UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 OPEN MEETING ON THE SEVENTEENTH SERIES OF

 PROPOSED RULEMAKINGS UNDER THE DODD-FRANK ACT

 Washington, D.C.

 Tuesday, July 19, 2011
 2

 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BART CHILTON, Commissioner

 5 MICHAEL V. DUNN, Commissioner

 6 JILL SOMMERS, Commissioner

 7 SCOTT D. O'MALIA, Commissioner

 8 Presentation No. 1: Consideration of NPRM on

 8 Customer Clearing Documentation and Timing of

 9 Acceptance for Clearing

 9

 10 Division of Clearing and Intermediary Oversight

 11 JOHN LAWTON

 12 CHRIS HOWER

 13 ANANDA RADHAKRISHNAN

 14 Presentation No. 2: Consideration of NPRM on

 14 Clearing Member Risk Management

 15

 16 Division of Clearing and Intermediary Oversight

 17 JOHN LAWTON

 18 CHRIS HOWER

 19 ANANDA RADHAKRISHNAN

 20

 21

 22
 3

 1 PARTICIPANTS (CONT'D):

 2 Presentation No. 3: Consideration of Final Rule

 2 on Process for Review of Swaps for Mandatory

 3 Clearing

 3

 4 Division of Clearing and Intermediary Oversight

 5 EILEEN DONOVAN

 6 ANANDA RADHAKRISHNAN

 7 JOHN LAWTON

 8 Presentation No. 4: Consideration of Final Rule

 8 on Part 40, Provisions Common to Registered

 9 Entities

 10 Division of Market Oversight

 11 BELLA ROZENBERG

 12 JOE CISEWSKI

 13 RIVA SPEAR ADRIANCE

 14 TOM LEAHY

 15 RICK SHILTS

 16 Division of Clearing and Intermediary Oversight

 17 PHYLLIS DIETZ

 18 Presentation No. 5: Consideration of Final Rule

 18 on Removing Any Reference to or Reliance on Credit

 19 Ratings in Commission Regulations; Proposing

 19 Alternatives to the Use of Credit Ratings

 20

 21 Office of General Counsel

 22 WARD P. GRIFFIN
 4

 1 PARTICIPANTS (CONT'D):

 2 Division of Clearing and Intermediary Oversight

 3 ANANDA RADHAKRISHNAN

 4 * * * * *

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 5

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

 2 (9:36 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 meeting will come to order. This is a public

 5 meeting of the Commodity Futures Trading

 6 Commission to consider issuance of proposed and

 7 final rules under the Dodd-Frank Act. I'd like to

 8 welcome members of the public, market

 9 participants, and members of the media to today's

 10 meeting as well as welcome those listening to the

 11 meeting by phone and watching the webcast.

 12 During today's meeting the Commission

 13 will consider two proposed rules and three final

 14 rules. Specifically, we'll consider proposed

 15 rules related to customer clearing documentation

 16 and timing of acceptance for clearing, and a

 17 related clearing member risk management rule.

 18 We'll also consider final rulemakings with regard

 19 to the process to review swaps for mandatory

 20 clearing; a second process rule, but it's called a

 21 process for registered entities rule submissions,

 22 or what the industry sometimes calls Part 40; and
 6

 1 removing references to credit ratings in some of

 2 the Commission regulations.

 3 Before we hear from staff, I would like

 4 to thank Commissioners Dunn, Sommers, Chilton, and

 5 O'Malia for their significant contributions to the

 6 rule-writing process. I also want to pause and

 7 give a hearty congratulations to Commissioner Bart

 8 Chilton who became a grandfather I guess a few

 9 hours ago. And a young baby boy, Connor Thomas,

 10 we understand is healthy. And so Bart, I think,

 11 has left his proxy for the various matters today,

 12 but terrific, Bart Chilton is a grandfather.

 13 I also want to thank --

 14 SPEAKER: Not ominous.

 15 CHAIRMAN GENSLER: Yeah, we're just all

 16 thinking about that. No cheated traders for that

 17 poor Connor, though.

 18 I also want to thank the hardworking

 19 staff of the CFTC for their efforts to implement

 20 the Dodd-Frank Act. This week's the one-year

 21 anniversary of the Dodd-Frank Act, and on this

 22 anniversary it's important to remember why the
 7

 1 President and Congress came together in this

 2 historic way. The financial crisis was very real

 3 and happened, in part, because the system failed,

 4 the financial system and the regulatory failed.

 5 And when AIG and Lehman Brothers failed, we all

 6 paid a price. The Dodd-Frank Act included

 7 critical swaps markets reform to protect the

 8 American public and the law brings much-needed

 9 transparency to this marketplace and reduces the

 10 risk that swaps pose to the overall economy. And

 11 while they are important, I would say, essential

 12 hedging tools for end users, they also

 13 concentrated risk and led to the possibility that

 14 taxpayers might stand behind large financial

 15 institutions.

 16 Since the passage of the Dodd-Frank Act,

 17 the CFTC has been working diligently to write

 18 rules to implement swaps provisions of the law to

 19 ensure that swaps no longer operate in the shadows

 20 and financial institutions pose less risk to

 21 taxpayers. And we substantially completed the

 22 proposal phase and have now turned towards final
 8

 1 rules. And we're going to take these up in public

 2 meetings as we have another one in early August

 3 and we have two scheduled for September and no

 4 doubt we'll probably schedule approximately two a

 5 month after that, and take them up when staff is

 6 ready to submit a recommendation and when the

 7 commissioners all have sufficient time to give

 8 feedback to the staff on those and bring them to a

 9 full commission action.

 10 But until the CFTC completes its

 11 rule-writing process and implements and enforces

 12 these new rules, the public remains unprotected.

 13 Many will get the benefits of swaps, but we'll

 14 still have less transparency and greater risk than

 15 the Dodd-Frank Act envisions.

 16 Before we hear from staff on the

 17 rule-writing I'd like to turn to my fellow

 18 commissioners. Commissioner Dunn.

 19 COMMISSIONER DUNN: Thank you, Mr.

 20 Chairman. And let me start off with my

 21 congratulations to Commissioner Chilton on

 22 becoming a grandfather. It is truly, for you
 9

 1 younger folks, one of the real joys in life to

 2 become a grandfather. My two grandsons, Sam and

 3 Aidan are a constant source of joy and when you

 4 get to be Bart's age and my age you'll get to be

 5 part of that.

 6 I want to thank you all for joining us

 7 today for our second meeting to consider final

 8 rules promulgated under -- pursuant to the

 9 Dodd-Frank Act. Today we will consider three

 10 final rules: Number one, Part 40 provisions

 11 common to registered entities; two, the process

 12 for review of swaps and mandatory clearing; and

 13 three, removing any reference to the reliance on

 14 credit ratings and Commission regulations, and

 15 we'll be proposing alternatives to the use of

 16 credit ratings.

 17 Before even considering any final rules,

 18 I asked each rule-writing team to answer a set of

 19 questions. First and foremost among those

 20 questions is whether or not the proposed final

 21 rule adheres to the agency's principle-based

 22 regulatory approach, an approach that has served
 10

 1 the futures industry well both before and after

 2 the financial crisis. I'm concerned that the

 3 final rule regarding Part 40 is prescriptive and

 4 does not adhere to our principle- based approach.

 5 Despite staff's efforts to soften the rule in

 6 response to comments on our original proposal, I

 7 still believe that the requirements in the final

 8 rule regarding documentation are prescriptive in

 9 nature. Additional requirements for

 10 self-certification of products may unnecessarily

 11 delay exchange innovation for little or no

 12 benefits to the CFTC.

 13 Part 40 also includes rules pertaining

 14 to rural certification for systemically important

 15 designated clearing organizations. Like both the

 16 CME and OCC, I believe the SIDCO attempting to

 17 implement a risk-reducing change should not have

 18 to wait 60 days to change their rules. While I

 19 understand that the CFTC must consult with the

 20 Federal Reserve regarding certain matters relating

 21 to SIDCOs, such consultation should not jeopardize

 22 public interest. This portion of Part 40 seems
 11

 1 not only to slow down a SIDCO seeking to reduce

 2 systemic risk, but it may slow down our ability to

 3 approve such change as well.

 4 From early in the proposal rule phase of

 5 Dodd- Frank implementation I've stated my concern

 6 that budget constraints and the efforts of those

 7 who would delay, weaken, or eliminate Dodd-Frank

 8 would force us to be more prescriptive than we

 9 should otherwise be in promulgating our final

 10 rules. I fear that my concerns in this instance

 11 have come to fruition in this rule. If not, for

 12 our budget constraints I would vote against this

 13 rule. As it stands, I must weigh my disdain for

 14 prescriptive, perhaps restrictive, rules against

 15 the competing interest of having a rule that we

 16 can implement and enforce with an undersized and

 17 overworked staff.

 18 I also expressed concerns and questions

 19 to the chairman's office and the rule team

 20 regarding the final rule on the process for review

 21 of swaps from a mandatory clearing. As has been

 22 the case throughout the process, the chairman's
 12

 1 office and rule team were accommodating in

 2 answering my questions, making necessary changes

 3 and working collaboratively with my office. I

 4 will continue to give the chairman high marks for

 5 conducting an open and transparent rulemaking

 6 process.

 7 In addition to the final rules

 8 considered today, we are also considering a

 9 proposed rule on customer clearing documentation,

 10 timing of acceptance for clearing, and clearing

 11 members' risk management. While I, again, have

 12 concerns that this rule proposal is too

 13 prescriptive, I will look to the public comment to

 14 guide my ultimate decision on whether or not to

 15 vote for this rule.

 16 I'd like to acknowledge that this week

 17 will mark the first anniversary of the Dodd-Frank

 18 Act. Over the past year the chairman and the

 19 staff have done a tremendous job moving forward on

 20 implementing Dodd-Frank despite limited resources.

 21 As we move forward in these coming months with the

 22 bulk of the new regulations required by
 13

 1 Dodd-Frank, I urge the chairman to place special

 2 emphasis on rules pertaining to the regulations of

 3 swap transactions, which were, in my opinion,

 4 largely responsible for the financial meltdown.

 5 With all of the Commission's new responsibilities

 6 under Dodd-Frank this is not a time for us to make

 7 significant changes to regulations pertaining to

 8 the future industry, which functioned properly

 9 during the financial crisis. We need to focus our

 10 limited resources on regulations that will provide

 11 real safeguards to our financial services

 12 industry.

 13 I'd like to thank the staff at the CFTC

 14 for all their hard work on these important rules.

 15 The rule-writing teams have put in incredibly long

 16 hours answering different and time-consuming

 17 questions from the commissioners, and I know we

 18 can quite often be difficult. I appreciate their

 19 efforts and look forward to their presentations.

 20 CHAIRMAN GENSLER: Thank you,

 21 Commissioner Dunn. Commissioner Sommers?

 22 COMMISSIONER SOMMERS: Good morning.
 14

 1 Thank you, Mr. Chairman, and thank you to all the

 2 teams that have final rule proposals before us

 3 today. I again want to acknowledge the excellent

 4 staff work and convey my sincere appreciation to

 5 everyone who's working to get these final

 6 documents ready for Commission consideration. We

 7 are all very grateful to all of you for your

 8 commitment to this enormous challenge and I want

 9 to reiterate what I said last week: We could not

 10 do this without all of your hard work. So thank

 11 you to all of you.

 12 This is the second Commission meeting to

 13 consider and vote on final rules with another

 14 meeting devoted on final rules planned for August

 15 4th. Although the final rules we have been

 16 considering thus far deal with discrete,

 17 standalone issues, complex issues dealing with

 18 market structure and business conduct standards

 19 are on the horizon. Finalizing those rules will

 20 be a difficult, uphill climb and we are beginning

 21 that difficult climb without a plan, and I believe

 22 that's a mistake.
 15

 1 As I have said many times, formulating

 2 and sharing with the public a thoughtful plan on

 3 how the Commission will logically sequence its

 4 consideration of final rules, along with a

 5 transparent implementation plan that will allow

 6 for a reasonable phased-in approach, is critical.

 7 I believe we run the risk of unnecessarily

 8 increasing uncertainty among market participants

 9 by continuing to roll out final rules in a

 10 piecemeal fashion, one meeting at a time, without

 11 this type of plan.

 12 I support the final rules we are voting

 13 on today and have a few questions for the teams,

 14 but I'm concerned about the proposed rules. Both

 15 of the proposals were added just a couple of

 16 months ago to an already full agenda and they are

 17 not required by Dodd-Frank. These proposals

 18 involve complicated issues that market

 19 participants have spent countless hours

 20 addressing. I question whether our proposals

 21 recognize the complexity of the issues and the

 22 amount of work that has been done on sensible,
 16

 1 industry- driven solutions. As I have said

 2 before, I would like to see this Commission finish

 3 the job of implementing the requirements of

 4 Dodd-Frank before we turn our attention to these

 5 discretionary items.

 6 I want to thank you -- thank the teams

 7 again and look forward to the discussion of the

 8 rules.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner Sommers. Commissioner O'Malia?

 11 COMMISSIONER O'MALIA: Thank you, Mr.

 12 Chairman, and thank you to the teams who have

 13 done, again, yeoman's work. I echo Commissioner

 14 Sommers' sentiments that we couldn't do it without

 15 you.

 16 Today the Commission will consider three

 17 final rules and two proposed rules. I support the

 18 final rules as they are non-controversial process

 19 rules. However, I have serious concerns with both

 20 the proposed rules as they rely on weak statutory

 21 authority, poorly articulate a necessity for

 22 either rule, and are neither justified nor
 17

 1 required under Dodd-Frank.

 2 Today's draft rules regarding client

 3 documentation and clearing member risk standards

 4 were never previously mentioned during the months

 5 of intense rulemaking and seemed to be fabricated

 6 out of whole cloth. I have grown increasingly

 7 frustrated with the rulemaking process because

 8 there appears to be no specific plan or strategy

 9 for implementing these rules nor do we seem to be

 10 following President Obama's direction to ensure

 11 that the federal rulemaking process be done in the

 12 most transparent, responsible, and accountable

 13 fashion. I have requested specific reforms to

 14 improve the rulemaking process, but each request

 15 has been met with silence.

 16 As we push forward, we are running out

 17 of time to make a correction. To be clear, if we

 18 fail to produce a final rule schedule and

 19 implementation plan the next time the Commission

 20 meets on August 4th, we render public input

 21 virtually irrelevant as the Commission barrels

 22 through its final rules this fall.
 18

 1 The President has taken three steps

 2 earlier this year to open up our rulemaking

 3 process. The first was in his Inaugural Address

 4 when he challenged the American people and the

 5 government to restore trust with the American

 6 people by creating an unprecedented level of

 7 openness in government.

 8 Second, this past January, the President

 9 signed Executive Order 13563, to quote the

 10 President, "to root out regulations that conflict,

 11 that are not worth the cost, or that are just plan

 12 dumb." He actually said that.

 13 Third, last week, the President signed

 14 Executive Order 13579 to extend the previous order

 15 to independent agencies. If the January directive

 16 wasn't clear, the new order should eliminate any

 17 doubt that agencies like the CFTC must go out of

 18 its way to ensure responsible rulemaking. We

 19 should undertake a more thorough cost- benefit

 20 analysis and make our process more accountable

 21 through increased transparency and openness, which

 22 our current process lacks.
 19

 1 In response to the near universal cry

 2 for additional information on rule implementation

 3 I've put forward two proposals to address the need

 4 for greater openness, transparency, and

 5 accountability. First, I've called that a

 6 detailed plan be produced that reveals the order,

 7 timing, and substance of the Commission's rules

 8 and specific dates as when we expected these rules

 9 to be implemented.

 10 Second, I have requested that all final

 11 rules be published seven days prior to each public

 12 meeting. Today the public must wait days, if not

 13 weeks, for the Federal Register to publish

 14 proposed and final rules. My proposal would give

 15 the public a clear picture before the vote, not

 16 after.

 17 The Commission has responded with

 18 silence to both proposals, cementing in my mind

 19 that the current process is inadequate. The

 20 Commission is tentatively scheduled to meet on

 21 August 4th. I hope the Commission will be able to

 22 vote on a final rule order, a draft rule order,
 20

 1 and implementation plan that will have the benefit

 2 of receiving public comment.

 3 With regard to the rules before us

 4 today, Part 39 in specific, I must commend Eileen

 5 Donovan and her team for their work to establish a

 6 new process for reviewing swaps for mandatory

 7 clearing. I support this final regulation today.

 8 However, market participants have

 9 requested greater certainty as to the criteria the

 10 Commission will use to determine whether mandatory

 11 clearing is appropriate for a swap. And given our

 12 emphasis on the clearing -- on clearing the

 13 mandate risk, I believe moving forward on

 14 mandatory clearing without written guidance is

 15 problematic and is also arguably an abrogation of

 16 our responsibilities under Section 2(h)(3)(D) of

 17 the CEA amended by Dodd-Frank.

