UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 PUBLIC MEETING

 Washington, D.C.

 Wednesday, September 17, 2014
 2

 1 PARTICIPANTS:

 2 Commission Members:

 3 TIMOTHY G. MASSAD, Chairman

 4 MARK P. WETJEN, Commissioner

 5 SHARON Y. BOWEN, Commissioner

 6 J. CHRISTOPHER GIANCARLO, Commissioner

 7 Staff:

 8 ERIK F. REMMLER, Division of Swap Dealer and

 Intermediary Oversight

 9

 BARBARA S. GOLD, Division of Swap Dealer and

 10 Intermediary Oversight

 11 ISRAEL J. GOODMAN, Division of Swap Dealer and

 Intermediary Oversight

 12

 CHRISTOPHER W. CUMMINGS, Division of Swap

 13 Dealer and Intermediary Oversight

 14 STEPHEN A. KANE, Office of the Chief Economist

 15 JOHN C. LAWTON, Division of Clearing and Risk

 16 THOMAS J. SMITH, Division of Swap Dealer and

 Intermediary Oversight

 17

 RAFAEL MARTINEZ, Division of Swap Dealer and

 18 Intermediary Oversight

 19 CHRISTOPHER KIRKPATRICK, Secretary

 20

 21 * * * * *

 22
 3

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

 2 (1:58 p.m.)

 3 CHAIRMAN MASSAD: This meeting will come

 4 to order. This is a public meeting of the

 5 Commodity Futures Trading Commission. It is the

 6 first open meeting of the Commission since two of

 7 my fellow commissioners, Commissioner Bowen and

 8 Commissioner Giancarlo, and I took office. So I'm

 9 very pleased that we're here today. I'm very

 10 pleased to have the benefit of their experience

 11 and insight as we move ahead. I also want to

 12 acknowledge and thank Commissioner Wetjen, our

 13 veteran, who has put in a tremendous effort,

 14 particularly over the first several months of this

 15 year when he served as Acting Chairman and who's

 16 been very helpful to all of us as we have gotten

 17 up to speed on various issues. Thank you, Mark.

 18 I would also like to welcome members of

 19 the public, market participants, and members of

 20 the media as well as those listening to the

 21 meeting on the phone or watching the Webcast.

 22 As we take up any rule required by the
 4

 1 Dodd-Frank Wall Street Reform and Consumer

 2 Protection Act, we must never forget why the act

 3 was passed and the motivations behind Title VII.

 4 The Dodd-Frank Act was a comprehensive response to

 5 the worst financial crisis since the Great

 6 Depression. While there are many causes of the

 7 crisis, one was excessive risk from

 8 over-the-counter swaps, a large global industry

 9 essentially unregulated by any jurisdiction at

 10 that time.

 11 It was six years ago almost to the day

 12 -- September 16, 2008 -- when our government was

 13 required to step in and prevent the failure of

 14 AIG, which was on the brink of collapse because of

 15 excessive swap risk, a collapse that could have

 16 thrown our nation into another Great Depression.

 17 These rules, like many of the

 18 Commission's, are highly technical and complex.

 19 They may seem esoteric and far removed from the

 20 lives of most Americans, but the costs of the

 21 crisis were not. They were very real, very large,

 22 and borne by the American people through millions
 5

 1 of lost homes and jobs, many businesses shuttered,

 2 and many educations and retirements deferred.

 3 That is why these reforms are so important and

 4 that is what brings us here today.

 5 Today we will consider a final rule that

 6 will help make sure that many of the small utility

 7 companies that serve communities across our nation

 8 can reduce their risk of doing business when it

 9 comes to cost of fuel. We will also consider a

 10 proposed rule that will reduce the risk to our

 11 financial system that can be created when swap

 12 dealers enter into swaps that are not then cleared

 13 on central clearinghouses. Both of these agenda

 14 items are important steps in our effort to finish

 15 the job of implementing the Dodd-Frank Act. They

 16 help us achieve the full benefit of the new

 17 regulatory framework, while at the same time

 18 protecting the interests of commercial companies

 19 that need to use these markets.

 20 We will begin with consideration of the

 21 final rule pertaining to the swap activities of

 22 small utility companies, a small but important
 6

 1 part of the market, and that is what I like to

 2 refer to as the fine tuning of rules that is

 3 inevitably required when you have reforms as

 4 significant as Dodd-Frank required.

 5 Congress directed the Commission to

 6 regulate swap dealers. Among other things, we

 7 require swap dealers to treat customers fairly and

 8 manage risk adequately. Congress directed the

 9 Commission to impose heightened standards on swap

 10 dealers in their swaps activity with federal,

 11 state, and municipal government agencies and

 12 certain other so-called special entities. This

 13 was in response to the instances where swap

 14 dealers may have failed to disclose material risks

 15 of swap transactions to municipal entities or

 16 otherwise acted improperly, which often resulted

 17 in massive losses to the municipality.

 18 Because Congress defines special entity

 19 broadly, when the Commission implemented this

 20 congressional directive, it applied to many

 21 utility companies that are government owned.

 22 These are the companies responsible for keeping
 7

 1 the lights on in communities across our country,

 2 for heating and cooling our homes, and powering

 3 the kitchen appliances we use every day to feed

 4 our families.

 5 To do their job, they must manage the

 6 risk of their own fuel costs and to do that, they

 7 must be able to access the energy commodity

 8 markets. They engage in energy swaps. The

 9 counterparties with whom they transact business

 10 were often not registered swap dealers, nor were

 11 they the dealers that engaged in the abusive

 12 practices that led to Congress's concerns. The

 13 imposition of these requirements through a

 14 designation as a swap dealer could unduly burden

 15 their business and thereby threaten the ability of

 16 our local utility companies to manage their risks.

 17 To avoid burdening local utility

 18 companies, CFTC staff issued a series of no-action

 19 letters so that such requirements weren't

 20 effective while the Commission studied the issue

 21 further and decided whether to take permanent

 22 action -- and I commend Commissioner Wetjen, who
 8

 1 was then Acting Chairman, for doing that. The

 2 rule we are considering today provides a permanent

 3 solution to enable such utility companies to

 4 continue to use these markets effectively.

 5 We are also considering today a proposed

 6 rule on margin requirements for uncleared swaps.

 7 A key mandate of the Dodd-Frank Act was central

 8 clearing of swaps. This is a significant tool to

 9 monitor and mitigate risk, and we have already

 10 succeeded in increasing the overall percentage of

 11 the market that is cleared from an estimated 17

 12 percent in 2007 to 60 percent last month when

 13 measured by notional amount.

 14 But cleared swaps are only part of the

 15 market; uncleared bilateral swap transactions will

 16 continue to be an important part of the

 17 derivatives market. This is so for a variety of

 18 reasons. Sometimes commercial risks cannot be

 19 hedged sufficiently through clearable swap

 20 contracts; therefore, market participants must

 21 craft more tailored contracts that cannot be

 22 cleared. In addition, certain products may lack
 9

 1 sufficient liquidity to be centrally risk managed

 2 and cleared. This may be true even for products

 3 that have been in existence for some time and

 4 there will and always should be innovation in the

 5 market, which will lead to new products. That is

 6 why margin for uncleared swaps is important. It

 7 is a means to mitigate the risk of default and,

 8 therefore, the potential risk to the financial

 9 system as a whole. We need only recall how

 10 Treasury and the Federal Reserve had to commit

 11 $182 billion to AIG because their uncleared swaps

 12 activity threatened to bring down our financial

 13 system to appreciate the importance of the rule we

 14 are considering today.

 15 The proposed rule requires swap dealers

 16 and major swap participants to post and collect

 17 margin in their swaps with one another. They must

 18 also do so in their swaps with financial entities

 19 if the level of activity is above certain

 20 thresholds. This focus on swap dealers and major

 21 swap participants is appropriate. They are the

 22 participants that much of our oversight is focused
 10

 1 on. The proposal does not require commercial

 2 end-users to post or collect margin. This is a

 3 very important point.

 4 The two rules we are considering today

 5 thus share an important characteristic, which

 6 reflects one of my priorities and I believe a

 7 priority of my fellow Commissioners, and that is

 8 to make sure the overall regulatory scheme we are

 9 putting in place recognizes the needs and concerns

 10 of commercial end-users. While each rule is part

 11 of our framework for regulating the potential

 12 risks of this market, each proposal is designed to

 13 minimize burdens on commercial end-users who

 14 depend on the derivatives markets to hedge normal

 15 business risks. Today's proposal on margin also

 16 reflects the benefit of substantial collaboration

 17 between our staff and our colleagues at the

 18 Federal Reserve, the OCC, and the FDIC as well as

 19 significant public comment.

 20 The Dodd-Frank Act directs each of the

 21 prudential regulators to propose rules on margin

 22 for the entities for which it is the primary
 11

 1 regulator. The CFTC is directed to propose a rule

 2 for other entities engaging in uncleared swaps

 3 transactions. The Dodd-Frank Act also directs us

 4 to harmonize our rules as much as possible.

 5 Today's proposed rule is very similar to the

 6 proposal of the prudential regulators that was

 7 issued two weeks ago -- and I want to thank our

 8 staff as well as the staffs of the prudential

 9 regulators for working together so well to

 10 accomplish that task.

 11 We have also sought to harmonize our

 12 proposal with rules being developed in Europe and

 13 Asia. Our proposed rule is largely consistent

 14 with the standards proposed by the Basel Committee

 15 on Banking Supervision and the International

 16 Organization of Securities Commissions, and we

 17 have been in touch with overseas regulators as we

 18 developed our proposal. There are some

 19 differences that the staff will discuss.

 20 The importance of international

 21 harmonization cannot be understated. It is

 22 particularly important to reach harmonization in
 12

 1 the area of margin for uncleared swaps because

 2 this is a new requirement and we do not want to

 3 create the potential for regulatory arbitrage in

 4 the market by creating unnecessary differences.

 5 Margin for uncleared swaps goes hand in hand with

 6 the global mandates to clear swaps. Imposing

 7 margin on uncleared swaps will level the playing

 8 field between cleared and uncleared swaps and

 9 remove any incentive not to clear swaps that can

 10 be cleared.

 11 Now, with regard to clearing there's

 12 been attention lately on the issue of cross-border

 13 recognition of clearinghouses, so let me if I may

 14 say a few words about that. I am firmly committed

 15 to working with the European Commission on this

 16 issue. In particular it is very important that

 17 they recognize our exchanges and clearinghouses to

 18 prevent any potential for market disruption and so

 19 that European market participants can continue to

 20 trade and clear transactions in the United States.

 21 I believe we can and we'll achieve this soon.

 22 Now, a little history may be helpful.
 13

 1 The path forward statement issued in July 2013 by

 2 my predecessor as Chairman, Gary Gensler, and EC

 3 Vice President, Michel Barnier, recognized the

 4 important role played by clearing organizations

 5 that are "registered in both the U.S. and the EU."

 6 The path forward stated that the goal of avoiding

 7 significant market fragmentation and uncertainty

 8 around clearing obligations was to be achieved

 9 through the EC's equivalence decisions and ESMA's

 10 recognition of foreign CCPs along with the CFTC's

 11 issuance of targeted no-action relief to certain

 12 CCPs located in the European Union. The CFTC

 13 provided such relief to two European CCPs at the

 14 time the path forward was issued, and we are

 15 working now to finalize the remaining steps

 16 necessary to "provide an effective equivalent

 17 system for the recognition of swap clearinghouses

 18 in Europe." This is the final remaining legal

 19 requirement for their recognition of our

 20 clearinghouses under our dual registration

 21 structure.

