COMMODITY FUTURES TRADING COMMISSION

 SECURITIES AND EXCHANGE COMMISSION

 PUBLIC ROUNDTABLE ON

 GOVERNANCE AND CONFLICTS OF INTEREST

 IN THE CLEARING AND LISTING OF SWAPS

 Washington, D.C.

 Friday, August 20, 2010
 2

 1 PARTICIPANTS:

 2 CFTC:

 3 ANANDA RADHAKRISHNAN

 Director, Division of Clearing and Intermediary

 4 Oversight (DCIO)

 5 NANCY SCHNABEL

 Special Counsel, Division of Clearing and

 6 Intermediary Oversight (DCIO)

 7 LOIS GREGORY

 Assistant Deputy Director for Market Review

 8 Division of Market Oversight (DMO)

 9 CODY ALVAREZ

 Attorney-Advisor, Division of Market Oversight

 10 (DMO)

 11 DANA BROWN

 Law Clerk, Division of Market Oversight (DMO)

 12

 ANDREA MUSALEM

 13 Attorney-Advisor, Division of Clearing and

 Intermediary Oversight (DCIO)

 14

 JORDAN O'REGAN

 15 Attorney-Advisor, Division of Clearing and

 Intermediary Oversight (DCIO)

 16

 JOLANTA STERNHENZ

 17 Counsel, Office of the General Counsel

 18 DAVID REIFFEN

 Senior Economist, Office of the Chief Economist

 19

 SEC:

 20

 ROBERT COOK

 21 Director, Division of Trading and Markets

 22 JAMES BRIGAGLIANO

 Deputy Director, Division of Trading and Markets
 3

 1 PARTICIPANTS (CONT'D):

 2 THOMAS EADY

 Senior Policy Advisor, Division of Trading and

 3 Markets

 4 HEATHER SEIDEL

 Acting Associate Director, Division of Trading and

 5 Markets

 6 HAIMERA WORKIE

 Deputy Associate Director, Division of Trading and

 7 Markets

 8 NANCY BURKE-SANOW

 Assistant Director, Division of Trading and

 9 Markets

 10 CATHERINE MOORE

 Senior Special Counsel, Division of Trading and

 11 Markets

 12 MOLLY KIM

 Special Counsel, Division of Trading and Markets

 13

 JOSEPH KAMNIK

 14 Special Counsel, Division of Trading and Markets

 15 Panelists:

 16 Clearing Agencies/DCOs:

 17 ROGER LIDDELL

 Chief Executive Officer, LCH ClearNet Group

 18

 JONATHAN SHORT

 19 ICE Trust U.S., LLC

 20 BILL NAVIN

 Options Clearing Corporation

 21

 22
 4

 1 PARTICIPANTS (CONT'D):

 2 Exchange/Potential SEFs:

 RICK McVEY

 3 Chief Executive Officer, MarketAxess Holdings,

 Inc.

 4

 LEE OLESKY

 5 Tradeweb Markets, LLC

 6 LYNN MARTIN

 Chief Executive Officer, NYSE Euronext, Inc.

 7

 Members/Potential Members:

 8

 JEREMY BARNUM

 9 Managing Director, J.P. Morgan

 10 DAN THOMPSON

 J.P. Morgan

 11

 BILL HILL

 12 Morgan Stanley

 JASON KASTNER

 13 Vice Chairman, Swaps and Derivatives Markets

 Association

 14

 Investors/Consultants:

 15

 RICHARD PRAGER

 16 Blackrock

 17 HEATHER SLAVKIN

 AFL-CIO

 18

 Non-Industry/Academic Community:

 19

 HAL SCOTT

 20 Harvard Law School

 21 DARRELL DUFFIE

 Stanford University

 22
 5

 1 PARTICIPANTS (CONT'D):

 2 RANDY KROSZNER

 Professor of Economics, University of Chicago,

 3 Booth School of Business

 4 MICHAEL GREENBERGER

 University of Maryland

 5

 Interdealer Brokers:

 6

 SHAWN BERNARDO

 7 Tullett Prebon Americas Corp.

 8

 9 * * * * *

 10

 11

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22
 6

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

 2 (9:00 a.m.)

 3 MR. RADHAKRISHNAN: Good morning. My

 4 name is Ananda Radhakrishnan. I am the director

 5 of the Division of Clearing and Intermediary

 6 Oversight at the CFTC.

 7 I am pleased to open the Joint CFTC-SEC

 8 Public Roundtable to discuss issues related to

 9 governance and conflicts of interest in the

 10 clearing and listing of swaps and security-based

 11 swaps. This discussion this morning is divided

 12 into two panels. The first concerns types of

 13 conflicts while the second concerns possible

 14 methods for mediating conflicts. We have what we

 15 hope is a comprehensive agenda that is designed to

 16 focus a discussion.

 17 We have a distinguished group of

 18 panelists, both for Panel 1 and Panel 2, and I'd

 19 like to thank them for agreeing to participate.

 20 I'd also like to thank the staff of the

 21 SEC and the CFTC for their hard work in planning

 22 this roundtable. This roundtable is only one
 7

 1 example of the close and collaborative

 2 relationship that the staff of the CFTC has

 3 developed with the staff of the SEC, and we hope

 4 that this will continue to flourish.

 5 The Dodd-Frank Act for the first time

 6 brings over-the-counter derivatives under

 7 comprehensive regulation. It requires

 8 standardized derivatives to be traded on

 9 transparent trading platforms and to be cleared by

 10 robustly regulated central counterparties. This

 11 will greatly reduce the risk in our economy and

 12 will benefit the American public. Identifying and

 13 mitigating conflicts of interest that may impede

 14 such trading and clearing is crucial for such

 15 benefits to be achieved. Therefore, we look

 16 forward to hearing the thoughts and analyses of

 17 those on the panels. The roundtable should assist

 18 both the SEC and the CFTC in implementing the

 19 Dodd-Frank Act.

 20 Now, for the record, I wish to state

 21 that all statements and opinions that may be

 22 expressed and all questions asked by CFTC staff
 8

 1 are those of CFTC staff and do not represent that

 2 views of any commissioner or the Commission,

 3 collectively. And before I invite my colleague,

 4 Robert Cook, some housekeeping items with respect

 5 to technology.

 6 Everybody should know that the meeting

 7 is being recorded. The microphones that you have

 8 in front of you, press the button in front of you,

 9 and you'll see the red light. That means you can

 10 talk, speak directly into it. When you finish,

 11 please press the button again to turn off the

 12 microphone. And, finally, please refrain from

 13 putting any BlackBerry or cell phones on the table

 14 as they have been known to cause interference in

 15 the audio system.

 16 And now it gives me great pleasure to

 17 invite my colleague, Robert Cook, to make opening

 18 remarks. Thank you.

 19 MR. COOK: Thanks, Ananda. Good

 20 morning, I'm Robert Cook. I'm the director of the

 21 Division of Trading and Markets at the FCC, and

 22 it's my great pleasure to be here today with my
 9

 1 fellow staff members from the CFTC and the SEC.

 2 I'd like to start by thanking the CFTC

 3 and its staff for hosting and organizing the event

 4 this morning, the first in a series of roundtable

 5 discussions concerning the implementation of the

 6 Dodd-Frank Wall Street Reform and Consumer

 7 Protection Act. I'd also like to echo Ananda's

 8 comments about the very close working relationship

 9 we have between the two staffs and the great

 10 pleasure it gives me to be part of that, and I

 11 look forward to continuing to have a very

 12 productive and fruitful dialogue with them.

 13 I would also like to extend our

 14 appreciation to the panelists this morning, who

 15 are with us to share their insights, advice, and

 16 recommendations. We're truly grateful for your

 17 participation in this roundtable and for your

 18 willingness to share your views with us. Your

 19 participation today will help us as we move

 20 forward in faithfully and fully implementing the

 21 provisions of the Dodd-Frank Act.

 22 Just by way of housekeeping matters as
 10

 1 well, I will repeat the same disclaimer that

 2 Ananda just gave, that any opinions, views,

 3 questions from which opinions might be inferred or

 4 otherwise from the SEC staff reflect merely staff

 5 opinions and do not reflect the opinions of any of

 6 the Commission, of the SEC, the commissioners or

 7 any of our other colleagues on the staff of the

 8 Commission.

 9 I would also like to point out that this

 10 is not the only opportunity for interested parties

 11 to have input on these important matters. Both of

 12 the agencies have open mailboxes into which anyone

 13 from the public can submit comments and supporting

 14 materials. And they will be read through by the

 15 staff, and we very much encourage people to take

 16 advantage of that. We really want to get broad

 17 input into not only the conflicts rulemaking that

 18 we were talking about today, but all the

 19 rulemakings related to the implementation of

 20 Dodd-Frank.

 21 So with that I'll hand it back over to

 22 Ananda.
 11

 1 MR. RADHAKRISHNAN: Thanks, Robert.

 2 Before we start the panel, I'd like to go through

 3 the agenda. We have two panels. The first panel

 4 deals with types of conflicts and there are three

 5 discussion items. And I'm the designated

 6 timekeeper, so make sure that we stay on time. So

 7 between now and 9:45 we're going to talk about

 8 securities clearing agencies and derivatives

 9 clearing organizations, specifically topics

 10 relating to access to clearing, the determination

 11 of swaps are legible for clearing, and risk

 12 management.

 13 9:45 to 10:15, Security-Based Swap

 14 Execution Facilities and Swap Execution

 15 Facilities. Again the issues will be access to

 16 trading, determination of swaps eligible for

 17 trading, and the potential for competition with

 18 respect to the same swap.

 19 And then from 10:15 to 10:45, Designated

 20 Conflict Markets and National Securities Exchanges

 21 topics. That will be the listing of swaps and the

 22 comparison with conflicts of interest for swap
 12

 1 execution facilities and security-based swap

 2 execution facilities, similarities, and

 3 differences.

 4 Then we go on at 10:45 to Panel 2, which

 5 concerns possible methods for remediating

 6 conflicts.

 7 10:45 to 11:05, Ownership and Voting

 8 Limits. 11:05 to 11:25, Structural Governance

 9 Arrangements. Here the specific sub-topics will

 10 be independent or public director requirements for

 11 board and board committees, consideration of

 12 market participant views with respect to DCOs and

 13 designated contract markets, the fair

 14 representation requirement in the Securities

 15 Exchange Act, and other governance matters such as

 16 transparency.

 17 11:25 to 11:45, Substantive

 18 Requirements, Membership Standards, Impartial

 19 Access Requirements.

 20 And 11:45 to 12:00, Appropriateness of

 21 Applying the Same Methods to Each Type of Entity.

 22 And we hope to conclude the roundtable at 12
 13

 1 o'clock. You will notice there is no room for

 2 breaks, so -- and that's because of the time we

 3 have.

 4 So before we start Panel 1, I would like

 5 to invite the panelists to, you know, introduce

 6 themselves and let us know where they're from. So

 7 we'll start with Jonathan Short.

 8 MR. SHORT: Jonathan Short,

 9 Intercontinental Exchange.

 10 MR. NAVIN: Bill Navin, the Options

 11 Clearing Corporation.

 12 MR. OLESKY: Lee Olesky, Tradeweb.

 13 MR. HILL: James Hill, Morgan Stanley,

 14 on behalf of the Securities Industry and Financial

 15 Markets Association.

 16 MR. KASTNER: Jason Kastner, vice

 17 chairman, Swaps and Derivatives Market

 18 Association.

 19 MS. SLAVKIN: Heather Slavkin, AFL-CIO.

 20 MR. BERNARDO: Shawn Bernardo, Tullett

 21 Prebon, on behalf of the Wholesale Market Brokers

 22 Association.
 14

 1 MR. DeLEON: Bill DeLeon, Kinko.

 2 MR. RADHAKRISHNAN: Go ahead.

 3 MR. DUFFIE: And Darrell Duffie of

 4 Stanford University.

 5 MR. KROSZNER: And Randy Kroszner,

 6 University of Chicago, Booth School of Business.

 7 MR. SHORT: I would like to echo my

 8 thanks to all the panelists for participating here

 9 today.

 10 I would start off by asking just

 11 basically what do you see as being the primary

 12 sources of conflicts within clearing AGs and DCOs,

 13 and specifically those that clear swaps and

 14 securities-based swaps, and I open this question

 15 up to all the panelists.

 16 MR. KASTNER: Again, Jason Kastner from

 17 the SDMA. I think one of the fundamental issues

 18 which is well- addressed in the law in Section 725

 19 is the issue of fair and open access. The SDMA is

 20 a strong proponent of central clearing. We

 21 believe that anything that can be cleared should

 22 be cleared. We also believe that economic
 15

 1 interests should be set aside to mitigate systemic

 2 risk and protect the American public against

 3 further financial calamity.

