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1

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3 UNITED STATES OF AMERICA

4 COMMODITY FUTURES TRADING COMMISSION

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8

9 TECHNOLOGY ADVISORY COMMITTEE MEETING

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18 Washington, D.C.

19 Tuesday, October 12, 2010

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1 PARTICIPANTS:

2 Commission Members:

3 SCOTT O'MALIA, Commissioner

4 GARY GENSLER, Chairman

5 MICHAEL V. DUNN, Commissioner

6 JILL SOMMERS, Commissioner

7 BART CHILTON, Commissioner

8 Presenters:

9 ANDREI KIRILENKO

Senior Financial Economist,

10 Office of Chief Economist, CFTC

11 BOB PEASE

Trial Attorney, Division of Enforcement, CFTC

12

MAURICIO MELARA

13 SEF Rule-Making Team

14 JOHN ROGERS

Chief Information Officer, CFTC

15

THOMAS SECUNDA

16 Chief Technology Officer, Bloomberg LP

17 MICHAEL COSGROVE

Managing Director-Head of Commodities &

18 Energy Brokerage, North America, GFI Group

19 TOM LEAHY

Chief, Product Review Branch,

20 Division of Market Oversight, CFTC

21 DAVID TAYLOR

Special Counsel, Division of

22 Market Oversight, CFTC
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1 PARTICIPANTS (CONT'D):

2 STEVEN A. JOACHIM

Executive Vice President of

3 Transparency Services, FINRA

4 JIRO OKOCHI

CEO and Co-Founder, Reval

5

PETER AXILROD

6 Managing Director for New Business

Development, The Depository Trust &

7 Clearing Corporation

8 Technology Advisory Committee Members:

9 DR. JOHN BATES

Senior Vice President, Chief Technology Officer

10 and Head of Corporate Development

Progress Software

11

BRENDA BOULTWOOD

12 Chief Risk Officer

Constellation Energy

13

JOHN BREYAULT

14 Vice President, Telecommunications and

Fraud Public Policy

15 National Consumers League

16 DR. PETER CARR

Global Head of Market Modeling

17 Morgan Stanley

18 MICHAEL COSGROVE

Managing Director-Head of Commodities &

19 Energy Brokerage, North America

GFI Group

20

GARY A. DeWALL

21 Senior Managing Director and General Counsel

Newedge USA, LLC

22
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1 PARTICIPANTS (CONT'D):

2 DONALD F. DONAHUE

President and Chief Executive Officer

3 The Depository Trust & Clearing Corporation

4 BRYAN T. DURKIN

Chief Operating Officer and Managing Director,

5 Products and Services

CME Group, Inc.

6

RICHARD B. GORELICK

7 Chief Executive Officer

RGM Advisors, LLC

8

DR. MICHAEL GORHAM

9 Industry Professor of Finance and Director

IIT Center for Financial Markets

10 Illinois Institute of Technology

11 SIMON GRENSTED

Managing Director, Business Development

12 LCH.Clearnet

13 JILL L. HARLAN

Corporate Risk Manager

14 Caterpillar, Inc.

15 DOUGLAS E. HARRIS

Managing Director

16 Promontory Financial Group, LLC

17 CHRISTOPHER K. HEHMEYER

Vice-Chairman of the Board

18 National Futures Association

19 STEVEN A. JOACHIM

Executive Vice President of Transparency Services

20 Financial Industry Regulatory Authority (FINRA)

21 PETER G. JOHNSON

Managing Director of Futures & Options

22 J.P. Morgan
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1 PARTICIPANTS (CONT'D):

2 DR. ALBERT S. KYLE

Charles E. Smith Chair Professor of Finance

3 University of Maryland

4 GARRY N. O'CONNOR

Chief Executive Officer

5 International Derivatives Clearing Group, LLC

6 MICHAEL RICKS

Merchandising Manager, North America

7 Cargill Inc.

8 MATT SCHATZMAN

Senior Vice President, Energy Marketing

9 BG Americas & Global LNG

10 THOMAS SECUNDA

Chief Technology Officer

11 Bloomberg LP

12 CHARLES A. VICE

President and Chief Operating Officer

13 IntercontinentalExchange

14 DR. MATTHEW WHITE

Senior Economist

15 ISO New England, Inc.

16 CHARLES F. WHITMAN

Chief Executive Officer

17 Infinium Capital Management

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

2 -----

3 COMMISSIONER O'MALIA: Good Afternoon.

4 I would like to welcome everyone to the second

5 meeting of the CFTC Technology Advisory Committee.

6 During this meeting, we will continue our debate

7 regarding high frequency and algorithmic trading,

8 and focus on improving market transparency through

9 the deployment of swap execution facilities and

10 swap data repositories.

11 I would like to thank my fellow

12 Commissioners for their participation, and I would

13 like to welcome our Committee members. All of you

14 have taken time out of your busy schedule, and I

15 appreciate your participation to contribute to

16 this technology discussion.

17 I would also like to thank our

18 presenters, many of whom are Commission staff and

19 who have worked very long hours in their

20 respective rulemaking teams. I greatly appreciate

21 your participation and presentations, which I know

22 will contribute to today's debate.
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1 Since our last meeting in July, Congress

2 passed and the President has signed the Dodd-Frank

3 Wall Street Reform and Consumer Protection Act.

4 This statute provides vast new authorities to this

5 Commission, most notably the comprehensive

6 regulation of the over-the-counter swaps markets

7 calling for mandatory exchange trading and

8 clearing of standardized swaps.

9 In addition, we will have the benefit of

10 a presentation by Dr. Kirilenko, an economist,

11 regarding the events of May 6. Dr. Kirilenko will

12 also present his academic paper that he has

13 co-written with several other authors, including

14 Dr. Kyle, a Committee member.

15 In developing the agenda for this

16 meeting, I focused on some of the most challenging

17 and technology-related questions facing this

18 Commission in light of the recent events and our

19 new jurisdiction. The first topic on high

20 frequency trading is not only obvious, but also a

21 continuation of our first meeting where we sought

22 to identify and establish appropriate controls on
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1 high frequency trading.

2 The May 6 staff report identifies the

3 various roles computer trading strategies played

4 in the massive sell-off, and highlights the

5 interconnectedness of the futures and equity

6 markets. The staff report essentially concluded

7 that a large sell order in a very turbulent market

8 set off a chain reaction in the markets. In doing

9 so, it exposed significant and systemic flaws in:

10 (1) our market structures; (2) the stub quote

11 system; and (3) the resultant breaking of trades.

12 When a regulator steps in and breaks trades, we

13 have no choice but to question whether we have

14 failed in some manner. I also believe the payment

15 for order flow practice warrants further

16 investigation.

17 Another element of our first panel will

18 focus on the new statutory authority intended to

19 reign in manipulative and disruptive trading

20 strategies. Bob Pease, who is the CFTC lead on

21 the rule-making teams, will educate the Committee

22 on the new authorities. Although the inclusion of
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1 these topics in one panel should not be read to

2 mean that there was any nefarious intentions at

3 play on May 6, it is appropriate to use this forum

4 to discuss the options available to the Commission

5 in dealing with computer aided trading strategies

6 that are disruptive to these markets.

7 Our third panel will focus on how swap

8 execution facilities can improve pre-trade

9 transparency in the marketplace. Understanding

10 our options and constraints with regard to

11 technology in these new trading venues is

12 essential to developing a flexible and lasting

13 market design that is responsive to innovation and

14 product evolution.

15 Finally, our fourth panel will address

16 the technological challenges relating to

17 post-trade transparency and the Commission’s

18 ability to meet these challenges by deploying an

19 effective surveillance system to see across all

20 markets, trading platforms and clearing entities

21 to ensure risk is well managed.

22 On Sunday, 60 Minutes fortuitously ran a
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1 story on high frequency trading that referenced

2 the May 6 staff report and its relationship to

3 computer based trading systems. I would like to

4 quote Larry Leibowitz, the COO of the New York

5 Stock Exchange, who appeared in the 60 Minutes

6 story. I believe Mr. Leibowitz accurately

7 captured our mission here today when he said, in

8 reference to high frequency trading, "We have to

9 do a better job. We have to make changes that

10 make sense that give people more confidence in

11 this market. Add more transparency. And make

12 people feel like this is a place I can trust my

13 retirement savings to."

14 I hope today’s discussion will provide

15 specific recommendations as to how we can do a

16 better job and make appropriate changes that

17 instill confidence in these markets. The CFTC’s

18 30 rule-making teams are working towards

19 recommending rules and creating standards for the

20 swaps markets, and today’s hearing can help guide

21 the Commission and teams going forward.

22 I appreciate everyone's participation
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1 here, and before we begin, I'd like to recognize

2 my other commissioners for their opening remarks.

3 Mr. Chairman.

4 CHAIRMAN GENSLER: Thank you,

5 Commissioner O'Malia, for chairing today’s

6 Technology Advisory Committee. I also want to

7 thank my fellow commissioners for all their hard,

8 particularly as we move forward in the Dodd-Frank

9 Act.

10 As the CFTC works to implement

11 Dodd-Frank, it is essential that our rulemakings

12 take into consideration the rapidly evolving

13 technology in the marketplace. Rapidly changing

14 technology has been a feature of our markets for a

15 long time, of course. I mean, from the first

16 telegraph facilitating greater transparency in the

17 mid 19th century, and that really lead to the

18 ticker tape, as many of you know. Since even when

19 the Securities and Exchange Commission and our

20 predecessor were set up in the 1930s, we as

21 regulators have constantly had to remake our

22 regulations so that technology can be used to the
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1 benefit of investors and end-users and help best

2 promote transparency and efficiency in markets.

3 While new uses of technology such as

4 algorithmic and high-frequency trading,

5 co-location and electronic trading facilities pose

6 additional challenges, they are not so different

7 from when the first telephone was brought onto the

8 floor of the Exchange, and I don't think anyone

9 here is old enough -- I am not -- but there was an

10 actual debate whether telephones would be allowed

11 on the floor of the New York Stock Exchange, and

12 for years they were banned. They were not

13 allowed.

14 In the 1990s, we had the internet. And

15 when the internet came around, we first had to say

16 how is this going to be used in the trading of

17 futures and securities. So As regulators, we need

18 to ensure that these advances in technology, just

19 like advances in past decades, help to lower risk

20 and promote transparency in markets rather than

21 going in the reverse direction.

22 That's why I'm so thankful that
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1 Commissioner O'Malia reconvened this Advisory

2 Committee a number of months ago. In particular,

3 we get the benefit from all of our panelists here

4 and the advice that you have as we write rules

5 with regard to Dodd-Frank and as we consider

6 responses to the events of May 6.

7 I'm going to give a couple of for

8 examples, but what's the role that technology

9 should play in both pre-trade and post-trade

10 transparency? What is the appropriate balance

11 between electronic and voice trading for swaps as

12 we promote this pre-trade transparency? How

13 should we interpret the statute’s requirement that

14 says real-time reporting should be "as soon as

15 technologically practicable." So it's a

16 technology committee and the word technological is

17 right in the statute. How should the CFTC use

18 technology to link directly to swap data

19 repositories? The statute says we get a direct

20 link, but also maybe to clearinghouses. How

21 should this evolving world of high-frequency and

22 algorithmic trading influence our new authorities
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1 regarding disruptive trading practices? We'll

2 hear from the staff a little bit, but it would be

3 great to hear from you all.

4 In addition to what we're doing on

5 Dodd-Frank, I look forward, of course, to your

6 views about the unusual events on May 6. What

7 responses are appropriate to prevent such events

8 in the future? We're fortunate to have, and look

9 forward to have advice from a Joint Advisory

10 Committee that advises the SEC and CFTC with the

11 advice of this panel is certainly warranted and

12 looked forward to as well.

13 Specifically, should executing brokers

14 have an obligation to enter and exit the markets

15 in an orderly manner? Or if they do, at least on

16 the largest of orders, should they have some

17 obligation? Should they adopt certain trading

18 practices when executing such algorithms?

19 Would it be beneficial to increase

20 visibility into the order book in these markets?

21 And if so, how is the best technological way to do

22 it?
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1 And then lastly, as we know from May 6,

2 there was a five-second pause at a critical

3 moment, but that algorithm itself, that, too, is

4 an algorithm, the five-second pause called stop

5 loss. I'm trying to remember exactly how we

6 called this thing. Stop-loss logic. But that,

7 too, is an algorithm. Might it have been better

8 if it was earlier or was triggered by different

9 events? And if so, what would be good?

10 So again, I want to thank the whole

11 committee and I look forward to your advice, and

12 thank you, Commissioner O'Malia.

13 COMMISSIONER O'MALIA: Commissioner

14 Dunn.

15 COMMISSIONER DUNN: Well, I too would

16 like to thank Chairman O'Malia for holding this

17 very timely Technology Advisory Committee meeting

18 today, and orchestrating 60 Minutes and a good

19 half-dozen clips this morning was just a stroke of

20 genius, Scott. My hat is off to you.

21 I would further like to thank those that

22 are on the panel today making presentations, and a
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1 special thanks to the members of the Technology

2 Advisory Committee who will help the Commission as

3 we try to understand the impact technology is

4 having on all types of derivatives trading.

5 Dodd-Frank mandates the Commission to

6 promulgate rules in the area of data record

7 keeping and reporting, real-time reporting as well

8 as oversee swap data repositories and swap

9 execution facilities. All of these duties require

10 the Commission to have a greater understanding of,

11 and reliance on, technology. Investment in

12 technology hardware and the recruitment and

13 retention of qualified employees to deploy this

14 technology will undoubtedly strain the

15 Commission’S budget. It's imperative that we

16 understand how to optimize the scarce resources we

17 have so we aren't left behind by the people we are

18 charged with regulating.

19 After the Flash Crash of 5-6 and with

20 the new disruptive trading practices and

21 anti-manipulation requirements in Dodd-Frank, the

22 Commission must understand the potential negative
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1 impact that today’s technology may have in our

2 industry. Weekly we hear concerns about

3 high-frequency traders and how they are affecting

4 the markets, both positively and negatively.

5 Phrases like “quote stuffing” and “spoofing” are

6 bantered about as the way algorithmic traders are

7 gaming the market place. Sadly, there is a real

8 concern that investors are sitting on the sideline

9 because they don't think there is a level playing

10 field. Perhaps my greatest concern is a runaway

11 algo will trigger a cascade of events by other

12 algo-driven traders that will totally collapse the

13 markets.

14 Many questions need to be answered. Who

15 is responsible for oversight? Who should be privy

16 to what the algorithms are based on? Should they

17 be regulated? How can they be regulated? Should

18 they be allowed at all? Hopefully, we will begin

19 addressing these questions today.

20 Once again, I thank Chairman O'Malia,

21 the staff and all the participants in helping the

22 Commission face these most important issues.
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1 COMMISSIONER SOMMERS: Good afternoon.

2 I'll join with the rest of my colleagues by

3 thanking Commissioner O'Malia. At the last

4 meeting, I spoke about how the relevance of this

5 advisory committee could not be higher, but I

6 think that was even before Dodd-Frank was passed.

7 So I'll renew that statement today and say with

8 the items that are on the agenda that the

9 relevance of this committee has probably never

10 been higher.

11 The items we're discussing today are

12 several of the big ticket market structure items

13 from the Dodd-Frank Wall Street Reform Act as well

14 as the report from the May 6 flash crash. An area

15 that I'm very interested in, as are many other

16 market participants, is what the requirements of

17 trading swaps on a SEF will be. The CFTC and the

18 SEC heard a great deal of concern about this issue

19 from market participants at a joint round table on

20 September 15. The CFTC staff has recently

21 estimated that there could be over 40 entities

22 that may register as SEFs or designated contract
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1 markets. The designated contract market model is

2 easy for the Commission and market participants to

3 deal with. We know how they work and market

4 participants know how they work. SEFs are new and

5 the relevant statutory language is not very clear.

6 When you read the new statutory language in

7 conjunction with the existing statutory language,

8 it raises some questions. I favor the view

9 expressed by many of the market participants in

10 the September 15 round table that the definition

11 of SEF must encompass multiple models and must be

12 flexible enough to allow several ways to buy and

13 sell contracts on SEFs.

14 Two other issues that the Commission

15 will address very soon relate to anti-manipulation

16 and disruptive trading practices. Much has been

17 said about how technology, and more specifically,

18 high-frequency trading impacts trading and whether

19 it's disruptive or manipulative. The work of this

20 Committee is very important as we move forward

21 with these efforts, and I certainly appreciate the

22 perspective and the input that you as committee
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1 members will provide on these issues.

2 Other big ticket items from Dodd-Frank

3 are the requirements for swap data repositories

4 and real-time reporting. And it's so important

5 for us to have these types of forums as we

6 consider the appropriate policy responses to our

7 future's regulatory structure.

8 I recognize the enormous challenge we

9 face in comprehensively changing the regulatory

10 landscape, and I'm grateful for the industry

11 participation today and to Commissioner O'Malia

12 and his staff for organizing this meeting. Thank

13 you.

14 COMMISSIONER O'MALIA: Thank you very

15 much. Commissioner Chilton.

16 COMMISSIONER CHILTON: Thanks for doing

17 this, and thanks for your staff. There's an old

18 comic strip that some people may remember, Flash

19 Gordon. They made it into an animated series and

20 into a television series that was on the SciFi

21 Channel a couple of years ago. A buddy of mine

22 reminded me that when Flash Gordon started, they
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1 called him Speed Gordon in Australia, because

2 "flash" at that time in the '30s was seen as a

3 negative thing, that there was a negative

4 association with it, that you would be flashy or

5 showy or even dishonest.

6 I'm not suggesting that flash trading or

7 robotic trading is in any way dishonest,

8 certainly. There's lots of great advantages. The

9 access and better audit trails, to name a few.

10 But it's certainly not showy, because

11 we're not shown anything about these algorithm

12 trades. Unless we ask, we don't know anything

13 about the trading programs, because it's

14 proprietary information. And I understand that

15 businesses need confidentiality and they need to

16 keep their competitive edge, but as we've seen,

17 this type of trading can impact markets and

18 possibly lead to problems.

19 So as regulators, it just seems to me

20 and folks that are concerned about these markets,

21 like you-all, it just seems that we need to get a

22 better handle on the trading, as my colleagues
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1 have said, and look at it in sort of a

2 comprehensive cross-market fashion. I wonder

3 whether or not our agency should have people that

4 are specifically dedicated to looking at

5 algorithmic programs or looking at them in general

6 or whether or not people that use them should have

7 to make some certification that they meet certain

8 parameters. Should we as regulators or other

9 brethren regulators have any limits whatsoever on

10 this type of trading? I'm not saying one way or

11 another. I'm just raising questions.

12 Finally, there's some news stories this

13 morning about the flash crash, and that's good.

14 It's good that people question reports, and we

15 should expect that, and it should be welcomed, but

16 I did want to comment specifically on one issue

17 about the trade in question, that large trade my

18 colleagues have spoken about. There's news

19 articles that said it was potentially a

20 price-sensitive trade, and our report concludes

21 that it was not, that it was price insensitive and

22 didn't adjust during the algorithmic order flow
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1 due to any price variation.

2 Most folks are aware that under our law,

3 the Commodity Exchange Act, we're prohibited from

4 revealing any information that would disclose an

5 individual trader's position, so we have to be

6 very careful, and sometimes people think we're a

7 little bit cryptic in what we're talking about,

8 but we have to be exceptionally careful in

9 publically addressing some of these particular

10 trades. That said, I just wanted to be real clear

11 that we're all well aware of the nature of the

12 algorithm utilized by us at the Agency, and we've

13 spoken with the executing broker for this trade,

14 and that analysis is accurately reflected in the

15 staff's report.

16 And there is another allegation in some

17 of the stories this morning that there was a

18 breaking mechanism. That's what they called it, a

19 breaking mechanism, indicating some type of price

20 sensitivity. All I'd say about that is that

21 there's been really an exhaustive analysis of

22 this, and Andrei can probably talk about it a
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1 little bit later, but I'd caution against drawing

2 any specific conclusions. Just looking at the raw

3 data. What may appear to be an intentional

4 breaking could be accounted for with a number of

5 factors. Volume, for example, could have slowed

6 it down. So if you look at it this way, if you

7 see a car and it's slowing down, you might assume

8 that the driver has tapped the brakes, but in

9 reality, maybe the car has just hit a little bit

10 of an uphill grade, and that could slow it down.

11 So I appreciate that people are asking

12 questions about the report. I look forward to our

13 staff sort of giving us a more granular analysis,

14 but I have a lot of confidence in the good work

15 that they've done and the SEC has done, and based

16 upon what we've learned from the executing broker

17 in addition to the traders themselves. So I feel

18 like we're in a good place. So thanks very much,

19 Scott and your staff, for doing this, and I look

20 forward to the meeting. Thanks.

21 COMMISSIONER O'MALIA: Thanks. I have a

22 couple of housekeeping matters. This meeting is
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1 being recorded, push to talk on the microphones,

2 and please refrain from putting any Blackberries

3 or cell phones by the microphone, because they

4 will cause some interference.

5 We're going to start with our first

6 panel presenters. We have Dr. Andrei Kirilenko,

7 the Senior Financial Economist with the Office of

8 Chief Economist here at the CFTC. Dr. Kirilenko

9 will present a summary of the May 6 staff report

10 to the Advisory Committee and an academic paper he

11 coauthored entitled, "The Flash Crash: The Impact

12 of High Frequency Trading on an Electronic

13 Market." Dr. Kirilenko also served as a CFTC

14 staff member in the Joint Staff Report.

15 We also have Bob Pease, a trial attorney

16 with the Division of Enforcement, and he leads the

17 team for -- the rule-making team for the

18 antimanipulation and disruptive trading practices

19 authorized up the Dodd-Frank bill. Mr. Pease will

20 explain the issues and policy questions

21 surrounding these new authorities, and in Tab 6 of

22 your books, we've provided the statutory
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1 authority, so as Bob goes through and explains it,

2 you can read along in the statute and you'll

3 understand how difficult his job is going to be.

4 So we're going to start with Andrei and

5 move on to Bob, and then we'll open it up for some

6 discussion. Thank you.