 22 Now, I believe our laws already permit
 14

 1 the recognition of clearinghouses on both sides of

 2 the Atlantic. It is important to understand how

 3 our clearinghouse recognition law works and how it

 4 is different than theirs. Our laws for the

 5 clearing of swaps were built on the laws and

 6 successful practices that have developed

 7 concerning the clearing of futures. We do not

 8 require that clearing of swaps take place in the

 9 U.S., just as we do not require that for futures

 10 traded on U.S. exchanges. But Dodd-Frank does

 11 require that clearing of swaps for customers take

 12 place through a registered futures commission

 13 merchant, or FCM, who in turn clears on a

 14 registered clearinghouse. The law contains that

 15 requirement because clearing through an FCM and on

 16 a registered clearinghouse is very important for

 17 protecting U.S. customers. These requirements are

 18 closely tied to how U.S. bankruptcy law applies to

 19 an FCM. The standards ensure not only that

 20 customer funds are protected, but also that in the

 21 event of a defaulting FCM, customer accounts can

 22 be moved quickly to another FCM. This is very
 15

 1 important for stability, and we have seen its

 2 value most recently in the crisis as well as in

 3 the failure of MF Global.

 4 This legal framework has worked to

 5 promote the global market. There have been

 6 clearinghouses located outside the U.S. that have

 7 been registered with the U.S. and with their home

 8 authorities for many years. We work with the home

 9 authority to ensure cooperative supervision and

 10 oversight. The dually registered clearinghouses

 11 in Europe have grown to be globally important

 12 clearinghouses. One, for example, has been dually

 13 registered since 2001 and it handles most of the

 14 market for swap clearing and a majority of that

 15 clearing is for U.S. persons.

 16 I also believe this is a good approach

 17 because central clearinghouses are even more

 18 important in the global financial system today as

 19 a result of our reforms to the OTC swap market

 20 and, therefore, regulators must work together to

 21 make sure clearinghouses operate transparently and

 22 do not pose risks to financial stability. We have
 16

 1 cooperated well with other regulators on this to

 2 date, and I envision that cooperation and

 3 interaction increasing, not decreasing. Here at

 4 home, for example, we are now working with the

 5 Federal Reserve on clearinghouse examinations, and

 6 we are increasingly working with foreign

 7 regulators on the supervision of our

 8 clearinghouses.

 9 In short, I believe the system of dual

 10 registration is not a source of potential market

 11 fragmentation; it is just the opposite. The

 12 foundation that allowed us not to insist that

 13 clearing take place on our shores and which has in

 14 turn led to a global market, and cooperative

 15 oversight is a key part of that.

 16 We must make sure that dual

 17 registration, however, does not create conflicts

 18 and inconsistencies and that is what we are

 19 discussing currently. That is, the issue today is

 20 not primarily about the standards that apply to

 21 our clearinghouses. Our clearinghouses have long

 22 met the standards agreed to by international
 17

 1 regulators, known as the principles for financial

 2 market infrastructures. And shortly after I took

 3 office, I traveled to Europe to meet with European

 4 regulators. They informed me that they were

 5 satisfied with our standards and did not have

 6 further issues.

 7 Our discussion today is focused on the

 8 EMIR requirement for "effective recognition"

 9 within this context of dual registration. So we

 10 are looking at whether particular regulatory

 11 objectives that we have can be met through the

 12 regulation and oversight of the home country

 13 regulator. We are also exploring ways to enhance

 14 cooperation in the joint supervision of dually

 15 registered clearinghouses. I am hopeful we can

 16 reach agreement soon.

 17 I am also encouraged by the recent

 18 statements from European Vice President Barnier

 19 and reports in the press that the European

 20 Commission can postpone the December 15 deadline

 21 for the imposition of capital charges on European

 22 firms for transactions on our exchanges and
 18

 1 clearinghouses if recognition has not occurred by

 2 this time. While I believe we and they are still

 3 committed to resolving this issue well before such

 4 date, I think this is a very important gesture of

 5 good faith on their part and so there is not a

 6 risk of market disruption.

 7 Now, I apologize to my fellow

 8 Commissioners for taking so much time on this

 9 point, but I felt it was important to share our

 10 progress with the Europeans on these issues.

 11 So before we hear from the staff on the

 12 rulemakings that we will consider today, I would

 13 like to thank my fellow Commissioners for their

 14 contributions to these rules and especially to the

 15 CFTC's hardworking and dedicated staff. And I

 16 would now also like to recognize my fellow

 17 Commissioners for their opening statements. I

 18 will start with Commissioner Wetjen.

 19 COMMISSIONER WETJEN: Thank you,

 20 Chairman Massad. Let me start by saying it's a

 21 pleasure to be here today on the dais with you and

 22 Commissioners Giancarlo and Bowen. Welcome. It's
 19

 1 been a real honor these last few months to work

 2 with all three of you, and even in this short

 3 amount of time I've learned a great deal from each

 4 of you and have really enjoyed the work and

 5 experience, so thank you. It's great to have you

 6 here.

 7 I want to commend Chairman Massad for

 8 his focus on the unfinished work of Title VII as

 9 well as his focus on appropriate fine-tuning of

 10 recent rulemakings, which is reflected in today's

 11 agenda. Staff has been coordinating with

 12 international and domestic regulators for many

 13 months on the new margin proposal as well, and

 14 they should be commended for completing their work

 15 in a way that positions us along with the

 16 prudential regulators to seek comment on a new

 17 approach.

 18 As for the special entities release,

 19 finalizing this rule today shows the Commission's

 20 continuing commitment to course correction when

 21 necessary. End-users have been disadvantaged in

 22 their ability to find counterparties to hedge the
 20

 1 risks due to complications under the Commission's

 2 swap dealer definition rule and today's release

 3 addresses that.

 4 Today's proposal, on margin for

 5 uncleared swaps, establishes initial and variation

 6 margin requirements for uncleared swaps between

 7 swap dealers and certain financial entities with

 8 material swap exposures. It also contains

 9 important risk management and documentation

 10 provisions for swap dealers and major swap

 11 participants. I am supportive of today's release

 12 in order to facilitate an ongoing dialogue on the

 13 appropriate means for ensuring the safety and

 14 soundness of these critical intermediaries. I do,

 15 however, have a number of questions and indeed

 16 some concerns with the proposal that I will

 17 identify in my following remarks.

 18 Today's release has been largely

 19 harmonized with those proposed by the prudential

 20 regulators two weeks ago as well as with the 2013

 21 global margin framework developed through IOSCO

 22 and CPMI, but there remains some important
 21

 1 differences. Public comments will be especially

 2 critical in addressing these differences.

 3 Along these lines, I am most eager to

 4 review public comments relating to the

 5 cross-border impact of today's release. Unlike

 6 previous drafts and as a result of many

 7 discussions among Commissioners in recent days,

 8 the ANPR now proposes several ways of applying the

 9 margin rule in a cross-border context. Again, I

 10 commend Chairman Massad for his openness to these

 11 multiple approaches. One option proposed would be

 12 to allow the cross-border approach taken by the

 13 prudential regulators. Another option would be

 14 for the margin rule to apply pursuant to the

 15 Commission's cross-border guidance finalized last

 16 year, which at the moment I believe is the best

 17 option. And the third option proposed would be a

 18 hybrid of the aforementioned approaches, in my

 19 view, and would treat the margin rule as an

 20 entity-level requirement of the Commission.

 21 The prudential regulators' approach

 22 essentially and not surprisingly would treat the
 22

 1 margin rule as an entity-type rule. Through this

 2 approach, non-U.S. dealers registered with the

 3 Commission would need to comply with the rule in

 4 many instances, again with substituted compliance

 5 available under appropriate foreign regimes.

 6 Under this option the Commission would take the

 7 step of codifying a U.S. person definition that is

 8 applicable solely to the margin requirements and

 9 not to other transaction-level requirements in its

 10 guidance from last summer.

 11 This prudential-like approach is founded

 12 on the policy rationale that entities having

 13 sufficient U.S. contacts or counterparties pose

 14 sufficient safety and soundness concerns for U.S.

 15 Regulators. The Commission, however, should

 16 carefully consider whether the transaction-level

 17 approach under the guidance struck at least an

 18 equally agreeable balance and perhaps better

 19 ensured an equal playing field for swap dealers

 20 operating in global markets. The Commission's

 21 cross-border guidance treated margin as a

 22 transaction-level requirement that would apply
 23

 1 differently depending on an analysis of whether

 2 the entity qualifies as a U.S. person and

 3 depending on whether the entity faces a non-U.S.

 4 Counterparty.

 5 The cross-border guidance also

 6 recognized that capital rules interact with the

 7 margin rules to the extent additional capital is

 8 required when trades are not fully margined. It

 9 is worth noting, therefore, that the credit risks

 10 addressed by the present proposal may be addressed

 11 in part by indirect capital requirements at the

 12 holding company level and direct capital

 13 requirements at the registrant level. To the

 14 extent any foreign swap dealer were to fail and

 15 expose U.S. financial entities to unmargined

 16 losses, the Commission's cross-border guidance

 17 requires those trades to be fully collateralized

 18 consistent with the CFTC margin rules. Losses

 19 would be mitigated, therefore, by provisions such

 20 as custodial protections, which are intended to

 21 safeguard U.S. collateral posted in connection

 22 with such trades.
 24

 1 Consequently, the Commission should be

 2 careful when applying its margin rule abroad

 3 knowing that a covered swap entity is complying

 4 with capital rules here or in a foreign

 5 jurisdiction that is equally comprehensive and

 6 comparable. By following the Commission's

 7 guidance in applying the margin rule, the

 8 Commission could still fulfill its regulatory

 9 objectives and avoid disadvantaging U.S. firms

 10 competing overseas. Stated differently, there are

 11 far fewer complications related to

 12 operationalizing substituted compliance for the

 13 Commission's capital rule than for today's margin

 14 proposal given the latter's requirement that

 15 initial margin be passed in both directions

 16 between counterparties.

 17 To be clear, I do not intend to suggest

 18 that the cross-border guidance is the perfect

 19 answer to all cross-border considerations. But it

 20 is important to remember that many operational and

 21 compliance decisions with significant costs have

 22 been made by firms under the Commission's
 25

 1 jurisdiction pursuant to that guidance, and we

 2 should not depart from the policy driving those

 3 decisions without sufficient cause. Additionally,

 4 following the guidance instead of one of the other

 5 cross-border approaches proposed today would avoid

 6 adding yet another cross-border analysis to a

 7 Commission rule, but with narrow application. The

 8 Commission should not knowingly make the

 9 cross-border application of our rules

 10 unnecessarily complex, even in the face of a

 11 statutory mandate that the Commission follow the

 12 prudential regulators' approach as closely as

 13 possible.

 14 And, finally, the Commission should

 15 propose its capital rules in the near future and

 16 reopen the comment period for its margin proposal

 17 at that time. Only by fully considering the

 18 margin rule alongside the capital rule can the

 19 Commission make the very best policy judgment

 20 about how best to protect against the risk posed

 21 by covered swap entities.