 4 In order to do that, it is more

 5 efficient to bring transparency and open access

 6 and to allow more participants into the market to

 7 diversify risk. We must remember that the

 8 essential point of the Dodd-Frank Act is to

 9 address the issue of too big to fail and too

 10 interconnected to fail. And by permitting

 11 unfettered access to clearing and bringing in more

 12 participants, we address those risks and help

 13 protect the American public.

 14 MR. SHORT: I would like to share ICE's

 15 perspective on this issue. Certainly open access

 16 is an important part of the Dodd-Frank Act, but it

 17 is certainly not the primary driver of the Act. I

 18 think one of the biggest conflicts that has to be

 19 addressed here is the conflict between open access

 20 and proper risk management of the clearinghouse.

 21 And one of the things that I think has to happen

 22 is that people need to step back and consider that
 16

 1 clearinghouses are going to be the ultimate

 2 repositories for all of the systemic risk that was

 3 previously dispersed throughout the market.

 4 And one of the things that I think needs

 5 to be carefully considered is the clearinghouses'

 6 obligation to manage that risk and perhaps the

 7 limitations that have to be placed on SEFs or

 8 other market participants in their access to the

 9 clearinghouse. I'm not saying that that

 10 eviscerates open access -- it certainly doesn't --

 11 but I think there's the balance there, and the

 12 members of the clearinghouse are ultimately the

 13 parties that are underwriting this risk and

 14 responsible for it.

 15 MR. HILL: I wonder if I could just add

 16 to that. This is Jim Hill from Morgan Stanley. I

 17 think there's two parts to access: The first is

 18 we certainly agree that every customer who is

 19 transacting -- every individual and customer who's

 20 transacting in OTC derivatives should have access

 21 to a clearinghouse, should be able to clear their

 22 trades through a clearinghouse. That goes without
 17

 1 saying that's required by the law. I think

 2 everyone in this room probably agrees that that's

 3 clearly the case.

 4 But the second piece of this is who

 5 should be a clearing member. And that's where we

 6 get into the risk management issues of the

 7 systemically important clearinghouses, and the key

 8 thing that people need to think about is when once

 9 all these OTC derivatives are concentrated in the

 10 clearinghouse, what is the purpose of the

 11 clearinghouse? The purpose is if one of the

 12 clearing members were to default and become

 13 insolvent, the risk needs to be absorbed by the

 14 other clearing members.

 15 And the way that risk is absorbed is

 16 twofold. The first is the surviving clearing

 17 members put capital into the clearinghouse, so

 18 they have to have a sufficient capital base so

 19 that they can put capital into the clearinghouse

 20 in a time of crisis.

 21 And two, and perhaps even more

 22 importantly, they have to be able to absorb the
 18

 1 positions, the risk positions of the defaulting

 2 member. So, for example, if an entity like Lehman

 3 Brothers is a clearing member in the clearinghouse

 4 and it defaults, in order for the clearinghouse to

 5 remain flat risk and itself not become insolvent

 6 the risk of the OTC derivatives, the economic

 7 risk, needs to be replaced. And the way it gets

 8 replaced is the surviving clearing members enter

 9 into transactions, OTC derivatives, with the

 10 clearinghouse to replace that market risk.

 11 So not only do you need to have clearing

 12 members who have enough capital, you know, to

 13 recapitalize the clearinghouse if a member

 14 defaults, but they have to be able to keep the

 15 clearinghouse flat from an economic risk

 16 perspective, which means they have to be able to

 17 trade very large amounts of very highly complex

 18 illiquid OTC derivatives. And if they can't do

 19 that, by introducing them as a clearing member

 20 into the clearinghouse, you actually increase risk

 21 in the clearinghouse because at a time when a

 22 member is defaulting, the clearinghouse won't be
 19

 1 able to absorb the losses.

 2 And that is critical. And if we don't

 3 get that right, we end up with clearinghouses

 4 that, where all this risk is concentrated, that

 5 are inappropriately risk- managed.

 6 MR. OLESKY: Lee Olesky from Tradeweb.

 7 I guess I have a slightly different perspective

 8 I'd like to raise which has to do with a potential

 9 conflict when a clearinghouse is both a

 10 clearinghouse and also an exchange venue. As we

 11 see in the futures markets and other markets, if

 12 you have both execution and clearing, we think

 13 it's very important for there to be a competitive

 14 environment among execution venues. And in order

 15 to have that competitive environment among

 16 execution venues, that requires really equal and

 17 fair access from any execution venue into a

 18 clearing corp.

 19 So it's a slightly different slant on

 20 what everyone's been saying to this point, but

 21 from an execution venue standpoint we think it's

 22 really critical for there to be a competitive
 20

 1 environment so that we can access the central

 2 counterparties.

 3 MR. NAVIN: This is Bill Navin from OCC.

 4 MR. DeLEON: Bill DeLeon from Kinko. I

 5 think, you know, there definitely is some very

 6 good points here, and I'd like to first bring up

 7 the issue (inaudible).

 8 MS. SCHNABEL: I'm sorry, Bill, you're

 9 breaking up a little bit. Can you -- we're having

 10 some echoes. Can you make sure that there are no

 11 BlackBerrys where you are?

 12 (Interruption; speakerphone

 13 malfunction)

 14 MS. SCHNABEL: Heather, would you like

 15 to say something while we're waiting for

 16 (inaudible)?

 17 MS. SLAVKIN: Sure. What I was starting

 18 to say earlier is that I think -- I'm sorry, can

 19 you hear me now?

 20 What I was starting to say earlier is

 21 that I think in addition to the access question

 22 there's a concern generally about who owns and
 21

 1 controls the clearinghouses. If there's an

 2 interest among the people who own the

 3 clearinghouse, or a conflict of interest that

 4 would create incentives for them to also favor,

 5 you know, now allowing certain types of swaps to

 6 clear because they may be more profitable for the

 7 institution generally if they remain over the

 8 counter, then that can create perverse incentives

 9 to maintain the over-the-counter, nontransparent,

 10 systemically risky markets when the goal needs to

 11 be to prevent those conflicts of interest to

 12 ensure that anything that can be cleared does, in

 13 fact, clear.

 14 MR. HILL: I wonder if I could respond

 15 to that. I think there's a bit of a misconception

 16 that somehow clearing makes trades less

 17 profitable. That's clearly not the case. In

 18 fact, I think most of the large systemically

 19 important participants in this market prefer

 20 clearing. And I think that's not just a

 21 statement; there is significant anecdotal evidence

 22 to support that perhaps the most important of
 22

 1 which is LCH.

 2 LCH is one of the main clearinghouses

 3 for interest rate derivatives. It was founded, at

 4 least with respect to interest rate swaps, over I

 5 think it was nine or ten years ago. They're

 6 currently clearing $230 trillion of interest rate

 7 swaps. There was no law that required LCH, you

 8 know, for people to use LCH for clearing. There

 9 was never regulatory encouragement or mandate of

 10 any sort; it was formed by consortium of dealers

 11 to mitigate the counterparty risk. And it was

 12 done because from an economic perspective it was

 13 deemed to be prudent as well as risk reducing, and

 14 to suggest, then, somehow that people, that

 15 dealers purposefully created LCH 10 years ago to

 16 reduce their own profits doesn't really make

 17 sense. It was reduced to -- it was introduced to

 18 reduce risk.

 19 And so, and as I said, you know, it's

 20 clearing currently $230 trillion of interest rate

 21 swaps, so it's hard to imagine why that would have

 22 happened if it actually reduced profits.
 23

 1 MR. DUFFIE: This is Darrell. Can I

 2 follow up on that, please?

 3 MR. HILL: Please.

 4 MR. DUFFIE: I agree with the idea that

 5 incentives are already aligned for a large amount

 6 of clearing. And as we attempt to get more

 7 counterparty exposures cleared, the issue arises

 8 of conflicts over what types of financial products

 9 must be cleared. The interest rate swaps is a

 10 good example of where regulatory pressure is not

 11 needed. As we move into additional products or

 12 more types of interest rate products, there are

 13 two approaches. One that's been suggested for

 14 Europe is for regulators to define what products

 15 will be standardized and cleared.

 16 Another approach which I would advocate

 17 in order to reduce conflicts of interest and

 18 maintain the incentives that were just described

 19 is to increase the pressure for more clearing in

 20 general and allow the market participants to

 21 decide what particular products to clear. That's

 22 important because there's, if regulators should
 24

 1 make a mistake in their best efforts and define

 2 products for clearing that are not appropriate,

 3 first of all not enough clearing will occur, and,

 4 secondly, there will be some spurious

 5 customization of products that's designed to avoid

 6 the clearing of products that are not economical

 7 for markets to clear.

 8 So I would advocate to use the capital

 9 requirements and collateral requirements to

 10 encourage more clearing rather than defining what

 11 specific products must be cleared.

 12 MR. BERNARDO: Shawn Bernardo on behalf

 13 of the Wholesale Markets Association. I'd like to

 14 echo what Lee Olesky said, which is that we've

 15 seen entities or exchanges that have both

 16 execution and clearing, that it's not just a

 17 concern, but we've actual experience where you

 18 don't have fair and open access to the clearing

 19 and in the space that we're in, which is the

 20 execution of SEFs, if we don't have fair and open

 21 access to that clearing, it's a concern and it

 22 creates an issue for us moving forward.
 25

 1 MR. NAVIN: Bill Navin from OCC. Our

 2 model is one that does provide equal access from

 3 execution venues to the clearinghouse. While our

 4 stock is owned by Exchanges, we're controlled by

 5 the Street. Nine of our 16 directors are drawn

 6 from our clearing members, and over the last

 7 nearly 40 years we found that that's been a

 8 successful model.

 9 I think it's important that, while there

 10 are certainly conflicts of interest that need to

 11 be taken into account, at the end of the day,

 12 effectively the capital of the clearinghouse is

 13 supplied by the membership, and the risk is borne

 14 out by the membership. And, therefore, it seems

 15 to us only fair that the membership should have an

 16 active role in determining how that risk gets

 17 managed.

 18 MR. KASTNER: Jason Kastner again from

 19 the SDMA. I'd like to opine, if I may, on

 20 something that Jim Hill discussed with regards to

 21 the LCH. The LCH is a closed system. It requires

 22 that one have not only $5 billion of net capital
 26

 1 but $1 trillion if swaps already cleared.

 2 Now, how does one join a clearinghouse

 3 if they require that you already have cleared $1

 4 trillion of swaps? So the idea is again to bring

 5 more members, qualified members, well-capitalized

 6 members. But allow me to take an example of a

 7 very large clearing bank that clears $21 trillion

 8 of treasuries who is not allowed to become a

 9 clearing member of the LCH, one of our member

 10 firms.

 11 Now, if we're going to be really clever

 12 about keeping people out of the system, the system

 13 is not going to work effectively. We're going to

 14 have the same OTC style, bilateral, closed,

 15 untransparent, opaque, risky system. And what we

 16 need to do is allow more entrants to diversify

 17 risk, address too big to fail and too

 18 interconnected to fail.

 19 Secondly, I'd like to also say that it's

 20 not only about membership of a clearinghouse; it's

 21 about access to clearing services as a sort of

 22 introducing broker. So one of the other tenets of
 27

 1 the LCH is that one must, to be a party to a

 2 trade, one must be a clearing member of the LCH.

 3 And what we would support at the SDMA is a system

 4 whereby a member firm of the SDMA could use an LCH

 5 member firm as their sort of SCM, Swap Clearing

 6 Member, but actually take the execution risk,

 7 because there's a difference here between

 8 execution and clearing. And by time, inexorably,

 9 we're not addressing the issue of systemic risk.

 10 MS. SCHNABEL: I have a quick question.

 11 I think one of the key issues that we've

 12 identified so far is the balance between open

 13 access and risk management, and to play off what

 14 Jason has just said about LCH and the requirements

 15 to become a clearing member such as $5 billion in

 16 capital and $1 trillion in transactions cleared, I

 17 was wondering, I guess, how is the balance struck

 18 currently between open access and risk management?

 19 Because I was wondering if anybody can have a

 20 perspective on how these requirements came about.

 21 I mean, why would $5 billion be necessary for risk

 22 management, or $1 trillion in transactions
 28

 1 cleared?

