UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 OPEN MEETING ON TWO FINAL RULE PROPOSALS

 UNDER THE DODD-FRANK WALL STREET REFORM

 AND CONSUMER PROTECTION ACT

 Washington, D.C.

 Monday, December 5, 2011
 2

 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BART CHILTON, Commissioner

 5 MARK WETJEN, Commissioner

 6 JILL E. SOMMERS, Commissioner

 7 SCOTT D. O'MALIA, Commissioner

 8 Staff:

 9 DAVID STAWICK, Office of the Secretariat

 10 Presentation No. 1: Final Rule on Investment of

 Customer Funds and Funds Held in an Account for

 11 Foreign Futures and Options Transactions

 12 JON DEBORD, Division of Clearing and Risk

 13 PHYLLIS DIETZ, Division of Clearing and

 Risk

 14

 ANANDA RADHAKRISHNAN, Division of Clearing

 15 and Intermediary Oversight

 16 WARD GRIFFIN, Office of General Counsel

 17 DAVID MEISTER, Division of Enforcement,

 18 DAN BERKOVITZ, Office of General Counsel

 19 Presentation No. 2: Further Notice of Proposed

 Rulemaking on Process for Making a Swap Available

 20 to Trade Under Section 2(h)(8) of the Commodity

 Exchange Act

 21

 BELLA ROZENBERG, Division of Market

 22 Oversight
 3

 1 PARTICIPANTS (CONT'D):

 2 AMIR ZAIDI, Division of Market Oversight

 3 MAURICIO MELARA, Division of Market

 Oversight

 4

 RICK SHILTS, Division of Market Oversight

 5

 Presentation No. 3: Final Rule on Registration of

 6 Foreign Boards of Trade

 7 DUANE ANDERSON, Division of Market

 Oversight

 8

 DAVID STEINBERG, Division of Market

 9 Oversight

 10 RYNE MILLER, Division of Market Oversight

 11 DAVID VAN WAGNER, Division of Market

 Oversight

 12

 RICK SHILTS, Division of Market Oversight

 13

 14 * * * * *

 15

 16

 17

 18

 19

 20

 21

 22
 4

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

 2 (9:35 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 meeting will come to order. This is a public

 5 meeting of the Commodity Futures Trading

 6 Commission -- are we all signed in -- to consider

 7 final and proposed rules under the Dodd-Frank Act.

 8 I'd like to welcome members of the

 9 public, market participants, and members of the

 10 media, as well as those listening to this meeting

 11 on the phone and watching the webcast.

 12 I'd like to thank Commissioner Sommers,

 13 Chilton, O'Malia, and Wetjen for their significant

 14 contributions to the rule writing process. I also

 15 want to thank the CFTC's hardworking and dedicated

 16 staff. They're working day and night and many

 17 weekends. I was in here Saturday, and I saw

 18 numerous folks, and I thank you on that.

 19 Today is our 21st open meeting to

 20 consider Dodd- Frank Act rules. And I'd

 21 particularly like to welcome Commissioner Wetjen

 22 to his first open meeting. And I'm told somewhere
 5

 1 there's a rulebook or something that that is the

 2 seat where the most junior Commissioner sits.

 3 Since Commissioner O'Malia has now switched over

 4 there, and this is the seat where the most senior

 5 Commissioner sits, other than the Chair. I don't

 6 know, but that's why you have us switched around

 7 here.

 8 Today we'll consider two final rules,

 9 the investment of customer funds, and a rule with

 10 regard to the registration process for foreign

 11 boards of trade. Will also consider one of

 12 proposed rule, the process for designated contract

 13 markets and swap execution facilities to make a

 14 swap available to trade.

 15 Last Friday, the Commission approved an

 16 interpretation related to antifraud authority

 17 provided in the Dodd Frank Act under --

 18 OPERATOR: I'm not hearing anything at

 19 this time. I'm doing a test on the line right

 20 now. I'm not hearing anything at this time.

 21 CHAIRMAN GENSLER: There you have it, so

 22 maybe I start over. So, that was not webcast?
 6

 1 What do we do? I'm going to pause. Keep going?

 2 All right, we're good.

 3 Last Friday, the Commission approved an

 4 interpretation on Section 742. This related to

 5 retail commodity swaps, and this interpretation

 6 had originally been countered for today, but we

 7 completed it by seriatim last week. And it's also

 8 up on our website, or should be sometime today.

 9 The CFTC is working to complete

 10 Dodd-Frank rules thoughtfully, not against the

 11 clock. We've finished 18 rules and have a full

 12 schedule of public meetings this month, and well

 13 into next year. And we've benefited from

 14 significant public input, including 25,000 common

 15 letters, 1,100 meetings, 14 roundtables. I've

 16 also directed staff to host additional roundtables

 17 as well. After the first of the year, staff will

 18 put together a roundtable on mandatory clearing

 19 for swaps. Under this congressionally mandated

 20 process, the Commission has 90 days to review a

 21 clearinghouse submission and to determine whether

 22 a swap is required to be cleared based on various
 7

 1 factors that are in statute. And, though the

 2 clearinghouses will decide on the timing of the

 3 submission, this could be in the near term, and,

 4 thus, this staff roundtable will provide further

 5 helpful public input regarding the implementation

 6 of the clearing mandate.

 7 Today we are considering a rule to

 8 enhance customer protections regarding where

 9 clearing organizations and futures commission

 10 merchants can invest customer funds.

 11 We're losing the connection again here?

 12 But I'm going to keep going.

 13 I believe that this rule is critical for

 14 safeguarding of customer money. The Commodity

 15 Exchange Act in Section 4(d)(A)(2) -- did I get

 16 that right, Phyllis -- prescribes that customer

 17 funds can only be placed in a set list of

 18 permitted investments.

 19 From 2000 to 2005, the Commission

 20 granted various exemptions to this list, loosening

 21 the rules for the investment of customer funds.

 22 These exemptions allowed futures commission
 8

 1 merchants to invest customer funds in AAA rated

 2 sovereign debt, as well as to lend customer money

 3 to another side of the firm through repurchase

 4 agreements.

 5 Today's rule prevents such in-house

 6 lending through repurchase agreements. I believe

 7 there is an inherent conflict of interest between

 8 parts of a firm doing these transactions, and I'm

 9 glad that were able to consider staff

 10 recommendation on a final rule today.

 11 The rule also would limit a futures

 12 commission merchants ability to invest customer

 13 money and foreign sovereign debt. This is in part

 14 a result that Dodd-Frank in Section 939(a) require

 15 that the CFTC remove all reliance on credit

 16 ratings from its regulations. And, thus, we can

 17 no longer just say if it's the highest rated or

 18 AAA back debt.

 19 Wee proposed this rule and October 2010,

 20 and since then I've consistently felt that the

 21 CFTC needs to finalize this rule to ensure

 22 customer funds are best protected. This rule is
 9

 1 important, but I might say the agency will look at

 2 additional ways to enhance customer protections.

 3 Among possibilities we're reviewing are the audits

 4 of futures commission merchants, futures

 5 commission merchants' monthly and daily reporting

 6 to regulators, how futures commission merchants

 7 are examined for compliance, the futures

 8 commission merchants' relationship with

 9 self-regulatory organizations, custodial

 10 arrangements, and possibly increasing the

 11 transparency between futures commission merchants

 12 to customers. In essence, what do they

 13 communicate to their customers, not to the

 14 regulators, but to their customers regarding how

 15 they invest those funds?

 16 As we've previously reported, along with

 17 the self- regulatory organizations, the CFTC is

 18 also doing a series of reviews of the segregation

 19 in futures commission merchants accounts.

 20 In addition, the CFTC's five

 21 Commissioners and staff will be working with the

 22 self-regulatory organizations and market
 10

 1 participants on further enhancements and ideas to

 2 customer protection.

 3 The Commission is also looking soon to

 4 finish rules on segregation for cleared swaps.

 5 Segregation of funds is the core foundation of

 6 customer protection.

 7 Also today, the Commission will consider

 8 a final rule to implement the Dodd-Frank provision

 9 for registration of foreign boards of trade, which

 10 will make the swaps market more open and

 11 transparent. The registration system replaces the

 12 CFTC's current practice of staff issuing no action

 13 letters to foreign boards of trade, and it's the

 14 result of an amendment in the Dodd-Frank act by

 15 Senator Feinstein and Senator Levin. I know there

 16 were many others that worked on it, but it's

 17 specific to those -- that registration regime.

 18 And I think that exchanges and trading

 19 platforms that allow investors and hedgers and

 20 speculators to meet in an open and competitive

 21 central market is fundamental to our markets and

 22 promotes competition. And even market
 11

 1 participants who are either exempted or choose not

 2 to use a trading platform will benefit from

 3 transparent pricing and liquidity on trading

 4 venues. When markets are open and transparent,

 5 prices are more competitive, they're more

 6 efficient, and costs are lower to the companies

 7 and their customers. Transparency benefits, I

 8 think, all of us.

 9 Lastly, will consider a proposed rule

 10 for a process by which contract markets and SEFs

 11 make a swap available to trade. I've also

 12 directed staff to put together a roundtable to

 13 hear from the public on this topic during the

 14 comment period. This is something we've done from

 15 time to time, and I think it's enormously helpful,

 16 particularly during comment periods.

 17 Before we hear from the staff on the

 18 rulemaking that will consider today, I will

 19 recognize my fellow and commissioners for their

 20 opening statements. I think it's a great honor.

 21 I turned to Commissioner Sommers.

 22 COMMISIONER SOMMERS: Thank you, Mr.
 12

 1 Chairman, and I, too, would like to welcome

 2 Commissioner Wetjen to his first CFTC Dodd-Frank

 3 open meeting. It's been a very fast-paced first

 4 six weeks for him, I know. But I just want to say

 5 how much I appreciate the communication between

 6 his office and be able to work with you on all the

 7 rules before us today. So, welcome.

 8 I also want to thank the teams that that

 9 are before us today. As I always say, but really

 10 mean it, your hard work and the long hours you put

 11 in, and especially in the last few days before we

 12 are getting ready to consider these rules, is much

 13 appreciated.

 14 Today we are considering the final rule

 15 creating a registration system for foreign boards

 16 of trade that make their products available to

 17 U.S. customers by providing them with direct

 18 access to their electronic trading system. This

 19 rule will replace the existing process of staff

 20 issued no action letters.

 21 The CFTC has a long history of

 22 recognizing regimes with comparable regulatory
 13

 1 objectives. Currently, we have 20 foreign boards

 2 of trade, operating under this no action relief.

 3 It is very important for me that we retain the

 4 type of regulatory cooperation that we have with

 5 other jurisdictions.

 6 I believe that global markets benefit

 7 from international support and collaboration among

 8 supervisors, and it is my hope that under this new

 9 registration regime, the CFTC will continue to be

 10 a global leader in recognizing and granting access

 11 to foreign boards of trade with comprehensive and

 12 comparable oversight from their home country

 13 regulator.

 14 In September of this year, the

 15 Commission voted on a proposed compliance and

 16 implementation schedule for the clearing and trade

 17 execution requirements of Section 2(h) of the Act.

 18 I reluctantly supported the proposal because it

 19 provided some degree of certainty regarding

 20 implementation deadlines. I was discouraged,

 21 however, that the Commission had failed to provide

 22 any certainty with respect to what would trigger
 14

 1 the trade execution requirement. I urged the

 2 Commission at our September meeting to define what

 3 it means to make a swap available to trade.

 4 The proposal before us today represents

 5 some progress in that direction. Unfortunately, I

 6 think we've taken a wrong turn.

 7 The proposal provides that DCMs and

 8 SEFs, rather than the Commission, will make the

 9 determination of when a swap has been made

 10 available to trade by considering seven enumerated

 11 factors, or any other factor that the DCM or SEF

 12 may view as relevant.

 13 The DCM or SEF may base its

 14 determination on any combination of the factors,

 15 or on one single factor. The rules provide that

 16 the DCM or SEF may either certify the

 17 determination or seek approval under the

 18 Commission's part 40 rules. Although the

 19 Commission could theoretically overturn such a

 20 determination through its rule certification or

 21 approval review, the lack of any parameters on how

 22 these factors should be considered will make it
 15

 1 very difficult, if not impossible, for the

 2 Commission to reverse a determination. Once a

 3 determination is final, all other DCMs and SEFs

 4 are obligated to determine whether they list or

 5 offer the same or economically equivalent swap,

 6 and, if so, they must treat the swap or

 7 economically equivalent swap as having been made

 8 available to trade within the meaning of section

 9 2(h)(8).

 10 And although the proposal is silent on

 11 the matter, all over-the-counter participants will

 12 also have to determine whether a swap of a trade

 13 or would like to trade is the same or economically

 14 equivalent, because if the Commission has

 15 determined that the swap must be cleared, OTC

 16 trading must cease.

 17 This approach is deeply flawed, and I

 18 cannot support putting it out for comment, even

 19 recognizing that it's just a proposal. This

 20 proposal, if finalized, would allow a single DCM

 21 or SEF to bind the entire marketplace to a trade

 22 execution requirement through an ill-defined
 16

 1 analysis that the Commission will be unable to

 2 reject unless it finds that the determination is

 3 inconsistent with the Act or Commission

 4 regulations.

 5 Giving the lack of any mandatory,

 6 objective criteria contained in the rules, it is

 7 difficult to envision how the Commission can find

 8 a made available for trading determination to be

 9 inconsistent with the act or regulations. For

 10 example, the proposed rule would allow a DCM or

 11 SEF to declare a swap "made available to trade"

 12 based solely on a finding that there are ready,

 13 willing buyers and sellers.

 14 Will a swap that trades once or twice a

 15 year, qualify under this test? Could the

 16 Commission find a determination, based on one or

 17 two trades a year, to be inconsistent with the

 18 rule? These are certainly questions that I have.

 19 The definition of economically

 20 equivalent set forth in the proposal is also

 21 problematic. It directs the DCM and SEFs to

 22 determine whether a swap is economically
 17

 1 equivalent with another swap after considering

 2 each swap's material pricing terms. I'm not sure

 3 what that means, and I expect that market

 4 participants will not be sure either.

 5 The proposal, in effect, would delegate

 6 implementation of the trade execution requirement

 7 of Section 2(h)(8) of the Act to DCMs and SEFs.

 8 The fact that Congress did not explicitly direct

 9 the Commission to make the "made available for

 10 trading" determination does not mean that we

 11 should not turn this -- that we should turn this

 12 critical responsibility over to DCMs and SEFs.

 13 I strongly disagree with the statement

 14 in the preamble to the proposed rule that this is

 15 a balanced approach. In my view, going down this

 16 path amounts to an abdication of our

 17 responsibility as a market regulator to provide

 18 clear rules of the road. We've given no

 19 legitimate reason for taking this approach, and I

 20 do not believe that Congress intended for us to

 21 allow a single DCM or SEF to make determinations

 22 that will have profound market wide implications.
 18

 1 Revisions to the list of permitted

 2 investments under rule 1.25 is an issue that the

 3 Commission has been grappling with for quite some

 4 time beginning with a survey conducted in 2007 to

 5 gather information on how futures commission

 6 merchants and derivatives clearing organizations

 7 were investing customer funds.

 8 In May of 2009, the Commission solicited

 9 comments through advanced notice of proposed

 10 rulemaking, and we issued a proposed rule in

 11 October of 2010. In July of this year, staff

 12 circulated to the Commission a proposed final

 13 rule. I supported most of the provisions

 14 contained in the July version of the rule, but

 15 believed some of the revisions need further

 16 vetting, primarily with regard to the issues

 17 surrounding the ban on in-house transactions.

 18 The preamble to the version -- to that

 19 version of the rule - I'm sorry, to the version of

 20 the rule we are voting on today clarifies that the

 21 scope of the ban and distinguishes in-house

 22 transactions from in-house sales of permitted
 19

 1 investments, and in-house exchanges of collateral

 2 to convert customer funds into collateral that

 3 will be accepted by a DCO or foreign board of

 4 trade as margin.

 5 I support the ban on in-house

 6 transactions with this clarification, and also

 7 support the harmonization of Rule 30.7 with the

 8 investment limitations of Rule 1.25, and the

 9 concentration limits on various investments to

 10 promote portfolio diversification.

 11 I have lingering questions, however,

 12 regarding the investment and foreign sovereign

 13 debt. A number of different recommendations on

 14 this issue have been presented to the Commission

 15 in recent days. The version before us today bans

 16 investment in foreign sovereign debt, but invites

 17 FCMs and DCOs that seek to invest customer funds

 18 in foreign sovereign debt to petition the

 19 Commission for exemptive relief pursuant to

 20 Section 4(c) of the Act.

 21 I believe that investment in foreign

 22 sovereign debt, to the extent that an FCM or DCO
 20

 1 has balances, in segregated accounts denominated

 2 in that country's currency, should be permitted to

 3 hedge foreign currency fluctuation risks, so long

 4 as the foreign sovereign debt qualifies under the

 5 overarching objectives of preserving principal and

 6 maintaining liquidity. I question the process of

 7 including -- that is included in the rule, and I

 8 have a number of questions on how this will be

 9 handled under 4(c).

 10 I would like to close with an

 11 observation on the dearth of information we have

 12 regarding how FCMs and DCOs are actually investing

 13 customer funds.

 14 The cost benefit analysis states that at

 15 FCMs currently hold over $170 billion in

 16 segregated customer funds, and $40 billion in Rule

 17 30.7 funds. Throughout the cost benefit analysis,

 18 we acknowledged that the new restrictions on

 19 investment may cause some forced sales or

 20 administrative costs to convert unacceptable

 21 investments into permitted investments. But we

 22 have no way of calculating these costs because we
 21

 1 are not in a position to know the composition of

 2 customer fund portfolios. We should know.

 3 The last time the Commission attempted

 4 to collect this information was in 2007. As the

 5 last four years have demonstrated, we are living

 6 in volatile times. Financial instruments that are

 7 safe today can quickly devolve into risky

 8 propositions. The Commission should make a

 9 concerted effort, through either a reporting

 10 regime or regular surveys, to collect information

 11 on the investment of customer funds on at least a

 12 yearly basis. We should also think about ways to

 13 regularly review and update the list of permitted

 14 investments under Rule 1.25.

 15 Thank you, and I look forward to the

 16 questions for the teams.

 17 CHAIRMAN GENSLER: Thank you,

 18 Commissioner Sommers. Commissioner Chilton.

 19 COMMISSIONER CHILTON: Thanks, Mr.

 20 Chairman. I also want to welcome Commissioner

 21 Wetjen, who I'm very impressed with so far. Mark,

 22 you've been helpful to me and others already. And
 22

 1 I also want to thank Commissioner Summers for

 2 taking on some added responsibilities lately.

 3 It's been helpful not just to me and the other

 4 Commissioners, but I think helpful to the

 5 contrary, although everybody may not realize it.

 6 So, thank you for being so tireless and working

 7 hard on those other issues, Jill.

 8 We get e-mails all the time from folks

 9 and we get phone calls, and I can tell you that

 10 lately they haven't been so pleasant. And people

 11 are concerned in general about, you know, customer

 12 money with regard to one of the cases we're

 13 involved in. People are concerned that we don't

 14 quite get it, that the regulatory world hasn't

 15 necessarily shifted enough yet after the passage

 16 of Dodd-Frank. It's all these important rules

 17 that have not yet been put in place.

 18 And, quite frankly, a lot of them just

 19 think there's a big disconnect. There's a

 20 disconnect between the average folks out there and

 21 what goes on on Wall Street and what goes on in

 22 Washington. And, you know, I think you see it
 23

 1 down at McPherson Square and other places, that

 2 they just don't think we get it. There's a

 3 disconnect.

 4 And sometimes I think they're right,

 5 that we don't get it all the time. Other times

 6 it's just a matter of explaining what we're doing,

 7 and ensure them that we're from the government,

 8 and we're not part of the problem.

 9 So, this is an effort to continue the

 10 good work that we do, and we'll just have to do

 11 the best we can to explain to people what our job

 12 is, what our responsibilities are.