 22 I have a number of other issues that I
 26

 1 mention in a written statement, Mr. Chairman, so I

 2 point that written statement out to the public if

 3 they're interested. But I'll close my oral

 4 remarks at this time and take up some of those

 5 issues addressed in the written statement through

 6 my questions.

 7 And just real quickly on the special

 8 entity rule, again, I applaud you, Chairman

 9 Massad, for focusing on this matter and putting us

 10 in a position to finalize this rule today.

 11 Today's rule would amend the Commission's swap

 12 dealer definition and permit the exclusion of

 13 utility operations-related swaps when determining

 14 whether that person has exceeded the de minimis

 15 threshold specific to dealing with special

 16 entities. The final rule includes beneficial

 17 modifications to the original proposal, including

 18 striking the notice requirement for market

 19 participants who rely on the exclusion provided by

 20 the rule. And, likewise, I support removing

 21 redundant recordkeeping requirements for swaps

 22 with utility special entities and instead relying
 27

 1 on current Part 45 requirements and

 2 representations that the swap qualifies for the

 3 exclusion. I look forward to staff

 4 recommendations regarding how our Part 45 rules

 5 might be amended to further account for swaps with

 6 utility special entities.

 7 And with that, thank you again. I look

 8 forward to the other opening statements.

 9 CHAIRMAN MASSAD: Thank you,

 10 Commissioner Wetjen. Let me turn now to

 11 Commissioner Bowen.

 12 COMMISSIONER BOWEN: Thank you, Chairman

 13 Massad. Before we proceed with the rules today

 14 before this Commission, I want to thank Chairman

 15 Massad and Commissioner Wetjen for your assistance

 16 during my first weeks here at the Commission.

 17 You've both been extremely helpful during my

 18 transition. I would also like to acknowledge

 19 Commissioner Giancarlo who joined nearly at the

 20 same time as I did and who has been very

 21 supportive as we each moved into our new roles. I

 22 have sincerely enjoyed working with all of you so
 28

 1 far. I'm very optimistic about how we as a

 2 Commission will be able to move forward on the

 3 many issues before us.

 4 And, indeed, there are a wide variety of

 5 issues before us. Over these last three months, I

 6 have been meeting with the staff from all of the

 7 divisions and offices. I am very impressed with

 8 their expertise, professionalism, and commitment.

 9 They are handling a broad range of activities and

 10 responsibilities with very limited resources. I

 11 want to express my appreciation for their efforts.

 12 The broad range of issues we are working

 13 on is exemplified by the two rules before us

 14 today. First, the proposed margin rules would

 15 affect swap dealers, MSPs, and the largest

 16 financial end-users of swaps. Second, the

 17 adjustment to the de minimis rule will affect

 18 municipal electric and natural gas utilities -- a

 19 few large and many very small -- when they are in

 20 the market to hedge their commodity risk. From

 21 the largest financial conglomerate to a municipal

 22 utility serving a small locality, the range of
 29

 1 market participants before us is as broad as it

 2 could be.

 3 Although these two rules affect

 4 different types of companies, they both serve in

 5 different ways the same purpose of maintaining our

 6 well-functioning, stable markets. As we continue

 7 on this path, we must be mindful of our need to

 8 coordinate with our fellow domestic and

 9 international regulators. In fact, our

 10 consideration of today's re-proposed rule on

 11 margin for uncleared swaps is a result of a

 12 domestic and international cooperative effort to

 13 reduce global systemic risk. It focused

 14 particularly on the risk arising at the largest

 15 global financial institutions from the use of

 16 uncleared swaps.

 17 There is a place for uncleared bespoke

 18 swaps, but we don't want the risk from these swaps

 19 to accumulate unchecked. Collection of margin

 20 helps to manage risk and to attenuate risk. Our

 21 goal is to reduce systemic leverage and discourage

 22 the excessive growth of risky, uncleared
 30

 1 derivatives. I'm interested to hear from

 2 commenters today and later on as to whether the

 3 proposed rules will achieve our goal.

 4 As for the de minimis rule, I understand

 5 that in many instances electricity and natural gas

 6 service is provided to consumers and businesses

 7 from municipal utilities, also known as special

 8 entities. Provision of electricity and natural

 9 gas is different from other services provided by

 10 local governments, in that it involves a

 11 continuous supply of gas and electricity to homes

 12 and businesses around the clock. The electricity

 13 and natural gas markets are particularly complex,

 14 in part because there are interlocking swap

 15 arrangements between the various participants and

 16 demand and supply fluctuates in real time.

 17 So this is a crucial corner of a special

 18 entity world where I think it makes sense to take

 19 a different approach and depart from the $25

 20 million threshold in the rule that applies to

 21 other special entities.

 22 Last, I'd like to take a moment to
 31

 1 acknowledge the point we have reached today. This

 2 is the first meeting of the CFTC where all of the

 3 commissioners have arrived after passage of the

 4 Dodd-Frank Act. We have the responsibility to

 5 preserve and continue the good work that's already

 6 been done by our predecessors. Although I

 7 understand that tweaks must be made and details

 8 added, I wouldn't want to give up the market

 9 improvements that we have already received from

 10 these new rules.

 11 As a commissioner, my door will always

 12 be open to hear the viewpoints of the many

 13 stakeholders who are affected by our rulemaking.

 14 As I stated during my confirmation hearing, I feel

 15 a special obligation to be the voice of those who

 16 have not had a seat at the table as do I. I saw

 17 the devastating effects from our financial crisis

 18 and the burdens placed on many individuals who

 19 lost their jobs, lifesavings, retirement accounts,

 20 and homes. My vision is to get it right. As we

 21 build upon the incredible progress the Commission

 22 has achieved to date, I look forward to improving
 32

 1 upon our well-functioning market in a way that's

 2 transparent and fair without barriers and undue

 3 burdens.

 4 Thank you and I look forward to hearing

 5 the staff's presentation.

 6 CHAIRMAN MASSAD: Thank you,

 7 Commissioner Bowen. Let me now turn to

 8 Commissioner Giancarlo.

 9 COMMISSIONER GIANCARLO: Mr. Chairman,

 10 it's a great pleasure to participate today with my

 11 fellow Commissioners in this first open meeting

 12 under your chairmanship. I thank the CFTC staff

 13 for their very warm welcome and their ready

 14 support to me and my team and to get us up and

 15 running. I thank Commissioner Bowen for her

 16 kindness and fellowship throughout the Senate

 17 confirmation process and our first few months at

 18 the Commission. And I thank Commissioner Wetjen

 19 for his steady leadership as Acting Chair and his

 20 policy insights as a Commissioner, especially on

 21 the challenging subject of cross-border rule

 22 implementation. And I thank you, Chairman Massad,
 33

 1 for the tone of professionalism and collegiality

 2 that you're setting at the Commission. It bodes

 3 well for a very productive agenda of oversight of

 4 U.S. financial and commodity derivative markets.

 5 I look forward to participating in the important

 6 work of this Commission in service to the American

 7 people, starting with today's open meeting.

 8 And I'll turn to the special entity

 9 utility final rule. As you know, the Dodd-Frank

 10 Act requires that American towns and

 11 municipalities be labeled as special entities for

 12 swaps transactions. The purpose was to provide

 13 protections for complex financial swaps of the

 14 type that ensnared Jefferson County, Alabama, and

 15 led it to file what was at the time the largest

 16 municipal bankruptcy in U.S. history. But

 17 Congress never intended to limit the ability of

 18 public-owned utilities to manage ordinary risks

 19 associated with generating electricity or

 20 producing natural gas.

 21 Unfortunately, the CFTC's first shot at

 22 this special entity rule contained some onerous
 34

 1 restrictions on ordinary risk management

 2 activities by America's taxpayer-owned utilities.

 3 It generated an enormous amount of public comments

 4 and many of them asserted that the rule would

 5 cause trading counterparties to avoid dealing with

 6 these special entity utilities due to increased

 7 regulatory compliance and registration burdens.

 8 That meant that these utilities would have had far

 9 fewer tools to control fluctuations in operational

 10 costs and supply and demand and that would have

 11 caused electricity and other energy costs to rise

 12 for American consumers.

 13 The initial CFTC proposal also led to

 14 two identical pieces of legislation in Congress,

 15 one that passed the House unanimously and the

 16 other introduced in the Senate with 14 co-sponsors

 17 from both political parties. Both bills would

 18 have reversed the impact of the CFTC's initial

 19 proposed rule -- and I should note that few bills

 20 pending in Congress seeking to amend Dodd-Frank

 21 have had such broad support.

 22 So, in fact, the final rule we are
 35

 1 considering today recognizes Congress's concern

 2 and revises the earlier proposal. It provides the

 3 relief these utilities need to manage risks in the

 4 production of gas and electricity. The more

 5 options our rules give utilities to manage these

 6 risks, the less Americans pay in utility bills.

 7 So, in short, today's rule is a good rule, and I'm

 8 going to be glad to vote for it.

 9 I would like everyone listening to know

 10 that the work that went into today's special

 11 entity utility rule exemplifies how this agency

 12 should conduct rulemaking -- reasoned,

 13 collaborative, and supportive of U.S. financial

 14 markets while at the same time providing proper

 15 protections for the American public. I commend

 16 Commissioner Wetjen for proposing this commonsense

 17 rule when he was Acting Chairman, and I applaud

 18 Chairman Massad and his team for making the

 19 special entity rule a priority and for his

 20 thoughtfulness and pragmatic approach throughout.

 21 I thank the CFTC staff for working with

 22 Commissioner staffs to improve the rule by making
 36

 1 it less burdensome on market participants. And I

 2 look forward to helping develop a straightforward

 3 reporting regime that works for the marketplace.

 4 I now turn to the uncleared margin rule

 5 proposal. Uncleared over-the-counter swaps and

 6 derivatives are vital to the U.S. economy. Used

 7 properly, they enable American companies and the

 8 banks they borrow from to manage challenging

 9 commodity and energy prices and fluctuating

 10 currency and interest rates. They allow our state

 11 and local governments to manage their obligations

 12 and our pension funds to support healthy

 13 retirements. Uncleared swaps serve a key role in

 14 American business planning and risk management

 15 that cannot be filled by cleared derivatives.

 16 They do so by allowing businesses to avoid basis

 17 risk and obtain hedge accounting treatment for

 18 more complex, nonstandardized exposures. While

 19 much of the swaps and over-the-counter derivatives

 20 markets will eventually be cleared -- a transition

 21 I have long supported -- uncleared swaps will

 22 remain an important tool for customized risk
 37

 1 management by businesses, governments, asset

 2 managers, and other institutions whose operations

 3 are essential to American economic growth.

 4 Turning to the aspect of the rule

 5 concerning end-users, I take positive note that

 6 the prudential regulators have moved in the CFTC's

 7 direction in regard to nonfinancial end-users.

 8 They will no longer be required to pay margin

 9 except in certain circumstances. This accords

 10 with congressional intent. Nonfinancial end-users

 11 do not cause and create systematic risk and should

 12 not bear the increased cost of uncleared swaps

 13 margin. This is one rule set that the CFTC got

 14 right the first time. I commend the CFTC's

 15 commonsense leadership on the issue.