7 DR. KIRILENKO: Thank you very much,

8 Committee Chairman O'Malia, Commissioners,

9 Mr. Chairman. There is slides that will probably

10 come up momentarily. I know when people call me

11 Dr. Kirilenko, I'm in trouble, so I'm expecting

12 some trouble from this.

13 So what I'm about to present to you is a

14 paper called, "The Flash Crash: The Impact of

15 High Frequency Trading on an Electronic Market."

16 It's coauthored with Pete Kyle, Mehrdad Samadi and

17 Tugkan Tuzun. It's publically available, and this

18 presentation and the views presented here are our

19 views. They're not views of the Commission,

20 commissioners or staff of the CFTC.

21 This paper is also referenced in the

22 report as providing the analytical foundation for
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1 some of the statements that were made in the

2 report.

3 Just to recoup for you about the flash

4 crash, the picture that you've probably seen many

5 times, this is the picture of Dow Jones Industrial

6 Average, E-mini S&P and S&P 500 stocks started

7 moving together, falling down and then recovering.

8 Shortly thereafter, about a month and a

9 half after that, there was a company, Market

10 Strategies International conducted a survey of US

11 retail advisors, and about 80 percent of US retail

12 advisors at that time believed that, "overreliance

13 on computer systems and high-frequency trading"

14 were the primary contributors to the volatility

15 observed on May 6. So this prompted us to look

16 more specifically into what happened in there, and

17 some of what happened is in the report that you

18 see in the position on September 30. Also has a

19 section on the E-mini, and the analytics are in

20 the paper that was issued on October 1.

21 So what I will discuss today is

22 something that's specific to the June 2010 E-mini
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1 S&P 500 contract. This is the price and volume

2 chart, so you see that the volume spikes up and

3 the price goes down an goes back up in the matter

4 of a few minutes. We also reconstructed for this

5 analysis the entire order book depth, and you can

6 see that there is a collapse on the buy side as

7 much as on the sell side at that time.

8 When we're looking at these aggregate

9 indicators, market price, market trading volume or

10 market wide depth, it's not entirely clear what

11 happened. So if we here have, on a daily basis,

12 available to us audit-trail data and end-of-day

13 position data, outside of May 6, any day, on all

14 the contracts that are traded in our exchanges,

15 all the contracts that we regulate, we have this

16 data. We have the data. This data is very exact.

17 It has the exact identities of traders who traded.

18 It has transactions in which they participated.

19 We have the exact sequence in which these

20 transactions took place, because we have -- even

21 though the time stamps are not as granular as we

22 always like them to be, but we have the ID
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1 indicator from the exchange that gives to us the

2 exact sequence of transactions. We also have for

3 each transaction exactly who was in the market,

4 whose order was entered first and whose order came

5 in later and executed against it. So-called

6 passive and aggressive flag.

7 So we're not guessing anything. We know

8 exactly who's done what in these markets. And

9 when you compare our analysis with other things

10 you may be reading, please keep in mind that our

11 data is what is the most exact audit trail that we

12 could find. Other people may be looking at

13 portions of it, some of it and other things.

14 In addition to that, the information in

15 the May 6 report is based not just on the

16 numerical and quantitative analysis, but on

17 numerous interviews whose market participants were

18 present on that day, including market participants

19 who specifically participated in some of the most

20 important trades that happened on that day.

21 So what we've done, then, is we've

22 grouped our traders into categories, so the paper
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1 goes on about describing how we grouped them. We

2 basically looked at profiles of their execution

3 patterns, and we grouped -- we created one group,

4 let's call them market makers, and out of the

5 market makers, those are the traders who trade a

6 lot during the day, but they typically revert to

7 their positions around, let's say, zero, around

8 small number relatively quickly throughout the

9 day, and then they start flat and typically end

10 flat. Out of those, we selected a very small

11 number of 16 trading accounts that specifically

12 account for an inordinate amount of trading.

13 We also selected fundamental buyers and

14 fundamental sellers. Those who they may both buy

15 and sell. They don't have to be only buying or

16 only selling, but they accumulated directional

17 positions throughout the day.

18 And noise traders, those who trade no

19 more than nine contracts per day. As you can see,

20 there's a very large number of participants who

21 trade maybe once or twice a day. A very small

22 number of contracts.
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1 And the rest we call opportunistic

2 traders. These are your cross-market

3 (unintelligible). These are your technical

4 traders. Those are the ones who fall somewhere

5 between fundamental traders and market makers.

6 They may accumulate a directional position. They

7 may sit on that. They may trade around it. They

8 may go back. They may accumulate something else.

9 So we've separated the entire cross

10 section of over 15,000 accounts that traded on

11 May 6 into these categories, and what we wanted to

12 see is how they interacted with each other,

13 because we believe that these markets are an

14 ecosystem. This is an ecosystem of market

15 participants who trade with each other, and their

16 responses are best responses to each other's

17 strategies.

18 What you can see here is roughly where

19 these different portions of the ecosystem fall.

20 On the vertical axis, you can see trading accounts

21 in percent of volume grouped and percent of volume

22 in decreasing order, or in percent of the number
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1 of transactions. It shouldn't surprise you that

2 high-frequency traders account for a large

3 fraction of volume. These are individual account

4 by account. You cannot see the actual dots

5 corresponding to the accounts, but you can see the

6 shaded areas where those dots mostly fall. So

7 that is the overlapping sort of ecosystem of this

8 large electronic market. Very, very liquid

9 market.

10 Just very briefly, high-frequency

11 traders, we looked at when we classify them

12 high-frequency traders and other market makers, we

13 actually looked on this three days prior to May 6,

14 because we believe market makers are in there all

15 day every day. They're not just there on May 6.

16 So we selected accounts that were there before,

17 and high-frequency traders accounts were somewhere

18 around 30 to 35 percent of volume and

19 transactions. Remember, these are 16 accounts,

20 16 trading accounts. That's a lot. Buyers and

21 sellers individually -- fundamental buyers and

22 sellers individually account for about 10 to
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1 12 percent of the total. Let's keep in mind that

2 these are the accounts that actually take the

3 contracts off the market and keep them overnight.

4 So these are the ones who come into this market

5 and for whom this market is to actually manage

6 their exposure, and the rest of the market, the

7 rest of the 20 percent intermediate during the

8 day. So 80 percent of this market is an

9 intermediation market. And this intermediation

10 market operates on different time scales.

11 When we were trying to answer the

12 question what do the high-frequency traders do and

13 how they behaved on May 6 relative to other days,

14 we've constructed for the group of high-frequency

15 traders what their net holdings are. So these are

16 the number of contracts second by second that they

17 hold, either long or short, and you can see that

18 we start them all at zero on each one of these

19 days.

20 So you can see that they revert to their

21 sort of target inventory position. Their target

22 inventory position fluctuates somewhere around
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1 3,000 contracts in each direction. And if you

2 look at -- if I were to switch the May 3, May 4,

3 May 5, May 6 for you, you wouldn't know which one

4 of those days was which. It looks like what they

5 were doing on May 6 is very similar to what they

6 were doing on the previous three days, to us.

7 Now, the important part is they don't

8 accumulate a position larger than a certain

9 relative target. You'll know now from the May 6

10 report that the largest trader was trying to sell

11 75 -- or sold 75,000 contracts. So as you can see

12 from this, these traders are not in a position,

13 not interested in accumulating this size.

14 The intermediaries, the slower

15 participants, are the ones who are also making

16 markets, and their behavior, however, you can see

17 is quite different from high-frequency traders in

18 that they do get caught. They do get run over by

19 the price moves, especially when the price moves

20 are sharp. The price on May 3, you can see when

21 the price moved up, they ended up on the short

22 side, and you can see on May 6 when the prices
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1 move down, they ended up accumulating in that long

2 position. This is very common for the

3 intermediaries. This is their big worry, to

4 be caught on the wrong side when the prices move.

5 You can see that compared in contrast to

6 high-frequency traders who did not get caught, or

7 at least did not get caught by the price. Mostly

8 slower intermediaries, slower market makers did.

9 What we've also done is that we looked

10 at how these participants adjust their positions,

11 and what you'll notice is that high-frequency

12 traders trade in the direction of price movement

13 for the first five seconds and then trade in the

14 opposite direction. That is, either their speed

15 or their predictive ability enables them to buy

16 when the prices are about to increase and sell

17 right after that. On May 6, they seemed to follow

18 the same strategy, only do it faster.

19 In contrast, intermediaries trade

20 opposite the prive movement for the first two

21 seconds and then trade in the same direction after

22 three seconds. So they do get run over by the
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1 price move. And on May 6, that's what happened to

2 them.

3 We also looked, as I said, we have the

4 exact flag of whether high-frequency traders

5 provided liquidity have taken liquidity. We find

6 that generally, high-frequency traders both

7 provide and remove liquidity on -- it's about

8 50/50, but often it is more. They more

9 aggressively remove liquidity than passively

10 supply it. They followed the same strategy on

11 May 6.

12 Intermediaries, as you can see by the

13 direction they were trading to, they typically

14 provide liquidity and did less so on May 6. We

15 also investigated specifically what during the

16 down time and the up time what the high-frequency

17 traders and slower market makers did, and we found

18 them to be high-frequency traders following the

19 same strategy and intermediaries getting caught

20 and then withdrawing.

21 This is the Hot Potato chart. The chart

22 that on the red line indicates to you this is the
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1 ratio of trading volume to net position. People

2 see the exact description in the paper of how we

3 calculated this. And we interpreted as there was

4 a period of time in the markets when

5 high-frequency traders and other traders were not

6 there or not forthcoming for some reason and the

7 high-frequency traders were the only ones that

8 accounted for a majority of trading volume.

9 We looked at what typically fundamental

10 traders do and the large seller whose sell-out

11 rating was executed on May 6 is in the category of

12 fundamental sellers here. As you can see, the

13 important part here is the difference between buy

14 and sell, so for the buyers, that's about

15 50,000 contracts. 78,000 minus 28,000 on the way

16 down, and for the sellers, that's about

17 84,000 contracts. And that imbalance is seemed to

18 be picked up by the opportunistic traders who are

19 demanding large price concessions on this point.

20 On the way up, the imbalance between

21 fundamental buyers and fundamental sellers is not

22 there anymore. You also can see that
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1 high-frequency traders on the way down and on the

2 way up as well as the intermediaries buy and sell

3 about the same amount.

4 We've also looked at the aggressiveness.

5 Some of the things that we are looking at

6 specifically in response to how much more

7 visibility and what other additional indicators

8 market participants may benefit from when

9 ascertained in market conditions, we looked at

10 aggressiveness and balance. That is aggressive

11 buying minus aggressive sell cumulative.

12 We've estimated some price impact of

13 different market participants and what their

14 strategies have done to prices both on May 3-5 and

15 May 6. As you can see, the title of the paper is

16 "Impact on Market of High-Frequency Traders," so

17 this is how we define market impact. You define

18 high-frequency traders the way we define them in

19 the paper. Flash crash you know.

20 Now we move to what this quantitative

21 evidence combined with other evidence seems to

22 suggest to us is that a large fundamental seller
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1 initiates a sell program, and then at some point,

2 high-frequency traders, as they typically do,

3 reverse the direction of their trading. They

4 start selling.

5 These fundamental opportunistic buyers,

6 fundamental buyers are not forthcoming during this

7 period of time. Or at least they're forthcoming,

8 but not at the rate to pick up the sell program.

9 Opportunistic buyers are demanding price

10 concessions. There's a five-second trading pause,

11 then there's a reopening procedure, prices

12 stabilize and then fundamental buyers lift prices

13 back up, and by 2:08, prices are back to their

14 central time. Prices are back to their

15 1:32 level.

16 The report identified a lot more. We

17 went to extraordinary lengths, as Commissioner

18 Chilton said, we are bound by the statute. We can

19 only reveal what we can reveal. At the request of

20 Congressional committees, we revealed for the

21 benefit of the public and the markets a lot of

22 what happened on that day, and it is important
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1 to -- we also showed how this particular event

2 propagated to other markets and resulted in

3 liquidity events in the securities markets more

4 generally.

5 So now we're in a situation where we're

6 not in Kansas anymore. We know now that the

7 largest trader will always have an impact; that

8 volume is really not the same as liquidity,

9 especially the times of high volatility; that HFTs

10 are probably more volume rather than liquidity

11 providers. The slower liquidity providers get

12 caught on the wrong side. There's some remaining

13 questions remain: Why does it take so long for

14 fundamental and opportunistic buyers to come in?

15 And as Chairman Gensler said, there certainly, as

16 markets become -- as technology in the markets

17 changes, we need to revisit the issue of what the

18 safeguards might be against practices that may be

19 disruptive. They may not be intended to be

20 disruptive or they may be intended to be

21 disruptive, but they may result in a disruption,

22 and we need to deal with that.
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1 COMMISSIONER O'MALIA: Thank you very

2 much. There's a lot of material here that Andrei

3 has laid out, to say the least, and I want to make

4 sure everybody is -- if you have any questions,

5 we're on schedule, and while the topic is fresh in

6 your head, if you have any specific questions to

7 Andrei, probably best to ask it now before we move

8 on to Bob's presentation. Any concerns?

9 Questions?

10 If not, Andrei, let me ask you one

11 question. In the May 6 report and in your

12 academic paper, you talked about the Hot Potato

13 Volume and the role it had in contributing to the

14 kind of liquidity issues and the sell volume, for

15 example. Can you elaborate on that a little bit

16 more, what role it might have had?

17 CHAIRMAN GENSLER: If you go back to

18 that chart, because I had a question on the same

19 thing. So the chart would help. There was a Hot

20 Potato chart.

21 DR. KIRILENKO: Right. There are two

22 parts to it. So this chart, as you can see,
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1 specifically looks at the spike in the hot potato

2 effect around past 1:45:18. So this is already

3 very, very close to the time when the stop-logic

4 functionality kicks in.

5 So there are two parts. One is how did

6 the sell algorithm respond to volume and

7 which fraction of this volume it was responding

8 to. That was happening prior to this. This is

9 more -- we consider this to be more indicative at

10 this point of relative lack of fundamental and

11 opportunistic traders. It's not necessarily at

12 this point the algorithm may or may not be

13 responding to this particular spike in volume.

14 Remember that this is the ratio of trading volume

15 over net position. So as net positions stay

16 relatively flat, the trading volume increases. It

17 will show up as an indicator like this.

18 It's somewhat different from trading

19 volume in the prior minutes that were generated by

20 the rebalancing strategy of the high-frequency

21 traders who were reducing their net positions. So

22 they've accumulated the net long position, and
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1 then they seem to have reached a certain inventory

2 level, and they started reducing that. As they're

3 reducing that, they're going through a lot of

4 volume. So you see again is that ratio of -- as

5 their net position is going down, the denominator,

6 their trading volume at the same time is

7 increasing. You see that increase, and that is --

8 that increase is possibly something that the

9 algorithm has responded to.

10 Again, we're viewing this more as an

11 indicator of a particular imbalance in the

12 ecosystem of the market rather than something that

13 is more than that. It may have been more than

14 that, but at this point, it may not have, also.

15 CHAIRMAN GENSLER: I'm not going to

16 focus on this chart, because I'm not sure I follow

17 it, but the concept that you call hot potato

18 volume and I call it a rally and ping pong, what

19 do you think happened on that day? Why wasn't a

20 9 percent volume limit good enough to protect that

21 seller at that moment? What else was going on?

22 DR. KIRILENKO: I think that -- let me
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1 perhaps start by asking a somewhat broader

2 question is that automated execution algorithms,

3 in my opinion, are not designed to be disruptive.

4 The automated execution algorithms are like cargo

5 trucks. They're supposed to deliver a certain

6 customer order from place A to place B, and

7 generally, they're designed to go with the

8 traffic. They're not designed to disrupt traffic

9 or do something else. That's not what they're

10 supposed to do.

11 However, a particular way of driving the

12 truck on the congested road may cause other market

13 participants to respond to that, and in response

14 to that, then we can see what I think happened on

15 May 6 is that typically, a particular execution

16 could take a market that's given, a market that's

17 not going to change what it does. But on that

18 day, which was already a turbulent day, and a very

19 large volume coming in very fast, the market no

20 longer could be taken as given. It actually

21 changed in the response, as we could see from the

22 behavior of the cross section of participants.
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1 They stop changing what they do. And as they

2 changed what they do -- what does it mean market

3 participants change what they do? They start

4 adjusting their positions. And they started

5 adjusting their positions, and they generate the

6 volume. And the truck responds to volume. It

7 says they go with the traffic. It doesn't say I

8 go with the traffic but I never increase, I never

9 go beyond 55 miles an hour. It just says I go

10 with the traffic. Traffic goes 100 miles an hour;

11 I go 100 miles an hour. Traffic goes 120; I go

12 120.

13 I think that is what -- I'm sorry I have

14 to refer to analogies like this, as again, some of

15 the things we would like to discuss, we cannot

16 always. I think that response of the market and

17 that response of the algorithm to the market

18 created the loop that led to the extreme

19 volatility that we observed.

20 CHAIRMAN GENSLER: I'd like to

21 understand if you agree with what Commissioner

22 Chilton said, or a variation of what he said, that
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1 during those critical minutes, that this algorithm

2 was not price limited, or at least to our

3 knowledge it wasn't price limited.

4 DR. KIRILENKO: We have had discussions

5 with the executing broker, and we had analyzed the

6 execution profiles of many, many market

7 participants. In fact, 48 hours after May 6

8 happened, we have seen execution profiles of many,

9 many market participants, including the large

10 traders, and some of the analysis is presented in

11 the report.

12 By analogy with the truck, it might well

13 be that if you're looking at the execution

14 profile, and the cargo trucks are not designed to

15 be the fastest vehicles on the road, so if the

16 traffic is moving fast and it seems that the cargo

17 truck is not accelerating as fast as the traffic

18 at this point is moving, it would be erroneous to

19 call it that the actual truck is slowing down.

20 CHAIRMAN GENSLER: You lost me on your

21 metaphor. I was just asking whether, to your

22 knowledge, was there any price limit in the
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1 algorithm or not.

2 DR. KIRILENKO: We are not aware of any

3 specific price limit that was built into the

4 algorithm. Now again, this does not mean that

5 this algorithm does not take into account prices

6 and quantities that are present in the market.

7 This algorithm does compute prices and quantities,

8 because after all, it submits limit orders, and

9 limit orders must have prices in them. So in

10 order to execute, the algorithm has to see where

11 the market prices are and what the quantities are,

12 and it actually calculates prices and quantities.

13 Also knows that if it submits prices and

14 quantities outside the bans imposed by the

15 exchange, those orders are not going to get

16 executed. It can't submit an order of 5,000

17 contracts, because that order is going to be

18 rejected. You cannot submit orders outside of the

19 price bans. Those orders are going to be

20 rejected. It knows that, so it does -- it's an

21 algorithm. It takes into account a lot of

22 information. Now, we are not aware of the fact
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1 that it has a specific price limit.

2 CHAIRMAN GENSLER: The only other thing

3 I had was as I understood the day, really it was

4 the evening of May 6 or maybe it was the morning

5 of May 7, I lose track of it, that I think staff

6 views working with the Chicago Mercantile

7 Exchange, if I remember that evening and that next

8 morning, that there was a confluence of events.

9 It was a very shaky market out of Europe, and by

10 2:30 east-coast time, it was a very fragile -- I

11 would use a different metaphor: The ice was very

12 thin. But then something came onto that ice. And

13 it took, as it turned out, about a six and a half

14 percent price concession to do this $4 billion

15 trade. The first 2 billion of it took that price

16 concession, actually, more accurately.

17 So it sort of was a confluence of

18 events, and then, of course, we had all the

19 breakage in the securities market, that fragmented

20 marketplace that some stocks went to a penny. I

21 didn't read your report as suggesting that this

22 large trade caused penny of shares trades in the
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1 securities market, but it's this sort of three

2 chapters. Very thinning of the ice until 2:30, a

3 large trade puts this significant pressure on the

4 market, and then the spillage and breakage in the

5 equity markets. Does that seem about right? I

6 mean, do I --

7 DR. KIRILENKO: That is exactly right,

8 and in order for us to be able to establish that,

9 the work that we've done primarily and the

10 analysis that we've done since the May 18 report,

11 and that report was a confluence of events,

12 because if you look at these prices, these price

13 movements, it's not really entirely clear who is

14 moving and why prices all seem to be moving

15 together.

16 Twenty-four hours after the event

17 happened, we did have execution patterns of

18 traders in our market, and from those execution

19 patterns, it was not entirely clear what exactly

20 happened. If a large trader came in and submitted

21 a market order for 35,000 contracts and it

22 completely evaporated liquidity on that side, we
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1 wouldn't need to write the report. We would have

2 just come out and said somebody came in with a

3 very, very large market order and disrupted

4 trading. But that's not what happened. What

5 happened is that there was trading done all around

6 the market, and what we've done subsequently, the

7 work that was done jointly with the SEC, we went

8 over something along the lines of five-billion

9 records and put together order books for the

10 E-mini, spider and the S&P 500 stocks, and based

11 on that, we were able to see changes in liquidity

12 in these different markets and how it propagated.

13 Now, it did not, of course, answer the

14 question entirely why did the -- it was reasonably

15 clear to see the propagation mechanism, and we

16 conducted some entries to do that from the E-mini

17 into the S&P 500 stocks and then to the spider.

18 It was not entirely clear why would Extentia trade

19 for a penny after what happened, happened. And

20 that happened and we -- again, jointly with the

21 SEC, we conducted a number of interviews to find

22 out, and the propagation mechanism that caused
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1 that to happen is basically related to pauses and

2 to provision of liquidity that many, many market

3 participants engage in. And whether they do it

4 automatically through algorithms or they do it on

5 the human scale, but basically, as prices move

6 very large, it triggers pauses, and then humans go

7 and look at the trading systems and decide what

8 at-risk parameters they want to trade, and after

9 they adjusted those risk parameters, some of them

10 decided not to provide liquidity. Some of them

11 decided to route orders. Not to internalize

12 orders, to route them directly to the exchange.

13 So the sell orders were coming, and the

14 liquidity that would typically absorb some of that

15 shock through internalization or through some

16 additional provision was just not there at that

17 price, and that resulted in trades at quite

18 abnormal prices and broken trades.

19 COMMISSIONER O'MALIA: I was just going

20 to ask you a question, but you answered it in that

21 response there. Was it one big -- was it simply

22 this large trade? And I think you've answered it
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1 was actually the liquidity that drive up it.

