UNITED STATES OF AMERICA 

COMMODITY FUTURES TRADING COMMISSION

OPEN MEETING TO CONSIDER FINAL RULE ON FURTHER 

DEFINITION OF THE TERM "SWAP," FINAL RULE ON THE 

END-USER EXCEPTION TO CLEARING, AND PROPOSED RULE 

TO EXEMPT FROM CLEARING CERTAIN SWAPS BY 

COOPERATIVES 

Washington, D.C. 

Tuesday, July 10, 2012 
PARTICIPANTS: 

Commission Members:

GARY GENSLER, Chairman 

BART CHILTON, Commissioner 

 JILL E. SOMMERS, Commissioner 

SCOTT D. O'MALIA, Commissioner

 MARK WETJEN, Commissioner 

Presentation 1: Final Rule: Further Definition 

of "Swap," "Security-Based Swap" and 

"Security-Based Swap Agreement"; "Mixed Swaps" 

and "Security-Based Swap Agreement Recordkeeping

JULIAN HAMMAR, Office of General 

Counsel 

LEE ANN DUFFY, Office of General 

Counsel 

DAVID ARON, Office of General 

Counsel 

STEVE KANE, Office of General 

Counsel 

Presentation No. 2: Final Rule: End-User 

Exception to the Clearing Requirement for Swaps

ERIK REMMLER, Division of Clearing 

and Risk 

EILEEN DONOVAN, Division of Clearing 

and Risk

JON DEBORD, Division of Clearing and 

Risk 
PARTICIPANTS (CONT'D):

CAMDEN NUNERY, Office of the Chief 

Economist

ANANDA RADHAKRISHNAN, Division of 

Clearing and Intermediary Oversight

Presentation No. 3: Proposed Rule: Clearing 

Exemption for Certain Swaps Entered into by 

Cooperative

ERIK REMMLER, Division of Clearing 

and Risk 

EILEEN DONOVAN, Division of Clearing 

and Risk

JON DEBORD, Division of Clearing and 

Risk 

CAMDEN NUNERY, Office of the Chief 

Economist

ANANDA RADHAKRISHNAN, Division of 

Clearing and Intermediary Oversight

Also Present:

DAN BERKOVITZ, Office of General 

Counsel

DAVID STAWICK, Office of the 

Secretariat 

PHYLLIS CELA

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

(10:06 a.m.)

CHAIRMAN GENSLER: Good morning. I'm 

glad to call this 10 o'clock meeting to order. I 

apologize to the public and the media. This is 

a consensus process and it's always good to have 

discussions even on the dais of the day of the 

meeting. This meeting will come to order. This 

is a public meeting of the Commodity Futures 

Trading Commission, and I'd like to welcome 

members of the public, market participants and 

members of the media, as well as those listening 

at home and watching our webcast.

Today is our twenty-eighth open meeting 

on Dodd- Frank financial reform and we will 

consider tow final rules each of which are at the 

foundation of our overall swaps markets reforms. 

One is the joint rule with the Securities and 

Exchange Commission on further defining the term 

swap, security-based swaps and other products 

that come under swaps markets reforms. Secondly 

is an exception from required clearing for 

so-called end users or nonfinancial firms. In 

addition, we'll consider one related proposal, an 
exemption from clearing for cooperatives acting 

on behalf of their members, end users. I'd like 

to thank Commissioners Sommers, Chilton, O'Malia 

and Wetjen for their significant contributions to 

the rule-writing process and the CFTC's 

hard- working and dedicated staff. We're working 

to complete common-sense rules of the road for 

swaps markets reforms, and with today's final 

actions, I would anticipate that we will have 

finished 35 final rules and have just over 15 to 

go, so that by the math you can see we're quite 

a ways into this. But particularly with today's 

foundational rules and having completed some 

others, the CFTC and SEC have already completed 

as you might know in April the first joint rule 

which further defined the terms swap dealer and 

securities-based swap dealer. Following on the 

SEC's unanimous approval announced yesterday 

with regard to the swap definition and the CFTC's 

anticipated action today, for the first time we 

will be requiring registration of swap dealers 

which will come under comprehensive regulation. 

This includes implementing already completed 

external and internal business conduct standards 
which will help lower risk to the economy but also 

help protect special entities and the purchasers 

and users of swaps. Staff will also shortly 

provide to Commissioners for final consideration 

recommendations on swap relationship 

documentation and confirmation which will help

also lower risk to the markets.

Furthermore, with the completion of 

these further product definitions, many other 

critical swap market reforms already completed by 

the Commission will come to life. This rule means 

that 2 months after the rule is published, light 

will begin to shine on the swaps markets for the 

first time. Initially, and I would say likely in 

September because our rule has to get to the 

Federal Register once we take formal action today, 

swaps price and volume information will be 

reported for the first time in real time to the 

public for interest rate products and credit 

default swap indices. Three months subsequently, 

such real-time reporting will begin for energy 

and other physical commodity swaps and these are 

all based on rules that this Commission finalized 

last December. Swap data repositories will also 
receive data on all swaps transactions, giving 

regulators their first full window into these 

markets. We've benefited from some voluntary 

reporting in the data repositories, but we'll get 

a full picture. One swap data repository has 

already successfully registered with the 

Commission and we have at least four other parties 

working on their applications with staff.

Today's rule is especially meaningful 

also for the implementation of position limits. 

For the first time, limits will apply to the 

aggregate spot month positions including both 

futures and swaps. Spot month limits protect the 

markets against corners, squeezes and the burdens 

that may come from excessive speculation.

We'll also consider today another key 

rule, the end user exception to clearing. 

Consistent with congressional intent, this rule 

ensures that end users using swaps to hedge or 

mitigate commercial risk will not be required to 

bring swaps into central clearing. After today, 

the foundational rules bringing oversight to the 

swaps market will have been completed. The next 

major reforms we are set to consider relate to the 
required clearing of swaps between financial 

firms. For over a century through good times and 

bad, central clearing in the in our futures 

markets has lowered risk to the broader public and 

Dodd-Frank's financial reforms bring this 

effective model to the swaps market at, least to 

the financial firm facing another financial firm. 

Clearing significantly lowers risk of this highly 

interconnected financial system which is 

particularly critical I believe given the current 

uncertainties emanating still out of Europe and 

the recent ratings downgrades of many of the 

world's leading banks. We've completed rules 

establishing clearinghouse risk- management 

requirements, the bulk of which went into place 

in May. The remainder will come into effect in 

November and I will be more specific on November 

8. That will include key customer protection 

enhancements to collect margin on a gross basis 

and also something we call around here the LSOC 

rule, or legal segregation with operational 

comingling for swaps, a mouthful, but it helps 

protect the public.

Commissioners now are reviewing staff 
recommendations on clearing requirement 

determinations and I expect if we are able to move 

this out for consideration for the public later 

this month, then the staff recommendations could 

be commented on by the public. These 

recommendations are based on clearinghouse 

submissions on swaps that they already clear. The 

staff recommendations begin with standard 

interest rate swaps and four currencies as well 

as a number of key credit default swap indices. 

Thus based on the Dodd-Frank 90-day clock, and 

Congress laid out a 90-day clock for making these 

determinations, the first clearing determination 

might be completed by October just before the 

gross margining and this key customer protection 

rule, the LSOC rule, takes effect.

Commissioners are also reviewing staff 

recommendations on the final rule on the 

implementation phasing of the clearing 

requirement. Commissioner O'Malia, how am I 

doing? I'm doing this early because you usually 

ask me later to lay all this out. The CFTC has 

also received substantial public input on the 

treatment for swaps among affiliates of the same 
financial entity and there is a staff 

recommendation that we're all considering at this 

point as well, and I expect that we'll take that 

up shortly. We're also hoping to see from staff 

recommendations in two other areas related to 

electricity markets as well as something called 

conforming rules, and the conforming rules help 

us, but I think since we've made such significant 

progress to date it's now come to the time to start 

to look at these conforming rules as well.

Following the clearing rules, we'll 

look to finish the remaining transparency rules, 

the block rule and the swap execution facility 

rules. It's important that we fulfill these 

Dodd-Frank reforms to bring pretrade 

transparency to the swaps marketplace. The 2008 

crisis led to 8 million jobs lost and millions of 

families losing their homes and thousands of 

businesses shuttering, and 4 years after the 

crisis and 2 years after Congress passed the 

Dodd-Frank reforms, the CFTC is well on its way 

to bringing those reforms to light. But I think 

it's critical that we finish the job, protect the 

market and promote more transparent and healthier 
markets.

Beyond these swaps markets reforms, I 

think it's also crucial that the Commission 

continue to build upon customer protection 

regulation for both futures and swaps. The 

Commission has already adopted important 

amendments to Rule 1.25 regarding investment of 

customer funds, and as I mentioned, the rules 

related to grow margining and this LSOC rule, but 

we should now move to approving the National 

Futures Association proposal for greater 

controls for segregation of customer funds. We 

also look forward to staff recommendations to 

further enhance segregation of customer funds and 

CFTC staff is working on recommendations for 

enhanced internal controls and transparency 

regarding futures commission merchants handling 

such funds.

I'd like to close before I turn it over 

to other commissioners to talk about a topic 

beyond Dodd-Frank, to thank the Division of 

Enforcement for their hard work on the London 

Interbank Offered Rate case against Barclays. 

People taking out small business loans, credit 
cards and mortgages as well as the biggest 

companies involved in complex transactions all 

rely on the honesty of this benchmark called LIBOR 

and other benchmarks similar to it for the cost 

of their borrowing. It courses through our entire 

economy and we all depend on it and banks must not 

attempt to influence LIBOR or other similar 

benchmarks based on concerns about their 

reputation or concerns about their profitability, 

their trading desk or the profitability of some 

other bank's trading desk. It's just not right. 

We need to have an honest rate at the heart of our 

financial system. The CFTC has and will continue 

to vigorously use our enforcement and regulatory 

authorities to protect the public, promote market 

integrity to ensure that these indices and other 

benchmarks are free of manipulative conduct and 

false information. With that I turn it over to 

Commissioner Sommers.

COMMISSIONER SOMMERS: Thank you, Mr. 

Chairman. Good morning. I want to begin by 

thanking the rulemaking teams that are before us 

today. The product team and the end- user team 

specifically have put a lot of hard work and many 
hours into the rules that are before us today and 

I want to sincerely thank you for all of your 

efforts.

The rules we have before us today 

include the long- awaited final rules relating to 

the further definition of swap, the end-user 

exception to the clearing requirement for swaps 

and the proposed rules relating to the clearing 

exemption for certain swaps entered into by 

cooperatives. In my view, the primary goal in 

crafting these final and proposed rules has been 

to provide clarity to market participants 

regarding what instruments are not swaps and 

therefore are not subject to comprehensive 

regulation by the Commission and what 

transactions are not subject to the mandatory 

clearing requirement. An overly broad 

interpretation of the term swap or an overly 

narrow interpretation of the clearing exception 

would lead to unnecessary regulation of 

transactions that did not cause or contribute to 

the financial crisis and that do not lead to the 

accumulation of risk that would be of systemic 

significance. Such an approach would not be wise.
It appears to me that in large part we 

have made the correct determinations. I have 

questions about whether we have sufficiently 

addressed the concerns of the captive finance 

entities so they do not needlessly get swept into 

the definition of financial entity. I also have 

questions about whether we have taken the correct 

approach with nondeliverable foreign exchange 

forwards and whether they should be regulated as 

swaps particularly if Treasury exempts foreign 

exchange swaps and deliverable forwards from 

regulation. If Treasury issues such an exemption, 

we would be hard pressed to explain how the 

functional nature of deliverable and 

nondeliverable foreign exchange forwards and the 

risk posed by each are so different that they 

deserve different regulatory treatment. I'm also 

concerned that the way we have defined NDFs in the 

final rule is inconsistent with other major 

financial regulators and could lead to regulatory 

arbitrage. I'm supportive of the important 

additions to the end-user exception final rule 

which finally includes exemptions for small 

financial institutions from the financial entity 
definition. Although I do not believe that 

Congress expressed a clear intent that the $10 

billion total asset threshold was the only level 

we could consider, I am encouraged that we are 

also proposing to use our 4(c) authority to allow 

relief from the clearing mandate for cooperatives 

meeting certain conditions.

I will end by pointing out the obvious, 

the significance of this vote on the further 

definition of swap cannot be overstated. Many 

market participants are now off to the races and 

need to quickly register and come into compliance 

with vast new regulatory requirements. During 

the 60 days after these rules are published in the 

Federal Register, glitches and cracks may quickly 

become evident as they did when market 

participants attempted to comply with the Part 20 

reporting requirements. Staff and the Commission 

must be ready to quickly respond to and fix the 

glitches pointed out by market participants to 

ease the transition into this new highly 

regulated environment. We will all benefit from 

an efficient nondisruptive transition if we keep 

in mind that a request for relief does not equal 
an attempt to evade. I have long supported the 

approach being taken by the SEC to not require 

registration until the substantive portion of the 

swap dealer rules have been finalized. The more 

we can coordinate with the SEC on substance and 

timing the better it will be for the markets. 

Thank you again to the rule teams before us and

I look forward to your presentations.

CHAIRMAN GENSLER: Thank you, 

Commissioner Sommers. Commissioner Chilton?

COMMISSIONER CHILTON: Good morning. 

Thank you, Mr. Chairman. Tonight in Kansas City 

is the baseball All Star Game. Does anybody know 

Bryce Harper from the hometown team? He's a 

position player, an outfielder I think for the 

Nats and he's the youngest position player ever 

to be called upon for the All Star Game. A 

reporter a few weeks back asked him a question 

that he thought was a silly question and his 

response was, "That's a clown question, bro." How 

these things happen on the internet is beyond me, 

but it became viral, it's all over, they're 

selling T-shirts, "That's a clown question, bro." 

I have a point. Believe me. Here it is. That 
we're 2 years into Dodd-Frank and we've done a 

pretty good job, actually, under the Chairman's 

leadership and with a lot of pain and suffering 

on the staff's part and the Commissioners' part, 

as the Chairman was saying, we've done more than 

our share and this definitions domino really 

starts the ball rolling on 10 or 12 different 

rules so that it's critically important.

But it doesn't mean that we haven't been 

thoughtful. We've been thoughtful. And the rest 

of the government hasn't done so well. Only about 

a third of the rules are done. So we've been 

thoughtful, we've taken this time, but it has been 

2 years. We've been pretty thoughtful over 2 

years. And it amazes me that there are still 

people, some on Capitol Hill and some in the 

industry who say we want you to be thoughtful, but 

has Dodd-Frank really made a difference so far? 