 16 Now I want to address the 10-day margin

 17 requirement. Somewhat less positively, I note

 18 that today's proposal requires collateral coverage

 19 on uncleared swaps equal to a 10-day liquidation

 20 period. This 10-day calculation comports with

 21 rules adopted recently by the U.S. prudential bank

 22 regulators. But the question must be asked, is 10
 38

 1 days the right calculation? Why not 9 days? Why

 2 not 11 days? Should it be the same 10 days for

 3 uncleared credit default swaps as it is for

 4 uncleared interest rate swaps and all other swaps?

 5 Surely all noncleared swap products do not have

 6 the same liquidity characteristics and risk

 7 profile.

 8 I'm mindful of a recent statement by SEC

 9 Chair, Mary Jo White. She said, "Our regulatory

 10 changes must be informed by clear-eyed, unbiased,

 11 and fact-based assessments of the likely impacts

 12 -- positive and negative -- on market quality for

 13 investors and issuers." Chair White's standard of

 14 assessment certainly must be applied to the

 15 proposed rule on uncleared swaps. Where is the

 16 clear-eyed assessment of the 10-day margin

 17 requirement? Where is the cost benefit analysis?

 18 What are the intended consequences, and what are

 19 the unintended ones? How much of the increased

 20 margin cost will be passed on to America's

 21 farmers, ranchers, and manufacturers, and

 22 ultimately to ordinary Americans who consume their
 39

 1 goods and services?

 2 I'm very concerned by recent press

 3 reports of remarks by unnamed Fed officials that

 4 the 10-day coverage period was meant to be

 5 intentionally "punitive" in order to move the

 6 majority of trades into a cleared environment.

 7 Any punitive or arbitrary squeeze on noncleared

 8 swaps will surely have consequences, likely

 9 unintended, for American consumers and the U.S.

 10 Economy. With tens of millions of Americans

 11 falling back on part-time work, it is not in our

 12 national interest to deter U.S. employers from

 13 safely hedging commercial risk to free capital for

 14 new ventures offering full-time jobs. It's time

 15 we moved away from punishing U.S. capital markets

 16 toward rules designed to revive American

 17 prosperity.

 18 In a related concern I note that the

 19 CFTC and the prudential regulators have set the

 20 threshold for material swaps exposure for

 21 financial end-users at $3 billion while the 2013

 22 international framework sets the threshold closer
 40

 1 to $11 billion. It appears that the middle tier

 2 of American financial end-users could be subject

 3 to margin requirements that will not be borne by

 4 similar firms overseas. This may well limit the

 5 number of American counterparties willing to enter

 6 into swaps with these American lenders.

 7 In this time of dismal economic growth,

 8 it's hard to justify placing higher burdens on

 9 America's medium-sized financial firms than is

 10 being asked of foreign firms. Again, why are we

 11 punishing America's lenders? Where is the

 12 "clear-eyed" analysis of the impact of this rule

 13 on the American economy? It's time our rules were

 14 designed less to punish and more to promote U.S.

 15 Capital markets. Punishment as a singular

 16 regulatory policy is getting old and is

 17 counterproductive. We must refocus our rules on

 18 returning Americans to work and prosperity.

 19 In short, on the cross-border, I do want

 20 to make the point that I support the decision to

 21 issue an Advance Notice of Proposed Rulemaking to

 22 solicit comments on how the uncleared margin rules
 41

 1 should apply in light of last summer's

 2 cross-border interpretive guidance. It's

 3 undeniable that the lack of such certainty is

 4 fragmenting what were once global swaps markets

 5 and increasing systemic risk rather than reducing

 6 it.

 7 I do want to note in a positive fashion

 8 that the Advance Notice of Proposed Rulemaking on

 9 the treatment of cross-border reach of the

 10 uncleared margin rule shows a pragmatism and a

 11 flexibility that belies the notion of CFTC

 12 rulemaking that widely and woodenly overreaches in

 13 the assertion of extraterritorial jurisdiction. I

 14 commend it to our fellow regulators abroad as a

 15 portent of greater accord in global regulatory

 16 reform.

 17 I will be issuing a written statement

 18 with the publication of the uncleared margin

 19 proposal that will amplify these concerns and

 20 several additional ones. It will include

 21 commentary about the cross-border components of

 22 the proposal where I have several concerns and
 42

 1 seek well-informed public comment.

 2 I do, despite my concerns, want to

 3 commend my fellow commissioners, especially

 4 Commissioner Wetjen, for leadership on the

 5 cross-border issues both in this proposal and

 6 generally. And I also want to thank Chairman

 7 Massad and the rule-writing staff for their deep

 8 thoughtfulness and flexibility in responding to

 9 the cross-border issues raised by me and my staff

 10 and those of my fellow Commissioners. Thank you.

 11 CHAIRMAN MASSAD: Thank you,

 12 Commissioner Giancarlo. The staff will now make

 13 presentations to the Commission concerning two

 14 recommendations: First, the final rule on utility

 15 special entities and then the proposed rule on

 16 margin. After each presentation, the floor will

 17 be open for questions and comments from each of

 18 the Commissioners. Following these discussions,

 19 the Commission may take votes on the

 20 recommendations as presented. All final votes

 21 conducted in this public meeting shall be recorded

 22 votes, and the results of those votes will be
 43

 1 included in their relevant Federal Register

 2 releases.

 3 At this point, I ask unanimous consent

 4 to allow staff to make technical corrections to

 5 the documents voted on today prior to sending them

 6 to the Federal Register. Is there any objection?

 7 Without objection, so ordered.

 8 So at this time I would like to welcome

 9 Erik Remmler, Barbara Gold, Israel Goodman, and

 10 Chris Cummings from the Division of Swap Dealer

 11 and Intermediary Oversight, and Stephen Kane from

 12 the Office of the Chief Economist, to present the

 13 staff recommendation concerning the final rule.

 14 And let me again thank all of you, and I know

 15 there are many more members of your teams and our

 16 staff who have been involved in this. So thanks

 17 again. Please go ahead.

 18 MR. REMMLER: Good afternoon,

 19 Commissioners. Before summarizing the particulars

 20 of this rule, I would like to recognize the hard

 21 work of the staff sitting with me today, in

 22 particular Israel Goodman, Barbara Gold, and Chris
 44

 1 Cummings. They were the staff who did much of the

 2 writing and analysis in preparing the proposed

 3 rule as well as the final rule before you today.

 4 They also undertook the review and analysis of

 5 comments received from the public. Also with us

 6 today is Steve Kane from the Office of the Chief

 7 Economist who provided good insights on the cost

 8 benefit analysis. And I would also like to thank

 9 in particular the Office of General Counsel who

 10 helped with preparing the rule.

 11 This rule is a final rule. The proposed

 12 version was published in the Federal Register on

 13 June 2 of this year, and the Commission received

 14 ten comment letters on the proposed rule. If

 15 adopted, the final rule we are recommending today

 16 would amend the Commission's regulation 1.3(ggg)

 17 that identifies which entities must register as

 18 swap dealers. Under the swap dealer rule, an

 19 entity dealing in swaps only needs to register if

 20 the aggregate notional amount of swaps entered

 21 into by that entity on a dealing basis over a

 22 12-month period exceeds a specified de minimis
 45

 1 amount. The general de minimis amount is $8

 2 billion.

 3 The swap dealer rule also establishes a

 4 separate de minimis amount of $25 million for

 5 dealing swaps entered into with special entities.

 6 As the Commissioners noted, special entities are

 7 defined in the Dodd-Frank Act as certain federal

 8 agencies, states, political subdivisions of

 9 states, and certain of their agencies,

 10 instrumentalities, and pension systems.

 11 The Commission proposed this rule in

 12 response to a petition for rulemaking. The

 13 petition indicated that utilities that are special

 14 entities often rely on customized swaps to hedge

 15 and mitigate the risks of their electric and

 16 natural gas businesses. They rely on these swaps

 17 to meet their obligations to provide continuous

 18 service to their customers.

 19 The petition indicated that the low de

 20 minimis threshold for special entities was having

 21 a chilling effect on the willingness of

 22 counterparties with specialized expertise in these
 46

 1 operational swaps to enter into those swaps with

 2 utility special entities. The basic effect of the

 3 amendments to rule 1.3(ggg) in the final rule

 4 before you would permit a person that deals in

 5 utility operations-related swaps with utility

 6 special entities to exclude those swaps in

 7 calculating whether the person's dealing

 8 activities exceeds the $25 million de minimis. As

 9 noted above, if they exceed that de minimis, they

 10 would need to register as swap dealers.

 11 To give effect to this provision, the

 12 proposed rule defines certain terms. The term

 13 "utility special entity" is defined to mean a

 14 special entity that owns or operates electric or

 15 natural gas facilities or operations or

 16 anticipated electric or natural gas facilities or

 17 operations, supplies natural gas or electric

 18 energy to other utility special entities, has

 19 public service obligations or anticipated public

 20 service obligations under law or regulation to

 21 deliver electric energy or natural gas to utility

 22 customers, or that is a federal power marketing
 47

 1 agency as defined in Section 3 of the Federal

 2 Power Act. This definition is unchanged from the

 3 proposed rule.

 4 The final rule would also define the

 5 term "utility operations-related swap" to mean a

 6 swap with the following characteristics: One of

 7 the counterparties to the swap must be a utility

 8 special entity; the utility special entity must be

 9 using the swap to hedge or mitigate its commercial

 10 risks; a swap must be related to an exempt

 11 commodity, as defined in the Commodity Exchange

 12 Act, or to an agricultural commodity used for fuel

 13 for generation of electricity or otherwise used in

 14 the normal operations of the utility special

 15 entity; and the swap must be an electric energy or

 16 natural gas swap or be associated with any one of

 17 a number of listed purposes related to the normal

 18 operations of utility special entities. I note

 19 that this definition has been modified in a couple

 20 of ways, most prominently we added at the request

 21 of commenters agricultural swaps as a permitted

 22 form of swap.
 48

 1 Other changes in the final rule from the

 2 proposed rule based on comments received from the

 3 public: After consideration of those comments, a

 4 requirement that a person that relies on the rule

 5 must file a notice with the NFA has been removed

 6 from the final rule.

 7 Also in response to comments, the final

 8 rule text includes a provision permitting a person

 9 relying on the rule to rely on written

 10 representations from the utility special entity

 11 counterparty that the entity is a utility special

 12 entity and that the swap is a utility

 13 operations-related swap as required by the rule.

 14 And, finally, the final rule no longer

 15 includes a requirement that persons relying on the

 16 rule must maintain certain books and records in

 17 accordance with the Commission's regulations in

 18 order to be eligible to use the rule.

 19 With that I'll take any questions you

 20 may have.

 21 CHAIRMAN MASSAD: Thank you, Mr.

 22 Remmler. Just on the notice provision, can you
 49

 1 talk about the alternative that the staff is

 2 contemplating and why we're contemplating that

 3 alternative?

 4 MR. REMMLER: Yes, sure. The notice

 5 provision that was proposed would have required

 6 the counterparties to the utility special entities

 7 to identify themselves in a notice to NFA.

 8 Commenters indicated that that requirement could

 9 have a chilling effect on counterparties using the

 10 rule. And also staff after consideration of

 11 comments was also concerned that that notice

 12 provision may not in effect provide fully the

 13 information that would be useful in administering

 14 this rule. So after consideration, we have

 15 included in the preamble of the rule an indication

 16 that staff will consider possible alternatives.