2 So I'd like to get some discussion going

3 around that issue of liquidity and could this

4 happen again, what are the factors that -- you

5 know, we understand what the factors were that

6 lined this thing up to put this in position, but

7 what do we do about the liquidity issue? What do

8 we need to think about as regulators to ensure

9 that these kind of things don't happen again?

10 Mr. DeWaal?

11 MR. DeWAAL: Actually, I have a question

12 first, because I'm sort of struck by the

13 conclusion that the high frequency traders removed

14 the liquidity, because certainly in conversations

15 I've had, the spin could be viewed as a bit

16 different. I mean, at least as the trading

17 began -- and I don't have the benefit of the

18 CFTC/SEC report in front of me. The

19 high-frequency traders were actually fulfilling

20 the -- were actually the offset to the mutual fund

21 that was selling, then obviously as the spiral

22 began, at least as I talked to some of the
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1 traders, what they're saying is that their

2 algorithms were actually smart enough to realize

3 that there was something wrong with the market and

4 they should step away. And it was actually the

5 intermediaries who didn't have the benefit of

6 analyzing the market as efficiently and didn't see

7 that problem, and so they stayed in the market at

8 a time when they also should have logically pulled

9 out. In fact, it was the five-second pause that

10 brought the market back to coherence.

11 So I'm wondering whether this is not

12 looking at the glass half full, half empty,

13 whereas rather than pulling out liquidity, in

14 fact, the high-frequency traders were providing

15 liquidity until such time as they correctly

16 assessed the market as something fundamentally

17 wrong and they should step aside. In fact, that

18 analysis is validated by the fact that ultimately,

19 that's what, in fact, the market did itself. It

20 took a five-second pause, and things sort of got

21 back on the right track.

22 DR. KIRILENKO: I think we found exactly
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1 what you said except for the very first sentence

2 that you said. You said I'm struck by the fact,

3 and then you described exactly what was said. The

4 analysis that we have corroborates what you just

5 said, that the initial providers of liquidity to

6 the large seller were the high-frequency traders.

7 At some point, they seem to have reached their

8 traditional inventory constraint, and then they

9 started selling. And then that happened before

10 the large price moved down, and they did not get

11 caught on the way down, did not get caught on the

12 way up, whereas slower market makers did get

13 caught on the way both down and up.

14 So, now having said that, then, if we

15 move beyond whether or not they were providers of

16 liquidity or takers of liquidity, as I said, we

17 have the exact flag of whether their order was

18 there first or it was there second. Whether or

19 not they actually were -- their order was resting

20 or it came in and hit the order that was sitting

21 in there.

22 As we say in the report of May 6, the
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1 large -- if you look at the execution of the large

2 seller, you can also see that they're about 50/50

3 aggressive impassive, too, on the way down and on

4 the way up. So it's slightly different on the way

5 down than on the way up, but also about 50/50.

6 So they're also not just aggressively

7 removing liquidity. It's an automated execution

8 algorithm that's designed to do many things that

9 it does, and one of them is not necessarily to be

10 removing liquidity, but also put in quotes so that

11 the market comes to them.

12 So we could see that high-frequency

13 traders generally remove more liquidity than they

14 provide liquidity. They trade a lot against

15 volume, so calling them liquidity providers is

16 not -- now, compared to slower market maters are

17 primarily providing liquidity rather than removing

18 liquidity. Now, they do get caught, of course, if

19 prices move.

20 MR. DURKIN: Thank you, Commissioner. I

21 just need to, if I may, add some further contacts

22 to the large order that's been referenced here,
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1 because I am concerned that my colleagues around

2 the table may not have the complete context as we

3 understand it of how the order was actually

4 transmitted and entered into the order book.

5 So the 75,000 contracts, first and

6 foremost, to put it in context, represented

7 1.3 percent of the 5.7 million contracts that

8 traded in the E-mini and that were sold on May 6

9 on that day. And it represented an even smaller

10 amount of the total instruments that were offering

11 similar bait, and I really appreciate Chairman

12 Gensler clarifying the confluence of events that

13 took place during this particular day. You know,

14 a great deal of the reference here has been on

15 this particular order, but there was absolutely,

16 unequivocally, fundamental negative financial

17 economic political unrest occurring throughout

18 that day, which lead to a very strong, bearish

19 session throughout that day as well.

20 And during the 20-minute period in which

21 this order was entered and executed, it accounted

22 for, and I believe you did codify it accounted for
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1 around nine percent of the total sell volume.

2 However, more important during the critical time

3 period of the three and a half minutes that have

4 been the subject of reference, it accounted for

5 less than five percent of the total volume of the

6 sales in that market.

7 In less than 75,000, less than half of

8 the 75,000 lot order was executed during the sell

9 off. In fact, a greater proportion was executed

10 during the market rally off of its strong lows.

11 The algorithm itself, as we understand it, was a

12 volume-participation algorithm. So it wasn't

13 entered in the context of 75,000 lot order hitting

14 the marketplace. It was Al allocated across three

15 25,000 lot orders, and the objective of the

16 algorithm was for each of those to represent

17 3 percent of the volume during that time period.

18 Of each of those three orders, they were

19 broken up into over 1,000 smaller child orders,

20 and each of those smaller child orders have

21 randomized quantities between established minimums

22 and maximum order quantities for each one of those
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1 respective orders.

2 Then the one point of clarification from

3 our understanding is that each of those child

4 order was entered with limit prices, and I believe

5 Dr. Kirilenko actually did indicate after Chairman

6 Gensler's question to reconfirm his answer that it

7 was plausible that there were limit prices. We

8 understand that there were limit prices for each

9 of those orders. They were initially placed as

10 passive orders above the current bid, and prices

11 were only adjusted lower in defined increments

12 relative to the market so that the order could

13 participate and meet its volume objectives.

14 At the end of the day, the aggregate

15 size of the participants' order, by virtue of this

16 algorithm and how it was used, was not known by

17 the other market participants. The participant

18 could not know, given the anonymity of the trading

19 on our platform, who was accepting the risk it was

20 seeking to trans for. The orders, you know, the

21 algorithm also did rely on not only issuing

22 smaller-sized orders but utilizing iceberg
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1 functionality to further reduce the impact of the

2 larger orders into the market.

3 COMMISSIONER O'MALIA: Dr. Bates?

4 DR. BATES: Dr. Kirilenko -- I'm not

5 trying to give you a hard time by saying that, by

6 the way -- one thing I'm very interested in just

7 getting some more clarification on, I love the way

8 you drew out the different types of trading and

9 diagrammatically with high-frequency trading and

10 so on laid out. High-frequency trading has had a

11 tremendously bad wrap in the mainstream press

12 linked to the flash crash where it's been

13 demonized to some extent. And in fact, it was

14 interesting to see that the flash crash really

15 wasn't caused by high-frequency trading. It was

16 caused by an execution, an algorithm, but really

17 with much more human impact, parameterized, set up

18 by a human and then set running. Not an

19 automated, high-frequency trading algorithm. So I

20 just want to -- you know, there was all that

21 coverage of Nanex about quote stuffing.

22 I wanted to get your clarification,
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1 because I think it would be great to actually say

2 publically it wasn't high-frequency trading that

3 caused it, and in fact, all that -- I'd love to

4 get your view.

5 CHAIRMAN GENSLER: I've noticed that

6 we're not going to get much advice. Brian wanted

7 to state CME's view. You're stating your view.

8 Everybody wants to get poor Andrei to state

9 something on the record to confirm your views.

10 But your advice to the commission would be really

11 helpful, too.

12 DR. BATES: Fair enough. Well, my view

13 on this is that there's a number of things that we

14 should look at and perhaps state some best

15 practices on. Around, for example, back testing

16 of an algorithm like the execution algorithm that

17 was put into the market. What kind of back

18 testing under the kind of market conditions that

19 we saw or varying kinds of market conditions may

20 have discovered that this kind of thing could

21 happen. And indeed, what kind of risk and market

22 monitoring was there to detect for that algorithm
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1 to stop it from happening. Gary talked about

2 smart algorithms on the high frequency side, and

3 believe me, I wasn't trying to defend

4 high-frequency trading. I'd love it if algorithms

5 in general got a clean bill of health. They

6 didn't, but what kind of mechanism should be

7 prescribed to be able to detect that? Why

8 couldn't that algorithm have detected and pulled

9 that from what it was doing? So I guess if I was

10 going to raise some issues and recommendations,

11 better back testing under all market conditions

12 and better monitoring and real-time pre-trade risk

13 management on an ongoing basis, and perhaps even

14 for the CFTC, shouldn't you have a NASA type

15 launch-control system where you could see

16 something flashing red and you could get on the

17 phone or get in there and be able to alert people

18 that something's happening across all trading

19 venues. Are these not things that we should

20 perhaps be looking at? Was that suitably

21 nonpartisan?

22 CHAIRMAN GENSLER: It's advise.
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1 MR. DURKIN: Mr. Chairman and

2 Commissioner O'Malia, I appreciate your point in

3 terms of offering recommendations and advice. We

4 certainly have some from the CME Group. In

5 particular, I do think that there are a number of

6 processes and automated capabilities attendant to

7 both the trading platforms themselves as well as

8 front-end system technology that should be adopted

9 as best practices, and we should really be looking

10 at that in that context in terms of what's in our

11 tool kit today that we could be using in a more

12 broadened basis as an industry in general. I

13 think we've been pretty clear in terms of some of

14 the innovative capabilities that we've been

15 driving in the context of stop-loss functionality,

16 in the context of credit controls, and this

17 committee has, I think, taken a very responsive

18 and positive step forward in moving that

19 initiative ahead in terms of automated credit

20 controls and establishing some criteria in that

21 regard, or at least the Commission is considering

22 such.
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1 You know, there's definitely

2 functionality in place today in the context of

3 price banding as well as automated parameters that

4 can be both on the front end of trade risk systems

5 and also at the trading platform that could limit

6 the cascading type of effects that we experienced

7 on May 6. In fact, as you alluded to,

8 Mr. Chairman -- and we appreciate your

9 acknowledgment that the stop functionality did

10 kick in. Now, is there a way for us to better

11 calibrate going forward when it kicks in or the

12 parameterization of how it kicks in? Absolutely.

13 So I do think that there are a number of things at

14 our disposal right now that we could be looking at

15 more closely as a unit to say how can we learn

16 from that and how can we expand that should some

17 of these things become best practices.

18 COMMISSIONER DUNN: This has really been

19 a very enlightening discussion here. And I guess

20 Nanex published their report Friday, which is

21 looking at the report that has come out of the

22 Joint Advisory Committee report. It all helps me
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1 understand that there's more than one side to

2 these issues here, and we're really looking at

3 this advisory group. We're looking at the joint

4 advisory group that we have on the flash crash

5 take place. They're going to get this information

6 that Andrei and his colleagues have presented.

7 But feel free, anybody that's on this committee,

8 to give us your input on it as well. This is

9 something that we absolutely have to understand

10 what's taking place in the marketplace, and it is

11 just imperative that we have all sides of the

12 issue here. So I appreciate the discussion that's

13 taken place.

14 COMMISSIONER O'MALIA: As I stated in my

15 opening remarks, this is building on a previous

16 meeting which the focus of that meeting were the

17 recommendations of the FIA to implement certain

18 risk functionalities to avoid situations like

19 May 6, or other situations, but we obviously have

20 a teaching moment here, and maybe you can think

21 about this a little bit more and get your thoughts

22 on it, but what do we need to build on from the
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1 FIA paper in light of the situation we have with

2 May 6 and the recommendations we're going to need

3 for disruptive trading practices? How does that

4 paper grow? What additional controls might be

5 necessary? We should probably go back and revisit

6 that FIA paper a little bit and understand what we

7 need to add to avoid another May 6. If anybody

8 has any thoughts on that immediately, I'd love to

9 hear them. Think about it a little bit more.

10 Before we go to Bob, I want to make

11 sure -- anymore questions or thoughts?

12 Christopher?

13 MR. HEHMEYER: Just an observation.

14 There's some very smart people here, and your

15 paper's very good, by the way. It was obviously a

16 lot of work and you should be very proud of it.

17 DR. KIRILENKO: Thank you.

18 MR. HEHMEYER: So I'm surrounded by a

19 lot of smart people, but I've been around these

20 markets for a long time, and one thing that I

21 think it's important to take away from this whole

22 thing is that this circuit breaker was very
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1 effective in calming this market down. I think

2 that should be kept in mind as you look at

3 policies that can be very complex, and then a

4 simple circuit breaker said -- in five seconds.

5 Maybe the technologies used to be a day. It used

6 to be 30 minutes. It used to be -- now it's five

7 seconds. Reasonable people I think can debate the

8 logic of the circuit breaker, but that was very

9 effective in calming this market down.

10 COMMISSIONER O'MALIA: Mr. Pease, we

11 will take the macro or take it down to some very

12 specific trading issues we have, as given to us in

13 new authorities provided by Dodd-Frank.

14 MR. PEASE: Thank you. Sorry for the

15 lawyer to go after the interesting economist, but

16 I'll try to keep you awake. Good afternoon

17 Mr. Chairman and commissioners, and thank you

18 Commissioner O'Malia, the chairman of the

19 Technology and Advisory Committee, for inviting me

20 here today to discuss two rule makings. The new

21 anti-manipulation authority of Section 753 of

22 Dodd-Frank, and Section 747, which prohibits
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1 certain disruptive trading practices and gives the

2 Commission the authority to prohibit other

3 practices that are disruptive of fair and

4 equitable trading. Of course, my comments today

5 are my own and do not reflect those of the

6 Commission or other staff members.

7 Section 753 of Dodd-Frank amends

8 Section 6(c) of the Commodity Exchange Act and

9 expands the authority of the Commission to

10 prohibit fraudulent and manipulative behavior.

11 This new section creates a prohibition against any

12 person using or attempting to use any manipulative

13 or deceptive device for contrivance. The new

14 statute requires the Commission to promulgate the

15 implementing rule within one year.

16 The text of this new section prohibiting

17 fraud-based manipulation is patterned after

18 Section 10(b) of the Securities Exchange Act of

19 1934. The courts have interpreted the Exchange

20 Act Section 10(b) and Section 10(b)(5) to cover

21 intentional or reckless conduct that deceives or

22 defrauds market participants. New Section (c)(1)
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1 is similar to the antimanipulation authority

2 granted in the Federal Energy Regulatory

3 Commission and the Federal Trade Commission. FERC

4 and the FTC have promulgated rules based on SEC

5 Rule 10(b) and 10(b)(5) to implement their

6 respective authority, but have modified

7 Section 10(b) and 10(b)(5) as appropriate to the

8 distinct regulatory missions and responsibilities.

9 Section 753 of Dodd-Frank further adds a

10 special provision for manipulation by false

11 reporting and a prohibition on false information.

12 This provision is self-activating and does not

13 require a rule making.

14 Congress also created a new

15 Section 6(c)(3) entitled "Other Manipulation,"

16 which mirrors existing commission authority to

17 prohibit manipulation of crisis. As with many of

18 the provisions of Dodd-Frank, as staff well knows,

19 Section 753 requires the commission within one

20 year to promulgate a new rule implementing

21 authority granted by Section (c)(1).

22 In Section 747, congress amended the
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1 Commodity Exchange Act to prohibit specific

2 trading practices that are disruptive of fair and

3 equitable trading. Specifically, Section 747

4 makes it unlawful to violate bids or offers, to

5 demonstrate intentional or reckless disregard for

6 the orderly execution of transactions during the

7 closing period or to engage in spoofing. Spoofing

8 is defined as bidding or offering with the intent

9 to cancel the bid or offer before execution.

10 Congress authorized the Commission to

11 promulgate rules to prohibit these three

12 enumerated disruptive trading practices and any

13 other trading practice that is disruptive of fair

14 and equitable trading. Congress did not provide a

15 deadline for this optional rule making, nor is the

16 Authority limited to one rule-making effort.

17 Section 747 also makes it unlawful for

18 any person to enter into a swap knowing, or acting

19 in reckless disregard of the fact, that its

20 counterparty will use the swap as part of a

21 device, scheme or artifice to defraud a third

22 party.
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1 Our rule-making team, which consists of

2 representatives from each of the Commission's

3 divisions, is currently drafting rules to

4 implement the provisions of Section 753 and

5 Section 747. In addition, the team continues to

6 examine the events of May 6, in particular, to

7 determine whether there are other disruptive

8 trading practices we should recommend to the

9 Commission to prohibit as disruptive of fair and

10 orderly markets.

11 Staff is examining technological

12 innovations in our markets and whether those

13 innovations, particularly algorithmic trading

14 programs, pose risks to the fair and orderly

15 operation of commodity markets.

16 Staff is here to listen to the

17 discussion this afternoon to help guide us in our

18 review. Staff will be making complete

19 recommendations concerning the implementation of

20 the new anti-manipulation authority contained in

21 Section 753 and the anti-disruptive trading

22 practices already in Section 747 in the near
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1 future. Thank you and I look forward to answering

2 any of your questions.

3 COMMISSIONER O'MALIA: I know I can

4 count on Gary DeWall for a question on this one.

5 He even gave a presentation in Chinese, I think it

6 was, last week on disruptive trading practices.

7 Bob, can you give us a -- this is a

8 pretty broad definition or statute in which we're

9 supposed to identify and send a market specific

10 direction about what's going to be tolerated and

11 what's not going to be tolerated. Can you give us

12 a sense of some of the trading patterns or styles

13 that you've either heard about or are concerned

14 about that you're looking at that you may advise

15 the Commission on?

16 MR. PEASE: Well, we're looking at a

17 number of different practices, quote stuffing and

18 others that really are variations of spoofing. We

19 want to make sure there isn't a loophole there,

20 and staff's looking at that issue. For example,

21 spoofing is defined as pulling back the bids or

22 offers before execution. Certain trading
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1 strategies may involve a certain number of being

2 executed, and so we want to make sure that we will

3 make recommendations to the Commission that would

4 cover those type of trading practices which we

5 think would very well be abusive to the market.

6 We're also looking at, as I indicated,

7 and want to hear from all the panel members here,

8 what is it about algorithm programs? Is there

9 anything about them that is either, A, inherently

10 disruptive or could cause disruptions that we

11 should look at potentially other issues that

12 involve how the algos are employed. Does a large

13 trade trigger different responsibilities of market

14 participants and other issues like that.

15 MR. HARRIS: I have just a question.

16 These disruptive practices that you're talking

17 about, presumably you needed this enforcement

18 authority because these practices would not

19 constitute manipulation?

20 MR. PEASE: Not necessarily, no.

21 Spoofing in the past had been prosecuted by the

22 Commission as a form of manipulation. And you
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1 still would have the intent element. Congress

2 specifically provided that in 747. But you don't

3 have to go to the other elements that the

4 Commission would need to prove to establish a

5 complete claim of manipulation. There certainly

6 could be instances where enforcement may recommend

7 a 747 violation of spoofing as well as a

8 manipulation violation.

9 MR. BREYAULT: One of the things you

10 mentioned here is when you defined spoofing, it's

11 offering with the intent to cancel. How would you

12 determine the intent to cancel?

13 MR. PEASE: That's always a problem in

14 enforcement cases. Certainly we're going to look

15 at documentary evidence, but we're going to look

16 at a circumstantial case also. The totality of

17 the evidence. Does the totality of the evidence

18 show that the intent of the traders is to pull

19 back before execution? You can look at the volume

20 that they're putting in of bids and offers and

21 seeing that none of them are being executed or

22 almost instantaneously pulled back. Certainly
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1 we'd love to have that incriminating e-mail, but

2 that doesn't -- it's not always as simple as that.

3 So we would look at the totality of the evidence.

4 Certainly all the documentary evidence.

5 COMMISSIONER O'MALIA: Dr. Carr?

6 DR. CARR: I just had a question on the

7 definition of spoofing. If someone submits a bid

8 or offer with the intent to cancel and replace

9 with another bid or offer, is that spoofing?

10 MR. PEASE: It depends on the intent,

11 depends on the circumstances. That's not one

12 that's easy to answer in isolation. We would

13 again look at the intent of the trades, looking at

14 what they were trying to accomplish, and there

15 could be circumstances where that would be

16 perfectly -- your hypothetical would be perfectly

17 legitimate behavior.

18 MR. DURKIN: I think I see a few frowns

19 around the table, so I'll be the -- I mean, that

20 answer I don't think really gives anybody comfort

21 in terms of how do you encourage electronic market

22 making and trading and you start going down the
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1 path of dictating or establishing prescriptive

2 requirements in terms of how long an order needs

3 to remain in a platform before it may be canceled.

4 I mean, that could have very serious effects on

5 the market structure as it exists today. So I

6 think that that is something that we as a group

7 really need to kind of talk through in great

8 detail in terms of what is intended by this, what

9 is contemplated by the Commission, the Commission

10 staff, and how could whatever path we're going

11 down have either a positive or a very negative

12 impact on market liquidity and people's

13 willingness to step into the market.

14 COMMISSIONER O'MALIA: Dr. Bates?

15 DR. BATES: I'm actually going to say

16 something in defense of Bob here, which is I think

17 it is a very difficult issue to decide between,

18 say, a high-frequency trading, which is

19 continuously putting quotes out there but then

20 changing them as things happen in the market, and

21 this market manipulation we saw made very

22 popularized by the Nanex report.
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1 But what I've seen in the past, even

2 with regulators like the UK's FSA, for example, in

3 the equity spaces, that you can't just determine

4 one circumstance is the thing that's gone wrong.

5 You have to build cases over time. So you might

6 detect that one of your surveillance rules has

7 detected a scenario that looks like market

8 manipulation. It falls in one of your market

9 manipulation roles with temporal or logical

10 things, but then that could have been an accident.

11 We've seen a lot of high profile accidents in the

12 last few months, actually with algorithms. It

13 could have been something unintentional.