Are we safer? Wait a minute. You told us to be 

thoughtful and to go slow and make sure we get the 

comments. Of course we're not that much safer. 

It's not in place yet. The same people who voted 

against it. So a lot of people still say we should 

repeal it, we should defund it, we should defang 
it and if that doesn't work let's go to court. 

Take the regulators to court. We'll tie them up 

in knots for a while. So forget about 2008. 

Forget about the economic calamity. Look at MF, 

look at JP's losing streak, look at Barclays as 

the Chairman was talking about, look at an 

apparent loss at an FCM of hundreds of millions 

of dollars. There are recent examples out there 

for why we need thoughtful regulation. Do we need 

Dodd-Frank? That's a clown question, bro. Thank 

you.

CHAIRMAN GENSLER: Thank you, 

Commissioner Chilton. Good luck, Commissioner 

O'Malia.

COMMISSIONER O'MALIA: I'm not going to 

touch it. I would like to begin by thanking the 

teams who are about to present today, both the 

products team and the end-user team, who worked 

closely with me and my staff and I know the other 

Commissioners' staffs over the last several 

months and I'm pleased to vote for both the final 

rules and the proposal before us today.

As a whole, the three items we have 

today protect end users consistent with the 
letter and spirit of Dodd-Frank and provide 

guidance and clarity with respect to the 

definition of swap. Additionally, these rules 

are the first to benefit from our recently signed 

memorandum of agreement with Information and 

Regulatory Affairs, OIRA, within OMB. I asked for 

some technical assistance and believe it or not 

some said it wasn't allowed and some said it 

couldn't happen. Here's proof it happened. And 

these rules are the recipient of the technical 

assistance and oversight from OMB and OIRA so that 

I'm grateful for their assistance. We can add to 

this and build on this in future rules and 

continue to work on this to build our quantitative 

analysis, but I'm very pleased that we were able 

to get this assistance and it's worked out. Thank 

you, Mr. Chairman, for your assistance on that.

Because both of these rules do 

establish appropriate baselines, they do include 

replicable and quantitative analysis when it's 

possible, and, three, considers a range of policy 

alternatives which are three foundational 

elements to good cost-benefit analysis. Today's 

product definition rules and the rule and the 
interpretation will set in motion an 

implementation chain reaction. Nearly a dozen 

rules which Commissioners Chilton and Sommers and 

the Chairman have outlined will go into effect 60 

days after this final rule and the interpretation 

as published in the Federal Register including 

registration, internal and external business 

conduct, dealer reporting, et cetera, that many 

of you have already outlined. I too predict that 

many of these companies will find the 

registration and compliance schedule to be very 

aggressive and quite challenging and we should be 

prepared for a wave of requests for no action 

relief and interpretations to our complicated 

rulemakings. On the list that you provided, Mr. 

Chairman, we have to be nimble enough to be 

responsive to provide the guidance and the 

clarity for these confusing rules. There are so 

many of them and so many different elements that 

sometimes they conflict with one another. We need 

to step into that gap and answer those questions 

immediately.

Notwithstanding my approval of today's 

rules, there are areas where I think we can 
improve such as provisions on exemptive relief 

for counterparties dealing with municipal 

utilities and the availability of the one-pot 

margining regime which I think you left off of 

your list, Mr. Chairman. I know you're passionate 

about it, so let's make sure you get right on it. 

Both the final rules implementing the end-user 

exception and the clearing of swaps and the 

proposed pass- through clearing exemption for 

certain cooperatives are good policy solutions. 

I'm pleased that in the final rules we have 

provided legal certainty for clearing by small 

financial institutions as defined in Section 2(h) 

of the Commodity Exchange Act and the new 

Commission Regulation 39.6. I voted against the 

proposal of the end-user rule because we failed 

to fully address the issue of excluding small 

banks, farm credit institutions and credit unions 

from the definition of financial entity which 

would permit them to take advantage of the 

end-user exemption consistent with congressional 

intent. To paraphrase Senators Dodd and Lincoln, 

these small financial institutions did not get us 

into the crisis and should not be punished in the 
implementation legislation that was meant to 

restore vibrancy to our financial markets. I 

applaud the coordination of the staff at the SEC 

and the Commission in jointly preparing 

approximately 600 pages to further define and 

interpret the term swap. Today's final product 

definition rule and interpretation will not 

subject forward transactions with embedded 

options to the swaps requirement under Title VII, 

and provides for the same transactions that 

satisfy a seven-part test. In essence, these 

transactions with embedded optionality can 

satisfy this test and qualify the forward 

exclusion if the predominant feature of the 

transaction is actual delivery. I am pleased that 

the final rule and the interpretation include an 

expansion of the Commission's interpretation of 

the forward contract exclusion to cover swaps in 

energy and other types of nonfinancial 

commodities. In order to meet these varying 

customer demands, national gas and electricity 

suppliers frequently enter into commercial 

transactions with embedded optionality as to the 

volume of energy that is physically delivered. 
Since the publication of the final rule and 

interpretation will be the first time that the 

general public sees certain elements of this test, 

I believe that it is appropriate that the 

Commission seek further input to determine 

whether the test makes sense and does not 

frustrate the normal operations of end-users 

which this rule does.

As I noted earlier, I have a couple of 

concerns which I believe the Commission should 

address as soon as possible. The fact that the 

Commission is finalizing relief for small 

financial entities and proposing exemptive 

relief for cooperatives highlights the difficult 

situation that we have created for municipal 

utilities. Municipal utilities fall under the 

definition of special entity under Section 4(s) 

of the Act and were incorporated into the entities 

rule. In my dissent to the entities rule I 

criticized the swap dealer definition primarily 

for its focus on the activities-based approach as 

an entity itself. Oddly enough, the special 

entity sub-threshold focuses on the entity or 

rather the special entity but does so in a manner 
that completely ignores the nature and the 

activities in which they engage. Municipal 

utilities primarily execute swaps with nonbank 

firms in regional electric and natural gas 

industries in order to manage their operational 

risk. Given the size of their operations, a 

single 100 megawatt trade could exceed the $25 

million threshold provided in this rule. This 

could drive many nonbank firms away from dealing 

with municipal utilities in order to avoid the 

swap dealer designation. This will lead to less 

competition and pricing for hedging activities 

with these municipal firms. When you consider the 

commercial end- users in general and municipal 

utilities in particular did not cause or advance 

the financial crisis of 2008, it is difficult to 

justify imposing increased operational costs. 

Large municipal utilities like the Los Angeles 

Department of Water and Power are financially 

sophisticated organizations. Affording them 

protections more suited to small towns is like 

putting training on Lance Armstrong's bike, a 

nice gesture but not really necessary. The 

Commission should remove the regulatory burden 
now being imposed on municipal utilities. This 

could be done by a new rule under Section 

1(a)(49)(B) of the Act or at minimum providing 

some guidance to ensure the nation's largest 

power providers are not limited to whom they can 

trade and deal with.

Finally, building off of the momentum 

and collaboration between the definition and the 

SEC in the final products rule and interpretation, 

it is now time that the agencies propose a one-pot 

margining methodology to provide capital 

efficiency as envisioned by Congress. Section 

713 of Dodd-Frank gave both the Commission and the 

SEC the authority to grant exemptions to allow 

futures commission merchants and broker-dealers 

to maintain customer funds in a single omnibus 

account which is much more capital efficient. A 

solution to this problem is long overdue and both 

commissions need to work together to implement a 

formal process to approve portfolio margining 

regimes. The Commission should set a goal of 

formally completing the rule by the time the 

clearing mandate becomes effective.

Again let me thank the teams for their 
hard work, patience and willingness to consider 

options and I'm glad to support both rules today. 

Thank you.

CHAIRMAN GENSLER: Thank you, 

Commissioner O'Malia. Commissioner Wetjen?

COMMISSIONER WETJEN: Thank you, Mr. 

Chairman. I'd like to commend the staff as well 

for all their hard work on these rules before us 

today.

Congress tasked the commissions, two 

agencies with different statutory 

responsibilities and different histories, with 

jointly resolving key definitional issues that 

affect the scope of their respective mandates 

under Dodd-Frank. In a number of areas this has 

proved to be quite a challenge as the staff well 

knows, but the persistence and dedication of the 

professional staff at both agencies have produced 

a set of recommendations that I am pleased to 

support today.

Although the product definitions are 

important in their own right, they are even more 

significant because so many other aspects of the 

Dodd-Frank regime depend on them. The other 
Commissioners have spoken about this at length. 

One headline yesterday read, "Floodgates on U.S. 

Derivatives Reforms Set to Open." Another stated, 

"Swap Definition Vote Set to Trigger Dodd-Frank 

Overhaul Cascade." Perhaps more than any other 

one rule, the final product definitions will 

enable us to fully usher in Dodd-Frank's 

important regulatory reforms for the swap markets. 

Swap dealers and major swap participants will be 

required to register and the Commission's 

compliance dates for certain transaction level 

requirements such as external business conduct 

standards and real-time reporting will take 

effect for transactions with U.S. persons. The 

Commission's spot month position limits for swaps 

referencing certain energy and agricultural 

commodities also will be effectuated. In short, 

the new swap regulatory regime is aging to become 

a reality. This regime will better protect 

American taxpayers from future financial crises. 

The regime and its implementing rules inevitably 

will short of perfection, but clearly its 

hallmarks, greater reporting as well as central 

clearing, will reduce systemic risk and bring 
needed improvements to these markets that are so 

vital to the U.S. economy. And I believe that with 

greater consensus at the Commission supporting 

these implementing rules become more effective 

rules in the long run. As we complete the 

rulemaking process and pivot to implementation, 

it is appropriate for the Commission and its staff 

to remain open to public feedback on the 

compliance schedule that we are imposing. An 

approach at looking at the implementation of each 

final rule in isolation can underestimate the 

compliance challenges that lie ahead.

Turning to the product definitions 

themselves, I do believe they strike a proper 

balance. On the one hand, they provide an 

insurance that forward contracts and certain 

consumer and commercial transactions which have 

never considered to be swaps and which I am 

convinced Congress did not intend to be regulated 

as swaps are not swept up by Dodd- Frank. On the 

other hand, I am confident they are comprehensive 

enough to prevent relevant derivatives products 

from escaping the new regulatory structure 

through inadvertent loopholes. I reiterate 
however my prior comments that our rulemakings 

must provide clarity. As I noted when the 

Commission finalized the entity definitions, it 

may not be possible to always come up with a 

bright-line test, but the lines we draw must be 

bright enough to provide sufficient clarity to 

market participants. I support the final product 

definitions release, but I am concerned that 

certain aspects may not meet that standard of 

clarity. In particular, I worry that the 

interpretation for forward contracts with 

embedded volumetric optionality in its 

seven-factor test could needlessly complicate 

commercial practices that I do not believe 

Congress intended to bring under Dodd-Frank. 

Accordingly, I thought it was essential for the 

release to pose further questions and request 

additional public comment on this topic and I 

thank the Chairman and my colleagues for 

accommodating these changes to the release. I 

look forward to reviewing the comments to make 

sure that we adopt the right interpretations. We 

also will be providing relief for users of trade 

options that meet the definition under the 
Commission's recent interim final rule. This 

will allow the Commission to better consider the 

comments responding to that rule alongside those 

responding to today's release and will give 

market participants more certainty about the 

Commission's treatment of this important tools 

for risk management in the meantime. Again, I 

thank the Chairman and my fellow Commissioners 

for their flexibility in agreeing to this 

adjustment. Both of these rules will be better 

for it in the end.

Similarly, there is one comment that we 

have heard and which I have much sympathy for but 

which we have not accommodated well enough in this 

rulemaking. Several commenters told us that 

while it is important to know which products will 

be regulated as swaps by the Commission and which 

products will be regulated as security-based 

swaps by the SEC, it is equally important that the 

analysis for making that determination be simple 

and straightforward to apply. Unfortunately, 

that is not the case for some of the final rules 

that we are adopting today. The complexity of 

these rules is due in part to the lack of 
information that the Commission and the SEC have 

in our possession regarding these previously 

unregulated products. It is my hope that as both 

agencies obtain data and develop experience with 

these products that we will not hesitate to 

revisit the tests we are adopting today to craft 

more streamlined rules that are tailored to the 

nature of these products. In the meantime, I 

encourage market participants to follow the 

guidance provided in the release. It advises that 

they may seek informal guidance from the 

agencies' staffs or use the process that we are 

establishing in these rules for seeking formal 

guidance from the agencies when there is 

uncertainty as to the results of a product 

analysis under today's rules. Such requests for 

guidance will enable us to assist market 

participants in applying these definitional 

rules to specific types of products. I also am 

pleased that the clearing mandate which is a 

centerpiece of Dodd-Frank's reform for the swap 

markets also is on the verge of becoming a reality 

with the Commission's adoption today of the 

end-user exception. The Commission already has 
adopted rules governing derivatives clearing 

organizations, customer clearing documentation, 

timing of acceptance for clearing and clearing 

member risk management. We expect to issue our 

first proposed clearing requirement 

determination and a final compliance and 

implementation schedule in the very near term. 

Also before us is a proposed clearing exemption 

for certain swaps entered into by cooperatives. 

I support both of these recommendations. 

Mandatory clearing is important, but the 

risk-reducing benefits of clearing comes with 

certain costs. Congress was clear in its 

determination that those costs should not be 

borne by end-users that use swaps or hedge or 

mitigate their commercial risks and I believe 

that the rulemakings before us today implement 

the end-user exception in an appropriately 

balanced manner. They allow end-users to elect 

the exception without compliance burdens yet 

ensure that the Commission can monitor the use of 

the exception for abuse.

Thank you again to the professional 

staff for your hard work on the rules before us 
today. I will address a few additional issues in 

my questions later.

