orderly execution of transactions

 18 during the closing period." I would like to know

 19 how do they do that assessment, and in particular,

 20 how do they do it if they're doing algorithmic

 21 trading?

 22 MR. PEASE: What we're talking about
 87

 1 there is using the existing concepts of

 2 orderliness. We're not trying to create new

 3 ground here. So they would look to the rational

 4 relationship between consecutive prices, levels of

 5 volatility, supply and demand, the relationship

 6 between the price of a derivative and the

 7 underlying physical commodity. We give some

 8 examples of that in the proposed order.

 9 COMMISSIONER DUNN: Are we assuming then

 10 if someone is trading with an algorithm that

 11 that's built into that algorithm?

 12 MR. PEASE: Yes.

 13 COMMISSIONER DUNN: I really look

 14 forward to see the comments on this. I want to

 15 thank the folks who commented on the advanced

 16 notice of proposed interpretation that went out

 17 and the members of that roundtable because this is

 18 something I'm having difficulty getting my arms

 19 around and I really, really need the general

 20 populace to help me with it.

 21 CHAIRMAN GENSLER: Thank you,

 22 Commissioner Dunn. I think I agree with that.
 88

 1 I'm glad to see that we're putting something out

 2 that does narrow and addresses some of the

 3 concerns that Commissioners have raised about

 4 ambiguities with regard to the statute. I suspect

 5 the public will tell us where they think there are

 6 still additional ambiguities. Commissioner

 7 Sommers?

 8 COMMISSIONER SOMMERS: Thank you, Mister

 9 Chairman. As I stated in my opening statement, I

 10 have a lot of different concerns about this

 11 proposal not really clarifying where the statute

 12 was vague. Bob, with all due respect, I think

 13 that your answers to the Chairman's questions

 14 created even more confusion for me. On the first

 15 subject when the Chairman asked with regard to the

 16 scope of this proposal, you said that it didn't

 17 apply to bilateral noncleared swaps, but does it

 18 say that anywhere in this proposal that the scope

 19 of this proposal does not apply to bilateral

 20 noncleared swaps? In the section with regard to

 21 violating bids and offers it says that it will not

 22 apply to bilateral swap transactions, but I took
 89

 1 that to mean just A did not apply to bilateral

 2 swap transactions. It doesn't say noncleared. Do

 3 B and C also not apply to bilateral noncleared

 4 swaps?

 5 MR. MCGONAGLE: Commissioner, to follow

 6 on first on the section talking about where the

 7 transactions are, continuing on into the footnote,

 8 footnote number 36 to have the full context, the

 9 proposed interp says that in addition to EFPs, the

 10 Commission believes that the legitimate execution

 11 of exchanges for swaps, exchanges for options,

 12 exchanges for risk and for any other transaction

 13 that may be negotiated and executed bilaterally

 14 under the rules of a designated contract market or

 15 a SEF will not violate 4(c)(A)(V). With respect

 16 to the first question, I think that we're clearly

 17 saying that bilaterally negotiated swaps are not

 18 part of the intent of the first part of the rule.

 19 But the broader question as to whether they would

 20 get swept in under spoofing or the orderly

 21 execution turns on on or subject to a registered

 22 entity. So if the transaction is subject to the
 90

 1 rules of a registered entity, then spoofing or

 2 orderly trading may be picked up, but absent any

 3 further evaluation of that particular issue of how

 4 does a bilateral swap get to a registered entity,

 5 I think the answer is no, that it's outside of the

 6 provision of disruptive practices.

 7 COMMISSIONER SOMMERS: Is it possible

 8 for us to state that more clearly, that the scope

 9 of this proposal does not apply to bilateral

 10 noncleared swaps unless it's subject to the rules

 11 of a registered entity or whatever you just said?

 12 MR. MCGONAGLE: Yes. I think we can in

 13 the proposed iteration for a final interpretation

 14 spell out more clearly the preamble to A, B and C

 15 of the section to discuss what it means for

 16 engaging in trading practice of conduct on or

 17 subject to the rules of a registered entity.