14 But then if you see it consistently from

15 the same firm over time, you can then start asking

16 questions and CFTC might go in and investigate,

17 but I think one of the key things is you want to

18 get it as up-to-date as possible to have the same

19 sort of real-time monitoring that the algorithmic

20 firms have. So I do think it's necessary to do

21 that, particularly because of the bad press that

22 it gets if you don't be able to monitor it.
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1 MR. DURKIN: My comments are actually in

2 support of what Bob has represented in terms of

3 maintaining trading practices that are fair and

4 equitable. We're very, very much all about that

5 as an industry and a marketplace, and I

6 definitely, to jump on your comments, Gary, I

7 think a lot of it goes to the surveillance

8 mechanisms and programs that we have in place at

9 our various markets as well as at the CFTC, and it

10 was very impressive to hear Dr. Kirilenko be able

11 to articulate down to the exact order and the

12 context of that order and the ability to

13 reconstruct that trade allows you to build

14 patterns. Patterns of conduct and activity, which

15 I think can help the staff look at this from a

16 surveillance perspective to see whether or not

17 there was intent and whether there was a basis to

18 be trying to manipulate or take advantage of the

19 marketplace, and those types of things should be

20 staunchly investigated and pursued. No question

21 about it. And I think this industry in particular

22 has done a pretty solid job of developing
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1 innovative ways to reconstruct the activities in

2 these markets and we should continue to build upon

3 them.

4 COMMISSIONER O'MALIA: Before I go to

5 Gary DeWaal, there are some people here that have

6 some money in these markets and have some

7 aggressive trading strategies, and I will ask you

8 to offer your comments and thoughts for Mr. Pease

9 here. So before I do that, I'll talk to Gary.

10 MR. DeWAAL: Again, just in the area of

11 possible guidance, to me, at the end of the day,

12 the markets are all about prices and what --

13 there's a general prohibition of the foresee of

14 engaging in acts that cause non-bona-fide prices,

15 and to me, that's the critical provision. What

16 bothers me about this -- and I remember saying

17 something at the time when this legislation was

18 being proposed -- and unfortunately, we're stuck

19 with the legislation now, so it's a little bit too

20 late, I guess, to complain about it -- is that in

21 the abstract you're talking about in connection

22 with 4(c)(a), 5(c), you're talking about conduct
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1 that's really just the placement of the order

2 irrelevant of the price. It seems to me at the

3 end, I would hope, that to the extent that there

4 are enforcement cases that are premised on these

5 provisions, that somehow they continue to be

6 coupled with the end game, which is the causation

7 of a non-bona-fide price, because otherwise, I

8 think that, in fact, you will scare the market

9 that something about canceled replace is

10 fundamentally wrong when I think that kind of

11 strategy has been around for quite some time,

12 high-frequency trading and non high-frequency

13 trading. Again, I think it's very, very important

14 that it's all about the prices. It's either a

15 price set -- and I've never, quite frankly,

16 understood the difference between a non-bona-fide

17 price under 4(c) or a manipulative price under 9.

18 I've always accepted that somehow there's a

19 difference. I don't know what they are, but to

20 me, these conducts should be in connection with

21 some price problem.

22 COMMISSIONER O'MALIA: Richard.
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1 MR. GORELICK: Sure. Don't really envy

2 the position of the Commission here to have to

3 come up with rules that will both accomplish the

4 objectives of the legislation here and strike the

5 delicate balance that's important to make sure

6 that the markets continue to function very well.

7 It is a tricky obligation. I think regulators

8 clearly need the all the tools that can be

9 available to them to detect and deter abusive

10 behavior and to be able to stop manipulation where

11 it exists, so to the extent that we're moving in

12 that direction, that's very helpful.

13 On the other hand, it's important that

14 whatever rules come out of this accomplish a

15 couple of objectives. One, there needs to be

16 clarity. You know, the market participants need

17 to know whether a strategy that they would like to

18 pursue will potentially get them in trouble or is

19 clear and permissible.

20 A lot of the concerns that have been

21 expressed here about legitimate beneficial

22 strategies that involve cancelling and replacing a
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1 lot of orders, that's exactly sort of the delicate

2 balance that needs to be struck here. How do we

3 put a rule in effect that will go after the

4 manipulative behavior, and how do we -- without

5 inhibiting the real legitimate behavior that both

6 helps price discovery and helps to provide

7 liquidity in the market.

8 And so I would hope that the objectives

9 of clarity from market participants and of

10 continuing to strengthen the market are kept in

11 mind as we go about and define these practices

12 that you're now required to go ahead and define

13 here.

14 MR. WHITMAN: A couple of things I would

15 say. I agree both with Brian and Richard's

16 comments. I think they were very good.

17 When you look at this problem that we're

18 talking about, I think it's not just this issue,

19 it's several issues that you guys are facing. I

20 think it really comes down to data. You need data

21 and you need the ability to have people on staff

22 who can interpret that data. Because if you can
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1 get down and you can get granule enough, you can

2 see things in data that -- I'm nervous about

3 making rulings without that, that basically

4 encompass something that in the data is actually

5 not wrong.

6 And I think there's ways that you can

7 get at that. You can look at strategies and see

8 what percentage of the time do they have orders in

9 the market and over what percentage of time are

10 they in the market are they getting filled. And

11 what percentage of the orders that they have in

12 the market are they getting filled on? I'm

13 talking about an individual order or quantity.

14 I think back to in the open ALCRY days,

15 we used to see -- this definition of spoofing, we

16 used to see this, where you knew somebody was a

17 big short, and then they just came out and they

18 started offering and offering and offering. And

19 the way you really got down to the heart of it was

20 somebody would buy from them, and when they would

21 hit them, would they sell it to them. And it was

22 technically always supposed to be a violation if
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1 they didn't, that they had to sell it to you, but

2 they didn't always do that. That was spoofing.

3 Somebody that's backing out.

4 In an electronic realm, it's much

5 harder, because an execution is an execution.

6 Once you're hit, you're done. You can't back out

7 of it, unless we put in some kind of rule about we

8 can see the trade and back out in a time frame.

9 But I really think to come down to this,

10 you're going to have very intricate situations

11 that you're going to have to be able to identify

12 patterns, and then out of that, then I think you

13 can have really good rulings that would get what

14 you want.

15 CHAIRMAN GENSLER: On data, this

16 Commission's been probably in a pretty good spot,

17 a spot that was tested on May 6. By 9 a.m. the

18 next day, we had the whole book: Transactions,

19 positions and the order book. We don't generally

20 download the order book every day just because of

21 the volume of it. We always download the

22 transaction and position data every day from each
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1 of the regulated exchanges, and we've thought

2 about it and we're actually -- part of our

3 thinking as we go into the swap world, we might

4 have to start downloading the order book as well.

5 I appreciate your point, because it then

6 relates to money from congress and whether we get

7 enough resources, and I always associate myself

8 with Commissioner Dunn on that.

9 COMMISSIONER DUNN: I was just going to

10 make that point, Charles, because you indicated we

11 needed the data and we needed the ability to

12 interpret. And frankly, given what's going on in

13 the appropriation process, I don't think we'll

14 ever have that. So then we must fall back to the

15 SROs, to the exchanges and to the FCMs, and I want

16 to know who here want to be responsible.

17 MR. DURKIN: As an SRO, we obviously

18 take our responsibilities extremely seriously, and

19 again, I'm deeply sincere about the progress that

20 both the Commission and the SROs I think

21 collaboratively have made together in being the

22 frontrunner in the ability to develop technologies
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1 and capabilities to reconstruct everything that

2 happens on our markets, and we do that, and that's

3 a model that Chairman Gensler I think can be

4 deeply proud of, and we were deeply proud of him

5 in his testimony to be able to say what he said

6 that by 9:30 in the morning, because some of us

7 lived through that with him, that we were able as

8 an industry to have a fairly solid handle on what

9 happened on that particular day.

10 We're able to do that on a continuous

11 basis as an SRO, and we have similar concerns,

12 obviously, in terms of funding and whatnot, but at

13 the end of the day, we know we have a

14 responsibility to be able to effectively protect

15 and monitor everything that occurs in our markets,

16 and so therefore, we've invested tremendously in

17 the technology capabilities to have all of that

18 data readily accessible.

19 CHAIRMAN GENSLER: One of the

20 challenges, and Commissioner Sommers mentioned the

21 number that established maybe upwards to

22 40 trading platforms, these swap execution
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1 facilities. So in the futures world, we've had a

2 little bit of a luxury. I'm not saying it's good

3 or bad, but that there's not that many trading

4 platforms, and there's one that has a rather large

5 market share.

6 But in this swap world, if there are

7 30 to 40 to begin with -- and it could shake down.

8 It might shake down to a handful later. There's

9 probably only one way to integrate and look across

10 disruptive trading practices like Bob's talking

11 about, or manipulation across the market. There

12 has to be an aggregator. Whether that's the

13 Commission, as the statute says, or swap-data

14 repositories -- but swap-data repositories don't

15 have a regulatory function over the SEFs. I mean,

16 this is something that we have challenged with,

17 how to have an aggregated view for position

18 limits, for disruptive trading practices, for

19 manipulation, for all our enforcement. So we will

20 need the resources to do that.

21 COMMISSIONER O'MALIA: This quote

22 stuffing issue has been circulating a lot in the
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1 press, and I'd like to get a sense of anybody

2 in -- can you define it? Does it happen in the

3 market? What have you seen in the market? Are

4 you familiar with this?

5 MR. HEHMEYER: We've seen it in back

6 month crude oil and nat gas. The back markets,

7 which are usually less liquid and not as active in

8 the back months, they flood it with orders, cancel

9 all the orders, and everybody's algorithms are

10 trying to figure out what happened that could take

11 a half a second to a second to create optionality

12 in the front month, that you can then pick

13 somebody off if the rest of the market changes.

14 And we see it on a fairly regular basis, and it's

15 pretty predatory, and I agree with Richard

16 completely that it's a -- I don't envy your task.

17 It's a little like the famous thing of the supreme

18 court justice that said it's like porn: I know it

19 when I see it. And it's difficult to write that,

20 because it can be a slippery slope and getting

21 into places where you get into art, right? The

22 difference in art and porn is sometimes difficult
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1 to draw that line. But when you see it, it can be

2 pretty obvious.

3 MR. GORELICK: The quote-stuffing

4 allegations that I've read about in the press seem

5 like they would be fairly obvious and pretty easy

6 to detect. So I don't think that there's a big

7 problem of detecting that if it's going on. It's

8 not close to sort of the legitimate behavior where

9 it's hard to draw the line and just real market

10 making quoting activity where you have to adjust

11 your quotes regularly to remain competitive and to

12 be able to be able to offer good prices to the

13 market. But if you're cancelling and replacing

14 thousands of orders well away from the inside

15 intentionally and then benefiting from that in

16 some way, it seems like that's a pretty easy case

17 to both detect and to prosecute.

18 In fact, one of the reasons that I've

19 been a little bit skeptical about whether or not

20 this played a major role on May 6 -- and again, I

21 don't have all the information that's available

22 here, but just generally, my sense has been this
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1 would be so easy to detect, there wouldn't be

2 any -- it wouldn't make any sense to do it, and it

3 would also be just a very easy case to bring.

4 I've said to some people that, hey, if I

5 was at the SEC, it probably would have taken me

6 about an afternoon to figure out -- you know, to

7 look at the specific allegations in the reports,

8 figure out what exchanges they were being

9 conducted on, call up the exchanges, ask who sent

10 these orders, and then call up the people who sent

11 the orders and say why did you send these orders?

12 If they have a real good answer, then maybe that's

13 something to pay attention to. Otherwise, you've

14 got an enforcement action that should be pretty

15 easy to win. So that quote stuffing stuff, to the

16 extent that it exists, should be really easy to

17 distinguish from the legitimate behavior that I'm

18 concerned about inhibiting that really improves

19 market quality.

20 COMMISSIONER O'MALIA: Bob, I don't

21 think you mentioned this in your statement, but

22 part of the discussion last meeting was making
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1 sure that whatever algorithms go into the market

2 have been back tested and tried and used -- just

3 all the back testing. Occasionally, mistakes are

4 made and algorithms do go into the market that

5 ratios are different or there's a mistake. It

6 happens. How do we treat that? Is there an

7 opportunity to treat it like a rogue trader and

8 we'd apply some sort of a strict liability to it

9 or --

10 MR. PEASE: That's an interesting

11 question, and of course, being an enforcement

12 lawyer, I will say it depends, and again, it will

13 depend on the totality of the circumstances.

14 This is an algorithm that has gone --

15 did they test it and knew it had problems with it

16 but they put it in the market anyway? Well, we

17 might have a different view of that type of an

18 algorithm. Is this one that had worked properly

19 for some period of time and something happened and

20 it caused a disruption? We're going to look at

21 that situation very differently.

22 We're going to look at a situation where
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1 the programmers developed the algorithm and it's

2 put immediately into the markets. Instead of

3 being tested, it's going live right away or with

4 minimal testing. We're going to look at that one

5 very differently.

6 So there are a number of different

7 sequences and circumstances, and we're going

8 examine before we're going to jump to a conclusion

9 as to whether it was disruptive or not.

10 COMMISSIONER O'MALIA: Do any of the

11 market participants have an opinion of kind of an

12 incentive or some sort of punishment for trading

13 behavior that would make -- at least you

14 understand what the consequences are from an

15 enforcement standpoint? I know there's been a lot

16 of discussion about some certainty here, and

17 obviously, building cases built on fact using the

18 data on trades, but is there -- in terms of an

19 outcome. Gary?

20 MR. DeWALL: I do know a number of

21 exchanges around the world have a specific

22 provision that if you have a percentage higher
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1 than a certain amount of unfilled orders, you're

2 paying the penalty, and it's calculable, and you

3 can assess that in advance.

4 MR. DURKIN: That's correct. It's part

5 of our rules and our requirements at the CME Group

6 that we put all our users through a very strict

7 test in terms of order-to-trade ratio, and they do

8 understand that there is a monetary penalty

9 associated with that, and that's just an adjunct

10 to our overall surveillance.

11 So in looking at the activity in

12 general, I mean, you know, parties may very well

13 be subject to disciplinary action under our rules

14 and regulations if we feel that their trades or

15 their activity created disruption to the market,

16 and it's very clearly spelled out in our rules.

17 Lastly, we do have under our liability

18 policy for error trades under our Rule 588, if a

19 party has been known to be responsible for

20 entering orders that results in errors or price

21 adjustments, because it was outside our prescribed

22 limits, those parties may very well be held liable
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1 for the losses that have been realized by the

2 persons whose trades were busted or price

3 adjusted. So again, those parameters are very

4 clearly outlined in our rules.

5 CHAIRMAN GENSLER: You mentioned

6 parameters on order-to-trade ratio, so it's the

7 number of orders per trade, and I didn't know if

8 you had --

9 MR. DURKIN: That's actually articulated

10 in the policy.

11 CHAIRMAN GENSLER: Right, but I was

12 curious what the -- I'm an old numbers guy. What

13 is the ratio itself?

14 MR. DURKIN: You know, it's broken down

15 by market, so it's a whole litany across every

16 product. We look at order to trade ratio, and we

17 update those routinely so it's not just stagnant.

18 We'll look at the demographics of the market, and

19 we're in routine communication with the market

20 participants in terms of why they're changing,

21 what they're --

22 CHAIRMAN GENSLER: Is that on your
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1 website or somewhere?

2 MR. DURKIN: Correct, and I'll get them

3 to you.

4 COMMISSIONER O'MALIA: I guess before we

5 go to break, I asked about the quote stuffing, and

6 Chris said yeah, he's seen it in nat gas and oil.

7 Either one of the exchanges want to comment on

8 what the policy might be to address that?

9 MR. DURKIN: Well, I think I commented

10 on my policy in terms of our requirements for

11 being subjected to investigatory process and

12 prosecution if you're found to have been engaging

13 in disruptive practices to the exchange.

14 So we have a very extensive regulatory

15 surveillance program that looks at activities on a

16 daily basis, and if in our monitoring or through

17 any allegations that come our way that we're able

18 to find and build a case, we take the appropriate

19 action.

20 COMMISSIONER O'MALIA: Have you caught

21 this quote stuffing yet? Or identified it?

22 MR. DURKIN: I'm not prepared to talk
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1 about any specific cases.

2 CHAIRMAN GENSLER: I was wondering if

3 Chuck had anything from ICE. We've heard so much

4 from CME, you've been kind of --

5 MR. VICE: Bryan's done a great job.

6 CHAIRMAN GENSLER: I know the press is

7 here and everything, but we always like to give

8 you equal access.

9 MR. VICE: I agree with essentially

10 everything he said, and we have very similar

11 policies, as you might suspect. I mean,

12 particularly on the volume ratio, we're in the

13 process of enhancing that policy so that it

14 additionally penalizes orders that are further

15 away from market. So the further away you are, it

16 has a multiplier effect on what your score would

17 be, therefore, and likely that you would incur

18 some kind of charge. So we're in the process of

19 kind of overhauling, taking that multiplier into

20 effect, what are appropriate benchmarks. As Bryan

21 said, in these different markets, depending on

22 what the liquidity is, you develop different
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1 benchmarks.

2 We dialogue with the high-frequency

3 traders on a daily basis, giving them feedback

4 independent of formal policies, giving them

5 feedback if we're seeing a lot of orders from some

6 high-frequency trader, particularly if it's not

7 one we typically see that level of orders from.

8 And they have tremendous downside if they have

9 problems, as we all know, so there's in addition,

10 I think, to the exchange penalties, it's more than

11 like if anything goes wrong on their end, they're

12 going to lose a lot of money in the market to

13 begin with.

14 So I think even before the CFTC gets to

15 the point of piling on with some additional

16 enforcement, which I'm not arguing against, but I

17 think there's ample deterrent incentives in the

18 marketplace already for the high-frequency traders

19 to do a good job of programming their algorithms

20 and testing and working with the exchange and the

21 conformance with the exchange, making sure it's

22 behaving as they would expect it would.
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1 COMMISSIONER O'MALIA: Commissioner

2 Chilton, do you have anything before we move to a

3 break?

4 COMMISSIONER CHILTON: No, thank you.

5 COMMISSIONER O'MALIA: Anybody? Last

6 comments? Thoughts? We'll take a 15-minute break

7 and come back here and talk about some SEFs for a

8 while.

9 (Break.)

10 COMMISSIONER O'MALIA: We are now going

11 to move to the SEF, and we have two CFTC

12 individuals. We have a switch. Mauricio Melara

13 is on the SEF rule-making team and has the

14 challenge of interpreting the statutory direction

15 and developing a regulatory framework for swap

16 execution facilities. He will highlight the

17 issues surrounding the enhanced transparency and

18 price discovery associated with SEFs.

19 We also have John Rogers, who is our

20 Chief Information Officer with the CFTC who will

21 outline the technological challenges facing the

22 Commission and keeping pace with the data
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1 collection and market-surveillance

2 responsibilities to aggregate data from both

3 futures and swaps markets, and to do so in near or

4 real-time capability, which currently is beyond

5 our reach.

6 I've also asked two Committee members

7 seating the panel here. Tom Secunda, Chief

8 Technology Officer with Bloomberg, will provide

9 his perspective on the SEF definition and on

10 technology -- as a technology and execution

11 provider in an OTC market, and how Bloomberg

12 facilities will facilitate pre-trade transparency.

13 And Michael Cosgrove is Managing

14 Director-Head of Commodities & Energy Brokerage,

15 North America, GFI Group. Also a tech member, and

16 will provide his perspectives and that of the

17 voice-broker community on the SEF execution.

18 Mauricio, let's start with you. Thanks.

19 MR. MELARA: Thank you, Commissioner,

20 and thank you for the Chairman and the other

21 commissioners for allowing me to present on swap

22 execution facilities. By the way, this is Tab 7
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1 of the meeting booklet, if anyone wants to follow

2 along to the power point.

3 It would be hard to do better than Bob

4 Pease on the process piece and explanation of the

5 implementation of the Dodd-Frank Act, so I won't

6 try to do that. He did a superb job. Everything

7 applicable to the efforts that the staff is

8 undertaking to write rules to implement our

9 section, Section 733 of the Dodd-Frank Act,

10 applies here as well.

11 One of the efforts that we have

12 undertaken has been to take as many public

13 meetings and to participate in as many events such

14 as this to gather information and to be able to

15 recommend rules that are faithful to the statute,

16 and at the same time, take different perspectives

17 and viewpoints of the market at large.

18 So again, one note that I want to make

19 is that the views that I present here are my own

20 and do not reflect those of the Commission or any

21 individual commissioner.

22 Swap execution facilities under the
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1 Dodd-Frank Act are addressed in a couple of

2 places. One is Section 721, the definition

3 section of Title 7, and Section 733 of the Act.

4 Section 721-850 lays out the definition, and

5 Section 733 outlines the registration requirement

6 and the core principles applicable to swap

7 execution facilities.

8 The purpose and objectives of this

9 particular rule making are to, one, establish the

10 requirements for the new type of regulated entity.

11 That's the SEF; two, to implement the 15 core

12 principles applicable under the statute under

13 Section 733; three, to promote the goals under

14 Section 733(e), one being the promotion of trading

15 of Swaps and swap execution facilities, and two,

16 to promote pre-trade price transparency in the

17 swaps market.

18 Finally, although not expressed in the

19 statute -- in Section 733, rather, one of the

20 purposes of the rule making and one of our

21 objectives is to coordinate with the SEC to

22 harmonize rules applicable to swap execution
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1 facilities and security by swap execution

2 facilities.

3 The rule-making elements that the

4 rule-making team is undertaking include

5 establishing a working interpretation of the

6 statutory definition for swap execution

7 facilities. In your materials, we have the

8 applicable and statutory relevant sections for

9 swap execution facilities, and that's at the very

10 top of the materials included there. I believe

11 that would be -- they've been included elsewhere

12 in the Table of Contents.

13 I might as well read the definition,

14 which is very familiar to quite a few of the

15 participants here. The swap execution facility

16 definition reads as follows: "The term 'swap

17 execution facility' means a trading system or

18 platform in which multiple participants have the

19 ability to execute or trade swaps by accepting

20 bids and offers made by multiple participants in

21 the facility or system through any means of

22 interstate commerce, including any trading
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1 facility that, (A) facilitates the execution of

2 swaps between persons, and (B) is not a designated

3 contract market."

4 The second element of the rule making is

5 to adopt the swap execution facility registration

6 procedures, in which applicants must submit an

7 application and go through an approval process,

8 and through which we have determined so far at the

9 staff level that such process should be similar to

10 that applicable to designated contract markets

11 currently.