 18 Because this rule did not provide such

 19 specificity, I have drafted a letter right here

 20 that I'll be sending out to the market

 21 participants seeking their input on further

 22 defining the various thresholds and standards that
 21

 1 the Commission should consider in determining

 2 whether swaps should be subject to mandatory

 3 clearing. I hope to receive comments during the

 4 60 days prior to the effective date of the rule

 5 and such comments will inform staff discussions

 6 going forward.

 7 Another concern I have with the rule is

 8 it overreaches in interpreting Section 723(a)(3)

 9 of Dodd- Frank. It leaves open the possibility

 10 that the Commission could impose capital and

 11 margin directly on end-users. This rule also

 12 permits the CFTC to impose capital and margin on

 13 bank dealers and MSP, a position which the Office

 14 of Comptroller probably disagrees.

 15 With regard to the two proposed rules,

 16 the client clearing documentation and timing of

 17 acceptance for clearing and clearing member risk

 18 management, I oppose both rulemakings. The rules

 19 before us today seem to put the cart ahead of the

 20 horse. Neither rule is specifically mandated by

 21 Dodd-Frank nor are they well grounded in statutory

 22 authority. Further, it is unclear as to what
 22

 1 resources the Commission will utilize to enforce

 2 these two new optional rules.

 3 Setting aside the flawed process in the

 4 development of these rules, the first proposal

 5 regarding client clearing documentation may be

 6 attempting to solve a problem that no longer

 7 exists. The proposal alleges that the voluntary

 8 annex to a voluntary model agreement from two

 9 industry associations may restrict open access to

 10 clearing and harm competitive trading. I

 11 understand that more than 60 market participants

 12 on both the buy-side and sell-side discussed the

 13 voluntary model agreement over a period of several

 14 months. The final agreement reflected an

 15 accommodation, even if imperfect, of their

 16 respective interests.

 17 I'm very supportive of maximizing the

 18 effectiveness of clearing. I do not want

 19 artificial barriers to clearing such as needless

 20 credit or position limits. Based on the practices

 21 in the futures market, I am also quite certain

 22 that technology is available to ensure timely
 23

 1 acceptance of trades. However, as the second part

 2 of this rulemaking makes evident, the industry

 3 must still resolve a number of operational issues.

 4 Therefore, there may be certain types of

 5 documentation -- a need for certain types of

 6 documentation. Ideally, buy-side, sell-side, and

 7 clearing organizations will continue their

 8 dialogue to resolve these issues. Before

 9 substituting Commission judgment for private

 10 consensus, I hope the Commission will host a

 11 public roundtable and a Commission meeting to see

 12 if the restrictions and anti-competitive effects

 13 alleged in this rulemaking actually exist. And,

 14 if so, how we resolve these issues to everyone's

 15 satisfaction?

 16 The second proposal regarding clearing

 17 member risk management fails to justify the costs

 18 in light of the benefits. First, as I mentioned,

 19 the proposal is neither mandated by the Dodd-Frank

 20 or the CEA. Second, the proposal would require

 21 the Commission to ascertain whether clearing

 22 members are following certain risk management
 24

 1 procedures. However, under another rulemaking,

 2 the Commission assigns the same responsibility to

 3 clearing organizations.

 4 Given our resource constraints, the

 5 Commission should focus on supervising clearing

 6 organizations, the main bulwark against systemic

 7 risk. The Commission should ensure that clearing

 8 organizations are fulfilling their statutory and

 9 self-regulatory responsibilities, and adequately

 10 evaluating the risk management practices of their

 11 members. The Commission should not divert its

 12 resources to directly auditing clearing members,

 13 the failure of any one of which may not be

 14 systemic.

 15 Frankly, I would rather see the

 16 Commission dedicate resources to developing

 17 real-time trade surveillance capabilities rather

 18 than developing a redundant oversight function

 19 that will require additional resources that we

 20 currently don't possess.

 21 Mr. Chairman, I greatly appreciate the

 22 hard work of the staff and sincerely hope you will
 25

 1 provide an answer as to whether or not the

 2 Commission will publish a rulemaking schedule and

 3 an implementation timetable that includes dates to

 4 give the market and its participants an

 5 unambiguous strategy for implementing Dodd-Frank.

 6 I hope you will also commit to publishing a draft

 7 rule when you publish the notice regarding all

 8 Commission meetings. Thank you very much.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner O'Malia. The staff will now make

 11 presentations considering the recommendations. I

 12 think first we're going to turn to Ananda, John,

 13 and Chris on the two proposals, if I recall.

 14 Do I have to -- oh, I also note that

 15 Commissioner Chilton is unable to join us today

 16 and he's becoming a grandfather as we just

 17 chatted. So he's requested that he be permitted

 18 to vote by limited proxy for all votes taken at

 19 this meeting, a procedure that we have utilized in

 20 the past. So to that end, I request unanimous

 21 consent to permit Commissioner Chilton's limited

 22 proxy voting for all subsequent votes taken at
 26

 1 this meeting. Without objection.

 2 Now, I think I'm turning over to Ananda

 3 and his team.

 4 MR. RADHAKRISHNAN: Thank you. John

 5 Lawton and Chris Hower are going to present the

 6 proposed --

 7 CHAIRMAN GENSLER: Ananda, you might

 8 want to move the mike closer. I don't think they

 9 can hear you.

 10 MR. RADHAKRISHNAN: Oh, I'm sorry. John

 11 Lawton and Chris Hower are going to present the

 12 proposal for the client clearing documentation and

 13 timing of acceptance of trades and risk management

 14 for clearing members. I'll turn it over to John.

 15 Thank you.

 16 MR. LAWTON: Good morning. The proposed

 17 rules before the Commission address customer

 18 clearing documentation and the timing of

 19 acceptance or rejection of trades for clearing.

 20 The proposals are intended to facilitate customer

 21 access to clearing and to bolster risk management

 22 through timely processing of trades.
 27

 1 Turning first to the customer clearing

 2 documentation, the proposal consists of three

 3 parallel rules that would apply to FCMs, to swap

 4 dealers and major swap participants, and to DCOs.

 5 The rules would prohibit certain arrangements

 6 involving FCMs, SDs, MSPs, or DCOs that would do

 7 the following: Disclose to an FCM, SD, or MSP the

 8 identity of a customer's original executing

 9 counterparty; limit the number of counterparties

 10 with whom a customer may enter into a trade;

 11 restrict the size of a position a customer may

 12 take with any individual counterparty apart from

 13 an overall credit limit for all positions held by

 14 the customer at the FCM; impair a customer's

 15 access to execution of a trade on terms that have

 16 a reasonable relationship to the best terms

 17 available; or prevent compliance with specified

 18 timeframes for acceptance of trades into clearing.

 19 The proposals are designed to facilitate

 20 open access to clearing by customers, to remove

 21 potential barriers to competitive execution of

 22 trades for customers, and to promote risk
 28

 1 management through timely processing. The Federal

 2 Register release would request comment on how

 3 effective the proposed rules would be in achieving

 4 these goals.

 5 Turning to the second aspect of the

 6 proposed Federal Register release, which is the

 7 timing of acceptance or rejection of trades for

 8 clearing, again, the proposal consists of three

 9 parallel rules that would apply to FCMs, to swap

 10 dealers and MSPs, and to DCOs. Last March, the

 11 Commission proposed rules relating to the

 12 processing and clearing of customer positions.

 13 Included in that release was proposed Rule

 14 39.12(b)(7) regarding timeframes for clearing.

 15 Among other things the provision required DCOs to

 16 coordinate with designated contract markets and

 17 swap execution facilities concerning prompt and

 18 efficient processing of trading.

 19 Recognizing the key role the clearing

 20 members play in trade processing and submission of

 21 trades to clearing, today's proposal would also

 22 require DCOs to coordinate with clearing members.
 29

 1 The proposal would also have a reciprocal rule for

 2 clearing members that are FCMs, swap dealers, or

 3 MSPs to provide reciprocal coordination with the

 4 DCOs.

 5 As previously proposed, 39.12(b)(7)

 6 required DCOs to accept immediately upon execution

 7 all trades entered into on a DCM or SEF. A number

 8 of DCOs and other commenters expressed concern

 9 that this could expose DCOs to unwarranted risk

 10 because they would be unable to screen trades

 11 against applicable product and credit filters.

 12 While immediate acceptance for clearing has proven

 13 successful in a number of markets with central

 14 limit order books, it might be impractical at this

 15 time for some products and markets, particularly

 16 if trades are coming in to the DCO from multiple

 17 execution venues. Accordingly, today's proposal

 18 would modify 39.12(b)(7) to allow DCOs time to

 19 screen trades against applicable product and

 20 credit filters.

 21 Acceptance or rejections for trades in

 22 close to real time continues to be crucial, both
 30

 1 for effective risk management and for efficient

 2 operation of trading of venues. So rather than

 3 prescribing any specific length of time, the

 4 proposal would require acceptance or rejection as

 5 quickly as would be technologically feasible if

 6 fully automated systems were used. This standard

 7 would apply to DCOs and to FCMs, SDs, and MSPs

 8 that were clearing members.

 9 The proposal is intended to be a

 10 performance standard, not a prescription of a

 11 particular method of trade processing. It would

 12 allow flexibility to accommodate differences among

 13 products and markets. But as noted, the standard

 14 would tend to drive acceptance or rejection closer

 15 to real time, that is within seconds or minutes of

 16 execution, not hours or days of execution. The

 17 proposed release requests comment on whether this

 18 standard is appropriate and how practicable it is.

 19 And that concludes the presentation on

 20 the first proposed rulemaking. Thank you.

 21 CHAIRMAN GENSLER: Thank you, John, for

 22 that. I think I'll entertain a motion on the
 31

 1 staff recommendation.

 2 COMMISSIONER DUNN: So moved.

 3 COMMISSIONER SOMMERS: Second.

 4 CHAIRMAN GENSLER: What's that? Oh, all

 5 right, I don't need that right now.

 6 So with that, we'll take questions.

 7 And, John, just if you can address the industry

 8 has been looking at this and certainly there's a

 9 model in the futures world as well, so how does

 10 this documentation that you're talking about

 11 compare and contrast to what's used in the futures

 12 world right now?

 13 MR. LAWTON: Typically in the futures

 14 world I think there's bilateral agreements that a

 15 customer would have an agreement with his futures

 16 commission merchant that would go to acceptance of

 17 his trades for clearing. There's been discussion

 18 in the industry of trilateral agreements in

 19 connection with swaps which would include

 20 potentially the counterparty to the trade in the

 21 agreement. Again, going back to the futures

 22 world, when a trade is cleared there's no
 32

 1 particular need for the clearing member to know

 2 who the customer's counterparty was that make --

 3 it goes into a system, the trade's executed, the

 4 clearing member's going to have risk facing his

 5 customer, it's going to have risk facing the

 6 clearing house. It doesn't have any risk facing

 7 the counterparty. Any risk with regard to that

 8 counterparty goes to its clearing member.

 9 This rule addresses the potential for

 10 bringing the counterparty into the agreement,

 11 which could have the effect of limiting the number

 12 of counterparties with whom a customer could

 13 trade, which could potentially affect its ability

 14 to receive effective execution of its trades. It

 15 also could potentially affect the speed with which

 16 a trade is processed if a clearing member not only

 17 has to check whether a customer's trade is within

 18 its limits -- overall limit that the clearing

 19 member has provided, but within some potential

 20 sub-limits, that it can only have a trade up to a

 21 certain size with a specified counterparty.

 22 Again, in the futures world that sort of thing
 33

 1 wouldn't exist. It doesn't matter who the

 2 counterparty is. There's just one overall limit

 3 that the FCM has established based on its judgment

 4 of the risk that the customer poses to it.

 5 CHAIRMAN GENSLER: I support the

 6 proposed rulemaking on the customer clearing

 7 documentation and timing for acceptance. I think

 8 that it'd be very helpful to get industry and

 9 public market comment. But I do think that it

 10 helps promote access to central clearing and that

 11 that's the key here is that the asset managers and

 12 pension funds and small as well as large would be

 13 able to have access through clearing members and

 14 enter into these bilateral arrangements.

 15 I also support it because the proposal

 16 actually re-proposes certain timeframe provisions

 17 in the Commission's proposed rule that we did

 18 earlier this year, I think in a February meeting,

 19 with regard to straight- through processing, and

 20 that there were commenters that came in on that

 21 proposal and straight-through processing and this

 22 is an example. Sometimes we're asked are we going
 34

 1 to re-propose? This rule actually re-proposes the

 2 straight-through -- a key aspect of

 3 straight-through processing that was -- a number

 4 of commenters thought was too limited and the

 5 staff thought it would be appropriate to

 6 re-propose something. But I look forward to

 7 hearing from the public and on both aspects, the

 8 re-proposal of certain aspects of straight-through

 9 processing and on the client documentation.

 10 Commissioner Dunn.

 11 COMMISSIONER DUNN: Mr. Chairman, this

 12 is a very important week. On Monday, the CMA

 13 announced that they were going to delist pork

 14 belly contracts, and that's an end of an era. But

 15 it does signify that there's change in this

 16 industry and there's constant change that goes on.

 17 I see this proposal as an effort for the

 18 Commission to get its arms around some of the

 19 changes that are taking place and have a better

 20 understanding. I'm not sure at this point whether

 21 I support it. However, I do support, as been my

 22 practice, of putting out proposed rules and
 35

 1 hearing from the public. I look forward to

 2 hearing the public's input on this proposed

 3 ruling.

 4 CHAIRMAN GENSLER: Thank you,

 5 Commissioner Dunn. Commissioner Sommers?

 6 COMMISSIONER SOMMERS: Thank you, Mr.

 7 Chairman. To be clear, I am supportive of the

 8 timing of acceptance for clearing changes and have

 9 no problem with that part of the rule, but I have

 10 a number of different questions with regard to the

 11 documentation part and must admit I think I'm

 12 confused. So I've gone through the actual

 13 execution agreement that we are, I guess,

 14 addressing through this proposal and I'm under the

 15 impression from the execution agreement that it

 16 intends to address -- and I'm quoting -- "the

 17 respective rights and obligations in the event a

 18 swap that is intended to be cleared fails to

 19 clear." That seems reasonable to me that a

 20 clearing firm would want some sort of confirmation

 21 that a swap that is intended to be cleared is

 22 going to clear.
 36

 1 So our proposal suggests that these

 2 arrangements potentially conflict with the

 3 concepts of open access to clearing and execution

 4 of customer transactions on DCMs or SEFs on terms

 5 that have a reasonable relationship to the best

 6 terms available. And I think where I may be

 7 confused is do we have problems with the actual

 8 execution agreement or do we have problems with

 9 the annexes to this execution agreement?

 10 MR. LAWTON: I think that we are -- I

 11 would say that we're requesting comment on whether

 12 there's aspects of these agreements that might run

 13 counter to the standards that are in the proposed

 14 rules as implemented. So we're not specifically

 15 saying there's anything wrong with anything that's

 16 been posted out there. It more goes to as

 17 implemented might they have the effects that we're

 18 concerned about of potentially disclosing

 19 information that doesn't need to be disclosed or

 20 potentially limiting the access to competitive

 21 execution by particular customers.

 22 COMMISSIONER SOMMERS: I think what I'm
 37

 1 concerned about is that this actually has the

 2 opposite effect. So if we say that this kind of

 3 documentation or these kind of agreements are not

 4 appropriate for clearing members to execute with

 5 executing brokers or customers of those executing

 6 brokers, then the clearing member may be less

 7 likely to want to take on the clearing risk of

 8 smaller entities. If they are not able to have

 9 this kind of confirmation that those swaps will

 10 clear, it may actually be a barrier to smaller

 11 entities to clear than, in fact, what we think it

 12 could do is give those entities greater access.

 13 MR. LAWTON: One of the questions that's

 14 in the proposed release actually is would the

 15 proposed standards have the unintended consequence

 16 of, in fact, limiting open access in any way? I

 17 mean, we're definitely open to comments in that

 18 direction, saying if someone can demonstrate that,

 19 in fact, it would have the opposite effect of the

 20 intended effect, the Commission would want to hear

 21 analysis that supports -- if there's analysis that

 22 would support that point of view.
 38

 1 COMMISSIONER SOMMERS: And then I think

 2 my last question is if you could explain to me how

 3 that that type of agreement, execution agreement,

 4 would conflict with transactions on a DCM or SEF

 5 on terms that have a reasonable relationship to

 6 the best terms available. So how would those kind

 7 of agreements actually limit you getting the best

 8 terms available on a DCM or a SEF?

 9 MR. LAWTON: If they had the effect of

 10 limiting with whom you could trade, that you could

 11 only trade with certain entities that had big --

 12 that had deep pockets, so to speak, and you could

 13 have a large limit with them. There might be

 14 smaller entities you might want to trade with, but

 15 that you wouldn't be allowed to under the

 16 agreement to execute with. That's our

 17 understanding that there's concern expressed out

 18 there by market participants that they might end

 19 up being limited to trading potentially with just

 20 big dealers as opposed to others who might

 21 actually, in a given instance, be offering a

 22 better price.
 39

 1 COMMISSIONER SOMMERS: And I think this

 2 is the part where I get confused. So you'd be

 3 limited to your -- who you could clear with?