 2 MR. HILL: I don't want to speak to any

 3 specific clearinghouse because I'm not sort of

 4 intimately familiar with any of the very detailed

 5 rules of each of the clearinghouses. But, I mean,

 6 as -- again, as a general rule, the clearing

 7 member needs to be able to absorb losses, a

 8 default by another clearing member, number one;

 9 and, number two, they need to be able to absorb

 10 the economic transaction risk in the portfolio of

 11 a defaulting member.

 12 And so the way these clearinghouses set

 13 up their risk, you know, their admission or their

 14 membership criteria, is both of those things. So,

 15 A, they have to have a capital base sufficient to

 16 absorb losses and add in more capital to the

 17 clearinghouse if a member defaults. And B, they

 18 have to be able to in a situation where a clearing

 19 member has defaulted, which is probably the time

 20 of most economic stress, you know, in the economy,

 21 be able to take down the economic transaction risk

 22 of the swaps that were otherwise, the defaulting
 29

 1 member was otherwise a party to, those trades need

 2 to be allocated among the surviving clearing

 3 members.

 4 And so the way these clearinghouses

 5 developed their criteria is they look at both of

 6 those prongs and they set thresholds to make sure

 7 that the members who are admitted can do those

 8 things. Because, remember, if you admit a member

 9 who can't do both of those things, then what

 10 happens is the clearinghouse will have

 11 insufficient capital in a situation where a member

 12 has defaulted, which is the time of the highest

 13 economic stress.

 14 And so I mean perhaps, you know, a panel

 15 of the sort of risk managers of each of the major

 16 clearinghouses would be able to address that more

 17 specifically. But I think ultimately that's the

 18 framework on which they make decisions.

 19 MR. RADHAKRISHNAN: Now, I know Randy

 20 Kroszner was trying to make a point earlier on,

 21 and it's audio issues.

 22 Randy, can you hear us, and would you
 30

 1 like to make your point again?

 2 MR. KROSZNER: I'm having difficulty

 3 hearing you, and so I apologize on that. Can you

 4 hear me?

 5 MR. RADHAKRISHNAN: Yes, we can. Thank

 6 you.

 7 MR. KROSZNER: Okay, great. Well, first

 8 I wanted to underscore what Darrell Duffie had

 9 said. I think that in terms of thinking about the

 10 determination of what's possibly eligible for

 11 clearing, we want to think about giving strong

 12 incentives through cap requirements, collateral

 13 requirements, but not necessarily mandating each

 14 individual -- contracting each individual product.

 15 On the -- with the conflict of interest

 16 that you're talking about of being really getting

 17 to the heart of the issues that clearinghouses

 18 have been struggling with since they started to

 19 function as the guarantors of the contracts back

 20 in the late 19th century of getting the balance

 21 right between having access -- well, a combination

 22 of having access and having clearing members,
 31

 1 making sure that there are enough members, making

 2 sure there's enough trading and drawing things off

 3 the Exchange, but also ensuring that those members

 4 have the wherewithal to withstand the shocks to

 5 make the clearinghouse something that will reduce

 6 system risk, reduce interconnectedness rather than

 7 increase it.

 8 And so I think these are exactly the

 9 very questions to be focusing on. Unfortunately,

 10 I couldn't hear a little bit of some of the

 11 specifics, so is there something in particularly

 12 you wanted me to comment on?

 13 MR. RADHAKRISHNAN: No. One of the

 14 questions that was asked -- I don't know if you

 15 heard it -- was how do you find the balance

 16 between open access, fair access, and the desire

 17 for the risk management considerations: One, are

 18 decisions being made purely on risk management

 19 reasons and not, you know, anti-competitive or

 20 pro-competitive reasons? So how do you find the

 21 balance?

 22 And one of the issues is, if you have a clearinghouse,
 32

 1 if I understand the discussion, if you have a

 2 clearinghouse that's dominated by a group of people --

 3 I won't tell you who they are, but dominated by a

 4 group of people -- does that achieve the objective of

 5 fair and open access, or -- well, I guess the question

 6 is which should prevail? Ideally, both should

 7 prevail, but, you know, that you avoid conflict of

 8 interest but at the same time you make sure that all

 9 decisions are being made by the clearinghouse

 10 according to its risk management.

 11 So if you care to share your thoughts with us on that,

 12 we'd appreciate it.

 13 MR. KROSZNER: The law is very clear on

 14 what should prevail. It is rife within the law

 15 open access, fair, open, unfettered access,

 16 transparency. Risk management is better done in a

 17 default scenario if there are more members

 18 participating in an auction. And to say that an

 19 SDMA member firm that that clears $21 trillion of

 20 treasuries is somehow ineligible or unqualified to

 21 be a member of whatever clearinghouse is not

 22 addressing the issues properly.
 33

 1 And I would also like to point out

 2 Section 731 on page 342 of the Dodd-Frank Act

 3 which discusses this issue in a different way in

 4 regards to conflicts of interest right after Risk

 5 Management Procedures. It requires that banks

 6 establish structural and institutional safeguards

 7 and supervisory barriers and informational

 8 partitions between those who trade and those who

 9 provide clearing services.

 10 So this is what we call in the SDMAs

 11 "the Chinese Wall provision." This is a very good

 12 provision because it goes directly to this issue

 13 of the conflict between trading and clearing.

 14 Because, currently, annually, there's estimated to

 15 be about 3- to $500 million made clearing, and

 16 there are between 40- and $60 billion being made

 17 trading. So this discussion of clearing and

 18 access to clearing is really just a proxy about

 19 access to trading, because that's where the

 20 revenues are. And the law is clear: Open access

 21 is the fundamental principle.

 22 MR. RADHAKRISHNAN: And keep in mind if
 34

 1 you have a --

 2 MR. DeLEON: This is Bill DeLeon, can

 3 you hear me?

 4 MR. RADHAKRISHNAN: Yes. Yes, yes.

 5 SPEAKER: Say, can you let Bill speak

 6 first, just because he was cut off earlier?

 7 MR. DeLEON: Thank you very much. I

 8 find all this very interesting and there's some

 9 very good points here. In terms of, you know,

 10 (inaudible) to you and sort of concerns in

 11 general, I think it's important to separate

 12 clearing and access to clearing and what it

 13 represents in terms of (inaudible) risk.

 14 Our view has been that clearing should

 15 be viewed as a utility where all members who use

 16 it have access to clear as well as to reduce

 17 systemic risk. And in order to reduce systemic

 18 risk, the member or firms who are supporting the

 19 Exchange or the clearing mechanisms need to be

 20 able to have sufficient capital. And it's

 21 important to note that sufficient capital to

 22 support is not -- come out of this with clearing
 35

 1 trade. It means actual capital is being

 2 supported. And whatever, you know, that view is

 3 the important differentiation because the

 4 mechanism where the trades are cleared has to be

 5 sufficiently strong and risk managed such that

 6 when you look at the members backing the Exchange,

 7 you're comfortable that both the member you're

 8 using for clearing as well as the overall clearing

 9 mechanism have sufficient capital to withstand a

 10 default by either a member or by a user of it.

 11 So this is the important thing, is we

 12 view it as a utility function with correct risk

 13 management need. Who becomes a member should be a

 14 function of being able to provide the capital and

 15 support a member default because, ultimately,

 16 there is still commingled counterparty risk going

 17 on. And that is the important differentiation,

 18 you know. I, personally, wouldn't want to see,

 19 you know, anyone on this as a personal clearing

 20 member because I don't think anyone personally has

 21 enough capital to go in. But their firm, it's a

 22 question of how much capital they have when they
 36

 1 go in to support. There shouldn't be a club or a

 2 group, it's the utility, so I think that's

 3 important.

 4 And then to the clearing and the trading

 5 execution, I think that's a very important thing,

 6 And I know that one of the later panels is going

 7 to talk about transparency and that information.

 8 But I think it's very important to separate the

 9 two things of clearing versus trade execution.

 10 What's the most important thing from our

 11 standpoint is that the trades get done, and once

 12 they're done that they'd be able to be cleared.

 13 That is how you mitigate risk is getting the

 14 trades turned into a TCP where there is risk

 15 management and there is sharing and margining, and

 16 it's been moved into a utility function as opposed

 17 to the opaque bilateral agreement whereby no one

 18 -- you know, only regulators can sort of figure

 19 out what's going in after the fact.

 20 So those are sort of our big things.

 21 And I think that the risk management and ability

 22 of the Exchange to -- or the CCP to handle and
 37

 1 have members who can support the capital is the

 2 important thing.

 3 MR. RADHAKRISHNAN: Shawn, you have a

 4 response?

 5 MR. BERNARDO: I just wanted to point

 6 out again that if you have a clearing firm that

 7 charges fees for that clearing and then you have

 8 that same clearing firm has an execution venue

 9 that competes in the interdeal broker space, which

 10 is what we do, or as which is we create and we

 11 operate fair open access to our markets, it's

 12 transparent, and we charge a fee for what we do,

 13 that clearing firm cam who's also executing or

 14 allowing people to execute on their trading venue,

 15 not charge a commission. Basically, which you

 16 would not create a competitive or force a

 17 competitive atmosphere with what we're doing, and

 18 at some point in the future turn that commission

 19 back on for the execution.

 20 So you can execute now on our platforms

 21 and compete, whereas a clearing firm can turn

 22 around and say, okay, we're not going to charge
 38

 1 for execution, we're just going to charge for

 2 clearing. So that open access is, it's just not

 3 there. It's --

 4 MR. RADHAKRISHNAN: It doesn't mean --

 5 MR. BERNARDO: A competitive and fair

 6 environment.

 7 MR. WORKIE: I'm sorry, Dodd-Frank asks

 8 us to think about restrictions with respect to

 9 swap participants, major swap participants, bank

 10 holding companies and nonbank financial

 11 institutions, and when we're thinking about

 12 conflicts and potential restrictions, how should

 13 we think about them, either collectively within

 14 that group, or individually within those

 15 subgroups?

 16 And just as a follow-up, does it make a

 17 difference if there are actually numbers of the

 18 clearing agency or DCO, or not when we think about

 19 these conflicts? And I imagine it would, but just

 20 I'd like some opinions on that.

 21 MR. KASTNER: Well, I would refer you to

 22 Section 726 where it's sort of -- I call it Lynch
 39

 1 Light. You know, it was the Lynch amendment that

 2 now the Commission is to take under consideration

 3 certain ownership and control restrictions in

 4 DCOs. And I would say that the SDMA strongly

 5 supports restrictions on ownership and

 6 restrictions on control in DCOs, and the reason

 7 why is because if you have a club which is closed

 8 which controls not only what goes into the

 9 clearinghouse but who can become a member of it,

 10 it doesn't address the issues of too big to fail

 11 and too interconnected to fail.

 12 So I would strongly suggest and highly

 13 recommend that well the Commission considers the

 14 implementation over the next 180 days of Section

 15 726, that they do move forward and impose

 16 restrictions because, if they're not, there is a

 17 real risk that we're going to end up right back

 18 where we started again.

 19 MS. GREGORY: I have a question. What

 20 types of conflicts -- oh, I'm sorry. Okay.

 21 What types of conflicts of interest have

 22 arisen, or made potentially arise, in the
 40

 1 operation of a DCO with respect to determining

 2 which swaps are eligible for clearing?

 3 MS. SCHNABEL: I believe that Heather

 4 spoke a little bit about that, but we would like

 5 to, you know, if you could just expound.

 6 MS. SLAVKIN: I think that there's the

 7 risk that anything that could be made to appear to

 8 be something that is a bilaterally contract, you

 9 could have the spurious customization issues, if

 10 there's the opportunity to get additional profits

 11 within the big dealer banks, and those same dealer

 12 banks are running and controlling the

 13 clearinghouses, then, you know, the potential for

 14 spurious customization becomes a real issue and

 15 becomes a possibility.

 16 MS. GREGORY: So that's --

 17 MS. SCHNABEL: Sorry. Multiple times, I

 18 think I've heard concerns raised about the

 19 potential tying of execution and clearing. And I

 20 guess one concern that I've heard and maybe

 21 somebody can address it or speak more to it, is

 22 that with respect to clearing, I mean, the
 41

 1 clearinghouses would determine what swaps would be

 2 cleared and then, because of Dodd-Frank, the

 3 clearinghouse -- I mean the swaps that would be

 4 determined could be cleared, maybe listed on a SEF

 5 or a DCO.

 6 And so it seems as if, perhaps, the

 7 circumstances surrounding clearing now may be

 8 slightly different than what have previously

 9 happened when LCH was first formed, for instance

 10 by the interdealer banks, and I was wondering if

 11 somebody can speak more to perhaps the shifted

 12 circumstances between then and now and what the

 13 incentives and what the conflicts of interest are

 14 for eligibility of clearing.