 13 And the first responsibility is to

 14 protect customer funds. Priority for us. It's

 15 got to be up there, that we need to ensure that

 16 those funds are sacrosanct. And today were going

 17 to take one action, I hope, with the 1.25 reg

 18 banning internal repos. But there are also other

 19 things that we need to do.

 20 One, I've talked about this a lot in the

 21 last month, we need to do regular and robust deep

 22 data dives, and that is going beyond just the
 24

 1 sheet that says, this is where the segregated

 2 funds are, and actually looking to the bank

 3 accounts to make sure the money is there. And not

 4 just at COB, but it's there intra-day, that it's

 5 there all the time.

 6 The second thing we need to do is ensure

 7 that the penalties that we impose, which are

 8 defined by statute, and Commissioner Wetjen and I

 9 talked about this ad nausea, that the penalties

 10 may not be the appropriate deterrent to using

 11 customer funds and a potentially nefarious way.

 12 And I think we'll have a little bit of

 13 conversation on that when we get to 1.25.

 14 But, look, by law, it's of hundred and

 15 $40,000 penalty if somebody, and I'm not speaking

 16 about any specific case. If somebody can transfer

 17 hundreds of millions of dollars overnight and

 18 potentially make some money off that, is a

 19 $140,000 penalty a deterrent? Of course not, but

 20 we'll talk about that.

 21 And the last thing is something that's

 22 out of our purview, but it's within our interests,
 25

 1 and that is something that exists in the banking

 2 world and something that exists in the securities

 3 world. And that's an insurance fund for futures

 4 customers, sort of a belt and suspenders approach.

 5 If we don't locate all of the funds from the given

 6 circumstance where a firm may go into insolvency

 7 were where they may be in bankruptcy. There could

 8 be a gap between what customers put in and what

 9 they will receive. But if there's an insurance

 10 fund, that is something that could make them

 11 whole, make the customers whole.

 12 I hope Congress will consider it.

 13 Again, it exists in the securities world. It

 14 exists in the banking world. And I think it's

 15 time that we have one in the futures world. With

 16 that belt and suspenders approach, if our

 17 oversight, surveillance, or enforcement arm

 18 breaks, if that belt breaks, people will lose

 19 their pants.

 20 Thank you.

 21 CHAIRMAN GENSLER: Commissioner O'Malia,

 22 you still go after Commissioner Chilton. That
 26

 1 didn't change.

 2 COMMISSIONER O'MALIA: No.

 3 CHAIRMAN GENSLER: Thank you,

 4 Commissioner Chilton.

 5 COMMISSIONER O'MALIA: And it is a tough

 6 act to follow. Commissioner Chilton does an

 7 excellent job every speech he gives. And I'd also

 8 like to welcome Commissioner Wetjen as well. I'm

 9 your buffer, so it's a lot easier to follow me

 10 than it is Commissioner Chilton.

 11 I, too, am impressed with Commissioner

 12 Wetjen's rapid adoption of these issues and

 13 uptake. It's an extraordinary time with a massive

 14 amount of work, and he's done a very careful job

 15 and thorough job. And I've been very impressed

 16 with all of the work that he's committed thus far.

 17 And keep that seat warm over there. It's an

 18 absolute place of power, so enjoy it.

 19 Today we have before us two final rules

 20 and a further notice of proposed rulemaking. I

 21 greatly appreciate the cooperation of the staff in

 22 accommodating many of the requests I have made
 27

 1 four changes in these rules to make them a better

 2 product.

 3 It is that time of year when I start to

 4 fill out my Christmas list, and this year I've

 5 come with some new requests, and I'm going to ask

 6 for some old things. But the Chairman also

 7 preempted two of the items with certain

 8 roundtables, so it's Christmas come early.

 9 Last Christmas, my first wish for the

 10 Commission was to take the opportunity to organize

 11 the rulemaking process and a manner that would

 12 build a derivative regulation from a strong

 13 foundation as opposed to the regulatory jumble of

 14 our earliest attempts to put out the 50 plus

 15 Dodd-Frank rules. I'm pleased that Congress has

 16 taken notice. Dan retained language in the

 17 Commission's annual appropriation bill directing

 18 the Commission to develop and publish a 60-day

 19 comment period, a schedule for implementation, and

 20 sequencing of all rules and regulations under the

 21 Dodd Frank Act, specifically Title VII. Not only

 22 will that help U.S. markets, but a desire for such
 28

 1 a schedule was a common refrain from fellow

 2 regulators in Asia, which I just returned from,

 3 who are attempting to coordinate their rules with

 4 both U.S. and European reform efforts.

 5 My second wish is that the Commission

 6 continue its early efforts to organize itself

 7 around technology. We need to upgrade our 20th

 8 century surveillance tools to oversee a 21st

 9 century electronic marketplace. Congress has

 10 provided that's a significant increasing the

 11 funding for technology. It would be a missed

 12 opportunity if the Commission does not capitalize

 13 on this targeted investment to focus on developing

 14 a strategic plan for technology.

 15 My next Christmas request was for the

 16 Commission to schedule roundtables and to provide

 17 market participants an opportunity to fully vet

 18 their concerns with staff before they're in a sea

 19 of uncertainty between effective dates and

 20 implementation dates. Based on the Chairman's

 21 statements, Christmas has come early on two of the

 22 three roundtables I am seeking, and I appreciate
 29

 1 the Chairman's willingness to hold these two

 2 meetings on mandatory clearing and trading, which

 3 are, I believe, very closely linked. And both of

 4 these rules are sufficiently vague, as

 5 Commissioner Sommers pointed out, about the

 6 definitions and what the determining factors are.

 7 As many will recall, I sent out a letter

 8 on the mandatory clearing requirement, and we

 9 received a number of very good, thorough responses

 10 back, which are on my website, and I think will

 11 help inform the staff roundtables. So, I greatly

 12 appreciate your willingness to do that, and I know

 13 there's strong support among the Commission.

 14 But there's one more round table, that

 15 I'd like to reiterate my request for, and that's

 16 on clearing and documentation. Since the

 17 Commission has approved a proposal to ban the

 18 FIA-ISDA Cleared Derivatives Execution Agreement,

 19 particularly the tri-party agreement, market

 20 participants from all sectors have continued to

 21 discuss the best technological solutions for

 22 executing swap transactions.
 30

 1 I support the development of a

 2 technological solution that will minimize the

 3 chance that an intermediary or DCO would reject a

 4 swap for credit reasons. However, market

 5 participants do differ on how fast the swap

 6 markets can evolve to implement this new

 7 technology.

 8 They also differ on what -- on where the

 9 technology should be most effectively deployed.

 10 Namely, the debate seems to be deploying it at

 11 either the intermediary, the execution platform,

 12 at the DCO, or a new concept that was new -- that

 13 I was recently informed of, a centralized credit

 14 hub. Thus far, the Commission's proposal will ban

 15 the tri-party annex, but it does nothing to

 16 provide the critical technology solution that the

 17 swaps market desperately needs. Our next step

 18 should be to schedule a roundtable and discuss the

 19 most effective solutions available.

 20 A bunch of my speech here, which is

 21 probably a great relief to many.

 22 Getting back to today's final rules, I'd
 31

 1 like to thank Bella Rosenberg, Duane Anderson, and

 2 Jon DeBord, and their teams for their work on

 3 these rule makings.

 4 On the foreign board of trade, I intend

 5 to support the final rule on registration of

 6 foreign boards of trade. The rule sets forth a

 7 new requirement that links the approval of an FBOT

 8 with a clearing organization.

 9 I have two primary concerns with this

 10 rule, however. First, does this rule provide

 11 adequate clarity regarding the new requirement

 12 that links FBOT approval to a Commission

 13 determination regarding its clearing organization?

 14 This is a new standard which is tied to my second

 15 concern. The rule relies on international

 16 principles and standards that are currently, but

 17 may not be in the future, comparable to our own

 18 standards.

 19 I have just returned from a trip to

 20 Asia, where I met international regulators.

 21 Uniformly, the first question that they asked me

 22 was, what standard will the U.S. apply permitting
 32

 1 mutual recognition for clearing -- for regulation

 2 of clearing organizations? Foreign regulators are

 3 concerned that the U.S. would demand that U.S.

 4 clearing organizations and their regulators

 5 comport with standards that are not strictly --

 6 that are not necessarily under principles set

 7 forth in the Bank of International Standards

 8 Committee on Payment and Settlement Systems and

 9 the Technical Committee under IOSCO. And I'm

 10 looking forward to hearing some clarification from

 11 the staff on this point.

 12 With regard to the investment of

 13 customer funds rulemaking, I intend to support the

 14 final rule on investment of customer funds. As

 15 recent events have highlighted, the protection and

 16 preservation of customer funds is fundamental to

 17 our markets. By limiting investments of customer

 18 funds to a subset of instruments that currently

 19 have minimal risk, this final rule is a step

 20 towards enhancing customer protection.

 21 However, as I have emphasized in a

 22 statement to MF Global, the Commission must be --
 33

 1 must not be complacent. It must take additional

 2 action to bolster public confidence and our

 3 customer protection regime, including enhancing

 4 transparency and risks that our intermediaries

 5 assume.

 6 I hope that the Commission can develop a

 7 notice of proposed rulemaking in the new future to

 8 improve transparency into intermediaries and on

 9 behalf of their customers.

 10 I am pleased that this rule before us

 11 today, however, permits greater utilization of

 12 money market funds, which would enable

 13 intermediaries and DCOs to more easily diversify

 14 investment of customer funds. Further, I am

 15 pleased the rule restricts investments into failed

 16 government sponsored enterprises that remain

 17 eligible entirely as a result of federal backstop

 18 protection.

 19 My support of the final rule on

 20 investment protection is not without reservation.

 21 With regard to sovereign debt limitations, I am

 22 reminded of my recent discussions in Asia with
 34

 1 regulators and market participants. Both

 2 participants in Singapore and Australia had

 3 exposure to MF global, and are fighting to secure

 4 a lost customer funds, like U.S. market

 5 participants. The fact highlighted the

 6 interconnection of our economies and markets.

 7 I recognize that foreign sovereign debt

 8 can no longer be considered a riskless investment.

 9 But the truth of the matter is we are all the

 10 global economy together. The coordinated efforts

 11 by the Federal Reserve and five other central

 12 banks last week evidenced this truth.

 13 I'm pleased that the final rule states

 14 that the market participants may petition for an

 15 exemption, that the Commission would consider such

 16 an exemption on a case-by-case basis.

 17 While the rule provides no standards for

 18 acceptable holdings, even those at hedging

 19 currency exposure operational risks, I hope that

 20 the Commission will act in a timely manner to

 21 clarify the acceptable practices and debt holdings

 22 to minimize disruption to the market.
 35

 1 Finally, I intend to support the

 2 proposed rulemaking, making swaps available to

 3 trade. My main purpose is to focus the public

 4 commentary on the mandatory trading requirement.

 5 Pursuant to this proposed rulemaking, an execution

 6 platform would determine that a swap is, "made

 7 available to trade" after considering a minimum of

 8 eight liquidity factors. The execution platform

 9 would then notify the Commission of its

 10 determination, either by requesting a rule,

 11 approval or by certifying the rule.

 12 My concern with this proposal is that

 13 the Commission is fostering an inherent conflict

 14 of interest that could negatively impact the swaps

 15 market. The proposals permitting those who have

 16 the greatest financial incentive to trade all --

 17 to force all trading onto a platform to determine

 18 which swaps should be executed. Fearing this

 19 exact situation, many on the buy side have already

 20 urged the Commission to play a more active role in

 21 the mandatory clearing requirement. For example,

 22 the American Benefits Council stated the
 36

 1 Commission, and not platforms with pecuniary

 2 interests, should determine whether the swaps have

 3 been made available for trading. They further

 4 stated that the Commission should base

 5 determination on empirical data of swap liquidity.

 6 I recognize this issue is not easy,

 7 particularly due to the linkage between mandatory

 8 trading and the mandatory clearing determination,

 9 unless, of course, the Commission applies the

 10 lowest standard of simply listing a product as

 11 sufficient. As mentioned above, I believe the

 12 Commission should engage the market through a

 13 roundtable, which the Chairman has agreed, and I'm

 14 thankful.

 15 The Dodd Frank act has placed the

 16 Commission in a position to preside over a

 17 significant portion of the sweeping financial

 18 regulatory reforms. Although we often attach a

 19 numerical label to mark our progress in terms of

 20 proposed and final rules issued, pages published,

 21 and the comments received, it all comes down to

 22 making sure that we ultimately create a regulatory
 37

 1 structure that will promote the successful

 2 transformation of the over-the-counter markets to

 3 decrease systemic risk and increase stability. We

 4 must make sure we get it done right, not just on

 5 quickly.

 6 I hope the Commission will focus the

 7 rulemaking schedule as requested by Congress, and

 8 conduct the roundtables, so we will benefit from

 9 the market input.

 10 I think the staff again for their hard

 11 work and therefore the lists in developing these

 12 rules. Thank you.

 13 CHAIRMAN GENSLER: Thank you,

 14 Commissioner O'Malia. And before I turn it over,

 15 I just want to make sure Macie's going to do well

 16 at Christmas time as well. I look out for you,

 17 you know, because she and I are kind of aligned on

 18 this stuff now.

 19 COMMISSIONER O'MALIA: I did ask about

 20 her Christmas list. It is not yet ready, so we

 21 will have to see what she comes up with.

 22 CHAIRMAN GENSLER: Okay. I mean, if
 38

 1 Macie needs any help from me, you know --

 2 COMMISSIONER O'MALIA: Macie does not

 3 need any help from anybody.

 4 (Laughter)

 5 COMMISSIONER O'MALIA: Macie is quite

 6 sufficient to get what she wants when she wants

 7 it.

 8 CHAIRMAN GENSLER: All right, good. I'm

 9 glad about that. Macie is one of his young ones.

 10 Thank you, Commissioner O'Malia.

 11 Commissioner Wetjen, we welcome you to

 12 the dais. It is wonderful to have you here and

 13 all the input that you've given already in these

 14 six weeks.

 15 COMMISSIONER WETJEN: Thank you,

 16 Chairman Gensler. And thanks to the rest of the

 17 Commissioners on the dais for their kind comments

 18 this morning. I really appreciate that.

 19 Before I comment on the rules before the

 20 Commission today, I want to thank Chairman Gensler

 21 and Commissioners Chilton, Sommers, and O'Malia

 22 for their graciousness during my first week here
 39

 1 at the Commission. You've been both welcoming and

 2 extremely helpful during my transition here, and I

 3 have sincerely enjoyed working with each of you,

 4 especially on the rules we are considering today.

 5 I also want to thank the professional

 6 staff for their assistance. I look forward to

 7 knowing all of you better as we work together to

 8 meet the important mission of this Agency.

 9 I also have been meeting with members of

 10 the public almost nonstop since I arrived. I want

 11 to express my special appreciation to those who

 12 have reached out to offer suggestions and comments

 13 to these rules. Public input is an indispensable

 14 part of the Commission's rulemaking process, as

 15 well as the best safeguard against unintended

 16 consequences. So, your involvement was critical

 17 to ensuring that we have the best version of the

 18 rules before us.

 19 I want to stress my belief that the

 20 Commission should remain open to course correction

 21 as the facts change. The Commissioners and staff

 22 have been active in responding to questions and
 40

 1 issues raised by my office and others. I believe

 2 that the rules under consideration today are

 3 better for it, and I believe we must remain open

 4 and nimble during the implementation phase.

 5 I will be supporting all three rules

 6 today, though I intend to pay especially close

 7 attention to the Commission's final rule out

 8 concerning the protection of customer funds.

 9 Today we are considering changes to

 10 Regulation 1.25, and it's being done against the

 11 backdrop of recent developments in the FCM

 12 community. It's important to know that the

 13 current investigation underway here at the

 14 Commission will yield additional facts to explain

 15 what led to the disappearance of customer funds.

 16 But the Commission cannot ignore the widely known

 17 fact that thousands of futures customers do not

 18 know where their money is. Futures customers

 19 generally, and indeed the public, are rightly

 20 demanding that the Commission take immediate

 21 steps. These steps are intended to reassure the

 22 public that we are doing everything we can to
 41

 1 safeguard customer money.

 2 Although we cannot be sure the present

 3 rule will address every issue ultimately raised by

 4 the recent FCM failure, it is an important step

 5 toward reemphasizing the Commission's commitment

 6 to ensuring that customer money is invested in a

 7 manner that preserves principle and maintains

 8 liquidity. I believe this rule is necessary to

 9 restore confidence that this is the case.

 10 It is incumbent upon the Commission,

 11 however, to revisit Rule 1.25 and/or other rules

 12 as markets evolve, circumstances change, and new

 13 information is brought to light. An investment

 14 once viewed as safe may not be viewed as such.

 15 Only a few months later, and vice versa. What is

 16 deemed a prudent investment cannot be a static

 17 determination. Toward this end, we remind market

 18 participants in this rule that the Commission can

 19 and should implement further changes to our rules

 20 whenever it is presented with an informed basis

 21 for doing so.

 22 There are few issues important to
 42

 1 protecting customer funds that the Commission was

 2 unable to address in this role, but perhaps should

 3 address in the future in order to restore

 4 confidence in the futures markets.

 5 First, I agree with Commissioner Chilton

 6 that misconduct with respect to seg funds must be

 7 addressed immediately and with all appropriate

 8 sanctions. The Commission, therefore, should

 9 consider whether its current approach to penalties

 10 in this area is a sufficient deterrent to misusing

 11 or misplacing customer funds.

 12 Second, the Commission should review how

 13 examinations are conducted, and evaluate our

 14 compliance regime to ensure that customer funds

 15 and segregated accounts are fully protected. I

 16 support the Chairman's request for a review of the

 17 Commission's regulations in this regard.

 18 Finally, I also believe that staff

 19 should begin thinking about an appropriate FCM

 20 disclosure regime that would disclose to customers

 21 certain risks and investment information

 22 concerning the firms that take custody of margin.
 43

 1 Customers have a right to know how FCMs and DCOs

 2 are investing segregated funds, and they are doing

 3 so prudently -- excuse me, and that they are doing

 4 so prudently. I hope the Commission can take this

 5 matter up in the near future.

 6 Today, I also support the staff's

 7 recommendations with respect to the registration

 8 of foreign boards of trade, offering direct market

 9 access to participants located in the United

 10 States. Congress granted the Commission new

 11 authority to register such foreign exchanges in

 12 the Dodd-Frank act, and I believe that the final

 13 regulations appropriately implement this new

 14 authority.

 15 The regulations provide a standardized

 16 and transparent process that will benefit the

 17 public. They also provide a former firm or legal

 18 foundation than the current no action regime

 19 governing access to FBOT trading platforms by U.S.

 20 participants.

 21 In my view, the final regulations better

 22 ensure the fair treatment of applicants through
 44

 1 formal and published processes and criteria. They

 2 also align our registration regime with a number

 3 of countries that permit U.S. exchanges to provide

 4 direct market access internationally.

 5 Finally, I am supporting the

 6 Commission's re-notice of an issue from the SEF

 7 and DCM proposals in order to seek further comment

 8 on the meaning of the phrase "made available to

 9 trade," or MATT. There has been some confusion

 10 concerning the Commission's sub proposal and its

 11 provision relating to Matt, assessments and

 12 reports. I support the staff's recommendation to

 13 reconsider and clarify our initial approach, and

 14 to propose a new MATT determination process with

 15 greater Commission involvement. Again, I think it

 16 is important that we permit course correction as

 17 new facts come to the Commission's attention, and

 18 I am confident that the proposal will elicit

 19 useful comments that will inform our ultimate

 20 approach.

 21 I look forward to reading the comment

 22 letters and reviewing our options for meeting our
 45

 1 contract congressional mandate, while ensuring

 2 that U.S. swap markets remain liquid and

 3 efficient. And I also wanted to add my support

 4 for Commissioner O'Malia's request for roundtables

 5 on both this issue and the mandatory clearing

 6 requirement. That's something he and I discussed

 7 this week.

 8 Again, I want to thank the staff for all

 9 their hard work on each of these rulemakings. I

 10 also look forward to the Commission's future

 11 efforts to implement the Dodd-Frank Act in the

 12 weeks and months ahead. Thank you.