 18 COMMISSIONER SOMMERS: I didn't know

 19 that until you asked the question about scope so

 20 that it brought that up.

 21 CHAIRMAN GENSLER: I apologize. I

 22 wanted to clarify. I thought that's what Congress
 91

 1 did too. I always thought that disruptive trading

 2 practices meant something being on a trading

 3 platform and that's why I asked the question and

 4 they confirmed it.

 5 COMMISSIONER SOMMERS: It just doesn't

 6 say that. Your second question with regard to

 7 partial fills, in the spoofing section of the

 8 proposal it actually says that a partial fill does

 9 not automatically exempt activity from being

 10 classified as spoofing. What I understood the

 11 answer to the Chairman's question to be is that

 12 partial fills without an intent element would not

 13 be a violation of C, but it doesn't say that here.

 14 It says that partial fills aren't exempt.

 15 MR. PEASE: If we're not clear there, we

 16 can make it clear. The idea is there could be

 17 circumstances where the intent is to engage in

 18 spoofing, say for example, but because it is then

 19 a bid and offer out there and before it's

 20 cancelled it could possibly be hit and could

 21 possibly have a partial fill. The idea here is

 22 that it must be intent based and the intent must
 92

 1 be to engage in spoofing regardless of whether it

 2 is partial fill or any other type of transaction.

 3 COMMISSIONER SOMMERS: Thank you. I

 4 certainly don't disagree with that. I am

 5 suggesting that perhaps it's not as clear as what

 6 your answer to the question was.

 7 CHAIRMAN GENSLER: Let me ask. The

 8 sentence, we could get out of the transcript your

 9 answer to my question, but I'd ask for unanimous

 10 consent that his sentence that answered the

 11 question be put in here on that partial fill.

 12 I'll for unanimous consent for that.

 13 COMMISSIONER SOMMERS: I have no

 14 objection to that.

 15 CHAIRMAN GENSLER: You have no objection

 16 to that?

 17 COMMISSIONER SOMMERS: Thank you.

 18 Moving on and going back to the questions I was

 19 going to ask, the Chairman's questions just

 20 brought up a couple of other questions for me. On

 21 A, violating bids and offers, we had a lot of

 22 comment with regard to this area with regard to
 93

 1 whether or not we needed to show intent in A. We

 2 have decided that we're not required to because

 3 the Act doesn't require us to show that a person

 4 violating a bid or an offer did so with the intent

 5 to disrupt fair and equitable trading, but we

 6 could have put that in. Do we have to show that a

 7 person intended to violate a bid or an offer?

 8 Should we show that a person even know of the

 9 existence of a better bid or an offer? I'm trying

 10 to understand without the intent element how we

 11 move forward with this.

 12 MR. PEASE: We of course look forward to

 13 what commentors will have to say at this issue,

 14 but when we looked at the three provisions

 15 together and the way Congress drafted the three

 16 provisions together, Congress specifically put in

 17 an intent and a reckless requirement in the

 18 closing period provision and put in intent and

 19 specifically mentioned that in the spoofing

 20 provision without putting in recklessness. So

 21 what staff is recommending here is consistent with

 22 the words that Congress gave us in this provision
 94

 1 and since Congress did not give us an intent

 2 requirement here, we did not recommend that an

 3 intent requirement applied to the violating bids

 4 or offers.

 5 MR. MCGONAGLE: Just a quick add-on,

 6 with respect to the intent, differentiating the

 7 intent, I think as you articulated the intent to

 8 enter into a trade or put a bid or an offer that

 9 you know is violating where the market currently

 10 is versus an intent to put in a bid or an offer

 11 with the intent to cause a disruption in the

 12 market. Part of the interpretive guidance was

 13 addressing this latter issue that there isn't

 14 specific intent required for subsection A to cause

 15 a disruptive effect to fair and equitable trading.