 15 MR. HILL: Yeah, we -- it is our view

 16 that -- and I think Dodd-Frank requires this --

 17 that clearinghouses be agnostic as to where they

 18 accept trades from, so clearinghouses should be

 19 open to any SEF. You know, we believe there will

 20 be multiple SEFs in the marketplace from, you

 21 know, for multiple products, and the

 22 clearinghouses should accept trades from multiple
 42

 1 SEFs which is consistent with the statute's goal

 2 of increasing clearing. And we also believe that

 3 SEFs should be clearing agnostic as well, meaning

 4 that SEF should feed in, you know, should be

 5 allowed to -- should be set up so as to allow the

 6 people using the SEF to choose which clearinghouse

 7 they want to go to.

 8 So that clearinghouses should be

 9 agnostic and the SEFs, themselves, should be

 10 agnostic. That will, without question, ensure

 11 that the maximum amount of clearing that can occur

 12 will occur.

 13 Going back to the point about who should

 14 decide what gets cleared, I want to emphasize

 15 that. I don't think the assumption that somehow

 16 clearing hurts profits is correct. I just don't

 17 think that's correct, and I haven't really heard

 18 any explanation as to why people think that. But,

 19 more importantly, again the members of the

 20 clearinghouse -- and we believe anybody who has

 21 the capital and the expertise to evaluation risk

 22 should be allowed to be a member, so we share that
 43

 1 view with, you know, some of the other members

 2 here.

 3 But in terms of whether or not those

 4 clearing members should have a say in what gets

 5 cleared, the key I think for people to remember is

 6 that the clearing members themselves are the ones

 7 who capitalize the clearinghouse.

 8 So with respect to all the

 9 clearinghouses that are out there for OTC

 10 derivatives, the clearing members have the

 11 overwhelming preponderance of capital in the

 12 entity. So, for example, XYZ clearinghouse, the

 13 clearing members may have put in $5 billion. The

 14 clearinghouse itself probably has about, you know,

 15 20- to $50 million. So the overwhelming

 16 preponderance of capital in the clearinghouse is

 17 put up by the clearing members.

 18 In evaluating what trades should be

 19 cleared, there's a balance that needs to be struck

 20 between the goal of increasing clearing,

 21 obviously, but, B, you don't want to put trades in

 22 the clearinghouse that can't be appropriately
 44

 1 risk-managed. So if you put trades in the

 2 clearinghouse that are illiquid and can't be

 3 valued properly, what will happen is when a

 4 clearing member defaults, there will be

 5 insufficient collateral with respect to that trade

 6 because it wasn't properly valued in the

 7 clearinghouse, and the surviving clearing members

 8 will be stressed from an economic perspective in

 9 taking positions the value of which cannot be

 10 readily ascertained.

 11 So it's critical that only trades that

 12 can be appropriately risk-managed be put into the

 13 clearinghouse. And I think what you'll see is

 14 that most of the clearinghouses look to their

 15 clearing members to help them valuate which trades

 16 are appropriate from a clearing perspective, and

 17 that is completely consistent with the economic

 18 incentives because the clearing members are the

 19 ones who have the overwhelming preponderance of

 20 the capital in the clearinghouse. So it's their

 21 capital that's at risk. They should certainly

 22 have a say in helping the clearinghouse evaluate
 45

 1 which trades are acceptable for clearing and which

 2 trades are too risky or can't be valued, or are

 3 too illiquid or not standardized and, therefore,

 4 shouldn't be cleared.

 5 MS. SCHNABEL: James, I have a quick

 6 question. When you say that it's the capital of

 7 the clearing members that are at risk, do you make

 8 a differentiation between margin and default fund?

 9 MR. HILL: I'm speaking of the default

 10 fund when I say that.

 11 MS. SCHNABEL: Okay, so margin is still

 12 the first line of defense, and that, you know, can

 13 be provided by customers as well?

 14 MR. HILL: Correct. But when, in a

 15 situation where a clearing member is defaulting

 16 and markets are illiquid, if the margin is

 17 insufficient, then you look to the default fund to

 18 make sure the clearinghouse stays solvent.

 19 MS. SCHNABEL: Jonathan and Bill, sorry,

 20 just a quick question. I mean from your

 21 experience in clearing, how many times have a

 22 default -- or has a default caused access to the
 46

 1 default fund, do you know?

 2 MR. OLESKY: In our case, once back in

 3 1987, and it was for a relatively trivial amount

 4 but it's something that you always have to be

 5 concerned about. And when you're talking -- we

 6 clear Exchange-traded products that are relatively

 7 liquid. I think when you start talking about

 8 over-the-counter products that can be complex and

 9 relatively illiquid, then you have to worry more

 10 about whether your margining system properly

 11 values them, and you have to be more concerned, I

 12 think, that you may need to have access at some

 13 point to your default fund.

 14 And I second Mr. Hill's comments. I

 15 think that it's very important that the people who

 16 bear the risk and supply the capital should have a

 17 substantial voice in how that risk gets managed,

 18 and that includes what contracts are accepted for

 19 clearing.

 20 MR. KASTNER: May I please, upon --

 21 first of all, allow me to address something that

 22 Jim said. He keeps saying that, you know, there's
 47

 1 no money to be lost here, that clearing doesn't --

 2 you know, there's no economic disincentive to

 3 preclude membership or keep things out of the

 4 clearinghouse, and again it's not about clearing;

 5 it's about execution. If you look at the BIS, 96

 6 percent of the swap market is executed by the

 7 largest 10 banks. I think they call that an

 8 oligopoly. And the notion is if you introduce

 9 more competition into that 40 to 60 billion

 10 dollars which are at risk or being earned by

 11 execution, that's where the pushing and shoving

 12 begins. It's not about clearing per se; it's

 13 about competition for execution in interest rate

 14 swaps and CDS.

 15 And allow me to make one other point.

 16 The problem with the clearinghouse is not when

 17 your smallest clearing member fails. The problem

 18 with the clearinghouse is when your highly

 19 interconnected, large, same guys are in the room

 20 and the top three of them go. That's when you

 21 have a problem with the clearinghouse. So, the

 22 notion somehow that you should restrict
 48

 1 arbitrarily membership to a clearinghouse such

 2 that you have more connected, larger, systemically

 3 important institutions who are highly correlated

 4 is patently wrong.

 5 And I would also say, in specific

 6 response to the question before about a specific

 7 example, single-name CDS is a good example about

 8 how something that could be cleared and should be

 9 cleared could be viewed in an overly complex way

 10 such that somehow it would be precluded, and I

 11 think one of the main reasons that we passed the

 12 Dodd-Frank Act was to deal with risk in the CDS

 13 market.

 14 MR. HILL: Okay --

 15 MR. KASTNER: And I'll conclude.

 16 MR. HILL: Can I just address -- we have

 17 started clearing single-name CDS, and I think

 18 highlighting single- name CDS might be a useful

 19 example for thinking about what can and can't be

 20 cleared. Looking at it simplistically, we should

 21 say, well, single-name CDS is standardized. It's

 22 all the same, so we should clear all single-name
 49

 1 CDS. And this is the issue we struggle with from

 2 a risk-management perspective. Single-name CDS on

 3 a very liquid U.S. Corporation that trades, you

 4 know, in the hundreds of millions every day --

 5 true, that can be cleared, and it is starting to

 6 be cleared, because it can be valued by multiple

 7 market participants. Single-name CDS on a highly

 8 illiquid Latin American sovereign, which is only

 9 traded by two entities and only trades maybe once

 10 a month in $10 million clips -- they're both

 11 single-name default swaps; they're both completely

 12 standardized; one is extremely liquid and easy to

 13 value; one is completely illiquid and extremely

 14 difficult to value. The one that's liquid and

 15 easy to value should be cleared. The one's that's

 16 illiquid and can't be valued or very difficult to

 17 value should not be cleared. They're both single

 18 name CDS.

 19 And so I think using -- you know, the

 20 point of single-name CDS highlights the

 21 risk-management issue here. It's easy for someone

 22 to say, who doesn't trade the product, single-name
 50

 1 CDS should be cleared; it's the same; it's all

 2 standard; let's clear it. You have to understand

 3 the risk of each individual contract, be able to

 4 value it, be able to trade it, and be able to set

 5 margin levels for it to decide whether it can be

 6 cleared. And that's critical. And if we don't

 7 get this right, we're centralizing all this risk

 8 in the clearinghouses. They will become the next

 9 too big to fail, and we don't want to do that.

 10 These have to be risk-managed correctly, and you

 11 need clearing members who understand the risk.

 12 So we, again, are for complete open

 13 access to clearing membership in any clearinghouse

 14 as long as you have the capital to support it and

 15 as long as you have the risk-management tools to

 16 evaluate the risk of the products that are being

 17 cleared.

 18 With that, we are absolutely for that

 19 kind of open access. From our perspective, the

 20 more clearing members that are in a clearinghouse

 21 who understand the risk who want to neutralize the

 22 risk, that is better for us. That takes risk away
 51

 1 from us.

 2 MR. RADHAKRISHNAN: Okay, we've got to

 3 go on to the next topic, so I don't mean to cut

 4 off the discussion, but we've got an aggressive

 5 time schedule, so we want to make sure that all

 6 the topics get discussed. But people are free to

 7 send us their comments in writing, and I urge you

 8 to do so and, you know, I think if you look at the

 9 Federal Register at least, it will tell you how

 10 you can send it in writing, but please do so.

 11 So, now we're going to go on to swap

 12 execution facilities, both security-based and

 13 non-security-based -- and Cody.

 14 MR. ALVAREZ: This is a non-dimension.

 15 We're going to discuss swap execution facilities,

 16 and specifically we'd like to again speak about

 17 the conflicts of interest related to two points:

 18 Permitting access and determining which swaps are

 19 eligible for trading on the swap execution

 20 facility.

 21 MS. SCHNABEL: And I think we talked a

 22 little about this previously. We're interested in
 52

 1 hearing more about vertical integration.

 2 MS. SEIDEL: And also I would sort of,

 3 in this discussion as well, when you're sort of

 4 talking about conflicts of interest in the SEF or

 5 the security-based SEF space, in light of the

 6 structure of the Dodd-Frank Act where if a product

 7 is cleared then it is traded to sort of speaking

 8 of potential conflicts in light of the structure

 9 put in place by the Act.

 10 MS. SCHNABEL: We're going to go down

 11 the line if no one volunteers.

 12 MR. KASTNER: I'll take the ball for a

 13 second with the SEFs.

 14 The same principles that apply to DCOs

 15 in terms of open access -- also if you carefully

 16 apply to SEFs, anybody who is able to get a

 17 clearing account at a qualified swap clearing

 18 member or FCM to use the, you know, futures

 19 analog, anybody that wants to trade on a SEF, the

 20 SEF should not have any barriers to entry. So, in

 21 other words, just like the futures markets, if

 22 you've got enough money in your margin account to
 53

 1 go along with wheat because you have an opinion

 2 about the Russian wheat harvest, similarly, if you

 3 have an opinion about the direction of CDS or, you

 4 know, an interest rate movement and you're

 5 properly margined with a qualified swap clearing

 6 member, you should have access. And, again, it's

 7 about too big to fail and too interconnected to

 8 fail. So, it's about bringing in greater

 9 transparency and more participants in the market.

 10 MR. OLESKY: I would agree with that. I

 11 think I could speak from our own experience. We

 12 have thousands of clients that are on our system,

 13 and we have unbiased access rules that apply that

 14 just set up certain standards that we need to have

 15 as a business to maintain the integrity of our

 16 business. So, I think there are, at a minimum,

 17 certain standards that you need to have. They

 18 should be impartial; they should be unbiased; and

 19 they should be transparent. And there are, in

 20 fact, for example, in our markets the Treasury

 21 market, for example, which is not the subject of

 22 this discussion, where we have standards for
 54

 1 liquidity providers to be primary dealers as

 2 designated by the Fed. And the reason we have

 3 those standards is that the thousands of

 4 institutions that trade U.S. Treasuries around the

 5 world when they come on to Tradeweb, they want to

 6 know for certain that they're going to be able to

 7 access the liquidity that is part of the

 8 relationship that those primary dealers have with

 9 those customers. So, at least on our system we're

 10 open with out standards. We have over 40

 11 liquidity providers around the world and several

 12 thousand takers of liquidity, but we do have

 13 certain access criteria that we apply that we're

 14 transparent with in order to support the integrity

 15 of the system and to continue, frankly, to have

 16 clients come to our system to access liquidity and

 17 use us as a commercial entity.