12 The third aspect of the rule making is

13 to develop regulations and guidance related to the

14 core principles, which are fairly comprehensive.

15 They address general subject matters such as

16 compliance with rules, the timely publication of

17 trading information, recordkeeping and reporting

18 requirements, and system safeguards, provisions,

19 as well as safeguarding against manipulation,

20 managing conflicts of interest and addressing

21 responsibilities and procedures during a market

22 event. In other words, emergency authority
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1 actions.

2 Finally, some of the issues that staff

3 have been reviewing include the interpretation of

4 the statutory definition of a SEF. In particular,

5 what the references to trading system or platform

6 mean. Also, what the multiple participant to

7 multiple participant requirement is meant to

8 include and address. And also, how block trades

9 interact in that within the definition. Finally,

10 any means of interstate commerce, what the

11 language in the definition is supposed to address.

12 Another issue that the staff has been

13 looking at is how swaps are fundable and tradable

14 on multiple swap execution facilities and

15 designated contract markets. It's expected that

16 no single swap execution facility will have the

17 information on positions or trades for the entire

18 swaps markets, and therefore, we have resulting

19 cross-market issues, which include the monitoring

20 of market manipulation and trading abuses, the

21 enforcement of position limits, and the procedures

22 and responsibilities that market participants and
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1 regulators would have when facing emergency

2 actions.

3 With that overview, I'm happy to take

4 any questions that the panel might have, and I'm

5 also ready to ask a few questions on behalf of the

6 staff.

7 COMMISSIONER O'MALIA: Does anybody have

8 any questions for Mauricio? If not, we'll go to

9 John Rogers, who can highlight our technological

10 challenges facing the Commission enforcing and

11 surveilling us.

12 MR. ROGERS: Thank you very much. Thank

13 you for the opportunity to speak today. I believe

14 the term that was used when I was approached for

15 this was what is it that keeps you up at night, so

16 this is some of the things that keep me up at

17 night.

18 I wanted to also add you've heard from a

19 lawyer, you've heard from an economist. Now

20 you're hearing from an IT guy. As is customary,

21 I'd like to note that all statements and opinions

22 are my own and do not necessarily represent the
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1 views of any commissioner or the Commission. I'm

2 pleased to talk about what we're doing as we

3 contemplate how the Dodd-Frank Act will impact our

4 IT operations and the mission-related activities

5 they support.

6 As I go into the specifics of the

7 technology considerations of Dodd-Frank, I would

8 also describe what we do in OITS related to

9 futures data, since I believe it has a strong

10 relationship to how we would implement Dodd-Frank

11 requirements of the Commission. My primary focus

12 for the discussion is on what data the Commission

13 may require, when we may need it, how we would

14 get it, how we would use it, and in what form it

15 should be delivered.

16 One significant area of focus within

17 OITS is the collection, processing and utilization

18 of data at the Commission. In the futures space,

19 we collect millions of records daily for use by

20 various automated systems supporting trade

21 practice compliance, large trader reporting,

22 market surveillance, risk surveillance, economic
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1 analysis and enforcement investigations.

2 Over time, we have automated the

3 collection of this information so that economists,

4 investigators and attorneys have information

5 available to them when they arrive at work in the

6 morning. The ability to provide this level of

7 automation was very helpful in the events such as

8 May 6, where we were able to load and make

9 available the data for that particular time period

10 of interest within hours.

11 Within the context of data collection

12 and management, I will discuss six areas: Data

13 standardization, data aggregation and the need for

14 unique identifiers, routine data collection versus

15 ad hoc data access, data calculation

16 responsibilities, data sharing with other

17 regulators, and data utilization by the

18 Commission.

19 As is common with organizations

20 processing large volumes of data from various

21 sources, we have focused on data standardization.

22 Our ability to utilize data standards such as
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1 FIX ML for the capture of trade data has greatly

2 enabled our ability to load data more quickly for

3 use on the May 6 analysis and in many other

4 situations.

5 Our work toward applying XML-based

6 standards for other types of data continues in the

7 futures market as we look to collect order data

8 and large-trader data in a standard XML-based

9 format. As a continuation of our data

10 standardization core principal, we would expect to

11 develop data standards to receive and process

12 swaps data.

13 The development of the data standard and

14 its application has been accomplished with

15 considerable feedback from industry participants

16 providing the data. While the rule-making process

17 necessarily formalizes communications, in OITS, we

18 would expect to continue this approach wherever

19 possible.

20 One of the challenges we face related to

21 data collection is first defining the data that we

22 routinely need at the Commission in order to
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1 support our mission functions. It's my

2 expectation that we will continue to have such

3 data delivered in a standardized form and in a

4 consistent manner to the Commission within a

5 particular time frame for automatic loading into

6 systems so that it would be readily available to

7 Commission staff. The goal would be that the

8 Commission staff would have a familiar set of

9 technologies at the Commission with timely data

10 available for their analysis. I did not

11 specifically mention a time window, because that

12 would be something that would be determined in the

13 process.

14 Just as we know the data requirements

15 are different for trade practice surveillance,

16 large-trader reporting and other functions, we

17 expect that data requirements will be different

18 for swaps. In addition, we are considering how

19 data requirements may differ based on asset

20 classes associated with swaps. These requirements

21 must all be defined in detail to enable automated

22 systems to be built on top of the data collected.
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1 As part of the data-collection effort

2 related to swaps, we are considering the potential

3 sources of data collection in futures. We collect

4 data from FCMs, DCOs and DCMs, to name a few. In

5 swaps, we are discussing how we might collect data

6 from swaps data repositories, swaps execution

7 facilities and other entities.

8 As part of this activity, we must

9 consider the method of delivery from both a volume

10 perspective and from a security perspective. We

11 must also consider the technological capability of

12 reporting entities from end users to swaps

13 dealers.

14 We are also considering what we must

15 collect from one entity such as a SEF as an

16 interim step while fully-functioning SDRs are

17 coming online. We expect that both industry and

18 regulators will need to phase-in technology just

19 as the regulatory approach is being phased in.

20 Another key area of data collection will

21 be recognizing the distinction of data collected

22 routinely versus data collected on an ad hoc
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1 basis. It is the goal of OITS to define how data

2 fits into those two categories. Expecting that

3 ad hoc data may live away from CFTC and an SDR,

4 for example, and not be part of a regular delivery

5 process to the Commission. Instead, the

6 Commission would have access to that data through

7 a direct link to the SDR. The Commission would

8 also have the ability to download ad hoc data for

9 further analysis, defining the sets of data that

10 are routinely provided for our common functions as

11 well as understanding what data needs to be

12 collected as needed is the important future

13 activity.

14 Given that we expected to find the set

15 of uniquely required data, we are not concerned

16 about the volumes of data that we would collect.

17 Even without such a definition, the data in terms

18 of the number of rows collected is not expected to

19 be overly burdensome when compared to the futures

20 data volumes. We expect the number of columns

21 required to vary by asset classes for swaps, but

22 we would expect only to be collecting a subset of
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1 data on a routine basis.

2 One data collection expectation that is

3 being considered is the general principle that

4 calculations were ever possible would be performed

5 by the external entities and reported with other

6 data being reported to the Commission. As an

7 example, net present value calculations would be

8 performed at the SEF and/or SDR level prior to

9 reporting to CFTC. In addition to the values used

10 to calculate the net present value would be

11 available so the commission staff can determine if

12 net present value appears reasonably stated.

13 One area of considerable discussion

14 right now is the notion of how data might be

15 aggregated to cross SDRs and SEFs. Since trading

16 activities and like products could occur across

17 multiple SEFs and reported to different swaps data

18 repositories, we must devise a method of

19 aggregation that allows the Commission to perform

20 information analysis using data received from

21 multiple reporting entities. An example of that

22 would be risk surveillance where the Commission
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1 would be interested in looking at all positions in

2 the account to perform stress testing and to

3 assess risk associated with firms' positions.

4 The Commission will need an aggregated

5 view into this data to perform the required risk

6 surveillance function. A key component of being

7 able to conduct aggregation across SDRs and SEFs

8 that is currently discussed is the application of

9 a unique identifier for market participants,

10 sometimes called a counterparty ID.

11 Many if not all of the software systems

12 this I have seen in the swaps markets currently

13 utilize a system specific unique identifier. The

14 challenges there is that there is not one unique

15 identifier shared among the systems. Aggregation

16 becomes considerably more difficult and manually

17 intensive without a unique identifier.

18 A unique participant identifier is an

19 essential ingredient to systemic oversight because

20 of its ability to enable aggregation of data. It

21 must be noted that the implementation of such an

22 identifier would require major changes to existing
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1 industry systems.

2 In addition to changing existing

3 systems, determining how a unique identifier would

4 be established and managed is another large task

5 requiring a technology implementation by some

6 organization or organizations. I would expect the

7 issuance of an ID would be part of a registration

8 function performed by one or more organizations,

9 with the main objective being to ensure uniqueness

10 and avoid duplication. That is, two participants

11 with one ID or one participant with multiple IDs.

12 I would also expect that this ID would have the

13 potential to be shared by all market participants

14 and potentially by other regulators.

15 The last key component of the unique

16 identifier challenge is determining the

17 relationship between swaps data and futures data.

18 It will be necessary to establish a data linkage

19 between the swaps and futures data sets so that

20 the Commission can aggregate position limits

21 across both markets, conduct risk analyses and

22 stress tests and perform economic analysis.
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1 One implication of this scenario is that

2 a unique participant identifier would also require

3 use by participants in the futures market.

4 Without such a requirement associating swaps

5 participants with futures participants would

6 require laborious manual effort.

7 There are expected to be other forms of

8 aggregation requirements that will be essential

9 for information analysis such as cross products.

10 It's expected that a unique identifier for

11 products will also be necessary. This concept is

12 important to the mission functions of the

13 Commission and will again require systems

14 modifications so that visibility into trading in

15 the same product across SEFs or housed in

16 different SDRs can be achieved.

17 Once data is defined, processed and

18 aggregated, the next steps is to determine how we

19 will use it. I would expect that OITS will need

20 to build technology capabilities to support the

21 Dodd-Frank rule making. At the beginning of this

22 process, I would expect that we would modify
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1 CFTC.gov to develop new capabilities to receive

2 SEF and SDR applications. On the other end of the

3 process, I expect that we would be modifying

4 CFCT.gov to meet public data transparency

5 requirements.

6 Between those two end points, I envision

7 that we'll be revising existing systems and

8 building new ones to support the core mission

9 functions; namely, trade practice surveillance,

10 large trader reporting, market surveillance, risk

11 surveillance, economic analysis and enforcement

12 investigations.

13 The process of gathering high-level

14 requirements for technology is beginning to take

15 shape as the rule-making process continues, but

16 considerable work remains on detailed requirements

17 definition, business process design, solution

18 design and technology implementation. The pace of

19 the technology change will be based on the timing

20 requirements of the specific rules.

21 Thank you very much for the opportunity

22 to speak, and I'd be happy to answer any
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1 questions.

2 COMMISSIONER O'MALIA: Well, I'm

3 relieved to hear this isn't going to be hard.

4 Let's go back to the SEF and the practitioners of

5 this market. So Tom, if you'd --

6 MR. SECUNDA: Sure. I'd like to take

7 just a quick step back and talk about Dodd-Frank a

8 little bit. When you look at the problems that

9 were trying to be solved, certainly the problems

10 of central querying to take care of counterparty

11 risk was very important, and trade reporting to

12 take care of transparency types of risk. And when

13 you go and you look at the role of SEF, the SEF's

14 job is about liquidity and facilitating both the

15 querying and the reporting mechanism.

16 I'd like to talk to you a little bit

17 about querying and transparency and how the SEF

18 and some examples of how Bloomberg has done this

19 in other markets and what kind of technology is

20 involved, then move a little bit into the

21 different kinds of mechanisms that we use to do

22 trading and talk about the pros and cons, and
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1 again, the technical implications of those.

2 To start with, in terms of central

3 querying, there are many different querying

4 organizations out there that are now willing and

5 able to do swaps. Given some of the standards

6 that exist, or even given the existence of many of

7 these exchanges for a long time, many firms are

8 ready-wired up to them, Bloomberg included, but

9 one of the things that's nice about what we're

10 talking about, in almost all of these areas, we're

11 not a sole player, that there are many players in

12 these areas. So there's many people that hook up

13 to CME and to ICE and to some of the other players

14 out there.

15 The one thing we'd like to caution

16 about, though, is that there's often third-party

17 people that sit in between and are exclusive to

18 different querying corps. Our view is that the

19 querying corp, the reporting organizations and the

20 SEFs and the distribution organizations like

21 Bloomberg should be all independent and

22 competitive amongst themselves, and no one
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1 querying guy should be able to force a business to

2 a SEF and then to a market data vendor, or a

3 market data vendor upstream the other way. That

4 openness and not having a middle man that

5 monetizes their position in the middle is

6 important.

7 The same thing is true with

8 transparency. It's very clear that it is quite

9 possible to report trades when they happen.

10 There's a question of do you want to report block

11 trades. In other words, we do a trade and we

12 report it at trade time, not at allocation time.

13 It depends whether you're looking for market

14 transparency; in other words, knowing what's

15 trading, or are they looking at querying and

16 counterparty risk. There's also nothing to be

17 said that both are independent actions and both

18 can't be done. I think pretty much everybody in

19 the business now has the ability -- should have

20 the ability to redistribute at trade time on a

21 block trade.

22 Same thing I -- since I'm sitting next
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1 to Steven here, one of the very successful

2 regulations, legislations that have happened in

3 the OTC market for corporate bonds and now

4 agencies and municipal bonds was trace reporting,

5 where trades had to be reported. I think it used

6 to be 15 minutes -- still 15 minutes? And that

7 those trades would have to be reported with size

8 and other kinds of information. And that

9 information would be available back to the market

10 at a fee. I think that it's available the next

11 day to anybody without a fee or at a reduced fee.

12 That's a model that we can support. We

13 again want to be very careful that the person that

14 has, in a sense, the control of that data, that's

15 in charge of that data, is more of a utility type

16 of company and doesn't try to be in that unique

17 position to monetize the control of information

18 that they've been granted by the regulatory body.

19 So that's very, very important to us.

20 But where we stand at Bloomberg, we have

21 a whole host of different ways that in the OTC,

22 treasury market, corporate bond market, agency
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1 market, mortgage-backed market, we report. I'd

2 like to take you through a couple of these

3 different mechanisms we use and talk about how

4 they might apply to being a SEF or not being a SEF

5 or might apply to block trades that trade

6 differently maybe than the smaller trades that are

7 reported, that are done through the SEF.

8 We have a wide range of different ways.

9 I'll start with the way that's used, which is

10 basically automating voice trades, and end up sort

11 of with a limit order book concept.

12 In many of the markets, trades are done

13 over the phone because advice is given in

14 consultation. It's not that I'm going to buy a

15 specific security. It's that I have a need and I

16 want to understand what you can do to help me with

17 that need. And it's usually not one phone call,

18 it's multiple phone calls, but at the end of the

19 process, a ticket is written.

20 And what we've done at Bloomberg -- and

21 again, we are not unique. There are two or three

22 other players that do pretty much what we do. We
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1 ask the salesperson that made that sale to write a

2 ticket into our system or into their own system

3 that feeds into our system. That ticket is then

4 sent to the buy-side participant, who acknowledges

5 it.

6 I'll give you an idea. In some of the

7 credit products, not only will we do that, but

8 we'll flash and tell the recipient if there's

9 something strange, a funny settlement date, a

10 funny size, so that not only are you getting a

11 digital copy of what used to be a voice copy, but

12 you're getting a warning that there was something

13 different than what was normal here.

14 On top of that, it's being done between

15 the salesperson and the portfolio manager or

16 trader and the trader, who are the professionals

17 who know the trade, versus often these things are

18 done in the back office between middle-office

19 people who no longer remember the trade.

20 And also, the timeliness of the middle

21 office after allocation confirm could be a day,

22 half a day. So by moving it and making it a
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1 front-office product and not a back-office

2 product, we're able to get disclosure of

3 information, but also much cleaner information.

4 Now again, that doesn't get you querying, because

5 you then have to allocate the trade, but it does

6 get you trade reporting.

7 The next step up is something which is

8 very commonly called request for quotes, where you

9 go out and you say look, I want to buy 50 million

10 long bonds, tell me what you can do for me, and

11 you go out to a certain number of guys, five,

12 three, eight, really selectable by the market, an

13 you get responses and you pick the best offering

14 that you can get, the best bid that you can get.

15 So that is one mechanism, and I'll talk about the

16 pros and cons.

17 We also sort of have another mechanism

18 that we use which we -- Bloomberg jargon, I

19 apologize. Any customers out here? We have a

20 function called all Q, where independent dealers

21 will go out and make markets in a security, and an

22 investor will go out and say, show me who's making
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1 markets on this particular bond. And you'll see a

2 list with real prices. I think we need a

3 98 percent acceptance rate or something like that,

4 and then you can hit the bid. So it's multi to

5 multi. It's many people showing to many people.

6 When it comes time to pick, it's only me talking

7 to the guy that gave me the best bid or offer.

8 Now, we actually like this mechanism,

9 and this mechanism has been very well received by

10 both the investment community and the selling

11 community. Because it stops some of the problems

12 like front running or the winner's curse. I mean,

13 think about it. If I go out and have to tell five

14 people that I'm doing a big trade, the guy who

15 wins it now has to go and do the other side of

16 that trade in a marketplace that knows that he did

17 it. Even worse than that, if I'm not one of the

18 guys that did it, I'm exposed because I have a

19 lack of information.

20 So the request-to-quote system, which

21 works well and we use it, in very liquid markets

22 works really poorly when the amount of liquidity
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1 you're doing can move the market. Counterpose

2 that with my all Q mechanism, I'm looking at the

3 best players, so I get to pick the guy who has the

4 best price, but I only tell that person to trade.

5 And I don't tell them to trade until I have to do

6 that trade.

7 Of course, the final step is sort of a

8 limited-order book where you can go and manage

9 market depth and work like many of the exchanges

10 were. Before I get -- and actually, as part of

11 talking to that, not before I talk to that, is

12 it's kind of an interesting thing that's going on

13 here. Typically, whether it's the SEC or the

14 CFTC, typically, the regulations are about the

15 exchanges or about the participants in the

16 exchanges, the market makers. And sometimes, yes,

17 there's high-frequency traders and hedge funds

18 that play a middle role between investment company

19 and a market maker. But most investment companies

20 are only regulated to the extent that the people

21 they're buying and selling from are regulated.

22 So really, for the first time, we're
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1 talking about regulating the buy side, which is

2 really kind of a funny thing. We're talking about

3 investors now being told on how they're going to

4 trade with the dealers. And that's why it's

5 important to look at these things. If this was

6 between market makers and market makers, that

7 would be fine, but we've tried a couple of times

8 and we've seen tried many times in the past where

9 you intermingle the buy side and the sell side in

10 a market maker type facility, and the problem is,

11 if I'm an investor, what I want to do is get my

12 block done. I'm not really prepared to work

13 against high-frequency traders or big broker

14 dealers and try to get the best 32nd. What I

15 don't want to do is I don't want to move the

16 market. I want to get in there where the market

17 is, because that's where my trade works. So in

18 many markets and most of the regulated markets, I

19 would do that trade with a market maker or

20 participant and they would then take the

21 market-making risk of trying to unwind that trade.

22 So when we start looking at how we're going to
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1 move the SEFs, if we're moving the SEFs into the

2 buy side, then we have to be conscious not of the

3 way we would normally do a sell side to sell side

4 transaction, but we have to start looking at how

5 the buy side interacts. And it's a very different

6 kind of system. In the end, I think that it's

7 fair to say that we're regulating, we're trying to

8 protect the investment community, and to the

9 extent we introduce regulations that make

10 investors start having to compete with market

11 makers or compete on exchanges, we're not doing

12 them a service. As a matter of fact, that is the

13 service they're paying the sell side for.

14 So when we look at the full spectrum of

15 things, we sort of love the limit order book or

16 love a broker, inter-broker system for brokers to

17 talk to brokers, but when you start extending that

18 to the buy side, that's when there's a different

19 kind of SEF we think necessary so that they can

20 get their transactions done without having to

21 compete in this market-maker type space.

22 So that's basically it for us. When it
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1 comes to technology, I think there are many, many

2 players now, and again, the thing that I would

3 caution the most about is to make sure that

4 whether it's Bloomberg being a SEF or CME being a

5 clearing house, that we're all out to compete in

6 all these different spaces, unimpeded by the

7 person in the middle who has control of some part

8 of that operation.

9 And it was interesting in the technology

10 discussion that you're thinking about unique

11 customer IDs. We've talked in the past about even

12 having unique product IDs. And again, we think

13 that it's very, very important that these things

14 are available and available to all SEFs and all

15 querying corps and all reporting mechanisms at

16 more of a price point that is for a service

17 utility type organization and not a purely for

18 profit kind of thing, because once you're the sole

19 provider, the price you can charge becomes

20 anything you want it to be. Just as a Bloomberg

21 offer, we've published all of our identifiers. We

22 don't complete the entire world, but for the world
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1 that we cover to the web is an open source, and we

2 certainly offer that to the extent that

3 contractually we can do it and to the extent that

4 the Commission wants it, we would offer those kind

5 of identifiers as open source and loose, and to

6 the extent that some other organization wanted to

7 control them, we'd be happy for that. We think

8 that it's important for the marketplace to have

9 common nomenclature. We haven't anticipated,

10 although you're absolutely right. I didn't come

11 here anticipating a unique ID system. There are

12 many players in that space as well. We don't have

13 to be one of them. Thank you.

14 CHAIRMAN GENSLER: I just wanted, Tom,

15 to clarify, because we were having -- are you

16 saying that you think the buy side should have

17 access to SEFs? That's how I read the statute,

18 because it says it has to have impartial access.

19 There's both open access for clearing houses, but

20 then the SEFs impartial access. You're saying

21 they should and then we have to be conscious that

22 there's ramifications or you're saying they
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1 shouldn't have access?