 16 But as to the question as to whether what level of

 17 intent needs to be shown concerning the intent to

 18 put a bid an offer that violates the market, I

 19 think that's appropriate for comment and

 20 consideration in the next round.

 21 COMMISSIONER SOMMERS: That we could

 22 potentially clarify more in this area after
 95

 1 comment that a person would have to actually know

 2 of the existence of better bids or offers.

 3 MR. MCGONAGLE: I would expect that some

 4 commentators would consider for example other

 5 prohibited practices under 4(c), in particular

 6 wash sales and what has the Commission articulated

 7 with respect to the burden in wash sales and

 8 whether or how that should relate to this new

 9 disruptive practice.

 10 COMMISSIONER SOMMERS: Moving on to B,

 11 with regard to the orderly execution during the

 12 closing period, it seems to me like we should have

 13 more of a focus in this area on protecting the

 14 integrity of the settlement price so that I'm

 15 wondering because we mentioned settlement price

 16 but we don't expressly say that this intent should

 17 have the impact on the settlement price and I'm

 18 wondering what your thoughts are on not expressly

 19 having -- sorry, ultimate goal.

 20 MR. PEASE: When you get to discussing

 21 an effect on price I think you're moving more away

 22 from an disruptive trading practice and into a
 96

 1 manipulation matter and Congress separated out

 2 these two provisions and did not lump disruptive

 3 trading in with manipulation. The difference is

 4 that in manipulation unlike disruptive trading you

 5 don't require showing the person engaged in fraud

 6 or acted with the specific intent to create an

 7 artificial price. I think the situation that

 8 you're covering in terms of affecting the

 9 settlement price may be better prosecuted under

 10 manipulation.

 11 COMMISSIONER SOMMERS: I guess I've

 12 always assumed that if anyone is executing orders

 13 in a disruptive fashion in the closing period that

 14 their intent to be to affect the settlement price

 15 because that would benefit them. Why would

 16 someone act recklessly in the closing period for

 17 any other reason than to affect the settlement

 18 price?

 19 MR. PEASE: That's a good question,

 20 Commissioner, and that's where the two provisions,

 21 manipulation and the disruptive trading during the

 22 closing period overlap. I think it's just the
 97

 1 level of proof that you would need in the way

 2 Congress set it out in these two provisions, what

 3 proof you would need to establish a violation of

 4 Section 747 or a violation of the manipulation

 5 provisions.

 6 COMMISSIONER SOMMERS: I'll move on to

 7 spoofing. I think my overall concerns with

 8 spoofing is that there is not a specific

 9 definition of what spoofing is. When reviewing

 10 some of the comment letters, I felt like at least

 11 in my view that some of the comment letters gave

 12 us some very good suggestions for how we could

 13 potentially define spoofing, for having the

 14 purpose of misleading market participants to

 15 benefit a person's own position and I think that

 16 several different commentors commented in one way

 17 or another with those types of words. Why haven't

 18 we put some sort of proposal for defining

 19 spoofing?

 20 MR. PEASE: We think that the statute

 21 defines spoofing and the statute defined it as the

 22 intent to cancel the bid or offer before execution
 98

 1 so that this is a specific-intent requirement

 2 here. Recklessness would not apply under the

 3 proposed guidance that you have before you, so

 4 that it would be a specific intent to enter into

 5 these transactions and your intent at the time is

 6 to send a false signal into the market and to not

 7 engage in a completed transaction and that's what

 8 we think the statute is providing for.

 9 COMMISSIONER SOMMERS: I don't disagree

 10 with that either. I was wondering if perhaps it

 11 would be more beneficial to have more clarity

 12 around legitimate versus illegitimate behavior.