 18 MR. HILL: We share the views expressed

 19 that, you know, anyone who wants access to trading

 20 should have access to a SEF. I mean, I think that

 21 goes without saying. The more trading the better

 22 as far as we're concerned. We also think there
 55

 1 should be multiple SEFs. We think the statute

 2 allows the CFTC and the FTC to define SEFs, to

 3 allow for different types of SEFs that act

 4 differently and can be, you know, customized for

 5 the types of users who want to use that SEF, so we

 6 think that there should be multiple SEFs. There

 7 should be multiple formats, you know, among those

 8 SEFs, and whoever wants access to trading should

 9 have access to trading. We don't think there

 10 should be any barriers.

 11 MR. SHORT: I think I'd just like to

 12 point out some of the interconnected issues here,

 13 and one thing we haven't really defined is what

 14 exactly is a SEF, and I agree with most of what my

 15 co-panelists have said about having proper access

 16 to SEF, but I think with SEFs I think one thing

 17 that has to be considered is what is a SEF and how

 18 are these new forms of trading entities going to

 19 discharge the core principles that they are

 20 charged with discharging, and I think that in turn

 21 feeds in to this question about which SEFs can

 22 hook to the clearinghouse, so I think there are a
 56

 1 lot of questions that still need to be answered

 2 before you can get to the conflicts question.

 3 MR. DeLEON: This is Bill at PIMCO. You

 4 know, that concept of using a SEF, I think it

 5 should be free and open access. I agree with the

 6 panel as well. The issue is that there needs to

 7 be a guarantee that when you access a SEF, that

 8 when you do a trade, that there is someone who is

 9 guarantee that that is a good trade. So whether

 10 that means that there's a market maker, sort of

 11 someone to (inaudible) that facility, or if that

 12 means that there's a DCM or an FCM or someone

 13 who's going to guarantee that they're going to

 14 stand behind force of unknown clients. As you see

 15 in the current futures market, we can trade

 16 anonymously and to a position that you go till

 17 you're clear. We're a different -- need to know

 18 that when you access or think there's a market

 19 will work and you'll multiple SEF and the market

 20 will behave quite well. If you have a situation

 21 where when you pick up the phone, do an SEF, you

 22 do a trade, you know which one to be a good trade
 57

 1 because there's going to be someone who ensured

 2 that there's another side of the counterparty that

 3 stands into it, and then there's a good, clean

 4 mechanism to get that trade given up into a CCP

 5 for clearing. And the market should work very

 6 well, and you could have situations where there

 7 are quite a few SEFs and a limited number of CCPs.

 8 MR. COOK: There seems to be a consensus

 9 that open access to a SEF is a good thing. I

 10 think the issue we need to struggle with is how do

 11 we make sure that happens and what are the

 12 potential conflicts that we need to anticipate and

 13 prevent in order to ensure that there is open

 14 access, and going back to a statute again, we

 15 meant to consider potential rules governing

 16 ownership and voting and control of a SEF by

 17 particular types of parties in order to ensure

 18 that outcome. So, it would be helpful if we could

 19 hear what should we be worried about here if our

 20 goal is open access? What types of conflicts do

 21 we need to try to anticipate and prevent against

 22 happening? And are there differences in the types
 58

 1 of pressures that those particular parties

 2 mentioned in the statutes while participants, bank

 3 holding companies, et cetera, should we think of

 4 them differently or are they all just one cup of

 5 kind of just homogenous types of entities that we

 6 should treat the same?

 7 MR. KASTNER: Robert, let me try to

 8 highlight a couple of the issues here which

 9 address somewhat open access and ownership but

 10 also one of the main issues. If you look at the

 11 progress of the legislation into the final hours

 12 was the notion that a SEF may operate by any means

 13 of interstate commerce. A previous version of the

 14 Bill required electronic trading, and so the issue

 15 is can you trade swaps with two paper cups and a

 16 string and carrier pigeons, or is it required that

 17 they be on a screen, an electronic screen?

 18 And another issue is should you have a

 19 request for quote model or should you have a fully

 20 disintermediated market where anybody can join any

 21 bid and offer and anybody can participate in an

 22 open way?
 59

 1 And I would draw your attention to page

 2 345 of the Act where it discusses rule

 3 construction, and it says the goal of the section

 4 is to promote the trading of swaps on swap

 5 execution facilities and to promote pre-trade

 6 price transparency. Now, the only way that you

 7 can have pre- trade price transparency is if it's

 8 on a screen and everyone can see it ahead of time.

 9 So, I think that's one of the main issues as you

 10 are thinking about the definition of the SEF and

 11 rule construction and electronic versus, you know,

 12 carrier pigeon when you think about requests for

 13 quote versus disintermediated market that you need

 14 to consider.

 15 MS. SLAVKIN: Another issue I think

 16 arises in this context is the question of the

 17 timeliness of information received by various

 18 players in the market. I understand that the SEC

 19 has probably been looking at the issue of

 20 collocation with regard to the exchanges, and I

 21 see this is a potential issue that could arise as

 22 well in the context of the SEFs, and I think it's
 60

 1 important as you guys consider potential conflicts

 2 of interest to also consider who's getting what

 3 information, when they're receiving it, and what

 4 they can do with that information once they

 5 receive it.

 6 MR. OLESKY: If I could just quickly hit

 7 on the point Mr. Cook made -- or the question --

 8 about conflicts of interest and how they relate to

 9 ownership or governance, try and respond to what

 10 you were -- part of your question.

 11 I think it's really important to

 12 recognize -- for all of us to recognize -- that

 13 market participants really engender many market

 14 facilities. And in my experience in the

 15 investment of capital and the knowledge about a

 16 particular space has led directly to innovations

 17 and advances both with Tradeweb and another

 18 company I was with, BrokerTech; exchanges;

 19 clearing corps. If you go back in history, those

 20 are the folks that have the capital to support

 21 this innovation and the knowledge and experience

 22 to move it forward. And while it's easy to sort
 61

 1 of be critical of that group, I think it's also

 2 important not to cut off that flow of capital into

 3 innovative organizations that are really groups of

 4 market participants that are investing in these

 5 types of mechanisms.

 6 Tradeweb was started in 1997 with the

 7 internet with a group of banks. We had four banks

 8 initially. Then we sold 100 percent of the

 9 company in 2004 and we weren't owned by any banks

 10 for 4 years. Then we had another investment back

 11 in, and we had a minority stake by some banks. I

 12 think we really have to separate out the ownership

 13 argument from the governance argument, because

 14 it's critical to be able to access that capital

 15 for entrepreneurs and for innovators when they're

 16 trying to build these mechanisms.

 17 MS. SCHNABEL: Darrell or Randy, I just

 18 wanted to make sure that you had a chance to

 19 participate.

 20 MR. DUFFIE: Yeah, I wanted to go back

 21 to this issue of open access. We talked earlier

 22 about how the members of the clearinghouse should
 62

 1 determine what gets traded, and we also have

 2 conflicts of interest arising from the incentives

 3 of the dealers to profit from bid versus ask on

 4 products that are not traded on swap execution

 5 facilities. So the interaction effect here is

 6 effectively if one gets cleared as one gets traded

 7 on a swap execution facility, then we want to be

 8 very careful that the members of a central

 9 clearing counterparty that determine what gets

 10 cleared and, therefore, have control over what

 11 gets traded on swap execution facilities are the

 12 members that have, you know, the right social

 13 incentives to create competition. And, therefore,

 14 I would like to revisit the point that Mr. Hill

 15 made earlier that you need to be very, very large

 16 in order to be a clearing member. This has this

 17 interaction effect with creating competition.

 18 If you -- I fully agree with Mr. Hill

 19 about the clearinghouse in aggregate needs to have

 20 the size -- capacity to wind down failing

 21 positions.

 22 MS. SCHNABEL: Oh, no, sorry. I don't
 63

 1 know exactly what happened, Darrell.

 2 We're going to try to reestablish the

 3 link to Darrell as soon as possible.

 4 Maybe while we're waiting to reestablish

 5 the link, maybe the panelists could sort of

 6 expound on what he was saying, sort of in that

 7 context of where there's a link between what gets

 8 cleared and what gets traded and potential

 9 conflicts with respect to the decisions as to what

 10 gets traded or cleared?

 11 MR. KASTNER: Well, I think where he was

 12 going is the clearinghouse clearly has to be

 13 stable enough, and there's got to be sufficient

 14 capital, and there's got to be fair, publicly

 15 disclosed, transparent requirements to become

 16 clearing members. But where I hope he was going

 17 before he got disconnected was to the point of

 18 it's not if your smallest clearing member fails,

 19 and it's about creating the right incentives where

 20 there is sufficient diversity, and maybe the

 21 number's not 5 billion -- maybe it's 500 million

 22 or maybe it's 200 or whatever the right number is
 64

 1 -- but it's certainly not an arbitrary thing like

 2 you've got to have a trillion dollars of swaps to

 3 be a clearing member.

 4 MR. BERNADO: I agree that there

 5 shouldn't be arbitrary rules. The rules, again,

 6 should be related to the ability to absorb losses

 7 and the ability to manage risk, and, you know, I

 8 think all the different CCPs that are out there

 9 currently have different rules for this. And,

 10 again, I think, you know, I would encourage you to

 11 talk to the risk managers of each individual

 12 clearinghouse either separately or as a group for

 13 them to better articulate than probably any of us

 14 have their concerns around clearing membership

 15 criteria and what they think is the appropriate

 16 level, because they're clearly independent of, you

 17 know, any of us. And I think what you'll hear is

 18 they think, again, that they need to be of

 19 sufficient size and sufficient expertise, and

 20 maybe the numbers -- 500 million, maybe it's 5

 21 billion -- I have no idea, but the clearinghouse

 22 risk managers are the best people to talk to about
 65

 1 that.

 2 MR. OLESKY: Don't we really want to

 3 create a model here that just creates an

 4 environment for competition among business -- you

 5 know, business models and business ideas, and I

 6 think that this applies across the board to the

 7 clearing corps., the SEFs, the exchanges. We want

 8 an environment where there's competition. We've

 9 heard it from different participants and different

 10 perspectives -- competition among SEFs;

 11 competition, frankly, among clearing corps.;

 12 competition among exchanges; competition among

 13 banks; competition among a broader group of banks.

 14 I think that really should be -- you know, the

 15 linchpin here is creating a set of principles and

 16 regulations that allows for that competition.

 17 MS. SCHNABEL: Okay, Darrell, you're

 18 back on. I'm so sorry. Can you hear us?

 19 MR. DUFFIE: Sure. Sure. I'm not sure

 20 how much my point got across, but, again, 30

 21 membership will eventually have some influence

 22 over competition in the execution side of the
 66

 1 business, and therefore I want to revisit this

 2 issue and that one must be a relatively large

 3 player in order to participate in a clearinghouse.

 4 Once one has the aggregate size necessary to wind

 5 down failing positions, I want to understand why

 6 additional 30 members that are not large would

 7 reduce the ability of the clearinghouse to wind

 8 down failing positions. And if that='s not the

 9 case, then perhaps wider access is important.

 10 MR. LIDDEL: Hi, this is Liddel. To

 11 answer that question, one of the things that we've

 12 got to apply to all CCPs, Mike, if you look at

 13 some of the waterfall structures that currently

 14 exist, the way they are written, and if the

 15 counterparty that just (inaudible) goes down,

 16 depending on how catastrophic it is, the members

 17 may not have sufficient capital to support, and

 18 then the people using them as a clearer could

 19 possibly be hit. So to the extent that they don't

 20 have expertise and capital, by using a certain CCP

 21 -- using a certain DCM through a CCP, you are

 22 taking additional counterparty risk. So, it is
 67

 1 important to think about it from the standpoint

 2 that there does have to be additional counterparty

 3 and credit review there, because you are facing

 4 both the Exchange as well as your clearing member.

 5 And Jim can probably expand on that more

 6 (inaudible) than I can. In addition, it's really

 7 important to note that it sort of a conflict in

 8 terms of what gets traded versus what gets cleared

 9 and whether or not it makes sense to have either

 10 those -- the people deciding what gets cleared,

 11 what gets traded. At the end of the day, the

 12 point about this is to reduce systemic risk to the

 13 system and give people access to better

 14 counterparty controls and have less credit risk.