 4 Because how would you know on a DCM who you're

 5 transacting with?

 6 MR. LAWTON: I'm not sure how often

 7 these types of agreements -- they might -- they

 8 may not be applicable to the DCM transactions. I

 9 think it's probably more likely to be applicable

 10 in circumstances of trading on a SEF or even

 11 purely bilateral trading where it may limit the

 12 potential counterparties.

 13 COMMISSIONER SOMMERS: Okay. Thank you.

 14 CHAIRMAN GENSLER: Could I follow up on

 15 Commissioner Sommers' question? It called my

 16 attention about the annex versus the agreement.

 17 This is -- for members of the public, this is an

 18 industry document which is referred to in this

 19 proposal that various industry associations came

 20 together, and there's a draft, I guess, standard

 21 agreement and then an annex. So Commissioner

 22 Sommers' question, without opining, John --
 40

 1 because I know you're being very careful, you

 2 don't want to opine on this is just a proposal; it

 3 hasn't gotten public comment; we don't even know

 4 if we'll finalize the rule in this way -- but

 5 without opining on the industry documentation,

 6 would I be right to assume that the agreement is

 7 bilateral or appears more bilateral, meaning

 8 between two parties, and the annex is that which

 9 is the trilateral or appears to be between three

 10 parties? Without trying to opine, is that

 11 directionally correct?

 12 MR. LAWTON: I think that's correct.

 13 CHAIRMAN GENSLER: That's correct. So

 14 to Commissioner Sommers' question, which is just

 15 sort of how I understood it, again, without

 16 opining to their agreement, we're looking for --

 17 if we vote this proposal out today, we're looking

 18 for input as to the proposal, but it's possible

 19 that the annex is -- there may be more comments as

 20 to how the annex relates to this proposed rule

 21 than the actual agreement itself?

 22 MR. LAWTON: Yeah, I expect that that
 41

 1 will be the case.

 2 CHAIRMAN GENSLER: So I tried to answer

 3 that carefully, but it's the annex, I think,

 4 Commissioner Sommers. It's the -- that might run

 5 in conflict with this rule, not the agreement

 6 itself, without opining on the agreement. I

 7 think. Is that -- do I sort of roughly have that

 8 right?

 9 MR. LAWTON: I think that's right.

 10 CHAIRMAN GENSLER: I'm sorry,

 11 Commissioner O'Malia.

 12 COMMISSIONER O'MALIA: Thank you. As I

 13 noted in my statement, you know, this is a

 14 complicated process and I think for all of us it's

 15 fascinating to anticipate what the market's going

 16 to look like, what the SEFs are going to look like

 17 as we go forward. We have a good understanding of

 18 what the DCM model is and we understand what the

 19 processing requirements -- and we like that. We

 20 want good competitive markets with plenty of

 21 participants without limitations. And we're

 22 beginning to develop this swap market, right, and
 42

 1 trying to figure out how that's all going to play

 2 out. And we're trying to anticipate where we're

 3 going on that, and it's complicated. And I think

 4 that that is really one of my biggest

 5 frustrations, as I noted, in my statement that

 6 this would really benefit.

 7 The industry has developed this

 8 documentation, whether it's the bilateral or the

 9 trilateral, the annex, or the voluntary agreement.

 10 They're working through these processes. I would

 11 have preferred that we had a staff roundtable to

 12 develop and understand where this is going, maybe

 13 even a Commission meeting, because I find this

 14 very fascinating how all the operational

 15 challenges are going to be executed going forward.

 16 So I would have preferred more of a hearing

 17 process to develop this rule to figure out where

 18 the industry is and see if we can move them in a

 19 direction that is acceptable to everyone.

 20 So let's see if we can kind of continue

 21 to make that happen in this rulemaking process.

 22 CHAIRMAN GENSLER: Let me just say,
 43

 1 Commissioner O'Malia, I'm supportive of as many

 2 roundtables as this hardworking and diligent staff

 3 can fit in. And if they find the time to do that

 4 in the 60-day period or even if it's after the

 5 60-day, I'm certainly supportive of that on this.

 6 COMMISSIONER O'MALIA: All right. Thank

 7 you. Now, let me get to my question because it's

 8 kind of the process issue. We developed this rule

 9 out of comment letters, concerns raised in two

 10 comment letters to Commission rulemakings. Other

 11 than these comment letters in which other

 12 communication -- what other communications did

 13 staff have with market participants on the FIA

 14 ISDA clearing derivatives execution agreement?

 15 MR. LAWTON: Staff had some

 16 conversations, meetings, I think, with, broadly

 17 speaking, representatives of the buy-side and

 18 representatives of the sell-side; that there were

 19 some number of meetings and --

 20 COMMISSIONER O'MALIA: Now, did any of

 21 these take place after the 16th in which the

 22 agreements were completed?
 44

 1 MR. LAWTON: I'm not sure, but I think

 2 not, but I'm not certain.

 3 COMMISSIONER O'MALIA: I'm very -- I

 4 understand you've reached out to them, there were

 5 a lot of comments that came in for kind of the

 6 public. There were some concerns that were raised

 7 in April, I understand. The ISDA documentation,

 8 the FIA ISDA documentation proposing the voluntary

 9 agreement and annex came -- was completed in June

 10 and which included participants on both sides.

 11 Now, I understand not everyone agrees.

 12 In fact, yesterday I had a call with two of the

 13 largest buy-side participants and they came down

 14 on either side of this thing: Some said it was a

 15 problem, the other side said it wasn't a problem.

 16 So, you know, I understand that not everybody

 17 agrees on every part of this, but I really think

 18 it's best suited if they kind of work through this

 19 with our kind of assistance, if you will, maybe

 20 not necessarily this rulemaking.

 21 Now, let me ask you another question.

 22 The proposal states, "No futures commission
 45

 1 merchant providing clearing services to customers

 2 shall enter into an agreement that discloses to

 3 the futures commission merchant or any swap dealer

 4 or major swap participant the identity of the

 5 customer's original executing counterparty." Now,

 6 we know that certain SEFs may wish to operate

 7 using an RFQ on a disclosed basis. Would this

 8 rule prevent an FCM from acting as an executing

 9 broker and a clearing member on such a SEF?

 10 MR. LAWTON: No, I don't think it would.

 11 I think that -- and if there's drafting

 12 clarification that would be needed, I mean, that

 13 would be something that would be appropriate for a

 14 comment. But the notion would be that if one is

 15 acting as a clearing FCM, one would not need to

 16 know who the counterparty was. If one is acting

 17 as an executing FCM, by the nature of your role

 18 you do know who the counterparty is, or least in

 19 -- certainly in an RFQ situation where you're

 20 responding to a Request for a Quote and you're

 21 executing on behalf of your customer. That's

 22 inherent in what you're doing.
 46

 1 COMMISSIONER O'MALIA: Great. Well,

 2 that's all the questions I have. I certainly look

 3 forward to the roundtable and potentially a

 4 Commission meeting on this going forward on the

 5 execution.

 6 CHAIRMAN GENSLER: I thank you. I

 7 think, Mr. Stawick, if you can call the roll.

 8 MR. STAWICK: Commissioner O'Malia?

 9 COMMISSIONER O'MALIA: No.

 10 MR. STAWICK: Commissioner O'Malia, no.

 11 Commissioner Chilton?

 12 CHAIRMAN GENSLER: I'm reading a proxy

 13 in favor of the motion to accept the staff on

 14 comment, yes.

 15 MR. STAWICK: Commissioner Chilton, aye

 16 by proxy. Commissioner Sommers?

 17 COMMISSIONER SOMMERS: No.

 18 MR. STAWICK: Commissioner Sommers, no.

 19 Commissioner Dunn?

 20 COMMISSIONER DUNN: Aye.

 21 MR. STAWICK: Commissioner Dunn, aye.

 22 Mr. Chairman?
 47

 1 CHAIRMAN GENSLER: Aye.

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

 3 Chairman, on this question the yeas are three, the

 4 nays are two.

 5 CHAIRMAN GENSLER: Thank you. I gather

 6 you're going to stay at the table, right?

 7 MR. RADHAKRISHNAN: Thank you. And next

 8 we will talk about the proposed rule that

 9 addresses risk management for cleared trades by

 10 clearing participants.

 11 MR. LAWTON: Good morning again. The

 12 proposed rules before the Commission address risk

 13 management procedures at FCMs, swap dealers, and

 14 major swap participants that are clearing members.

 15 Clearing members provide the portals by which

 16 market participants gain access to clearing and

 17 are the first line of risk management. The

 18 Commission has previously proposed extensive risk

 19 management standards at the DCO level. Given the

 20 increased importance of clearing under the Dodd-

 21 Frank Act and the expected entrance of new

 22 products and new participants into the clearing
 48

 1 system, assuring that there are effective

 2 safeguards in place at the clearing member level

 3 as well seems appropriate.

 4 Bringing swaps into clearing will

 5 increase the magnitude of the risks faced by

 6 clearing members. In many cases, it will also

 7 change the nature of the risks as well. Many

 8 types of swaps have their own unique of risk

 9 characteristics. This increased concentration of

 10 risk in the clearing system combined with the

 11 changing configuration of that risk seems to

 12 warrant additional vigilance. The proposed rules

 13 would require FCMs, SDs, and MSPs that are

 14 clearing members to do the following:

 15 Establish risk-based limits in the

 16 proprietary account and in each customer account.

 17 Use automated means to screen orders for

 18 compliance with risk-based limits.

 19 Monitor for adherence to risk-based

 20 limits. Conduct stress tests of all positions in

 21 the proprietary account and in each customer

 22 account that would pose material risk to the FCM
 49

 1 or a swap dealer or major swap participant that's

 2 a clearing member. I guess the -- I'm sorry, the

 3 customer part would not actually apply to swap

 4 dealers or MSPs because they would not be clearing

 5 customer positions, so that aspect would only

 6 apply to the FCMs.

 7 Evaluate its ability to meet initial

 8 margin requirements at least once per week.

 9 Evaluate its ability to meet variation

 10 margin requirements at least once per week.

 11 Evaluate its ability to liquidate in an

 12 orderly manner the positions in its accounts and

 13 estimate the cost of liquidation.

 14 And test all lines of credit. The

 15 proposal does not prescribe particular means of

 16 fulfilling these obligations. As was the case in

 17 the DCO rules, clearing members would have

 18 considerable flexibility in designing risk

 19 management procedures that meet these -- that

 20 would meet their needs. For example, the proposal

 21 would require stress tests to be conducted. It

 22 would not specify what inputs would be used. That
 50

 1 would be a matter within the judgment of the risk

 2 analysts at each clearing member, and that's,

 3 again, parallel to the way the stress testing

 4 rules were written for DCOs.

 5 Over the past two years, Commission

 6 staff have discussed aspects of risk management

 7 programs with representatives of most clearing

 8 FCMs. The proposals before the Commission today

 9 is drawn heavily from what's been learned in those

 10 discussions. The proposed release requests

 11 comment on the extent to which clearing members

 12 have already incorporated components of the

 13 proposal into their risk management programs. The

 14 release also requests comment on the costs and the

 15 benefits of each component of the proposal.

 16 And that concludes my presentation on

 17 that one. Thanks.

 18 CHAIRMAN GENSLER: With that I'll

 19 entertain a motion to accept the staff

 20 recommendation on what I keep calling pre-trade

 21 risk filters for clearing, but I know it also has

 22 other monitoring and supervision and testing.
 51

 1 COMMISSIONER DUNN: So moved.

 2 COMMISSIONER SOMMERS: Second.

 3 CHAIRMAN GENSLER: I support this

 4 proposal. I think it's important that all that we

 5 do and in the nature of Dodd-Frank is it helps

 6 lower risk. And I think this does that at it's

 7 core, that swap dealers, major swap participants,

 8 and futures commission merchants and the like have

 9 some risk filters when trades are being submitted

 10 to clearing. And this is really about that, about

 11 clearing, and that they be able to monitor their

 12 customers and their house accounts to make sure

 13 that they can meet the daily variation margin and

 14 also monitor and stress test with regard to if

 15 they have to liquidate a position.

 16 I think this is part of what's come out

 17 of a lot of industry roundtables in front of this

 18 Commission and even relates to the change in the

 19 marketplace, the marketplace that's become, at

 20 least in futures and securities, very

 21 electronic-traded and also has a lot of

 22 high-frequency trading. That's not yet the case
 52

 1 in the swaps marketplace, but once swap execution

 2 facilities start to run over the next several

 3 years, one can imagine and actually predict that

 4 there'll be some electronic trading and swaps.

 5 That's what a swap execution facility will

 6 facilitate. But it's important when somebody

 7 meets at the swap execution facility that they

 8 know that the counterparty on the other side is

 9 guaranteed by a futures commission merchant and

 10 that futures commission merchant has done

 11 something to make sure that their counterparty is

 12 not putting in a trade, you know, whether there's

 13 a fat finger or something else, put in a trade too

 14 large.

 15 I like that this says that they'd have

 16 to have policies and procedures that might include

 17 kill buttons, if I remember. Kill switches is it

 18 called?

 19 MR. LAWTON: That's right.

 20 CHAIRMAN GENSLER: I think it's very

 21 important that we continue on what I consider sort

 22 of the sister to this, is the testing and
 53

 1 supervision and exchange world. And I see Rick

 2 Shilts here, but hopefully, you know, that we'll

 3 have that as well because I think clearing and

 4 trading both benefit from some of these

 5 supervision by the clearing members and the swap

 6 dealers before trades are submitted for clearing

 7 and into exchanges.

 8 So I don't really have any questions

 9 unless I got -- is there anything I said there

 10 other than the opinions, but the facts, did I sort

 11 of get what this rule does?

 12 MR. LAWTON: Yes.

 13 CHAIRMAN GENSLER: All right. Thanks.

 14 You don't have to opine on my opinions, but.

 15 Commissioner Dunn?

 16 COMMISSIONER DUNN: Thank you, Mr.

 17 Chairman. As you're aware, I've long been an

 18 advocate for increasing our entire risk management

 19 throughout: How we operate within the agency, how

 20 the industry operates, how products are developed.

 21 And I think this proposal is one that I'm going to

 22 pay a lot of attention to as to what we get from
 54

 1 the public on how the individual clearing houses

 2 are assessing and managing the risk that they

 3 have. I don't know if there will be a best

 4 practices that may come out of this or not, but I

 5 am very, very interested in seeing what the

 6 industry as a whole has to say. And I think this

 7 is a proposal that, given what has happened in the

 8 last three years in financial services, it's time

 9 for us to take this hard look at risk management.

 10 CHAIRMAN GENSLER: Thank you,

 11 Commissioner Dunn. Commissioner Sommers?

 12 COMMISSIONER SOMMERS: Thank you, Mr.

 13 Chairman. I have a couple of different questions

 14 about how FCMs currently employ these kind of risk

 15 management procedures. Do we think that this is

 16 common practice for FCMs now? And how do we

 17 currently monitor that?

 18 MR. LAWTON: We currently monitor it in

 19 two ways. There's the Risk Surveillance Group

 20 does actually go out and talk to firms, both

 21 clearing firms and actually large traders, so you

 22 learn a little bit about what the firm is doing by
 55

 1 talking to the trader that goes through the firm

 2 as well as by going to the firm directly and

 3 talking to them.

 4 Secondly, we monitor it because the DCOs

 5 are monitoring to some degree -- or not to some --

 6 DCOs are monitoring what their clearing members

 7 are doing. Again, different DCOs have different

 8 levels of programs. I think some are more

 9 rigorous than others, but in the review of a DCO

 10 we will also learn what they've learned about what

 11 their clearing members are doing.

 12 With regard to what the firms are doing,

 13 I think I'm very much generalizing, but I think

 14 there's some firms out there that probably won't

 15 have to change anything that they do today if this

 16 rule were to go into effect. There's other firms

 17 that probably would have to make changes that they

 18 -- and again, the degree of changes they might

 19 have to make would vary. I mean, some firms it

 20 might be that there's a timing thing, they don't

 21 do stress testing as frequently as this rule might

 22 require, but they're already doing it. Other
 56

 1 firms may not actually be doing formal stress

 2 testing, so they would have to develop some sort

 3 of program.

 4 There's a lot of -- not a lot, but there

 5 are vendors out there who have stress testing

 6 products and a number of firms are currently using

 7 those, that they don't have to develop a stress

 8 testing system on their own, that there's vendors

 9 that are out there and their products are commonly

 10 used across a lot of firms. And again, they can

 11 be customized so that any given firm can decide

 12 what inputs they want to use, but they don't have

 13 to develop the software themselves from scratch.

 14 COMMISSIONER SOMMERS: Have DCOs

 15 identified problems to us that they would like to

 16 see us promulgate rules to address?

 17 MR. LAWTON: No, DCOs I don't think have

 18 ever suggested -- I mean, they've definitely

 19 identified problems, which, again, depending on

 20 the DCO they may go to the firm and say we think

 21 you should address this directly. But nobody --

 22 no DCO to my knowledge has suggested that we
 57

 1 propose a rule across the industry.