CHAIRMAN GENSLER: Thank you, 

Commissioner Wetjen. I want to thank all of my 

fellow Commissioners because these three 

documents today have really been collaborative 

documents and each of you have put a lot of time, 

effort and good judgment into these as the public 

could even see going on as we delayed the start 

of the meeting here. Everybody said that the next 

two or three months is going to be critical, but 

it goes well beyond that two or three months and 

as we pivot, if I can quote your words, Mark, from 

rule-writing to implementation there is going to 

be a lot of questions, this has already occurred 

for the last nine or twelve months, a lot of 

questions as Commissioner Sommers said even on 

Part 20, large trader reporting. We do look 

forward to the public asking our excellent staff 

questions and where appropriate for us to smooth 

this transition rather than stick firm to some 

date if there are issues that come to fore on 

certain provisions from certain market 

participants. We want to work with you. We are 
limited by funding and I will say this, we would 

have been far better off if we had more staff 

onboard right now, but we will do our best and I 

think it is appropriate and I agree with every 

Commissioner who said implementation we want to 

work smoothly, work with market participants and 

hear the issues. What was the word used, 

Commissioner Sommers? The glitches and cracks 

that we'll find. And to Commissioner O'Malia, I 

think there are many things you have agreed on on 

policy, in fact probably 90-plus percent we've 

agreed to, but on this portfolio margining we very 

much are in synch, and maybe working on this great 

effort of joint collaboration with the Securities 

and Exchange Commission on the products rule and 

the entities rule and others, we can build on that 

and try to do this portfolio margining but it does 

take two commissions and two staffs.

With that I think I will turn it over 

to Julian Hammar and Lee Ann Duffy who have been 

leading this team for many moons, with David Aron 

and Steve Kane to present the staff 

recommendation on the joint rule with the SEC on 

further defining swaps and other products.
MR. HAMMAR: Good morning. Today staff 

is recommending that the Commission adopt final 

rules and interpretations that further define the 

term swap, security- based swap and 

security-based swap agreement, providing for 

regulation of mixed swaps and addressing books 

and records requirements for security-based swap 

agreements. As the Chairman mentioned, this is 

a joint rulemaking with the Securities and 

Exchange Commission.

I'd like to thank my CFTC colleagues on 

the definitions team who are with me here today

including from OTC Leon Duffy and David Aron, from 

the Chief Economist's Office Steve Kane and 

members of the team from other divisions 

including Kathy Banner, Ken McCracken, Jason 

Schoeffler, Rose Troya, Somi Song, and our SEC 

colleagues including Robert Cook, Brian Bussey 

and the SEC team for their contributions to this 

final rulemaking.

In developing the final rules and 

interpretations, we reviewed more than 140 

comments in response to the Notice of Proposed 

Rulemaking that the Commissions issued last year. 
We met with market participants, trade 

associations and other members of the public. We 

had many meetings with our SEC colleagues and 

consulted with staff of the Federal Reserve as 

well as the prudential regulators, the Treasury 

Department including the new Federal Insurance 

Office, as Commissioner O'Malia mentioned, the 

Office of Management and Budget considerations 

and the Environmental Protection Agency with 

respect to environmental commodities.

All of the comments and consultations 

we've had have been very informative. Although 

the overall framework of the final rules is the 

same as what was proposed, as a result of these 

comments and consultations, staff is 

recommending a number of changes and 

clarifications to the proposal that we believe 

have improved the rules and interpretations.

As the Commission is aware, the 

Dodd-Frank Act contains detailed and specific 

definitions of the terms swap and security-based 

swap which were designed to comprehensively cover 

previously unregulated derivatives including 

interest rate swaps, currency swaps, commodity 
swaps, equity swaps and credit default swaps. 

Many commenters pointed out, however, through the 

rulemaking process that expansively certain 

parts of the statutory definition could cover 

products such as insurance that traditionally 

have not considered to be swaps and nothing in the 

legislative history of the Dodd-Frank Act 

suggests that Congress intended such products to 

be regulated as swaps or security-based swaps. 

The proposal addressed these concerns by 

clarifying that certain products are not swaps or 

security-based swaps and this approach is 

maintained in the final rules.

With respect to insurance, the final 

rules provide a safe harbor for traditional 

insurance products that are provided by regulated 

insurance providers and will not be regulated as 

swaps or security-based swaps. Contracts that 

satisfy either the product test or are included 

of enumerated traditional insurance products in 

accordance with the provider test will not be 

considered swaps or security-based swaps. In 

response to comments, the final release would 

increase the number of products included in the 
enumerated list and included in rule text rather 

than interpretation as was proposed. The final 

release clarifies that a contract that does not 

fall within the safe harbor is not necessarily a 

swap or a security-based swap, but that further 

analysis of the facts and circumstances is 

required. The release also includes an insurance 

grandfather provision for existing insurance 

contacts which will not have to be run through 

these tests and the rules as a result.

The proposing release also requested a 

comment on the treatment of guarantees of swaps 

and security-based swaps. The final release 

includes an interpretation by the CFTC that a

guarantee of a swap is an integral part of the swap 

and therefore the term swap includes guarantee of 

such swap to the extent that a counterparty to a 

swap position would have recourse to the 

guarantor. Staff is preparing a separate release 

that deals with the regulatory consequences of 

this interpretation including applicable 

reporting requirements. The SEC interprets 

guarantees of security-based swaps to be 

securities under federal securities laws. The 
SEC plans to address reporting requirements for 

guarantees in a separate rulemaking.

In addition, the proposal included 

interpretation clarifying that certain consumer 

and commercial arrangements that historically 

have not been considered swaps or security- based 

swaps such as mortgage rate locks and contracts 

to purchase nonfinancial commodities like home 

heating oil should not be considered swaps or 

security-based swaps. The final release retains 

the interpretation, but in response to comments, 

expands lists of transactions that are not swaps 

or security-based swaps. To name a few, these 

include certain residential fuel storage 

contracts, consumer options to buy, sell or lease 

real or personal property and certain consumer 

guarantees of personal obligations like credit 

cards and auto loans. The proposal includes an 

interpretation clarifying the scope of the 

forward contract exclusion for nonfinancial 

commodities that is included in the statutory 

swap definition. Forward contracts, that is, 

contracts for deferred shipment or delivery are 

excluded from futures regulation. The Dodd-Frank 
Act excluded from the swap definition "any sale 

of a nonfinancial commodity or security for 

deferred shipment or delivery so long as the 

transaction is intended to be physically 

settled." Although the working of those forward 

exclusion is slightly different than the forward 

exclusion applicable to futures because there is 

legislative history in the Dodd-Frank Act 

indicating that Congress intended that the 

Commission interpret the two exclusions in the 

same way which was supported by commenters, staff 

recommends that the Commission consistently the 

two exclusions as was proposed. The final 

interpretation further clarifies that book out 

transactions in nonfinancial commodities that 

meet the requirements specified in the Brent 

interpretation and are effectuated through a 

subsequent separately negotiated agreement 

should qualify for the forward exclusion from 

swaps and futures. Because the interpretation 

extends the Brent interpretation to all 

nonfinancial commodities, the final release as 

proposed withdraws the 1993 energy exemption 

which applied to energy commodities other than 
oil, but in response to comments clarifies that 

the alternative delivery procedures mentioned in 

the energy exemption continued to apply. Also in 

response to comments, the final release provides 

a number of clarifications with respect to the 

forward exclusion. It clarifies that oral book 

outs are permissible under the Brent 

interpretation if they are followed by written or 

electronic confirmation. It also includes an 

interpretation of the term nonfinancial 

commodity which generally means an agricultural 

or exempt commodity that can be physically 

delivered. Under this interpretation, contracts 

involving environmental commodities such as 

allowances, offsets and renewable energy credits 

may qualify for the forward exclusion. As 

Commissioner Wetjen mentioned, interpretation 

concerning forwards with embedded volumetric 

optionality which is in response to a wide range 

of contracts discussed by commenters is also 

provided. Commenters in the energy industry in 

particular asserted that many of their 

transactions contain volumetric optionality 

meaning optionality as to the amount of the 
commodity that can be delivered and should be 

considered forwards, while prior CFTC guidance 

restated in the proposal covered price 

optionality only. Under the final interpretation, 

if among other things the volumetric optionality 

in a contract is due to physical factors or 

regulatory requirements beyond the control of the 

parties, it may qualify for the forward exclusion. 

Because this is a new interpretation for the CFTC, 

the release includes request for public comment 

on this interpretation and questions. Other 

guidance addressed certain types of contract in 

response to comments as well as certain typical 

contract provisions such as liquidated damages 

and renewal evergreen provisions that do not 

disqualify transactions for the forward 

exclusion.

While as I mentioned at the outset that 

the definition of swap and security-based swap 

are comprehensive, the final rules clarify that 

a few types of transactions in particular are 

swaps or security-based swaps. For example, 

foreign exchange forwards and swaps are defined 

as swaps subject to the Treasury secretary's 
determination to exempt them from the swap 

definition. Even if the Treasury secretary 

determines to exempt them, however, the statute 

provides that certain provisions of the CEA apply 

to FX forwards and swaps. The final rules reflect 

this and as proposed clarify that certain FX 

products do not fall within the definitions of FX 

swap and FX forward so that they are not subject 

to Treasury's determination to exempt. These 

products include foreign currency options, 

nondeliverable forwards, foreign exchange 

currency swaps and cross-currency swaps. The 

final rules and interpretations also add as 

proposed certain non-FX products to the swap 

definition such as forward -- agreements. In 

response to comments, the final release adds an 

interpretation concerning certain FX spot 

transactions that are not subject to the CEA and 

a clarification that retail forward certain 

options subject to the CEA's retail FX regime are 

not swaps or security-based swaps. The final 

release then turns to the relationship between 

swaps and security-based swaps. The release 

principles from the proposal about how 
transactions that are subject to Title VII of the 

Dodd-Frank Act which are referred to in the 

release as Title VII instruments are to be 

classified as swaps, security-based swaps or 

mixed swaps. It also retains clarifications 

about how Title VII instruments are classified in 

specific areas such as interest rates, monetary 

rates and yields. Additional guidance is 

provided in response to comments that total 

return swaps on two or more loans generally are 

swaps and that one type of TRS, a quanto equity 

swap, is a security-based swap. The release also 

addresses Title VII instruments based on futures 

contracts which generally are swaps subject to 

CFTC regulation. The proposal requested comment 

on the appropriate classification of Title VII 

instruments based on futures on foreign sovereign 

debt that have been exempted for purposes of 

futures trading by the SEC. In response to 

comments, the final release includes rules which 

provide that if certain conditions are met, these 

instruments will be swaps under the CEA..

The release then turns to the term 

narrow-based security index in the 
security-based swap definition. In general, with 

respect to Title VII instruments and security 

indexes, the CFTC has jurisdiction over such 

instruments on broad-based security indexes, 

while the SEC has jurisdiction over Title VII 

instruments on narrow-based security indexes. 

The final rules clarify as proposed that the 

existing criteria for determining whether a 

security index is narrow based in the past 

guidance of the Commissions regarding those 

criteria in the context of security futures apply 

to Title VII instruments. Credit default swaps 

are also subject to this same jurisdictional 

division. CDSes on broad-based indexes are 

regulated by the CFTC, while CDSes on 

narrow-based indexes as well as CDSes on single 

names or loans are regulated by the SEC. The final 

rules retain the new CDS focus criteria from the 

proposal for determining whether a CDS is based 

on an index that is a narrow-based security index. 

A couple of clarifications though have been made 

in response to comments such as that the criteria 

apply to loan index CDSes if the reference entity 

borrowers are issuers of securities, and certain 
technical adjustments to the rules have been made. 

The release does not make any substantive 

modifications to the proposed rules with respect 

to mixed swaps, security-based swap agreements, 

the process for members of the public to request 

a joint interpretation from the Commissions or 

the CFTC's anti-evasion rules, although the CFTC 

is providing additional anti-evasion guidance in 

response to comments. The team and I would 

welcome any questions you may have. Thank you.

CHAIRMAN GENSLER: Thank you very much, 

Julian, for that presentation. And thank you 

everybody for that. The Chair will now entertain 

a motion to accept the staff recommendation on 

this final rule.

COMMISSIONER SOMMERS: So moved.

CHAIRMAN GENSLER: The motion being 

made and seconded, I support the final rule. I 

had a couple of questions. David Aron, does that 

button say something important for us?

MR. ARON: No. It's just 7 U.S.C. 1a(47), 

the citation of the swap definition.

CHAIRMAN GENSLER: 7 U.S.C. 1a(47). And 

you had that button made up?
MR. ARON: I also had this button made 

up for Julian.

CHAIRMAN GENSLER: Mr. Swap.

MR. HAMMAR: I refuse to wear it.

CHAIRMAN GENSLER: Thank you. Before 

I say that I support this, I wanted to ask a couple 

of questions about some things we did in the past. 

You mentioned, Julian, the energy policy 

statement? I'm trying to remember exactly the 

words.

MR. HAMMAR: The energy exemption.

CHAIRMAN GENSLER: The energy exemption. 

With this vote that we're likely to take shortly, 

the energy exemption goes away because of the 

intersection of Dodd-Frank and this? I want to 

confirm is that correct?

MR. HAMMAR: That's correct.

CHAIRMAN GENSLER: Then I don't 

remember the footnote, but I want to confirm on 

the record again that the swaps policy statement 

that was done by this Commission in the late 1980s 

was superseded by Dodd-Frank, but what footnote 

is that? Footnote 228 I'm told says that 

Dodd-Frank supersedes it. Is that correct?
MR. HAMMAR: Correct.

CHAIRMAN GENSLER: By superseding it, 

that means in essence by act of Congress that it 

goes away. Is that correct?

MR. HAMMAR: That's right.

CHAIRMAN GENSLER: If somebody is 

looking for guidance, now they look here for 

guidance as opposed to those two provisions?

MR. HAMMAR: That's correct.

CHAIRMAN GENSLER: I support the final 

rulemaking. To implement Dodd-Frank reforms 

required us to further define the word swap and 

I'll have a longer statement for the Federal 

Register. We've worked by closely with the 

Securities and Exchange Commission with 

consultation with the Federal Reserve on these 

final rules. I think the statutory definition 

laid out by Congress was quiet detailed, but I 

think these final rules and interpretations are 

consistent with that which was detailed by 

Congress and we sought significant public comment 

starting with an Advanced Notice of Proposed 

Rulemaking and then a proposal and then of course 

this final rule and 2 years of meetings and input. 
Interest rate swaps, currency swaps, commodity 

swaps including energy, agricultural and metal 

swaps, broad-based index swaps such as index 

credit default swaps that have been in the news 

recently around the JP Morgan Chase's chief 

investment officer, they're all swaps and will 

come under this significant reform that this 

agency has been tasked by the Congress to do. This 

is the day that many members of Congress and this 

Commission see as fulfilling the mandate that you 

asked us to fulfill to bring this reform to life. 