 15 We hope in that process this is viewed as a

 16 utility, but, you know, competition should be --

 17 while it's important should be secondary to

 18 ensuring that the system does not become more

 19 risky. And I think there have been several

 20 examples outlined earlier today of things that

 21 could be traded and could be cleared, but the

 22 reality is there is no good risk management or
 68

 1 pricing for these things. There are certain CDS

 2 that trade twice a month, 10 million (inaudible)

 3 dealers. I'm not sure I want that on an exchange,

 4 because someone could build a very large position

 5 in that, and no one has a clue where or how to

 6 trade that. And that is the type of thing that

 7 costs them a lot of money for a certain system in

 8 the program.

 9 MR. HILL: I just wanted to go back to

 10 what --

 11 MR. KROSZNER: Okay, if I might jump in

 12 here. It's Randy Kroszner. I think this is

 13 getting in exactly the right issue about the role

 14 of risk management, because we're now at by giving

 15 very strong incentives to get things onto the

 16 (inaudible) platforms making everyone

 17 interconnected to the clearinghouse. So, in order

 18 to avoid the kind of conference crises that we

 19 saw, the clearinghouse has to be seen as very

 20 strong, seen as basically bulletproof so that an

 21 individual member going down won't cause the

 22 cascading -- the sort of cascading concerns that
 69

 1 we saw in late 2008. And so it's crucial that

 2 members have a very -- have the right incentives

 3 for risk management. It may be difficult to have

 4 two types of members on the exchange, but they

 5 might have different incentives to get their

 6 approaches to risk management, that you have

 7 institutions that have very little capital,

 8 because they might be willing to take more risks

 9 and want the exchange to or take the central

 10 clearer as well as the exchange to take more risks

 11 than otherwise.

 12 And a number of people said the point of

 13 trying to migrate these things onto central clear

 14 platforms and potentially on exchanges is try to

 15 reduce those risks since you've got to think about

 16 the incentives that people with different amounts

 17 of capital might have for ensuring good risk

 18 management. This has been -- but as I said

 19 before, this is exactly the struggle since the

 20 19th century that clearinghouses and exchanges

 21 have had trying to get more things onto the

 22 exchange, but also making sure that what is on the
 70

 1 exchange is something that can be -- that the

 2 risks can be managed by the exchange or by the

 3 clearinghouse.

 4 MR. HILL: Just to expand on that point

 5 for a minute, we've been focused very much on what

 6 happens when a member defaults and you have to

 7 sort of unwind the portfolio or inject more

 8 capital into the clearinghouse. But the related

 9 piece is who can inject risk into the

 10 clearinghouse. So, the clearing members, in

 11 addition to contributing capital to the

 12 clearinghouse and margin, they interact with their

 13 customers and put trades into the clearinghouse.

 14 And because the FCM ultimately has a risk to its

 15 customer, if its customer defaults, the FCM has to

 16 carefully risk manage the amount of trades it

 17 takes from any one customer and puts into the

 18 clearinghouse. And so not only do you have to be

 19 worried about someone's ability to fund the

 20 clearinghouse in a default scenario, but you have

 21 to be concerned that and focused on their ability

 22 to risk manage their customer relationships so
 71

 1 that they don't put trades into the clearinghouse

 2 that could otherwise destabilize the

 3 clearinghouse. So, it's not just a wind- down

 4 that you have to be concerned about; it's the

 5 injection of risk into the clearinghouse as well.

 6 MR. RADHAKRISHNAN: Jonathan, I think

 7 you wanted to make a point.

 8 MR. SHORT: I wanted to echo some of the

 9 points made earlier, and I'd also just note that I

 10 think if you'd get the governance of the

 11 clearinghouse right, a lot of these problems will

 12 go away, and I know that's the topic of the next

 13 panel. But I would just like to go back and

 14 reiterate that risk management here is paramount.

 15 The reason there is a mandate for clearing in

 16 Dodd-Frank is to make the financial system more

 17 stable, and I realize there are conflicts that

 18 have to be dealt with, but I have never heard the

 19 Dodd-Frank Act described as, you know, an act that

 20 was aimed at, you know, simply promoting

 21 competition among financial institutions. That

 22 really wasn't the gist of what we were doing here,
 72

 1 and, you know, while all of these things need to

 2 be considered and balanced, I want to reiterate

 3 that if you create a system that allows too much

 4 risk or unmanageable risk to come into the

 5 clearinghouse, we're going to be right back in

 6 front of Congress again with hearings and major

 7 problems, and that is the paramount thing that I

 8 think people should take away from this when

 9 they're looking at these questions.

 10 MR. RADHAKRISHNAN: Now, I'd like to ask

 11 a question, which I expand upon what Darrell said,

 12 which I think is a good segue to our next area,

 13 which is I think it's sad to say that apart from

 14 the mandate to clear as many OTC instruments as

 15 possible, the other mandate is to bring

 16 transparency to these products through the listing

 17 of them on exchanges and swaps execution

 18 facilities. And I think, if I might pick on

 19 Darrell's point, and the point is -- and correct

 20 me if I'm wrong -- it's entirely possible that by

 21 not clearing a large group of swaps, there will be

 22 no trading requirement, because, one, if you -- at
 73

 1 least from the CFTC, you know, part of the world

 2 -- you're dependent on DCO submitting swaps to be

 3 cleared and then, you know, there's a comment

 4 process and so on. And, two, the Commission on

 5 its own has to make a determination as to whether

 6 a group of swaps has to be cleared. But if the

 7 Commission makes a determination that said this

 8 class of swaps has to be cleared but nobody wants

 9 to clear it, and let's say nobody wants to clear

 10 it for, you know, nefarious purposes, then, one,

 11 it won't be cleared; two, it won't be traded. So,

 12 how do we make sure that the governance structures

 13 -- how do we make sure that we take care of the

 14 conflicts of interest to make sure that, you know,

 15 what I consider to be the mandate of Congress is

 16 not somehow blocked?

 17 MR. KASTNER: This is the -- this goes

 18 directly to this Lynch Light section 726. The

 19 idea is I agree with you a hundred percent that we

 20 could run the risk here if we don't manage the

 21 governance properly where certain DCOs just sort

 22 of refuse to engage. Now, certain things -- I
 74

 1 mean, it would be very difficult to say that a,

 2 you know, plain vanilla interest rate swap is

 3 somehow unclearable. I mean, people have tried to

 4 say it before. You know, ooh, it's so

 5 complicated, it could be annual money; it could

 6 be, you know, actual 360 or whatever. But I don't

 7 really see that as a risk. I think that the issue

 8 is making sure that the risk committees of these

 9 DCOs are transparent, that you know who the

 10 membership is, that the decisions that are taken

 11 about whether to permit new clearing members and

 12 whether to permit new products to be listed are

 13 transparent and readily appraisable, and so that

 14 everyone knows, you know, what's going on so you

 15 can -- I think the word you said was "nefarious."

 16 You know, you want to make sure that things are

 17 being done in the public interest to protect the

 18 American public against another financial

 19 calamity, not to preclude for some, you know,

 20 bizarre reason a product going on or a new

 21 clearing member, and that applies. So,

 22 transparency -- it not only applies in prices of
 75

 1 securities and security-based swaps and

 2 everything; it also applies in governance. So,

 3 this is an open hearing, right? There's a public

 4 record. There's cameras. There's recordings.

 5 The same type of transparency should apply to DCO

 6 governance so that everyone is clear about how

 7 decisions are taken and how they're made and who's

 8 making them.

 9 MR. SHORT: I agree with what Jason just

 10 said. I think if you get the governance right, a

 11 lot of this goes away, and I think there should be

 12 an open dialog with the regulator, independence on

 13 board so that you don't face this situation where,

 14 you know, for a nefarious purpose things are kept

 15 out of clearing. But, you know, I would note that

 16 there is a financial incentive on the part of most

 17 clearinghouses to clear clearable swaps. It's in

 18 our interest to do that, so I think, you know, if

 19 you get the governance right, a lot of this -- a

 20 lot of the rest of it should fall into place.

 21 MR. HILL: I would like to echo that we

 22 agree with both those points and also want to add
 76

 1 -- remember that in most -- I think most if not

 2 all of the different product areas there are

 3 multiple clearinghouses competing with each other.

 4 So, and credit in the U.S., you have ICE and CME

 5 and others, and rates, you have LCH and CME and

 6 others, and these are all profit-making

 7 institutions and, you know, they're going to

 8 balance their desire to make money and clear as

 9 much as possible with their own internal

 10 risk-management concerns about what should be

 11 cleared and not be cleared, and I think that

 12 competition will go along toward making sure the

 13 right balance is struck.

 14 MS. SCHNABEL: Darrell, I just wanted to

 15 make sure that you had a chance to speak again.

 16 MR. DUFFIE: I agree with those points

 17 that have just been made.

 18 MS. SLAVKIN: I just wanted to --

 19 MS. SCHNABEL: Sorry, Heather, please.

 20 MS. SLAVKIN: Sure. I just wanted to

 21 add on, on the governance issue, that I do think

 22 it's important in addition though to transparency
 77

 1 and independence I think having real experts on

 2 the boards of directors is a very important issue.

 3 We all saw situations in the last several years

 4 where there were boards that were two-thirds

 5 independent and made really stupid decisions about

 6 risk management. So, we need to make sure that

 7 there are people on those boards of directors that

 8 really understand the risks that exist within a

 9 clearinghouse and are prepared to perceive

 10 potential risks that may arise in the system down

 11 the road and address them. So they also need to

 12 have the personalities to stand up to a board of

 13 directors that may be entrenched and have their

 14 own interests that may differ from those that are

 15 in the best interests of the systemic stability.

 16 MR. SHORT: I want to just add something

 17 to what Heather said. I mean, she's right, but I

 18 just want to point out that there really is a

 19 tension there, because some of the people who are

 20 best qualified to assess risk in a given market

 21 are the people that some parts of the -- you know,

 22 of the market are complaining about is controlling
 78

 1 clearinghouses and controlling key infrastructure.

 2 That's just the fact, and not saying that they're

 3 the only people that can do it, but I think when

 4 we're assessing good governance and who should sit

 5 on boards, who should sit on risk committees, the

 6 idea of excluding the very people that have the

 7 most visibility into the market is not a very wise

 8 decision from a risk-management perspective.

 9 MR. NAVIN: I would second those

 10 remarks. Our experience has been that we've

 11 benefited greatly from the expertise of industry

 12 directors, and I think it would be throwing the

 13 baby out with the bathwater if substantial

 14 restrictions on industry governance were to be

 15 enacted.

 16 MR. ALVAREZ: Excuse me, I have a

 17 question. How -- we kind of have conflicting

 18 points here. We need enough independence by

 19 having enough public directors, but we also need

 20 to preserve the expertise, so how are we to strike

 21 that balance?

 22 MR. KROSZNER: This is Randy Kroszner.
 79

 1 If I might, I think this gets back to the

 2 transparency point, but I do think it's extremely

 3 important to have people with the knowledge, the

 4 wherewithal, and with their money on the line

 5 having input into these risk-management decisions,

 6 and I think the best way to ensure that is to

 7 ensure a very, very transparent process so that

 8 outsiders can evaluate and provide the commentary

 9 and the independent directors will have enough

 10 wherewithal, enough knowledge to know what is

 11 going on. And also what I think could be very

 12 valuable in these prophesies is not just to make

 13 them transparent so that you can see how the

 14 decision is made, exposed on an individual

 15 contract, but something that could very valuable

 16 is for principles to be outlined in advance of

 17 what types of contracts can come onto exchanges,

 18 how the decision process will be made. Because

 19 one of the things that we're trying to accomplish

 20 with Dodd-Frank is a migration of some of these

 21 contracts onto essentially bigger platforms.

 22 Providing a roadmap for how to do that will help
 80

 1 to encourage market participants to restructure

 2 contracts to make them in a way that -- or write

 3 them in a way that will be more readily clearable.

 4 And so I think you get a double win on that of

 5 bringing more over-the-counter types of contracts

 6 onto exchanges and you'll have a much a

 7 transparent process. Because I think it's good to

 8 have the process transparent not only ex poste

 9 after the decision is made, but also ex ante what

 10 kind of principles they used and how the decision

 11 will be examined or how the decision will be made.

 12 MR. DeLEON: This is Bill at PIMCO. I

 13 just want to point out that there is quite a bit

 14 of transparency already, and there's a second

 15 check on the risk-management process that any DCO

 16 will use, which is that end users will decide

 17 whether or not (inaudible). And if there is sort

 18 of a race to the bottom in terms of not charging

 19 sufficient capital or having good risk management,

 20 end users will not want to use that DCO for

 21 clearing. So, you will naturally see and move

 22 away from them, and if you look at the current
 81

 1 models that are employed by the exchanges, they

 2 tend to be conservative, and it's pretty easy to

 3 be transparent when they change margins, because

 4 you need statements from them saying they've gone

 5 up or they've gone down and you need to post right

 6 away. So, I think that process already is in

 7 place and works, and at the end of the day as

 8 there are more DCOs, end users will make a very

 9 loud vote with their feet in terms of where they

 10 put their capital, because if someone's charging a

 11 lower rate or has very low margin, you know, at

 12 the end of the day people who have fiduciary

 13 responsibilities to manage clients' money will

 14 have to go well, it may be cheaper but it's not

 15 going to provide the protections I need; I don't

 16 think I want to use them. So, I think there is a

 17 natural mechanism in the market to enforce that.