 2 COMMISSIONER SOMMERS: And would this

 3 proposal basically take that responsibility from

 4 the DCOs and put it in the Commission so that it's

 5 now our responsibility to go out and monitor

 6 whether these FCMs have these kind of procedures?

 7 MR. LAWTON: No. It'd be more parallel

 8 to the way, for example, in the financial auditing

 9 world, where you do have a DSRO that goes out and

 10 monitors, in the first instance, whether a firm is

 11 complying with the cap loan seg rules. But you

 12 also have Commission rules and the Commission is

 13 always available to go in itself and -- both as a

 14 check on how well the DSRO is doing and just as an

 15 independent check on the FCM.

 16 In this case, I think what you would

 17 find is that different DCOs have different

 18 standards, so the effect of a rule like this might

 19 be to raise the standard at some DCOs. Again, at

 20 other DCOs there may not be any change because

 21 effectively what they're requiring would be the

 22 equivalent of what this rule would require. There
 58

 1 might be other people who might have to make

 2 changes to their program because perhaps the DCO

 3 rule wasn't as rigorous as -- at least in some

 4 components as what might end up in a proposal like

 5 this.

 6 COMMISSIONER SOMMERS: I just want to

 7 make sure that I heard that correctly, that the

 8 DCO will be responsible -- or the DSROs will be

 9 responsible for compliance with this?

 10 MR. LAWTON: Right. Yeah, I'm sorry,

 11 there actually isn't a DSRO type of program at

 12 this point on the DCO side like there is with

 13 regard, again, to the longstanding programs for

 14 capital and segregation. So it would be

 15 individual DCOs would continue to have

 16 responsibility to enforce their own rules and then

 17 --

 18 COMMISSIONER SOMMERS: What about for

 19 these rules?

 20 MR. LAWTON: They would not have

 21 responsibility for enforcing these rules.

 22 COMMISSIONER SOMMERS: And so we would
 59

 1 have an additional -- we would be responsible for

 2 this, for implementing and monitoring.

 3 MR. LAWTON: Right.

 4 COMMISSIONER SOMMERS: Okay. So, and

 5 that would be new for us or this is something that

 6 the Risk Surveillance Group already does?

 7 MR. LAWTON: It would be new in that

 8 there's a standard, a rule out there. I mean, the

 9 Risk Surveillance Group today monitors for these

 10 sorts of things and makes recommendations, but

 11 there's not really any mechanism other than saying

 12 -- and again, many times we have found that, in

 13 fact, the firms implement; that there have been

 14 times when we've identified something that was

 15 happening at a firm, talked to them, and they said

 16 that's a good suggestion, we're going to do that.

 17 But there's not really any authority at this

 18 moment if they decide it's a bad suggestion or not

 19 necessary.

 20 COMMISSIONER SOMMERS: Okay. And my

 21 last question is, is it possible that in order to

 22 actually have a good risk management program an
 60

 1 FCM would employ things like these type of

 2 execution agreements, and that what we're doing in

 3 these two different rules is that we're saying

 4 that you can't have this even though it might be

 5 good risk management, but yet we're requiring risk

 6 management?

 7 Sorry, you don't have to answer that.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Sommers. Did you have something?

 10 No.

 11 MR. RADHAKRISHNAN: No, I hadn't thought

 12 about that, but -- and I think the comment period

 13 will be great, you know, just to address the

 14 question that Commissioner Sommers asked.

 15 MR. LAWTON: Yeah, I agree, that's a

 16 good question.

 17 MR. RADHAKRISHNAN: Because what we're

 18 looking at in the execution side is the ISDA

 19 agreement is basically purely -- the FIA is purely

 20 execution. And here we're looking at it in the

 21 proposed rule that the Commission just voted on,

 22 it's on the clearing side. So I don't think the
 61

 1 proposed rule is saying don't do a good job of

 2 risk management. We just want to make sure that

 3 it concentrates on risk management and clearing as

 4 opposed to who you can execute with. I think

 5 that's the objective. The objective, as John

 6 pointed out in the previous rulemaking, was to

 7 make sure that clients had choice with respect to

 8 which FCM they could use to clear. And the worry

 9 is that, as it's been expressed to us, is that if

 10 you have a tri- party that an entity will exercise

 11 undue influence on a customer to say if you want

 12 my affiliate to clear for you, you have to trade

 13 with me or vice versa, if you want me to clear,

 14 you must execute swaps (inaudible) my swaps desk.

 15 So that is what staff is concerned about. That

 16 limits the choice that customers have with who

 17 they can clear with.

 18 CHAIRMAN GENSLER: Commissioner O'Malia?

 19 COMMISSIONER O'MALIA: Thank you. This

 20 proposal addresses some of the issues raised by

 21 the direct market access and the need to monitor

 22 and mitigate risk. The Commission's Technology
 62

 1 Advisory Committee, which I chair, has explored

 2 these same issues and offered thoughtful solutions

 3 based on independent research as well as a review

 4 of best practices and research put forward by FIA

 5 and others, as well as my understand that the

 6 separate rulemaking team is working on rules that

 7 specifically address the risk inherent to direct

 8 market access, which are also used by HFTs

 9 referenced by the chairman regarding testing and

 10 supervision as well as, I think, are DCM and SEF

 11 rulemaking teams who have also kind of positioned

 12 themselves to include more specifics.

 13 What guidance did you seek from the

 14 members of the Technology Advisory Committee and

 15 internal rulemaking teams who are tasked with

 16 specifically addressing these pre- and post-trade

 17 risk management tools?

 18 MR. RADHAKRISHNAN: I don't think we

 19 sought any guidance from the Technology advisory

 20 Committee. And I'm not aware of -- personally not

 21 aware of any proposed rulemaking on -- I know the

 22 chairman mentioned it, but I'm not sure what that
 63

 1 objective is.

 2 COMMISSIONER O'MALIA: No, no, I'm

 3 talking about testing and supervision.

 4 MR. RADHAKRISHNAN: Testing and

 5 supervision.

 6 COMMISSIONER O'MALIA: And we talked

 7 about it quite a bit.

 8 MR. RADHAKRISHNAN: Okay. But I think,

 9 for example, if we require people to establish

 10 credit and market base limits it'll probably be in

 11 line with the concerns that were expressed by the

 12 Technology Advisory Committee. The concern -- and

 13 forgive me, I'm not completely --

 14 COMMISSIONER O'MALIA: Ananda, with all

 15 due respect, we have a document. We have a lot of

 16 work that's been -- that has gone into that. A

 17 lot of it's pre-trade risk functionality.

 18 MR. RADHAKRISHNAN: Right.

 19 COMMISSIONER O'MALIA: All of these

 20 things we've kind of addressed. The problem is

 21 when we're doing these things in an ad hoc manner,

 22 we're not -- you know, you have to answer
 64

 1 "probably" and "potentially" and "likely." And

 2 what we need to see is clear rules across all of

 3 these things so we can get clear best execution

 4 working with Rick's group and DMO and others.

 5 MR. RADHAKRISHNAN: Well, I think these

 6 rules are designed to make sure that clearing

 7 members discharge their responsibility to manage

 8 risks appropriately. That's the (inaudible).

 9 COMMISSIONER O'MALIA: I don't disagree

 10 with that goal either.

 11 MR. RADHAKRISHNAN: Right.

 12 COMMISSIONER O'MALIA: The problem is

 13 the words matter, the relationships matter, and

 14 understanding how this is going to work across

 15 market is really pretty critical. And my points

 16 in my opening statement about transparency,

 17 accountability, and responsibility, getting the

 18 rules to work well with one another are pretty

 19 important. And I have a little bit of frustration

 20 the way we're developing in an ad hoc manner just

 21 this popcorn approach to the rulemaking.

 22 Let me -- so going forward, I think
 65

 1 there's probably role that the Technology Advisory

 2 Committee can offer some assistance in this venue

 3 and make sure that we've got some specific

 4 recommendations. Because we actually -- we did an

 5 evaluation of best practices and put forward, you

 6 know, some very specific proposals.

 7 One of the concerns in the Technology

 8 Advisory Committee was -- and now this is maybe

 9 outside your immediate thing because we were

 10 looking at a lot of this execution, but also at

 11 the FCM level, there was concern about

 12 inconsistent application of these best practices.

 13 How would this rule fix it? Would we mandate one

 14 standard across everybody or we continue with this

 15 kind of individual approach to risk management?

 16 MR. RADHAKRISHNAN: I think it has to --

 17 you have to allow for individual approaches to

 18 risk management because not all clearing members

 19 have the same risk. So -- and that's why we're

 20 not saying, you know, one size fits all. We're

 21 saying, you know, I think what these are -- these

 22 are establishing baselines, but I do think that we
 66

 1 need to leave it to the clearing member to make

 2 judgments because it depends on what kind of

 3 trades you're clearing. Some clearing firms may

 4 clear for a significant number of HFTs and others

 5 may not. And if you're clearing for an HFT there

 6 is a different approach, I think, to clearing --

 7 to risk management. In fact, if you're clearing

 8 for an HFT, if I were the clearer I'd be watching

 9 trades, executions going in and out constantly.

 10 Because if you accept the proposition that an HFT

 11 goes on flat, they may not be flat in the middle

 12 of the day.

 13 So, for example, it's entirely possible

 14 that an HFT could build up a significant position

 15 at the intraday cycle and I'll be able to pay or,

 16 you know, close out the position at a big loss.

 17 And if that person is not able to pay, then the

 18 clearing FCM will have to pay. So that's why we

 19 think that it's critical for one of the proposals

 20 to monitor for adherence to risk-based limits

 21 intraday and overnight. And that's why we --

 22 COMMISSIONER O'MALIA: And how is that
 67

 1 not being addressed in the DCO core principles?

 2 MR. RADHAKRISHNAN: Well, we think that

 3 --

 4 COMMISSIONER O'MALIA: Especially on a

 5 case-by- case depending on which clearing members

 6 you're dealing with.

 7 MR. RADHAKRISHNAN: Our approach is as

 8 follows. This is DCI's approach. Financial

 9 integrity is -- you've got two key sets of

 10 players: The DCOs and the clearing members. And

 11 we believe that it is appropriate to have rules

 12 for both sets of players. Because, no doubt, it

 13 is not in any DCO's interest to make sure -- to

 14 have a failure, but we do believe that the

 15 Commission also has a role because all of these

 16 will be Commission registrants. And as

 17 Commissioner Dunn pointed out, you know, with

 18 Dodd- Frank, if you look at the structure -- and

 19 I'm sure the Commission is aware -- there will be

 20 a tremendous amount of open interests going to

 21 DCOs, tremendous amounts of open interests going

 22 to FCMs. The risk that DCOs and clearing members
 68

 1 will have will increase exponentially, assuming

 2 that the clearing mandate works out and, you know,

 3 the objective of Dodd-Frank comes into fruition.

 4 So we think it's appropriate to have both sets do

 5 this.

 6 COMMISSIONER O'MALIA: Now, this rule

 7 applies to both swaps and futures, right?

 8 MR. RADHAKRISHNAN: Correct.

 9 COMMISSIONER O'MALIA: Okay. I recall

 10 reading in the comment letter from Newedge, I

 11 think it was in the segregation comments, that

 12 they had proposed several recommendations for

 13 increased transparency on FCMs specifically. And

 14 we have our Excel spreadsheet that talks about

 15 available margin, et cetera, that we post. I

 16 don't recall the form number, but Newedge proposed

 17 that, you know, we need better transparency. How

 18 does this rule address those concerns

 19 specifically?

 20 MR. RADHAKRISHNAN: I'm afraid I'm not

 21 familiar with what Newedge asked for, but --

 22 COMMISSIONER O'MALIA: They were looking
 69

 1 at things like concentration of customers,

 2 exposure to assets, you know, just to give

 3 customers of FCMs a better understanding of the

 4 relation -- of what their FCM exposure might be.

 5 They had several specific recommendations.

 6 MR. RADHAKRISHNAN: Okay. Right. This

 7 doesn't go to that. That particular -- I think,

 8 Commissioner, you're talking about this report

 9 that the Commission publishes of selected

 10 financial information and FCMs. And what that has

 11 is, you know, the required ANC, the excess, the

 12 required funds under segregation, and the access.

 13 The required funds under segregation will give

 14 everybody an idea of what the exposure is because

 15 this is --

 16 COMMISSIONER O'MALIA: But does it give

 17 you the level of exposure where all of this is

 18 CDS, for example?

 19 MR. RADHAKRISHNAN: Right.

 20 COMMISSIONER O'MALIA: Would people know

 21 that from that report?

 22 MR. RADHAKRISHNAN: No, no, they would
 70

 1 not know that.

 2 COMMISSIONER O'MALIA: Or they wouldn't

 3 know whether there's a single large customer?

 4 MR. RADHAKRISHNAN: Right. The worry

 5 with that is we also have Section 8 of the act.

 6 COMMISSIONER O'MALIA: Of course we do.

 7 MR. RADHAKRISHNAN: So the question is

 8 how do we find a balance between providing

 9 information, public information, about our

 10 registrants to the public and crossing that line?

 11 COMMISSIONER O'MALIA: Maybe you could

 12 go back and look at the Newedge letter --

 13 MR. RADHAKRISHNAN: Yeah.

 14 COMMISSIONER O'MALIA: -- and see if any

 15 of those comments are relevant to this rulemaking.

 16 Commissioner Sommers raised a question that, you

 17 know, since we do charge DCOs with this

 18 responsibility what happens if there's a conflict

 19 between a DCO saying we propose this level of

 20 recommendation and the CFTC coming in and saying,

 21 no, we want something different?

 22 Now with this new authority that we have
 71

 1 as opposed to working exclusively with the DCO --

 2 or not necessarily exclusively, but using that as

 3 our main -- addressing that to the core principles

 4 in the DCO rulemaking. Now we have kind of two

 5 different venues. How do we resolve conflicts?

 6 MR. RADHAKRISHNAN: Between a DCO rule

 7 and the Commission's rule?

 8 COMMISSIONER O'MALIA: Or, you know,

 9 DCOs surveilling for their customers. We come in

 10 with this new authority and say, well, we have

 11 different opinion. What happens when there's a

 12 conflict?

 13 MR. RADHAKRISHNAN: Well, I think, first

 14 of all, we'll try and see if we can resolve the

 15 conflict and try and find out why there is a

 16 conflict. But at the end of the day, I believe

 17 it's -- I believe the Commission rules trump the

 18 DCO rules.

 19 COMMISSIONER O'MALIA: Well, of course

 20 they do, but why couldn't we do that through the

 21 DCO is kind of my point.

 22 MR. RADHAKRISHNAN: Well, I think --
 72

 1 well, John, did you want say (inaudible)?

 2 MR. LAWTON: I was going to say that if

 3 we, over time, developed an interpretation of what

 4 the requirements are under this, I think we would

 5 then go into the DCO core principles and say we

 6 would probably require the rule which requires

 7 DCOs to have standards to come up to that. So I

 8 think that's what I would expect that we would

 9 recommend (inaudible).

 10 COMMISSIONER O'MALIA: One final

 11 question. How many people will this new

 12 responsibility require to surveil it and manage

 13 it?

 14 MR. RADHAKRISHNAN: If I would take a

 15 very educated guess, I'm going to say 20 people to

 16 go to -- you know, to the clearing FCMs.

 17 COMMISSIONER O'MALIA: So we don't have

 18 this in our budget? Because this seems new to me,

 19 frankly. In the '12 budget, and certainly in the

 20 '11 budget it wasn't there, but in the '12 budget

 21 I don't think this responsibility is specified, so

 22 that's why I'm asking how many people.
 73

 1 MR. RADHAKRISHNAN: I think we had

 2 mentioned it in the '12 budget because I think in

 3 the risk surveillance budget we always talked

 4 about going to the firms, not just to the DCOs,

 5 but going to firms and large traders to make sure

 6 that they're conducting appropriate risk

 7 management.

 8 COMMISSIONER O'MALIA: So how many new

 9 FTEs will we have in the DCO surveillance

 10 responsibility to kind of surveil core principles?

 11 MR. RADHAKRISHNAN: I don't know that

 12 number offhand. I can --

 13 COMMISSIONER O'MALIA: Fair enough.

 14 Thank you.

 15 CHAIRMAN GENSLER: Thank you,

 16 Commissioner O'Malia. Mr. Stawick?

 17 MR. STAWICK: Commissioner O'Malia?

 18 COMMISSIONER O'MALIA: Nope.

 19 MR. STAWICK: Commissioner O'Malia, no.

 20 Commissioner Chilton?

 21 CHAIRMAN GENSLER: Aye by proxy.

 22 MR. STAWICK: Commissioner Chilton, aye
 74

 1 by proxy. Commissioner Sommers?

 2 COMMISSIONER SOMMERS: No.

 3 MR. STAWICK: Commissioner Sommers, no.

 4 Commissioner Dunn?

 5 COMMISSIONER DUNN: Aye.

 6 MR. STAWICK: Commissioner Dunn, aye.

 7 Mr. Chairman?

 8 CHAIRMAN GENSLER: Aye.

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

 10 Chairman, on this question the yeas are three, the

 11 nays are two.