 17 In particular, one alternative that we would look

 18 at is whether a reporting requirement can be added

 19 to Part 45, in which an additional data field

 20 would be required whenever one of these swaps is

 21 reported to an SDR, or swap data repository,

 22 indicating that the swap is a utility
 50

 1 operations-related swap.

 2 CHAIRMAN MASSAD: Thank you. I realize

 3 that in my desire to get to the questions, and I

 4 know my fellow Commissioners want to get to the

 5 questions, I overlooked the proper process here.

 6 I'm supposed to first, to open the Commission's

 7 consideration of this rulemaking, I think we need

 8 a motion to adopt the final rule as presented by

 9 the staff, and then we can have the discussion.

 10 So I will wait for that motion.

 11 COMMISSIONER WETJEN: So moved.

 12 CHAIRMAN MASSAD: Is there a second?

 13 COMMISSIONER BOWEN: Second.

 14 CHAIRMAN MASSAD: Okay, now we can begin

 15 the discussion. I take it I don't need to repeat

 16 that question, but I appreciate the staff's

 17 answers. As I understand it, that would give us

 18 actually -- if we went the Part 45 route, that

 19 would actually give us more granular data that

 20 would be swap by swap, which is in my mind more

 21 useful. Is that correct?

 22 MR. REMMLER: Yes, I would agree.
 51

 1 CHAIRMAN MASSAD: Okay. And on this

 2 point I just want to thank Commissioner Giancarlo

 3 for raising this idea and for his support for

 4 looking at that as an alternative. I thought it

 5 was a very good suggestion.

 6 I want to allow the other Commissioners

 7 to ask questions. Let me just make a couple of

 8 comments because I don't have any other questions.

 9 But just to reiterate, I support the staff's

 10 recommendation. As I noted in my opening

 11 statement, this final rule addresses an issue for

 12 a limited, but important, group of end-users.

 13 These public power companies, such as municipal

 14 gas and electric companies, provide vital services

 15 to communities across our country. And to do

 16 their job, they must be able to access the energy

 17 commodity markets and hedge fuel price risk. The

 18 rule we are voting on today will help them

 19 continue to do so. The rule addresses an

 20 unintended consequence of the actions taken by the

 21 Commission to implement a very important directive

 22 of Congress, to provide certain municipal
 52

 1 government entities and other special entities

 2 heightened protection when they transact business

 3 in the derivatives markets so that we prevent some

 4 of the abuses of the past.

 5 In order to implement that directive,

 6 the Commission set a lower de minimis threshold

 7 for being a swap dealer when it comes to swap

 8 activity with special entities. This was because

 9 the Commission wanted to make sure the special

 10 entities would receive heightened protections for

 11 more companies than just large swap dealers, but

 12 the Commission's prior rule adversely impacted the

 13 ability of these utility companies to hedge or

 14 mitigate their commercial risks. And due to the

 15 unique nature of the energy markets in which these

 16 utility companies operate, segments of the markets

 17 they use are not nearly as liquid or large as say

 18 the interest rate swap market.

 19 Consequently, the number of potential

 20 counterparties for utility operations swaps is

 21 limited, and the regulatory requirements

 22 associated with swap dealer registration could
 53

 1 discourage potential counterparties from

 2 transacting with these utility companies. That

 3 could, in turn, impose costs that would ultimately

 4 be passed on to consumers. The final rule fixes

 5 that problem and, as you have noted, I think it

 6 has benefited from public comment.

 7 In sum I believe the final rule advances

 8 the core goals of financial reform as set forth in

 9 the Dodd-Frank Act while responding to an

 10 important need and that is why I support the final

 11 rule.

 12 With that I will now open the floor to

 13 allow the Commissioners to make any statements or

 14 ask any questions they may have, and I will start

 15 with Commissioner Wetjen.

 16 COMMISSIONER WETJEN: Thank you, Mr.

 17 Chairman. I also intend to support the final rule

 18 before us today. I'm delighted to do so and,

 19 again, applaud your efforts, Mr. Chairman, in

 20 bringing this before the Commission so quickly

 21 after the comment period ended. And I do not have

 22 any further questions.
 54

 1 CHAIRMAN MASSAD: Thank you.

 2 Commissioner Bowen?

 3 COMMISSIONER BOWEN: Yes, thank you,

 4 just a couple of questions. Can you confirm

 5 whether this rule will have any effect on how the

 6 utility special entities would otherwise transact

 7 in interest rate swaps or other swaps not related

 8 to energy?

 9 MR. REMMLER: Sure. The definition of

 10 the term "utility operations-related swap"

 11 excludes interest rate swaps and other types of

 12 financial swaps. Accordingly, the rule would not

 13 affect how utility special entities would enter

 14 into these types of swaps. They can do so in the

 15 same way that any other type of special entity

 16 could enter into these swaps. And to the extent

 17 their counterparty is entering into the swap with

 18 a utility special entity, they would have to count

 19 that swap -- interest rate swaps -- in the same

 20 way that they would if they were entering into a

 21 swap with any other type of special entity.

 22 COMMISSIONER BOWEN: Thank you. And
 55

 1 then could you also elaborate a little bit on why

 2 the utility special entity -- why they should be

 3 different from other special entities? For

 4 example, why doesn't this rule apply to a local

 5 government using swaps to hedge financial risk?

 6 MR. REMMLER: Sure, sure. As the

 7 Chairman noted, the Dodd-Frank Act had created

 8 heightened protections for special entities in

 9 connection with the swaps they enter into. Many

 10 of those swaps were interest rate swaps and other

 11 financial swaps that in some cases led to some

 12 significant losses for these governmental

 13 entities. Some of those swaps may have been

 14 entered into without a clear understanding of some

 15 of the risks involved in those swaps.

 16 Unlike other special entities, utility

 17 special entities are engaged in a very focused

 18 business activity of providing electric energy and

 19 natural gas services to their clients. In doing

 20 so, they buy and sell physical commodities

 21 routinely and regularly have historically entered

 22 into specialized swaps for hedging their
 56

 1 businesses. Because of this experience, the

 2 utility special entities are more likely to have

 3 developed a greater expertise with the underlying

 4 commodities and the swaps themselves. And so the

 5 needs for those heightened protections is lessened

 6 because of that experience.

 7 I think I would also add that registered

 8 swap dealers will make markets and interest rate

 9 swaps and other financial swaps readily with

 10 special entities and utility special entities.

 11 However, because of the customized nature of the

 12 utility operations-related swaps that this rule

 13 addresses, these swaps are often very customized

 14 based on the location and the specific needs of

 15 each utility special entity. And because of that

 16 there's a greater need for relief in connection

 17 with utility special entities and with these

 18 particular types of swaps.

 19 COMMISSIONER BOWEN: Thank you. I think

 20 we've struck the right and appropriate balance in

 21 this rule, but I will be vigilant in making sure

 22 that we don't have any loopholes that may arise.
 57

 1 Thank you.

 2 CHAIRMAN MASSAD: Thank you,

 3 Commissioner Bowen. Let me now turn to

 4 Commissioner Giancarlo.

 5 COMMISSIONER GIANCARLO: Thank you,

 6 Chairman. Just briefly, I think this is indeed a

 7 good rule made better through thoughtfulness,

 8 through flexibility and collaboration amongst the

 9 agency staff and the Commissioners. So I'm very

 10 pleased to support it and thank you very much for

 11 your hard work on it, over the last few days

 12 especially.

 13 CHAIRMAN MASSAD: Are the Commissioners

 14 prepared to vote? If so, I will ask Mr.

 15 Kirkpatrick, can you call the roll?

 16 MR. KIRKPATRICK: Mr. Chairman, the

 17 motion now before the Commission is on the

 18 adoption of the final rule on exclusion of utility

 19 operations-related swaps with utility special

 20 entities from de minimis threshold for swaps with

 21 special entities. Commissioner Giancarlo?

 22 COMMISSIONER GIANCARLO: Aye.
 58

 1 MR. KIRKPATRICK: Commissioner

 2 Giancarlo, aye. Commissioner Bowen?

 3 COMMISSIONER BOWEN: Aye.

 4 MR. KIRKPATRICK: Commissioner Bowen,

 5 aye. Commissioner Wetjen?

 6 COMMISSIONER WETJEN: Aye.

 7 MR. KIRKPATRICK: Commissioner Wetjen,

 8 aye. Chairman Massad?

 9 CHAIRMAN MASSAD: Aye.

 10 MR. KIRKPATRICK: Chairman Massad, aye.

 11 Mr. Chairman, on this matter the aye's have four,

 12 the no's have zero.

 13 CHAIRMAN MASSAD: Thank you, Mr.

 14 Kirkpatrick. Let us now move to the presentation

 15 on proposal two, so we'll ask our staff to change

 16 seats.

 17 First, let me also once again make a

 18 slight backtrack, having not memorized all my

 19 lines. I was supposed to say "the aye's have it"

 20 on that prior recommendation and "the motion to

 21 adopt the final rule is approved."

 22 So let's now go on to proposal two on
 59

 1 margin requirements. At this time I would like to

 2 welcome John Lawton from the Division of Clearing

 3 and Risk, Tom Smith and Rafael Martinez from the

 4 Division of Swap Dealer and Intermediary

 5 Oversight, and Stephen Kane once again from the

 6 Office of the Chief Economist, to present the

 7 margin rule proposal. Again, thank you all, and

 8 let me extend my thanks again to the many members

 9 of your teams that have worked on this. Please go

 10 ahead.

 11 MR. LAWTON: Good afternoon,

 12 Commissioners. The proposed rules before the

 13 Commission would implement Section 4s(e) of the

 14 Commodity Exchange Act. They would address margin

 15 requirements for uncleared swaps entered into by

 16 swap dealers, SDs, or major swap participants,

 17 MSPs. The rules would apply to SD/MSPs that are

 18 not subject to regulation by either the Federal

 19 Reserve Board, the Office of the Comptroller of

 20 the Currency, the Federal Deposit Insurance

 21 Corporation, the Farm Credit Administration, or

 22 the Federal Housing Finance Agency. Collectively,
 60

 1 these agencies are known as the prudential

 2 regulators.

 3 In developing the proposed rules,

 4 Commission staff worked closely with the

 5 prudential regulators. Commission staff also

 6 consulted with staff of the Securities and

 7 Exchange Commission. The proposed rules are very

 8 similar to the rules recently proposed by the

 9 prudential regulators. The proposed rules are

 10 also very similar to the international standards

 11 that were issued in 2013 by the Basel Committee on

 12 Banking Supervision and the International

 13 Organization of Securities Commissions.

 14 In this presentation I will briefly

 15 touch on the following topics: The products that

 16 are subject to the rules, the market participants

 17 that are subject to the rules, the nature and

 18 timing of margin requirements, how initial margin

 19 would be calculated, acceptable collateral,

 20 custodial arrangements, the implementation

 21 schedule, and finally cross-border issues.

 22 Moving first to products, the rule would
 61

 1 apply to uncleared swaps entered into after the

 2 effective dates of the regulation. As I will

 3 describe in a few moments, the rules will be

 4 phased in so they will apply to different parties

 5 at different times. The requirements would not

 6 apply retroactively to swaps entered into before

 7 the applicable effective date.

 8 The market participants that are covered

 9 would be those SDs and MSPs that are not subject

 10 to oversight by prudential regulators. We refer

 11 to these SDs and MSPs as covered swap entities, or

 12 CSEs. The rules would impose margin requirements

 13 on trades between a CSE and any other SD/MSP and

 14 on trades between a CSE and a financial end-user.