 13 CHAIRMAN GENSLER: Thank you,

 14 Commissioner Wetjen. And I think roundtables --

 15 I'm going to just make two comments before I turn

 16 it over. I think roundtables are very helpful.

 17 Of course, you have to be respectful of staff just

 18 getting the wealth of information prepared before

 19 a roundtable, and then to be -- you know, make

 20 them worthwhile while they're still doing the

 21 ongoing business of overseeing the futures market,

 22 the business of completing our rules. And so,
 46

 1 it's just a matter of -- so on the third and

 2 possibly fourth, fifth, and sixth roundtable, that

 3 people have ideas for, it's mostly just how staff

 4 reacts and whether they can -- I'm supportive of

 5 as many roundtables as can work and be balanced

 6 into their schedule.

 7 I also do note, though, two

 8 Commissioners just maybe didn't put it on the

 9 list, but I want to thank Commissioner Wetjen and

 10 Commissioner O'Malia because I share your view

 11 that I think that one of the areas to enhance the

 12 confidence in the seg system is for customers to

 13 know where their money is and what it's invested

 14 in. And I know that Commissioner O'Malia and

 15 Commissioner Wetjen put that in. And that's in

 16 one of the lists that I've asked staff to really

 17 think about what recommendations we could have

 18 that would probably require rule changes, but to

 19 really to be open to get the staff to bring

 20 forward recommendations in that area as well as

 21 the examination and audit area and custody. And

 22 any areas that any of you think appropriate,
 47

 1 please weigh in directly with staff.

 2 With that, I think we're going to turn

 3 over to four people who have been here before.

 4 The staff will make presentations concerning their

 5 recommendations on the final rules, as well as the

 6 proposed rule. After each presentation, the floor

 7 will be open for questions, and following the

 8 discussions, the Commission will take votes on the

 9 recommendations presented.

 10 So, at this time, I'd like to welcome

 11 Jon DeBord, Phyllis Dietz, Ananda Radhakrishnan of

 12 the Division of Clearing and Risk, and Ward

 13 Griffin of the Office of the General Counsel.

 14 Nice bow tie today, Ward. There's a long history

 15 of Ward and his bow ties.

 16 SPEAKER: Mr. Chairman, I second that.

 17 (Laughter)

 18 CHAIRMAN GENSLER: All right. We could

 19 have a vote now on your bow tie. To present their

 20 recommendations on the final rule and investment

 21 of customer funds. I turn it over.

 22 MR. RADHAKRISHNAN: Thank you. Before
 48

 1 we turn it over to the presentation on Regulation

 2 1.25, I would like to highlight a couple of

 3 points, which I know the Commission is aware, but

 4 members of the public may not be aware.

 5 The first point is that the statute

 6 limits the investment of customer funds. I'm

 7 going to read from the statute. Section

 8 4(d)(A)(2) says that such money, meaning customer

 9 money, "may be invested in obligations of the

 10 United States in general obligations of any state

 11 or of any political subdivision thereof, and

 12 obligations fully guaranteed as to principle and

 13 interest by the United States." So, it's

 14 essentially U.S. treasuries, what we call

 15 municipal securities, and any other obligations

 16 fully guaranteed as to principle and interest by

 17 the United States.

 18 And Congress repeated this provision in

 19 the cleared swaps provision when Congress passed

 20 Dodd-Frank, and, in fact, Congress did not change

 21 this when Congress had an opportunity to do so

 22 when it was considering the Dodd-Frank Act.
 49

 1 So, Regulation 1.25, to the extent that

 2 it permits investments in anything else, is

 3 allowed because the Commission exercises or

 4 exercised its exemptive power under Section 4(c)

 5 of the Commodity Exchange Act. And as

 6 Commissioner Wetjen pointed out, the overarching

 7 principle or thought is that the FCM and the DCO

 8 must make such investments to preserve principle

 9 and maintain the liquidity of the investments.

 10 So, I think it's important to bear this in mind,

 11 certainly for the members of the public who may

 12 not be aware of the provisions of the Act, and the

 13 interaction between the Act and Regulation 1.25.

 14 So, I'm going turn it now over to the

 15 team, Jon DeBord, who has been the attorney who

 16 has been working on this substantially, Phyllis

 17 Dietz, who is the resident expert on Regulation

 18 1.25, and Ward Griffin from OGC who's been very

 19 helpful in, you know, this effort. Thank you.

 20 MR. DEBORD: Thank you. Good morning.

 21 I'm Jon DeBord, Special Counsel for the Division

 22 of Clearing and Risk. I'm pleased to present for
 50

 1 your consideration our recommendation for final

 2 regulations regarding the investment of customer

 3 funds in secured amounts.

 4 Under 4(d) of the Commodity Exchange

 5 Act, customers' segregated funds may be invested

 6 in obligations of the United States and

 7 obligations fully guaranteed as the principle and

 8 interest by the United States, and general

 9 obligations in any state or any political

 10 subdivision thereof.

 11 Starting in 2000, and again in 2004 and

 12 2005, pursuant to authority under Section 4(c) of

 13 the Act, the Commission substantially expanded the

 14 list of permitted investments to allow investment

 15 in GSEs, CDs, commercial paper, corporate notes or

 16 bonds, general obligations of a sovereign nation,

 17 interest in money market mutual funds, and

 18 in-house transactions. Other rules dealt with

 19 repurchase agreements, standards for investing in

 20 instruments with embedded derivatives, and

 21 requirements for adjustable rate securities.

 22 In connection with that expansion, the
 51

 1 Commission included several provisions intended to

 2 control exposure to credit, liquidity, and market

 3 risks, for example, requirements that the

 4 investment satisfy specified rating standards and

 5 concentration limits, and be readily marketable

 6 and subject to prompt liquidation. The Commission

 7 has been and continues to be mindful that the

 8 customer's segregated funds must be invested in a

 9 manner that minimizes their exposure to credit

 10 liquidity and market risks, both to preserve their

 11 ability to customers and DCOs and to enable

 12 investments to be quickly converted to cash at a

 13 predictable value in order to avoid systemic risk.

 14 Toward these ends, Regulation 1.25

 15 establishes a general prudential standard by

 16 requiring that all permitted investments be

 17 consistent with the objectives of preserving

 18 principle and maintaining liquidity.

 19 In October of 2010, the Commission

 20 approved a notice of proposed rulemaking proposing

 21 that the Commission amend its regulations

 22 regarding the investment of customer segregated
 52

 1 funds. Certain amendments reflect the limitation

 2 of new statutory provisions enacted under Title IX

 3 of the Dodd-Frank Wall Street Reform and Consumer

 4 Protection Act. Other amendments addressed

 5 certain changes to the list of permitted

 6 investments, notably the elimination of foreign

 7 sovereign debt and in-house transactions, a

 8 clarification of the liquidity requirement, the

 9 removal of ratings requirements, an expansion of

 10 concentration limits, including asset-based,

 11 issuer-based, and counterparty concentration

 12 restrictions.

 13 They also address revisions to the

 14 acknowledgment letter requirement for investments

 15 in money market mutual funds, revisions to the

 16 list of exceptions to the next day redemption

 17 requirement for money mutual funds, the

 18 elimination of repurchase and reverse repurchase

 19 agreements with affiliates, the application of

 20 1.25 investment limitations to 30.7 funds, the

 21 removal of ratings requirements for depositories

 22 of 30.7 funds, the elimination of the option of
 53

 1 designated depositories for 30.7 funds, and

 2 certain technical changes.

 3 Today, DCR recommends that the

 4 Commission adopt the proposals in the MPRM as

 5 proposed, except for the following areas:

 6 In the fall of 2010, the Commission had

 7 proposed to limit the GSE asset class to only U.S.

 8 agency obligations that are fully guaranteed as

 9 the principle and interest by the United States.

 10 Today, DCR recommends that the Commission retain

 11 the current permissibility standards for GSEs with

 12 a caveat that investments in Fannie Mae and

 13 Freddie Mac remain permissible only so long as

 14 these entities are operating under the

 15 conservatorship or receivership of the FHFA.

 16 In the fall, for money market mutual

 17 funds, the Commission had proposed a 10 percent

 18 asset-based concentration limit and a two percent

 19 family of funds issuer-based concentration limit.

 20 Today, we recommend that FCMs and DCOs be allowed

 21 to invest all segregated funds, subject to other

 22 concentration limits, in money market mutual funds
 54

 1 with at least $1 billion in assets and with a

 2 management company of at least $25 billion in

 3 money fund assets under management. FCMs and DCOs

 4 will be allowed to invest up to 10 percent of

 5 segregated funds in money funds with less than $1

 6 billion in assets and/or a management company with

 7 less than $25 billion in money fund assets under

 8 management.

 9 Non-treasury only funds would be subject

 10 to a 50 percent asset-based concentration limit,

 11 and non-treasury only funds would also be subject

 12 to a 25 percent family of funds issuer-based

 13 limitation, as well as a 10 percent individual

 14 fund issuer-based limitation.

 15 Finally, in the fall, we had proposed a

 16 five percent counter party concentration limit for

 17 repurchase agreements. Today, DCR recommends

 18 increasing that to a 25 percent counterparty

 19 concentration limit.

 20 That concludes the summary of our

 21 recommendation. I'd be happy to answer any

 22 questions. Thank you.
 55

 1 CHAIRMAN GENSLER: Thank you, Jon and

 2 Ananda. The Chair will now entertain a motion to

 3 accept the staff recommendations concerning the

 4 final rule on investment of customer funds.

 5 COMMISSIONER SOMMERS: So moved.

 6 COMMISSIONER CHILTON: Second.

 7 CHAIRMAN GENSLER: Thank you. I'll now

 8 open the floor to allow Commissioners to ask

 9 questions.

 10 I support this rule for the reasons I

 11 stated earlier, and I'll have a little statement

 12 to go in the Federal Register. So, I don't really

 13 have questions on this, but, Jon, I just wanted to

 14 clarify -- maybe it's for the public listening. A

 15 lot of people have called this Regulation 1.25, it

 16 also covers something called Regulation 30.7, is

 17 that correct?

 18 MR. DEBORD: That's correct.

 19 CHAIRMAN GENSLER: And the reason I

 20 think that's important is, but let me clarify,

 21 30.7 is about -- well, in your own words, what

 22 customer funds does that cover?
 56

 1 MR. RADHAKRISHNAN: 30.7 is an account

 2 class. If I have an FCM, you are my customer, and

 3 you tell me that you want to invest in foreign

 4 futures, I have to put that money in the 30.7

 5 account. I cannot put it in the customer

 6 segregated account. So, it's money supporting

 7 foreign futures.

 8 CHAIRMAN GENSLER: So, importantly, this

 9 covers both monies customers put up for domestic

 10 futures.

 11 MR. RADHAKRISHNAN: Correct.

 12 CHAIRMAN GENSLER: And that's what's

 13 called 1.25.

 14 MR. RADHAKRISHNAN: No, that's -- 1.25

 15 applies to all three account types. One is the

 16 cleared futures account, cleared futures and

 17 cleared options and futures. The second is a

 18 cleared swaps account, which Congress created last

 19 year. And the third is the foreign futures

 20 account. So, 1.25 applies to the investment of

 21 customer funds by an FCM or a DCO in all three

 22 account types.
 57

 1 CHAIRMAN GENSLER: And then, Rule 30.7

 2 would also be amended to be in conformity.

 3 MR. RADHAKRISHNAN: Actually we're not

 4 amending 30.7. We're just saying that if you are

 5 an FCM and you have customer money that supports

 6 positions in foreign futures, you must follow

 7 1.25.

 8 CHAIRMAN GENSLER: Oh, I see.

 9 Technically, it's done in 1.25.

 10 MR. RADHAKRISHNAN: Correct.

 11 CHAIRMAN GENSLER: But it covers --

 12 MR. RADHAKRISHNAN: Correct.

 13 CHAIRMAN GENSLER: -- the 30.7 funds.

 14 MR. RADHAKRISHNAN: Correct.

 15 CHAIRMAN GENSLER: Is that -- or maybe

 16 your colleagues have something.

 17 MR. RADHAKRISHNAN: Do you know what

 18 we're doing?

 19 MS. DIETZ: Yeah. I believe there is a

 20 modification to the language of 30.7, yeah. It's

 21 at the very end.

 22 MR. RADHAKRISHNAN: I'm sorry. It says
 58

 1 you must -- I beg your pardon. It's the other way

 2 around. It says you must invest it in accordance

 3 with 1.25.

 4 CHAIRMAN GENSLER: Right. So, there is

 5 a --

 6 MR. RADHAKRISHNAN: It's a cross

 7 reference.

 8 CHAIRMAN GENSLER: There's a cross

 9 reference, but the important thing for the public

 10 is this covers not only your funds that are put up

 11 for domestic futures and swaps, but also if you

 12 put it up through a futures commission merchant

 13 regulated and registered with us to send it into

 14 what's called a 30.7 account.

 15 MR. RADHAKRISHNAN: Correct.

 16 CHAIRMAN GENSLER: All right. Thank

 17 you. Again, I support this rule. I think it's

 18 really important and critical that we have such

 19 protections, and I'm pleased that we could get to

 20 this point.

 21 Commissioner Sommers.

 22 COMMISSIONER SOMMERS: Thank you, Mr.
 59

 1 Chairman. I have a couple of questions, and the

 2 first part of my questions are with regard to the

 3 foreign sovereign debt.

 4 I support the rule before us today

 5 narrowing the scope of investment choices.

 6 However, I have a lot of questions with regard to

 7 why we would seek to eliminate investment in

 8 foreign sovereign debt in the rule, yet entertain

 9 further exemptions from FCMs or DCOs that seek

 10 that type of investment.

 11 So, I guess my first question would be

 12 how we're going to determine under 4(c) that it's

 13 within the public interest to exempt foreign

 14 sovereign debt if we felt that in the rule we

 15 should eliminate the investment.

 16 MR. RADHAKRISHNAN: I think that's a

 17 great question. I think we would ask the

 18 petitioner to explain to us why it's in the public

 19 interest. So, I can see how, you know, they may

 20 say, well, I've got a lot of balances in a

 21 particular foreign currency; therefore, I should

 22 be allowed to invest in that foreign sovereign
 60

 1 debt, in which case I think it's entirely

 2 appropriate for the staff to ask, why do you need

 3 to invest? Is it because you have to post margin

 4 in that sovereign form, in which case it's not an

 5 investment, it's a transformation of cash for

 6 collateral.

 7 But the way I would -- I look at it

 8 right now is, the burden is on the petitioner to

 9 explain to the Commission why they believe an

 10 investment in the particular sovereign debt is in

 11 the public interest.

 12 COMMISSIONER SOMMERS: I guess I would

 13 expect, because within the comment period, I guess

 14 we received 13 comment letters that commented on

 15 the investment in foreign sovereign debt and four

 16 -- I'm sorry, 12 out of the 13 of the letters

 17 suggested that we retain foreign sovereign debt as

 18 a permissible investment in some varying degree.

 19 So, I would guess that we're going to have people

 20 who will immediately petition us for this type of

 21 exemptive relief.

 22 So, as an example, the CME announced
 61

 1 today that they will accept Chinese currency as

 2 collateral for trading and all of its products

 3 beginning in January of 2012.

 4 MR. RADHAKRISHNAN: Right.

 5 COMMISSIONER SOMMERS: How will we make

 6 a determination that it's in the public interest

 7 to allow CME to invest in Chinese sovereign debt

 8 under our 4(c) analysis?

 9 MR. RADHAKRISHNAN: So, I think what the

 10 -- I haven't read the release in whole,

 11 Commissioner, but I think what they said, they

 12 will accept RMB as collateral, which means that

 13 they will expect people to give RMB to them. I'm

 14 not sure whether it's limited to a particular

 15 contract. I'd need to take a look at that. But

 16 that's not an investment. That is a DCO saying, I

 17 will accept this as collateral.

 18 The way I look upon an investment is,

 19 you've got something, like cash, and you invest it

 20 in something else to get a return, not because

 21 you've got to post that other form of collateral

 22 out with another DCO or another FCM. So, I make
 62

 1 the distinction there.

 2 So, I would, I guess, you know, if a

 3 petitioner says, we'd like to invest, say, for

 4 example, RMB cash in, and assuming the Chinese

 5 government issues bonds, although I do not know

 6 that for a fact. The question we will ask is why?

 7 Why do you want to do that? Why do you think --

 8 tell us how you think that that preserves

 9 principle and maintains liquidity. And tell us

 10 why you think that is in the public interest,

 11 because the key about Section 4(d) and 1.25 is

 12 that the term "investment." It's an investment of

 13 what the customer gives you in something else.

 14 COMMISSIONER SOMMERS: And would you

 15 envision that this process will be such that you

 16 will make individual determinations with regard to

 17 individual --

 18 MR. RADHAKRISHNAN: I think that's

 19 possible. It depends on what, you know, the FCMs

 20 and DCOs want to do. I'm not sure what -- I can

 21 anticipate getting a petition very soon. I just

 22 don't know what forms of -- which particular
 63

 1 sovereign debt people are likely to invest in.

 2 The other issue is how they demonstrate

 3 to us that a particular sovereign debt is credit

 4 worthy. As the Commissioner is aware, in our

 5 rule, we cannot make references to credit rating

 6 agencies. However, I think it's a pipe dream to

 7 assume that nobody makes a reference to credit

 8 rating agencies at all. People still do, and

 9 that's how sovereign debt is issued -- sorry,

 10 sovereign debt is rated right now.

 11 So, we'll have to see whether in our

 12 4(d) process we can consider rating agency

 13 ratings. I think the statute -- correct me if I'm

 14 wrong, Ward -- just says we cannot make reference

 15 to it in our regulation. I don't know whether it

 16 prohibits us from considering it at all.

 17 MR. GRIFFIN: That's correct. Section

 18 -- excuse me, Section 939(a) of Dodd-Frank

 19 mandated that all agencies review the regulations

 20 and remove any reference to or requirement of

 21 reliance on credit rating. So, that does, in

 22 fact, just apply to the regulations.
 64

 1 MR. RADHAKRISHNAN: So, and we'll

 2 probably ask questions about liquidity, evidence

 3 of liquidity.

 4 COMMISSIONER SOMMERS: And how often do

 5 we anticipate we would review any of these

 6 exemptions under 4(c) to know? And how will we

 7 deal with, you know, fluctuations in the risk

 8 associated with anything we're granting exemptions

 9 for?

 10 MR. RADHAKRISHNAN: I think that can be

 11 answered in one of two ways. One is it's entirely

 12 appropriate, I think, for the Commission to place

 13 restrictions on -- if the Commission were minded

 14 to grant the petition, to grant restrictions, and

 15 to provide -- for the petitioners to provide

 16 information to the -- affirmative obligation to

 17 provide information to the Commission about things

 18 like you talked about, Commissioner Sommers, the

 19 liquidity and the credit worthiness of a

 20 particular instrument.

 21 For example, staff has been observing

 22 the yield spreads between some sovereign debt
 65

 1 against the AAA index. And we've observed that

 2 the yield in Italian and Portuguese and Irish debt

 3 has improved.

 4 Now, this -- we're doing it because, you

 5 know, we've got staff looking at it every day, but

 6 I think it may be entirely appropriate for the

 7 recipient of such relief to have an obligation to

 8 tell the Commission either on a daily basis or on

 9 a weekly and monthly basis.

 10 COMMISSIONER SOMMERS: Okay. Thank you.

 11 The second issue that I had a couple of questions

 12 on -- is with regard to the money market mutual

 13 funds. And the concentration limits that we

 14 impose on other instruments are lower than the

 15 concentration limits that we have on money market

 16 mutual funds.

 17 And my question would be, if we're

 18 allowing indirect investment of up to 50 percent

 19 through money market mutual funds in certain

 20 instruments that have lower concentration limits

 21 through direct investment in those instruments, do

 22 we believe that money market mutual funds are
 66

 1 somehow safer than direct investments in those

 2 other instruments?

 3 MR. DEBORD: It's a reflection of some

 4 of the adjustments made by the SEC to 2(a)(7).