 13 MR. MCGONAGLE: The proposed

 14 interpretation does talk about outlining where

 15 trading activity -- evaluate it so see whether

 16 there is an overload of the quotation system or

 17 delay another person's execution of trades or

 18 creating the appearance of false market depth. We

 19 are looking with the specific intent to nefarious

 20 types of activity that's going to cause price

 21 disruption so the extent that I think more

 22 examples would be illustrative, I think that's
 99

 1 something that we can consider again going through

 2 this next round. But the idea for spoofing is

 3 this concept that you are engaging in activity

 4 that is the type that I see is a continuum where

 5 it can have a price effect and we don't need to

 6 show that it actually does have a price effect

 7 which makes it a prohibitive transaction, and when

 8 you look at false reporting where it's activity

 9 that affects or tends to affect, and then finally

 10 manipulation where you actually have to show that

 11 there's an effect on price. So the design for

 12 spoofing and prohibited practices is to get at

 13 conduct which might otherwise disrupt -- the

 14 statute, orderly trading.

 15 COMMISSIONER SOMMERS: Thank you. I

 16 would suggest that if we could clarify further

 17 that the type of behavior that is purposefully

 18 misleading other market participants for the

 19 benefit of your own position is what we're

 20 specifically trying to get at.

 21 My last question is with regard to

 22 buying the board. In the ANPR we asked a question
 100

 1 and we had a lot of comments back on that yet we

 2 didn't include it in this proposed guidance and

 3 I'm wondering if a market participant is buying

 4 and selling at multiple levels at the same time if

 5 we're intending to include that in this proposal.

 6 MR. MCGONAGLE: I actually picked up on

 7 that myself this morning unfortunately where I saw

 8 one of the commentators had specifically addressed

 9 buying the board. As a general matter we would

 10 not say that buying the board violates any

 11 provision of A, B and C. If you're looking at say

 12 violating bids or offers, if you're engaging in

 13 activity that otherwise complies with the rules or

 14 regulations of the registered entity, we think

 15 you're going to be okay so that if you're buying

 16 the board, in and of itself that's not going to

 17 violate Provision A. If you're buying the board

 18 in connection with some manipulative scheme then

 19 we have a different conversation. So I think in

 20 the first instance, buying the board is not

 21 intended to be included for violation for bids and

 22 offers, but it can be evidence of a manipulative
 101

 1 scheme and so may actually be evidence of another

 2 violation of the Act.

 3 COMMISSIONER SOMMERS: I would ask if

 4 that was a mistake if we could add a sentence to

 5 include that we did not intentionally leave out

 6 buying the board in A.

 7 CHAIRMAN GENSLER: I'm seeking unanimous

 8 consent and I'm not hearing any objection.

 9 COMMISSIONER SOMMERS: Thank you.

 10 CHAIRMAN GENSLER: Commissioner Chilton?

 11 Thank you, Commissioner Sommers.

 12 COMMISSIONER CHILTON: Thanks, Mister

 13 Chairman. I want to go back to the first thing

 14 that Commissioner Sommers was asking about where

 15 the Chairman had this discussion with Vince. With

 16 regard to bilateral trades, unless the trades

 17 occur on a regulated entity, it does not apply.

 18 Is that correct?

 19 MR. PEASE: Yes.

 20 COMMISSIONER CHILTON: Thank you. When

 21 I read this the first time, some of you probably

 22 remember that old commercial, that "Where's the
 102

 1 beef" commercial that was a Wendy's commercial?

 2 Walter Mondale used it in a debate with Reagan to

 3 absolutely no effect. But when I read this the

 4 first thing I thought is, wait, we're doing the

 5 three things that the statute has called for but

 6 we're not doing anything else. But as you read

 7 through these comment letters and my colleagues

 8 and I have read through a lot of them, they want

 9 us to be cautious and careful and deliberate and I

 10 think that's what we're doing with their concerns

 11 and Commissioner Sommers was talking about some of

 12 them. But this is a proposal. You could propose

 13 these glasses. It's not a final rule and it

 14 wouldn't be a very good proposal, but we could

 15 propose it. It's what we do in the final as we

 16 talked about later with regard with the

 17 cost-benefit analysis. We really need to know

 18 what's going on then, so I commend you for the

 19 work that you've done so far.