 15 The rules would not impose margin requirements on

 16 commercial end-users.

 17 Turning to the nature and timing of

 18 margin requirements: With regard to initial

 19 margin, the rules would require two-way initial

 20 margin; that is to say posting and collecting for

 21 all trades between a CSE and any SD/MSP. The

 22 rules would also require two-way margin for all
 62

 1 trades between a CSE and a financial end-user that

 2 had over $3 billion in gross notional exposure in

 3 uncleared swaps. This provision recognizes that

 4 certain financial end-users with relatively

 5 smaller positions do not pose the same risk as

 6 those with larger positions. By reducing the

 7 number of market participants subject to initial

 8 margin requirements, it also would address

 9 concerns that have been mentioned about the

 10 availability of sufficient collateral to meet

 11 these requirements. This concept is consistent

 12 with international standards, but the proposed

 13 threshold is lower. The proposed threshold is the

 14 same as that recently proposed by prudential

 15 regulators. Based on analysis of additional data

 16 that became available after the initial standards

 17 were issued, Commission staff and prudential

 18 regulator staff concluded that the lower threshold

 19 would more closely align with the expressed intent

 20 of the international standards, which was to

 21 exclude market participants who would have margin

 22 requirements below $65 million.
 63

 1 Turning to variation margin, the rules

 2 would require daily payment of variation margin

 3 for all trades between a CSE and another SD/MSP.

 4 The rules would also require daily payment of

 5 variation margin for all trades between the CSE

 6 and a financial end-user. In contrast to initial

 7 margin, there isn't a threshold for variation

 8 margin.

 9 Turning to the calculation of initial

 10 margin, the rules would permit the calculation of

 11 initial margin to be based on models or a

 12 standardized table. Models would be required to

 13 use a 99 percent confidence level or a 10-day

 14 liquidation time. The rules would permit the

 15 parties to establish a $65 million threshold below

 16 which margin would not need to be collected. This

 17 threshold is designed to mitigate the cost of

 18 these rules while continuing to protect the

 19 overall financial integrity of the swap dealers

 20 and the financial system. Smaller exposures would

 21 be permitted to go uncollateralized, but a

 22 significant percentage of all larger exposures
 64

 1 would, in fact, be subject to collateral. To

 2 illustrate the operation of this provision, if the

 3 initial margin for a particular trade was $55

 4 million, no margin would be required to be

 5 collected. If it was $75 million, $10 million

 6 would be required to be collected. That is the

 7 difference between the margin required and the $65

 8 million threshold.

 9 Moving to forms of margin: For initial

 10 margin, the rules would permit cash; sovereign

 11 debt; certain government-sponsored debt;

 12 investment-grade debt, including certain corporate

 13 and municipal bonds; certain equities that meet

 14 certain standards; and gold. This list is the

 15 same as the list that the prudential regulators

 16 proposed a couple of weeks ago. It's a

 17 substantial expansion of the list that was

 18 proposed by the Commission and by the prudential

 19 regulators in 2011. This was in response to

 20 concerns that there might be a potential scarcity

 21 of collateral if we had a very narrow list of

 22 eligible collateral. The rules would require the
 65

 1 variation margin to be paid in cash. This is the

 2 same as the prudential regulators' proposal.

 3 Turning to custodial arrangements: The

 4 rules would require initial margin to be held at

 5 an independent custodian. The rules would not

 6 permit the re-hypothecation of initial margin.

 7 Again, both of these provisions are the same as

 8 the prudential regulators' proposal. The

 9 prohibition of re-hypothecation is stricter than

 10 what is in the international standards, which did

 11 allow re-hypothecation under certain

 12 circumstances. The concern that has been

 13 expressed is that if collateral is being allowed

 14 to be re-hypothecated, it could be used to margin

 15 more than one position or it could be lost in a

 16 financial stress situation and someone wouldn't

 17 actually be able to recover collateral that they

 18 thought was rightfully theirs.

 19 The implementation schedule is

 20 consistent -- again, it's identical to the

 21 implementation schedule proposed by the prudential

 22 regulators and in the international standards. It
 66

 1 would require that variation margin requirements

 2 be effective December 1, 2015. Initial margin

 3 requirements would be phased in starting December

 4 1, 2015, with a different group coming in December

 5 1 of each year through 2019 based on their gross

 6 notional exposure. So only the largest

 7 participants would be effective December 1, 2015,

 8 and then intermediate groups in '16, '17, and '18,

 9 and then the last group on December 1, 2019.

 10 The final topic I want to address is the

 11 cross-border application of these rules. Here the

 12 Federal Register release does not propose rule

 13 text, but instead takes the approach of an Advance

 14 Notice of Proposed Rulemaking. The release

 15 describes three alternative ways in which these

 16 issues could be addressed and requests public

 17 comment. The three alternatives are first, the

 18 approach taken on the cross-border guidance issued

 19 by the Commission last year, which is broadly and

 20 generally a transaction-based approach. The

 21 second alternative, the approach taken by the

 22 prudential regulators two weeks ago, which is
 67

 1 generally an entity-based approach with some

 2 modification. Or a third approach, which is also

 3 an entity-based approach, which would differ from

 4 the prudential regulators' approach in a couple of

 5 particulars. The release asks a number of

 6 questions about each of the approaches intended to

 7 elicit comment on the pluses and the minuses of

 8 each of these approaches or any other approach

 9 that members of the public might think were

 10 preferable or some combination.

 11 In closing I'd like to thank the other

 12 members of the staff who worked on this project --

 13 Tom Smith, Rafael Martinez, Francis Kuo, Steve

 14 Kane, David Reiffen, Carlene Kim, Paul

 15 Schlichting, and Laura Badian. Thank you.

 16 CHAIRMAN MASSAD: Thank you. To begin

 17 the Commission's consideration of this rulemaking,

 18 I will now entertain a motion to adopt the

 19 proposed rule as presented by the staff.

 20 COMMISSIONER WETJEN: So moved.

 21 CHAIRMAN MASSAD: Is there a second?

 22 COMMISSIONER BOWEN: Second.
 68

 1 CHAIRMAN MASSAD: Thank you. Let me

 2 begin. I would like to ask a few questions. Mr.

 3 Lawton, can you just explain further on the

 4 threshold? You said that our threshold for

 5 collection of margin is higher than -- it's the

 6 same as the prudential regulators. It is higher

 7 than the IOSCO standard, but you said it

 8 nevertheless really -- it's consistent with the

 9 intent of the IOSCO standards as to the $65

 10 million threshold. Can you talk a little bit more

 11 about that and the data or analysis that you made?

 12 MR. LAWTON: Right. The international

 13 standards and this rule and the prudential

 14 regulators' rule all stated that if you have a

 15 margin requirement below $65 million, you need not

 16 post margin. The threshold of gross notional

 17 exposure was effectively an attempt to

 18 reverse-engineer what amount of gross notional

 19 would tend to generate $65 million in margin to

 20 allow people sort of a safe harbor. If you have

 21 below this gross notional, you don't even have to

 22 do the computation. So the international group
 69

 1 based on data that it got essentially from the

 2 largest of the dealers came up with a standard,

 3 which was 8 billion euros, which is roughly $11

 4 billion.

 5 Subsequent to the issuance of that, we

 6 started looking at data with regard to cleared

 7 swaps. We looked at over 4,000 accounts and

 8 calculated what was the ratio of margin to gross

 9 notional and found that the ratio was frequently a

 10 much higher number than had been found based on

 11 the data that the international group had used to

 12 set the threshold. We provided this data to the

 13 prudential regulators. They also analyzed it.

 14 They reached the same conclusion that CFTC staff

 15 had reached; that, in fact, the -- and one further

 16 point I should make and this was cleared data. If

 17 one is calculating a ratio of margin to gross

 18 notional for a cleared position, you're doing that

 19 based on a 5-day liquidation horizon. The

 20 proposed rules for uncleared would require a

 21 10-day liquidation horizon. Roughly speaking, one

 22 would expect a 10-day liquidation horizon to have
 70

 1 about a 40 percent higher number.

 2 So, again, the data from the cleared

 3 world indicated that the safe harbor in the

 4 international standard would probably exclude a

 5 lot of people whose margin requirements would, in

 6 fact, turn out to be greater than $65 million. So

 7 we presented this data to the prudential

 8 regulators. They analyzed it. They reached the

 9 same conclusion. We've also provided this data to

 10 the monitoring group of the international group.

 11 It's going to be an active topic for this

 12 monitoring group after these rules are proposed so

 13 that the foreign regulators can analyze it and see

 14 if they reach the same conclusion and perhaps

 15 there will be discussions. Perhaps the

 16 international standard might be adjusted based on

 17 this data.

 18 CHAIRMAN MASSAD: So we are in

 19 discussions with our international counterparts on

 20 trying to harmonize these standards?

 21 MR. LAWTON: Yes, definitely.

 22 CHAIRMAN MASSAD: Okay, thank you.
 71

 1 Secondly, can you talk a little bit more about the

 2 types of acceptable collateral? You included in

 3 your list municipal securities. I know that when

 4 the prudential regulators adopted their proposal,

 5 the Fed also adopted its liquidity coverage ratio

 6 and there was some discussion in the press that

 7 municipal securities were not included. Now, the

 8 rules are different. Our margin proposal today as

 9 well as the prudential regulators' includes

 10 corporate debt and corporate equities, so I do

 11 think it's important that we include municipal

 12 bonds. Obviously, they can be subject to some

 13 liquidity and quality standards, but can you talk

 14 a little bit more about that?

 15 MR. LAWTON: Yes. Again, on acceptable

 16 collateral, our rule is identical to the

 17 prudential regulators' except in one place where

 18 we effectively -- they cross referenced some of

 19 their own rules and we simply cross referenced

 20 anything that's been approved by the prudential

 21 regulators. And that would be particularly

 22 relevant on this particular point because, for
 72

 1 example, one of the cross references is to -- one

 2 of their regulations, which defines investment

 3 grade securities, and basically that means "a

 4 security where the issuer has adequate capacity to

 5 meet financial commitments under the security for

 6 the projected life of the asset or exposure."

 7 Staff of the prudential regulators has indicated

 8 that there is corporate debt that meets that

 9 standard. There are municipal bonds that meet

 10 that standard. And, therefore, those particular

 11 assets would be acceptable collateral under their

 12 proposed rules; therefore, by extension under

 13 ours, our thinking being that it would make sense

 14 for swap dealers to have the same standards of

 15 collateral whether it's a CFTC regulated swap

 16 dealer or a prudentially regulated swap dealer.

 17 CHAIRMAN MASSAD: Thank you. Let me

 18 also ask you about the process for approving the

 19 models used to calculate margin. Obviously, we

 20 need a very robust review process. It also needs

 21 to be an efficient review process. This is

 22 especially a concern given our limited resources.
 73

 1 What would be the interaction between us and other

 2 regulators in that regard?

 3 MR. LAWTON: We anticipate working very

 4 closely both with the prudential regulators, the

 5 SEC, and we hope many international regulators. I

 6 think we'll find that there's a lot of swap

 7 dealers, there's multiple swap dealers in the same

 8 corporate family. We would anticipate that

 9 largely they would use the same model. So,

 10 therefore, if the Comptroller of the Currency

 11 approved a model that was being used by the bank,

 12 we would expect it to be essentially the same

 13 model approved by the bank's affiliates that were

 14 under CFTC jurisdiction. So we think there can be

 15 a very close cooperative relationship, which will

 16 expedite that given the CFTC's limited staff. And

 17 we think that could probably work internationally

 18 as well if there are affiliates of foreign banks

 19 that might be subject to our jurisdiction.