 5 Essentially, the staff felt that through money

 6 market mutual funds, it's sort of an independent

 7 way to ensure high quality securities, short

 8 material limits, and so forth. So, we're aware of

 9 that difference, but that's the reason for the

 10 treatment.

 11 COMMISSIONER SOMMERS: And then, will

 12 our rules in this area be consistent with the SEC

 13 rules?

 14 MR. DEBORD: How do you mean?

 15 COMMISSIONER SOMMERS: Well, you said

 16 that the reason why we decided to allow this is

 17 because of the SEC changes.

 18 MR. DEBORD: So, money market mutual

 19 funds are regulated by the SEC under 2(a)(7), and

 20 2(a)(7) is what dictates what the money market

 21 mutual funds are allowed to invest in, the quality

 22 of the securities, maturity limitations, and so
 67

 1 forth. And so, in our rules, we refer to 2(a)(7).

 2 COMMISSIONER SOMMERS: Because they've

 3 upgraded their rules.

 4 MR. RADHAKRISHNAN: Yes.

 5 COMMISSIONER SOMMERS: We feel more

 6 comfortable.

 7 MR. RADHAKRISHNAN: Yes. The one

 8 distinction is that I think under 2(a)(7), money

 9 market mutual funds is up to seven days to redeem,

 10 and we said if you want to participate -- if a

 11 fund wants to be 1.25 compliant, it must provide

 12 for the next liquidation?

 13 MR. DEBORD: Yes.

 14 MR. RADHAKRISHNAN: Yeah, next day

 15 liquidation.

 16 COMMISSIONER SOMMERS: Okay, thank you.

 17 MS. DIETZ: Yeah. I would just add that

 18 the next day redemption requirement is not new in

 19 this regulation.

 20 CHAIRMAN GENSLER: Thank you,

 21 Commissioner Sommers. Commissioner Chilton?

 22 COMMISSIONER CHILTON: Thanks, Mr.
 68

 1 Chairman. I support the rule, and I thank the

 2 staff for the good job you've done.

 3 I did have some questions. I think I'm

 4 going to need some other people, though, so we're

 5 going to have to do a little bit of musical

 6 chairs. If I could get David Meister, our

 7 director of the Division of Enforcement, and we

 8 already have Mr. Berkovitz, our counsel.

 9 So, I'm talking theoretically now, first

 10 of all, for my questions, and this is for Mr.

 11 Berkovitz, Mr. Meister, and Ananda, if you'd like

 12 to answer, feel free also. So, the three division

 13 directors.

 14 And so, I'm talking theoretically. And

 15 I understand at the outset that everything I'm

 16 talking about would depend upon the facts and

 17 circumstances with regard to an individual case.

 18 So, by law, there is a fine for the

 19 misuse of customer funds of $140,000. If I say

 20 anything, correct me. Raise your finger and I'll

 21 let you correct me.

 22 So, there's a $140,000 penalty. So, in
 69

 1 theory, you could have an FCM that transferred

 2 millions, hundreds of millions of dollars, and the

 3 penalty is $140,000, which doesn't seem like much

 4 of a deterrent to me.

 5 So, my question is, how do we define

 6 what the actual violation would be? Again,

 7 depending upon the individual facts and

 8 circumstances, and I'm not talking about any

 9 individual case. For example, Mr. Meister, if

 10 there was, say, $100 million that was transferred

 11 from customer money, and it went to three

 12 different places, so it's a transfer out, but it

 13 goes to three different places, would that be one

 14 violation or three violations?

 15 MR. MEISTER: Just sort of taking your

 16 qualification that obviously a penalty depends

 17 upon facts and circumstances, let me just address

 18 one premise.

 19 The Commission can impose -- generally

 20 speaking, the Commission can impose a penalty of

 21 $140,000 per violation of the Act or a rule, or --

 22 and that would be a maximum penalty -- or three
 70

 1 times the gain to the defendant per violation, so

 2 that there's actually two alternatives. Our

 3 penalties are not based upon the amount of a loss,

 4 however.

 5 In your hypothetical, I would say that

 6 it really does depend upon a number of things,

 7 including perhaps conduct of the defendant, which

 8 might give rise to more than one violation. The

 9 number of victims involved might give rise to more

 10 than one violation; it might. The duration might

 11 give rise to more than one violation.

 12 And, again, generally speaking, we in

 13 the Division of the Enforcement and the Commission

 14 considers a whole host of factors in determining

 15 the number of violations in play that would give

 16 rise to the maximum possible penalty.

 17 COMMISSIONER CHILTON: So, it is

 18 theoretically possible, given the facts and

 19 circumstances of the individual case, that such a

 20 violation could be three different violations and

 21 not just one. Theoretically possible.

 22 MR. MEISTER: Absolutely.
 71

 1 COMMISSIONER CHILTON: Okay. And the

 2 same would go, I assume, but correct me if I'm in

 3 error, that if during the day you transferred

 4 three different times to the same place, that even

 5 though it was in one day, that given the specific

 6 facts and circumstances, that it could be three

 7 violations, even though it occurred on the same

 8 day. Is that also correct?

 9 MR. MEISTER: Again, sure. That is

 10 theoretically possible for us to recommend.

 11 COMMISSIONER CHILTON: Okay. Now, I

 12 want to talk about this other criteria that you

 13 mentioned, the amount of money that they would

 14 make. So, if you're an FCM and you say, look, you

 15 know, it's only $140,000 penalty, so I'm going to

 16 take $100 million and I'm going to use it to make

 17 some bet overnight. And with $100 million, I

 18 mean, I could make millions and millions. And the

 19 fine's only $140,000, so that's not a deterrent.

 20 But you say that there's also this treble damage

 21 essentially. You're saying it could be three

 22 times -- is it three times the 140 if they made a
 72

 1 profit? Say, they made a profit of $10 million.

 2 Is the damage three times the 140? Is that what

 3 we could theoretically, given the facts and

 4 circumstances, fine someone, fine an FCM?

 5 MR. MEISTER: Again, we're talking about

 6 civil monetary penalties, which is actually

 7 something different from damages. So, this is

 8 civil monetary penalties. And in your

 9 hypothetical, one way to calculate the civil

 10 monetary penalty maximum would be three times the

 11 gain to the defendant.

 12 COMMISSIONER CHILTON: Three times the

 13 gain. So, if they made $10 million, the civil

 14 monetary penalty could be $30 million. Is that

 15 correct?

 16 MR. MEISTER: Theoretically, correct.

 17 COMMISSIONER CHILTON: You ever hear of

 18 that? So, $30 million on a $10 million gain if

 19 you used the customer money illegally. Three

 20 times the gain.

 21 Mr. Berkovitz, is there anything else

 22 that we should be looking at, if we -- and I do --
 73

 1 I can't speak for my colleagues -- want to be as

 2 tough as we possibly can as a deterrent to

 3 misusing customer funds? Is there anything you'd

 4 add to the discussion Mr. Meister and I had here

 5 today?

 6 MR. BERKOVITZ: One thing I would note,

 7 Commissioner Chilton, and, again, it depends on

 8 the hypothetical. But I think some of your

 9 hypotheticals and the questions that you posed

 10 possibly would indicate potentially a deliberate

 11 intent to take these funds and use them for some

 12 other purpose. If there were a certain level of

 13 intent, I'd just also add there are criminal

 14 provisions in the Commodity Exchange Act. There's

 15 one specifically, Section 9(a)(1) provides -- it's

 16 a criminal provision for knowingly embezzling,

 17 stealing, or criminal intent to convert customer

 18 funds that have been deposited to margin or

 19 guarantee. So, there's that specific criminal

 20 provision.

 21 Secondly, there's the more general

 22 criminal provision regarding willful violations of
 74

 1 the Act in general, knowing of the unlawfulness

 2 and willful. So, potentially I think some of the

 3 hypotheticals that you pose could raise criminal

 4 issue as well.

 5 CHAIRMAN WETJEN: Actually I had one

 6 follow-up question. Thanks, Commissioner Chilton.

 7 In the hypothetical that Commissioner Chilton laid

 8 out where you had theoretically three violations,

 9 I'm kind of curious, if you had a gain of $10

 10 million to the defendant, and the statute allows

 11 you to choose that as the basis for the penalty,

 12 so you can treble that, you still have two

 13 separate violations.

 14 How does the statute read? Do you have

 15 to -- is it one or the other, or could you do

 16 treble damage on one violation and then just for

 17 good measure do 130 for the other two, for each of

 18 the other two?

 19 MR. MEISTER: I guess the way the

 20 statute is written is per violation. The penalty

 21 is imposed per violation. I don't -- as I'm

 22 sitting here right now, I don't know of a
 75

 1 restriction such that you would have to calculate

 2 the penalty for one violation in a course of

 3 conduct one way, and then keep to that calculation

 4 for each of violations. So, again, just sitting

 5 here, I would imagine you could calculate the

 6 maximum penalty for one of those violations one

 7 way under one theory, and then the maximum penalty

 8 for a second violation under an alternative

 9 theory.

 10 In other words, just to put that more

 11 directly, so $140,000 maximum for one of the

 12 violations and triple the gain for a second

 13 violation.

 14 COMMISSIONER WETJEN: Thank you.

 15 COMMISSIONER CHILTON: Okay. Thank you.

 16 The point I'm trying to make is that from my

 17 perspective, look, if you are out there and you've

 18 violated the law, you've misused customer funds,

 19 but don't expect me to give you a third of what

 20 you should get. If you violated, for example,

 21 and, again, I'm not talking about a specific

 22 matter. This would depend upon the circumstances
 76

 1 of the individual case. But if you went out and

 2 four years you messed up and used customer funds

 3 illegally, then you should be fined $140,000 every

 4 day, or, depending upon what the prophets is,

 5 three times that amount.

 6 I just want to be clear that I'm done

 7 with any settlements or deals that would lessen

 8 that amount. There are people out there who've

 9 lost their money. They're having to, as I said

 10 earlier, using their college kids' funds. They're

 11 using their retirements because they've lost their

 12 money. And we've got to do everything we can. I

 13 don't know if there's more we can do. Something

 14 the chairman and I have talked about a little bit,

 15 whether or not there's more we can do, but we've

 16 got to provide a real deterrent out there. And I

 17 think $140,000 when you could spend millions of

 18 dollars, hundreds of millions of dollars on a bet,

 19 is just silly. Just silly.

 20 That's all I have. Thank you.

 21 CHAIRMAN GENSLER: Thank you,

 22 Commissioner Chilton, and a cameo from
 77

 1 Commissioner Wetjen.

 2 Commissioner O'Malia.

 3 COMMISSIONER O'MALIA: Thank you. I'd

 4 like to ask one question before -- a follow-up to

 5 Commissioner Chilton.

 6 Commissioner Chilton seemed to indicate

 7 that there was one account that money came from.

 8 If this money was moved from an FCM to some other

 9 entity, wouldn't we do the $140,000 million

 10 violation per account of the accounts it came

 11 from, or is it because it's an omnibus account,

 12 there would only be a single --

 13 MR. MEISTER: Again, there are a number

 14 of ways in which the Commission can and has

 15 determined the number of violations. I would

 16 think it would be relevant to that assessment as

 17 to the number of accounts in play. And, you know,

 18 the Commission has issued some authority with

 19 respect to this.

 20 I should add that the Commission has

 21 also issued a policy statement on how it does

 22 calculate penalties. That was from November of
 78

 1 1994, which is on the books and people can

 2 consider, and it's something that we in the

 3 Division consider. There are a number of

 4 different factors that go into play, and it's

 5 something that the Commission always does consider

 6 as well.

 7 COMMISSIONER CHILTON: Thank you,

 8 Commissioner O'Malia. I mean, I just wonder,

 9 which maybe my colleagues are, 1994. Should maybe

 10 we look at updating that? Is that something that

 11 could be done internally to make a recommendation

 12 to the Commission is whether or not we should

 13 reevaluate that? I'm not sure about the process.

 14 MR. MEISTER: The 1994 policy statement

 15 that I'm talking about is a Commission policy

 16 statement concerning the factors it considers in

 17 determining the amount of the sanction. I'll

 18 point out, however, that that also says that the

 19 Commission is not limited by those factors, but it

 20 does list them. I imagine that the Commission

 21 could issue --

 22 COMMISSIONER CHILTON: But the types of
 79

 1 things we're talking about, if we wanted to up

 2 that, it's a Commission document, so it requires

 3 three of us to make that. Is that correct? Well,

 4 to the extent that staff can come up with a

 5 recommendation for whether or not we could --

 6 should update that 1994 document, I'd appreciate

 7 hearing what you have to say. Thank you.

 8 MR. MEISTER: Right. Just so it's

 9 clear, Commissioner Chilton, that doesn't talk to,

 10 you know, the $140,000 or triple the gain. It

 11 just talks about -- which those are things that

 12 set maximums. What it does is it lists a number

 13 of factors that the Commission does consider in

 14 deciding where between zero and the maximum it

 15 wants to impose.

 16 CHAIRMAN CHILTON: But it's talking

 17 about the exact questions the three of us were

 18 just asking about if it's one account or if it's

 19 three. I mean, it could get into those types of

 20 things --

 21 MR. MESITER: Yes.

 22 COMMISSIONER CHILTON: -- and provide
 80

 1 some guidance to people that we wouldn't be

 2 limited to, but we could use, depending upon the

 3 facts and circumstances.

 4 MR. MEISTER: Yes, correct.

 5 COMMISSIONER O'MALIA: I have no further

 6 questions about this hypothetical or theoretical,

 7 so you're welcome to stay at the table if you

 8 want.

 9 I would like to thank the team for

 10 rationalizing its analysis of the risks posed by

 11 certain instruments and adjusting asset-based and

 12 issuer-based concentration limits. Nowhere is

 13 this rationalization more clear in the final rule

 14 treatment of investment securities,

 15 government-sponsored enterprise, and money market

 16 funds.

 17 Since the public does not have the

 18 benefit of having the rule in front of them, I'd

 19 just like to go through some of the differences

 20 between the final rule and the proposed rule for

 21 their benefit.

 22 First, with respect to GSE securities,
 81

 1 the proposal would have effectively banned an

 2 investment of customer funds in such securities,

 3 correct, in GSEs?

 4 MR. DEBORD: That's correct.

 5 COMMISSIONER O'MALIA: Including

 6 securities that have performed well during the

 7 financial crisis, such as the Farm Credits System,

 8 GSE, and Federal Home Bank?

 9 MR. DEBORD: That's correct.

 10 COMMISSIONER O'MALIA: And now, how does

 11 the final rule treat investments of customer funds

 12 in these securities?

 13 MR. DEBORD: Well, they'd be retained.

 14 The only change between the current permissibility

 15 standards in which those investments are allowed

 16 and what we're recommending today is simply a

 17 caveat that for just Fannie Mae and Freddie Mac,

 18 that those investments would be allowed only so

 19 long as they're operating under the

 20 conservatorship or receivership of the FHFA. But

 21 the Federal Home Loan and Farm Credit you

 22 mentioned would be permitted.
 82

 1 COMMISSIONER O'MALIA: And what of the

 2 -- how will we treat the potential replacement

 3 entities to Fannie and Freddie if those reforms

 4 are undertaken?

 5 MR. DEBORD: Any limited life follow-ups

 6 to Fannie and Freddie wouldn't be permitted.

 7 Would not be.

 8 COMMISSIONER O'MALIA: Would not be

 9 permitted, all right.

 10 Second, with regard to money market

 11 mutual funds, the proposal would have limited

 12 investments to such funds to 10 percent and

 13 investments in a particular fund to two percent,

 14 correct?

 15 MR. DEBORD: That's correct.

 16 COMMISSIONER O'MALIA: And the treatment

 17 of customer funds in those -- in the final rule

 18 would do what?

 19 MR. DEBORD: Well, it's a bit more of a

 20 nuanced approach. We make distinctions between

 21 the size and also fund type. So, I'm going to

 22 read from my notes just so I'm clear on it.
 83

 1 COMMISSIONER O'MALIA: Please.

 2 MR. DEBORD: FCMs and DCOs can invest

 3 all their segregated funds in money market mutual

 4 funds with at least $1 billion in assets and a

 5 management company of at least $25 billion in

 6 assets under management. FCMs and DCOs can invest

 7 up to 10 percent of segregated funds in money

 8 funds with less than $1 billion in assets and/or a

 9 management company with less than $25 billion in

 10 money fund assets under management. So, that's

 11 the size treatment.

 12 In addition, non-Treasury only funds, so

 13 typically prime money funds, will be subject to a

 14 50 percent asset-based concentration limit. It

 15 would also be subject to issuer-based

 16 concentration limits, 25 percent for a family of

 17 funds, and 10 percent for an individual fund.

 18 COMMISSIONER O'MALIA: Thank you. Let

 19 me turn to the foreign sovereign debt issue.

 20 It is an understatement to say the

 21 safety of certain foreign sovereign debt has been

 22 in the news recently. I'd like to explore some of
 84

 1 the nuances and, frankly, build on some of the

 2 questioning from Commissioner Sommers about

 3 sovereign debt, this investment versus

 4 transformation debate that we -- I'm still a

 5 little confused about it, so I'd like to ask a

 6 couple of questions.

 7 On its website, LCH indicates that in

 8 addition to the U.S. dollars and euros, it accepts

 9 cash collateral in the form of sterling, Canadian

 10 dollars, Swiss francs, Japanese yen, Swedish

 11 krona, Danish krona, and Norwegian krona. Let's

 12 assume that for the certain contract, LCH only

 13 accepts cash collateral in Canadian dollars.

 14 Let's also assume that the U.S. customer would

 15 like to take a position in that contract.

 16 Now, that we've banned Canadian debt,

 17 how would an intermediary hedge foreign currency

 18 exposure that it faces on behalf of a customer?

 19 MR. RADHAKRISHNAN: So, the question is

 20 LCH says I will only take Can dollars?

 21 COMMISSIONER O'MALIA: It currently does

 22 today.
 85

 1 MR. RADHAKRISHNAN: Okay. So, the

 2 customer has got a choice. He can deposit Can

 3 dollars, FCM passes it on. If the customer gives

 4 something else, let's say Can bonds, FCM sells the

 5 Can bonds, get Can dollars, passes it on, the

 6 customer gives treasuries, FCM sells treasuries,

 7 gets U.S. Dollars, buy Can dollars with the U.S.

 8 dollars, buy the debt with Can dollars.

 9 It's not impossible. They can do it,

 10 yeah. It's -- you know, something -- some of the

 11 comment letters, with all due respect to the

 12 commenters, I don't think they're being completely

 13 honest with all the steps. It involves a couple

 14 of steps, but it's not impossible. And when

 15 financial institutions with the sophistication of

 16 these FCMs tell me it's impossible, I'd like to

 17 know why.

 18 COMMISSIONER O'MALIA: Okay. Do we have

 19 any sense of what the cost of these alternative

 20 hedging arrangements might be?

 21 MR. RADHAKRISHNAN: Again, I don't know

 22 whether there's any -- I don't understand when
 86

 1 these firms say there's hedging risk, because you

 2 hedge because you have a risk. It's not clear to

 3 me -- what I don't understand is the customer

 4 gives me Canadian dollars, and I'm not obliged to

 5 pass it on. I have Canadian dollars. The risk

 6 belongs to the customer, not to me. So, I don't

 7 quite understand where, you know, when an FCM says

 8 I've got a risk, I don't quite understand what the

 9 risk is, because the point is, it's customer's

 10 money.

 11 COMMISSIONER O'MALIA: I do have some

 12 frustration. I would note that on the cost

 13 benefit analysis that we noted that this is a $100

 14 million significant -- major -- what do we call

 15 it, a major rule. Therefore, it has an impact of

 16 over $100 million in economic impact due to the

 17 change that we've implemented.

 18 We don't do a very good job of

 19 quantifying those costs in the rule, but if the

 20 analysis -- the memo says that we have $170

 21 billion in segregated funds, and $40 billion in

 22 Part 30 funds, it doesn't take much in terms of
 87

 1 changes to equal -- to go over $100 million. Less

 2 than one-tenth of one percent I think is what the

 3 memo says.