 12 CHAIRMAN GENSLER: Thank you, Mr.

 13 Stawick. Thank you, John and Ananda and Chris.

 14 And with that I think that the majority having

 15 voted on both of those, it'll be sent to the

 16 Federal Register and posted on our website post-

 17 haste. You'll be able to post them actually

 18 today. I'm for the same transparency Commissioner

 19 O'Malia's for, that we should post these the day

 20 we -- the day --

 21 MR. RADHAKRISHNAN: (inaudible)

 22 CHAIRMAN GENSLER: No, he has other
 75

 1 suggestions maybe earlier, but I don't see no

 2 reason why we don't do it the same day and we

 3 should put that out.

 4 MR. RADHAKRISHNAN: I think that's been

 5 the practice. The teams have sent it to --

 6 CHAIRMAN GENSLER: I know we have a

 7 different on this other piece --

 8 MR. RADHAKRISHNAN: Okay.

 9 CHAIRMAN GENSLER: -- but the same day

 10 let's put it up on our website.

 11 MR. RADHAKRISHNAN: Yeah, absolutely.

 12 CHAIRMAN GENSLER: Eileen, are you going

 13 to come up next? Do you have the seat?

 14 At this time I'd like to welcome Eileen

 15 Donovan, John Lawton, and Ananda Radhakrishnan,

 16 all from the Division of Clearing and Intermediary

 17 Oversight. Eileen has been the team lead on this

 18 important role, and so I hand it over to I suspect

 19 Eileen's probably going to take the lead here. Is

 20 that right? Or? I'm not trying to pick amongst

 21 you. Thanks.

 22 MS. DONOVAN: Good morning. The final
 76

 1 rule before the Commission is --

 2 CHAIRMAN GENSLER: You might want to

 3 bring the mike a little closer to you.

 4 MS. DONOVAN: Okay, sorry. Good

 5 morning. The final rule before the Commission

 6 establishes a process for the review of swaps for

 7 mandatory clearing. This rule has four parts.

 8 The first part implements the provision

 9 of Section 745(b) of Dodd-Frank that requires the

 10 Commission to prescribe criteria, conditions, or

 11 rules under which the Commission will determine

 12 the initial eligibility or the continuing

 13 qualification of a DCO to clear swaps. Under the

 14 rule a DCO would be presumed eligible to accept

 15 for clearing any swap that is within a group,

 16 category, type, or class of swaps that the DCO

 17 already clears. A DCO that plans to accept for

 18 clearing any swap that is not within a group,

 19 category, type, or class that the DCO already

 20 clears would be required to request a

 21 determination by the Commission of its eligibility

 22 to clear the swap. To receive such a
 77

 1 determination a DCO would have to submit to the

 2 Commission a written request that addresses its

 3 ability to maintain compliance with the DCO core

 4 principles if it accepts the swap for clearing,

 5 particularly the sufficiency of its financial

 6 resources and its ability to manage the risks

 7 associated with clearing the swap, especially if

 8 the Commission determines that the swap is

 9 required to be cleared.

 10 The second part of the rule concerns the

 11 submission of swaps to the Commission by a DCO.

 12 Section 723(a)(3) of Dodd-Frank provides that it

 13 shall be unlawful for any person to engage in a

 14 swap unless that person submits such swap for

 15 clearing to a DCO that is registered under the CEA

 16 or a DCO that is exempt from registration under

 17 the CEA if the swap is required to be cleared.

 18 Section 723(a)(3) also requires a DCO to submit to

 19 the Commission each swap or any group, category,

 20 type, or class of swaps that it plans to accept

 21 for clearing so that the Commission may review

 22 such submission and determine whether the swap or
 78

 1 swaps described in the submission are required to

 2 be cleared.

 3 The rule requires the DCO submitting

 4 swaps to the Commission to provide certain

 5 information to assist the Commission in its

 6 review, including a statement that addresses the

 7 five factors that the Dodd-Frank Act requires the

 8 Commission to take into account when reviewing a

 9 swap submission. Those five factors include:

 10 Existence of significant outstanding notional

 11 exposures, trading liquidity, and adequate pricing

 12 date; the availability of rule framework capacity,

 13 operational expertise and resources, and credit

 14 support infrastructure; the effect on the

 15 mitigation of systemic risk; the effect on

 16 competition; and the existence or reasonable legal

 17 certainty in the event of the insolvency of the

 18 relevant DCO or one or more of its clearing

 19 members.

 20 The rule would also require the DCO to

 21 provide a statement of its eligibility to clear

 22 the swap; product, participant, and pricing
 79

 1 information; the applicable rules, manuals,

 2 policies, or procedures; and a description of the

 3 manner in which it has notified its members of the

 4 submission. The Commission must receive the

 5 submission by the open of business on the business

 6 day preceding the DCO's acceptance of the swap for

 7 clearing. The Commission would post the

 8 submission for a 30-day public comment period and

 9 make its determination no later than 90 days after

 10 receiving the submission.

 11 The third part of the rule concerns

 12 Commission- initiated review of the swaps. The

 13 Dodd-Frank Act requires the Commission on an

 14 ongoing basis to review swaps that have not been

 15 accepted for clearing by a DCO to make a

 16 determination as to whether the swap should be

 17 required to be cleared. Under the rule if no DCO

 18 has accepted for clearing swaps that the

 19 Commission finds would otherwise be subject to a

 20 clearing requirement, the Commission must

 21 investigate the relevant facts and circumstances

 22 and within 30 days of the completion of its
 80

 1 investigation issue a public report containing the

 2 results of the investigation. The Commission

 3 would take such actions as it determines to be

 4 necessary and in the public interest, which may

 5 include establishing margin or capital

 6 requirements for parties to the swaps.

 7 And finally, the last part of the rule

 8 concerns the stay of a clearing requirement.

 9 After making a determination that a swap or group,

 10 category, type, or class of swaps is required to

 11 be cleared, the Commission on application of a

 12 counterparty to a swap or on its own initiative

 13 may stay the clearing requirement until it

 14 completes a review of the terms of the swap and

 15 the clearing arrangement. If the Commission

 16 decides to issue a stay it would have 90 days to

 17 complete its review of the clearing of the swap.

 18 Upon completion of the review the Commission could

 19 determine, subject to any terms and conditions as

 20 the Commission determines to be appropriate, that

 21 the swap must be cleared or that the clearing

 22 requirement will no longer apply.
 81

 1 And thank you. That's the end of my

 2 presentation.

 3 CHAIRMAN GENSLER: Thank you, Eileen. I

 4 support the final rulemaking to establish a

 5 process for review and designation of swaps for

 6 mandatory clearing. And one of the primary goals

 7 of the Dodd-Frank Act was to lower risk through

 8 moving the standardized swaps to central clearing,

 9 not all swaps, many swaps, customized swaps,

 10 bilateral. Many end users will be able to hedge

 11 that which they want by not using a clearing

 12 house. There won't even be a clearing mandate for

 13 non-financial end users, but the financial end

 14 users would still be able to do their customized

 15 swaps.

 16 But Congress said there should be a

 17 process about this mandate and I think this final

 18 rule is consistent with the congressional

 19 requirement that the clearing houses themselves

 20 who are eligible to clear swaps then submit swaps

 21 to us and put it out to public comment based on

 22 five statutory provisions. I think we've that
 82

 1 taken into consideration numerous comments. I

 2 think it was only about 30 comments or 18 or

 3 something, if I remember the count. Twenty, was

 4 it?

 5 MS. DONOVAN: Twenty-six.

 6 CHAIRMAN GENSLER: Twenty-six, there you

 7 go. But what I took away from the commenters was

 8 trying to lessen some of the burdens of these

 9 regulatory filings, and I think I want to

 10 compliment Eileen and the others on this team for

 11 taking into consideration those comments.

 12 So I don't have any questions, but I'm

 13 supposed to ask for a motion. I'm sorry, I forgot

 14 that part. That's important. A motion on the

 15 staff recommendation on a final rule on a

 16 mandatory clearing process.

 17 COMMISSIONER DUNN: So moved.

 18 COMMISSIONER SOMMERS: Second.

 19 CHAIRMAN GENSLER: So now I state that I

 20 support it, but any questions? Commissioner Dunn?

 21 COMMISSIONER DUNN: Thank you. As I

 22 stated earlier, I've asked a number of questions
 83

 1 to the division and the rulemaking team, and on

 2 this I had asked how many folks it would take to

 3 implement that. I believe the answer was for DCIO

 4 approximately 20, is that correct?

 5 MR. RADHAKRISHNAN: Commissioner, in

 6 response to your questions, we had said an

 7 additional five, five FTEs to work on the mandate

 8 determinations based on the President's request

 9 2012. The President in the budget requested 70

 10 FTE for the clearing policy and risk surveillance

 11 subprogram and we had planned to allocate 5 for

 12 the mandate determinations.

 13 COMMISSIONER DUNN: So it'd be five on

 14 this. Is this in addition to the 20 that you

 15 talked about on the other proposed rule?

 16 MR. RADHAKRISHNAN: Yes.

 17 COMMISSIONER DUNN: How do you intend to

 18 implement this if we don't get increased budget?

 19 MR. RADHAKRISHNAN: I think the issue

 20 will have to be a prioritization of work. So what

 21 DCIO will recommend to the Commission is that we

 22 do the things that we're required to do and then
 84

 1 with respect to those that we may not be required

 2 to do, they may have to take a backseat until we

 3 finish the things that we're required to do.

 4 These mandate determinations have to be made

 5 within a 90- day period.

 6 COMMISSIONER DUNN: Thank you.

 7 CHAIRMAN GENSLER: Thank you,

 8 Commissioner Dunn. I just -- Ananda, this 20 --

 9 I'm sorry, because I was conferring with Sara --

 10 there's a Risk Surveillance Group in Chicago right

 11 now.

 12 MR. RADHAKRISHNAN: Correct.

 13 CHAIRMAN GENSLER: And so maybe I'm not

 14 following you, but on the earlier proposal, and it

 15 was just a proposal, but doesn't the Risk

 16 Surveillance Group in Chicago already -- I mean,

 17 of course, they have other duties, but that group

 18 would have to take on this, you know, if we were

 19 to finalize the Futures Commission.

 20 MR. RADHAKRISHNAN: Correct.

 21 CHAIRMAN GENSLER: So it'd be --

 22 MR. RADHAKRISHNAN: That group, yeah.
 85

 1 CHAIRMAN GENSLER: It's that group.

 2 MR. RADHAKRISHNAN: Right.

 3 CHAIRMAN GENSLER: So were you saying --

 4 I don't remember the size of the Risk Surveillance

 5 Group in Chicago, but it's 20 including --

 6 MR. RADHAKRISHNAN: Right now they're

 7 22.

 8 CHAIRMAN GENSLER: Right now they're 22

 9 and so that would have to grow.

 10 MR. RADHAKRISHNAN: Yeah.

 11 CHAIRMAN GENSLER: Okay.

 12 MR. RADHAKRISHNAN: Yeah.

 13 CHAIRMAN GENSLER: Commissioner Sommers?

 14 COMMISSIONER SOMMERS: Thank you. I

 15 have a couple of different questions about the

 16 process that I think I'd like to clarify, and

 17 especially for those people who were very

 18 concerned about this process through the comment

 19 period. So the process for reviewing

 20 pre-enactment swaps that are currently being

 21 cleared, those swaps were deemed submitted to us

 22 on July 21, 2010, but we had agreements from all
 86

 1 of the DCOs to extend that 90-day period, the way

 2 I understand it, for making that determination.

 3 Is that correct?

 4 MR. RADHAKRISHNAN: That's correct.

 5 COMMISSIONER SOMMERS: So we're

 6 currently operating under that extension from DCOs

 7 that currently clear swaps.

 8 MR. RADHAKRISHNAN: Correct.

 9 COMMISSIONER SOMMERS: So does that

 10 extension of time also apply to swaps that they

 11 started clearing post- enactment? So it's not

 12 pre-enactment, it's also post- enactment swaps?

 13 MR. RADHAKRISHNAN: No, because I think

 14 by the statute the deemed submission -- and

 15 correct me if I'm wrong -- was -- the deemed

 16 submission was in relation to pre-enactment, swaps

 17 already being cleared pre-enactment.

 18 COMMISSIONER SOMMERS: Only. So only

 19 pre- enactment swaps. Anything that is currently

 20 being cleared, but being cleared post-enactment, a

 21 DCO would have to formally submit to us, they're

 22 not deemed submitted.
 87

 1 MR. RADHAKRISHNAN: Correct.

 2 COMMISSIONER SOMMERS: The effective

 3 date of this rule, would that affect the clock on

 4 the extension or does the clock start running

 5 again, another 90 days after the effective date of

 6 this rule?

 7 MR. RADHAKRISHNAN: I think the

 8 arrangement we had with the DCOs was that it

 9 wouldn't start until 90 days after the effective

 10 date of this rule.

 11 COMMISSIONER SOMMERS: So 90 days after

 12 the effective date of this rule, if we're not

 13 prepared to make a determination we'd ask for

 14 another extension.

 15 MR. RADHAKRISHNAN: Correct.

 16 COMMISSIONER SOMMERS: Okay. And is it

 17 possible that we would decide at the conclusion of

 18 that 90 days that we're not prepared or that the

 19 answer is, no, these swaps are not yet mandated

 20 for clearing, we need another 60 days, we need

 21 another 180 days in order to make a mandatory

 22 decision because there may -- for a number of
 88

 1 different reasons?

 2 MR. RADHAKRISHNAN: That is possible,

 3 yeah. That is possible because we --

 4 COMMISSIONER SOMMERS: But we have the

 5 ability to do that.

 6 MR. RADHAKRISHNAN: Yeah. Because we'll

 7 have to go through the five factors and the

 8 Commission will have to be satisfied that the five

 9 factors are satisfied.

 10 COMMISSIONER SOMMERS: And how will we

 11 -- what's the process for reviewing those

 12 decisions? So we considered the five factors --

 13 MR. RADHAKRISHNAN: Yeah.

 14 COMMISSIONER SOMMERS: -- but how often

 15 do we consider those five factors? And what's the

 16 review of the decision? If we -- if you can

 17 contemplate that we have the ability to make a

 18 decision that, no, these swaps that are currently

 19 being cleared are not mandated to be cleared, how

 20 do we go back and review that decision?

 21 MR. RADHAKRISHNAN: I think the

 22 Commission can at any time of its own volition go
 89

 1 back and examine whether any class, category, type

 2 of swap has to be cleared. So I think the

 3 Commission has the flexibility to do that. So I

 4 guess --

 5 COMMISSIONER SOMMERS: Why would we

 6 initiate that? I mean, I guess from your

 7 perspective what would change? What would you be

 8 looking for?

 9 MR. RADHAKRISHNAN: Probably new

 10 information because one of the factors is -- let

 11 me get to the factors -- outstanding notional

 12 amount, liquidity, and so on. So, yeah,

 13 significant outstanding notional exposures,

 14 trading liquidity, and adequate pricing data. So

 15 if it were to transpire that the Commission

 16 believes that that factor is not met because of a

 17 dearth of information, all the information we have

 18 is from DCOs, but the way I look at it a

 19 significant outstanding notional exposure doesn't

 20 just relate to cleared swaps because there may be

 21 other swaps which are uncleared. Staff will

 22 probably go to other sources by the -- publicly
 90

 1 available sources. But it could well be that we

 2 don't have enough information, the Commission is

 3 not satisfied.

 4 But I think one of the things that might

 5 -- really would help us is SDRs. If a lot of

 6 stuff is reported to SDRs, then the Commission has

 7 an avenue to get this information. So it could be

 8 that once SDRs are registered and, you know, they

 9 start operating, the Commission could be in

 10 possession of information that will allow it to

 11 make a determination.

 12 COMMISSIONER SOMMERS: So getting more

 13 accurate information would be helpful.

 14 MR. RADHAKRISHNAN: Yes, yes,

 15 absolutely.

 16 COMMISSIONER SOMMERS: The next set of

 17 questions I have are on eligibility

 18 determinations. So the rules provide that a DCO

 19 is presumed eligible to accept for clearing any

 20 swap that is within a group, category, type, or

 21 class of swaps that a DCO is already clearing, but

 22 that this presumption is subject to Commission
 91

 1 review. If a DCO wishes to accept a new type of

 2 swap for clearing it must ask the Commission for

 3 an eligibility determination.

 4 So do we have a time period in which we

 5 need to make that determination?

 6 MR. RADHAKRISHNAN: We don't have a set

 7 time period.

 8 COMMISSIONER SOMMERS: And will we be

 9 making those eligibility determinations on DCOs

 10 that currently clear swaps?

 11 CHAIRMAN GENSLER: Eileen, why don't you

 12 just answer?

 13 MS. DONOVAN: Sorry. No. No, because

 14 they would be presumed eligible to clear the swaps

 15 that they're already clearing.