 20 I did want to mention one thing and this

 21 comes up again and again. As I was reviewing

 22 these letters last night, there was one. I'm not
 103

 1 going to say who it is, but I shouldn't

 2 characterize the entire letter of 13 pages. There

 3 is one part here which is the type of thing which

 4 isn't helpful actually. It says, the Commission

 5 has not identified specific problem and this is

 6 with regard to disruptive trading in 747; has not

 7 identified specific problems or concerns where the

 8 pre-Dodd-Frank enforcement authority is lacking.

 9 Listen to this, because the language of 747 came

 10 from the Commission itself. Congress passed the

 11 law. We may provide some language to Congress,

 12 but they passed the law and not us. It's their

 13 law and signed by the President. It's not our

 14 law. We didn't write the law just because we give

 15 a suggestion. But it says, because the language

 16 came from the Commission itself, and they've made

 17 another job, it is incumbent upon the Commission

 18 to identify past ongoing problems that Section 747

 19 is targeted to address. First of all they said

 20 it's our language. We made it up. Second they

 21 say and since you made it up, you've got to prove

 22 that there's a problem before you do anything.
 104

 1 But that's not the language of the Act in general

 2 and I've talked about this again and again on

 3 other matters. It's to deter and prevent all

 4 these things, fraud, abuse, manipulation, it's to

 5 be proactive. We don't want to be crazy on this

 6 stuff. I'm glad we ask all these important

 7 questions. But to create new nonlegitimate

 8 hurdles that the Commission does not to leap over

 9 isn't helpful. The last thing in this letter

 10 says, absent identification of such problems, this

 11 entity urges the Commission to seek repeal of this

 12 provision, that we should repeal the law. If we

 13 can't -- we repeal the law. First of all, we

 14 can't repeal the law. I guess we'd go to Congress

 15 to repeal the law.

 16 There are many helpful things in this

 17 letter and we get these once in a while they're

 18 just trying to get out crap and that's not

 19 happening on my watch. Thanks.

 20 CHAIRMAN GENSLER: Thank you,

 21 Commissioner Chilton. Commissioner O'Malia?

 22 COMMISSIONER O'MALIA: Thank you. The
 105

 1 Chairman mentioned, Commissioner Sommers mentioned

 2 it and it's a process question. I want to walk

 3 through this. Why did the Commission determine to

 4 recommend interpretive guidance over proposed

 5 rules?

 6 MR. PEASE: Staff is not recommending

 7 any additional regulatory text. As a result, we

 8 thought the best vehicle which as I said earlier

 9 if were an interpretive order would have the same

 10 legal effect, we thought interpretive order would

 11 be the best vehicle to use to provide guidance to

 12 the marketplace.

 13 COMMISSIONER O'MALIA: If it has the

 14 same legal effect based on your cumulative legal

 15 scholarship, would it receive Chevron deference?

 16 MR. MCGONAGLE: That's my understanding.

 17 CHAIRMAN GENSLER: May I interrupt?

 18 General Counsel Berkovitz, do you have a view on

 19 that?

 20 MR. BERKOVITZ: That's correct. We

 21 believe we would receive deference after the

 22 Commission has promulgated the guidance through
 106

 1 the notice and comment period.

 2 COMMISSIONER O'MALIA: Thank you. After

 3 the 60- day comment period, if the comments

 4 indicate that the Commission has not provided the

 5 appropriate guidance, what is our next step?

 6 MR. PEASE: Out next step would be as in

 7 any other rulemaking, review the comments, decide

 8 if we need to provide additional guidance or if we

 9 need to correct anything that we have in here. It

 10 would depend entirely on the comments that we

 11 received and in conversations with you what the

 12 next step should be.