 4 So, yet none of that quantitative

 5 analysis is reflected in the rule. I would just

 6 continue to make my concerns raised regarding our

 7 economic analysis, and what goes into it, and how

 8 we come up with these numbers because I can't tell

 9 what the costs are actually in the document as a

 10 result of this.

 11 Maybe you could explain why that is and

 12 why we don't have a good quantitative analysis.

 13 And maybe it's the point that Commissioner Sommers

 14 raised earlier that we don't really know what

 15 they're holding.

 16 MR. DEBORD: That's correct. We can

 17 only quantify information that we receive. We

 18 have an open comment period, and FCMs and DCOs are

 19 welcome to give us as much information as they

 20 want to to help us make these decisions. If they

 21 don't provide us with quantifiable information, we

 22 certainly can't quantify it.
 88

 1 COMMISSIONER O'MALIA: And that was --

 2 when you say that they don't provide it, that was

 3 in the request for comments, right?

 4 MR. DEBORD: That's correct.

 5 COMMISSIONER O'MALIA: The fact that we

 6 don't know what's being held in these funds today

 7 is also problematic, I would think. I do think.

 8 That's not a question, that's an answer. It's my

 9 own answer.

 10 CHAIRMAN GENSLER: I'm going to

 11 associate my -- I'm associating myself with what

 12 you just about, I think, we would be better served

 13 as regulators, and I think customers themselves

 14 would be better served if they knew how their FCMs

 15 were investing their money.

 16 COMMISSIONER O'MALIA: Agreed. That's

 17 all I have.

 18 CHAIRMAN GENSLER: Thank you,

 19 Commissioner O'Malia. Commissioner Wetjen.

 20 COMMISSIONER WETJEN: Thank you. My

 21 question is, has been more or less addressed

 22 already, but I did want to go over one point.
 89

 1 Commissioner Sommers raised it in her opening

 2 statement and I think in her questioning, too, and

 3 Commissioner O'Malia just touched on it. But the

 4 goal of this rule, as I understand it, is to

 5 protect customer funds insofar as they're used as

 6 investments by the FCM or the DCO.

 7 MR. RADHAKRISHNAN: Correct.

 8 COMMISSIONER WETJEN: But we do

 9 recognize, do we not, in this role that there are

 10 a variety of different services that FCMs provide

 11 for their customers that would continue to be

 12 permitted, notwithstanding this rule, correct?

 13 MR. RADHAKRISHNAN: Correct.

 14 COMMISSIONER WETJEN: I don't want to

 15 put you on the spot too much, but I wonder if

 16 maybe you could give an example of that. You've

 17 actually probably provided a couple already here

 18 this morning. But actually take it back. Let me

 19 ask you this question.

 20 If a customer provided Treasury

 21 securities to the FCM and let's say those bonds

 22 reach maturity, and so at that point, effectively
 90

 1 convert into cash --

 2 MR. RADHAKRISHNAN: Yes.

 3 COMMISSIONER WETJEN: -- But they want

 4 to reinvest the cash, roll it over rather, into

 5 more treasury debt. Would the FCM be able to do

 6 that transaction on their behalf?

 7 MR. RADHAKRISHNAN: Yes, that's an

 8 investment of customer funds. Under your

 9 hypothetical, in the first instance, there's

 10 access. This is not money that is required to be

 11 put out in a DCO or another FCM. This is money

 12 sitting with the FCM. And, let's say, you know,

 13 either because the customer says buys some

 14 Treasuries or the FCM decides to buy some

 15 Treasuries, they buy some Treasuries, and they

 16 mature. The U.S. Treasury Department gives you

 17 cash back. The FCM is free to reinvest the

 18 proceeds in Treasuries.

 19 COMMISSIONER WETJEN: And there's

 20 nothing in this rule that would keep the FCM from

 21 buying those Treasuries from an affiliated

 22 Treasury desk if it's a duly registered entity,
 91

 1 correct?

 2 MR. RADHAKRISHNAN: No, it's an outright

 3 purchase.

 4 COMMISSIONER WETJEN: That's all I have.

 5 CHAIRMAN GENSLER: Thank you,

 6 Commissioner Wetjen. There not being any further

 7 questions, I'd like to thank the presenters as

 8 well as the rest of the team for the excellent

 9 presentation. And unless Commissioners want to

 10 make any other further statements, I'd call Mr.

 11 Stawick to call the roll.

 12 MR. STAWICK: Commissioner Wetjen?

 13 COMMISSIONER WETJEN: Aye.

 14 MR. STAWICK: Commissioner Wetjen, aye.

 15 Commissioner O'Malia?

 16 COMMISSIONER O'MALIA: Aye.

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

 18 Commissioner Chilton?

 19 COMMISSIONER CHILTON: Aye.

 20 MR. STAWICK: Commissioner Chilton, aye.

 21 Commissioner Sommers?

 22 COMMISSIONER SOMMERS: Aye.
 92

 1 MR. STAWICK: Commissioner Sommers, aye.

 2 Mr. Chairman?

 3 CHAIRMAN GENSLER: Aye.

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

 5 Chairman, on this question, the yeas are five, the

 6 nays are zero.

 7 CHAIRMAN GENSLER: As the ayes have it

 8 unanimously, the staff recommendation is accepted,

 9 and it'll be sent to the Federal Register. I

 10 guess somewhere I'll probably say something about

 11 technical corrections. Why don't I just do that

 12 now if I could? What's that? Do it at the end

 13 unless there's an objection? All right. Thank

 14 you so much.

 15 And then, we're going to be calling up

 16 -- who's the next up? Are we doing the next

 17 final, or are we going to do the available for

 18 trading? All right.

 19 So, this is one of these opportunities

 20 to seek further public comment on a proposed

 21 rulemaking that's already outstanding. We already

 22 have proposed rulemakings out on designated
 93

 1 contract markets and swap execution facilities.

 2 And what we're considering is the staff

 3 recommendation to, in essence, open these up for

 4 further public comment, most specifically about

 5 the process that these swaps are "made available

 6 for trading."

 7 And at this time, I'd like to welcome

 8 Bella Rozenberg, Amir -- Amir, you're going to

 9 have to help me pronounce your last name. I just

 10 -- what's that?

 11 MR. ZAIDI: Zaidi.

 12 CHAIRMAN GENSLER: Zaidi. I don't see

 13 Mauricio, and Rick Shilts, all of the Division of

 14 Market Oversight, to present their staff's

 15 recommendation to provide further notice of

 16 proposed rulemaking and the process of a

 17 designated contract market and swap executive

 18 facility to make a swap available for trading

 19 under Section 2(h)(8) of the Commodity Exchange

 20 Act.

 21 I welcome Bella back because you were a

 22 team lead on another thing. This is what you do.
 94

 1 Thanks, Bella.

 2 MS. ROZENBERG: Thank you. Thanks.

 3 Amir is going to present --

 4 CHAIRMAN GENSLER: All right, great.

 5 Amir.

 6 MR. ZAIDI: Good morning, Mr. Chairman

 7 and Commissioners. Today, staff is recommending

 8 that the Commission approve for publication for

 9 publication in the Federal Register a further

 10 notice of proposed rulemaking that would establish

 11 a process for a designated contract market or a

 12 swap execution facility to make a swap available

 13 to trade as set forth in Section 2(h)(8) of the

 14 Commodity Exchange Act pursuant to Section 723 of

 15 the Dodd-Frank Act.

 16 Section 2(h)(8) of the Commodity

 17 Exchange Act has a trade execution requirement for

 18 swap transactions. This section requires that

 19 swap transactions, subject to the clearing

 20 requirement, be executed on a designated contract

 21 market or a swap execution facility.

 22 The exceptions to the trade execution
 95

 1 requirement are if no designated contract market

 2 or swap execution facility makes a swap available

 3 to trade, or the swap transaction is subject to

 4 the clearing exception; that is, the end user

 5 exception.

 6 On December 22, 2010, the Commission

 7 published for comment in the Federal Register a

 8 notice of proposed rulemaking entitled, "Core

 9 Principles and Other Requirements for Designated

 10 Contract Markets," which did not address the

 11 available to trade provision.

 12 Additionally, on January 7, 2011, the

 13 Commission published for comment unnoticed of

 14 proposed rulemaking entitled, "Core Principals and

 15 Other Requirements for Swap Execution Facilities,"

 16 which addressed the available to trade provision

 17 in a limited manner with respect to periodic

 18 evaluation and reporting. This further notice of

 19 proposed rulemaking is informed by public comment

 20 received in connection with the swap execution

 21 facilities' proposed rulemaking.

 22 Key theme to emerge from those comments
 96

 1 was that the Commission should establish a process

 2 for determining when a swap is made available to

 3 trade that includes greater Commission

 4 involvements. In light of the comments received

 5 and the fact that the designated contract market

 6 proposed rulemaking did not address the available

 7 to trade provision, this notice before you

 8 provides a process for both designated contract

 9 markets and swap execution facilities to make a

 10 swap available to trade within the meaning of the

 11 trade execution requirement.

 12 Under the proposed regulations, a

 13 designated contract market or swap execution

 14 facility would initially determine that a swap is

 15 available to trade for purposes of the trade

 16 execution requirement.

 17 To make a swap available to trade, a

 18 designated contract market or swap execution

 19 facility would consider, as appropriate, certain

 20 factors with respect to such swap, such as the

 21 frequency or size of transactions, trading volume,

 22 the number and types of market participants, war,
 97

 1 or the bid ask spread. A designated contract

 2 market or swap execution facility would be able to

 3 consider any one factor or several factors.

 4 Under the proposed regulations, the

 5 designated contract market or swap execution

 6 facility that decides to make a swap available to

 7 trade in accordance with the factors set forth in

 8 the regulations would submit to the Commission its

 9 determination, either for approval or under

 10 certification procedures, pursuant to the rule

 11 filing procedures under part 40 of the

 12 Commission's regulations. Specifically, a

 13 designated contract market or swap execution

 14 facility would have to submit its determination,

 15 either under approval procedures of Section 40.5

 16 or under certification procedures under Section

 17 40.6. Under the approval procedures, a designated

 18 contract market were swap execution facility would

 19 have to provide an explanation and analysis of the

 20 proposed rule and its compliance with applicable

 21 provisions of the Commodity Exchange Act and the

 22 Commission's regulations. The Commission would
 98

 1 have a 45-day review period, which may be extended

 2 for an additional 45-day period in specified

 3 circumstances.

 4 Similar to the approval procedures under

 5 Section 40.5, if the designated contract market or

 6 swap execution facility chooses to submit its

 7 determination under the certification procedures

 8 of 40.6, it would have to provide an explanation

 9 and analysis of the proposed rule, and a

 10 certification that the rule complies with the

 11 Commodity Exchange Act and the Commission's

 12 regulations. The Commission would have a 10

 13 business day review period, which may be stayed

 14 for an additional 90 days under specified

 15 circumstances.

 16 Under the proposed regulations, upon a

 17 determination that a swap is available to trade,

 18 all other designated contract markets and swap

 19 execution facilities listing or offering for

 20 trading such swap and/or any economically

 21 equivalent swap, would have to make those swaps

 22 available to trade for purposes of the trade
 99

 1 execution requirement. The proposed regulations

 2 would define the term "economically equivalent

 3 swap" is a swap that the designated contract

 4 market or swap execution facility determines to be

 5 economically equivalent with another swap after

 6 consideration of each swap's material pricing

 7 terms.

 8 Designated contract markets and swap

 9 execution facilities would also be required to

 10 perform an annual review and assessment of the

 11 swaps it has made available to trade, and to

 12 provide electronically to the Commission a report

 13 of this review no later than 30 days after the

 14 designated contract market's or swap execution

 15 facility's fiscal year end.

 16 This further notice of proposed

 17 rulemaking only solicits comments pertaining to

 18 the regulations proposed in this notice.

 19 At this time, I'd be happy to take any

 20 further questions.

 21 CHAIRMAN GENSLER: The Chair will now

 22 entertain a motion to accept the staff
 100

 1 recommendation to give further notice on these

 2 rules.

 3 COMMISSIONER SOMMERS: So moved.

 4 COMMISSIONER CHILTON: Second.

 5 CHAIRMAN GENSLER: I support the

 6 proposed rule to implement the process for

 7 determining a swap is made available to trade. Or

 8 now I've learned -- Commissioner Wetjen tells me

 9 this is called MATT. Is that right?

 10 COMMISSIONER WETJEN: That's what my

 11 staff tells me, Mr. Chairman.

 12 CHAIRMAN GENSLER: The Dodd-Frank Act

 13 requires that swaps subject to a clearing

 14 requirement be traded on a designated contract

 15 market, or SEF, unless no contract market or SEF

 16 makes the swap available to trade. Thus, this

 17 question as to, well, what does it mean for SEF or

 18 DCM to make something "available" to trade.

 19 And I think, though we did not include

 20 this in the initial staff proposals last December,

 21 that it's appropriate to seek further public

 22 comment, and also to have a SEF roundtable. I
 101

 1 hope Bella and Amir are looking forward to that

 2 during the 60-day public comment period to really

 3 get the market input on this, and to bring greater

 4 transparency to the process for making a swap

 5 available for trading.

 6 I just have maybe one or two questions,

 7 but anyone, is it correct that though Congress

 8 laid out in some significant detail a process for

 9 determining a clearing mandate, that Dodd-Frank

 10 did not have a similar set of statutory provisions

 11 this regard?

 12 MR. ZAIDI: Yes, that's correct.

 13 CHAIRMAN GENSLER: So, there's a real

 14 distinction as to what Congress did.

 15 MR. ZAIDI: Yes, in the statute there is

 16 a distinction.

 17 CHAIRMAN GENSLER: And I also just want

 18 to make sure you've asked a whole bunch of

 19 questions in this proposal, I mean, when I went

 20 through it, to get further input as well.

 21 MR. ZAIDI: Yes.

 22 CHAIRMAN GENSLER: And now, these seven
 102

 1 or eight factors that were referred to by a couple

 2 of Commissioners in their opening statement could

 3 be either a shorter list, or a longer list in a

 4 final SEF rule, is that right?

 5 MR. ZAIDI: Yes. We also asked

 6 questions, as you mentioned, in the proposal about

 7 the factors.

 8 CHAIRMAN GENSLER: Okay. Well, again,

 9 I'm going to support this proposal. I think it's

 10 good to get further input from market participants

 11 on this important matter.

 12 Commissioner Sommers?

 13 COMMISSIONER SOMMERS: Thank you, Mr.

 14 Chairman. I have a number of different questions

 15 with regard to the proposal, and a number of

 16 different concerns about the process. And I think

 17 I would start by saying that I think that there

 18 are -- there's potential for huge competitive

 19 advantages with regard to allowing DCM's and SEFs

 20 to make this determination.

 21 So, just following up on the Chairman's

 22 question, is there anything in Dodd-Frank that
 103

 1 would prevent the Commission from being able to

 2 make this determination instead of allowing the

 3 DCM or SEF? Could the Commission be the one

 4 making the determination?

 5 MR. ZAIDI: The Dodd-Frank Act doesn't

 6 specify who should make the determination.

 7 COMMISSIONER SOMMERS: I understand that

 8 it doesn't specify, but does it prevent us?

 9 MR. ZAIDI: And it doesn't prevent.

 10 COMMISSIONER SOMMERS: Okay. So,

 11 because I believe that these -- the factors here

 12 allowing SEFs or DCMs to make these determinations

 13 on their own will bind the entire marketplace to

 14 the trade execution requirement, I'm wondering how

 15 we're going to do anything about it if a SEF or a

 16 DCM submits these under part 40, as made available

 17 for trading.

 18 So, under what circumstances would you

 19 anticipate that the Commission could find that a

 20 Part 40 submission reflecting a determination is

 21 inconsistent with the Act?

 22 MR. ZAIDI: Well, under Part 40, as you
 104

 1 mentioned, as all rules under Part 40, a DCM or

 2 SEF would submit their determination, and we would

 3 review the explanation and analysis that they

 4 would provide to us. And we would look at the

 5 factors that they used in their analysis to come

 6 up with a determination that something's made

 7 available to trade. And then, we would have to

 8 look to see if that was inconsistent with either

 9 the Act or the regulations that we proposed.

 10 MR. SHILTS: And also, the specific

 11 factors that were listed in the proposal were

 12 things that I think most people would consider to

 13 be -- would go to the determination about whether

 14 something is really tradable, you know, and should

 15 be subject to the trade execution mandate.

 16 And I think the idea is, too, that is we

 17 get and look at the analysis, the description that

 18 the SEFs or DCMs supply with their filings. It's

 19 something that the staff and Commission over time

 20 would gain more experience and maybe potentially

 21 come up with some sort of more formal Commission

 22 process, as you're suggesting, ultimately. And
 105

 1 obviously, that would be up to the Commission at

 2 some time.

 3 COMMISSIONER SOMMERS: I think you have

 4 just completely identified where my concerns lie,

 5 because I believe that, and, I guess, have always

 6 assumed that this would be a determination that

 7 the Commission would make down the road after we

 8 gain experience and after we know what kind of

 9 factors should be considered. And my fear in

 10 allowing a DCM or a SEF to make the determination

 11 on their own is because of competitive reasons

 12 we're going to have SEFs and DCMs that immediately

 13 want the determination to be made that all

 14 economically equivalent swaps have to be executed

 15 on a platform because they want that competitive

 16 advantage. And I wonder how we draw the line and

 17 what kind of factors we would consider would be

 18 inconsistent with the Act if a swap is only

 19 trading once a week, or even once a day. Does

 20 that make a swap liquid enough to have the trade

 21 execution requirement?

 22 MR. SHILTS: Yeah. I just don't think
 106

 1 we can make a judgment now. We'd have to look at

 2 the filings and the analysis that the SEF or DCM

 3 supplied, and then evaluate it then with respect

 4 to its compliance with the Act.

 5 But also, this is a proposal, so we'll

 6 be looking for comments as well as the roundtable

 7 that the Chairman talked to get more feedback on

 8 how we should approach this in connection with the

 9 final.

 10 COMMISSIONER SOMMERS: I would really

 11 encourage market participants to provide us with

 12 very distinct economic analysis with regard to a

 13 determination like this being made by individual

 14 execution platforms, and what the disadvantages

 15 may be to other market participants. Thank you.

 16 CHAIRMAN GENSLER: Thank you,

 17 Commissioner Sommers. If I might mention, and

 18 sometimes there's role reversals here because I'm

 19 sort of probably inclined of being less

 20 prescriptive on this one than you are or it

 21 appears that you may be. But I think part of what

 22 influences me is not only the statute, but our own
 107

 1 Commission experience on the SPDC determinations.

 2 When we, the Commission, went through based on the

 3 2008 Farm Bill to make these determinations --

 4 Commissioner Wetjen, you weren't here, but when we

 5 went through this, contact by contract to

 6 determine whether they were significant price

 7 discovery contracts, it took a lot of staff time.

 8 I mean, an enormous amount of staff time.

 9 It was, I think, a thoughtful and

 10 considered review, but it was a significant -- now

 11 take that broader to the entire swaps marketplace

 12 and when Congress didn't mandate that we do it. I

 13 mean, we'd be, in essence, putting ourselves in to

 14 a determination process, even more than this

 15 process.

 16 I mean, this process has us involved. I

 17 mean, this process definitely has the Commission

 18 involved, but it sort of starts with the SEF or

 19 DCM, and then has us review it through the Part 40

 20 rather than possibly the other direction.

 21 COMMISSIONER SOMMERS: I understand

 22 that. I just would respectfully suggest that the
 108

 1 SPDC determination did not carry with it

 2 significant competitive advantages.

 3 CHAIRMAN GENSLER: Is your concern that

 4 one SEF might do it ahead of another one?

 5 COMMISSIONER SOMMERS: Absolutely.

 6 CHAIRMAN GENSLER: So, it may be that --

 7 COMMISSIONER SOMMERS: If you were

 8 determined to have been -- to have a SPDC on your

 9 market, you had more requirements put upon that

 10 specific contract. It didn't give you an

 11 advantage that then market participants would be

 12 required to trade the SPDC on your platform.