 18 MR. RADHAKRISHNAN: We need to move on

 19 to exchanges -- to contract markets and national

 20 security exchanges, so --

 21 MR. WORKIE: Can I just ask one more

 22 question? It's going to relate to all the points,
 82

 1 and then, Shawn, if I could (inaudible) I tried to

 2 get in a couple of times today.

 3 You know, a lot of questions, a lot of

 4 the discussion I've heard is related to complex as

 5 it relates to kind of members of the clearing

 6 origination or potentially members of the SEFs.

 7 Are there any financial institutions that are not

 8 members, because the Dodd-Frank doesn't spell it

 9 out between members and non-members. It just

 10 lists financial institutions. So, with respect to

 11 the group that's non-members and are financial

 12 institutions, are there conflicts with respect to

 13 those that we should be considering, or is that

 14 really just tied into those that are actually

 15 members?

 16 MR. BERNADO: Well, what I wanted to say

 17 was, just to go back to the original definition of

 18 "SEF," it says "trading"; it doesn't say "trading

 19 facility." And to go back to what Jason mentioned

 20 about any means of interstate commerce, there are

 21 multiple modes of interstate -- of -- I think what

 22 was intended was there are multiple modes of
 83

 1 execution in what we do -- voice, electronic, and

 2 hybrid. It really depends upon the product. The

 3 more liquid products, like Lee said, in U.S.

 4 Treasuries, it's highly liquid, it's very

 5 efficient, it trades fully electronic on screen,

 6 but some of the less liquid products don't -- they

 7 need voice intervention. They need to provide

 8 that liquidity to the marketplace, and to keep the

 9 markets moving you need to have voice -- you need

 10 to have the multiple modes of execution that was

 11 mentioned before in regards to interstate

 12 commerce. I don't think that answers the question

 13 that you just asked.

 14 As far as institutions or different

 15 types of institutions, we're open to having

 16 multiple participants on platforms, which we

 17 currently do.

 18 MR. KASTNER: If I could try to answer

 19 your question directly in terms of other conflicts

 20 of interest, apart from clearing members, okay,

 21 it's about access to clearing, so there are -- the

 22 membership of the Swaps and Derivatives Market
 84

 1 Association. There are over 20 firms who would

 2 love to get into the business of trading interest

 3 rates, swaps, and CDS with our customers who, by

 4 historical accident, credit rating, or for

 5 whatever reason have not developed that capability

 6 and who need access to clearing. So, it's not

 7 just about becoming a clearing member of an

 8 exchange and who gets to be a clearing member.

 9 It's about who can open a clearing account with a

 10 FCM, SCM, whatever, and the point is if you have a

 11 firm who is doing customer business and wants to

 12 engage in an interest rate swap with an end user

 13 who is not a clearing member, that they should be

 14 able to execute that trade with the end user and

 15 then give up to a clearing member. So, what it

 16 does is it allows more participants to diversify

 17 the risk. Some of them may not be big enough to

 18 become swap clearing members of an exchange, but

 19 they're certainly big enough to take the other

 20 side of a $100 million interest rate swap. Do you

 21 see what I mean? And so that's one of the key

 22 issues that goes back to this issue of opening the
 85

 1 market and bringing in more competitors. And so

 2 that's something that I think that you really

 3 should focus on in the rule-making stage.

 4 MR. COOK: If -- taking -- just to build

 5 on that point, if one's concerned about preserving

 6 the access to membership, as you point out is a

 7 central issue, and tie it back to Haimera's

 8 question, does one take from that that your

 9 primary concern is that the control over access is

 10 with dealer members? And so if you have dealers

 11 who are not members who may have an ownership

 12 interest, you are indifferent to that but because

 13 you really think that the conflict is between the

 14 dealer members potentially restricting access by

 15 non-dealer members, other types of financial

 16 institutions who aren't members of the

 17 clearinghouse, there's no conflict of interest?

 18 MR. KASTNER: The problem isn't with,

 19 you know, dealer members restricting customers

 20 from being clearing members, right? They're more

 21 than happy, you know, to, you know, use a name.

 22 You know, PIMCO is a member of the panel. I'm
 86

 1 sure any number of investment banks would be more

 2 than happy to open a clearing account for a

 3 buy-side institution such as that. The issue is

 4 if there is a sell- side institution that wants to

 5 do a trade with PIMCO, just to use an example,

 6 that isn't a clearing member, that requires access

 7 to a big financially important clearing member's,

 8 you know, capital base in order to facilitate that

 9 transaction now, that other firm, that other

 10 smaller, independent investment bank firm that

 11 wants to do that trade -- we need to have a system

 12 where they can do that, because what we don't want

 13 is the same 10 guys holding all the risk and then

 14 concentrating in the clearinghouse. The idea is,

 15 you know, introduce more participants who have

 16 access to clearing in order to facilitate that

 17 business, and that's where there has, in the past,

 18 been a bit of tension. I'm sure that given the

 19 various anti-trust provisions in the Act, as well

 20 as the ability of this Commission to issue

 21 cease-and-desist orders, that these problems will

 22 probably go away, but it's something that you need
 87

 1 to keep an eye on.

 2 MR. BERNADO: And, again, having a

 3 vertical -- having both the clearing and the

 4 execution definitely creates a problem, because

 5 there are so many means in which when you have the

 6 execution facility and you're competing in our

 7 space, which is what we do as SEFs, when you don't

 8 allow our customers, who are also the customers of

 9 the exchanges, to submit the trades the same exact

 10 way or do certain things, they can definitely

 11 create biases, which they currently do. I mean,

 12 we experience that today in certain markets where

 13 the exchange also has an execution platform that

 14 competes with us, and we cannot submit our trades

 15 to that clearinghouse the same way the exchanges'

 16 customers, who are also our customers, executing

 17 the same type of trades can submit to the

 18 clearinghouse. So, that's without question a

 19 conflict of interest that goes on today. It's a

 20 major problem with having a variable.

 21 MR. HILL: Right. We reiterate that

 22 point that we think the clearinghouse should be
 88

 1 agnostic as to which SEF they accept trades from,

 2 and the SEFs should be agnostic as to which

 3 clearinghouse they send trades to. I'm sure that

 4 would be a --

 5 MR. OLESKY: Yeah, we do, and that

 6 actually is our policy at Tradeweb. We actually

 7 have that approach. I'll just echo the comments

 8 that were just made. I think that there's also a

 9 statement about equal access, and then there's the

 10 reality of actually truly having equal access, and

 11 that gets down to really connectivity, technology,

 12 cooperation, cost differentials that are really

 13 the nuts and bolts of how do you actually really

 14 get equal access. So, as much as I think everyone

 15 will agree that everyone should have equal access,

 16 it really needs to be detailed so that there is

 17 not a bias that's applied subtly, which can happen

 18 and happens today when there's a -- and I

 19 understand it, because there's a conflict.

 20 There's a conflict where we will be competing with

 21 a part of a clearing partner. So, there's a

 22 built-in conflict there.
 89

 1 MR. ALVAREZ: Yep. Moving away from SES

 2 for a moment, talking about DCMs now, what are the

 3 similar types of conflicts that you're going to

 4 see with DCMs as clearing swaps?

 5 MS. SEIDEL: And I echo that question

 6 with respect to exchanges as well, sort of the

 7 existing trading markets versus the new ones that

 8 the Act puts in place. Are there any similarities

 9 or differences and concerns about conflicts with

 10 respect to trading?

 11 MR. HILL: I think the exchanges

 12 currently -- I think most if not all have this

 13 vertical model where if you trade on an exchange,

 14 you have to clear it through their clearinghouse,

 15 and I think the rules that apply to SEFs should

 16 apply to exchanges as well. It should be open

 17 access.

 18 MR. KASTNER: Let me give you a specific

 19 example. One of the members of this SDMA

 20 currently clears 13 percent of the business at a

 21 large exchange in Chicago. That large,

 22 independent FCM is clearly qualified to become a
 90

 1 swap clearing member. But because of various

 2 conflicts of interest, the risk committee of said

 3 exchange is precluding that firm, which is clearly

 4 qualified and has the capital, from becoming a

 5 swap clearing member. They're more than happy to

 6 let -- you know, they remain an FCM in good

 7 standing, but in terms of branching out and

 8 entering into these new products, a very motivated

 9 firm which wants to open clearing accounts for our

 10 members is currently being effectively shut out,

 11 and those are the types of things where -- this

 12 goes back to the governance point and transparency

 13 about who's making that decision and why, because

 14 a lot of times what happens is people will swallow

 15 themselves in the cloak of risk management or

 16 financial stability or whatever really to make an

 17 anti-competitive stand. In other words, you can

 18 never say that you don't want to let somebody in.

 19 But you could probably find an excuse or a reason

 20 in the interest of systematic -- you know,

 21 systemic stability and the rest of it to put an

 22 asterisk on the application or just delay it for
 91

 1 awhile. So, those are the types of issues I think

 2 that we need to be looking at.

 3 MR. RADHAKRISHNAN: So, let me follow up

 4 on that. Let's say, for example, you had a

 5 clearing organization exchange would say in order

 6 to be a clearing member you must have capital --

 7 regulatory capital of a billion dollars, let's

 8 just say, as calculated in accordance to SEC-CFTC

 9 rules. So we know that it's what I consider true

 10 $1 million -- safe $1 billion. And let's say

 11 somebody comes to us and says you know what, we

 12 think that's unfair; we want you to lower -- we

 13 want you to cause the clearinghouse to lower the

 14 capital requirement. So, by somebody in charge of

 15 clearing, I'm kind of reluctant to tell somebody I

 16 think you need to lower the capital requirement.

 17 Well, unless you give me very good reasons.

 18 What are those reasons? What would

 19 cause either Robert or I to go to a clearinghouse

 20 and say, you know, I think you need to lower the

 21 capital requirement?

 22 MR. KASTNER: So, it's not only about
 92

 1 the capital requirement. I agree that not only

 2 would it be imprudent to have requirements that

 3 are too low, but that also in terms of what the

 4 American public's perception would be of a

 5 regulator who's going around telling exchanges to

 6 lower their capital requirements after we just had

 7 a huge blowup. I mean, that's a big ask, right?

 8 But it's not just about capital, which needs to be

 9 set at a fair level. It's about -- if you get in

 10 these discussions -- let's say, for example, you

 11 have a firm that has the billion dollars of

 12 capital. They'll make some arguments, some

 13 operational expertise argument, and again it goes

 14 back to this chicken and the egg things. Well,

 15 you don't -- you've never cleared swaps before, so

 16 you can't clear swaps. You see? Or let me give

 17 you another solution. You permit a joint venture

 18 between a large money center bank, which has a ton

 19 of capital, but relatively meager operational

 20 expertise. And FCM that is very strong in

 21 operational management; a SEF that can provide the

 22 necessary pricing information and assist in a
 93

 1 default management procedure. So, it's not just

 2 about, you know, drawing a line in the sand and

 3 making that bar higher and lower. It's about

 4 being clever about how we actually look at risk

 5 and manage risk and how do you actually come up --

 6 what is the right number, you know?

 7 What is the sigma of an earthquake in

 8 San Francisco, you know? I mean, what is the

 9 answer to that question? Is it -- if I had a

 10 billion and one dollars I can trade as many as I

 11 want, but if I only have 200 I can't trade any?

 12 The point is there's position limits, right? And

 13 the amount of risk that you introduce is

 14 proportional to the amount of capital that you

 15 have, that you're clever about managing the

 16 margin, that you're clever about managing your

 17 risk, that you're a savvy trader, and that a guy

 18 with, you know, 500 million in capital can't clear

 19 as many interest rate swaps as a guy with 5j

 20 bazillion, but that he can clear some, that it's

 21 somehow proportional. So, the CFTC does not have

 22 to go and say to the exchange you must lower your
 94

 1 barrier to entry. What you should do is say you

 2 must make trading ability and clearing ability

 3 proportional to the capital that you have.

 4 MS. MOORE: You know, are these issues

 5 unique to the swap and security-based swap market?