 16 COMMISSIONER SOMMERS: Okay.

 17 MS. DONOVAN: Only if like, for

 18 instance, they're clearing interest rate

 19 (inaudible) swaps and suddenly wanted to do CDS,

 20 that we may have to revisit their eligibility.

 21 COMMISSIONER SOMMERS: That would

 22 initiate another --
 92

 1 MS. DONOVAN: Right.

 2 COMMISSIONER SOMMERS: -- a type. A

 3 different asset class would initiate another

 4 determination.

 5 MS. DONOVAN: Right.

 6 COMMISSIONER SOMMERS: Okay. And how

 7 will we make those determinations? Will it be a

 8 Commission determination by Commission order? How

 9 will we do that? And will we seek comment?

 10 MR. RADHAKRISHNAN: I would envision it

 11 to be a Commission action. And I think it makes

 12 sense to get public comment on it.

 13 COMMISSIONER SOMMERS: Another area that

 14 I have some concern about, but I do believe we've

 15 addressed in the final rule, is with regard to

 16 making a determination that a swap must be cleared

 17 if no DCO has accepted it for clearing. So if you

 18 could just walk through how you would anticipate

 19 that process working. Why would we make that kind

 20 of determination if no DCO has accepted a swap?

 21 MR. RADHAKRISHNAN: Well, that's a good

 22 question. The response is that the Commission has
 93

 1 the legal responsibility to do so. So some people

 2 have argued that it doesn't make any sense to make

 3 a determination if no DCO is going to clear it

 4 because it may be an empty determination. But I

 5 guess what I can predict is why a DCO may not want

 6 to clear a swap. It may be that the Commission

 7 gets information that a sudden category of swaps

 8 -- it's a no-brainer that has to be cleared, but

 9 because of what's happening structurally at DCOs,

 10 nobody wants to clear it. It could be. I don't

 11 know.

 12 COMMISSIONER SOMMERS: Because the

 13 statute prohibits us from forcing a DCO to clear

 14 something, I mean, what do you think we would do?

 15 Have a roundtable and talk to all DCOs about why

 16 nobody's clearing?

 17 MR. RADHAKRISHNAN: I think that's a

 18 fair question. I think that's a fair question.

 19 For example, you know, before Dodd-Frank we had

 20 conversations with DCOs -- and this was before the

 21 language was finalized -- and I asked a question

 22 as to whether there were any classes of
 94

 1 standardized swaps that you will not -- that

 2 somebody will not clear? And this doesn't apply

 3 to us because -- everybody said equity swaps, that

 4 they are standardized, but nobody wants to clear

 5 them because they cannot model the risk. Now, to

 6 me that's a very critical piece of information

 7 there. If somebody doesn't know how to model the

 8 risk -- either doesn't know how to model the risk

 9 or knows how to model the risk and it'll be so

 10 expensive that nobody will want to clear it or

 11 nobody wants to take the risk.

 12 So I guess what I'm saying is, we just

 13 don't know what people will tell us. And so

 14 that's why I think that -- and I guess that's why

 15 Congress gave us a responsibility for two reasons.

 16 I'm guessing, one, because they're worried that,

 17 you know, people will collude and not clear

 18 something. So it would stand to reason that,

 19 logically, if you would make the first

 20 determinations with respect to things that the

 21 people are already clearing. But I guess my

 22 answer is I just don't know, so.
 95

 1 COMMISSIONER SOMMERS: Thank you.

 2 CHAIRMAN GENSLER: Commissioner O'Malia,

 3 just before -- I just -- Ananda, I think that --

 4 if I recall, and Dan Berkovitz is here, I mean,

 5 Congress included this provision that we could

 6 initiate a review. And we say clearly -- I think

 7 it was good that we said this in the preamble --

 8 that the Commission anticipates that initially

 9 mandatory clearing determinations would only

 10 involve swaps that are either already being

 11 cleared or that a DCO submits to clearing.

 12 MR. RADHAKRISHNAN: Right.

 13 CHAIRMAN GENSLER: I mean, we're going

 14 to first let the clearing houses come to us.

 15 MR. RADHAKRISHNAN: Right.

 16 CHAIRMAN GENSLER: And they're already

 17 clearing and, I mean, in the interest rate swap

 18 world the largest clearing house has close to $300

 19 trillion notional amount of interest rate swaps in

 20 it.

 21 MR. RADHAKRISHNAN: Right.

 22 CHAIRMAN GENSLER: And we've been
 96

 1 regulating them for 10 years, along with the FSA.

 2 MR. RADHAKRISHNAN: Right. Broad-based

 3 index CDFs.

 4 CHAIRMAN GENSLER: Broad-based index

 5 CDFs are being cleared.

 6 MR. RADHAKRISHNAN: Energy.

 7 CHAIRMAN GENSLER: Energy, and actually

 8 it has lowered the risk in the energy market

 9 significantly these last 8 or 10 years post the

 10 Enron. So, in the energy and the interest rate

 11 and the index space --

 12 MR. RADHAKRISHNAN: And some

 13 agricultural as well, Mr. Chairman.

 14 CHAIRMAN GENSLER: So, I mean, I think

 15 it's important that the Commission has actually

 16 said here what we've said, that we anticipate

 17 initial mandatory clearing determinations would

 18 involve the swaps that are already being cleared

 19 or a clearing house wants to clear.

 20 MR. RADHAKRISHNAN: Yep.

 21 CHAIRMAN GENSLER: I mean, this is going

 22 to take a while. I mean, but the Congress still
 97

 1 has this back -- you might consider it a backup

 2 authority on which we could initiate something

 3 from time to time. In the future we might, but I

 4 think initially this is what we've said and if we

 5 all vote for it I think that's a good statement of

 6 where we are.

 7 But, I mean -- Dan, is there anything

 8 you -- no? Commission O'Malia?

 9 COMMISSIONER O'MALIA: Well, Mr.

 10 Chairman, I think you've highlighted an important

 11 point. In the futures markets, it's voluntary.

 12 In this, we're mandating it. There's no statute

 13 that says you have to clear future space. This --

 14 we are mandating it. This is a different breed of

 15 cat and we're going into this not knowing exactly

 16 how these things trade, what features they're

 17 going to be, how they're going to pre-price, what

 18 type of liquidity, et cetera.

 19 A feature that I've asked for in terms

 20 of guidance -- I mean, what are the criteria that

 21 we're going to use going forward? So I think it's

 22 a valid point, but this is a bigger challenge than
 98

 1 simply saying it's a one size fits all futures

 2 model because it's not. And we have our --

 3 CHAIRMAN GENSLER: I don't think I said

 4 that.

 5 COMMISSIONER O'MALIA: No, you didn't.

 6 CHAIRMAN GENSLER: Okay.

 7 COMMISSIONER O'MALIA: But I'm just

 8 agreeing with you actually.

 9 CHAIRMAN GENSLER: Okay. All right.

 10 COMMISSIONER O'MALIA: In some of the

 11 comment letters we received, they'd asked --

 12 market participants had asked for more

 13 transparency and clarity on some of the substance.

 14 And specifically they had asked what are the

 15 criteria the Commission will be using going

 16 forward in determining what's clearable, et

 17 cetera?

 18 How do you reconcile one little lie

 19 moving forward on mandatory clearing without

 20 guidance and -- in Section 2(h)(3)(D). The

 21 section states, "The Commission shall adopt rules

 22 for reviewing a derivatives clearing
 99

 1 organization's clearing of a swap or a group,

 2 category, type, or class of swaps that it has

 3 accepted for clearing."

 4 There's some broad categories that the

 5 statute gave us, but it gives no balance as to how

 6 we're going to determine which are more relevant.

 7 What's important? What standards are going to be

 8 within those categories? And I'm just sensitive

 9 to the market that they've asked for some more

 10 information.

 11 MR. RADHAKRISHNAN: I'm sorry. I'm to

 12 find it at 2(h)(3)(E)?

 13 COMMISSIONER O'MALIA: 2(h)(3)(D).

 14 MR. RADHAKRISHNAN: Okay. 2(h)(3)(D) --

 15 I'm sorry, maybe I'm misunderstanding this, but I

 16 think that's what we're trying to do, which is to

 17 comply with 2(h)(3)(D). I may be missing

 18 something.

 19 CHAIRMAN GENSLER: Eileen, do you want

 20 to join us? Eileen?

 21 MS. DONOVAN: Right. I mean, that was

 22 the basis for this rulemaking, yes.
 100

 1 COMMISSIONER O'MALIA: Yeah, but people

 2 have asked for additional guidance and we haven't

 3 been specific. I mean, we've had this discussion.

 4 MR. RADHAKRISHNAN: Guidance with

 5 respect to the factors?

 6 COMMISSIONER O'MALIA: Yeah.

 7 MR. RADHAKRISHNAN: Okay. So I don't

 8 know whether this is the place for guidance. To

 9 me, you know, one approach I would take is

 10 Congress has given us the factors to consider, I'm

 11 not sure what additional guidance we could give

 12 because -- the way I look at it, the Commission

 13 will have to seek comment as to whether, let's

 14 say, you know, interest rate swaps have to be

 15 cleared?

 16 And I would imagine that the Commission

 17 would be asking questions with respect to the

 18 factors. So are you suggesting that -- are the

 19 commenters suggesting that the Commission have a

 20 view?

 21 COMMISSIONER O'MALIA: Well, the

 22 commenters did ask about different waiting of the
 101

 1 various factors, the importance of the factors,

 2 what the minimum standards of the factors were.

 3 MR. RADHAKRISHNAN: Right.

 4 COMMISSIONER O'MALIA: So they did ask

 5 for several specific areas which we did not

 6 provide specificity on. And so one of the

 7 concerns I have is, if we're going to move forward

 8 on a case-by-case basis, a --

 9 MR. RADHAKRISHNAN: I think we have to.

 10 COMMISSIONER O'MALIA: So, if we do --

 11 MR. RADHAKRISHNAN: I think we have to

 12 move on a case-by-case basis because the asset

 13 classes are different.

 14 COMMISSIONER O'MALIA: The asset classes

 15 are different, but is that the only factor?

 16 Because if we move forward on a case-by-case basis

 17 -- and maybe Dan wants to weigh in on this --

 18 doesn't that really open us up to potential legal

 19 challenges such as those relating to arbitrary and

 20 capricious action?

 21 MR. RADHAKRISHNAN: Dan knows what your

 22 plan is, but with respect to the comment that
 102

 1 maybe some of the factors should have more weight,

 2 I don't know whether the statute allows us to do

 3 it because Congress gave us five factors and I

 4 think we have to consider the five factors.

 5 COMMISSIONER O'MALIA: No doubt, but on

 6 a case- by-case basis, then we seem to be ignoring

 7 2(h)(3)(D) which says a rule -- because if we're

 8 going to implement this separately -- when we have

 9 an obligation, the Congress told us to implement a

 10 single rule. I think we're kind of caught up in

 11 this debate here.

 12 CHAIRMAN GENSLER: Dan, do you want to

 13 address this?

 14 MR. BERKOVITZ: Generally the agency has

 15 the flexibility, as Ananda's been talking about,

 16 to do -- in a situation like this to either do a

 17 rulemaking with additional guidance --

 18 COMMISSIONER O'MALIA: Which is what

 19 (3)(D) specifically says.

 20 MR. BERKOVITZ: Or it could, as Ananda's

 21 explained, do it on a case-by-case basis and say

 22 we will consider the statutory factors, weigh the
 103

 1 statutory factors, put out its determination for

 2 public comment, get the public comment, and then

 3 make a determination based upon the record. As

 4 you've noted, its determinations would have to be

 5 rational, could not be arbitrary and capricious.

 6 And to a certain extent, if the agency chooses to

 7 proceed on a case-by-case basis, it would be

 8 developing essentially case law as to how it's

 9 applying the factors and that would become the

 10 body that would guide the future determinations.

 11 So, if you made a certain determination

 12 with respect to one particular type of swap and

 13 how the factors were weighted, that would guide

 14 the agency in its future determinations. So you

 15 could do it either through the rule or through a

 16 case-by-case determination with a sufficient

 17 explanation of the rational basis for that.

 18 COMMISSIONER O'MALIA: All right. Well,

 19 I assume this has the votes. I'm going to vote

 20 for it, but I am sensitive to the questions asked

 21 by commenters that they want a little more

 22 granularity on what the Commission's priorities
 104

 1 are in determining what a swap will be.

 2 I'll send the letter out and I hope in

 3 the 60 days it will get some -- the market does

 4 provide meaningful comment as to what relevant

 5 factors they think are in the market. And then we

 6 adjust that and maybe reflect on that as we

 7 develop this case-by-case evaluation.

 8 All right. My second question is

 9 targeted at the inner connections between this

 10 rulemaking and other rulemakings. What definition

 11 of swap is this rulemaking using?

 12 CHAIRMAN GENSLER: Dan, you want to go?

 13 MR. BERKOVITZ: The rulemaking does not

 14 rely on a specific definition, but clearing

 15 agencies or clearing organizations would be able

 16 to submit instruments they would consider swaps

 17 and the Commission could proceed to evaluate those

 18 prior to the completion of definitional

 19 rulemaking.

 20 COMMISSIONER O'MALIA: So if we have a

 21 clearing requirement effective before the

 22 definition of swap, that won't matter?
 105

 1 MR. BERKOVITZ: This doesn't impose the

 2 clearing requirement itself, this --

 3 COMMISSIONER O'MALIA: But if we do have

 4 a clearing requirement and we have swaps that have

 5 to be cleared, the definition of swap is somewhat

 6 --

 7 CHAIRMAN GENSLER: Commissioner O'Malia,

 8 I'll help you out. I'm in the same place you are

 9 on this. I think this is a process role, and an

 10 important process role where clearing houses might

 11 come to us in 2 to 3 months and start that 90-day

 12 clock. But I think, like you and maybe other

 13 Commissioners, I think any mandate that has, you

 14 know -- a legal mandate should come after we've

 15 finished that swap. We're only further defining a

 16 swap.

 17 I think everybody knows what a two-ear

 18 interest rate swap is, but the further defining

 19 the swap rule, I think the comment period closes

 20 July 22nd. It's emblazoned in me. And I talked

 21 to Chairman Shapiro yet again yesterday, at the

 22 tail end of the Financial Stability Oversight
 106

 1 Council, and the importance of -- once that closes

 2 to get our mutual staffs summarizing comments and

 3 finalizing that as well as finalizing the entity

 4 definition thing. I mean --

 5 COMMISSIONER O'MALIA: Right.

 6 CHAIRMAN GENSLER: I mean, I think what

 7 the five of us could compete on our enthusiasm and

 8 finalizing those joint rules, but I'm right with

 9 you on finalizing those.

 10 COMMISSIONER O'MALIA: Thank you.

 11 COMMISSIONER DUNN: Mr. Chairman --

 12 CHAIRMAN GENSLER: I'm not putting out a

 13 schedule for it because I just don't know. I

 14 mean, I would love to say we're going to finalize

 15 it in September, but I think it's going to take

 16 longer. I mean, I think it's going to be, you

 17 know, into the fall for the entity definition one,

 18 and on the product definition one the comment

 19 period hasn't closed yet, so.

 20 I'm sorry, Commissioner Dunn?

 21 COMMISSIONER DUNN: I was going to ask

 22 for you to give us an estimate, but I guess you
 107

 1 just did.

 2 COMMISSIONER O'MALIA: No, push him on

 3 it.

 4 CHAIRMAN GENSLER: My best estimate is

 5 that on the entity definition it's post-Labor Day,

 6 for sure. And I don't see it happening in

 7 September because we and the SEC both like to get

 8 to what's called a "pens down" version and, you

 9 know, get commissioner feedback on that "pens

 10 down" version promptly. But it's possible that

 11 we'll get that "pens down" version on the entity

 12 definition in August and try to schedule it for

 13 the September 22nd meeting, but I think it's more

 14 likely in October.

 15 And then on the product definition rule,

 16 since the comment period hasn't even closed yet,

 17 it's probably going to take us past Labor Day to

 18 summarize the comments, get them to 10

 19 commissioners instead of 5, of course, in that

 20 case. And we're probably talking about closer to

 21 that Thanksgiving period, but I don't want to --

 22 you know, this is -- we're not going to bring a
 108

 1 document to you all and to a vote unless it's

 2 really gotten the feedback from, you know, all of

 3 you and, obviously, the SEC commissioners as well.

 4 It's one of the challenges on doing a

 5 precise schedule with precise dates. It sort of

 6 flies in conflict of getting it right and getting

 7 the balance. And I think that come November, we

 8 may well be most likely taking up the exemptive

 9 order again, given those facts and circumstances,

 10 and looking at whatever other relief we need.

 11 Because I don't want to try to manage against a

 12 clock. It's more important to get it balanced and

 13 get it right and get all the inputs from staff and

 14 commissioners.

 15 COMMISSIONER O'MALIA: Let me go to my

 16 next question. Do you believe that the Commission

 17 has the authority under CEA Section

 18 2(h)(4)(B)(iii) to impose capital and margin

 19 requirements on banks, swap dealers, and bank

 20 major swap participants?