 20 We also anticipate that there'll be some

 21 instances where there might be third-party models

 22 out there, which, again, might be approved by one
 74

 1 of the other regulators. And that also might be

 2 used by a standalone swap dealer, and we would be

 3 able to expedite approval of that.

 4 We're also contemplating the concept of

 5 provisional approval so that people can be using

 6 models pending review.

 7 MR. CHAIRMAN: Yes, Tom?

 8 MR. SMITH: I'd just like to add just

 9 one more comment to that point that John was

 10 making. This was a significant issue when the

 11 Commission proposed its capital regulations and

 12 the question came up there. Same thing, who would

 13 be able to perform model reviews? And in looking

 14 at it today on who is provisionally registered

 15 with CFTC as a swap dealer, there are a number of

 16 entities that are not part of a prudential

 17 regulator family. They're not a nonbank

 18 subsidiary of a bank holding company. They don't

 19 have a foreign regulator; that is, a prudential

 20 regulator. So we're looking at that.

 21 And in the capital rule, a lot of the

 22 comments that came in on the capital model review
 75

 1 were what would be the role of the National

 2 Futures Association and should they have a role?

 3 We have put in questions regarding that in this

 4 proposal as well for those swap dealers that are

 5 not part of a prudential regulator family or have

 6 foreign regulators.

 7 MR. CHAIRMAN: Thank you. Well, thank

 8 you very much for the presentation. I support the

 9 proposal as I think we've all noted. I think this

 10 is a key part of our Dodd-Frank mandate. Margin

 11 requirements for uncleared swaps are vital to

 12 improving the safety and soundness of our swaps

 13 marketplace. I think it's very important that our

 14 rule does not unnecessarily burden commercial

 15 end-users and, therefore, I'm pleased that our

 16 rule, as well as the prudential regulators'

 17 proposals, does not require commercial end-users

 18 to post or collect margin.

 19 I'm also pleased that our proposal is

 20 very similar to the proposed rules approved by the

 21 prudential regulators and that it is very similar

 22 to the international standards. It's extremely
 76

 1 important that we try to harmonize these rules as

 2 much as possible in order to promote fair

 3 competition by entities regulated in different

 4 jurisdictions and by different regulators.

 5 I think we all recognize that more

 6 stringent margin requirements impose costs on

 7 market participants and, therefore, the proposal

 8 includes a detailed cost-benefit analysis. I

 9 believe the proposal before us balances the

 10 inherent tradeoff between mitigating systemic risk

 11 and minimizing costs on individual participants.

 12 But I'm very interested in having public feedback

 13 on that analysis as well as on the proposal as a

 14 whole. And I would be particularly interested in

 15 commenters' views on some of the issues I've

 16 noted, such as the threshold, the types of

 17 acceptable collateral, the process for approving

 18 margin models. I think also the requirement that

 19 collateral be held by a third-party custodian and

 20 the prohibition on re-hypothecation. These are

 21 important measures, as you've noted, to protect a

 22 posting party's collateral and minimize the
 77

 1 buildup of overall risk in the system. However,

 2 they do create costs of compliance, and we invite

 3 comments on the benefits as well as the costs.

 4 Finally, on the cross-border application

 5 of the rule, I think it is a good approach that

 6 we've outlined a few options. And I think the

 7 reason for that is pretty apparent, but I'm happy

 8 to explain it. On the one hand, there is clearly

 9 value in being consistent with our prior guidance,

 10 which did look at margin as a transaction-based

 11 requirement. At the same time, the law requires

 12 us to harmonize as much as possible with the

 13 prudential regulators. They have taken an

 14 approach which is slightly different in some cases

 15 to what the guidance would imply. And, finally,

 16 there are those who have suggested that we should

 17 really think of margin and capital not as

 18 transaction requirements, but as entity

 19 requirements, particularly when you think about

 20 the fact that if you are a swap dealer who's

 21 applying a margin model to some participants, why

 22 not just apply it to all participants. So that's
 78

 1 the reason for inviting public comment, and we

 2 look forward to those comments.

 3 The thing I would like to note is really

 4 when you step back the key here again is to

 5 achieve as much harmonization as we can between

 6 the rules of different regulators not only

 7 domestically, but abroad. If the rules are

 8 essentially the same, then whether we say our rule

 9 applies in this particular case or we say our rule

 10 applies, but with substituted compliance, or we

 11 say we have total difference, you end up in the

 12 same place if the rules with that other

 13 jurisdiction are essentially the same. So, again,

 14 that is I think a key objective here.

 15 Again, I want to thank the staff for

 16 their hard work on this proposal, which as I say I

 17 support. I would now like to open the floor to

 18 allow the Commissioners to make any statements and

 19 ask any questions they may have, and I will begin

 20 with Commissioner Wetjen.

 21 COMMISSIONER WETJEN: Thank you, Mr.

 22 Chairman. I think I'll go in the order reverse of
 79

 1 how it reads in my notes and start with a question

 2 on approving margin methodologies since it's

 3 something that we were just talking about.

 4 I share some of the concerns of the

 5 Chairman with respect to the agency's already

 6 greatly burdened staff and agree very much that it

 7 would make a lot sense where we can to borrow from

 8 or benefit from the work of some of the other

 9 regulators who are also making similar reviews and

 10 approvals or disapprovals of margin methodologies.

 11 And I would just note that there are a couple of

 12 different ways we could do this and ways that

 13 would be similar to what Mr. Smith alluded to.

 14 Tom, you mentioned the involvement of the NFA in

 15 how methodologies can be used pending approval or

 16 disapproval by the Commission.

 17 There's a number of other ways we can do

 18 it along those lines. We have precedent through

 19 Part 40 of our rules where a dealer could perhaps

 20 basically follow methodology that's self-executing

 21 and deemed approved pending review; that might be

 22 one efficient way of doing it. We've done
 80

 1 something similar even in the context of

 2 registering SEFs in the last year where we have

 3 provisional registration. SEFs are up and

 4 operating under a provisional registration while

 5 the staff continues to review the actual

 6 compliance with the core principles; that could be

 7 another precedent we could use here.

 8 But it sounds like the staff agrees

 9 based on comments I've heard here today. We want

 10 to make sure that people can continue doing

 11 business and the market can continue operating as

 12 it should while the agency does its work in making

 13 sure the methodologies are sound and fair. So I

 14 look forward to the comments and seeing whether

 15 there might even be additional ways we could

 16 approach this, balancing the needs of the

 17 Commission, but also recognizing some of the

 18 constraints that we have. So I look forward,

 19 again, to additional insights into that topic.

 20 Turning to a different topic, I wanted

 21 to ask the staff -- there's a decision made, at

 22 least in the proposal here, about what constitutes
 81

 1 a cleared swap and what does not constitute a

 2 cleared swap. And we say in the proposal that "a

 3 cleared swap is only one that's cleared by a

 4 registered DCO or cleared by a clearinghouse that

 5 is subject to relief from the Commission." Can

 6 you explain what the rationale for that decision,

 7 or proposal rather, what that rationale is?

 8 MR. LAWTON: Actually, the statute

 9 refers to a cleared swap as being one that's

 10 cleared by a DCO, so what we proposed actually

 11 goes beyond what's in the statute. The prudential

 12 regulators actually just followed the statute, so

 13 we actually proposed something a little bit beyond

 14 that because we did identify the concern that

 15 there are trades, which are executed by people who

 16 might be subject to this rule, that are submitted

 17 to CCPs, central counterparties, but CCPs that are

 18 not actually registered with the Commission. And

 19 we didn't think that it was the intent of the

 20 statute to apply these rules to that circumstance.

 21 It's hard to figure out how that would

 22 practically work because these rules are two-way
 82

 1 margin. Typically if you do a trade and you

 2 submit it to clearing, the counterparties no

 3 longer have a relationship with one another. They

 4 have a relationship with the clearinghouse. And

 5 if you tried to apply these rules, then you would

 6 be saying that the clearinghouse has to post

 7 margin with the clearing member; whereas typically

 8 in the clearing world, margin just goes one way

 9 from the clearing member to the clearinghouse.

 10 So we just flagged this as an issue,

 11 hoping to get comment from the public as to how to

 12 address this. On the other hand we didn't want to

 13 say that any clearinghouse anywhere would

 14 necessarily qualify, so we tried to come up with

 15 standards. We asked, for example, whether the

 16 PFMIs might be an appropriate standard for

 17 determining what's an acceptable clearinghouse to

 18 take you out from under the coverage of this rule.

 19 COMMISSIONER WETJEN: Thank you, John.

 20 I think it's excellent that we posed that question

 21 in today's release, and I'm thinking about a

 22 comment made by Commissioner Giancarlo earlier.
 83

 1 Obviously -- and I'm sure this is a concern the

 2 other Commissioners share as well -- we need to be

 3 pragmatic with our rules, too. It might make some

 4 sense to go beyond what's in the proposal and

 5 consider swaps to be cleared for purposes of the

 6 margin rule, even in the case of a swap cleared by

 7 an unregistered CCP so long as the CCP abides by

 8 the PFMIs adopted by IOSCO.

 9 To give some context to the practical

 10 implications here, there's a recent story in one

 11 of the newspapers that described how some dealers

 12 are members of literally dozens and dozens of

 13 clearinghouses. I'm quite certain we don't have

 14 registered as DCOs dozens and dozens of

 15 clearinghouses, and I know that we only have a

 16 handful of clearinghouses that are subject to

 17 relief by the staff. But, nonetheless, I would

 18 imagine most of those remaining clearinghouses are

 19 probably following rules in jurisdictions that

 20 were informed by IOSCO PFMI standards. We've seen

 21 some of the difficulties of not fully embracing

 22 where we can and should these PFMI standards. I
 84

 1 presume that Chairman Massad knows that better

 2 than anyone in recent months. And so I think it's

 3 something we need to think about carefully. So,

 4 again, I look forward to the comments as they come

 5 in that speak to this issue.

 6 I have just a couple of points of

 7 clarification on the issue of the material swap

 8 threshold. The way the proposal works, it says

 9 that "the threshold is exceeded if the average

 10 daily aggregate notional amount of uncleared swap

 11 activity of a corporate group with all

 12 counterparties over a three-month period in the

 13 previous year exceeds $3 billion." And so the

 14 proposal goes on to identify three specific months

 15 as those three months through which to make the

 16 calculation. I want to ask for the benefit of the

 17 public, why were those months chosen? The months,

 18 by the way, are June, July, and August, as you

 19 know.

 20 MR. LAWTON: That was working backwards

 21 from the implementation schedule, which the

 22 implementation schedule starts December 1 of each
 85

 1 year. So these months were chosen by the

 2 International Committee and then the prudential

 3 regulators and this proposal conformed to that.

 4 But the idea was that those months are fairly

 5 close in time to the December 1 implementation

 6 date, but give a little bit of room for people to

 7 do the calculation, determine whether, in fact,

 8 they've now gone over the threshold and might be

 9 subject to having to post and collect margin on

 10 December 1.

 11 COMMISSIONER WETJEN: And how's the

 12 notional amount of basis swaps considered? How is

 13 that supposed to be calculated in this notional

 14 calculation?