 13 MR. MCGONAGLE: I don't think the issue

 14 has really changed, which is the determination at

 15 the front end that the statute as drafted provides

 16 notice to market participants about the violations

 17 and whether the Commission determines to go

 18 forward with interpretive guidance to give

 19 context, the scope and parameters as Bob was

 20 talking about with respect to how we would apply

 21 Section 4(c)(A)(V).

 22 COMMISSIONER O'MALIA: May I didn't ask
 107

 1 this all that clearly. After the comment period

 2 and we make whatever changes we want to make, we

 3 would then go to essentially final guidance I

 4 guess.

 5 MR. PEASE: A final interpretive order.

 6 COMMISSIONER O'MALIA: And that would be

 7 implemented 60 days after publication?

 8 MR. PEASE: I'll let Dan address this

 9 too, I think it would become if it was done prior

 10 to Dodd-Frank, the 60-day period occurred within

 11 the period then that Dodd-Frank became effective,

 12 I think it would become effective on the date of

 13 Dodd-Frank. Otherwise it would be whatever we

 14 provide for in the interpretive order when it

 15 would become effective.

 16 MR. BERKOVITZ: Once the provision is

 17 effective then this interpretive order indicates

 18 how we're going to apply it, so I'd have to look

 19 technically as to whether it's effective

 20 immediately or not, but in effect I think it's

 21 basically effective immediately. We couldn't do a

 22 contrary interpretation within any time period
 108

 1 after we've issued this.

 2 MR. PEASE: I guess what I was trying to

 3 say is Dodd-Frank provisions of 747 won't become

 4 effective until a year after enactment. So

 5 whether the interpretation is effective prior to

 6 that doesn't really matter.

 7 CHAIRMAN GENSLER: I think you should

 8 assume that days from now with our very

 9 legitimately full schedule in the spring we would

 10 be doing a final order of this sometime in the

 11 summer, but maybe we'll be able to do this before

 12 July 15.

 13 COMMISSIONER O'MALIA: Thank you. What

 14 role do you anticipate the exchanges, and this is

 15 kind of subsumed by the other questions, that this

 16 applies obviously to on- exchange transactions,

 17 but what role will they have in enforcing this

 18 guidance?

 19 MR. PEASE: The exchanges will play an

 20 important role and a coordinated role with the

 21 Commission. As we say in the draft proposed

 22 order, the exchanges are very important. We
 109

 1 recommend a multilayered approach with the

 2 exchanges. But Congress gave us the specific

 3 authority also to enforce the provisions of

 4 Section 747 and while the exchanges will play an

 5 important role, we have a role to play here as

 6 well.

 7 MR. MCGONAGLE: The exchanges won't be

 8 bringing an action for disruptive practices under

 9 the Act. As part of our investigation process

 10 with prosecutorial discretion as well, we'll be

 11 making determinations as we do in any case whether

 12 an exchange action for conduct occurring on the

 13 exchange is sufficient or whether additional

 14 separate action by the Commission make sense and

 15 that is not atypical from how the Commission has

 16 interacted with exchange actions over the years.

 17 COMMISSIONER O'MALIA: You said they

 18 cannot bring disruptive trading violations? They

 19 have their own rules to ensure orderly execution.

 20 MR. PEASE: Correct. I think they would

 21 not bring an action for disruptive trading under

 22 Section 747. They may bring an action under their
 110

 1 own rules for disruptive trading.

 2 COMMISSIONER O'MALIA: As we could have

 3 under ours.

 4 MR. PEASE: Correct.

 5 COMMISSIONER O'MALIA: How are we

 6 proposing to define the term orderly execution and

 7 is this definition altered by the trading venue in

 8 which any trades occur?

 9 MR. PEASE: I think we try to give some

 10 guidance in the rule on how we're viewing that and

 11 we give some examples of what you would look at

 12 for existing concepts of orderliness. I don't

 13 think it varies -- in answer to your last

 14 question, some of the things we would look at

 15 would be the rational relationship between

 16 consecutive prices during the closing period, the

 17 correlation between price changes and volumes,

 18 levels of volatility, the relationship between

 19 price of the commodity and the other derivative

 20 and the underlying physical commodity and similar

 21 types of measures.