2 MR. SECUNDA: No, I'm not actually

3 saying they should, but I'm saying the kind of SEF

4 might be different. That the concept of limit

5 order book, where algorithms and people are

6 competing is not something that a buy-side guy, a

7 pure-investor guy would be interested in, because

8 he'd then have to take -- when you go and you buy

9 a mutual fund, muni-mutual funds, or in this case,

10 a fixed-income mutual fund that's using swaps, you

11 really don't want them to be taking market risks

12 or spending their money in trading execution. You

13 want them to be making their money by position

14 taking.

15 CHAIRMAN GENSLER: Right, but I gather

16 you are saying -- I mean, I can't speak for my

17 fellow commissioners. My read of the statute is

18 we're supposed to give impartial access. That

19 says it in the statute, so whether you're a buy

20 side, you're an end user, you're a dealer, that

21 you have access to these SEFs and whatever

22 pre-trade -- wherever we come out on request for
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1 quote, wherever we come out on all these really

2 important issues you raised, I thought that we

3 were pretty clear we have to give impartial access

4 to whomever wants to come in and use these things,

5 and it sounds like you're saying the same thing.

6 MR. SECUNDA: Yeah, I'm not -- it's very

7 hard to define what an investor is and what a

8 market maker is, and clearly, people will want to

9 play where they want to play. Certainly we're not

10 in a position to object or even comment on that.

11 I guess we're in a position after looking at how

12 people use our technology in talking to our

13 customers to hope that there is a way that there

14 will be an additional mechanism for them to play

15 in the marketplace as they'd like to play in the

16 marketplace.

17 CHAIRMAN GENSLER: If I could say one

18 more thing. Given that the statute says that we

19 can -- and I think it might have even said shall,

20 but at least we can have block-trading rules, and

21 I know staff are working on that. A block trading

22 in essence takes somebody out of pre-trade
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1 transparency, so some of what you're saying might

2 be addressed through the block trading.

3 You know, if somebody comes in and

4 they're that big mutual fund and wants to

5 billion-dollar trade, that might be out because

6 it's a block.

7 MR. SECUNDA: That's absolutely true,

8 and we would propose -- you know, the beauty about

9 block trading over a system like we talked about

10 called VCON, but again, is available through many

11 other sources than Bloomberg, is that you can

12 still get price transparency to the extent that's

13 it's right to ask for that through the VCON type

14 system for a block.

15 But also just, again, whether I have --

16 you're absolutely right that on big trades, it has

17 a much bigger effect -- we talked about this --

18 even in electronically active markets has a much

19 bigger effect. But even when it comes time to go

20 and buy reasonably-sized positions, it would be

21 nice for me as a buy-side guy saying I don't want

22 to have to work the exchange to make that happen.
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1 I want to sell that position to somebody or buy

2 that position from somebody and let them work the

3 exchange, and having that kind of a mechanism that

4 gives us transparency, gives us multi to multi,

5 gives us what the statute says we have to have

6 without me having to go and build my own

7 algorithmic trading and high-frequency trading

8 operation just to get my trades done.

9 CHAIRMAN GENSLER: Are you talking about

10 something that's below the block sides then?

11 MR. SECUNDA: Yes, I am. I'm basically

12 saying that in many cases, clearly the bigger the

13 size, the more important it is, but even with a

14 small size, in a very liquid market matters less,

15 but as the markets get less and less liquid, you

16 have to work a trade of a size that you might

17 consider below the block. Now, maybe you can

18 adjust block sizes to make that happen, but again,

19 I think that having the capability of an

20 investment firm to get a trade done without having

21 to work the market aggressively would be a

22 powerful thing, and really does exist in the
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1 equity market and your futures market as they

2 exist today. So the SEF idea, to an extent, is

3 moving beyond the kind of regulation that already

4 exists in your futures market. And to that

5 extent, you should look at its effect on the

6 investment community, which in the end is one of

7 the major reasons why we regulate is to protect

8 that investment.

9 COMMISSIONER O'MALIA: Thank you very

10 much. Michael?

11 MR. COSGROVE: Thanks for giving me the

12 opportunity to contribute to this discussion this

13 afternoon. I'd like to start by putting what I'm

14 about to say into a bit of a context. I know that

15 my company and companies like mine have been

16 referred to as voice brokers repeatedly, and I

17 want to first of all sort of describe the industry

18 group that we formed to advocate on behalf of our

19 businesses and the markets.

20 My company, GFI, along with BGC

21 Partners, Icap, Tradition and Tullett Prebon

22 formed the Wholesale Market Brokers' Association
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1 Americas, and our intention was to essentially

2 advocate not only for what we do, but also for the

3 health and vitality of our markets.

4 In fact, while we do collectively employ

5 thousands of individuals who are voice brokers, we

6 also operate some of the largest electronic

7 markets that you'll find in our spaces. GFI

8 operates EnergyMatch, CreditMatch and ForexMatch.

9 Icap operates EVS and Broker Tech, and of course

10 ICE purchased CreditEx not long ago and employs

11 voice brokers along with operating electronic

12 markets.

13 So I'm not here simply to plead for full

14 employment for our employees and those of our

15 competitors, but rather to make the distinction

16 that we apply -- we use voice brokers in markets

17 where we believe that that's the right approach.

18 We employ technology as aggressively as

19 we can and we invest in that, because we find that

20 it makes our voice brokers more powerful and more

21 productive, and we also find that from a simple

22 revenue and profit standpoint, all you have to do
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1 is look at recent financial statements that the

2 CME and ICE publish and you see 67 percent profit

3 margins. Those are enviable, and anyone in their

4 right mind who would be capable of deploying a

5 model to produce that kind of profit would do so.

6 And I'm not revealing any secret information. I

7 just read the 10-Qs.

8 CHAIRMAN GENSLER: What's GFI's profit

9 margin?

10 MR. COSGROVE: Less. That's the point

11 where I say don't look behind the curtain. It is

12 less.

13 Now, having sort of started with that, I

14 had a list of items that I was going to cover very

15 quickly here, and ultimately, what I'm going to

16 suggest is that I believe that our current

17 business models, GFI's and our competitors, do

18 actually meet the definition of SEFs as near as we

19 can determine them from the Dodd-Frank

20 legislation. But I wanted to start by just asking

21 a few questions, because I was under the

22 impression that it would be useful to help sort of
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1 stimulate this discussion.

2 I think the first objective that we have

3 must be to do no harm. And then I think the

4 second is do we have to ask for whom we seek to

5 improve the markets: The largest number of

6 participants? For hedgers? For small investors?

7 I think the third thing we want to ask

8 is should we have a single standard for all

9 markets, and if not, how do we stratify markets

10 for the purpose of applying regulation? I would

11 suggest that from our experience, we operate

12 exclusively in professional markets. We don't

13 deal with retail customers. Our customers are all

14 eligible commercial participants. I think that

15 they require less protection than retail

16 customers.

17 Next, do we stratify by market type?

18 For example, do we require pre-trade price

19 transparency in the Henry Hub Natural Gas swap

20 contracts under the assumption they're

21 sufficiently active, liquid and deep to produce

22 such transparency without dying under the burden?
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1 Do we satisfy ourselves with near real-time

2 post-trade price transparency in markets that

3 perhaps are insufficiently robust to support

4 pre-trade price transparency?

5 Actually, a lot of this has already been

6 covered, so I'm going to skip right to what I

7 believe to be my understanding of the Dodd-Frank

8 legislation and how I believe that in the current

9 market, we do actually satisfy these broad

10 prescriptions.

11 First, Dodd-Frank will subject US swaps

12 markets to comprehensive regulation by the CFTC

13 and SEC, including registration and regulation of

14 swaps dealers, intermediaries, clearers and so

15 forth. My company and our significant competitors

16 will certainly be regulated as SEFs. And when I

17 hear that there's going to be 40 SEFs, I would be

18 such a size buyer for that. I think there will be

19 100 SEF applications.

20 CHAIRMAN GENSLER: Michael, will you

21 share that with congress? We need more funding.

22 MR. COSGROVE: You know, I'd be happy to
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1 do that. There are 50 companies attempting to

2 broker OTC natural gas swaps right now. 50

3 companies. And they all want to stay in business,

4 and I think unless someone can offer them, sort of

5 lend them the SEF compliance, they're all going to

6 apply. So I think the OTC natural gas options

7 brokers, there's 50 of them, so you're going to

8 get 50 from those guys.

9 CHAIRMAN GENSLER: How many people are a

10 buyer at 40?

11 MR. COSGROVE: I think I'd be a buyer at

12 100.

13 CHAIRMAN GENSLER: Does anybody think

14 that we're high with that 30 to 40? Oh, wow. So

15 that's low.

16 MR. COSGROVE: I really think you're

17 going to get a lot more than you think.

18 COMMISSIONER O'MALIA: Mr. Chairman, I

19 think it depends on how flexible we are in letting

20 these SEFs function and what they look like.

21 COMMISSIONER DUNN: I think at some

22 point in time, we're going to have to consider the
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1 capacity of staff to process applications. We may

2 have to limit it to two.

3 MR. COSGROVE: That might be okay.

4 Second, there will be comprehensive position and

5 transaction regulatory reporting. We currently

6 employ robust -- and all our competitors, too.

7 All of our significant competitors currently

8 employ robust, state-of-the-art technology to

9 capture process, reconcile and bill transactions.

10 We will be able to report transactions timely to

11 trade repositories as required, and in our

12 fixed-income business, we already report to trace,

13 and it's not at all burdensome.

14 So I think that issue of post-trade

15 transparency is a piece of cake. We just need to

16 know who to plug into and the confirmations will

17 flow automatically.

18 Third, there will be mandatory clearing

19 of clearable swap instruments. I can say that in

20 the North American natural gas and electrical

21 power markets, probably in excess of 90 percent of

22 the business that we do in those markets are
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1 already cleared, and that required no directive or

2 regulation. That simply was a natural development

3 as a result of clearing being tremendously

4 beneficial to the market.

5 In fact, we could spend hours talking

6 about how valuable and enriching clearing has been

7 to these markets. So I'd be surprised if in the

8 business that we do, which is the wholesale

9 business, there would be much of a reluctance to

10 clear transactions. It's generally been very

11 beneficial, and I think the resistance would only

12 be quite limited and largely indefensible.

13 Fourth, swap transactions that are

14 subject to mandatory clearing will be required to

15 be intermediated by a swap execution facility.

16 We're going to make an application. We think we

17 qualify for that. And fifth, there will be

18 greatly enhanced public pricing transparency in

19 both pre- and post-trade time cycle.

20 Here I'd like to echo Tom's comments.

21 There are some markets where pre-trade price

22 transparency, in my opinion, would actually kill
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1 the market. It is in our best interest to have

2 pre-trade price transparency. I think it serves

3 the general public interest to have that, but

4 there are some markets that require such a large

5 degree of workup and finesse, in markets where you

6 really don't have a firm bid and firm offer until

7 literally the last second. You're in a

8 collaborative discussion with a customer, and as

9 Tom said, the customer doesn't know that he needs

10 to buy this or that. The customer has a need.

11 So in the course of collaborating with a

12 customer, you could come to a point in the

13 conversation where you may have had a dozen

14 conversations with them, either over the phone or

15 instant messenger, and the customer finally says,

16 "Okay, let's buy this. Get them on the line."

17 It's difficult prior to that as you're going

18 through the discussion with them, the

19 collaboration with them, to identify a point in

20 time where you could say okay, look, if you're

21 telling me you might be a buyer at 10, I'm going

22 to have to post that for everyone to see.
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1 So I think that we need to, in the

2 process of defining where and how we apply

3 pre-trade price transparency, to take into account

4 that it should be implemented wherever possible.

5 Where it would harm the markets, I think there has

6 to be some recognition of that so that we first,

7 essentially, do no harm to those markets. So that

8 sort of summarizes everything that I have to say.

9 COMMISSIONER O'MALIA: Thank you very

10 much. I'd like to get a sense from participants,

11 committee members here, what they want to see in a

12 SEF. Buy side, sell side, competitor. What are

13 the attributes mentioned by either of these

14 presentations do you want to see? What do you

15 think the most essential elements? Is it

16 pre-trade transparency? Is it execution? What is

17 it? What do we need to be thinking about here?

18 MR. HARRIS: I certainly think the goal

19 of transparency is one that the Commission should

20 be trying to achieve, but I think transparency is

21 intended to buy side, in large part. Those who

22 provide them with more information. So I think
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1 it's very important that the Commission actually

2 talk to the buy side and listen to them concerning

3 which systems and facilities are appropriate and

4 are desired, and what kind of information they

5 actually need, what kind of information gives them

6 the transparency to provide for better execution

7 of their transactions.

8 I also wanted to pick up on one other

9 thing that Mike said, and that is that I think

10 it's pretty clear that different systems and

11 facilities have evolved over time, and I think

12 that there may be different SEFs that are

13 appropriate for certain classes than others, so I

14 think the Commission needs to be very flexible in

15 its definition of SEFs, not just because the

16 technology is evolving, but also because there may

17 be differences in the classes and what's

18 appropriate.

19 MR. HEHMEYER: I'm a futures guy, so

20 take this for what it's worth, Michael, but at the

21 Board of Trade in the '70s, we were told exactly

22 the same thing by the primary dealers with regard
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1 to treasuries: Do no harm. Don't hurt the

2 market. It just work great, and why do we need

3 price discovery to really be transparent?

4 And so my own feeling is that -- and I'm

5 not in that market, so I definitely am not

6 somebody that's real conversant in the

7 over-the-counter nat gas markets, but the futures

8 guys tend to think if you give the market

9 transparency, in the price discovery transparency,

10 it will shrink the spreads of the markets and give

11 the public more access to information. So that's

12 where my background comes from is.

13 MR. COSGROVE: And I'm in favor of that

14 also, because as soon as we can bring a market to

15 the point where there are firm, tradable bids and

16 offers there, then we can access a far broader

17 range of customers. I mean, there's I don't know

18 how many companies in Chicago that will trade with

19 you if you can let them plug into your market as

20 opposed to pick up the telephone and talk to

21 someone about that market. So it's from a very

22 selfish perspective, as quickly as we can migrate
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1 a market to a screen, the better off we'll be.

2 Having said that, there are some markets

3 that are either nascent or they are just simply

4 very, very illiquid, and if you require the

5 participants in those markets to post a firm bid

6 and a firm offer -- and really, I'm not talking

7 about -- I'm talking about markets that I think

8 many people in the room probably -- well, many

9 people in the room may be familiar with, but many

10 people outside of the room wouldn't be familiar

11 with. They may be specific natural gas basis

12 markets. They may be specific nodal power

13 markets. In those areas, if we were to require

14 customers, principal traders to post a bid and an

15 offer, my fear is that instead of having

16 transactions, we'd have very wide bid offers and

17 far fewer transactions. We wouldn't really

18 have -- in fact, we would diminish our ability to

19 take that market from its current condition and

20 continue to bring it along to the point where it

21 could be a vibrant market with full pre-trade

22 price transparency.
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1 MR. HEHMEYER: Is some of that where you

2 draw the lines with regard to exotic products

3 being exempt and vanilla products being posted on

4 SEFs that have pre-trade transparency? And I

5 understand completely and respect that that gets

6 complicated quickly.

7 MR. COSGROVE: Yeah, I think so. I

8 didn't come here today with a list of markets to

9 say, well, this one should be. You know, you

10 should allow some degree of -- be satisfied with a

11 trace type reporting solution for this market, but

12 require pre-trade price transparency in these five

13 markets. But I think there are markets that

14 really do sit rather clearly on either side of a

15 line, and then there are going to be a number that

16 are sort of in the middle.

17 But I do think that the definition of a

18 SEF needs to accommodate those markets where

19 simply forcing full pre-trade price transparency

20 would I think have a harmful effect on the market.

21 MR. HEHMEYER: I respect that

22 completely. We have futures markets in some of
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1 these products, and there are differences in the

2 products, and I completely respect that. But like

3 I said, my gut is that if you bring transparency

4 to pre-trade price discovery, it will make the

5 market more efficient.

6 CHAIRMAN GENSLER: My gut's been with

7 Chris for a long time, and it's not -- because I

8 just think it. But my question for you, Michael,

9 is recognizing this is only on non blocks, because

10 if it's a block trade, there's not a pre-trade.

11 And recognize this as only on something that's

12 clearable, because it's got to be on a clearing

13 house, and as congress has said, accepted for

14 trading, and then we have to define what that

15 means.

16 So it's got to be accepted for trading.

17 It's got to be clearable, meaning it's not some

18 exotic bilateral, and it's the non blocks. You're

19 still worried about some of the pre-trade

20 transparency. That might separate us, but I think

21 that's what you're saying, but I have a question.

22 So you do something by voice and there's a resting
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1 bid or offer. It's not an affirmative obligation,

2 but there's a resting bid or offer. Are you all

3 right saying that as a SEF, you have to let your

4 participant or member know about that? And I

5 mean, if that's better than what you're doing on

6 the voice, to let them hit that bid or lift the

7 offer?

8 MR. COSGROVE: Yes, absolutely, and I'm

9 glad you asked that question. Even in the voice

10 markets, the voice markets are very large mini to

11 mini markets. And just to give an example, GFI

12 owns a company, Houston-based company, Amerex,

13 which has been in business for 35 years now. And

14 Amerex has 1,000 direct voice lines to customers,

15 and probably that many instant messaging

16 connections to customers also. So when a broker

17 is negotiating a transaction, all the broker's

18 colleagues are also showing that transaction to

19 their customers, and at any point in time, a

20 customer can step in and better the bid and better

21 the offer. And when you have 1,000 open lines all

22 the time, you can't actually, even in a voice
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1 market, communicate a tremendous amount of

2 information and inform quite a few people. And

3 because you're not simply communicating a number

4 on a screen, which I would prefer to do, frankly,

5 you can transmit a lot of qualitative information

6 also, which I think is important again for massive

7 markets or markets that are not as actively

8 traded.

9 CHAIRMAN GENSLER: So I hear that you're

10 comfortable having an affirmative obligation,

11 maybe, to show the resting orders, and even to let

12 the resting orders participate if they're better.

13 It's just that where you're drawing a line -- and

14 I might draw the same line that you draw, but

15 where you draw a line is forcing market

16 participants actually to make a bid or make an

17 offer.

18 MR. COSGROVE: Right. That's right. I

19 think if you -- I know from my even experience, I

20 came from the crude oil markets many years ago.

21 Especially in lesser-developed markets, markets

22 that don't trade as frequently, there's a lot of
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1 hand holding and lot of collaboration and a lot of

2 development that takes place, and it's difficult

3 sometimes to determine at what point someone has

4 really given an indication that qualifies as

5 something that should be broadcast, essentially.

6 And often, there's a kind of a -- often it comes

7 down to I'll do it if he'll do it.

8 In the workup prior to that, it's very

9 difficult to -- I think in the workup prior to

10 that, if we had to tell the parties, well, no, you

11 have to give me a firm bid and I have to post that

12 and everyone needs to see that, you have to give

13 me a firm offer and everyone has to post that, in

14 those markets, it would have a harmful effect. I

15 think, in fact, it would -- I'm sure that it would

16 invite a tremendous amount of gaming. I just

17 think that it would be unhelpful in some markets.

18 Having said that, I want to reaffirm

19 that my company and companies like ours are very

20 big believers in technology. We invest in it. We

21 like it. We think full pre-trade price

22 transparency is very, very important and valuable,
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1 but a one-size-fits-all I fear will do harm to

2 markets that we seek to improve.

3 COMMISSIONER DUNN: Listening to Tom and

4 Mike, it seems like pre-trade, there's a lot of

5 advisory activities taking place. How do you draw

6 the line between what we see as a CTA versus

7 what's going to be a SEF?

8 CHAIRMAN GENSLER: CTA is commodity

9 trading advisor, and in the statute, the word

10 "swap" was added to it. I see one of Chairman

11 Lincoln's staff here who probably helped do that.

12 So that's why, what he's talking about.

13 MR. COSGROVE: I've actually taken the

14 Series 3 Exam three times in the last 25 years, so

15 I know -- and many, many years ago I was involved

16 with the CTA. I think a commodity trading advisor

17 is -- correct me if I'm wrong. Doesn't a

18 commodity trading advisor have the ability to

19 trade the account or do you just need that for

20 advice only? I mean, does a CTA have the ability

21 to trade the account?

22 MR. HARRIS: Yes.
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1 MR. COSGROVE: Yeah. So I think clearly

2 in our business as it currently stands, we don't

3 have the ability --

4 CHAIRMAN GENSLER: It doesn't have to

5 have that.

6 MR. COSGROVE: So I'm going to have to

7 ask if you could repeat the question, because I

8 don't know exactly how to respond.

9 COMMISSIONER DUNN: I was just trying

10 to, in my mind, draw the line between the

11 distinction of being the advisor, and then at some

12 point you become the SEF where you're actually

13 doing the trade.

14 MR. COSGROVE: I see. That's a good

15 question and one that I came completely unprepared

16 for.

17 COMMISSIONER DUNN: Tom?

18 MR. SECUNDA: If I understand the

19 question right, I think somebody giving advice is

20 totally separate from the SEF. The SEF is closer

21 to where the transaction happens and not where the

22 advice goes to. So if I got -- I did not take the
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1 Series 3, so I'm completely handicapped here, but

2 the SEF has no advisory role. At the least, it's

3 process is an information provider.

4 COMMISSIONER DUNN: I must have

5 misunderstood your presentation, because I thought

6 you said you initially get in and do advice.

7 MR. SECUNDA: Let me explain. It was a

8 small part of my presentation. I was trying to

9 distinguish an investor, how he might or she might

10 purchase securities versus a market maker and what

11 their role is. But often what happens in the OTC

12 markets is there's a discussion, as Michael talked

13 about, of I have this need to get something done

14 and they discuss how to do it. Now, if it turns

15 out that that thing that has to get done is a very

16 liquid item that's SEF tradable, then yeah, they

17 probably go back to the screen and get the trade

18 done. If that item -- and I think that the

19 chairman's question, I think that it breaks down

20 between what is going to be clearable and what's

21 not going to be clearable. Clearly, if what you

22 discussed is an instrument that's not clearable,
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1 then it wouldn't be in the SEF and everything

2 would proceed off SEF, if you will. If it's an

3 item that's in the SEF, then you would have to go

4 back into that SEF and transact it.