In preparing this final rulemaking, we've gotten 

excellent comments from the public and are trying 

to provide guidance where we can, but there is no 

doubt going to be more questions in the future.

One area is that the CFTC does not 

regulate forward contracts. That's under the 

Commodities and Exchange Act. And over the 

decades there have been a series of orders and 

interpretations of cases that market 

participants have come to rely on regarding that 

exception for the difference between futures and 

forwards and forwards with embedded options. And 

consistent with that history and he Dodd-Frank 
Act as Julian said earlier, excluded any sale of 

nonfinancial commodity or security for deferred 

shipment or delivery so long as the transaction 

is intended to be physically settled. That's a 

quote from statute. I believe that what we're 

doing today, the interpretation and the 

exclusions therein, are consistent with our 

precedent and consistent with what Congress laid 

out. But in response to many commenters, we 

provide a lot of increased clarity on the forward 

exclusion from futures regulation. The final 

release also provides guidance regarding 

something called forwards with embedded 

volumetric options, a mouthful again, something 

that probably 2 years ago I did not focus on I 

would say when we started this exercise. But 

they're used within the electricity markets, and 

there were a lot of comments particularly from the 

electricity markets that we addressed and I think 

they were good comments. I hope when people take 

a look at this final release that they see that 

we've been thoughtful in what we've done, but 

we've also asked for some further comment as well.

Consistent with Dodd-Frank, insurance 
products will not be regulated as swaps, and I 

think Julian did an excellent job laying that out. 

We also have addressed consumer commercial 

transactions, and have taken care of in this 

release my favorite one that when I guarantee my 

daughter's credit card or debit cards, I have two 

girls at college, that apparently is not a swap. 

Julian, can you confirm? I want to make sure.

MR. HAMMAR: That's correct.

CHAIRMAN GENSLER: This was a special 

comment that you did take care of. Thank you. I 

think some public members also beyond me raised 

that. It provides also clarity with the 

distinction between a swap and a security-based 

swap. As Commission Wetjen said, there still may 

be questions out in front of us. The rule provides 

for a process of requesting joint interpretations 

in circumstances where you have questions. And 

there have been a lot of years where market 

participants have come to the SEC and CFTC and 

have asked is this a future or a security, maybe 

it's a swap or a security- based swap? We've laid 

out a process. I think it's a good process. I 

think it will address what has been some frankly 
frustration of market participants over the years. 

The working relationship with the SEC is terrific 

know but that doesn't mean that it will always be 

as terrific so that we did lay out a process to 

address that. Lastly, the final release also has 

specific provisions to guard against 

transactions that are willfully structured to 

evade Dodd-Frank.

Again I want to express my appreciation 

for the dedication and work of Chairman Shapiro 

and her fellow Commissions at the SEC as well as 

the staff, Robert Cook, Brian Bussey, Amy Starr, 

Donna Chambers, Kristie March, Andy Schoeffler, 

Wenchi Hu, John Guidorz and Sara Otte. It has been 

a true partnership. I also want to thank the 

hard- working staff here of Julian Hammar and Lee 

Ann Duffy who have been co-leading this. I would 

say Terry Arbit, you're now on this side of the 

stage but you were our first team lead on this and 

we couldn't have gotten here without the work 

you've done, Terry on this; Eric Juzenas, Steve 

Case, David Aron and so many, many others. I 

particularly want to come back to Chairman 

Shapiro. It's been a remarkable partnership and 
these two joint rules are the first two final 

rules that the SEC is doing on derivatives, and 

though there are -- I think the Commissioners at 

the SEC put a lot of other things a little bit to 

the side and helped us get this over the line. 

They didn't necessarily have to do that and I am 

deeply appreciative that they worked with us to 

get this hopefully across the line. With that I 

turn it over to Commissioner Sommers.

COMMISSIONER SOMMERS: Thank you, Mr. 

Chairman. I have a couple of questions on the 

nondeliverable Forex forwards. My understanding 

of the way a deliverable versus a nondeliverable 

Forex forward would work is that they're pretty 

much functionally equivalent. So my question for 

the team is how we've drawn this distinction and 

why we've drawn this distinction between the 

deliverable versus nondeliverable.

MR. HAMMAR: The way a nondeliverable 

forward contract works is that it's cash settled 

usually in U.S. Dollars, so in one currency, but 

the statutory definition of foreign exchange 

forward requires an exchange of two currencies so 

that because there is no actual exchange under a 
nondeliverable forward, staff didn't think that 

we had the authority to further define an NDF as 

a foreign exchange forward, but they do meet the 

swap definition. That said, the comments did 

express concerns about competitiveness of U.S. 

Companies with respect to markets where NDFs are 

traded and they're primarily in many countries 

that have currency controls. The biggest one I 

think is Korea. It may be something that the 

Commission could address later in terms of a 4(c) 

petition or something like that if it's 

determined that some Dodd-Frank Act requirements 

wouldn't be suitable for NDFs. But as a 

definitional matter, we didn't believe we had the 

legal authority to say that they're not swaps.

COMMISSIONER SOMMERS: Thank you for 

that explanation. I would say that without some 

sort of more concrete evidenced of congressional 

intent in this area that I would be hopeful that 

this is something that we will continue to look 

at and may be able to down the line fix. My other 

question is related, whether or not we know how 

other global regulators will treat these types of 

products and if they have any intention of 
treating them in the same way.

MR. HAMMAR: I'm not sure if we know they 

will be treated, although anecdotally as seen 

from articles and so forth that NDFs seem to be 

part of the discussions in terms of people wanting 

to clear them all over the world.

MR. ARON: I want to add that on 

functional equivalence, there are a number of 

products that are functionally equivalent like if 

there is going to be a swap cleared and traded on 

an exchange then it's pretty similar to a futures, 

but yet we have pretty different regulatory 

regimes and then the narrow-based index versus 

broad-based index there is a line at 9 and 10 and 

the SEC regulates them one way and we regulate 

them a different way, futures can be decomposed 

into options but we have different authority over 

those, so there has to be a line somewhere and 

these fall on the swap side.

COMMISSIONER SOMMERS: I don't disagree 

with that. However, I'm not sure if I agree that 

that's a very good reason for this. The other 

question with regard to this issue is obviously 

the Treasury decision on whether to exempt swaps 
and deliverable forwards would have a great 

impact on this. Do we have any idea about 

Treasury's timing on their decision?

MR. HAMMAR: First I would say that 

Treasury did agree with us with respect to NDFs. 

In in their proposed determination they did 

indicate that NDFs would not be covered by the 

secretary's determination. I think our 

understanding is that they will be considering 

the final exemptive determination shortly after 

action on the product definitions is taken by our 

Commissions.

CHAIRMAN GENSLER: Commissioner 

O'Malia?

COMMISSIONER O'MALIA: Channeling 

Commissioner Chilton, I hope this isn't a clown 

question. Julian, you mentioned a 4(c) exemption 

for NDFs. How do we provide a 4(c) if you said 

the statute doesn't allow for it?

MR. HAMMAR: That would be an exemption 

say from the substantive requirements applicable 

to swaps that we can exempt from -- and then from 

the definition.

COMMISSIONER O'MALIA: Certain 
clearing requirements or other things?

MR. HAMMAR: Right.

COMMISSIONER O'MALIA: In my question 

I'm going to focus on the forward contracts, and 

in what we've laid out here in this interpretation 

there's a bit of a process here and I'm going to 

run through a couple of process questions and you 

can lay out what it's going to be so that everybody 

will understand what this does. We've added 

several questions to the end of the forward 

exclusion discussion regarding the zero delivery 

volumetric options. Going forward, please 

explain the process by which the Commission will 

address comments received in response to these 

questions. And will there be any particular time 

period that the public has to respond to these 

comments, what will be the result of process and 

when can they expect a result? What is the 

turnaround? They're going to submit comments and 

we're going to review them. Then what happens? 

Are we going to take further question or what? And 

what is the controlling legal authority in the 

meantime?

MR. HAMMAR: We have put in a 60-day 
comment period for people to comment on the 

questions. We think it is an interpretation of 

the Commission so market participants can rely on 

it. Since the Commission hasn't talked about 

volumetric optionality before and we did have a 

lot of comments from the electric industry and so 

forth about these types of contracts, they will 

be able to rely on it. What we're trying to do 

with this request for comments is to make sure 

that we're getting it right because it is a new 

interpretation for us. But it would be 60 days 

and we'll take a look at the comments that we 

receive and it's up to the Commission on how you 

want to take action on it, but we'll make a 

recommendation and I think we'll go from there.

COMMISSIONER O'MALIA: But we will be 

making a recommendation based on essentially a 

final interpretation or is that not certain?

MR. HAMMAR: You could say it's like an 

interim final interpretation, but the 

Administrative Procedure Act doesn't have such a 

thing it's my understanding because 

interpretations aren't subject to notice and 

comment, rules are, but that doesn't mean an 
agency can't ask for comment on an interpretation 

and that's what we're doing to try to get it right.

COMMISSIONER O'MALIA: In the interim, 

what type of relief if any will the Commission be 

willing to provide market participants on these 

issues? Is this something where we're going to 

wait for the comment period to end, formulate our 

final guidance and them move forward within the 

60-day period because all of this implements 

after the comment period? All of this is final. 

That happens to occur on the same date.

MR. HAMMAR: The relief will go into 

effect at 60 days so they'll have that relief. If 

we need to make adjustments to it, we'll try to 

make adjustments as quickly as possible.

COMMISSIONER O'MALIA: Steve, I know 

you've worked on this cost-benefit analysis and 

we've made some improvements to this one. Can you 

briefly highlight how we've made some of these 

improvements in general, and was it as painful as 

people thought it might be?

MR. KANE: There were two really 

substantive changes we made. We had to consider 

not just the assessment costs of whether it's a 
swap or not or a security-based swap, we also had 

to consider the programmatic costs to consider 

the rules that were effectuated, by product 

definitions being effectuated and also the 

subsequent rules that come. So we had to take all 

of Title VII and consider it in total in this 

rulemaking, that was something we hadn't done 

before and then of course the baseline being the 

status quo.

COMMISSIONER O'MALIA: I think the 

baseline is critically important. It wasn't 

Dodd-Frank that made us do it. In determining our 

estimates, it's actually the current baseline.

MR. KANE: Let me say to clarify that 

we did the baseline, the status quo for 

informative purposes. We still feel that we're 

bound under 15(a) in our discretion which would 

be starting where the statute starts.

COMMISSIONER O'MALIA: Is this a major 

rule?

MR. KANE: It's a major rule because it 

effectuates major rules.

COMMISSIONER O'MALIA: What economic 

impact does it have? It's a $100 million annual 
economic impact at a minimum? Is that what the 

determination was?

MR. KANE: Yes.

COMMISSIONER O'MALIA: And each of the 

other rules like the external business conduct, 

internal business conduct, all of those are major 

rules as well. Right?

MR. KANE: We checked a few of the rules. 

If any single rule that's effectuated is a major 

rule, then it forces this one to be a major rule.

COMMISSIONER O'MALIA: Thank you.

CHAIRMAN GENSLER: Thank you, 

Commissioner O'Malia. Commissioner Chilton?

COMMISSIONER CHILTON: Thank you. I 

want to thank staff for our hard work. It's been 

a long one. You've been working on this for months 

and months and I know it's been a pain and I've 

been part of that pain so that I understand. I 

feel your pain.

I wanted to thank Terry Arbit who was 

one of the good attorneys when I was going through 

the confirmation process, when Jill and I were 

going through, and Terry really helped me out and 

did a good job. He's helping Commissioner Wetjen 
now. He made a bunch of I think very positive 

technical changes that make this rule read better. 

So I'm thanking Terry and his boss Commissioner 

Wetjen for those technical changes.

I do have some questions about the 

technical generically. There is this issue that 

I want to get to in a moment that my colleagues 

have talked about, the forwards with volumetric 

optionality. As the Chairman said, it's a 

mouthful. But save that from the other things, 

the other technical. The SEC after months and 

months, and I don't have to go into how long it 

took and why it took so long. They voted on it 

on Friday, it was 5-0, they passed this thing that 

we've been waiting for that I've criticized them 

for at times and we got this thing. Then we had 

all of these subsequent to the passage. We had 

all of these very good technical changes. It's 

a pretty document. It reads better. But one 

question I had is, are there any policy questions 

again absent the forward issue? Are there any 

policy issues that are addressed of any 

significance, Julian, in the technicals or are 

they merely technicals?
MR. HAMMAR: I would say they are 

technicals.

COMMISSIONER CHILTON: What we've done 

in the past on some things that are de minimis in 

nature and make something better and look pretty 

is that we've used delegated authority and we've 

dealt with it many times in interpretative 

guidance. I'm going to get to the forwards issue, 

but with regard to the technicals, we do these 

technicals, we put them in the rule, then the guys 

that I've been complaining about for 8 months who 

finally did the rule, we're sending it back to 

them again. It's like how many times do you got 

to be punched in the guy? Maybe they don't care 

about this stuff is what I'm told, the SEC. This 

is so far in the weeds on our bus, CFTC's bus, the 

SEC doesn't care about it, and I'm told by staff 

that our staff really believes that the SEC will 

just do this. It might happen by osmosis. It just 

might happen. But I'm a little skeptical. So 

that's one issue. Notwithstanding that I think 

these technicals are very good technicals and it 

reads better, and prettier is not the best word 

I'm sure, but it's what I came up with now, so very 
pretty.

Now this forwards with volumetric 

optionality. That's the policy change here. I've 

talked with the folks who've come in and talked 

with Commissioners about the importance of 

forwards and I agree they're important. I agree 

they should continue. And as my colleagues have 

talked about, they are not on our bus. Forwards 

aren't our jurisdiction. So that's the law. 

They're not ours. But I'm a little concerned that 

if you go back to the financial crisis, complexity 

in financial products is really what got us. 

People didn't know what was what. Things were 

unleveraged. I'm a little concerned that these 

good forwards, the forwards that had been used for 

legitimate purposes, are going to morph sort of 

chimerical. Remember the mythological creature 

with the lion's head, the goat's body and the 

snake's tail? They're sort of going to morph. 

They don't necessarily have to, but that's what 

I want to ask a couple of questions about, Julian. 