 22 MR. MCGONAGLE: By analogy,
 111

 1 Commissioner, this is what I was thinking going

 2 through this proposed interpretation is Commission

 3 case law in exacerbation. What are the market

 4 participants' obligations as they evaluate trading

 5 activity and how is that different? We're going

 6 to be looking at the market circumstances. I know

 7 there was one comment for example that says

 8 volatility shouldn't be a guide here in terms of

 9 determining that someone has engaged in a

 10 violation and I think that that by itself is true,

 11 it's how you react in the known market conditions

 12 may however subject you to liability such in the

 13 manipulation arena for exacerbation and I think

 14 this is just another way of looking at trading

 15 activity that could impact the normal

 16 price-discovery process. So it has to be

 17 open-ended.

 18 COMMISSIONER O'MALIA: Let me you more

 19 specifically in terms of May 6. In the view of

 20 staff, how would this guidance inform the

 21 operators of the algorithm that ultimately set

 22 into motion the events of May 6? The trading was
 112

 1 not in the closing period, so what would you say

 2 based on this guidance that the algorithm

 3 recklessly interfered with the orderly execution

 4 of a transaction?

 5 MR. PEASE: Since it was outside of the

 6 closing period, I don't think it would be covered

 7 by the provisions that we're discussing today.

 8 MR. MCGONAGLE: I actually think that

 9 would be an evaluation that we'd have to do in

 10 making the determination. If you're looking at

 11 this section, you're looking at intentional or

 12 reckless conduct so that we would have to

 13 undertake that evaluation of investigation to

 14 determine whether or what trading activity

 15 occurred during the timeframe and whether

 16 algorithmic trading was responsible or cause for a

 17 market change, that that order entry was somehow

 18 done in a reckless or other inappropriate manner.

 19 So by itself the activity that occurred during May

 20 6 doesn't warrant division investigation. There

 21 would have to be more just like in a manipulation

 22 case when you're trying to divine what the
 113

 1 trader's intent is. Have they engaged in conduct

 2 intending or with a reckless disregard for the

 3 orderly execution?

 4 COMMISSIONER O'MALIA: Based on how long

 5 it took us to develop the Order Book and the

 6 evaluation of May 6, put your enforcement on, how

 7 would you based on the technology we have today go

 8 about figuring this out and how long would it take

 9 us under this new guidance?

 10 MR. MCGONAGLE: Since we're dealing with

 11 an intent standard, practically I don't see the

 12 investigation operation from the division any

 13 different than what we would do in a manipulation

 14 case, and one of the first things we would focus

 15 on would be to get an understanding of the

 16 communication between the traders at the time,

 17 also then get an understanding concerning how they

 18 engaged in the trading conduct or practice and

 19 begin an evaluation of the recreation of the

 20 trades as they were executed. I think that can be

 21 a very complicated endeavor and certainly if there

 22 is information on the intent side on the front
 114

 1 end, that would help streamline the investigation

 2 as it does in manipulation cases.

 3 COMMISSIONER O'MALIA: This is probably

 4 one of the toughest rulemakings. Based on what

 5 Congress gave us or whether we gave it to Congress

 6 or Congress gave it to us, Congress did give it to

 7 us so your challenge to define this and define

 8 where good trading is separate from bad trading is

 9 a very difficult challenge so I'm very sympathetic

 10 to your efforts here. I do like the fact that

 11 this is another comment period and nothing is in

 12 effect and we're just asking the questions with

 13 more specifics than we did in the advanced -- I

 14 think we'll benefit from the comment period so I'm

 15 willing to support it.