5 The question that I don't have a good

6 answer for, that we have to think about, is what

7 happens to an item that could be clearable, it's

8 not too complex, it's not custom, but never

9 trades. Because how do you get a two-sided market

10 on an item that nobody wants to buy or sell except

11 for me and you. If you then force me to stop and

12 put it into the market, I might not want to buy or

13 sell much more than what I'm willing to by or sell

14 for you, and you're happy to buy it from somebody

15 else, but I just did all the work to get you ready

16 to buy it.

17 So that's sort of the gray area where I

18 don't know how you play it. Clearly, if it's a

19 custom item, we've discussed that that wouldn't be

20 clearable and not on a SEF, and if it is a SEF

21 tradable item, then clearly, I'd be an advisor,

22 but you would then go to the SEF and purchase it
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1 as if you would any other way and just remember

2 me. It's that in-between area where it's a

3 product that is understandable and not customized,

4 but not liquid and never liquid, and not likely to

5 be liquid again for a long period of time.

6 COMMISSIONER DUNN: You'll be happy to

7 know when staff was briefing me and I asked them

8 if a Series 3 would be required, I was told no.

9 MS. BOULTWOOD: Can I go back to the

10 question of what we as panel members would like to

11 see in the SEF? And like the other speakers from

12 the Committee, I think a broad definition is

13 desired.

14 I think we have to contemplate markets

15 where it's more than just a difference between

16 vanilla and exotic products. I think we have to

17 dive into the notion of what is a nascent market.

18 And some markets are just simply small, and it

19 comes down to often physical players, whether it's

20 a natural gas or power, that may have generation

21 or drilling wells in certain locations and are

22 trying to move the value of that commodity from
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1 one place to another.

2 And there just aren't that many physical

3 participants at any one time to begin with, and

4 there are even fewer who are willing to transact.

5 And I think it also helps to clarify some of the

6 confusion that exists around sometimes what is a

7 market maker in some of these small, nascent,

8 illiquid markets where if you are a physical

9 participant, just the ability to quote just both a

10 bid and an offer is a signal to others in the

11 market that you're trying to do a transaction more

12 than a persistent intent to trade on both sides of

13 a market, for example.

14 So I think it is important that we

15 consider, again, the broad definition, and in the

16 very different markets that will be regulating and

17 the characteristics, and in addition to vanilla,

18 exotic, just small versus large, it's also mature

19 versus immature, and we need a system that

20 facilitates the development and maturing of

21 products and innovation in our market and rules

22 that allow SEFs to facilitate that.
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1 COMMISSIONER O'MALIA: Chuck.

2 MR. WHITMAN: I have a point on that,

3 too. I think a key element of this is access, and

4 Michael, I agree with a lot of what you say. We

5 at Infinium, we execute a great deal of business

6 by a voice brokerage in addition to just executing

7 algorithmically and electronically.

8 One of the things that some of the

9 exchanges will know is that our firm has played a

10 vital role working with exchanges and developing

11 new products, and also with different brokerages.

12 Part of this discussion is key is how we define

13 this, and access is a key element to it, because

14 there's been some products we've come in to trade

15 that ahead of time, we would have been told this

16 is a dark market, it will never work. You come

17 in, it won't work. And we've come in and

18 radically changed some of these markets, brought

19 price transparency, brought regular bids and

20 offers and increased volumes. And once somebody

21 like us comes in, people will jump on our backs

22 and quote with us. All of a sudden, once we're
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1 the first market maker, if they get any kind of

2 sense that things are going well, there will two

3 or three more behind us, and it will bring

4 transparency to the market.

5 We've had the flip side where we've had

6 other products we've had other products we've gone

7 and tried to do it, and it's really struggled.

8 And we've done this both electronically and by

9 voice brokerage.

10 The key element, though, I'm trying to

11 emphasize, is access. And firms like ours in many

12 cases have tightened markets and brought

13 transparency just by having access to the market.

14 And that access can come electronically. It can

15 come voice brokerage, but I hesitate anytime we

16 talk about defining something ahead of time is too

17 thin or not mature enough or too exotic to trade,

18 because I would say give me a shot at it. Give me

19 a shot at pricing it. Give me a shot at putting

20 correlations to it and I might be able to make it

21 a much better market for people. Sometimes it

22 works, sometimes it doesn't. But I feel like
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1 that's a key point that I would like you guys to

2 consider as you look at this.

3 CHAIRMAN GENSLER: I think I'm

4 hearing -- I know there's people in this room that

5 don't agree with me on this pre-trade

6 transparency. Probably even on my own Commission.

7 But I haven't heard anybody disagree on this

8 impartial access -- yet. Maybe they're staying

9 quiet. Right? I mean, Tom said he thought yeah,

10 you should have access if the buy side wants to be

11 in or if Infinium wants to be in. Michael? Same

12 place? Brenda? And that there weren't people in

13 the room staying quiet on it.

14 MR. SECUNDA: I just want to add,

15 because I do agree, of course, whatever regulatory

16 regulations you need to participate, whether

17 that's margin or anything else, obviously all

18 participants are held to the same standards.

19 CHAIRMAN GENSLER: And maybe also held

20 to the standard that they have to have a futures

21 commission merchant who guarantees their trade at

22 a clearing house.
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1 MS. BOULTWOOD: And Tom raised a good

2 point earlier, just about how these operate as

3 profit-making entities. I think Michael alluded

4 to it later, or just utilities, and that is an

5 important issue related to access and impartial

6 access.

7 COMMISSIONER O'MALIA: Anybody else?

8 Brian? Or commissioner Chilton, if he has a

9 question.

10 MR. DURKIN: Just to echo some of the

11 comments here today, we really are advocating for

12 not getting overly aggressive in terms of the

13 definition of the model going forward in the

14 context of adding potentially disruptive processes

15 to a market model that has served a very, very

16 important role in the OTC side of the business.

17 One of the fundamental predicates of why

18 we're here today is to address central

19 counterparty clearing and providing mechanisms in

20 place to give the safety and security behind the

21 execution of those transactions, and a number of

22 us have I think done certain creative things over
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1 the years to provide that mechanism so that the

2 platform exists to provide the safety and

3 soundness of clearing. We've done it through the

4 clearport model, but one of the things that have

5 come out in this discussion today is hopefully a

6 recognition of the voice brokerage and the clear

7 importance of how that model has evolved over time

8 in supporting swap executions in general.

9 So we would certainly hope that the

10 Commission would take all of those comments into

11 consideration as we're moving forward to

12 developing this model.

13 MR. JOACHIM: Just one thought in terms

14 of the access and connectivity issue, in the

15 equity markets, they talk about fair and

16 equivalent access. When you're talking about the

17 proliferation of SEFs, defining what fair and

18 equitable access means is going to be very

19 critical. It can be everything from cost to speed

20 of connectivity, the levels of access, the kinds

21 of access you provide. I think you have to think

22 through very carefully what you mean by that to
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1 give each of the SEFs very careful guideposts as

2 to what they can do and can't do, because it's

3 really going to define how your marketplace

4 operates.

5 MR. WHITMAN: I would agree the

6 definition is key. I don't have more to add than

7 that, sorry.

8 MR. SECUNDA: There's a great example,

9 you know, as Europe opened up and started having

10 lots and lots of different exchanges, it got to be

11 a point that paying exchange fees for all the

12 exchanges prohibited for smaller players, and now

13 there are many players in the market that don't

14 have full transparency because they can't afford

15 to pay for it, and they let little pieces out and

16 hope that those aren't the guys that should be

17 showing them the market now.

18 So the cost of this, although if you

19 have 100 SEFs out there, we got to come up with a

20 mechanism that each of us doesn't charge $1,000 a

21 month to get the little bit of data that we

22 provide. It's going to be very, very important.
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1 Sometimes the best intents that we have

2 create our biggest problems, so we have to make

3 sure that if we have a lot of data transparency,

4 that somebody puts it together and puts it out

5 there in a way that can be afforded again by the

6 investment community and the smaller players.

7 MR. GORELICK: I'd like to just add that

8 there is a connection between the idea of open

9 access and pre-trade transparency, or transparency

10 in general. Access without that transparency

11 really can be a barrier to competition. I think

12 the purpose of having open access to these markets

13 is to encourage a variety of competitors to open

14 the market, tighten up the spreads and make a

15 better market for investors. And without the

16 transparency to what's going on, both pre- and

17 post-trade, it really can inhibit some that

18 competition, because it makes it much harder for

19 participants who don't have access to what's going

20 on in a market to really be able to compete on a

21 level playing field.

22 COMMISSIONER O'MALIA: Gary.
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1 MR. DeWALL: Just to change direction,

2 I'm still having John's early comments about the

3 IT and some of the requirements, we've sort of

4 moved off target a little bit. Just, again, in

5 the interest of an advisory, there's an

6 interesting obligation here, because whatever the

7 rules that you decide to implement for SEFs and

8 whatever processes go forward, it's interesting

9 that under the Dodd-Frank, and it's provisions

10 repeated for dealers, for major swap participants,

11 it's this whole role of the chief compliance

12 officer, and I just think it's worth noting that

13 at the end of the day, even though even here for

14 SEFs is a contemplation of a senior officer, the

15 contemplation of a chief financial officer, at the

16 end of the day, it's the chief compliance officer

17 of the Dodd-Frank that's required to establish and

18 administer the policies and procedures and is

19 required to ensure compliance of the organization

20 with these policies and procedures.

21 It's an odd obligation, because it's

22 almost making the chief compliance officer a
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1 guarantor, and I just hope that when the

2 Commission finally adopts regulations, they keep

3 in mind that hopefully that's not what's intended,

4 that there are other officers that are doing their

5 role, too. Otherwise, it's a pretty tough

6 standard to meet.

7 MR. HARRIS: In fact, that provision

8 would change the way many large financial

9 institutions organize their compliance risk

10 management functions. There are certain

11 compliance obligations that are generally owned by

12 the compliance function. Others are owned by

13 other groups, whether it's finance or treasury or

14 legal. This provision, which seemed to make

15 compliance the owner of all of the compliance

16 obligations of the firm, that's just not the way

17 most large institutions run their business.

18 COMMISSIONER O'MALIA: Any further

19 comments? I think we're going to go to the final

20 panel now, which is Swap Data Repositories. We'll

21 have the new panelists step in, and I'm just going

22 to read quickly who we will have testifying here.
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1 And I implore them to keep their presentations

2 sharp and quick.

3 We have Tom Leahy, chief of the Product

4 Review Branch of the Division of Market Oversight.

5 Mr. Leahy is the team lead charged with drafting

6 rule-making associated with the public reporting

7 of swap transaction data on a real-time basis.

8 Next we'll have David Taylor, Special

9 Counsel, Division of Market Oversight here at the

10 Commission. Mr. Taylor is the team lead for the

11 rule-making on swap reporting and record-keeping

12 requirements for swap data repositories, swap

13 execution facilities, DCMs, DCOs, swap dealers and

14 major swap participants.

15 We will have two -- we'll go to Steve

16 Joachim, EVP of Transparency Services from FINRA,

17 can provide us some perspectives on the challenges

18 that are facing the Commission in industry and

19 reporting in the swaps market as a result of his

20 experience with the trace system, and finally, we

21 have two further -- Jiro Okochi, CEO and

22 Co-Founder of Reval, and Pete Axilrod with DTCC,
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1 to share their views on the visions of swap data

2 repository in this market and the technology

3 challenges facing the Commission.

4 So we're going to start with the CFTC

5 staff, we'll go to Steve and then Jiro and Peter.

6 So Tom, it's your show. Just keep them quick.

7 MR. LEAHY: Thank you, Commissioner, for

8 this opportunity to discuss real-time public

9 reporting and rule-making. Standard disclaimer,

10 any views expressed are my own, do not necessarily

11 reflect those of the Commission, any commissioner

12 or any commission staff.

13 Section 727 of Dodd-Frank established

14 standards and requirements related to real-time

15 reporting and public availability of swaps

16 transaction data. We, in doing this rule making,

17 are considering various issues and questions and

18 are happy to hear what you have to say either

19 today or during the public comment period, which

20 will be coming up before too long.

21 One of the first questions is who would

22 be responsible for public reporting of swap data.
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1 We look at this, and the Act gives us the

2 authority to require registered entities to

3 report. That would be the DCMs, the SEFs and the

4 SDRs. But also registrants, major swap

5 participants and swap dealers.

6 I think one of the others questions we

7 talk about is what is meant by real time. There's

8 a key phrase in the legislation that is

9 technologically practicable. It's not, I don't

10 think, a very well-defined term, but it's

11 something that we need to consider. It may depend

12 on some of the variables with respect to swaps.

13 The next question is what data must be

14 reported, and the legislation says price and

15 volume. But we look at this and we say with

16 swaps, price may not be enough. You need other

17 fields to give context to that price, and we're

18 working on looking at what fields should be

19 required to be reported.

20 And then one other question with respect

21 to real-time reporting is data consolidation.

22 Should be there a consolidator? And if so, whom?
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1 Who would that be? And does the Commission have

2 the authority to name somebody or to require

3 somebody to be a consolidator? The legislation is

4 quiet on that issue. Speaking as an economist, I

5 can give you a legal opinion. There's no explicit

6 authority, but there's no prohibition, either.

7 And then the last major piece of

8 Section 727 is block trades and large notional

9 transactions. The big question there is what is a

10 block trade and what is a large notional

11 transaction? We look at blocks as being subject

12 to the rules of a SEF or a DCM. On the other

13 hand, a large notional transaction would be

14 something that is off-facility and is not subject

15 to the rules of a swap or an SEF.

16 So what we need to do is figure out what

17 is an appropriate transaction size, minimum

18 transaction size for a swap. And there, we're

19 looking at different things. The asset class may

20 make a difference, the contract type may make a

21 difference.

22 And then finally, what is an appropriate
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1 delay in reporting block trades? The legislation

2 says that delays may be appropriate and we are

3 supposed to consider the effects on liquidity of

4 reporting of blocks. So it's another question

5 that we're trying to answer when we write our

6 proposed rules.

7 So any comments that you-all would have

8 would be certainly welcome and any questions that

9 you may have are certainly welcome. And that's

10 pretty much all I have. Fortunately, it is short.

11 COMMISSIONER O'MALIA: Thank you. Let's

12 just go through the presentations and then we'll

13 come back. I'd like to get everybody, or anybody

14 who has an opinion on what a block trade is or

15 what should be a block and what's left over from

16 any SEF trading would be useful. I know that is a

17 difficult question for us. Dave?

18 MR. TAYLOR: As Commissioner O'Malia

19 said, I'm the leader of the Data Record Keeping

20 and Reporting Requirements rule-making team. I'll

21 give the same disclaimer that Tom did: Any views

22 I express are my own and don't necessarily reflect
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1 those of the Commission or any individual

2 commissioner.

3 Very briefly, new Section 21 of the

4 Commodity Exchange Act gives the Commission

5 appropriate authority to establish standards and

6 requirements relating to reporting and record

7 keeping for swaps. We are supposed to prescribe

8 standards that specify the data for each swap that

9 should be collected and maintained by each

10 repository, and to carry that out, we are supposed

11 to prescribe consistent data element standards for

12 registered entities and reporting counterparties.

13 We are going to seek and will welcome

14 comments on all aspects of the data rule making.

15 We intend to have a series of specific

16 comment-soliciting questions in the proposed rule

17 making, but we'll welcome comments on any aspect

18 of it.

19 Very briefly, Commissioner O'Malia asked

20 us to think about what aspects of this rule making

21 might be of interest to the Committee to talk

22 about today. Some people around here have accused
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1 me of being the zealot of unique identifiers, and

2 I suppose there's a search truth to that. We've

3 come to believe that using unique identifiers both

4 for the swap itself and for the counterparties for

5 the swap and for what kind of swap is this are

6 going to be crucial to achieving the purposes of

7 the legislation so that it's possible to track all

8 of those things in a reliable way. I'm happy to

9 answer questions or get in a discussion of that.

10 It might also be of interest to all of

11 you to talk a bit about the data standard that

12 could be used. Very briefly, what we're thinking

13 about there is two commandments. One of them is

14 the repository has to be able to give it to us the

15 way we want it and can use it. And then the

16 second commandment would be the repository can ask

17 for the data to come to it in any way it likes, as

18 long as it's capable of fulfilling the first

19 commandment. But we can talk more about that.

20 I'll stop there.

21 COMMISSIONER O'MALIA: You are honoring

22 the short. Steven, let's go with you.
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1 MR. JOACHIM: Sure. Thank you,

2 Commissioner O'Malia. Let me just first say that

3 this is the second Technology Advisory Committee

4 I've participated in, and I was honored to sit in

5 the joint round tables we had. And it is

6 interesting to hear some of the comments on TRACE,

7 because many of the industry participants weren't

8 in this room. It was a very long battle to get to

9 what we got to. But it is rewarding to hear that

10 at the end of that, that people feel pretty good

11 about how it turned out.

12 It was probably a three-year process in

13 getting TRACE launched the first time, and I do

14 admire the requirements of the bill in trying to

15 get this done in a very, very short period of

16 time. I think you have some amazing challenges in

17 front of you to bring real-time transparency in a

18 market like this.

19 Let me take you through just briefly

20 what we think of as the -- what I call the TRACE

21 environment, and then talk about how we approached

22 bringing transparency to an opaque environment and
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1 some of the issues that we've talked about today.

2 First is that we think of a TRACE

3 environment in really five pieces. The first are

4 the rules. The rules govern pretty much all the

5 operations of how you define what a transaction

6 is, some of the things that participants talk

7 about, which data needs to get reported, when it

8 needs to get reported. It defines who the

9 counterparties are, what their obligations are in

10 terms of the timing and how they'll submit the

11 transactions, who owns the transaction itself,

12 because the mechanism in terms of getting the

13 trade from the counterparty to the point of

14 aggregation could be very different from

15 participant to participant, but you want to have a

16 party who you know owns that obligation and has a

17 legal obligation to ensure that they get the trade

18 to us.

19 So just some of the rules. Defining the

20 rules is probably the most complex part of rolling

21 out any transparency facility. I've used this

22 story a couple of times, but I once had a guy come
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1 to me and talk to me about -- one of my people on

2 my team came to me and said we've looked at

3 rolling out corporate bonds and we're in the

4 process of now rolling out asset backed

5 securities, transparency in the bond market today,

6 and the difference between corporates and asset

7 backs is like the difference between French and

8 German. And I asked him what he meant by that,

9 and he said, well, corporates are kind of like

10 German and asset backs are kind of like French.

11 And he said in German, there are a million rules

12 and one exception, and in French there is one rule

13 and a million exceptions. And I think as you face

14 the swap marketplace, I think you're going to find

15 it's much more like asset-backed securities, and

16 maybe it's a million squared in terms of the

17 number of exceptions you're going to have, in

18 terms of the flavors and differences in

19 transactions, and that's why the rules become very

20 critical. The market participants need to know

21 what they have to do. It needs to be with a

22 minimum amount of judgment, and there's always
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1 going to be judgment in all these things, but you

2 want to be sure you know what you're getting,

3 because at the end, you need to be able to have

4 comparability of the information. You need to

5 know when you're looking at something, you

6 understand what that is. So a lot of time has to

7 be spent ensuring that those rules of the game are

8 defined very quickly. So that's the first thing.

9 Second thing is that technology needs to

10 be in place. I think you have to think of

11 technology in multiple ways. It's not just the

12 technology that exists at the point of collection

13 and the point of dissemination, but it's also the

14 technology. Adequate technology needs to exist at

15 each of the participant sites to make sure that

16 they can capture through order-management systems

17 the number of utilities that are in place, the

18 number of firms that put utilities in place and

19 tools in place that help people to gather this.

20 But you need to think about that in terms of just

21 the continuity and the speed in which transactions

22 can get reported to you.
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1 Third is you need an operating unit.

2 And some of the things we've talked about before,

3 you'll need operations that will manage the

4 process. Everything from, as we've talked before,

5 registering participants, identifying what the

6 participants are. With the number of instruments

7 you have in this marketplace, I guarantee you're

8 going to have a steady stream of new products

9 coming out, and participants are going to need to

10 know how to report them, how they're identified.

11 You're going to have to have a central point

12 that's going to identify those instruments,

13 identify IDs for those instruments and make sure

14 all the participants understand what those

15 instruments are on an ongoing basis. So you need

16 a group that's going to monitor that process.

17 The same thing as new participants come

18 into the marketplace, they're going to want to

19 trade the day they register. So you're going to

20 need to be able to get information account. The

21 counterparties who trade with them will need to

22 know who their counterparties are and how you get
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1 those pieces of identification out in the

2 marketplace are going to be critical.

3 The same thing is you're going to need a

4 point of contact for market events that may affect

5 market transparency so that you have a way to

6 communicate those information. So operations is a

7 third element of that.

8 A fourth element is what I call -- which

9 is somewhat connected and somewhat not connected.

10 It's kind of a data-cleaning operation. Tom

11 talked about the difference between when you

12 define a transaction takes place. Is it at the

13 point of clearing, when settlement takes place, or

14 is it the point of execution or when affirmation

15 takes place? We've interpreted for TRACE as the

16 point of affirmation the time when the bargain is

17 consummated and the terms are agreed to. We did

18 that because we believe that we wanted to get the

19 information out in the marketplace as quickly as

20 possible. The closer you do that, the more

21 important it is that you have a data-cleaning

22 exercise, because there's going to be errors that
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1 are going to come into the reporting facility.

2 You're going to have trades that are going to look

3 like they're out of line when they should be out

4 of line and sometimes when they're just in error

5 in terms of the reporting mechanism. You need to

6 have some facility that's going to correct it to

7 minimize the chances that you have bad information

8 going through the marketplace. So you need to

9 have a data-cleaning exercise on a real-time

10 basis, but you also then need to be able to have a

11 data-cleaning exercise, which often falls in what

12 we would call our market surveillance areas, where

13 they look back into the marketplace to identify

14 trades that are anomaly transactions. They do it

15 for regulation purposes, but they also do it for

16 data-cleaning exercises, to ensure that people are

17 reporting their transactions on a timely basis.

18 So that's kind of the way you get clean, complete

19 and accurate transactions.