What we're doing in here, and follow me if you will, 

guys, is we are excluding all forwards. An 

exclusion is different than an exemption. Yes, 
an exemption. An exemption is you could still 

have bells and whistles. So we're exempting you, 

but you got to report, you got to do this, whatever 

bells and whistles we determine to put on. And 

exclusion is you're off the bus. You might say 

but you just said that the law said that forwards 

aren't on your bus. So why do you have a problem 

with it? It's because of the potential chimerical 

nature of what the forwards could become. Again, 

I want forwards. I want them to be able to use 

them. I understand they're important. But I 

don't want to create some chimerical product or 

I don't want to open the door for the possible 

creation of a chimerical product that is a forward 

yet has embedded as part of the contract a 

commodity option and a commodity option is on our 

bus. That's ours. The question really comes to 

delivery of the physical product. Julian, what 

happens if a forward which again is off our bus 

contains some optionality and it does not deliver 

for some reason? I'm not saying it's some 

nefarious reason. It could be an emergency. It 

could be for some other reason. You described, 

Julian, when you were talking about I think the 
seven factors or a couple of the factors, but if 

there is a failure to deliver, if they book out 

this forward and they don't take delivery because 

to me it looks like a swap then again on our bus, 

a swap, but if it's forward and it doesn't take 

delivery, what happens?

MR. HAMMAR: We have to take a look at 

the particular facts in question. With respect 

to a book out, that would be okay under the Brent 

interpretation guidance if it's between 

commercial participants and it's a separately 

subsequent negotiated agreement meaning it can't 

be an automatic thing that you and I can just say 

on delivery. We both separately have to agree 

that delivery can be cancelled. I guess what 

you're getting at is in the context it's really 

that former case where if the contract says you 

can cancel it, and what we are saying in this 

release is that actual delivery is important, but 

at the same time we're also saying the seventh 

element of the seven-part test which says that if 

there is volumetric optionality, it has to be due 

to physical factors or regulatory requirements 

beyond the parties' control. What we were 
thinking of was contracts particularly with 

electricity where you have things like heat waves 

like we've just been experiencing or the weather 

which cause varying demand. Or these are things 

like the RTOs and ISOs may require companies to 

curtail their power usage from the grid so that 

we have optionality there and that would be the 

regulatory types of requirements we were thinking 

of. Under that seven-part test the overall facts 

and circumstances, the Commission's traditional 

way of looking at forwards, still applies so we 

will still be looking at the facts and 

circumstances.

COMMISSIONER CHILTON: Thank you. If 

I'm a commercial and I enter into a forward and 

embedded in there may be my commodity option to 

buy at certain prices, et cetera, and at the end 

something happens, there's a heat wave and I don't 

need it, I can get out of it. And it seems like 

a totally reasonable circumstance and there are 

others I'm sure that people would describe too. 

Again if it's forward it's totally off the 

Dodd-Frank bus. No margin. No capital 

requirement. No reporting. No enforcement. 
Nothing. Totally off. Here's what we know. There 

are attorneys out there hawking ways around 

Dodd-Frank. Somebody I know went to a conference 

the other day, and this has come to us, we're going 

to tell you how to get around it, not this thing 

specifically. But we know that that's part and 

parcel of our society. That's what happens. Here 

is my second question, Julian. What if I decide 

I want to get out of it because I can make more 

money or I won't lose as much money or whatever 

the circumstance is that didn't have anything to 

do with the weather? You just said that we would 

frown upon it or it may not meet the test, but is 

there a requirement if I get out of it, if I book 

it out the forward that's off our bus? Is there 

a requirement that I tell the agency I've gone 

ahead and I've booked this out? What if 10 percent 

of my forwards are booked out, or 20 percent or 

30 or 50? Is there any requirement on the 

commercial to report to this agency whether or not 

they've booked out and not taken delivery?

MR. HAMMAR: No, but that is consistent 

with the Commission's prior interpretation of 

Brent.
COMMISSIONER CHILTON: There is no 

requirement here. Okay.

CHAIRMAN GENSLER: Are you meaning to 

use the words booked out or cash settled? Because 

booked out in the Brent interp means something 

different I think than just cash settled.

COMMISSIONER CHILTON: Don't take 

physical delivery. Don't take physical delivery. 

Your answer is the same. Right?

MR. HAMMAR: Yes, that's right. Why if 

it's booked out there is no reporting requirement. 

It just as I say has to be done through a 

subsequent --

CHAIRMAN GENSLER: Julian, that's 

booked out. Booked out means moving the 

transaction to another party as contrasted to 

purely cashed settled, a cash settled option 

where somebody has a choice.

MR. HAMMAR: That's right.

CHAIRMAN GENSLER: That's different 

than booked out isn't it?

MR. HAMMAR: That's correct because a 

book out is a separate agreement, whereas what you 

just described as a cash settlement would be part 
of the contract.

COMMISSIONER CHILTON: A book out could 

also be internal, our own. You could have another 

contract where you wouldn't take physical 

delivery but you could do something else so you 

could just do it internally yourself. The point 

in either one of these is that it's not taking 

physical delivery.

CHAIRMAN GENSLER: Yes, but I think his 

answer would be different if it's not a book out. 

If it's just purely a cash settled option, isn't 

that a swap?

MR. HAMMAR: Yes. That's correct.

CHAIRMAN GENSLER: I know that the 

public listening might think what's the 

difference between a book out and a cash settled 

option, but there is some distinction back to this 

Brent interpretation of 20-some years ago is 

there not?

MR. HAMMAR: Right. The cash settled 

option would be embedded within the contract 

meaning that I can exercise it without having to 

get Commissioner Chilton's permission if I'm 

contracting with him. But with the Brent 
interpretation, I would have to get his 

permission to book out the contract and cancel it.

CHAIRMAN GENSLER: I know it's like way 

into details that I myself sometimes get confused 

on, but Congress said commodity options are swaps 

did they not?

MR. HAMMAR: Yes, and the release says 

that.

CHAIRMAN GENSLER: That's what Congress 

said.

COMMISSIONER CHILTON: I'm saying that 

they would call it a forward, it would not be 

required, and I'm okay with a forward not being 

on our bus. That's the law. No problem. I like 

forwards. I'm okay with forwards. We've got all 

of these changes. We've got all of these good 

technical changes which are sort of the grass and 

I'm worried that this provision is sort of a snake 

in the grass, that it's lurking in there and it's 

going to be used. It may not, but that it's 

possibly going to be used, that somebody will call 

it a forward and then they will not take delivery, 

they will go ahead and use it as an evasive

mechanism. Potentially it could be the new Enron 
loophole and I think that's just icky. I'm not 

sure what to do about it, but it's a concern I have 

and I don't think we're reached the right balance 

on it.

CHAIRMAN GENSLER: I'm going to turn to 

Commissioner Wetjen, but could I ask two 

technical questions? I don't know if anybody from 

the Division of Enforcement is here. Julian, you 

and Lee Ann are going to get this one. As to our 

jurisdiction over forwards, is it not the case 

that we still have antifraud and antimanipulation 

authority over commodity contracts entered into 

in interstate commerce? Here's Dan Berkovitz. 

Dan, you can come up to the mike too because I want 

to make sure we have something on the record for 

all future enforcement actions. I would not want 

a bunch of really thoughtful lawyers in this 

audience thinking we gave up something and I want 

to make sure that the record is clear to all those 

attorneys out there in the world.

MR. BERKOVITZ: Antimanipulation 

authority extends to the commodity itself.

CHAIRMAN GENSLER: Could you say it 

louder and closer to the mike?
MR. BERKOVITZ: The Commission's 

antimanipulation authority extends to involving 

the commodity itself in addition to the futures 

and the swaps.

CHAIRMAN GENSLER: I want you on the 

record as the General Counsel, it extends to 

forwards?

MR. BERKOVITZ: Yes, it would.

CHAIRMAN GENSLER: I want to make sure 

that there is something that is still on our bus. 

It might still leave you with that feeling of icky, 

but I just wanted to make sure.

COMMISSIONER CHILTON: It does. First 

of all, thank you. I appreciate that and 

appreciate Mr. Berkovitz's statement. For us to 

take an enforcement we sort of got to get some 

information and if it's not required that they 

report, these forwards that have turned into 

swaps, again there may be a legitimate reason for 

some of them, but I'm worried that all of a sudden 

we're going to see chimerical products that are 

created in using this little provision which I 

think is trying to fix a good thing, trying to deal 

with forwards in an appropriate way, but I think 
we've missed the mark on it and that it could be 

expanded. That's exactly the type of thing that 

happened in 2008. There were lawyers out there 

last week talking about ways around this. If we 

don't get the information, if we're not even 

getting it as a baseline on our radar screen, how 

the heck would we do any enforcement to begin with 

or why would we do any enforcement? How would we 

be alerted? So that's my concern.

CHAIRMAN GENSLER: The current concern 

being valid, I want to make sure I have something 

on the record. Phyllis Cela who is the Chief 

Counsel and Deputy of the Division of Enforcement, 

the question is, are forwards under our 

enforcement authority for fraud and manipulation, 

et cetera?

MS. CELA: Yes. Section 6(c)(1) and 

Rule 180.1 which the Commission promulgated 

recently both address contracts of sale of a 

commodity in interstate commerce which would 

include forward contracts. And in the 

antimanipulation provision, 9(a)(2), there is 

also price manipulation for commodities in 

interstate commerce which forwards would 
include.

CHAIRMAN GENSLER: I'm not taking away 

from your concern, but I want to make sure that's 

for the public.

MR. ARON: There is also the 

whistleblower authority. I don't know if that 

totally addresses your concern, but that may be 

one way we could get information about if people 

are intentionally trying to evade.

CHAIRMAN GENSLER: Commissioner 

Wetjen?

COMMISSIONER WETJEN: Thanks, Mr. 

Chairman. Thanks to the team. I also want to add 

my thanks to Terry Arbit who has been helping me 

shortly after I became a Commission and he's been 

extremely valuable in helping me work with you 

guys and the SEC and the rest of my colleagues here 

on this particular rule, so I wanted to thank 

Terry.

Originally I wasn't going to ask this, 

but in light of the recent discussion here on the 

dais I figured I would. We do have a section in 

this rule and in the preamble discussion 

concerning antievasion, do we not, Julian?
MR. HAMMAR: Yes. That's correct.

COMMISSIONER WETJEN: I think there 

were some important changes made I believe from 

the proposal or changes to the proposal that now 

appear in the final concerning a seenter (?) 

requirement. Isn't that correct?

MR. HAMMAR: Yes, that is in there.

COMMISSIONER WETJEN: Isn't it also the 

case that if someone were to try and create a 

so-called chimerical product that was designed to 

evade or was designed to qualify as a forward 

rather than a swap and it was willfully in order 

to avoid the swap regulatory regime, couldn't the 

Division of Enforcement bring an action against 

the parties to that instrument?

MR. HAMMAR: Yes, that's correct.

COMMISSIONER WETJEN: The one other 

question I had is a follow-up to a question that 

Commissioner O'Malia asked. He asked about what 

kind of relief we're providing in this release. 

What are people going to do in the meantime while 

we go out for comment in particular on these 

questions concerning the forwards with embedded 

volumetric optionality? One of the other things 
I mentioned in my statement as well is that I think 

one of the other things we do here in this release 

is we also provide some relief under the trade 

option interim final rule that we recently passed 

and I wondered if you could walk us through that.

MR. HAMMAR: The release mentions that 

CFTC staff will be preparing no action relief with 

respect to the trade option exemption until 

December 31 of this year.

COMMISSIONER WETJEN: I wanted to ask 

this question too because again I think it 

responds in some respects to some of the concerns 

raised by Commissioner Chilton. The idea here 

with both this release and extending the 

compliance date for the trade option rule is so 

we can gather more information. We have a series 

of questions laid out in the interpretative 

guidance concerning the seven-part test that we 

put together in the release. But I think we're 

making very, very good policy here and we're 

referring in particular to some of these types of 

instruments or contracts we don't know that much 

about including capacity contracts, transmission 

services agreements and tolling agreements. 
These are three in particular that we mention in 

our release and they are ones that we don't have 

a lot of information about, but they're ones that 

are used quite frequently by market participants 

in the electricity field as you alluded to. By 

asking for comments about our guidance, we are 

acknowledging that we need to learn more about 

more and in some cases some of these agreements 

might be forwards, in other cases they might be 

trade options and depending on which column 

you're in, the instrument is going to be treated 

differently. In the case of forwards it's 

excluded completely as Commissioner Chilton and 

others have mentioned. But I think this is 

actually very, very good policy because we're 

looking at these two rules together, we're 

reviewing the comments to both rules together and 

the Commission is going to try and sort out based 

on those comments whether or not the seven-part 

test is right enough and accurate enough and if 

it's not we can adjust. Certainly once the rule 

becomes effective as we just discussed, there is 

this antievasion authority that can be relied 

upon if it's quite clear to the Commission that 
someone is purposefully designing an instrument 

to avoid regulation by the Commission. I also 

think that, Commissioner Chilton, some of your 

concerns are very good ones, but I think that they 

are well addressed in the release. I think that's 

all I have on this rule, but thanks again to staff. 

I appreciate your help.

CHAIRMAN GENSLER: Thank you, 

Commissioner Wetjen. May I ask one? If a contract, 

electricity, natural gas, oil, any physical 

product, meets five or six parts of the 

seven- part test but not all seven, is it still 

a swap?

MR. HAMMAR: It wouldn't satisfy the 

forward exclusion.

CHAIRMAN GENSLER: So it's a 

conjunctive that's an "and," one, plus two, plus 

three, all the way down to seven?

MR. HAMMAR: That's right.

COMMISSIONER WETJEN: Or it could be an 

option too.

CHAIRMAN GENSLER: It could be an option, 

but Congress says an option is a swap and then we 

by another release said trade options might get 
limited regulatory treatment. Is that correct?

MR. HAMMAR: That's correct.

CHAIRMAN GENSLER: So Congress defined 

options as swaps, but we by other regulatory 

treatment said it's under limited treatment of 

enforcement authority, some reporting position 

limits and a couple of things for swap dealers if 

I remember. Is that right?

MR. HAMMAR: Yes.

CHAIRMAN GENSLER: Thank you. Are there 

any other questions? Mr. Stawick, if you wish to 

call the roll.

MR. STAWICK: Commission Wetjen?

COMMISSIONER WETJEN: Aye.

MR. STAWICK: Commissioner Wetjen, aye. 

Commissioner O'Malia?

COMMISSIONER O'MALIA: Aye.

MR. STAWICK: Commissioner O'Malia, aye. 

Commissioner Chilton?

COMMISSIONER CHILTON: No.