 16 CHAIRMAN GENSLER: Thank you, and I'll

 17 take a crack at one of your questions. I think it

 18 also relates to more resources. I think the

 19 Division of Enforcement and the Division of Market

 20 Oversight and Surveillance, all of our divisions

 21 have excellent staff, but without the resources to

 22 have the technology to actually get the benefit of
 115

 1 what's going to be in the swap data repositories

 2 and have our folks be able to link up to that

 3 data, it's going to be a challenge to do the job

 4 Congress has asked us to do.

 5 COMMISSIONER O'MALIA: I'll give you an

 6 amen. Put technology first.

 7 CHAIRMAN GENSLER: Yes, and even an

 8 Office of Data. I think I'm going to probably end

 9 up letting Mr. Stawick call the vote.

 10 MR. STAWICK: Commissioner O'Malia?

 11 COMMISSIONER O'MALIA: Aye.

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

 13 Commissioner Chilton?

 14 COMMISSIONER CHILTON: Aye.

 15 MR. STAWICK: Commissioner Chilton, aye.

 16 Commissioner Sommers?

 17 COMMISSIONER SOMMERS: No.

 18 MR. STAWICK: Commissioner Sommers, no.

 19 Commissioner Dunn?

 20 COMMISSIONER DUNN: Aye.

 21 MR. STAWICK: Commissioner Dunn, aye.

 22 Mister Chairman?
 116

 1 CHAIRMAN GENSLER: Aye.

 2 MR. STAWICK: Mister Chairman, aye.

 3 Mister Chairman, on this question the ayes are

 4 four, the nays are one.

 5 CHAIRMAN GENSLER: I thank you. With

 6 that we will also be sending this on. I think at

 7 this point I'd ask for unanimous consent to allow

 8 staff to make technical corrections to the

 9 documents voted on today prior to send them to the

 10 Federal Register. There were three or four places

 11 that we made some changes as well without

 12 objection. The CFTC has identified 30 topic areas

 13 or rulemaking throughout the fall and winter

 14 including today. I think we've heard from the

 15 thirty-first team so that I think we have now

 16 heard from 28 of our 31 teams. With the Volker

 17 Rule, capital margin and product definitions being

 18 the three we have yet to hear from.

 19 Our next meeting will occur in March. I

 20 believe it probably be toward the latter part of

 21 March given we're still coordinate the date and

 22 we'll put that in the Federal Register when we
 117

 1 have a date and we'll of course put the topics on

 2 the meeting site. Again we encourage the public

 3 to comment. They're doing a terrific job

 4 commenting. They're gracious with their comments,

 5 but we need all of the input from the public on

 6 the specific rules and on as you see the whole set

 7 of rules proposed, the interaction of those rules

 8 and the ultimate phasing and implementation. It

 9 would be enormously helpful to hear from the

 10 public on the policies, the law of course, the

 11 cost-benefit analysis and the phasing of these

 12 rules.

 13 With that if there is not any other

 14 Commission business, I'd ask for a motion to

 15 adjourn the meeting.

 16 COMMISSIONER DUNN: So moved.

 17 COMMISSIONER SOMMERS: Second.

 18 CHAIRMAN GENSLER: All in favor?

 19 (Chorus of ayes.)

 20 CHAIRMAN GENSLER: The meeting is

 21 adjourned. Thank you all.

 22 (Whereupon, at 11:44 a.m. the
 118

 1 PROCEEDINGS were adjourned.)

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 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Stephen K. Garland, notary public in

 4 and for the District of Columbia, do hereby certify

 5 that the forgoing PROCEEDING was duly recorded and

 6 thereafter reduced to print under my direction;

 7 that the witnesses were sworn to tell the truth

 8 under penalty of perjury; that said transcript is a

 9 true record of the testimony given by witnesses;

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

 11 employed by any of the parties to the action in

 12 which this proceeding was called; and, furthermore,

 13 that I am not a relative or employee of any

 14 attorney or counsel employed by the parties hereto,

 15 nor financially or otherwise interested in the

 16 outcome of this action.

 17

 18

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

 20 Notary Public, in and for the District of Columbia

 21 My Commission Expires: May 31, 2014

 22