 13 CHAIRMAN GENSLER: So, I'd like to

 14 continue this dialogue, but to better understand

 15 because if it's about trying to make sure that one

 16 SEF is not ahead of another, it might be that

 17 still the determinations are made by the SEF, but

 18 somehow they get aligned, or it could be in terms

 19 of the effective date to give others time to catch

 20 up.

 21 MR. ZAIDI: Also, just one point to

 22 consider on that, on the swap transaction
 109

 1 compliance and implementation proposed rulemaking,

 2 proposed a -- at least a 30-day time period before

 3 the trade execution requirement would kick in.

 4 So, that would maybe address some of the concerns

 5 about one SEF getting a competitive advantage over

 6 another one.

 7 CHAIRMAN GENSLER: Yes, though I think

 8 what Commissioner Sommers and I were talking about

 9 is whether that would be enough basically.

 10 Commissioner Chilton?

 11 COMMISSIONER CHILTON: I don't have any

 12 questions. I want to thank the team for your hard

 13 work on this.

 14 I do share some of Commissioner Sommers'

 15 concerns. That's why we have the comment period,

 16 and as we learned from the last rule, it's

 17 important for us to get information from people.

 18 And it's hard for us to make -- we're not the

 19 experts, and it's hard for us to make final

 20 determinations without fulsome input. So, I

 21 encourage people to comment, come in and visit

 22 with us, and explain your perspective. But no
 110

 1 questions, Mr. Chairman.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner Chilton. Commissioner O'Malia.

 4 COMMISSIONER O'MALIA: I guess I'd first

 5 like to make sure that I'm operating on the same

 6 document. Is this a 30-day or a 60-day comment?

 7 Mr. Chairman, you mentioned 60 days in your

 8 remarks. I have a document that says 30-day

 9 comment period.

 10 CHAIRMAN GENSLER: You probably have the

 11 right document. I don't know if --

 12 MS. ROZENBERG: We proposed 30 days.

 13 COMMISSIONER O'MALIA: I think -- do

 14 holidays count? This is --

 15 MS. ROZENBERG: The document is 30 days.

 16 We propose day --

 17 COMMISSIONER O'MALIA: It should be 60

 18 days, I think, consistent with what the

 19 President's transparency in government executive

 20 order would be.

 21 CHAIRMAN GENSLER: Yeah. When are you

 22 going to do your staff roundtable? You're talking
 111

 1 about --

 2 COMMISSIONER O'MALIA: Yeah, and that's

 3 another -- I mean, you've obviously made --

 4 CHAIRMAN GENSLER: Macie, you know. I'm

 5 thinking -- I'm channeling Macie.

 6 COMMISSIONER O'MALIA: I think a 60-day

 7 would be appropriate for this, and I'd make a

 8 motion that we do adjust it to 60 days.

 9 CHAIRMAN GENSLER: I'll second the

 10 motion.

 11 MS. ROZENBERG: All right. Thank you.

 12 CHAIRMAN GENSLER: Well, no, I think I

 13 seconded a motion. It's just an amendment to it,

 14 so it still has to probably -- Dave Stawick

 15 probably has to do something or not.

 16 MR. STAWICK: You can just do that by

 17 unanimous consent.

 18 SPEAKER: You can do it by unanimous

 19 consent, yes.

 20 CHAIRMAN GENSLER: So, I'll seek

 21 unanimous consent on that.

 22 COMMISSIONER O'MALIA: Thank you very
 112

 1 much, Mr. Chairman.

 2 Obviously we received a number of

 3 comments in the SEF proposal that put this on our

 4 radar screen, and a number of people have really

 5 raised significant concerns. And I would point

 6 out that some of the comments from the buy side on

 7 this were very concerned about an immediate

 8 decision. And I think to Commissioner Sommers'

 9 point that there's almost a race to the bottom, in

 10 their view, of people listing products regardless

 11 if they meet any of the eight -- what do we have,

 12 eight tests. One or eight tests, that there's no

 13 disincentive for a SEF to list any product

 14 whatsoever and try to capture that liquidity right

 15 out of the box.

 16 And, Rick, you mentioned that we would

 17 gain experience. I'm a little concerned that, you

 18 know, they would all list these products, and

 19 there would be -- you know, that work would be

 20 done and what experience we have with kind of

 21 already be behind us, and we wouldn't have an

 22 opportunity to really gain a lot of experience
 113

 1 because every SEF would list every product. I

 2 don't see what disincentive they would have not to

 3 list a product, to possibly capture that

 4 liquidity, which I think was the concern of the

 5 buy side comments.

 6 Why did we ignore the buy side comments

 7 on these?

 8 MR. SHILTS: Well, first off, just the

 9 listing of a swap on a SEF or DCM wouldn't trigger

 10 the requirement. They would have to then file

 11 something with us under Part 40, and then explain,

 12 you know, looking at the factors we enumerated or

 13 something else they felt was relevant, explain to

 14 us why they thought it should be subject to the

 15 made available to trade execution mandate. And

 16 that is something that, you know, staff -- the

 17 Commission, we would look at, and whether to allow

 18 that either to approve the proposal, or whether to

 19 allow it to go through as a certification. And

 20 that's what I meant as we get those filings and

 21 look at their analysis, that we would, you know,

 22 ultimately come up with, you know, more specific
 114

 1 criteria possibly, or, you know, at least staff

 2 would have criteria and things that we'd be

 3 looking at in making these -- in doing the reviews

 4 of the filings.

 5 COMMISSIONER O'MALIA: Do you envision

 6 some -- please go ahead.

 7 MR. SHILTS: No, but it just wouldn't be

 8 a listing in and of itself that would trigger

 9 that.

 10 COMMISSIONER O'MALIA: I understand

 11 that. So, let's go back to the concerns of the

 12 buy side. They had asked for a more formal

 13 analysis by the Commission to look at liquidity

 14 factors and a number of things, and to take some

 15 comment there. We didn't request that, or we

 16 didn't include that in the rule. What have we

 17 learned about pre-existing swaps? Did we do any

 18 data analysis in development of these factors or

 19 any other --

 20 MR. SHILTS: No, we didn't do any data

 21 analysis. As I said, I think these are the types

 22 of things that you and most, you know, industry
 115

 1 observers would consider when you're thinking

 2 about whether a particular swap might be liquid or

 3 tradable on a particular exchange. And, again, we

 4 put those out as a proposal, and we're looking for

 5 further comment on whether there's other factors,

 6 or how we should be treating them, or narrowing

 7 them, or whatever. And then, you know, look at

 8 that in the context of developing a final rule.

 9 MS. ROZENBERG: I also would like to

 10 clarify that we took the factors, the factors that

 11 are listed in the proposal are from the comment

 12 letters. So, these are the commenters suggesting

 13 to include these factors in making determination

 14 that something is available to trade.

 15 And I also would like to point out, even

 16 though I acknowledge there's flexibility in the

 17 determination process, but made available to trade

 18 determination because the rule is going to be

 19 treated like any other rule that's submitted to

 20 the Commission for either certification or

 21 approval. So, there is Commission involvement --

 22 there is some sort of Commission involvement in
 116

 1 the process, especially if people are going to

 2 start submitting these rules under the

 3 Commission's approval.

 4 The Commission -- staff looks at

 5 explanation analysis. Staff looks at the factors.

 6 So, I would say there is some Commission

 7 involvement, significant involvement in the

 8 process. It's not ideal, but it's the step in the

 9 right direction.

 10 COMMISSIONER O'MALIA: What would happen

 11 if two competing SEFs offered the same product,

 12 send it up. We have -- you know, their economic,

 13 what do we call it, economically equivalent. They

 14 come up with different criteria for eligibility.

 15 How do we sort that out between the two products

 16 that are of identical nature? Do we pick a winner

 17 or loser? I guess at the end of the day we would

 18 say whatever criteria somebody selected.

 19 MR. SHILTS: I think we -- the staff

 20 would like at the two filings and the analyses

 21 that were presented, and there would be one

 22 determination made by staff in connection with the
 117

 1 two filings. And if it's that these -- we agreed

 2 with either, both, or one or the other, that the

 3 -- presumably it would be both -- that the swap

 4 should be -- that the filing should go through,

 5 then that swap would be "made available for

 6 trade." Well, both swaps would then be subject to

 7 the trade execution mandate.

 8 I think part of the goal of having, you

 9 know, staff looking at this is you wouldn't end up

 10 with circumstances where you would have

 11 differences. The same swap, maybe, you know, one

 12 SEF would make a determination or not choose to

 13 file it thinking that it's not subject to the

 14 execution requirement, where another one would.

 15 But if they -- if you had something come in, then

 16 the staff would be looking at this. And I think

 17 one goal is that you would have a consistent

 18 approach or consistent treatment for the same

 19 swap.

 20 COMMISSIONER O'MALIA: So, let's -- when

 21 something is "made available for trade", and a SEF

 22 submits something, it's approved, it's a little
 118

 1 vague on what economically fungible, or

 2 economically equivalent is.

 3 So, what if we have a buy side

 4 participant looking to do a bilateral deal? Is it

 5 their obligation to go and search out the

 6 different rule submissions, or the self-

 7 certification and rule approvals that we have done

 8 to determine how equivalent their bilateral swap

 9 is to determine whether they have to transact on

 10 screen or not? How is this all going to be

 11 coordinated to ensure that market participants

 12 aren't put in any jeopardy for trying to determine

 13 whether their product is economically equivalent?

 14 MR. ZAIDI: Currently, the rule

 15 submissions -- any rule submissions are put on our

 16 website. And DCMs and SEFs, when submitting a

 17 rule submission, they would have to put those on

 18 their website as well.

 19 So, if a market participant is doing an

 20 economically equivalent swap and that has also

 21 been made available to trade, then they would have

 22 to currently look at our website to see if those
 119

 1 swaps would also be subject to the trade execution

 2 requirement.

 3 We also do ask questions in the proposal

 4 about how market participants would know that, and

 5 economically equivalent swap is available to

 6 trade, and also if DCMs and SEFs should also have

 7 to submit something for economically equivalent

 8 swaps.

 9 COMMISSIONER O'MALIA: So, we're going

 10 to be a clearinghouse for all, you know, at a

 11 minimum, they have to look at the Commission

 12 website to determine those that are economically

 13 equivalent to determine that.

 14 MS. ROZENBERG: Yes. I just want to add

 15 one more point. We mention in the preamble that

 16 we're considering creating -- maybe the Commission

 17 would consider creating a one-page on the

 18 Commission's website with all the submissions. At

 19 least it would be easier for the participants to

 20 see, with a definition of what economically

 21 equivalent is once we've -- if we go -- the

 22 Commission goes final. And it'll be easily
 120

 1 accessible to the participants.

 2 COMMISSIONER O'MALIA: Well, this is

 3 complicated. The factors are complicated and

 4 somewhat vague. And I don't -- you know, that's

 5 why we have a comment period. So, I appreciate

 6 the fact that we will do a comment period. We

 7 will extend the comment period longer than 30

 8 days. We will have a roundtable because these are

 9 -- this is difficult. I don't know how we're

 10 going to weigh individuals.

 11 I think Commissioner Sommers is right,

 12 we may be putting the wrong people in making this

 13 determination.

 14 Let me ask one other question, I guess.

 15 The link between clearing and trading, if we make

 16 a determination on the clearing, can we also make

 17 at the same time a trading determination? Would

 18 that one-stop-shopping offer the market a little

 19 better solution, or at least less confusion?

 20 MR. ZAIDI: Well, the clearing

 21 determination is a separate determination. The

 22 clearing determination looks at -- DCOs submit
 121

 1 clearing determinations, and here DCMs and SEFs

 2 are the ones submitting "made available to trade"

 3 determinations. And also for clearing, there are

 4 other factors besides liquidity that go towards

 5 swaps that are required to be cleared. So, those

 6 wouldn't be necessarily relevant to this process.

 7 COMMISSIONER O'MALIA: But we have eight

 8 factors. Aren't those -- don't we have some

 9 overlap in those two features? I mean, wouldn't

 10 it make it easier on the market to submit this

 11 once, a single contract?

 12 MR. ZAIDI: Some of the factors here do

 13 kind of go to the liquidity factors of the

 14 clearing determination. But in the -- in that

 15 rulemaking, from what I understand, that's not

 16 really flushed out of what liquidity is. So,

 17 we're not sure if that would be made at the same

 18 time or if -- what those requirements are there.

 19 MR. SHILTS: But I think if you're

 20 talking about internally, I mean, staff would work

 21 together, so if there's an analysis done by --

 22 with respect to making a determination where a
 122

 1 particular swap should be subject to the clearing

 2 mandate, then obviously we'll share that

 3 information from staff internally in looking at a

 4 filing with respect to a "made available to

 5 trade."

 6 But I think on your other point is that,

 7 as Amir said, with respect to the clearing

 8 mandate, you're going to get filings from DCOs,

 9 although the Commission could independently do

 10 that, whereas the determinations, at least

 11 initially, with respect to the trading mandate go

 12 to the exchanges, the SEFs and DCMs.

 13 But I think internally, we could

 14 certainly share -- you know, look at the same

 15 information. It wouldn't be duplicating the

 16 analysis.

 17 COMMISSIONER O'MALIA: Well, that's

 18 encouraging. You know, ideally -- we'll have to

 19 look at the factors. And I think with these

 20 roundtables, that we'll be able to have absolutely

 21 the opportunity to ask those questions about can

 22 we and should we make single determinations? It
 123

 1 would obviously save on our resources not to --

 2 you know, if we're already making one call and

 3 maybe working together, and maybe marketing

 4 participants need to think about how these things

 5 will interact. That could just save them some

 6 time and provide them some certainty going

 7 forward.

 8 Well, I think the comment period --

 9 hopefully everybody will comment, and now they'll

 10 have a little more comment -- opportunity to

 11 comment. They won't have to work through the

 12 Christmas holiday to get them in in 30 days. So,

 13 that's better. Thank you.

 14 CHAIRMAN GENSLER: Before I turn to

 15 Commissioner Wetjen, I just -- there is a question

 16 on page 22. And, Dan, I want to make sure that

 17 you're focused on this as well. But is the

 18 Commission's proposed definition of economically

 19 equivalent swap appropriate? If not, how should

 20 it be, you know, definition be changed, and why?

 21 And what other factors should consider when

 22 defining economically equivalent, et cetera, et
 124

 1 cetera?

 2 My question for you, Dan, is, if in a

 3 final rule in this matter we were to say, you

 4 know, based on commenters, these are the three

 5 things that define what economically equivalent

 6 is, then we could go final. We don't have an

 7 administrative law problem, that we didn't ask

 8 enough questions. Because I, for one, would've

 9 been fine even if this proposal had --

 10 economically equivalent means same tenor, meaning

 11 the same life, and the same underlying reference,

 12 you know, just things like that. Now, maybe

 13 there's a third or fourth thing, but I'm just

 14 using that as two examples that it's the same

 15 tenor and same reference, you know, because

 16 economically equivalent to me means really

 17 economically equivalent. But I just want to make

 18 sure we could -- my question for you is an

 19 administrative law question.

 20 MR. BERKOVITCH: The --

 21 CHAIRMAN GENSLER: Do we ask enough so

 22 that we could finalize with specificity about the
 125

 1 definition of economically equivalent?

 2 MR. BERKOVICH: As long as there's

 3 notice in the -- in this proposed rule that this

 4 is the subject of the Commission is considering,

 5 and that the proposed definition is something the

 6 Commission is considering. So, as long as the

 7 final is a logical outgrowth of the proposed,

 8 there's adequate notice.

 9 CHAIRMAN GENSLER: So, this is adequate

 10 notice on, for instance, if economically

 11 equivalent were to be the same tenor and the same

 12 underlying, or might we need to add a question to

 13 help on that?

 14 MR. BERKOVITZ: That sounds like that

 15 could be a logical outgrowth, what you had just

 16 described.

 17 CHAIRMAN GENSLER: Right, but if --

 18 MR. BERKOVITZ: The more specific --

 19 CHAIRMAN GENSLER: -- the fellow

 20 Commissioners would allow me to add a question

 21 there, right? So, could you, Amir, make sure,

 22 like, for instance, that it would be the same
 126

 1 tenor and the same underlying, what other factors

 2 could people, you know.

 3 MR. ZAIDA: That would be beneficial in

 4 providing the needed notice?

 5 CHAIRMAN GENSLER: Yeah. Commissioner

 6 Wetjen. I'm sorry to interrupt, but I was trying

 7 to build on what you were saying. Commissioner

 8 Wetjen?

 9 COMMISSIONER WETJEN: Thanks, Mr.

 10 Chairman. Thanks to the staff for all your hard

 11 work on this rule. And I also appreciate the

 12 briefings that you provide on this.

 13 Listening to the questions this morning

 14 and reflecting on our briefings and conversations

 15 about it over the last couple of weeks, I mean, it

 16 seems like there is this real issue or question

 17 about whether and to what degree the Commission

 18 should be involved in these determinations. I

 19 think that's the main takeaway, for me anyway,

 20 after having these discussions.

 21 But I think one thing that would be

 22 helpful for me, and maybe for the public, too, in
 127

 1 helping assess whether or not -- what has been

 2 proposed here would do the trick, and would

 3 reflect the appropriate level of involvement is if

 4 you could -- and it's been touched on a little bit

 5 already. But if you could walk me through again

 6 real briefly what the review process would like in

 7 the proposed rule, and what exactly the Commission

 8 and the Commission staff would do under that

 9 process, which is under Part 40, as I understand

 10 it.

 11 MR. ZAIDI: Sure. Under Part 40, like

 12 we mentioned, a DCM or SEF would submit the

 13 "available to trade" determination, and then staff

 14 would look at that explanation and analysis that

 15 they give -- that they provide with the rule

 16 submission, but also look at how they consider the

 17 factors under the regulations.

 18 And then, staff would either under the

 19 approval process or the certification process have

 20 45 or 10 days to review. It could also be

 21 extended for an additional review period based on

 22 certain -- in specified circumstances, like if
 128

 1 there was a novel or a complex issue. And then --

 2 COMMISSIONER WETJEN: Sorry to

 3 interrupt, but if the staff or the Commission does

 4 nothing, and then after, what is it, 10 days of

 5 doing nothing, that's when the rule becomes

 6 effective. Is that right?

 7 MR. ZAIDI: Right. That's correct.

 8 COMMISSIONER WETJEN: I'm sorry.

 9 MR. ZAIDI: Yes. So, it would become

 10 effective. Otherwise, if staff give notification

 11 that it's disapproving the rule, then it would

 12 provide a notification to the DCM or SEF that it's

 13 disapproving or it's objecting to the

 14 certification.

 15 COMMISSIONER WETJEN: Do we have any

 16 sense at all right now how many products there are

 17 out there -- potentially out there that the

 18 Commission would act on?

 19 MS. DIETZ: I don't think so. Not at

 20 this time.

 21 MR. SHILTS: Yeah. There's thousands of

 22 swaps that are out there, but how many would be
 129

 1 filed under the trade execution mandate, the "made

 2 available to trade" under this proposal, I'm not

 3 sure I could hazard a good educated guess.

 4 CHAIRMAN GENSLER: Yeah. Commissioner

 5 Wetjen, you know, you could towards, like, in

 6 clearing LCH, the largest clearinghouse for

 7 interest rate swaps right now, somewhere between

 8 three quarters of a million and a million

 9 individual contracts. That's not to say that

 10 those are each subject to trading. And, in fact,

 11 if you enter into an interest rate swap on a

 12 Monday and then enter into it Tuesday, that's a

 13 different contract. So, that gives you the widest

 14 scope.

 15 But how many contracts are on the

 16 futures markets right now to give you an order of

 17 magnitude there?

 18 MR. SHILTS: I don't -- it's around

 19 1,200, 1,400, somewhere in that range of listed

 20 products. But --

 21 CHAIRMAN GENSLER: So, it's likely to be

 22 well in excess of the futures, but not all the
 130

 1 individual dates and contracts of that bigger

 2 number.