MR. STAWICK: Commissioner Chilton, no. 

Commissioner Sommers?

COMMISSIONER SOMMERS: Aye.

MR. STAWICK: Commissioner Sommers, aye. 
Mr. Chairman?

CHAIRMAN GENSLER: Aye.

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

Chairman, on this question the yeas are four, the 

nays are one.

CHAIRMAN GENSLER: The ayes having it, 

then we will be sending it along with the SEC to 

the Federal Register. I probably at some point 

have to have a vote on technical amendments. 

Should I do it now or should I do it later?

MR. STAWICK: You may do it at any time.

CHAIRMAN GENSLER: I ask for unanimous 

consent to accept on this and the other two things 

we'll do today, technical amendments absent 

objection. Thank you very much. We'll hand it 

over to Erik and others on the clearing and risk 

team. I'd like to welcome Ananda Radhakrishnan, 

Eileen Donovan, Erik Remmler, Cam Nunery and Jon 

DeBord, many from the Division of Clearing and 

Risk and Cam from the Office of Chief Economist 

to discuss their staff recommendation on the 

end-user exception to clearing requirement and 

subsequently to this provision on cooperatives.

Ananda or Erik?
MR. RADHAKRISHNAN: Thank you, Mr. 

Chairman, and I'd like to thank the commissioners 

and their staffs for their valuable comments as 

well as --

CHAIRMAN GENSLER: Pull the mic just a 

little closer.

MR. RADHAKRISHNAN: I'd like to thank 

the commissioners and their staffs for their very 

valuable comments on this final rule and the 

proposed rule and for the team for their hard work. 

I'm going to turn it over to Erik Remmler and 

Eileen Donovan.

MR. REMMLER: Thank you, Ananda. Good 

morning, still, commissioners.

CHAIRMAN GENSLER: You may move the mic 

closer. I'm sure it's my hearing.

MR. REMMLER: Okay. The final rule 

before you now would implement what is commonly 

referred to as the end-user exception to the swap 

clearing requirement in the Dodd-Frank Act. 

Before I get into the particulars of the rule we 

would like to recognize the hard work and 

contribution of the staff of the Division of 

Clearing and Risk as well as of the Offices of the 
General Counsel and the Chief Economist. 

Finalizing this rule was truly a team effort and 

all of the folks who worked on it contributed 

significantly to making it a better regulation.

This rule was originally proposed and 

published for public comment on December 23, 2010. 

The Commission received over 2,000 comment 

letters and held over 30 meetings with interested 

parties, all of which are posted on the website.

The statutory background for this rule 

is that in Section 723 of the Dodd-Frank Act 

requires that any swap that is entered into by two 

parties must be cleared, if required, by the act 

unless the swap is submitted -- I'm sorry, it is

unlawful for parties to engage in a swap unless 

they submit the swap for clearing to a derivatives 

clearing organization. The Dodd-Frank Act also 

establishes an exemption from this clearing 

requirement, which is codified in 2(h)(7) of the 

Commodity Exchange Act, for swaps entered into by 

non- financial entities for the purpose of 

hedging or mitigating commercial risk. The act 

defines what a financial entity is and provides 

limited exceptions from that definition.
It also directs the Commission to 

consider whether to exempt certain small 

financial institutions from the definition of 

"financial entity." In doing so, small financial 

institutions would be permitted to use the 

end-user exception as well.

Turning to the final rule before you, 

it has four paragraphs. The first largely 

reiterates the basic provisions of the exemption 

in the act. Paragraph B sets out the reporting 

requirements that would be triggered if the 

exemption is elected. Paragraph C provides the 

criteria for what is hedging or mitigating 

commercial risk that must be complied with to 

elect the exception. And paragraph D would 

implement a small financial institution 

exemption. I will address the first two 

paragraphs and Eileen, my co-lead, will address 

the last two.

Paragraph A largely reiterates the 

basic exception provisions of the Dodd-Frank Act 

and provides that to elect the exception for a 

swap, the counterparty must not be a financial 

entity as defined in the act; must be using the 
swap to hedge or mitigate commercial risk, 

criteria for which are provided in Section C of 

the rule; and must report the information 

required by Section B of the rule.

Section B is the reporting section and 

it requires that on a swap-by-swap basis the 

parties report that the exception is being 

elected and who the counterparty is that is 

electing the exception. These two pieces of 

information are necessary for the Commission to 

know that the exception is being used..

In addition, paragraph B requires 

reporting of information about the electing 

counterparty. This reporting can be done either 

on a swap-by-swap basis or an annual basis. The 

information that must be reported regarding the 

electing counterparty is whether it's a financial 

entity and, if so, under what exemption from that 

definition it is using to elect the exception.

Second, the parties must confirm that 

the swap is hedging or mitigating commercial 

risk.

Next, notice of how the electing 

counterparty satisfies its obligations with 
regard to non-cleared swaps must be reported, 

which is a specific requirement in the Dodd- Frank 

Act.

And finally, for elected parties that 

issue securities or file reports under the 

Securities Exchange Act of 1934, the Commission 

must be notified whether a committee or the board 

of the electing counterparty has approved the 

decision to enter into non-cleared swaps. That 

reporting requirement was necessitated by 

Section 2(j) of the Commodity Exchange Act.

I would just point out with regard to 

the reporting requirements, in the proposed rule 

we received quite a few comments about the 

reporting requirements with regard to the end 

users, and the commenters indicated that most of 

these requirements will not change from one swap 

to the next and that periodic reporting should be 

allowed rather than swap-by- swap reporting. In 

consideration of those comments we added the 

option for annual reporting by the electing 

counterparty.

MS. DONOVAN: As Erik mentioned, 

Section 2(h)(7)(A)(iii) of the Commodity 
Exchange Act requires that for a swap to qualify 

for the end-user exception the elected 

counterparty must be using the swap to hedge or 

mitigate commercial risk. Paragraph C of the rule 

sets out the criteria for determining whether a 

swap hedges or mitigates commercial risk for 

purposes of the exception.

The criteria are virtually the same as 

the criteria for hedging or mitigating commercial 

risk recently adopted by the Commission in 

connection with the definition of "major swap 

participant." Paragraph C lists several types of 

commercial risks that would qualify and includes 

swaps that qualify as bona fide hedging for 

purposes of position limits and swaps that 

qualify for hedging treatment under accounting 

standards. The rule also specifies that a swap 

does not qualify if it is used for a purpose that 

is in the nature of speculating, investing, or 

trading, or if it's used to hedge or mitigate the 

risk of another swap unless the other swap itself 

is used to hedge or mitigate commercial risk.

And finally, paragraph D covers the 

exemption for small financial institutions. 
Section 2(h)(7)(C)(ii) of the Commodity Exchange 

Act directed the Commission to consider whether 

to exempt small banks, savings associations, farm 

credit system institutions, and credit unions, 

particularly those with total assets of $10 

billion or less from the definition of "financial 

entity" used in the end-user exception. While the 

proposed rule did not include any specific 

language for an exemption, the Notice of Proposed 

Rulemaking did request comments on a number of 

questions related to a possible exemption. Based 

upon those comments the final rule exempts banks, 

savings associations, farm credit system 

institutions, and credit unions with total assets 

of $10 billion or less from the definition of 

"financial entity," making such institutions 

eligible for the end-user exception.

We welcome your questions.

CHAIRMAN GENSLER: Thank you. I'm going 

to move back to my seat.

The chair will now entertain a motion 

to accept the staff recommendation on this final 

rule on end-user exceptions.

COMMISSIONER SOMMERS: So moved.
COMMISSIONER CHILTON: Second.

CHAIRMAN GENSLER: I support this final 

rule. I want to thank the team on working this 

through, I think working it through with the 

public, working it through with five 

commissioners, all of whom have been very engaged 

on this. One of the primary goals of Dodd-Frank 

is to lower risk of this interconnected financial 

system, and swaps tie together so much of the 

financial system: Insurance companies, banks, 

hedge funds, leasing companies, but also the 

largest swap dealers around the globe. Based on 

Bank of International Settlement statistics it's 

estimated somewhere a little bit more than 90 

percent, maybe 91 percent, of the notional value 

of swaps around the globe are between financial 

entities and other financial entities. And 

Congress moving forward said we've got to lower 

the risk of this interconnected system and bring 

those swaps into central clearing. But the 9 or 

10 percent that's with non-financial firms, 

particularly those hedging or mitigating risk, 

are not going to be required to come into central 

clearing, but get a choice.
Congress made that policy choice. 

We're supportive of that. A similar policy choice 

was actually made recently in Europe, in the 

European Parliament working with the European 

Commission. So I think this is a critical 

foundational rule to effectuate the intent of 

Congress that non-financial end users have this 

choice. Farmers, ranchers, manufacturers, other 

end users get the benefit of a lower risk 

financial system and if they want to use clearing, 

they can; if they don't, they don't need to.

I think we also benefited this final 

rule establishing clarity and clear lines. 

Commissioner Wetjen speaks about that in a number 

of rules, but I think this rule has benefited from 

a great deal of your input. And Commissioner 

Wetjen and I have spent probably three months 

chatting, but I think it's been very constructive 

and we've gotten to, you know, greater clarity in 

this role.

We've taken up the issue that Congress 

said we shall consider. When Congress says we 

shall consider, here we are, we have considered 

it in taking up this small financial institution 
exemption, the $10 billion or less exemption for 

small financial institutions, including small 

banks, savings associations, farm credit systems, 

and credit unions..

So I'm going to support this rule, but 

I turn it to Commissioner Sommers.

COMMISSIONER SOMMERS: Thank you, Mr. 

Chairman. I have a couple of different questions 

on the captive finance companies issue. And 

understand that this is not an easy issue because 

the way the statute's written it's not perfectly 

clear who qualifies and I know we got a lot of 

comments on this. There have been a number of 

members of Congress who have made it clear to us 

that they intended for us to allow these types of 

companies to qualify for this exception. And in 

some of the comment letters we were asked to 

create a simple test to determine who could 

qualify with regard to this, the two-pronged 90 

percent test. And can you explain why we didn't 

end up doing that?

MR. RADHAKRISHNAN: I think it's 

because the test is in the statute. And the issue 

is if you stray from the statute, then -- the 
question is if you stray, what line are you going 

to draw? If you're going to draw some other line, 

then you're ignoring the statute.

In our view -- well, the Division's view, 

the statute is very clear. It may not be perfectly 

written, in which my response is then it's up to 

Congress to fix it. And with all due respect to 

members of Congress who want us to do things, 

they're the lawmakers, not us.

And I'm really expressing a personal 

opinion, I'm very concerned about the Commission 

or the staff recommending things to the 

Commission to give effect to somebody's intention 

as expressed in a letter somewhere. We have a 

statute to look at and I urge the Commission not 

to stray from the statute.

So the statute has a two-pronged test. 

One, the definition of a financial entity does not 

include an entity whose primary business is 

providing financing and uses derivatives for the 

purpose of hedging underlying commercial risk 

relating to interest rate and foreign currency 

exposures, 90 percent or more of which arise from 

financing that facilitates the purchase or lease 
of products. So the exposures, 90 percent of the 

exposures or more have to arise from financing 

that facilitates the purchase or lease of 

products and then 90 percent or more of which are 

manufactured by the parent company.

So the staff thought that that was 

pretty clear. It may be that this was put in for 

and benefits certain companies. It is what it is. 

We thought that that was a very clear test and so 

we just didn't know what other test we could 

provide.

COMMISSIONER SOMMERS: And so we've 

chosen to read the statute as those two prongs 

have to be read separately --

MR. RADHAKRISHNAN: Exactly, right.

COMMISSIONER SOMMERS: -- yet you have 

to meet both tests in order to qualify.

MR. RADHAKRISHNAN: Right, correct. 

Correct.

COMMISSIONER SOMMERS: So, you know, I 

think that this may be an area where if we have 

not gotten it right, that Congress may choose to 

revisit because I do not disagree with you that 

this is not crystal clear. When you take into 
consideration somebody's specific business use 

of this type of exception, you know, will we, on 

a case-by-case basis, be able to allow somebody 

to take advantage of this exception if it's not 

clear to them in reading the statute whether or 

not they qualify?

MR. RADHAKRISHNAN: I think there have 

been some people who commented about certain 

activities. And I think -- well, two things. One, 

people have invited us to just ignore one of those 

prongs, which I submit we cannot do. Two, some 

of them -- the question relates to 90 percent or 

more of which are manufactured by the parent 

company. Right?

So somebody says I got a car dealership 

and, you know, I got a Volkswagen dealership and 

a Subaru dealership. Right? But I'm in the 

business of selling cars, so does it apply for 

both of them? And the answer -- and let's say the 

captive company is a Volkswagen company. I'm not 

picking on Volkswagen, but, you know, it just 

happens. So can they qualify if they finance 

Subarus? The answer is no, they can't because it 

says, "90 percent or more of which are 
manufactured by the parent company." So if you're 

VW Credit and you're providing financing for 

buying Subarus because the guy who's your dealer 

happens to sell both VWs and Subarus, you can't 

take advantage of this exception.

So basically what I'm saying is if it's 

VW Credit or Ford Credit, 90 percent or more of 

the sales have to be sales of Ford Motor cars.

COMMISSIONER SOMMERS: Okay, thank you. 

I do think this may end up being an issue for some 

people.

My next question, again, to reiterate, 

I'm very encouraged to know that we have included 

the exception for the small financial 

institutions. Even though we decided to stick 

with the 10 billion, at least it's in there.

Footnote 80 suggests that we're in 

harmony with the SEC on their proposal. Did the 

SEC also propose a $10 billion threshold? What 

are we --

MS. DONOVAN: Yes.

COMMISSIONER SOMMERS: Oh, okay.

MS. DONOVAN: Yes, they haven't 

finalized the rule, but the proposal was taken --
COMMISSIONER SOMMERS: But their 

proposal was also the $10 billion threshold.

MS. DONOVAN: Yes.

COMMISSIONER SOMMERS: Thank you. One 

other small issue is in the Preamble it talks 

about what a swap dealer would do in case of a 

limited designation and how they would 

potentially take advantage of an end-user 

exception if they've been deemed a swap dealer, 

but maybe only for one commodity. Could you 

explain how that might work?

MR. RADHAKRISHNAN: I think the 

provision you're referencing in the Preamble was 

talking about the need for swap-by-swap reporting 

of use of the end-user exception so that if a 

limited designated swap dealer were electing the 

end user exception for swaps for which it is not 

a designated swap dealer, the Commission would 

know that and would know that it's correctly 

electing the exception.