 21 MR. RADHAKRISHNAN: I think the document

 22 says that we will act -- the Commission will act
 109

 1 in accordance with other regulations, you know,

 2 (inaudible).

 3 COMMISSIONER O'MALIA: Here, I can read

 4 it for you, if you --

 5 MR. RADHAKRISHNAN: Yeah.

 6 COMMISSIONER O'MALIA: "Footnote 10

 7 states, the Commission would consult with the

 8 Prudential regulators before taking action under

 9 Regulation 39.5(c)(3)(iii), which would include

 10 margin capital."

 11 MR. RADHAKRISHNAN: Well, actually --

 12 because I think we are saying, you know -- page

 13 21, "Commission notes that with respect to swap

 14 dealers and major swap participants it will not

 15 impose marginal or capital requirements under

 16 39.5(c)(3) that defer from final Commission

 17 regulations on marginal capital for uncleared

 18 swaps."

 19 And then the document says, "Further,

 20 the Commission does not foresee that it would take

 21 action under 39.5(c)(3) to impose margin or

 22 capital requirements on any swap counterparty
 110

 1 permitted under final Commission regulations to

 2 exercise the end user exception to mandatory

 3 clearing."

 4 COMMISSIONER O'MALIA: Dan, do you

 5 believe that we have the authority? Yes or no on

 6 that? To set it on bank dealers?

 7 MR. BERKOVITZ: I think this footnote

 8 was -- and this addressing here was to address the

 9 difference -- to reconcile the various statutory

 10 provisions and so, in attempting to do that it

 11 said, obviously, we have the concerns on -- as

 12 you've talked about -- so we have to reconcile

 13 these various provisions. And that's what we

 14 would do.

 15 COMMISSIONER O'MALIA: Let me turn to

 16 the end- user exemption. We have language in the

 17 preamble that says, "The Commission does not

 18 foresee that it would take action under the final

 19 Commission regulation" to exercise end-user

 20 exemption to -- essentially, the Commission does

 21 not foresee applying capital margin on end users.

 22 I'm a little concerned because I thought
 111

 1 Congress was pretty clear about this. And

 2 certainly the Dodd- Lincoln letter to follow that

 3 was pretty clear about this. "Does not foresee"

 4 kind of has some wiggle in it. Why did we include

 5 those words?

 6 MR. RADHAKRISHNAN: I think it's because

 7 of -- you know, as Dan pointed out, you've got

 8 different statutory provisions, right? Because

 9 the statute provision says, you know, "The

 10 Commission can take such actions as the Commission

 11 determines to be necessary and in the public

 12 interest, which may include requiring the

 13 retaining of adequate marginal capital by parties

 14 to the swap, group, category, type, or class of

 15 swaps."

 16 COMMISSIONER O'MALIA: So does that --

 17 that's the standard end-user exemption?

 18 MR. RADHAKRISHNAN: It trumps that

 19 provision.

 20 CHAIRMAN GENSLER: Commissioner O'Malia,

 21 maybe the word came from me. I was trying to be

 22 respectful of the process that we hadn't finalized
 112

 1 the rule. That's all. I don't foresee that we're

 2 going to do it, but we have a proposal outstanding

 3 and that -- on the margin issue, the margin

 4 proposal we put out is clear that we're not

 5 imposing any margin on -- dealers don't have to

 6 collect margin from end users, but it's a

 7 proposal. So it may have just been me, just that

 8 it hasn't been finalized.

 9 I think it might help, subject to the

 10 comments, but not trying to envision what the

 11 final action would be, that it would be consistent

 12 with what was proposed. In fact, that was --

 13 COMMISSIONER O'MALIA: All right. Well,

 14 I just hope that I --

 15 CHAIRMAN GENSLER: I don't think there's

 16 any difference between you and me on the end user

 17 margin issue.

 18 COMMISSIONER O'MALIA: Then we really

 19 shouldn't put it in -- you know, insert

 20 uncertainty into the language, but I take you at

 21 your word and, hopefully, the comments will

 22 reflect -- and, hopefully, the language in the
 113

 1 final form will be much more certain for the end

 2 users on that one.

 3 That's all I have. Thank you very much.

 4 Eileen, great job.

 5 CHAIRMAN GENSLER: Mr. Stawick?

 6 MR. STAWICK: Commissioner O'Malia?

 7 COMMISSIONER O'MALIA: Yes?

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

 9 Commissioner Chilton?

 10 CHAIRMAN GENSLER: Aye by proxy.

 11 MR. STAWICK: Commissioner Chilton, aye

 12 by proxy. Commissioner Sommers?

 13 COMMISSIONER SOMMERS: Aye.

 14 MR. STAWICK: Commissioner Sommers, aye.

 15 Commissioner Dunn?

 16 COMMISSIONER DUNN: Aye.

 17 MR. STAWICK: Commissioner Dunn, aye.

 18 Mr. Chairman?

 19 CHAIRMAN GENSLER: Aye.

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

 21 Chairman, on this question, the ayes are five, the

 22 nays are zero.
 114

 1 CHAIRMAN GENSLER: Thank you, Mr.

 2 Stawick. Thank you, Eileen and John and Ananda,

 3 Dan, for your cameo.

 4 And I gather, at this time, I'd like to

 5 call Bella Rozenberg and a team up -- Joe, Tom,

 6 Riva, and Rick from the Division of Market

 7 Oversight, and Phyllis from the Division of

 8 Clearing and Intermediary Oversight -- to present

 9 the staff's recommendations regarding the final

 10 rule on certain provisions that are common to

 11 registered entities. or what often in the industry

 12 is referred to as Part 40.

 13 Assuming Bella is taking a lead here?

 14 MS. ROZENBERG: Yes. Good morning, Mr.

 15 Chairman, Commissioners. Today's staff is

 16 recommending that the Commission approve the final

 17 rulemaking to implement rule certification and

 18 approval procedures for existing registered

 19 entities such as designated contract markets and

 20 derivatives clearing organizations, and for new

 21 registered entities such as swap execution

 22 facilities and swap data repositories. The
 115

 1 rulemaking also prohibits event contracts based on

 2 certain excluded commodities, establishes special

 3 procedures for certain rule changes proposed by

 4 systemically important derivatives clearing

 5 organizations -- SIDCOs -- and provides for

 6 staying of review periods for certain novel

 7 derivative products pending the resolution of

 8 jurisdictional determination.

 9 Following the publication of the

 10 proposed rulemaking on November 2, 2010, the

 11 Commission received 10 comment letters. Staff

 12 carefully reviewed the comments and made a number

 13 of changes to address commenters' concerns. The

 14 final regulations establish a new timeline

 15 mandated by Dodd-Frank for self-certified

 16 submission of new rules and rule amendments.

 17 A new rule or rule amendment will become

 18 effective 10 business days after the certified

 19 rule or rule amendment is received by the

 20 Commission. The Commission may stay the initial

 21 review period for an additional 90 days if the

 22 submission includes novel or complex issues or is
 116

 1 certified with inadequate explanation or is

 2 potentially inconsistent with the Commodity

 3 Exchange Act.

 4 The Commission must provide a 30-day

 5 public comment period within the 90-day review

 6 period. The new rule or rule amendment will

 7 become effective 90 days after the certification

 8 is stayed unless the Commission objects to the

 9 certification.

 10 Notably, the Dodd-Frank Act mandates the

 11 above- mentioned timeline for self-certified rules

 12 and rule amendments, but not for self-certified

 13 new products. The timeline for filing products

 14 for self-certification remains unchanged and that

 15 is the Commission must receive a submission at its

 16 headquarters by the open of business on the

 17 business day preceding the product's listing.

 18 Also, the final regulations have been modified to

 19 address certain concerns raised by the comment

 20 letters.

 21 Specifically, with respect to the

 22 product and rules certification filings, as
 117

 1 requested by a number of commenters, the final

 2 regulation eliminates the requirement that a

 3 registered entity must include with its submission

 4 documents relied upon in determining that a new

 5 product or a new rule or rule amendment complies

 6 with the Commodities Exchange Act.

 7 To balance the staff need for

 8 information to carry our reviews while conserving

 9 staff resources and also to alleviate the

 10 commenters perceived burdens of complying with a

 11 documentation requirement, the final regulations

 12 only require the submission of a concise

 13 explanation and analysis of a product or a rule or

 14 a rule amendment. And in the case of a new

 15 product submission, such concise explanation and

 16 analysis must provide a simple reference to data

 17 sources.

 18 Furthermore, in consideration of a

 19 number of comments, the final regulations do not

 20 adopt the previously proposed provision requiring

 21 a registered entity to certify that it has rights

 22 to use or reference third party prices. Also, to
 118

 1 streamline the product certification process for a

 2 significant number of swap contracts, the final

 3 regulation permits SEFs and DCMs to certify within

 4 a single submission one or more swaps without

 5 submitting each swap and its supporting

 6 information to the Commission if the class of

 7 swaps meets certain conditions that are specified

 8 in the regulations.

 9 Moreover, to further streamline the new

 10 products submission process, the regulation

 11 permitting DCOs to submit products accepted for

 12 clearing only under the forthcoming provision of

 13 39.5, and not under Part 40.

 14 With respect to certification procedures

 15 for submission of rules by SIDCOs, in accordance

 16 with Section 806 of the Dodd-Frank Act, the

 17 regulations require SIDCOs to provide the

 18 Commission with a 60-day advanced notice to any

 19 proposed change to its rules or procedures that

 20 could materially affect the nature or level of

 21 risk presented by the SIDCO. The regulation

 22 allows the SIDCO to implement the proposal change
 119

 1 if the review period lapses without Commission

 2 action. The rule would allow the Commission

 3 during the 60-day review period to extend the

 4 review period for an additional 60 days if the

 5 proposed change raises novel or complex issues.

 6 Turning to the provision relating to

 7 event contracts, essentially the final rule

 8 remains unchanged from the proposed rulemaking.

 9 The final rule prohibits the listing, trading, or

 10 clearing of certain products that are based on

 11 excluded commodities that involve terrorism,

 12 assassination, war gaming, or an activity that is

 13 unlawful under any state or federal law. These

 14 activities are specifically enumerated in the

 15 statute.

 16 In addition, the rule provides that the

 17 listing, trading, or clearing of products

 18 involving activities that are similar to the

 19 activities that are prohibited by the statute and

 20 that the Commission determines to be contrary to

 21 the public interest would be prohibited and would

 22 be enumerated in the future rulemaking.
 120

 1 Furthermore, if the Commission

 2 determines that a submitted product involves or

 3 may involve one of the prohibited activities, the

 4 Commission will request that the registered entity

 5 suspend the listing or trading of this contract

 6 and will conduct a 90-day review to determine

 7 whether the product violates the prohibitions on

 8 certain event contracts. Upon completion of its

 9 review, the Commission will issue a determination

 10 order.

 11 And finally, the rules authorize the

 12 Commission to stay the product certification or

 13 approval review period for novel derivative

 14 products that have elements of both the security

 15 and a commodity futures and options contract

 16 pending the issuance of a final determination

 17 order as to whether the Commission or the SEC has

 18 jurisdiction over the product.

 19 That concludes my remarks. I would be

 20 happy to take any questions.

 21 CHAIRMAN GENSLER: Thank you, Bella.

 22 The chair will now entertain a motion to accept
 121

 1 the staff recommendation on the final rule related

 2 to Part 40?

 3 COMMISSIONER DUNN: So moved.

 4 COMMISSIONER SOMMERS: Second.

 5 CHAIRMAN GENSLER: Okay, thank you. I

 6 support the final rulemaking to establish a

 7 process for certification and approval of new

 8 rules and rule amendments for various registered

 9 entities, designated contract markets, and the

 10 clearing houses, and the new registrants, the SEFs

 11 and the data repositories.

 12 The Dodd-Frank Act established enhanced

 13 review and certification of new rule and

 14 amendments, and I think the final regulations here

 15 provide the procedural guidance for the various

 16 entities. I appreciate Bella and the team's work

 17 on the rule itself and taking the commenters and

 18 trying to lower the burden. In some instances,

 19 though, it was Congress that really did change

 20 something. And it was just not two areas because

 21 I know Commissioner Dunn and I have had a lot of

 22 conversations about this.
 122

 1 One is with relations to event

 2 contracts, those contracts Bella mentioned on

 3 anti-terrorism and the like. And even gaming, I

 4 guess, is in the statute, right?

 5 MS. ROZENBERG: Yes, in the statute.

 6 CHAIRMAN GENSLER: So the designated

 7 contract markets and swap execution facilities

 8 will be able to move forward on products with

 9 great certainty. I don't envision -- nor does

 10 anyone, I think, envision that we're back in the

 11 1980s and '90s of product review, but Congress had

 12 a specific provision that we're not supposed to do

 13 event contracts like these. So I think the rule

 14 is consistent with what Congress laid out, but

 15 that is something that I know we've chatted a lot

 16 about.

 17 And then secondly, on Title 8, if a

 18 clearing house is deemed systemically important by

 19 the Financial Stability Oversight Council and we

 20 -- you know, we're they're primary regulator here

 21 at the CFTC. We have to provide more time. I'm

 22 hoping that we cannot run 60 days to figure out
 123

 1 whether something is risk reducing or risk

 2 enhancing, but apparently Congress wanted that

 3 additional time so that the Federal Reserve and

 4 other regulators could take a look at it as well.

 5 MS. ROZENBERG: Yes.

 6 CHAIRMAN GENSLER: But I support the

 7 rule because I think it does what Congress said to

 8 do and it addresses industry comments.

 9 Commissioner Dunn?

 10 COMMISSIONER DUNN: Thank you, Mr.

 11 Chairman. I have no questions on this. I

 12 commented extensively in my opening statement on

 13 this particular proposal. I do hope that future

 14 commissions do not see this as the instrument in

 15 which they can begin going through product review

 16 on every issue that comes forward from the

 17 exchanges. I have a lot of reservations on this.

 18 As you point out, it is part of the

 19 statute and we have to follow the statute. I just

 20 hope that future commissions show a good amount of

 21 restraint as the implement this rule.

 22 CHAIRMAN GENSLER: I share your view
 124

 1 about product review. If I recall the history of

 2 this, it was just about when movie futures were

 3 being debated, and I think some of these

 4 provisions on the event contracts and anti-gaming

 5 were topical to certain senators and members of

 6 the House of Representatives at the time. Thank

 7 you.

 8 Commissioner Sommers?

 9 COMMISSIONER SOMMERS: Thank you. I

 10 have a couple of different questions with regard

 11 to the SIDCO parts of the rulemaking for Phyllis.

 12 In the part of the rulemaking that's

 13 specific to the SIDCOs there was one, Part 40.10

 14 with regard to DCOs and their supervisory agency,

 15 and it had been suggested to us that we clarify

 16 that language with regard to SIDCOs and who their

 17 supervisory agency would be. And in the final

 18 rule before us today it says that we intend to act

 19 by revising the definition of systemically

 20 important derivatives clearing organization in a

 21 future final rulemaking to clarify that a SIDCO is

 22 a financial market utility that has been
 125

 1 designated by the FSOC to be systemically

 2 important and for which the Commission acts as the

 3 supervisory agency.

 4 Can you tell us which future final

 5 rulemaking this will be part of?

 6 MS. DIETZ: Yes. As you may recall,

 7 there have been a series of rulemakings to

 8 implement DCO core principles and within those

 9 rulemakings we have proposed some definitions, and

 10 one of the definitions that was proposed was a

 11 definition of systemically important derivatives

 12 clearing organization.

 13 And as proposed the language did not

 14 take into account dual registrants. So that if

 15 you are, for example, the Options Clearing

 16 Corporation, you're registered with both the SEC

 17 and the CFTC. The way we had phrased the

 18 definition, if you are a DCO and you are deemed to

 19 be systemically important, then you are subject to

 20 this provision. And that was not as precise as it

 21 should have been because it had the unintentional

 22 result of taking a DCO, a dual registrant, and --
 126

 1 even if their supervisory agency were the SEC, we

 2 would say you have to file the rules with us. And

 3 indeed, Section 806 says that you file with your

 4 supervisory agency. So, it would either be the

 5 SEC or the CFTC, but it wouldn't be both.

 6 So, noting this issue, rather than

 7 building in a definition into this rulemaking, we

 8 decided it was better to just go ahead. When we

 9 do the DCO definitions, we will make the change

 10 there. Right now nobody's been designated as

 11 anything. There's no confusion. We'll put the

 12 change in there and then that will serve as a

 13 useful definition for all other references to the

 14 systemically important derivatives clearing

 15 organizations.

 16 COMMISSIONER SOMMERS: Thank you for

 17 clarifying that.

 18 CHAIRMAN GENSLER: Commissioner Sommers,

 19 it's just as we use the word "foresee" and this

 20 has "intent," I'm just sharing -- I support this.

 21 I mean, it's not a --

 22 COMMISSIONER SOMMERS: No, my only
 127

 1 clarification is which rulemaking we were going to

 2 fix this in.