 3 MR. SHILTS: (Nodding)

 4 COMMISSIONER WETJEN: I mean, I guess it

 5 might be a fair point -- if there are, in fact,

 6 that many products out there, and, you know, given

 7 the strains on resources, I guess you can kind of

 8 see where I'm going. I'm just trying to figure

 9 out, you know, what the Commission involvement

 10 would be under this review process if there's so

 11 many contracts. So, I'm just looking forward to

 12 the comments to see what folks have to say about

 13 that.

 14 CHAIRMAN GENSLER: And I'd imagine --

 15 but just make sure. We do ask -- people can make

 16 these submissions by class or group similar to how

 17 they do it on the clearing side, or is that not

 18 the case?

 19 MR. ZAIDI: That's not the case. We

 20 didn't propose that.

 21 CHAIRMAN GENSLER: But wouldn't it be

 22 wise of us to -- you know, if somebody's doing,
 131

 1 for instance, two- to three- year interest rate

 2 swaps, they don't have to make, you know, 365

 3 individual submissions. It could be one

 4 submission for two- to three-year interest rate

 5 swaps, noting 365 calendar days in the year.

 6 MR. ZAIDI: A DCM or SEF could submit

 7 determinations under rule submission. They

 8 wouldn't have to submit 365 rule submissions at

 9 one time. They could include the analysis for the

 10 different swaps that they want to make "available

 11 to trade" in one rule submission.

 12 CHAIRMAN GENSLER: But could they do the

 13 analysis based on a class rather than having a

 14 document for each -- it would seem, like,

 15 burdensome on a SEF if they had to make 365, in my

 16 little hypothetical, submissions, even if it was

 17 all appended to one document.

 18 MR. SHILTS: I guess I'm not really sure

 19 what makes the most sense. I think for clearing,

 20 that doing it by class, because you do -- you

 21 know, like LCH, you can clear thousands of

 22 different individual swaps, you know, of interest
 132

 1 rate swaps. I don't know if the same analysis or

 2 review, looking for the trading mandate, you know,

 3 what's tradable would apply necessarily, whether

 4 you can do a, kind of a broad review of, you know,

 5 a number -- like you said, of the three- to five-

 6 year, that every one of the three-year, 17-day,

 7 and whatever, they would all be subject to the

 8 trading mandate, that the same analysis would

 9 apply. I just -- I don't really know the answer

 10 to that.

 11 I think the -- you can do that for

 12 clearing, but I don't know if that's -- would work

 13 for the trading mandate. It's just not something

 14 I've really thought about. But it might be

 15 something we can include as a question.

 16 CHAIRMAN GENSLER: If other

 17 Commissioners felt the same way so that we could

 18 hear from the market participants, if we could add

 19 some question on that. But I don't know.

 20 MR. SHILTS: Yeah.

 21 CHAIRMAN GENSLER: But I was -- we'll

 22 call it the Mark Wetjen question.
 133

 1 COMMISSIONER WETJEN: Thanks, I think.

 2 I don't have any further questions. The only

 3 other thing I would say is that my impression is

 4 that Commissioner O'Malia has an especially keen

 5 interest in this, and so I'm looking forward to

 6 the opportunity of working with him on these

 7 roundtables so I can learn more from the market

 8 participants as well. Thanks.

 9 CHAIRMAN GENSLER: I thank you. And,

 10 Mr. Stawick.

 11 MR. STAWICK: Commissioner Wetjen?

 12 COMMISSIONER WETJEN: Aye.

 13 MR. STAWICK: Commissioner Wetjen, aye.

 14 Commissioner O'Malia?

 15 COMMISSIONER O'MALIA: Aye.

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

 17 Commissioner Chilton?

 18 COMMISSIONER CHILTON: Aye.

 19 MR. STAWICK: Commissioner Chilton, aye.

 20 Commissioner Sommers?

 21 COMMISSIONER SOMMERS: No.

 22 MR. STAWICK: Commissioner Sommers, no.
 134

 1 Mr. Chairman?

 2 CHAIRMAN GENSLER: I'm going to say aye,

 3 but before you summarize, that was with that

 4 question having been added, okay?

 5 MR. STAWICK: The staff proposal as

 6 amended.

 7 CHAIRMAN GENSLER: Yeah.

 8 MR. STAWICK: The -- Mr. Chairman, on

 9 this question, the yeas are four, the nays are

 10 one.

 11 CHAIRMAN GENSLER: I thank you, Mr.

 12 Stawick. And with the ayes having it, it will be

 13 sent off to the Federal Register, as amended. Was

 14 there -- no?

 15 So, I think what we're doing next is

 16 some members of the Division of Market Oversight

 17 will be up to talk about the staff recommendation

 18 on the final rule with regard to foreign boards of

 19 trade. Again, a particular shout out to two

 20 senators, Senators Feinstein and Levin, who worked

 21 so hard to help us, I think, move from a no-action

 22 regime to a more consistent registration regime.
 135

 1 I'd like to welcome Duane Anderson,

 2 David -- is David there? Yes, David Steinberg,

 3 Ryne Miller. Where's Ryne? I don't see him

 4 there. Oh, there's Ryne. David Van Wagner, and

 5 Rick Shilts, all of the Division of Market

 6 Oversight, to present the staff's recommendation

 7 concerning this final rule on registration of

 8 foreign boards of trade. I'll share with the

 9 public.

 10 Duane once said when we set up 30

 11 separate rule teams, and this one of them, Duane

 12 said he was just an island. He really -- he was

 13 off to his own, and he didn't think -- well,

 14 actually you're, as you'll describe, has touched

 15 clearing.

 16 MR. ANDERSON: And it wasn't just me as

 17 an island, it was the team was an island.

 18 I'm here to present for your

 19 consideration the proposed final rule for foreign

 20 board of trade registration. As you know, the

 21 Dodd-Frank Act amended Section 4(b) of the

 22 Commodity Exchange Act to provide that the
 136

 1 Commission may adopt rules and regulations

 2 requiring registration with the Commission of a

 3 foreign board of trade that provides its members

 4 or other participants located in the United States

 5 with direct access to its electronic trading and

 6 order matching system.

 7 The Commission may also adopt rules and

 8 regulations prescribing procedures and

 9 requirements applicable to such registration.

 10 For purposes of this registration, the

 11 Dodd-Frank Act defines direct access to mean an

 12 explicit grant of authority by a foreign board of

 13 trade to identified member or other participant

 14 located in the United States to enter trades

 15 directly into the trade matching engine of the

 16 foreign board of trade.

 17 Of course, the Commission determined to

 18 establish a registration provision and published a

 19 proposed rule in November of last year. After

 20 reviewing the comments submitted in response to

 21 the proposed rule, we are proposing that the

 22 Commission adopt this final foreign board of trade
 137

 1 registration rule substantially as originally

 2 proposed, with certain modifications.

 3 The registration provisions will replace

 4 the current procedure in place since 1996 of staff

 5 issuing no-action relief letters to foreign boards

 6 of trade that wish to permit direct access.

 7 By adopting uniform application

 8 procedures and registration requirements and

 9 conditions, the process by which foreign boards of

 10 trade are permitted to provide direct access to

 11 their trading systems will become more

 12 standardized, more transparent to both

 13 registration applicants and the general public,

 14 and will promote fair and consistent treatment of

 15 all applicants.

 16 Generally applicable regulations will

 17 provide greater legal certainty for foreign boards

 18 of trade providing direct access.

 19 Commenters generally supported the

 20 adoption of a registration process.

 21 The process set forth in new Part 48 of

 22 the Commission's regulations, it provides that a
 138

 1 foreign board of trade must be registered in order

 2 to provide direct access and identify standards

 3 that must be met to be registered and conditions

 4 that must be satisfied to maintain registration.

 5 Many of these requirements and conditions of

 6 registration have evolved from requirements and

 7 conditions that Commission staff currently applies

 8 to foreign boards of trade in the no-action relief

 9 letters.

 10 For instance, in determining whether to

 11 register a foreign board of trade, the Commission

 12 will evaluate whether the foreign board of trade's

 13 home regulatory authority overseas, the foreign

 14 board of trade, in a manner that is comparable to

 15 the CFTC's oversight of DCMs. The operative word

 16 here is "comparable," is used in both the

 17 registration rule and the foreign board of trade

 18 provisions of the Dodd- Frank Act itself.

 19 Comparable is not interpreted to mean

 20 that the foreign board of trade and its clearing

 21 organization have to be subject to oversight that

 22 is identical to the manner in which the CFTC
 139

 1 oversees DCMs and clearing organizations.

 2 Instead, the rule provides that the comparability

 3 determination will be based on a principles-based

 4 review in which the Commission will look to

 5 determine if the foreign board of trade and the

 6 clearing organization's regulators support and

 7 enforce regulatory objectives in the oversight of

 8 the foreign board of trade and clearing

 9 organization that are substantially equivalent to

 10 the regulatory objectives supported and enforced

 11 by the Commission in its oversight of DCMs and

 12 DCOs. These objectives would include such

 13 requirements as prevention of market manipulation

 14 and customer and market abuse.

 15 Part 48 describes how and where to apply

 16 for registration, and provides a limited

 17 registration application process for those foreign

 18 boards of trade that currently are operating on

 19 staff-issued no-action relief letters. Many of

 20 those who are recipients of the no-action letter

 21 commented to the proposed rules.

 22 In response to their comments, the
 140

 1 Commission has attempted to make it easier for

 2 those who are operating under a no-action letter

 3 to register; that is, originally they had to make

 4 a limited application within 120 days from the

 5 effective date of the rule. That's been modified

 6 out to 180 days, so they now have the two months

 7 the rule takes to become effective, and then 180

 8 days after that in which to submit a limited

 9 application.

 10 During that period, they can continue to

 11 operate pursuant to the no-action relief. If they

 12 get their application in at the 180-day point,

 13 they can continue to operate pursuant to the

 14 no-action relief until such time as the Commission

 15 acts upon their application; that is, by issuing

 16 an order of registration or a notice of action

 17 indicating that the Commission will not register

 18 the foreign board of trade, at which time the

 19 no-action letter will be withdrawn.

 20 Part 48 describes the requirements that

 21 foreign boards of trade would have to demonstrate

 22 and meet in order to be registered. Whether
 141

 1 they're successfully met will be determined by a

 2 review of the information submitted by the

 3 applicant in the application forms, and, as

 4 necessary, a staff on-site visit to the foreign

 5 board of trade, the clearing organization, and its

 6 regulator.

 7 With respect to the clearing and

 8 settlement requirement, Part 48 requires that the

 9 clearing organization either be registered with

 10 the CFTC as a DCO or demonstrate that it observes

 11 generally recognized international standards, the

 12 RCCP's recommendations for central counterparties,

 13 or successor standards.

 14 In response to comments, the Commission

 15 has modified the final rule to reflect that if a

 16 clearing organization is registered with the

 17 Commission as a DCO, we would need no further

 18 information from that clearing organization as

 19 part of the foreign board of trade's registration

 20 process.

 21 Part 48 also details the conditions that

 22 a registered foreign board of trade must meet to
 142

 1 retain its registration, including general

 2 conditions, reporting obligations, and conditions

 3 that apply to link to contracts. Staff believes

 4 that most of the general conditions and reporting

 5 obligations, including quarterly volume reports,

 6 are being met by foreign boards of trade currently

 7 operating pursuant to direct access no action

 8 relief.

 9 The linked contract conditions include

 10 those identified in the Dodd-Frank Act and those

 11 derived from Commission staff experience in

 12 issuing no-action letters, and currently are being

 13 met by the one foreign board of trade that is

 14 operating pursuant to direct access no-action

 15 relief that lists linked contracts.

 16 Part 48 identifies the types of entities

 17 to which a registered FBOT could grant direct

 18 access. That would include identified members and

 19 other participants that trade for their

 20 proprietary accounts, FCMs that can submit orders

 21 on behalf of U.S. customers, and CPOs or CTAs or

 22 entities exempt from such registration that submit
 143

 1 orders on behalf of U.S. pools or for accounts of

 2 U.S. customers for which they have discretionary

 3 authority.

 4 Again, this list of eligible

 5 participants is consistent with the participants

 6 under the existing no-action relief.

 7 With respect to new contracts that are

 8 not included in the original application, Part 48

 9 describes the procedures to be followed by a

 10 registered foreign board of trade that wants to

 11 make them available, including non-narrow based

 12 stock index futures contracts.

 13 Part 48 also identifies reasons for

 14 which a foreign board of trade's registration

 15 could be revoked, including failure to satisfy

 16 registration requirements or conditions.

 17 Finally, the appendix to Part 48 has

 18 been modified from a list of items that are

 19 required in the original proposed notice to

 20 application forms that include the same

 21 requirement for information.

 22 I'd like to thank my fellow team members
 144

 1 for their exceptional efforts in creating this

 2 proposal, and that includes David Steinberg, my

 3 deputy team leader, Ryne Miller, Phillip Calling

 4 (phonetic), and William Muldinado from DMO,

 5 Carlene Kim and Neil Kumar from OGC, Jocelyn

 6 Partridge from DCR, Michael Pennick from OCE,

 7 Peter Calls from DSIO, and last, but not least,

 8 Robert Rosenfeld from OIA.

 9 I'd be happy to answer any questions

 10 that you may have.

 11 CHAIRMAN GENSLER: Thank you, Duane.

 12 The Chair will entertain a motion to accept staff

 13 recommendations and consider this final rule.

 14 COMMISSIONER SOMMERS: So moved.

 15 COMMISSIONER CHILTON: Second.

 16 CHAIRMAN GENSLER: All right. I support

 17 the final rule to implement this foreign board of

 18 trade registration regime. I think it's very

 19 appropriate that we have a consistent registration

 20 regime. We didn't have this opportunity before

 21 Dodd-Frank. We, as Duane went through, used

 22 something called no-action letters, and I know
 145

 1 that sometimes it was a little bit concerning to

 2 members of Congress why we didn't register these

 3 entities. And now we have a specific registration

 4 in our statute.

 5 I just really -- I have one question.

 6 It's for somebody not at the table, but it's for

 7 Jackie Mesa, who's the head of our international

 8 -- as Jackie comes to the table.

 9 But, Jackie, I just want to understand

 10 how foreign jurisdictions see this, because I know

 11 we've shared, as we've been going through these,

 12 you know, dozen or 15 months, and we always want

 13 to coordinate closely. I know Jackie and I are

 14 flying out tomorrow night to Paris to be at these

 15 meetings on Wednesday and Thursday.

 16 MS. MESA: As you rightly point out,

 17 foreign regulators and foreign exchanges have been

 18 very interested in this rule and this provision in

 19 Dodd-Frank. They've really benefitted from our

 20 recognition procedures in the past. And we're

 21 curious on how we would be changing it.

 22 And so, we have been talking about it in
 146

 1 international meetings where foreign regulators

 2 and exchanges attend, but also in our bilateral

 3 discussions. It always comes up on how we're

 4 going to proceed in this area. And I can tell you

 5 that largely the biggest concern was whether we

 6 were going to back away from a recognition regime

 7 and a comparability analysis, and whether we were

 8 going to require, like, a domestic exchange full

 9 registration. And I think, as the rule reflects,

 10 we are going to maintain our recognition under --

 11 for foreign exchanges and the comparability

 12 analysis. And that was their biggest concern.

 13 So, we haven't had any other specific

 14 concerns from foreign regulators, and I think they

 15 seem relatively comfortable with the rule we're

 16 proposing today.

 17 CHAIRMAN GENSLER: Great. I thank you.

 18 And that gives me additional comfort.

 19 Commissioner Sommers?

 20 COMMISSIONER SOMMERS: Thank you, Mr.

 21 Chairman. I'll continue on the same path of

 22 questioning to just clarify that this rule creates
 147

 1 a registration system, not a dual registration for

 2 these foreign boards of trade. They will not be

 3 duly regulated by us and their home country

 4 regulator.

 5 MR. ANDERSON: That's correct. That's

 6 what this rule does. Dodd-Frank provides that we

 7 look to the foreign regulator for comparable,

 8 comprehensive supervision in the home country.

 9 The foreign regulator is the primary regulator.

 10 They're registered with us just for the purpose of

 11 providing direct access.

 12 COMMISSIONER SOMMERS: Thank you. I

 13 have a couple of questions on the process, and

 14 with regard to the process for limited

 15 registration in those foreign boards that are

 16 already operating under no-action relief. And you

 17 said that they will be able to continue to operate

 18 until the Commission acts. So, there isn't a

 19 deadline that would kick in that we have only a

 20 certain amount of time to either approve or

 21 disapprove their registration status.

 22 MR. ANDERSON: We have no time criteria
 148

 1 on ourselves. Now, we have established the

 2 180-day time period for the application, but we

 3 have amended the rule to say that it is required

 4 to be in good faith on the part of the applicant,

 5 a complete application. And we can work on that

 6 applicant -- application, and if down the road it

 7 turns out to be materially incomplete, we can work

 8 with the foreign board of trade to get it

 9 complete.

 10 COMMISSIONER SOMMERS: And if a foreign

 11 board of trade that is currently operating under

 12 no-action relief does not have an application,

 13 even in good faith and within those 180 days, do

 14 we immediately revoke their status?

 15 MR. ANDERSON: That's unclear. I don't

 16 anticipate that happening because we're telling

 17 the foreign boards of trade, we're encouraging

 18 them to come in in draft form before the 180 days.

 19 We're working with them to get a document that

 20 looks good when they do come in. I will be in

 21 contact with all of them, and they will certainly

 22 be pressured to have something here at the 180-day
 149

 1 point.

 2 COMMISSIONER SOMMERS: Okay.

 3 MR. ANDERSON: The ones that have the

 4 no-action letters, the ones that might not have

 5 anything, are probably the ones that will no

 6 longer have business from the U.S. But the others

 7 will certainly have something here because they

 8 want to continue to operate with business from the

 9 U.S.

 10 COMMISSIONER SOMMERS: I believe that

 11 the way that this rule is written, it also

 12 captures those people who currently have pending

 13 applications for no-action relief to be part of

 14 the limited registration.

 15 MR. ANDERSON: Yes.

 16 COMMISSIONER SOMMERS: Is that correct?

 17 And how many of those do we have pending right

 18 now?

 19 MR. ANDERSON: We have seven people who

 20 have submitted applications, but I don't know

 21 they're all going to be considered valid

 22 applications. One of them, for instance, is a
 150

 1 European MTF, a multi-lateral trading facility,

 2 and we have not addressed the issue of whether an

 3 MTF is subject to comparable, comprehensive

 4 supervision and regulation that the Commission

 5 applies to DCMs. So, I'm not sure whether that's

 6 going to turn out to be a valid application or

 7 not. We'll have to spend some time with that one.

 8 COMMISSIONER SOMMERS: Because those

 9 people who have pending applications for no-action

 10 relief are not able to actually operate during

 11 this time frame while we're considering

 12 applications, will they be first in the queue?

 13 MR. ANDERSON: If they wish to be. I

 14 mean, there's no incentive for them to wait 180

 15 days certainly. I mean, we're allowing them to do

 16 the limited part of the application process that

 17 allows them to identify documentation that they

 18 have already submitted to us and tell us that it's

 19 still current and valid, and apply it to their new

 20 application. They can certainly begin application

 21 right after the effective date, and my

 22 understanding is at least two of those who have
 151

 1 pending applications are going to be here probably

 2 day one after the effective date.

 3 COMMISSIONER SOMMERS: Right. I guess I

 4 would just expect that their applications would be

 5 the most current of anyone who's there.

 6 MR. ANDERSON: Certainly we will look at

 7 those as they come in, and they have more

 8 incentive to come in right after --

 9 COMMISSIONER SOMMERS: Right.

 10 MR. ANDERSON: -- the effective date

 11 than the exchanges that are operating under

 12 no-action relief.

 13 COMMISSIONER SOMMERS: All right. Thank

 14 you so much.

 15 CHAIRMAN GENSLER: Thank you,

 16 Commissioner Sommers. Commissioner Chilton.

 17 COMMISSIONER CHILTON: Thanks again for

 18 all your work.