COMMISSIONER SOMMERS: But how, I guess, 

practically will that work? When somebody has 

been deemed by us to have the limited designation, 

will that be in some sort of unique entity 
identifier that they are a swap dealer for one 

specific commodity?

MR. RADHAKRISHNAN: I believe that is 

what is contemplated, yes.

COMMISSIONER SOMMERS: Okay, thank you.

CHAIRMAN GENSLER: Thank you, 

Commissioner Sommers. Commissioner Chilton?

COMMISSIONER CHILTON: Thank you. 

Thanks to the team for your good and hard work on 

this.

Could somebody, I don't know who's 

appropriate, explain the difference between 

hedging in this context? You know, hedging runs 

through a bunch of the rules that we're doing. 

It's at the very core of, you know, the Commodity 

Exchange Act. So we've got it in position limits, 

but we also have it, you know, people talk about 

it with regard to the Volcker Rule. So what is 

the difference between hedging in this context 

for end users and the Volcker Rule hedging?

MR. RADHAKRISHNAN: Dan's going to 

answer that.

COMMISSIONER O'MALIA: Hey, 

Commissioner Chilton, maybe you could ask also in 
the context of swap dealer definition as well.

COMMISSIONER CHILTON: Yes.

COMMISSIONER O'MALIA: Because that's 

a different definition.

COMMISSIONER CHILTON: Yes, correct, 

good addition.

MR. BERKOVITZ: In each of these 

instances in the swap dealer, the major swap 

participant, position limits is another context, 

which it is. The end-user exception and the 

Volcker Rule, the analysis starts with the actual 

text of the statute and see whether the words are 

similar or different. In the end-user exception 

the terminology and the phrase is, "hedging or 

mitigating commercial risk." And obviously, also 

one looks at the purpose of the statutory 

provision interpreting the language. So the 

hedging or mitigating commercial risk, this is 

for the purposes of the clearing exception for 

non-financial entities who are hedging or 

mitigating commercial risk can take advantage of 

the end-user exception.

In the Volcker Rule, which seeks to 

limit proprietary trading by certain financial 
institutions, there's an exception from the 

proprietary trading. And I'll just read the 

statutory language because it is very different 

from what we have in the end-user exception. In 

the Volcker Rule the exception is for "risk 

mitigating hedging activities in connection with 

and related to individual or aggregated positions, 

contracts, or other holdings of a banking entity 

that are designed to reduce the specific risks to 

the banking entity in connection with and related 

to such positions, contracts, or other holdings."

So it's a very different statutory 

language, it's a different statute. In fact, it's 

the Bank Holding Company Act versus the Commodity 

Exchange Act, so they're in two different 

contexts. The analysis under each statute would 

be you have to look at any specific context 

wouldn't necessarily be the same in both 

circumstances.

COMMISSIONER CHILTON: So essentially, 

to put in layperson's terms, commercials under 

the Commodity Exchange Act, they're hedging a 

business risk and it's a hedge when they enter 

into it. The Bank Holding Company Act where 
Volcker is really just deals with the bank's 

financial institutions. And once you enter into 

the hedge under the proposal in Volcker, you have 

to monitor that hedge to keep tabs on it to make 

a determination whether or not it continues to be 

a hedge.

And the reason for the difference, also, 

I mean, they're two separate statutes and one's 

not ours, but, you know, the commercials that are 

hedging their risk, they're not systemic risks to 

our economy like financial institutions. I mean, 

these commercials are at the very heart of what 

we do and hedging your risk is like the basics of 

why you have a derivative industry. So is that 

pretty much correct?

MR. BERKOVITZ: Those are correct.

COMMISSIONER CHILTON: Thank you.

CHAIRMAN GENSLER: Commissioner 

Chilton, if I can engage you and maybe the staff, 

but I think that what we're doing here is 

appropriately doing a very broad interpretation 

of hedge or mitigate commercial risk because 

Congress wanted non-financial companies to get a 

choice. I mean, there may be occasionally a 
non-financial company that's speculating and 

it's truly not hedging or mitigating commercial 

risk, but I think we have in front of us a very 

broad definition of hedge and mitigate commercial 

risk. I think when Congress used that word 

"hedge" in the Volcker Rule, they would be 

probably pretty disturbed with us if we had such 

a wide remit there that it would swallow up the 

proprietary trading band.

So if we had to have only one, and maybe 

this goes to Commissioner O'Malia's question, if 

we had to have only one way to define what hedging 

is for all three of these rules, we might not line 

up with congressional intent. I think 

congressional intent here was be very liberal 

with the definition so that any non-financial 

entity other than a true speculator can kind of 

meet this end user thing. I don't think that's 

what Congress intended necessarily in every place. 

Yes, but that's how I think of it.

COMMISSIONER CHILTON: Agreed.

CHAIRMAN GENSLER: Can I ask a follow-up 

on Commissioner Sommers' question because it 

just -- before I turn? In the release that we have 
in front of us, Erik or Ananda, we do, I think, 

address this captive finance and I think in a way 

that's very helpful to the commenters when they 

asked. I mean, they asked several questions, but 

the one that I was most focused on and I worked 

with staff on and I think a number of 

commissioners worked on pages 19 and 20 is that 

captive finance companies had asked the 

Commission whether "financing that facilitates 

the purchase or lease of products," which I think 

is a quote from the statute, "should be measured 

on a single entity or consolidated." We went 

through that. I think we addressed that.

And then we go further, "Captive 

finance companies discuss ways in which finance 

companies might facilitate," and they focused on 

the word "facilitate" in the statute and how we 

might interpret that word "facilitate." And I was 

pleased that we ended up -- and one of the reasons 

I'm supporting this is that, you know, commenters 

asked, well, if you were selling the engine or the 

boat and the engine and the boat have to come 

together, how do we interpret the word 

"facilitate"? Because you might be selling the 
engine or the boat in the financing. And these 

keywords are, "The Commissioner agrees," this is 

on page 20, "The Commission agrees that the word 

'facilitates' as used in Section 2(h)(7)(C)(iii) 

should be interpreted broadly to include 

financing that might indirectly help to 

facilitate the purchase or lease of products."

So, I mean, that was a key provision 

that I think a lot of us, you know, weighed in on. 

It was important to a number of commissioners' 

offices. I just want to make sure I -- I mean, 

Erik?

MR. REMMLER: Yes, that's correct. In 

terms of interpreting the word "facilitates" in 

this provision we provided guidance that we would 

interpret it broadly. I would also add that we 

received a number of questions regarding what 

does "90 percent manufactured" mean? Does it 

require that the components also be manufactured? 

And we indicated that, no, the manufacturing 

would look to the final act of actually putting 

the product together and not that the parent 

corporation needs to manufacture 90 percent of 

all components.
CHAIRMAN GENSLER: Thank you. I'm sorry 

to interrupt the flow, but Commissioner O'Malia?

COMMISSIONER O'MALIA: Thank you very 

much. I don't know whose question I'm building 

on, but one of them regarding the Bank Holding 

Company Act and this financial entity or this 

Treasury affiliate issue that we've discussed a 

little bit here..

Treasury affiliates may fall under a 

Bank Holding Company Act designation, one of 

their company's affiliates, and, therefore, we 

can't provide them this exclusion, is that 

correct, under our rules because they're not 

under our rules? They're under the Bank Holding 

Company Act, is that correct?

MR. REMMLER: In terms of interpreting 

what that provision, what the Bank Holding 

Company Act means, no, we said that that is within 

the jurisdiction of the Federal Reserve.

COMMISSIONER O'MALIA: I just have one 

other question. International financial 

institutions, foreign central banks, and foreign 

governments, according to the Preamble these 

entities are not subject to the clearing 
requirement under 2(h). How does the 

inapplicability of this clearing requirements 

affect the applicability, if at all, of the recent 

cross-border guidance that we've provided? What 

is that relationship? Do these rules work at 

cross purposes or are they consistent?

MR. RADHAKRISHNAN: To be honest with 

you, I haven't read the Cross-Border Release, but 

I would suspect that if we say that these are not 

financial entities, I'm not sure whether the 

Cross-Border Release would capture them as swap 

dealers. This has to go to whether you got a clear 

or not, but.

CHAIRMAN GENSLER: Dan, you want to come 

up to the table as one of the key authors of the 

Cross-Border Release?

MR. BERKOVITZ: And I have to ask, sorry, 

if you could repeat the question.

COMMISSIONER O'MALIA: Sure. 

International financial institutions, foreign 

central banks, and foreign governments, under 

this release, the end user, these entities are not 

subject to the clearing requirement. And I'm just 

wondering is that consistent with where we are on 
cross- border?

CHAIRMAN GENSLER: I think in your first 

category you're reading is a term from the release 

that basically relates to multilateral --

COMMISSIONER O'MALIA: Right.

CHAIRMAN GENSLER: -- like the World 

Bank.

COMMISSIONER O'MALIA: The World Bank, 

correct.

CHAIRMAN GENSLER: The World Bank, the 

IMF.

COMMISSIONER O'MALIA: IMF, correct.

CHAIRMAN GENSLER: Et cetera.

MR. BERKOVITZ: That is consistent with 

what we actually did in the swap dealer definition 

and the entities definitions rules, where --

COMMISSIONER O'MALIA: They're exempt 

in that.

MR. BERKOVITZ: From that. From the 

registration requirement, from that..

COMMISSIONER O'MALIA: Okay. So my 

question was regarding the cross-border, what is 

it?

MR. BERKOVITZ: I'd have to check. It's 
not inconsistent with what we did on 

cross-border.

COMMISSIONER O'MALIA: Okay.

CHAIRMAN GENSLER: Yes, and I think it 

is -- I mean, if we're allowed to try to do this, 

but I think that in the Cross-Border Release if 

you are an international banking organization and 

you're dealing with a sovereign, that sovereign's 

not a U.S. person. I mean, that would be correct, 

right?

MR. BERKOVITZ: Correct. That's 

correct. That's correct.

CHAIRMAN GENSLER: So to use Dan's term, 

it's not inconsistent, but it's sort of because 

they're non-U.S. Persons. I think it wouldn't 

count towards the de minimis probably is you're 

doing it, you know, out of your -- you know, 

Deutsche Bank is doing it or somebody else.

MR. BERKOVITZ: That's correct.

COMMISSIONER O'MALIA: Thank you, Dan. 

That's all I have.

CHAIRMAN GENSLER: Commissioner 

Wetjen?

COMMISSIONER WETJEN: I want to build 
on one of Commissioner O'Malia's questions. He 

was talking about financial entities and how 

they're defined under the rule. But it is the case 

under this rule that there are instances when a 

financial entity can avail itself of the end-user 

exception, correct?

MR. REMMLER: Yes, that's correct.

COMMISSIONER WETJEN: And does the rule 

provide for sufficient flexibility to provide the 

exception for a variety of different types of 

corporate structures? And to be more precise, 

sometimes in a corporate family the entity that's 

actually facing the market can take a variety of 

shapes and forms, but I believe it was the intent 

of the release to allow for any number of 

different forms and still provide that the 

end-user exception can be made available to those 

companies. Isn't that the idea?

MR. REMMLER: The provision in the act 

that defines financial entity is fairly specific 

and complete. And the act also provides certain 

exemptions from that definition that are specific, 

for example, the captive finance corporation 

company provision. This small financial 
institution provision that's in the rule would 

apply to all small financial institution with 

regard to -- I think you're asking more about 

entities within corporations that may be 

financial entities. Is that correct?

COMMISSIONER WETJEN: That's correct.

MR. REMMLER: Okay. Those entities, if 

they're not financial entities as defined in the 

act, but are trading for the corporate enterprise, 

they themselves would be non- financial entities, 

and if they're hedging or mitigating commercial 

risk could use the end-user exception. If they 

are financial entities and they don't fall within 

one of the exemptions provided in the act, then 

they would not be able to use the end-user 

exception.

There is an exemption from the 

definition of financial entity in the act that we 

haven't discussed here yet, which provides for 

financial entities trading on behalf of 

affiliates. That provision specifically says 

that those entities, even if they're financial 

entities, can elect the end-user exception if 

they're trading on behalf of and as agent for the 
affiliates.

COMMISSIONER WETJEN: Yes, that's the 

part of the discussion I was referring to, so I'm 

glad you provided that response. I don't have any 

further questions.

CHAIRMAN GENSLER: I thank you. I'm 

just going to follow on something Commissioner 

O'Malia said. It's not a question, but to state 

that it's laid out in the document and footnote 

16 and around pages 9 and 10 that the 

international financial organizations, like the 

World Bank and the IMF, are sovereigns themselves, 

or central banks; that we did end up aligning, in 

essence, where the Europeans are. Because in the 

European provisions recently passed by the 

European Parliament those were not in the 

mandatory clearing. And so the question before 

this Commission, and we got a lot of public 

comment on, are they non-financials or financials? 

Of course, central banks have the word "bank" in 

it, but sovereigns don't. And so I think we came 

out in the right place here not only as a matter 

of international comity and law, but also so that 

we're best aligned with the European clearing 
mandate as well as best we can.

Mr. Stawick?

MR. STAWICK: Commissioner Wetjen?

COMMISSIONER WETJEN: Aye.

MR. STAWICK: Commissioner Wetjen, aye. 

Commissioner O'Malia?

COMMISSIONER O'MALIA: Aye.

MR. STAWICK: Commissioner O'Malia, aye. 

Commissioner Chilton?

COMMISSIONER CHILTON: Aye.

MR. STAWICK: Commissioner Chilton, aye. 

Commissioner Sommers?

COMMISSIONER SOMMERS: Aye.

MR. STAWICK: Commissioner Sommers, aye. 

Mr. Chairman?

CHAIRMAN GENSLER: Aye.

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

Chairman, on this question the yeas are five, the 

nays are zero.

CHAIRMAN GENSLER: The vote being 

unanimous we will send it along with any technical 

edits and corrections to the Federal Register. My 

compliments to the team, but you get to stay here 

for one more turn at the wheel. Erik or Eileen, 
whoever's presenting?

MR. REMMLER: Thank you, Mr. Chairman. 

The proposed rule that is now before you relates 

to the exemption of certain swaps entered into by 

cooperative entities. It would allow these 

entities to not clear swaps that would otherwise 

be subject to the clearing requirement under the 

Dodd-Frank Act. The cooperatives to which this 

proposed rule would apply would otherwise be 

ineligible for the end-user exception to clearing 

that the Commission just adopted because they are 

financial entities with total assets in excess of 

$10 billion.