 3 My other question is with regard to the

 4 60-day advanced notice of any rule change that

 5 would decrease risk for SIDCOs, and there were a

 6 number of different commenters that had an issue

 7 with waiting the 60 days time period. And so in

 8 the final rulemaking we talk about how the

 9 Commission could notify the SIDCO in writing that

 10 it does not object to the change before that

 11 60-day time period is up. My question is with

 12 regard to the 10-day for Commission review. Is it

 13 somewhere in between? It has to be at least 10

 14 days, but it can't be more than 60? Is that how

 15 those kind of risk-reducing changes would be dealt

 16 with?

 17 MS. DIETZ: I think we have interpreted

 18 the 60 days as it's the statutory timeframe, but

 19 we can always notify people in less than 60 days.

 20 And based on Title 8, it would not preclude

 21 notifying people in five days or nine days.

 22 COMMISSIONER SOMMERS: Okay, it doesn't
 128

 1 have to be at least 10?

 2 MS. DIETZ: That is how we've

 3 interpreted it.

 4 COMMISSIONER SOMMERS: Okay, thank you.

 5 CHAIRMAN GENSLER: Thank you,

 6 Commissioner Sommers. Commissioner O'Malia?

 7 COMMISSIONER O'MALIA: I have no

 8 questions.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner O'Malia. Mr. Stawick?

 11 MR. STAWICK: Commissioner O'Malia?

 12 COMMISSIONER O'MALIA: Aye.

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

 14 Commissioner Chilton?

 15 CHAIRMAN GENSLER: Aye by proxy.

 16 MR. STAWICK: Commissioner Chilton, aye

 17 by proxy. Commissioner Sommers?

 18 COMMISSIONER SOMMERS: Aye.

 19 MR. STAWICK: Commissioner Sommers, aye.

 20 Commissioner Dunn?

 21 COMMISSIONER DUNN: Aye.

 22 MR. STAWICK: Commissioner Dunn, aye.
 129

 1 Mr. Chairman?

 2 CHAIRMAN GENSLER: Aye.

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

 4 Chairman, on this matter the yeas are five, the

 5 nays are zero.

 6 CHAIRMAN GENSLER: I thank you, Mr.

 7 Stawick. I thank the Commissioners and I thank

 8 the team for their excellent work across

 9 divisions.

 10 Tom, now you get to go back and do

 11 real-time reporting and all that we need to do

 12 there. And Bella, you get to go back and do your

 13 SEF summaries and get things to the Commissioner

 14 and Phyllis. We look forward to -- with

 15 transparency maybe we'll address the clearing

 16 rules in late September or the risk management

 17 part of the clearing rules, which would include

 18 this. So, thank you all very much.

 19 At this time I'd like to welcome Ward

 20 Griffin of the Office of General Counsel; Ananda

 21 back again. Ananda, did you get any sleep last

 22 night?
 130

 1 MR. RADHAKRISHNAN: Just a bit.

 2 CHAIRMAN GENSLER: Not for two days. To

 3 present the staff recommendations in the final

 4 rule.

 5 Ward, there's a lot of ways that people

 6 start out the day when they're a team lead, but I

 7 have to say that as team leads go you started out

 8 this day like no other team lead maybe past or

 9 even in the future. But the e-mail that we all

 10 got this morning, I mean, the public might want to

 11 know. Ward's e-mail to all of us that somehow you

 12 had misplaced your two bowties and the colors of

 13 those bowties. Were you successful in retrieving

 14 those bowties yet?

 15 MR. GRIFFIN: Unfortunately, no. But

 16 I'm glad you bring it up as we know it's all being

 17 webcast here today and if any of the members of

 18 the public happen to come across a couple of

 19 bowties in downtown D.C., I'd appreciate the

 20 heads-up.

 21 CHAIRMAN GENSLER: I just want to let

 22 everybody know. What was it, orange and what?
 131

 1 MR. GRIFFIN: Orange and blue,

 2 University of Florida colors; and another one was

 3 a variety of colors.

 4 CHAIRMAN GENSLER: I see, all right.

 5 Well, I'm glad -- I hope that you'll be able to

 6 secure those bowties, Ward, and I thank you for

 7 all your hard work on this. But it's over to you,

 8 Ward.

 9 MR. GRIFFIN: Thank you, Mr. Chairman,

 10 Commissioners. I sit before you this morning to

 11 present the final rule titled: Removing any

 12 reference to or reliance on credit ratings in

 13 Commission regulations, and proposing alternatives

 14 to the use of credit ratings.

 15 But before I begin, I'd like to take a

 16 moment to thank the commissioners and your staffs

 17 for your thoughtful comments throughout this

 18 process. I would also like to thank Jon DeBord of

 19 the Division of Clearing and Intermediary

 20 Oversight for his assistance; Andrei Kirilenko and

 21 Steve Kane of the Office of the Chief Economist

 22 for their work with this rule; as well as our
 132

 1 colleagues and the other financial regulators with

 2 whom we've engaged in interagency discussions of

 3 the issues surrounding credit ratings. Finally, a

 4 special thank you to Adrianne Joves, who proceeded

 5 me as -- or preceded me, excuse me, as team lead

 6 of the Credit Ratings Team.

 7 The impetus for this rule arises from

 8 Title 9 of the Dodd-Frank Act, specifically

 9 Section 939(a) of the act. Section 939(a)

 10 requires agencies to take three actions by July

 11 21, 2011.

 12 First, each federal agency must review

 13 any regulation issued by the agency that requires

 14 the use of an assessment of the creditworthiness

 15 of a security or money market instrument and any

 16 references to or requirements in such regulations

 17 regarding credit ratings.

 18 Second, each federal agency must modify

 19 any regulations identified by that review by

 20 removing any reference to or requirement of

 21 reliance on credit ratings, and by substituting an

 22 alternative standard of creditworthiness as the
 133

 1 agency deems appropriate. To the extent feasible,

 2 federal agencies should seek to establish uniform

 3 standards of creditworthiness for use by each such

 4 agency.

 5 Third, Section 939(a) directs each

 6 federal agency to report to Congress a description

 7 of any regulatory modification made pursuant to

 8 939(a).

 9 To carry out the directive of Section

 10 939(a) the Commission reviewed its regulations and

 11 identified several references to credit ratings.

 12 The identified regulations could be categorized

 13 into two groups: First, those that rely on

 14 ratings to limit how Commission registrants may

 15 invest or deposit customers funds; and second,

 16 those that require disclosing a credit rating to

 17 describe an investment's characteristics.

 18 On November 2, 2010, the Commission

 19 issued a rule proposal addressing two such CFTC

 20 regulations. And after considering the public

 21 comments received in response to that proposal the

 22 final rule is presented for your consideration.
 134

 1 The two CFTC regulations to be amended by the

 2 final rule are as follows: Number one, Regulation

 3 1.49, which places qualifications on the types of

 4 depositories in which futures commission merchants

 5 and derivatives clearing organizations may place

 6 customer funds; and two, Regulation 4.24, wherein

 7 credit ratings are used to help disclose to

 8 customers the characteristics of investments. I'd

 9 like to take a moment and describe how each of

 10 those regulations will be affected by this final

 11 rule.

 12 In relevant part, Regulation 1.49

 13 restricts the types of foreign depositories into

 14 which futures commission merchants and derivatives

 15 clearing organizations may place customer funds.

 16 Specifically, a non-U.S. bank or trust company

 17 must either, one, have in excess of $1 billion of

 18 regulatory capital; or two, issue commercial paper

 19 or a long-term debt instrument that is rated in

 20 one of the two highest rating categories by at

 21 least one nationally recognized statistical rating

 22 organization. The final rule before you would
 135

 1 remove all ratings requirements from Regulation

 2 1.49 as the Commission originally proposed.

 3 Consequently, should the final rule be

 4 adopted a futures commission merchant or

 5 derivatives clearing organization may only deposit

 6 customer funds in a non-U.S. Bank or trust

 7 company if the non-U.S. bank or trust company has

 8 more than $1 billion of regulatory capital.

 9 Turning now to Regulation 4.24, the

 10 current regulation requires commodity pool

 11 operators to disclose to its customers the

 12 characteristics of the commodity and other

 13 interests that the pool will trade, including, if

 14 applicable, their investment rating. The final

 15 rule adopts the amendments proposed in November,

 16 which would remove the reference to ratings in

 17 Regulation 4.24 and replace that reference with

 18 the phrase "creditworthiness." The preamble of

 19 the final rule before you reiterates the point

 20 that commodity pool operators may still choose to

 21 reference an investment rating to describe the

 22 creditworthiness of an investment in its
 136

 1 disclosures. However, the commodity pool

 2 operator, as appropriate, should make an

 3 independent assessment of the creditworthiness of

 4 those investments.

 5 That concludes my prepared remarks.

 6 Thank you again for your time this morning and I'd

 7 be happy to answer any questions that you have.

 8 CHAIRMAN GENSLER: Thank you very much,

 9 Ward. And the chair will entertain a motion to

 10 accept the staff recommendation on the removal of

 11 credit ratings.

 12 COMMISSIONER DUNN: So moved.

 13 COMMISSIONER SOMMERS: Second.

 14 CHAIRMAN GENSLER: Thank you. I support

 15 the final rulemaking to remove references to

 16 credit ratings, Title 9 of the Dodd-Frank Act

 17 actually, provided that all of -- not just the

 18 CFTC, but other regulators do similarly. And this

 19 removes it from two of our regulations that Ward

 20 just described. I think that we addressed it in

 21 -- last week in one of the rules, too. We did

 22 some rating agency piece, if I remember. Is that
 137

 1 right, Ward?

 2 MR. GRIFFIN: There was a piece that was

 3 addressed actually in the Part 40 rule.

 4 CHAIRMAN GENSLER: Part 40, all right.

 5 MR. GRIFFIN: There was a reference --

 6 CHAIRMAN GENSLER: So it was earlier

 7 today.

 8 MR. GRIFFIN: Correct, correct. That

 9 was in Appendix A of Part 40 -- the former

 10 Appendix A of Part 40.

 11 CHAIRMAN GENSLER: And there is one

 12 other piece of this actually in a proposed rule

 13 where we have a proposed rule with regard to

 14 customer funds, so there's a piece in the customer

 15 funds rule. But I support this. I think you've

 16 found a way through this. I know some other

 17 regulatory agencies have a greater challenge with

 18 this, but I think that this is a good approach for

 19 us.

 20 Commissioner Dunn?

 21 COMMISSIONER DUNN: Thank you, Mr.

 22 Chairman. I support this and I commend Ward and
 138

 1 his team for putting this together. And Ward,

 2 just for your information, I keep a couple of ties

 3 in my office in case I spill something. One of

 4 them's a bow-tie, so if you ever lose all three of

 5 the ties at once, come see me.

 6 MR. GRIFFIN: I do appreciate the

 7 officer, Commissioner Dunn. Thank you.

 8 CHAIRMAN GENSLER: It's a heck of an

 9 offer because I'm not sure, I don't know about

 10 Commissioner O'Malia, but I don't keep any spare

 11 bowties in my office.

 12 Commissioner Sommers?

 13 COMMISSIONER SOMMERS: I don't have any

 14 questions. Thank you.

 15 CHAIRMAN GENSLER: Commissioner O'Malia?

 16 COMMISSIONER O'MALIA: Thank you. Yeah,

 17 I have conventional ties, regular ties, Ward.

 18 I don't have any questions. Well done.

 19 Thanks for your work on this. The -- I guess I'm

 20 interested to understand what is being done

 21 internationally. We have -- you know, obviously

 22 we're not internationally banning credit rating
 139

 1 agencies. Every day last week I think I read a

 2 different credit rating agency having an opinion

 3 about our debt situation going forward. But it

 4 makes me wonder are our rules similar to

 5 international rules on this issue?

 6 MR. GRIFFIN: Well, certainly 939(a) of

 7 Dodd-rank incorporated a restriction that

 8 internationally has, as far as I know, not been

 9 raised. And I know that in the course of our

 10 interagency discussions, you know, there is -- and

 11 speaking frankly, there is some question as to

 12 appropriate alternatives to the use of credit

 13 ratings. There is not a silver bullet, so to

 14 speak, that would apply to all asset classes, all

 15 types of investments, all entities equally. And

 16 so there has been an ongoing dialogue within and

 17 among the various U.S. financial regulators with

 18 respect to appropriate alternatives. And so I

 19 know that dialogue is ongoing.

 20 But to your question as far as

 21 internationally, I'm not aware of there being

 22 similar restrictions in foreign jurisdictions.
 140

 1 COMMISSIONER O'MALIA: Thank you.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner O'Malia. Mr. Stawick, you don't have

 4 the bowties either, do you?

 5 MR. STAWICK: I do at home.

 6 CHAIRMAN GENSLER: But you have them at

 7 home. You might want to keep one for work.

 8 MR. STAWICK: I will now. I will do

 9 that, Mr. Chairman.

 10 CHAIRMAN GENSLER: Thank you. Mr.

 11 Stawick, you want to call the roll?

 12 MR. STAWICK: Commissioner O'Malia?

 13 COMMISSIONER O'MALIA: Aye.

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

 15 Commissioner Chilton?

 16 CHAIRMAN GENSLER: Aye by proxy.

 17 MR. STAWICK: Commissioner Chilton, aye

 18 by proxy. Commissioner Sommers?

 19 COMMISSIONER SOMMERS: Aye.

 20 MR. STAWICK: Commissioner Sommers, aye.

 21 Commissioner Dunn?

 22 COMMISSIONER DUNN: Aye.
 141

 1 MR. STAWICK: Commissioner Dunn, aye.

 2 Mr. Chairman?

 3 CHAIRMAN GENSLER: Aye.

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

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

 6 nays are zero.

 7 CHAIRMAN GENSLER: Thank you, Mr.

 8 Stawick and Commissioners. Thank you, Ward and

 9 Ananda. Thank you, Ward, that we can have a

 10 little humor at your e-mail and expense and

 11 everything. But if we see somebody with orange

 12 and blue University of?

 13 MR. GRIFFIN: Florida.

 14 CHAIRMAN GENSLER: Florida, we'll know.

 15 MR. GRIFFIN: I appreciate it.

 16 CHAIRMAN GENSLER: When Mr. Stawick's

 17 wearing that bow-tie one day we'll know.

 18 So let me just see if there's any things

 19 I'm supposed to do because sometimes I ask

 20 unanimous consent at this point to allow staff to

 21 make technical corrections to documents voted on

 22 today prior to sending it to the Federal Register.
 142

 1 Sometimes that's just to make sure it's in the

 2 right format for the Federal Register. Without

 3 objection.

 4 Our next scheduled meeting is on August

 5 4th, and the subjects of the rulemaking presented

 6 at that meeting will be published at least seven

 7 days before the meeting. We had calendared a

 8 whistleblower I think for this week, but I think

 9 that we'll be looking -- hopefully, that on August

 10 4th. And we'll see what other things we can take

 11 up.

 12 I mean, we all know it because we have

 13 it front of us, but to the extent people get

 14 comments back in on the swap data repository

 15 registration rule, I think that's a very important

 16 one. A lot of market participants have actually

 17 asked for that to be early so that they could be

 18 registered and the data maybe could start to be

 19 collected in these data repositories. We have a

 20 couple of other possible ones that are all in your

 21 hands, so we'll see if seven days before the 4th

 22 we're going to do them, then we'll put them on the
 143

 1 website.

 2 And I think we have two meetings

 3 calendared for September right now.

 4 So with that I'll entertain a motion to

 5 adjourn the meeting and also congratulate -- maybe

 6 we should do a motion to congratulate Bart Chilton

 7 on becoming a grandfather, too.

 8 COMMISSIONER DUNN: So moved.

 9 CHAIRMAN GENSLER: All in favor of that?

 10 SPEAKER: Aye.

 11 CHAIRMAN GENSLER: Aye, yeah. We'll

 12 give him an official motion.

 13 On adjournment?

 14 COMMISSIONER DUNN: So moved.

 15 COMMISSIONER SOMMERS: Second.

 16 CHAIRMAN GENSLER: All in favor? Aye.

 17 GROUP: Aye.

 18 CHAIRMAN GENSLER: The Commission stands

 19 adjourned.

 20 (Whereupon, at 11:59 a.m., the

 21 PROCEEDINGS were adjourned.)

 22 * * * * *
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 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Stephen K. Garland, notary public in

 4 and for the District of Columbia, do hereby certify

 5 that the forgoing PROCEEDING was duly recorded and

 6 thereafter reduced to print under my direction;

 7 that the witnesses were sworn to tell the truth

 8 under penalty of perjury; that said transcript is a

 9 true record of the testimony given by witnesses;

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

 11 employed by any of the parties to the action in

 12 which this proceeding was called; and, furthermore,

 13 that I am not a relative or employee of any

 14 attorney or counsel employed by the parties hereto,

 15 nor financially or otherwise interested in the

 16 outcome of this action.

 17

 18

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

 20 Notary Public, in and for the District of Columbia

 21 My Commission Expires: May 31, 2014

 22