20 Another element of that is you need to

21 ensure all the counterparties are actually

22 reporting. It may seem like it's a very simple
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1 thing to just tell everybody they've got to

2 report, but you need some mechanism in place to

3 ensure that all the counterparties actually

4 fulfill their obligations. And we have a robust

5 examination program where we go into the market

6 participants and actually examine their books to

7 ensure that they are reporting their trades. And

8 even in a tight community like the broker-dealer

9 community in the US, where they are easily -- they

10 understand the concepts of rules and are

11 reporting, we found many participants over the

12 years, or some participants over the years, who

13 have missed their obligation. And sometimes it's

14 universal and sometimes it's in a certain

15 proportion of the marketplace, but it happens. It

16 just happens. And you need a mechanism to

17 identify when you don't have all the information,

18 because market participants over time get more and

19 more dependent on this information and depend on

20 the accuracy and completeness of it. So you need

21 to think through all those elements to be sure

22 it's there.
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1 The last piece is you need some kind of

2 an enforcement arm that's going to enforce all

3 these rule and ensure that when there are

4 violations, that there are consequences that

5 provide incentives and the stick-and-the-carrot

6 kind of exercise to ensure that all those take

7 place.

8 That's the TRACE environment as we think

9 of it. It's not just simply the technology put in

10 place to make transparency take place, happen, but

11 it is all of those other elements that really

12 compose the environment we talk about.

13 In terms of the way we approach the

14 business is we looked at this and recognized that

15 this was a marketplace that did not have a lot of

16 automation when we started. There was some places

17 and some pockets where it was the bigger firms had

18 a significant amount of automation, but there was

19 a need to put automation in place in a lot of the

20 other firms who were participants to be sure they

21 could capture and report transactions on time. So

22 we staged reporting requirements, first from a
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1 reporting time frame. We initially started at

2 75-minute reporting and then phased in our time

3 frame, so over time, giving market participants

4 time to make adjustments, we shortened the time

5 frame to what we considered then 15-minute

6 reporting as being real time.

7 Our rules were written so that we said

8 that you had an obligation as a participant to

9 report the trade as soon as practicable but no

10 later than 15 minutes. So in fact, almost

11 90 percent of our transactions came to us in less

12 than five minutes. Early on, it was probably

13 75 percent of our transactions that came to us in

14 less than five minutes, even though we were

15 talking about 75-minute reporting. So people had

16 an obligation to get those trades to us relatively

17 quickly, but we gave them the opportunity to build

18 in their automation time to do that.

19 The second thing we did was we looked at

20 phasing in terms of dissemination. We collected

21 100 percent of transactions on day one, and we did

22 that partially because, I would say, now
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1 experienced with our third market of doing this,

2 is that conventional wisdom and forecasts of what

3 the size, scope, activity level, the breadth of

4 participation in each market we faced has been

5 wrong. What I mean by conventional wisdom, I

6 don't mean anybody deliberately or intentionally

7 would mislead us, but people see when there's no

8 central clearing house information, they see what

9 they do. They don't see the broad marketplace,

10 and one value of getting all the trades in one

11 place at one time is it eliminates guessing. You

12 know what happens. And as the central point of

13 collection, it gave us an ability to phase in the

14 transparency side of the business in a way that

15 minimized disruption of the marketplace. And we

16 did it in phases starting with the most liquid

17 part of the marketplace to the least liquid

18 marketplace, giving the marketplace time to

19 adjust, but also giving us time to look and

20 understand the marketplace in a way that we could

21 analyze. We brought in some academic teams and

22 economists to come in and help us analyze what we
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1 thought the impact was at each stage. We actually

2 organized some experiments to see what the impact

3 would be in the places where there was less

4 liquidity to be sure we understood what we were

5 doing as we took steps in terms of improving,

6 enhancing transparency, that we can measure that

7 impact and really get our arms around whether we

8 would have any negative impact, because the

9 industry was forecasting that we -- what some

10 people talked about was that we would dramatically

11 dry up the liquidity in the marketplace. So we

12 phased in each of these processes to give us time

13 to do it. Took us about a two-and-a-half year

14 process to cover the entire marketplace over all.

15 The other thing we did is we listened

16 very carefully to participants, both buy side and

17 sell side -- then I'll finish, because I know I'm

18 going too long. As we looked at buy side and sell

19 side and we talked to them very actively in the

20 marketplace to understand where their concerns

21 were. And as we're talking about the block

22 exception, the one place that we did hear concerns
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1 from both buy side and sell side was that

2 liquidity would dry up in the largest pieces in

3 the marketplace. Our answer to that, after going

4 that many discussions, was when we disseminate

5 transactions, we would cap the size of the largest

6 trades, and that was done primarily because

7 universally, people felt that over a certain size,

8 it wasn't important to know the difference between

9 whether the trade was a $25 million trade or a

10 $50 million trade. I just needed to know it was a

11 large transaction in the marketplace. Give me the

12 price and tell me it was a large trade. That's

13 what we needed. So we created a set of caps that

14 were developed before the launch of TRACE, before

15 we sold this data together, that basically said

16 for investment grade bonds, we capped them at

17 $5 million, and when we disseminated the price, we

18 said it was five-million plus. If it was a

19 high-yield bond, we disseminated it as one-million

20 plus if it was over a million dollars.

21 That information has -- those caps have

22 been consistent. We've had very few complaints or
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1 concerns about that from either buy side or sell

2 side since that time. But we have looked at that

3 periodically and visited whether those caps could

4 be increased. And it is possible as we go forward

5 that we will modify those caps in terms of the

6 size of the transactions that we actually

7 disseminate in the marketplace, but we'll do that

8 in a very informed basis.

9 So those are the key elements. I could

10 probably talk for another two hours if you wanted

11 me to, but key things in terms of just lessons

12 learned in our approach as we took from TRACE.

13 COMMISSIONER O'MALIA: We'll reserve a

14 room over here and you can spend the next two

15 hours if you'd like. Jiro?

16 MR. OKOCHI: Mr. Commissioner,

17 Commissioner O'Malia, Commissioner Sommers,

18 Commissioner Dunn, Chairman Gensler, thank you for

19 allowing me to speak to the panel today. Just a

20 little bit of background on Reval. I started

21 Reval about eleven years ago after selling

22 derivatives. Came over from that side of the
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1 fence, seeing an opportunity to leverage the

2 internet technology to help end users book their

3 derivatives, find out what these prices really are

4 independently, and then comply with all the

5 regulatory standards around FASB 133, et cetera.

6 We, in my opinion, are a walking SDR and

7 plan on registering to become an SDR, so I'm happy

8 to be here today to talk to you a little bit about

9 my thoughts on that. I think given the time frame

10 is short, I'll go through the eight rules of what

11 an SDR should do in sort of a David Letterman

12 style top ten, top eight list.

13 So the first rule is accept data. I

14 think going to Mr. Taylor's recommendation of

15 Commandment 2, the SDR should take any form of

16 data. So I think there's been a lot of discussion

17 of should there be a standard FpML, XML, what have

18 you. We take data, a CSV file, FpML, our own XML,

19 or the user can enter in through the browser. The

20 many key terms of a derivative to get the price of

21 the derivative. So I think any SDR registering

22 should be able to take any of the data. Let's
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1 worry about getting the uniform standard down the

2 road. I think we have bigger fish to fry.

3 The second rule is, or duty is to

4 confirm the trade. My understanding, it's not to

5 confirm that the two trades, the two

6 counterparties in the trade match and confirm the

7 details, but the trade details the SDR receives

8 are, in fact, accurate. So if that is the case, I

9 think the onus may need to be put more so on the

10 dealer submitting the trade. I would advise that

11 you make sure that the dealer uses electronic

12 connections as much as possible. Any trade,

13 exception, handling, to be done electronically so

14 if there's any miskeying of the data on the

15 dealer's end, it's captured. But it would be very

16 difficult for the SDR to go in, look at an instant

17 confirm, look at the trade and receive -- to make

18 sure that the details are correct. Unless you got

19 trade details from both the end user or the other

20 counterparty in the swap dealer, which is not part

21 of the statute.

22 Number three is maintaining the life
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1 cycle of the trades. I think very different from

2 securities, from even CDS, these derivatives,

3 without even amending the trade, have their own

4 life cycle. Live boards reset, things happen, new

5 holidays are up to when the queen has her 100th

6 birthday pretty soon, we're going to have to have

7 a new holiday calendar for that. So I think all

8 of these things, the SDR is going to have to

9 really maintain the moving parts to the life cycle

10 of these over-the-counter derivatives, and every

11 piece can affect, ultimately, the NVP of the price

12 of the derivative or the future price of that

13 derivative depending on what is happening in the

14 marketplace.

15 Number four is to provide on-demand

16 access so all the different regulators, both here

17 and overseas, have to be able to access this

18 information. We are a true software service

19 company delivering our reporting over the

20 internet, so anyone with a proper access security,

21 et cetera, could access our data. I would

22 recommend that any SDR have some form of
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1 web-friendly access to get to that data. It's

2 obviously very important for the Commission to be

3 able to take this data and analyze it. An SDR can

4 give you all the data you want, but if you can't

5 really look at the risk within that data, we don't

6 even know today what the total notional

7 outstanding really is. We get the BIS numbers,

8 but we really don't know. We don't know what

9 end-user positions really are out there. People

10 aren't counting every single FX4 transaction, for

11 example.

12 So I think ultimately, the SDR has to be

13 able to take all of this data, and then,

14 Commandment No. 1, give it back to the Commission

15 in a friendly form. We would envision alerts,

16 user-friendly reports that any staff member could

17 get in terms of net-position movements, changes in

18 volume, whether it's aggregated public or whether

19 it's confidential and for your eyes only.

20 Also on the reporting side, stress

21 testing was mentioned earlier, MPV was mentioned.

22 It's not just about what is the value of the
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1 derivatives today. What happens if the Euro goes

2 to 150 or oil goes back to 140? I think the

3 Commission needs to understand what the future

4 risk is within the system, not just there's a

5 default today, what's the net impact of the system

6 today.

7 Obviously, the SDR has the duty to keep

8 all the data confidential and secure, so all of

9 our employees sign NDAs, we do background checks,

10 so I think that part of the reform should be easy

11 for any SDR to properly comply, so long as they do

12 have the proper controls and govern it, so one of

13 the rules would be to have the Chief Compliance

14 Officer responsible for compliance, and I think

15 for SEFs, maybe it is a different situation where

16 the compliance officer couldn't keep track of

17 everything, but for an SDR, I think it does make

18 sense for that ownership to be housed within

19 compliance of the standard.

20 And then, of course, the SDR would have

21 to have all the proper backup facilities, disaster

22 recovery, access to that information when the
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1 Commission needs it. So those are the eight basic

2 obligations that the SDR has.

3 What I'd like to quickly talk about is

4 some of the concerns I have about what we're

5 seeing in terms of what an SDR may be responsible

6 for. I think the biggest concern would be the

7 time frame. So my understanding of the time frame

8 of when an SDR has to turn on the switch and go

9 live would be around the fall of 2011. So if the

10 rules are issued in, say, February, it would

11 basically give you six months to go live.

12 So I think there are obviously

13 mechanical concerns with the SDR being able to

14 book all the trades and do all the reporting that

15 the Commission needs, but if you think about

16 180 swap dealers having to interface to one or

17 more SDRs, you're going to have a lot of -- good

18 news is you'll probably have a lot of job creation

19 for the economy, but it will be a monumental task.

20 If you speak to derivative dealers when

21 they're implementing a new trading system and

22 maybe they have a couple hundred-thousand trades,
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1 it can take two years to implement a trading

2 system. So 180 swap dealers times five asset

3 classes, that's a lot of implementation work to be

4 had.

5 And on that note, I think the more you

6 try and change the requirements for swap dealers,

7 the more challenging it will be. So if there's

8 going to be a unified, unique identifier, every

9 single swap dealer has to change their data base

10 to comply. Again, it will be possible, but can it

11 be possible within the time frames?

12 And similarly, if there's a standard for

13 the data, if everyone is required to define, claim

14 a no-interest rate swap with this XML, again,

15 everyone would have to change their systems and

16 interface to the SDR. So that's a top concern I

17 think I have for everyone.

18 I guess the second concern I have would

19 be competition. We're in favor of as many SDRs

20 for registering, and hopefully whatever the rules

21 are, they qualify and there's competition. I

22 think it shouldn't be the utility model.
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1 Ultimately, I think all of us around the table,

2 our hopes are -- and I think I speak for the

3 Commission, that derivatives volumes don't shrink

4 for the wrong reason or move offshore. So we need

5 to keep these costs as low as possible for swap

6 dealers so they don't pass them on to end users

7 and kill the market or the market goes to

8 Singapore where there may not be an SDR

9 requirement. So the more competition you have,

10 pretty obvious you should have better pricing

11 capabilities.

12 So my concerns would be to make sure

13 that there's fair competition, so I think the

14 topic of conflict of interest is really around to

15 making sure that if there are any number of SDRs

16 allowed, that they each have an equal right to

17 gain access to the marketplace by showing good

18 technology and proper service, low pricing, and

19 the ability to be motivated to continue to improve

20 their services to make sure as the market changes,

21 we provide that service to both the swap dealers

22 and the Commission. Thank you.
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1 COMMISSIONER O'MALIA: Thank you, Jiro.

2 Peter, you get the last word.

3 MR. AXILROD: Thank you. I think people

4 can read my slide deck. It's fairly

5 self-explanatory. I'm not going to go through it.

6 What I did want to do to is address what appeared

7 to be the 800-pound gorilla in the room that I

8 think is an extraordinarily difficult and naughty

9 problem, particularly from a technology point of

10 view, and that is aggregation.

11 It's been raised continuously throughout

12 the day that it's something that's needed. It's

13 been a question, sort of how are you going to get

14 it. I'm not going to propose an answer or

15 recommend an answer unless pressed.

16 I do think that there is also a

17 corollary to aggregation, which is how to assure

18 that the regulators, they are pleural, but we're

19 dealing with the Commission, get complete,

20 appropriately granular and accurate information.

21 In other words, they get all and only the

22 information they need to get to fulfill their
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1 mission. And that's sort of what I call an

2 inventory-control problem.

3 I guess in the course of the last four

4 years when we developed our trade information

5 warehouse for credit derivatives -- and I realize

6 different asset classes had different problems and

7 one size may not fit all, so to the extent that

8 lessons can be drawn from the credit derivative

9 market, we might be able to provide a little

10 experience and inform this discussion, but

11 essentially, we've had to deal with both

12 aggregation and sort of inventory control issues

13 in the course of development over the last four

14 years, and in particularly difficult political

15 circumstances.

16 So when we started this in 2006, it was

17 with an industry group and with the cooperation of

18 the OTC derivative supervisor's group that was

19 then chaired by Secretary Geithner. The first

20 thing that the industry had to grapple with is how

21 do you avoid double counting. How do you avoid --

22 they are very arcane things. How do you avoid
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1 amending the same contract in two inconsistent

2 ways, so forth and so on, and having that recorded

3 in a way that didn't make any sense.

4 What we discovered was that the things

5 that you might look at for precedence, Central

6 Securities depositories or DCOs, you know, listed

7 derivatives clearers, didn't provide good answers

8 to these questions. So the industry had to come

9 up with its own method of inventory control. I'm

10 happy to share the technical specs with the

11 Commission if you want. It's not secret, but it

12 was a unique solution.

13 This sort of got exacerbated I think a

14 couple of years ago when the European Commission

15 had a series of industry meetings dealing with the

16 subject of how it would address -- and these were

17 fact-finding meetings -- how it would address the

18 OTC derivatives markets in general, and the credit

19 derivatives markets in particular. And they were

20 focused both on CCPs and repositories, and there

21 was particularly an issue of should there be a

22 European repository for credit derivatives. And
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1 we went through really in great detail as a group

2 collectively all of the inventory control issues

3 with then Eddie Winemear, Cesar and Mary Onaba

4 (phonetic), who's also left but been replaced by

5 Patrick Pearson. And the issues are the same.

6 You have cross-border trading. Where do they get

7 reported? Both repositories? Then how do you

8 avoid double-counting? What about situations

9 where there's foreign trading on domestic

10 underlines? A large part of the credit derivative

11 market and all OTC derivative markets involve US

12 trading of EU underlines, EU tradings of US

13 underlines, Asian trading of both. Again, how do

14 you gather all that information in one place and

15 make sure that the regulators who have an interest

16 in seeing that information get to see it in a

17 useful way? And really, even in that atmosphere,

18 the solution that seems to be evolving in Europe

19 is that there shouldn't be a separate European

20 repository, but there should be a complete

21 duplicate of a global repository just happening to

22 be located in Europe to assure that European
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1 authorities have access to it. I think that was

2 particularly motivated by, if I may provide an

3 editorial comment on Dodd-Frank, the unfortunate

4 indemnity language in Dodd-Frank, which sort of

5 has pushed them to say I need to get this

6 information over into Europe and regulate it in

7 Europe.

8 So that was the solution, and the OTC

9 derivatives regulators forum, which is

10 44 regulators worldwide, they don't have any

11 statutory authority, but this Commission and

12 others participate in it, gave us a set of advice

13 that we published, which basically said here's

14 some guidance that we've all agreed on -- it was

15 signed by all 44 -- saying this is who ought to

16 see what data.

17 In a cinch, if I can summarize the rule,

18 if your regulatory mission touches either one of

19 the counterparties or the underlying, you get to

20 see the data. And we are -- with the Hellenic

21 capital markets commission, for instance, we

22 essentially gave them all the trades on Greek
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1 underlines, regardless of where they were

2 executed.

3 The only way to make sure -- I don't

4 want to say the only way to make sure, but the

5 problem that you to solve is how do you make sure

6 that you get -- the domestic regulators get all

7 the relevant non-domestic trading of the

8 underlines that they want to get, and how do you

9 get that in a timely manner? So if your

10 regulatory purpose is to look at position limits,

11 to look at maybe undue build-ups of open interest,

12 to look at market manipulation, you're going to

13 need the off-shore trading at the same time that

14 you see the on-shore trading.

15 So the problem that you need to solve is

16 all that information has to come to one place, and

17 then that one place has to sort of decide who gets

18 to see what in accordance with the rules that

19 everybody has agreed on, and that's just a naughty

20 problem. It happens to have been -- at least the

21 expedient that the regulators have taken up so far

22 in the credit derivatives market was to have sort
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1 of a utility that was recognized by many

2 regulators that followed the guidelines that were

3 put out by the OTC derivatives regulators forum.

4 Anyway, I'll leave everything there. I

5 think aggregation really is the elephant in the

6 room, and it's very, very difficult and naughty to

7 deal with.

8 COMMISSIONER O'MALIA: Thank you very

9 much. Let me point out it is a little after 5:00.

10 Does anybody have a question? Well, I want to

11 thank everyone for their attention, participation

12 and for the presentations we've had today. The

13 CFTC staff in addition to putting rule-makings

14 together has put together presentations for our

15 benefit, and I appreciate that. I appreciate all

16 the staff that have done that. I appreciate all

17 the participants here that have contribute as

18 well. And I think we'll have to obviously come

19 back to the swap data repository. There's many

20 other items in the technology fold that we're

21 going to explore, and we'll be looking at another

22 meeting probably early next year. We'll have to
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1 calibrate that with where the rule-makings are,

2 et cetera. So any thoughts or inputs you-all have

3 on new topics, issues, et cetera, we'd be happy to

4 review them and talk to you about them.

5 But let me just thank you all very much,

6 thank my fellow commissioners, and before we

7 leave, I'd like to see if anybody else has a final

8 comment.

9 CHAIRMAN GENSLER: I was just going to

10 thank Commissioner O'Malia for chairing this, for

11 hosting a very helpful discussion, my fellow

12 commissioners. And not just thanking you, but

13 also ask you if you have thoughts before we put

14 out rules, after we put out rules, all the way

15 through the final rules and probably even after

16 the final rules, we want to hear them. This is a

17 very significant market. It's critical for end

18 users and hedgers and investors throughout this

19 country, and we want to promote transparency and

20 get it right, but we need your advice.

21 COMMISSIONER DUNN: I'd just echo the

22 Chairman's remarks here and thank you very much,
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1 Scott. This has really been -- every time I think

2 I've got my arm around it, I have a meeting like

3 this and I say oh, my goodness.

4 COMMISSIONER SOMMERS: Thanks to

5 everybody for being here. Thank you to you and

6 your staff.

7 COMMISSIONER O'MALIA: Commissioner

8 Chilton?

9 COMMISSIONER CHILTON: Thank you,

10 Commissioner O'Malia, and your staff and for all

11 the members of the Advisory Committee for being

12 there.

13 I guess the only thing I'd say is

14 congress gave us instructions on real-time

15 reporting and data collection like we were talking

16 about, just like they gave us these instructions

17 and deadlines to implement the rest of the new

18 law. The new law. So none of this is a surprise

19 that we're coming out with some crazy regulation

20 that one day is going to fall out of the sky and

21 catch people completely unknown.

22 You know, folks who are going to be
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1 nimble and quick are able to compete and get a

2 competitive advantage. So a lot of folks, and

3 we've had some comments here today, but I've met

4 with a lot of people who think the task is too big

5 or it's too complicated, or they want

6 implementation delayed a year or they want

7 exemptions just for themselves from the bill.

8 You know, I can't speak for my

9 colleagues, but just because this is challenging

10 and monumental doesn't mean it's impossible. The

11 Chairman's done a great job of putting us on a

12 strong, solid course for going forward, and I'm

13 convinced we're going to get this done and we're

14 going to get it done on time. Thanks, Scott.

15 COMMISSIONER O'MALIA: Anyone else?

16 Final comment? Thank you very much for coming.

17 (Whereupon, the above-included matter

18 was concluded at 5:09 p.m., this date.)

19 -----

20

21

22
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1 UNITED STATES OF AMERICA)

2 STATE OF MARYLAND )

3

4 I, EMILY BOYD, the reporter before whom the

5 foregoing proceedings were taken, do hereby certify

6 that foregoing transcript is a true record of the 

7 testimony given by said witness.

8 I further certify that I am neither counsel

9 for, related to, nor employed by any of the

10 parties to the action in which this deposition was

11 taken; and further that I am not a relative or

12 employee of any attorney or counsel employed by

13 the parties hereto, or financially or otherwise

14 interested in the outcome of this action.

15

16

17

18 ______________________

19 Emily Boyd

20

21

22 My Commission expires January 17, 2014