These cooperatives, however, are 

membership entities that act in the financial 

markets on behalf of their members and enter into 

swaps for the benefit of their members. The 

members of these cooperatives could themselves 

elect the end- user exception. If the proposed 

rule is adopted, the members of the cooperatives 

could continue to access the financial markets 

through their cooperatives and also receive the 

benefits of the end-user exception that would be 

available to their members. In effect, the rule 
would pass through the end-user exception 

available to the cooperative members, to the 

cooperatives themselves.

I note that the proposed rule is being 

considered by the Commission under its authority 

provided in Section 4(c) of the Commodity 

Exchange Act to exempt certain classes of 

transactions or contracts and classes of market 

participants..

The rule as proposed would add a new 

Part 39.6(f) to the Commission's regulations and 

consist of four parts. The first paragraph 

provides that exempt cooperatives, which is 

defined in the rule, may elect not to clear a class 

of swaps that is identified in the rule. Section 

1, which defines the term "exempt cooperative," 

includes cooperatives that exist as cooperative 

entities under federal or state law and that meet 

two conditions: First, the cooperative must be 

a non-swap dealer, non-major swap participant 

financial entity as defined in the end-user 

exception portion of the act; second, all of the 

cooperative's members must either be eligible for 

the end-user exception or be cooperatives 
themselves whose members are eligible for the 

end-user exception. The purpose of this 

definition of "exempt cooperative" is to limit 

the class of cooperatives that could use the 

proposed rule to those entities for which all of 

their members could themselves elect the end-user 

exception.

Section 2 of the proposed rule limits 

the swaps for which the exemption applies to swaps 

entered into with a cooperative's members in 

connection with originating loans or swaps that 

hedge or mitigate risks associated with member 

loans or member loan-related swaps.

The last section of the proposed rule 

requires reporting of the swaps for which the 

exemption is elected. The reporting requirements 

are identical to the reporting requirements of 

the end-user exception.

And with that, I'll take any questions 

you may have.

CHAIRMAN GENSLER: Thank you. The chair 

will now entertain a motion to accept the staff 

recommendation on this proposed exemptive rule.

COMMISSIONER SOMMERS: So moved.
CHAIRMAN GENSLER: You want to second 

it for me?

COMMISSIONER CHILTON: Second.

CHAIRMAN GENSLER: Great. I support the 

proposed rule that would permit certain 

cooperatives to choose not to clear 

member-related swaps. And I've got a little bit 

further statement on it, but I have one question 

before I go on.

In the rule we just finalized on the 

end-user exception, we also take up the coop issue 

with regard to captive finance companies, if I 

remember. What happens? Is there sort of a 

captive finance coop analog as well, if I remember, 

in the document? I gave my document to Eric, so 

he took it. Eric Juzenas.

MR. REMMLER: I don't recall discussing 

cooperatives in the captive finance provision 

specifically, although there may have been some 

comments from cooperatives.

CHAIRMAN GENSLER: Okay, so --

MR. REMMLER: And in regard to those 

comments, they commented on a number of sections 

on the end-user exception rule requesting that 
coops be given --

CHAIRMAN GENSLER: Well, I just 

remember there's one coop and I didn't know where 

we took care of it, whether it's here or over in 

the other place, that's in the Rural Electric 

field that has a coop that works in that field.

MR. REMMLER: The National Rural 

Utilities Cooperative Finance Corporation is a 

cooperative that provided a number of comments on 

the end-user exception.

CHAIRMAN GENSLER: Okay, so that might 

be what I was thinking.

MR. REMMLER: They would be included 

here under this exemption as well.

CHAIRMAN GENSLER: So I think one of the 

primary goals of Dodd-Frank was, again, to bring 

into clearing finance companies facing finance 

companies in this interconnected financial 

system pose less risk to the U.S. taxpayers than 

90+ percent of swaps that are entered into by 

financial companies. But also, Congress provided 

the non-financial exception, which we just 

finalized moments ago.

And I think that cooperatives acting on 
behalf of and are, in essence, an extension of 

their members, it's something this agency has a 

great deal of experience with, working with 

agricultural cooperatives and rural electric 

cooperatives for decades, but particularly in the 

agricultural field. And I think Congress has 

addressed this in numerous ways and numerous

times since the 1930s about cooperatives and what 

they mean about how they are; in essence, act on 

behalf of and, if I can use a colloquial word, an 

extension of their members. Thus I believe it's 

appropriate that cooperatives made up entirely of 

their members that could individually qualify as 

an end-user exception also qualify as, in essence, 

as we've come to call this, a pass-through if 

they're entirely made up end users.

We do have two tailored, narrow 

conditions as well in the document. And I might 

not get the words quite right, but you'll confirm 

for me, hopefully, Erik, but one is the swaps 

entered into with the members of the cooperative 

are in connection with originating loans for the 

members, and so it's sort of tied to these members. 

It's not about some cooperative, you know, going 
out and competing with other financial 

institutions and just providing swaps for the 

general public. Is that right?

MR. REMMLER: Yeah, that's correct.

CHAIRMAN GENSLER: So it's really swaps 

who act as an extension of their members and 

entering into swaps -- I mean, cooperatives 

acting as an extension of their members and 

entering into swaps in connection with those 

loans.

And two, that it's swaps entered into 

by a cooperative to hedge or mitigate risk 

associated with their member loans. So, you know, 

they might need to offload their risk upstream, 

but --

MR. REMMLER: Correct.

CHAIRMAN GENSLER: So I'm supportive of 

this. I look forward to comment. We are putting 

it out for 30 days comment, is that right?

MR. REMMLER: Yes.

CHAIRMAN GENSLER: Which is a little 

shorter, but I think is appropriate because it's 

really about trying to provide clarification 

notes to these pass-throughs before we have a 
clearing requirement that might come into being 

in the fall. I think it'd be appropriate that this 

be a 30-day comment period.

So, Commissioner Sommers?

COMMISSIONER SOMMERS: Thank you, Mr. 

Chairman. If you could just describe the type of 

exception we're trying to allow and how the actual 

look-through is going to work. So, you know, the 

structure of these type of coops and who is 

actually qualifying under the -- sorry, above the 

10 billion.

MR. REMMLER: Cooperatives that are 

financial entities under the definition in the 

Dodd-Frank Act, that have assets of $10 billion 

or less, would, of course, now qualify as small 

financial institutions and would have the 

end-user exception available to them. However, 

those that have assets in excess of $10 billion 

obviously would not.

In order for a cooperative of that size 

to qualify, all of its members either themselves 

have to be end users or small financial 

institutions, or be cooperatives whose members 

are end users or small financial institutions. I 
mean, that last piece is sometimes being referred 

to as a double pass- through because we look 

through the cooperative that is a member to its 

members. And that provision is included in the 

proposal because a number of the finance 

cooperatives, particularly in the agricultural 

space, are themselves cooperatives of 

cooperatives, in effect.

COMMISSIONER SOMMERS: There may 

actually be members of a coop that are above the 

10 billion that have to look then to their members 

in order to qualify for this exception.

MR. REMMLER: That's correct.

COMMISSIONER SOMMERS: Okay. What 

types of swaps are going to qualify under this 

exception? So you said in the rule that there 

would be classes of swaps that we would identify.

MR. REMMLER: The rule provides that the 

exemption can be elected for swaps entered into 

with members in connection with originating loans 

or swaps used for hedging or mitigating risks 

related to member loans or member loan- related 

swaps. Many of the comments on the end-user 

exception rule that we received from cooperatives 
indicated that that is, in fact, what they use 

swaps for: Member-related loans and hedging 

interest rate risk. And one of the reasons that 

they indicated that we should have provided them 

with relief is because they believe those types 

of swaps tend to be less risky. And in the 

interest of drawing this exemption fairly 

narrowly in recognition of the systemic risk 

issues that clearing mitigates, we included that 

limitation in the rule.

COMMISSIONER SOMMERS: So presumably, 

this is interest rates and commodities?

MR. REMMLER: Since it relates to loans, 

it's most likely going to relate to interest 

rates.

COMMISSIONER SOMMERS: But commodity 

swaps can be allowed as well?

MR. REMMLER: I'm trying to think of an 

instance where that would be the case, where they 

would be related to member loans, and I don't 

think there would be an instance and that 

commodity swaps would be included.

COMMISSIONER SOMMERS: From what I 

recall, didn't we end up adding commodity swaps 
into the IDI exception in swap dealer? Well, 

there is a part in the rule text that we do refer 

to the provisions of IDIs that were in the swap 

dealer definition, I think. Isn't the 1.3(ggg) --

CHAIRMAN GENSLER: Yes.

COMMISSIONER SOMMERS: So we tie it to 

that definition. I was just wondering if it would 

also provide for commodity swaps?

MR. REMMLER: That provision identifies 

what is a swap in connection with originating 

loans. And we included the tie-in in order to be 

consistent.

CHAIRMAN GENSLER: Yes. And I think, 

Commissioner Sommers, since you and I somewhere 

late in the -- that was in the swap dealer 

definition, yes, arrange that, you're absolutely 

correct. We did work through something and this 

should be -- I think this is meant to be consistent 

with that and I think you are correct that we did 

end up with a provision tailored in the swap 

dealer definition that, in certain circumstances, 

loans in connection with -- I'm sorry, swaps in 

connection with a loan may be related to 

commodities. I mean, that was a provision that 
worked out -- well, maybe it was Mike Ott late one 

night and Erik Juzenas that we worked out.

COMMISSIONER SOMMERS: I guess because 

the rule, this proposal, is tied to the IDI 

provisions in swap dealer, I would encourage 

those cooperatives who have an interest in this 

to look carefully at that provision, to look at 

the timeframes, and to make sure that that 

actually works for the type of relief they're 

looking for here. Thank you.

CHAIRMAN GENSLER: Commissioner 

Chilton?

COMMISSIONER CHILTON: Thanks. Thanks 

to the team. I'm curious in coming up with this 

if we've talked with the primary regulator for the 

farm credit system, the Farm Credit 

Administration.

MR. REMMLER: Yes, we've consulted with 

them.

COMMISSIONER CHILTON: And did they 

have any words of wisdom for how we -- are there 

things in this proposal that we've taken from them 

that we think are pretty important or they thought 

were important?
MR. REMMLER: Yes, we had a number of 

discussions with them and requested certain data 

from them with regard to the cooperatives that 

they regulate, which was very useful in helping 

craft this rule.

COMMISSIONER CHILTON: Okay. Well, I 

look forward to any comments that they may have. 

Maybe we've included everything they thought was 

needed here, but, whenever there's a frontline 

regulator, you know, they're looking after all 

the farm credit institutions' capital, and I want 

to make sure that we pay particular attention to 

anything that they say.

So I think you guys did a pretty good 

job and I thank you.

CHAIRMAN GENSLER: Thank you, 

Commissioner Chilton. Commissioner O'Malia?

COMMISSIONER O'MALIA: I have no 

questions. Thank you.

CHAIRMAN GENSLER: Thank you, 

Commissioner O'Malia. Commissioner Wetjen?

COMMISSIONER WETJEN: As always, 

Commissioner Sommers asked very thoughtful, 

probing questions, so I just want to associate 
myself with some of her questions, and I also 

would encourage the commenters to make sure that 

the issue concerning our treatment of the IDI 

exclusion in this release is consistent with how 

it was done in the swap dealer definition rule. 

I think the intent was to fully embrace the IDI 

discussion from the dealer rule in this document.

But as I said, I think Commissioner 

Sommers asked some good questions. I think 

commenters should be sure to provide thoughtful 

comments on that issue. Thanks.

CHAIRMAN GENSLER: Mr. Stawick?

MR. STAWICK: Commissioner Wetjen?

COMMISSIONER WETJEN: Aye.

MR. STAWICK: Commissioner Wetjen, aye. 

Commissioner O'Malia?

COMMISSIONER O'MALIA: Aye.

MR. STAWICK: Commissioner O'Malia, aye. 

Commissioner Chilton?

COMMISSIONER CHILTON: Aye.

MR. STAWICK: Commissioner Chilton, aye. 

Commissioner Sommers?

COMMISSIONER SOMMERS: Aye.

MR. STAWICK: Commissioner Sommers, aye. 
Mr. Chairman?

CHAIRMAN GENSLER: Aye.

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

Chairman, on this question the yeas are five, the 

nays are zero.

CHAIRMAN GENSLER: The vote being 

unanimous, this, too, will be sent to the Federal 

Register with any technical changes. Maybe there 

aren't any on this one.

If there is nothing 

else -- Commissioner O'Malia, you don't need to 

ask what the next schedule is, right?

COMMISSIONER O'MALIA: You summarized 

it nicely, thank you.

CHAIRMAN GENSLER: I put it up front. 

So I thank the staff. I thank the SEC again for 

enormous partnership. I think this is a very 

significant day for the American public. 

Congress asked and directed this agency to put in 

place financial reforms to oversee the swaps 

market. Now with these foundational rules 

completed I think much of what the public needs 

will be coming to light. But we will take to heart 

that we want to work with members of the public, 
large and small alike, and try to sort through 

that this be a smooth transition and this work on 

the benefit of markets, transparency, and the 

public. So I thank you.

A motion to adjourn the meeting?

COMMISSIONER CHILTON: So moved.

COMMISSIONER SOMMERS: Second.

CHAIRMAN GENSLER: All in favor?

GROUP: Aye.

CHAIRMAN GENSLER: All in favor, good. 

The meeting is now adjourned.

(Whereupon, at 12:36 p.m., the 

PROCEEDINGS were adjourned.)

* * * * * 

CERTIFICATE OF NOTARY PUBLIC 

DISTRICT OF COLUMBIA 

I, Christine Allen, notary public in and for 

the District of Columbia, do hereby certify that 

the forgoing PROCEEDING was duly recorded and 

thereafter reduced to print under my direction; 

that the witnesses were sworn to tell the truth 

under penalty of perjury; that said transcript is 

a true record of the testimony given by witnesses; 

that I am neither counsel for, related to, nor 

employed by any of the parties to the action in 

which this proceeding was called; and, furthermore, 

that I am not a relative or employee of any attorney 

or counsel employed by the parties hereto, nor 

financially or otherwise interested in the outcome 

of this action.

(Signature and Seal on File)

-----------------------------------

Notary Public, in and for the District of Columbia

My Commission Expires: January 14, 2013