 19 I have a general question about

 20 comparability. And I appreciate the final rule

 21 and that it's using a principles- based look at

 22 our brethren regulatory regimes and the foreign
 152

 1 boards of trade. But I have a specific question

 2 with regard to look alike contracts; that is,

 3 contracts that are offered on a U.S. exchange,

 4 potentially for delivery in the United States. Is

 5 there any added criteria other than that

 6 principles-based general look at a foreign board

 7 of trade with regard to adhering to any of our

 8 rules or regulations?

 9 We all remember the ICE circumstance

 10 where ICE London has a look alike to the WTI

 11 contract offered on NYMEX for delivery in the

 12 United States. I'm curious, does this address

 13 that sort of possibility?

 14 MR. ANDERSON: There's a long series of

 15 conditions that apply in the ICE situation because

 16 that's a linked contract. It's actually -- the

 17 price is linked to a contract traded on a

 18 registered entity. Those conditions are in the

 19 rule.

 20 We have also asked the foreign boards of

 21 trade to identify any other kinds of contracts

 22 which may have some relationship to a contract
 153

 1 traded in the United States. For instance, MRX

 2 and NYMEX both traded freight rate contracts that

 3 used the same third party price for settlement.

 4 Now, it turns out that there was no market

 5 manipulation issue there. There was no potential

 6 problem, but we needed to know about that. And

 7 if, in fact, we get a contract listed in which

 8 there is a potential problem, we've given

 9 ourselves the option of imposing additional

 10 conditions on that contract, all the way up to and

 11 including the same conditions that we imposed on

 12 linked contracts.

 13 COMMISSIONER CHILTON: Very good.

 14 That's helpful. And no other question, but for

 15 the people who don't understand why this is an

 16 important issue, you have a contract on a U.S.

 17 Exchange, and there's a look alike contract on a

 18 foreign exchange for delivery at the same place in

 19 the United States. What we've seen happen in the

 20 past is that traders would reach a level at which

 21 they feel like they're above what are currently

 22 accountability levels on the U.S. exchange. These
 154

 1 aren't position limits, but they're accountability

 2 levels, sort of a loosey-goosey position limit, if

 3 you will.

 4 But then, they would, in order to have

 5 greater exposure in that same contract, this crude

 6 oil contract, they'd go to the look alike contract

 7 in London and have positions there. And they

 8 could do the same -- well, when you combined all

 9 of those in aggregate, they could have a

 10 significant, what I would term, excessive

 11 speculative role.

 12 So, this rule allows us to look at those

 13 sorts of things and ensure that they are meeting

 14 more than just a principles-based test, but an

 15 actual test similar to what we did in the specific

 16 crude oil example with regard to WTI.

 17 MR. ANDERSON: Yes, sir. And, as a

 18 matter of fact, among the link contract conditions

 19 is reporting in the COT, position limits that are

 20 comparable or identical to the position limits at

 21 the registered entity on which the contract is

 22 based. And ICE Futures Europe has been complying
 155

 1 with those for some time now, and will continue

 2 to. And any additional linked contracts get

 3 listed by other foreign boards of trade that want

 4 direct access, will also have to meet those

 5 conditions.

 6 COMMISSIONER CHILTON: Thank you very

 7 much. Thank you, again, for your work, guys.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Chilton. Commissioner O'Malia.

 10 COMMISSIONER O'MALIA: Thank you to the

 11 team for working through this.

 12 In the rule -- proposed rule, we have

 13 the term "observance of recommendations for

 14 central counterparties." Now, Duane, you had

 15 mentioned comparable regulation, but in this we

 16 use the term "observance of recommendations for

 17 the central counterparty." How will the

 18 Commission evaluate a clearing organization's

 19 "observance of recommendations of clearing

 20 counterparties?" I see Mr. Wasserman is in the

 21 house.

 22 MR. ANDERSON: We're going to defer the
 156

 1 questions on clearing to the clearing expert.

 2 MR. WASSERMAN: Thank you, Commissioner

 3 O'Malia. As you know, the currently applicable

 4 standard internationally is the recommendations

 5 for central counterparties. The Committee on

 6 Payment and Settlement Systems and IOSCO have a

 7 team, or a number of teams actually, working on

 8 updating these recommendations to what are going

 9 to be the principles for financial market

 10 infrastructures. And I'm actually participating

 11 in that effort. There is an intention that those

 12 will be completed by the end of March, and

 13 applicable by the end of 2012.

 14 Along with those principles, we are

 15 developing, with the help of the World Bank and

 16 the IMF, an assessment methodology to determine

 17 observance of those principles, both at the

 18 principle level as well as certain key

 19 considerations.

 20 That -- I think the intention of this

 21 rule is to permit, so long as the recommendations

 22 for central counterparties are effective, one may
 157

 1 essentially demonstrate observance of those. On

 2 the other hand, as may likely happen given the

 3 time schedule, in the case that the principles for

 4 FMIs have been finalized, but are not yet

 5 effective, an entity would be able to, if they so

 6 choose, say, well, let's just skip over and go

 7 directly to the PFMIs and demonstrate how those

 8 are observed.

 9 As I mentioned, there is an assessment

 10 methodology, and essentially what that looks is --

 11 that is still in development. It has not yet been

 12 finalized, but essentially as with a number of

 13 international standards, it looks at whether the

 14 standards are observed, broadly observed,

 15 partially observed. And it strikes me that the

 16 approach we will be taking is going to be a

 17 flexible one because essentially it may well be

 18 the case that perfection is very, very hard to

 19 achieve in terms of observance of each and every

 20 key consideration of each and every principle.

 21 And so, obviously if in some cases, if

 22 the standard may be broadly observed rather than
 158

 1 observed, that would not, it seems to me, be

 2 disqualifying. Obviously when one get down to

 3 partially observed and not observed, that might be

 4 somewhat of a different story. But I think the

 5 key point is it needs to be done in a bit of a

 6 more flexible and thoughtful manner rather than,

 7 okay, this box was not checked, you're out.

 8 COMMISSIONER O'MALIA: This is a key

 9 point. This was the first question I was asked

 10 every time I went into a meeting with foreign

 11 regulators in my recent trip to Asia. So, they

 12 were keenly aware of the IOSCO principles,

 13 international settlements. They do support a

 14 principles- based.

 15 What happens if there's a difference

 16 between our DCO core principles and the

 17 international principles-based standards? They

 18 were concerned that they would be tugged in two

 19 different directions on a clearinghouse at least.

 20 And now that we've linked clearing and trading in

 21 this regard, they were uncertain how that might

 22 play out.
 159

 1 MR. WASSERMAN: As I read it, they have

 2 two choices. They may register as a DCO, and if

 3 you have a registered DCO, that's the end of it.

 4 Now, obviously we are supervising those DCOs, and

 5 if we have some concern with what the DCO is

 6 doing, then DCR as part of its supervisory

 7 activities would be addressing that. But that

 8 would not be part of this exercise.

 9 So, under this exercise, if you're a

 10 DCO, you're in. Alternatively --

 11 COMMISSIONER O'MALIA: In meaning under

 12 our DCO core principles.

 13 MR. WASSERMAN: Yes. That is to say, if

 14 you are registered as a DCO, then for purposes of

 15 this rule, that is enough. One just simply says

 16 I'm registered, and we say, yes, indeed you are.

 17 And that's it for these purposes.

 18 Alternatively, if you are not registered

 19 as a DCO, then what you must do is observe this

 20 international standard, the RCCPs or, in the

 21 fullness of time, the principles for FMIs.

 22 And so, then the question is not, do you
 160

 1 meet the core principles for DCOs. If you're not

 2 seeking registration as a DCO, you would not be

 3 measured against those principles. You'd be

 4 measured against -- I'll just the principles for

 5 FMIs and your observance of those.

 6 COMMISSIONER O'MALIA: Thank you very

 7 much. Do other jurisdictions utilize or rely on

 8 an FBOT-

 9 Like registration regime so their

 10 citizens can directly access U.S. exchange? And,

 11 if so, do they require the same standards that

 12 we've -- that Mr. Wasserman here just laid out?

 13 MR. ANDERSON: Foreign countries do have

 14 standards for, for instance, CME or NYMEX to make

 15 it system available from their country. And I'd

 16 like to ask Jackie to come back up here and talk

 17 about similarities or differences.

 18 MS. MESA: We have a music chair on the

 19 end here. Yes, they do a have a similar process

 20 in foreign jurisdictions, and we looked at this

 21 pretty intensely a couple of years ago, a pretty

 22 thorough analysis. And most apply the same
 161

 1 standard across the board because there were

 2 principles developed in IOSCO for recognition of

 3 direct access. And so, everyone bases their

 4 regimes off those IOSCO standards, and we did the

 5 same here.

 6 COMMISSIONER O'MALIA: So, it's a

 7 two-way comparability street here. Okay.

 8 MS. MESA: That's right.

 9 COMMISSIONER O'MALIA: Thank you,

 10 Jackie. Can you walk me through the real time

 11 reporting obligations for swaps under the FBOT

 12 rules?

 13 MR. ANDERSON: The real time reporting

 14 is, I believe, going parallel to what we're going

 15 to do with DCMs, and that is the swap data will be

 16 provided to an SDR once there are SDRs available.

 17 And the SDR will do the real time reporting.

 18 COMMISSIONER O'MALIA: So, an FBOT would

 19 report to U.S. SDRs, or their respective --

 20 MR. ANDERSON: It's either one that's

 21 approved by the Commission or has an information

 22 sharing arrangement with the Commission. That's
 162

 1 our standard for SDRs.

 2 COMMISSIONER O'MALIA: So, an entity in

 3 a foreign jurisdiction has to report to a U.S. SDR

 4 under the FBOT rules.

 5 MR. ANDERSON: Yes.

 6 COMMISSIONER O'MALIA: One last question

 7 on pending contracts. You know, obviously there

 8 are contracts for clearing and trading that have

 9 been submitted and will be submitted, I suspect,

 10 under the no-action relief. How will we treat

 11 contracts being reviewed under that separate

 12 process while we're doing the FBOT? Are we going

 13 to wait until we complete the FBOT before we go

 14 back --

 15 MR. ANDERSON: No.

 16 COMMISSIONER O'MALIA: -- or can we walk

 17 and chew gum at the same time?

 18 MR. ANDERSON: I think we'll continue to

 19 look at contracts submitted by FBOTs under the

 20 no-action provision. The difference is that the

 21 no-action provision does not provide for swaps

 22 contracts. So, in all likelihood, they will have
 163

 1 to hold off if they want to trade swaps until

 2 they're registered, which would be an incentive

 3 for them to register as well.

 4 But we're reviewing contracts even now

 5 from foreign boards of trade operating under the

 6 no-action letters.

 7 COMMISSIONER O'MALIA: Well, assuming

 8 they're able to get their registration in on time,

 9 would they then be able to submit contracts -- if

 10 they submit within the 180-day period, would they

 11 then be able to submit swaps for trading?

 12 MR. ANDERSON: Once they're registered.

 13 COMMISSIONER O'MALIA: Under -- once we

 14 determine their --

 15 MR. ANDERSON: Yes. Once we issue --

 16 COMMISSIONER O'MALIA: Once we finalize.

 17 So, it's really -- it may be an incentive for

 18 them, but it's really -- we're really the

 19 gatekeepers as to whether -- and they get to move

 20 these contracts. And it's up to our pace to

 21 determine when that final rule is approved,

 22 correct?
 164

 1 MR. ANDERSON: Yes.

 2 COMMISSIONER O'MALIA: All right. So,

 3 regardless, they have 180 days, but it's still --

 4 they have to still wait for us to finalize.

 5 MR. ANDERSON: If they're really

 6 interested in trading swaps, they can submit the

 7 application the day after the effective date of

 8 the rule, if they wish.

 9 I mean, foreign boards of trade under

 10 the no-action relief have always been treated as

 11 parallel to the DCMs, and DCMs have never been

 12 able to list swaps. So, they've never been listed

 13 under the foreign board of trade no-action relief.

 14 So, it's new on both ends. It's new on the DCMs,

 15 and it's new on the foreign board of trade.

 16 COMMISSIONER O'MALIA: But you could

 17 probably understand their concern when they say

 18 you demanded 180 days, and yet I have no certainty

 19 going forward as to when you will approve my

 20 contract.

 21 MR. ANDERSON: Oh, that's true.

 22 COMMISSIONER O'MALIA: Or your exchange.
 165

 1 MR. ANDERSON: That's true.

 2 COMMISSIONER O'MALIA: Okay. I would

 3 suspect we have some concerns in that area.

 4 Thank you very much.

 5 CHAIRMAN GENSLER: Thank you,

 6 Commissioner O'Malia. Commissioner Wetjen.

 7 COMMISSIONER WETJEN: I just want to

 8 start by thanking the team. I appreciated the

 9 briefing that we had on this rule a couple of

 10 weeks ago. And I appreciate everyone's hard work

 11 in getting this rule finalized.

 12 I don't have any other questions. I

 13 just wanted to, I guess, restate something I

 14 alluded to in the opening statement, which was I

 15 think on balance it's better to have a

 16 registration approach or a registration regime as

 17 opposed to a no-action letter regime. I think

 18 there are a lot of benefits to that for market

 19 participants that were covered in the preamble of

 20 the rule. So, I'm happy to support the final rule

 21 today.

 22 Thanks for all your help.
 166

 1 CHAIRMAN GENSLER: Thank you,

 2 Commissioner Wetjen. Thank you for everybody on

 3 the staff.

 4 Mr. Stawick?

 5 MR. STAWICK: Commissioner Wetjen?

 6 COMMISSIONER WETJEN: Aye.

 7 MR. STAWICK: Commissioner Wetjen, aye.

 8 Commissioner O'Malia?

 9 COMMISSIONER O'MALIA: Aye.

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

 11 Commissioner Chilton?

 12 COMMISSIONER CHILTON: Aye.

 13 MR. STAWICK: Commissioner Chilton, aye.

 14 Commissioner Sommers?

 15 COMMISSIONER SOMMERS: Aye.

 16 MR. STAWICK: Commissioner Sommers, aye.

 17 Mr. Chairman?

 18 CHAIRMAN GENSLER: Aye.

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

 20 Chairman, on this question, the yeas are five,

 21 the nays are zero.

 22 CHAIRMAN GENSLER: Thank you, Mr.
 167

 1 Stawick. The ayes having it unanimously, the

 2 staff recommendation is accepted, and will be sent

 3 to the Federal Register.

 4 I think, Mr. Stawick, I already did a

 5 unanimous consent on technical corrections. Is

 6 that right?

 7 MR. STAWICK: Yes. You were going to.

 8 You mentioned it. You might want to just restate

 9 it now.

 10 CHAIRMAN GENSLER: I have. All right,

 11 I'll do it now.

 12 So, at this point, I ask unanimous

 13 consent to allow staff to make technical

 14 corrections to documents voted on today prior to

 15 sending them to the Federal Register, without

 16 objection.

 17 So ordered. Our next scheduled public

 18 meeting will be Tuesday, December 20th, and the

 19 subjects of the rulemaking presented in that

 20 meeting will be published on the Commission's

 21 website as is our practice under the Government

 22 and Sunshine Act seven days before the meeting.
 168

 1 If there's -- did you want to say something?

 2 COMMISSIONER CHILTON: I did very

 3 briefly.

 4 CHAIRMAN GENSLER: All right. All

 5 right. I'm sorry -- no, no, I think I have a

 6 minute. I need to go to an FSOC meeting, but go

 7 ahead.

 8 COMMISSIONER CHILTON: Well, I'll be

 9 very quick. The Chairman and I have spoken

 10 several times about the swaps definition, which

 11 the position limit rule is dependent upon the

 12 swaps definition. And I know you are working hard

 13 to push that. I know you were asked about it

 14 before the Agriculture Committee the other day.

 15 And it's a joint rule. It's mandated,

 16 but it's a joint rule between the CFTC and the

 17 SEC. So, as much as we might like to at times, we

 18 can't control everything.

 19 But I'd just reiterate that this is an

 20 important issue for me, that I know it's important

 21 for a lot of us, but that we got to get this thing

 22 done. And I appreciate the forbearance of the
 169

 1 Chairman as I continue to nip around trying to

 2 push us to do that.

 3 CHAIRMAN GENSLER: I will say this. I

 4 think it's critical that we complete the further

 5 definition rules, the entity definition that

 6 related to swap dealers and securities- based swap

 7 dealers and so forth. It is further along. There

 8 is nearly a PENs down version that we can

 9 distribute to all of you, and you've all given

 10 some input on that comment summary over the last

 11 two months.

 12 We're frankly just not as far along on

 13 the products because it was proposed in April,

 14 whereas the entities one was proposed about five

 15 or six months earlier.

 16 But I do -- I'll raise it with Chairman

 17 Shapiro again in about a half an hour when I'm at

 18 the FSOC.

 19 COMMISSIONER CHILTON: Thank you, sir.

 20 CHAIRMAN GENSLER: Thank you.

 21 COMMISSIONER O'MALIA: Mr. Chairman, to

 22 the point on the meeting on the 20th, obviously
 170

 1 we're approaching the holidays, and the more

 2 specificity we can have and the staff can have

 3 about who will be up on the 20th and potentially

 4 January 5th as well so we can marshal our forces

 5 and address the appropriate rules. We want to be

 6 as responsive as possible, but we also need to

 7 protect -- you know, the staff has worked

 8 extraordinarily hard, and protect their holidays

 9 to the extent that we can. And if we can narrow

 10 down those so we can address specifically the

 11 rules that we are going to be working over the

 12 holidays, I would greatly appreciate that, and cut

 13 everybody loose if they're not going to have to be

 14 ready for the 20th of --

 15 CHAIRMAN GENSLER: No, I think that's

 16 very good, and glad to have feedback. I think

 17 there's five documents that are PENs down version

 18 in each of your hands for finals. I think that's

 19 right. So, those are the ones that are possibly.

 20 But I know that we're not going to do all five on

 21 December 20th. But, I mean, to get some feedback

 22 from Commissioners' offices as to which ones you
 171

 1 think, you know, whether it's, you know, three of

 2 them, four of them, which ones also people think.

 3 And in terms of January 5th, we'll

 4 continue to work on that because we have still a

 5 few days before the PENs down version before that.

 6 It may just be that some of those five are split

 7 between December 20th and January 5th.

 8 COMMISSIONER O'MALIA: And I'm happy to

 9 work through that. I know this is -- we can't

 10 necessarily be 100 percent, but to the extent that

 11 the Commission can make a determination so we can

 12 tell everybody what their holiday future may be in

 13 store. Obviously, we're going to be working, and

 14 we're reading through the rules, and we're going

 15 to have to -- you know, we just want to make sure

 16 we're asking the right staff on the right rule

 17 teams to participate and cut the rest loose if

 18 they don't have to be here.

 19 CHAIRMAN GENSLER: Yeah, I absolutely

 20 agree. Absolutely.

 21 With that, I guess if there's no other

 22 further business, I'd entertain a motion to
 172

 1 adjourn the meeting, right? That's what I'm

 2 supposed to do?

 3 COMMISSIONER SOMMERS: So moved.

 4 COMMISSIONER CHILTON: I move we

 5 adjourn.

 6 CHAIRMAN GENSLER: All in favor?

 7 (Chorus of ayes)

 8 CHAIRMAN GENSLER: Any opposed? Thank

 9 you very much.

 10 (Whereupon, at 12:25 p.m., the

 11 PROCEEDINGS were adjourned.)

 12 * * * * *

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 173

 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Christine Allen, notary public in and

 4 for the District of Columbia, do hereby certify

 5 that the forgoing PROCEEDING was duly recorded and

 6 thereafter reduced to print under my direction;

 7 that the witnesses were sworn to tell the truth

 8 under penalty of perjury; that said transcript is a

 9 true record of the testimony given by witnesses;

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

 11 employed by any of the parties to the action in

 12 which this proceeding was called; and, furthermore,

 13 that I am not a relative or employee of any

 14 attorney or counsel employed by the parties hereto,

 15 nor financially or otherwise interested in the

 16 outcome of this action.

 17

 18

 19 (Signature and Seal on File)

 20 -----------------------------------

 21 Notary Public, in and for the District of Columbia

 22 My Commission Expires: January 14, 2013