 15 MR. LAWTON: That actually isn't

 16 specified in the proposal. That's an interesting

 17 question. I'm not sure exactly how that would be

 18 calculated.

 19 COMMISSIONER WETJEN: So another issue

 20 to flag for the commenters. It sounds like we

 21 could probably use some direction on that.

 22 Just one other area to point out where
 86

 1 there is a bit of a departure, although I don't

 2 think a serious one in any way, but a bit of a

 3 departure from the global margin framework. And

 4 that is in regard to the requirement under today's

 5 release that variation margin be passed as cash

 6 rather than some other liquid asset. So just help

 7 us understand why the proposal went the direction

 8 it did.

 9 MR. LAWTON: Basically variation margin

 10 serves a different purpose than initial margin. I

 11 mean initial margin is a performance bond to cover

 12 potential future exposure. Variation margin is

 13 intended to remove current exposure from the

 14 market. In the cleared world, variation margin is

 15 always paid in cash, at least at DCOs. This was

 16 an attempt to move in the same direction. I mean

 17 there were practical difficulties with the idea of

 18 if you could post variation margin say with some

 19 sort of bond and let's say that the bond declined

 20 in value the next day, how would you address that?

 21 Did you, in fact, now create some exposure that

 22 you thought you had taken out of the market?
 87

 1 There were issues that were discussed with regard

 2 to how would you haircut variation margin if it

 3 wasn't cash? There were issues discussed about

 4 where would you hold variation margin if it

 5 weren't cash? So our understanding is that,

 6 generally speaking, now most variation margin is,

 7 in fact, paid in cash. So staff here and staff at

 8 the prudential regulators thought it would be

 9 worthwhile to propose cash for these rules. But

 10 we, of course, are very interested in comment if

 11 people think there are practical difficulties with

 12 doing that and if there are ways to address any

 13 practical difficulties with accepting non-cash

 14 variation margin.

 15 COMMISSIONER WETJEN: And, finally, just

 16 one last issue to cover. John, you and I spoke

 17 about the approach taken in this proposal as it

 18 relates to the requirement that there be

 19 segregation of collateral collected by a dealer

 20 from a customer. And there's an interesting

 21 discussion behind all that as you and I went

 22 through. But jumping over that point for the
 88

 1 moment, in the proposal do we specify as to

 2 whether customer collateral can be kept in an

 3 omnibus account or does it have to be kept in

 4 individual accounts for the customer?

 5 MR. LAWTON: We don't actually specify

 6 in this proposal. There is an existing Commission

 7 rule on the books that was done pursuant to

 8 Section 4s(l) of the Act, which is the voluntary

 9 segregation. And that rule would require that the

 10 seg be held in an individual account. I think

 11 that our anticipation -- again, we welcome

 12 comments -- I think our anticipation would be that

 13 mandatory seg would be subject to the same

 14 requirement as voluntary seg; that is to say,

 15 individual seg rather than omnibus seg. There's a

 16 concern that omnibus seg may not provide

 17 bankruptcy protection in the same way that

 18 individual seg would.

 19 COMMISSIONER WETJEN: And, again,

 20 referring back to the global margin framework, I

 21 believe that framework would permit the dealer to

 22 keep the collateral in an omnibus account, though.
 89

 1 Isn't that correct?

 2 MR. LAWTON: It's actually -- it's

 3 ambiguous there as well. We've asked -- at least

 4 at the staff level -- people at the prudential

 5 regulators their anticipation as they would

 6 require individual seg. But, again, I think the

 7 actual rule text may be somewhat ambiguous at this

 8 point.

 9 COMMISSIONER WETJEN: Thank you, John.

 10 Thank you to the rest of the team as well. A lot

 11 of hard work over recent days and apologies for

 12 the scurry over the last two or three days in

 13 particular as we sorted out some of the

 14 cross-border matters, but really appreciate the

 15 efforts there.

 16 And thanks again to you, Mr. Chairman.

 17 The flexibility you showed here and also leading

 18 these creative discussions about how to solve for

 19 this cross-border issue result in something that

 20 we haven't done in a while with this ANPR, and I

 21 think it's a very appropriate approach in this

 22 circumstance. So thank you.
 90

 1 MR. CHAIRMAN: Thank you, Commissioner

 2 Wetjen. Commissioner Bowen?

 3 COMMISSIONER BOWEN: Yes, just a couple

 4 of questions. I know we've talked quite a bit

 5 about the threshold, and I just want to make sure

 6 that, generally speaking, the largest global

 7 institutions would be over this threshold and

 8 subject to initial margin.

 9 MR. LAWTON: Yes. They'd be quite a bit

 10 over. The implementation schedule, which was

 11 based on data provided to the International

 12 Committee, starts at $3 trillion. So there are

 13 global market participants who actually would be

 14 over that threshold, which, of course, are many

 15 multiples of the 2019 threshold.

 16 COMMISSIONER BOWEN: That's good to

 17 hear, particularly given the importance of initial

 18 margin as a risk management tool. I'd be very

 19 interested in hearing from our commenters,

 20 especially about how we would address this in the

 21 cross-border context, if there's a way we can get

 22 the rule right in that respect and capture the
 91

 1 largest global firms as well.

 2 I'd like to ask a little bit about swap

 3 dealers. As you know, many of the largest firms

 4 try as best they can to be one single global firm

 5 and to service their clients around the world. At

 6 the same time they're subject to different rules

 7 in those jurisdictions. Given the three options

 8 that have been proposed for the cross-border

 9 rules, what factors can we look at when we're

 10 considering these global firms?

 11 MR. LAWTON: Well, I think there are a

 12 couple of factors that would be looked at.

 13 Certainly you would want to look at the extent to

 14 which you think the risk of these trades would

 15 come back to the United States, to United

 16 States-based entities, or to the United States

 17 somehow. But you also would want to balance that

 18 against competitive effects; that you wouldn't

 19 want to create a system which unfairly advantaged

 20 some participants in the markets over others. So

 21 I think there's some sort of balancing that would

 22 be involved there.
 92

 1 COMMISSIONER BOWEN: Thank you. This is

 2 another topic that obviously we're looking forward

 3 to getting comments on.

 4 And I also want to just thank the

 5 Chairman and the other Commissioners, in terms of

 6 their approach the last several days, especially

 7 your willingness to hear all of our viewpoints and

 8 really to take that into consideration. The time

 9 that the staff took to meet with us on several

 10 occasions, I really appreciate it.

 11 CHAIRMAN MASSAD: Thank you,

 12 Commissioner Bowen. Commissioner Giancarlo?

 13 COMMISSIONER GIANCARLO: John, thank you

 14 for your explanation of the lowering of the

 15 threshold for financial end-users to $3 billion.

 16 In the event the Europeans and other regulators do

 17 not lower their $11 billion threshold to our more

 18 restrictive $3 billion level, what cost-benefit

 19 analysis is presented on the impact of the

 20 differential on the U.S. economy?

 21 MR. KANE: We didn't make an estimate.

 22 We said that we're at the proposal stage. We're
 93

 1 still negotiating. So we anticipate that we will

 2 meet. So we didn't analyze it, but we did ask for

 3 questions. It's very hard to quantify at this

 4 point.

 5 COMMISSIONER GIANCARLO: Thank you. I'm

 6 hopeful that interested members of the public,

 7 especially those with significant econometric

 8 capabilities, will weigh in on this topic. I

 9 think it's a very important one to take into

 10 account. And I do want to say, despite the

 11 concerns I've raised about cost-benefit, I do want

 12 to compliment actually the good work of the Office

 13 of the Chief Economist of the CFTC. My concerns

 14 here are not directed to them. I think this is a

 15 system-wide prudential regulator or regulatory-

 16 wide concern about the impact of some of these

 17 rules. So I hope the public will weigh in. We'll

 18 look forward to seeing those comments.

 19 I also want to, again, thank the agency

 20 staff and my fellow Commissioners for their

 21 collaborative approach to this very important rule

 22 proposal. It reflects a good amount of
 94

 1 thoughtfulness and hard work, and I think it's a

 2 very good product that's been put forth. I look

 3 forward to the comments from the public.

 4 CHAIRMAN MASSAD: Okay, if there are no

 5 other comments or questions, are the Commissioners

 6 prepared to vote? If so, I will ask Mr.

 7 Kirkpatrick, will you call the roll?

 8 MR. KIRKPATRICK: Mr. Chairman, the

 9 motion now before the Commission is on the

 10 adoption of a proposed rule and Advance Notice of

 11 Proposed Rulemaking on margin requirements for

 12 uncleared swaps for swap dealers and major swap

 13 participants. Commissioner Giancarlo?

 14 COMMISSIONER GIANCARLO: Aye.

 15 MR. KIRKPATRICK: Commissioner

 16 Giancarlo, aye. Commissioner Bowen?

 17 COMMISSIONER BOWEN: Aye.

 18 MR. KIRKPATRICK: Commissioner Bowen,

 19 aye. Commissioner Wetjen?

 20 COMMISSIONER WETJEN: Aye.

 21 MR. KIRKPATRICK: Commissioner Wetjen,

 22 aye. Chairman Massad?
 95

 1 CHAIRMAN MASSAD: Aye.

 2 MR. KIRKPATRICK: Chairman Massad, aye.

 3 Mr. Chairman, on this matter the aye's have four,

 4 the no's have zero.

 5 CHAIRMAN MASSAD: Thank you, Mr.

 6 Kirkpatrick. Well, I would just like to say again

 7 my thanks to the staff. There has been a lot of

 8 hard work, frankly, not just in the last week, but

 9 over many, many months on some of these issues.

 10 I want to thank again my fellow

 11 Commissioners for the collegiality and very good

 12 discussion we have had. I think it just reflects

 13 a willingness to consider one another's point of

 14 view that's very good.

 15 And I also want to say that I am very

 16 pleased that with respect to these two very

 17 important rules -- a proposed rule in one case and

 18 final rule in another -- that we are unanimous in

 19 our actions today. I think that's a great start.

 20 Is there any other Commission business?

 21 There being no further business, I would entertain

 22 a motion to adjourn the meeting.
 96

 1 COMMISSIONER GIANCARLO: So moved.

 2 CHAIRMAN MASSAD: Is there a second?

 3 COMMISSIONER BOWEN: Second.

 4 CHAIRMAN MASSAD: All in favor? Any

 5 opposed? The ayes have it. The meeting is

 6 adjourned. Thank you all very much.

 7 (Whereupon, at 3:41 p.m., the

 8 PROCEEDINGS were adjourned.)

 9 * * * * *

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 97

 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Carleton J. Anderson, III, notary

 4 public in and for the District of Columbia, do

 5 hereby certify that the forgoing PROCEEDING was

 6 duly recorded and thereafter reduced to print under

 7 my direction; that the witnesses were sworn to tell

 8 the truth under penalty of perjury; that said

 9 transcript is a true record of the testimony given

 10 by witnesses; that I am neither counsel for,

 11 related to, nor employed by any of the parties to

 12 the action in which this proceeding was called;

 13 and, furthermore, that I am not a relative or

 14 employee of any attorney or counsel employed by the

 15 parties hereto, nor financially or otherwise

 16 interested in the 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: March 31, 2017