 6 Because we do have member-controlled institutions

 7 today that act as utilities and provide for open

 8 access. So, you know, I just wanted to know how

 9 the conflict of interest issues, you know, are

 10 viewed with respect to the swap in the current

 11 markets today.

 12 MR. HILL: I think the conflict issues

 13 are similar. I think the risk management aspect

 14 of this, though, is certainly more heightened with

 15 respect to OTC derivatives even once they're

 16 traded on SEF, for example, than they are for the

 17 sort of highly, highly liquid exchange rate of

 18 products that you might see in the future as well

 19 during the -- or, you know, in the stock

 20 exchanges, and that's simply because by definition

 21 these products are less liquid; they're more

 22 complex. And so the skill level in risk managing
 95

 1 them, or the expertise level in risk managing them

 2 is higher, and I think your sensitivity around --

 3 or the clearinghouse's sensitivity around ensuring

 4 the right to participate is probably heightened.

 5 And I think that's just a function of complexity

 6 and liquidity.

 7 MR. SHORT: I want to add to that -- I

 8 think your question is are there differences

 9 between the existing derivatives markets and the

 10 equity-based derivatives markets, and if that was

 11 your question I think they have come from very

 12 different places and, you know, one of the things

 13 that I struggle with is, you know, it all sounds

 14 very good on paper to say let a thousand flowers

 15 bloom, we'll have hundreds of SEFs. They'll all

 16 hooked to a clearinghouse and everything will be

 17 great. We've got competition, but there are some

 18 very real issues that I think are going to be very

 19 difficult to work out in terms of how the DCO

 20 discharges its regulatory obligations. We've got

 21 an Act that talks about having position limits

 22 apply across markets, across venues.
 96

 1 You know, there are a lot of questions

 2 that I think we haven't even begun to get into

 3 here that may impact the ability of a particular

 4 SEF, for example, to hook to a derivatives market.

 5 And I know I've heard a lot of people hold the

 6 equities market up as an example of how you have

 7 multiple execution venues and everything is great.

 8 I don't think everything is so great. I mean,

 9 we've had flash crashers; we've had problems.

 10 You're talking about -- and when you're -- I just

 11 want to emphasize this point. When you're talking

 12 about risk managing derivatives in our world,

 13 you're talking about managing risk over a very

 14 long time horizon. And clearing of these

 15 derivatives is very complex, so I'm not saying

 16 that this is something that should preclude open

 17 access. But I think we need to go into this very

 18 carefully, and I think we need to consider how all

 19 of this actually bolts together in the real world

 20 and allows the markets to be properly regulated,

 21 because I think there are a lot of regulatory

 22 objectives here that we haven't talked about.
 97

 1 MS. SCHNABEL: Heather. Heather, I

 2 thought you wanted to say something. Did you --

 3 MS. SLAVKIN: I was just going to

 4 further expound, I guess, on the point that Jason

 5 was making earlier about the importance of not

 6 allowing the argument that we're having right now

 7 about the need for capital requirements to become

 8 a bar to entry for smaller players. And this

 9 issue really echoes issues that arose in the

 10 debate around capital requirements for the large

 11 financial institutions that occurred in the

 12 process of developing the Financial Reform Bill.

 13 And one of the big issues that people were talking

 14 about was whether progressive capital requirements

 15 were the way to go, because, you know, saying --

 16 you know, if you look at the 5 largest financial

 17 institutions that control 90 percent of the market

 18 and say that's going to be the bar for how much

 19 capital you have to have, the amount of risk and

 20 the amount of activity that those institutions are

 21 engaging in is not the same as the amount of risk

 22 and the level of activity of the smaller players
 98

 1 in the market, so it doesn't make sense to hold

 2 them to that high standard. And I think it would

 3 be important here to try to consider the

 4 possibility of creating requirements, have

 5 progressive capital requirements that consider

 6 volume and size and activity and risk when you're

 7 determining what the appropriate capital

 8 requirement should be for gaining access to a

 9 market.

 10 MR. KASTNER: And I would also direct

 11 your attention to the antitrust provisions where

 12 the Commission has been directed that unless

 13 necessary or appropriate to achieve the purposes

 14 of the Act, you shall not adopt any process or

 15 take any action that results in an unreasonable

 16 restrain of trade or impose any material,

 17 anti-competitive burden on trading or clearing.

 18 So, unless you've got a really good reason to have

 19 a trust or a monopoly or some, you know, closed

 20 system, there is a clear directive here and

 21 there's clear remedies as well. So, I think that

 22 as you think about it, and as you think about risk
 99

 1 management, you have to balance those risk

 2 management arguments against various other clear

 3 calls for a lack of anti-competitive behavior.

 4 MS. SCHNABEL: Okay, I think that we're

 5 counting down to the end of the first panel, so I

 6 just wanted to throw kind of a general observation

 7 out there.

 8 It seems as if one of the themes of our

 9 conversation is we need to figure out how to not

 10 inject systemic risk in clearing and listing of

 11 swaps, but then we also have to balance that

 12 against the systemic risk that would exist if

 13 bilateral swaps are not cleared or listed because

 14 of certain incentives. And so I guess I would

 15 just welcome the panelists to give their final

 16 thoughts on this subject on how the balance can be

 17 achieved.

 18 MR. RADHAKRISHNAN: Let's go down the

 19 lines.

 20 MR. SHORT: I would just say that -- one

 21 other observation -- I don't think this is going

 22 to occur in a vacuum. My understanding of what
 100

 1 happens under Dodd-Frank is that for swaps that

 2 are not cleared, there are prudential regulators

 3 who will be looking at the capital that has to be

 4 held by a given bank or market participants, so I

 5 think there are going to be other levers that are

 6 pulled that move things towards clearing.

 7 MR. NAVIN: I think it's very important

 8 that the risk managers be left to manage the risk,

 9 and I think that there may be situations where

 10 they have conflicts of interest. There may be

 11 situations where in fact they're being

 12 exclusionary. And I think in those situations

 13 we've got to rely on complaints by the people that

 14 are being adversely affected to the regulators and

 15 on appropriate response by the regulators. I

 16 don't think they can close their eyes to

 17 restraints of trade. But I think a regulator has

 18 to be very careful in second guessing experience

 19 to risk managers.

 20 MR. OLESKY: That's pretty much what I

 21 was going to say, Bill. You know, this is a

 22 really tough thing to balance. We do this all the
 101

 1 time, and for us it's about the integrity of our

 2 platform, the integrity of our system, and so what

 3 do we do when we make a decision to get into a new

 4 product line, a new business? We started trading

 5 derivatives in 2005 -- interest rate swaps. What

 6 do we do? We listen to the market participants,

 7 which is what we're doing right now, and I think

 8 really try and figure out, okay, what can

 9 legitimately work here, what will be the right

 10 balance between, you know, getting the risk into a

 11 clearing corp. and having standardized enough

 12 things, traded electronically, traded over voice

 13 through a SEF versus pushing things beyond what is

 14 really going to work in the marketplace, and so I

 15 think it's this balancing act. It's a challenge,

 16 but I think it's this process that we're going

 17 through of kind of engaging with the market

 18 participants that'll get us closer to the answers.

 19 MR. HILL: I would probably reiterate

 20 what Bill said, which is that ultimately the risk

 21 managers of the clearinghouse are the ones who

 22 need to figure out how to manage these risks and
 102

 1 manage these conflicts, and as I said a few times

 2 earlier I would certainly encourage the CFTC and

 3 the SEC to reach out to those risk managers to get

 4 their direct views on how these risks and these

 5 conflicts are best managed. I think getting a

 6 cross section of the market to opine is useful,

 7 but ultimately we have to get this right. The

 8 primary purpose of Dodd-Frank was to reduce

 9 systemic risk. That risk will now be concentrated

 10 primarily in the clearing houses, and it is

 11 critical that we get the risk management correct.

 12 MR. KASTNER: I would close by referring

 13 to Chairman Gensler's comments on July 15th when

 14 he commented on the passage. The essential point

 15 is that we have open platforms that are

 16 transparent to protect the American public. So,

 17 we have to act in good faith. We have to have

 18 openness and transparency.

 19 MS. SLAVKIN: And I think the question

 20 you asked echoes the question that the people who

 21 are drafting this legislation were asking that

 22 took them several hundred pages of legislative
 103

 1 text and almost a hundred rulemakings for you guys

 2 to try to figure out the answers to, and I think

 3 that, you know, conversations like this with

 4 market participants at the beginning of the

 5 process of determining what that right balance is,

 6 and I agree it's going to take, you know, the risk

 7 management staff at the clearinghouses as well as

 8 diligent oversight by the regulators.

 9 MR. BERNADO: I think that -- I keep

 10 hearing people say "listed," and I think the

 11 listed implies that you're looking to push things

 12 on to exchanges or it implies that, and currently

 13 -- I mean, we as the WMBA, the interdealer broker

 14 market, already operates efficient markets. And

 15 to go back to multiple -- to interstate commerce,

 16 there are definitely multiple modes of execution

 17 that need to stay in place to keep these modes

 18 sufficient, keep them like good, and not to upset

 19 the flow of the markets currently. So, you need

 20 voice; you need electronic. Certain things will

 21 be pushed to get standardized and get pushed to

 22 exchanges. But, again, we keep saying "listed."
 104

 1 That's not -- it's definitely a concern. We don't

 2 want to upset the markets as they currently are,

 3 because we play an integral part of keeping them

 4 as efficient as they are currently.

 5 MR. RADHAKRISHNAN: Okay, we'll go to

 6 Darrell on the video and then Bill DeLeon and

 7 Randy Kroszner on the phone.

 8 MR. DUFFIE: Thanks. I think the most

 9 important principles here are incentives. I don't

 10 think there's a conflict between the incentives

 11 for competition, increasing competition in this

 12 market on the one hand and the incentives for

 13 improving financial stability on the other, or I

 14 don't think there's a problem between those two.

 15 You can have going to have both. The incentives

 16 to watch for on competition are that we've got

 17 enough access by multiple market of participants,

 18 and that the oligopolistic nature of the market

 19 is, to some extent, watched carefully by

 20 regulators. And on the systemic list side I think

 21 the incentive issue is that everyone benefits from

 22 the safer markets, but not everyone internalizes
 105

 1 the costs and benefits on their own, and,

 2 therefore, regulators need to look for those

 3 weaknesses in financial stability for which no one

 4 individually gets the benefits. And, in this

 5 case, clearing and a relevantly transparent system

 6 are going to move in the right direction.

 7 MR. RADHAKRISHNAN: Bill?

 8 MR. DeLEON: Thank you. Yeah, I agree.

 9 I think that the most important thing to focus on

 10 is that it's meant as a reduction in systemic risk

 11 as a utility function, which does not preclude,

 12 you know, people having access, but you need to

 13 set a bar. It shouldn't be arbitrary and it

 14 should be fair. I agree that more participants in

 15 the clearing space, as long as they meet some bar

 16 and it's not a capricious or, you know, sort of

 17 exclusionary, will reduce risk to a system and

 18 ultimately bring cost down and tells the system.

 19 But at the end of the day, you do need to listen

 20 to who's doing the risk management. And I think

 21 you want to talk to both the current people as

 22 well as, you know, other risk managers throughout
 106

 1 the industry and see what they think is

 2 appropriate to come up with what that bar should

 3 be and how it should function. But rushing to

 4 force things on the CCPs with too low of a bar

 5 will not accomplish what we're looking for.

 6 MR. RADHAKRISHNAN: Randy.

 7 MR. KROSZNER: I certainly echo those

 8 last two sets of comments. The success of

 9 clearinghouses and the reason why there's been so

 10 much push to try to get many contracts into

 11 centrally (inaudible) platforms is precisely

 12 because of their success over a century in

 13 managing risks. They've been very successful

 14 through World War I, World War II, the Great

 15 Depression, and we should not do anything that is

 16 going to undermine that by forcing things that

 17 will -- or forcing types of contracts that cannot

 18 be risk managed well onto the Exchanges to --

 19 forcing certain -- using certain criteria that

 20 will undermine that risk management. The success

 21 has come from being tough about risk management,

 22 but sometimes means setting very tough criteria
 107

 1 that some institutions and individuals may not

 2 like. But we're now basically betting the system

 3 on the stability of these clearinghouses. And if

 4 we're going to do that we've got to make sure that

 5 they're not going to undermine the stability, but

 6 they're going to be seen as bulletproof or as near

 7 to bulletproof as any private institution can be.

 8 MR. RADHAKRISHNAN: Well, thank you.

 9 With that, we come to the end of the discussion

 10 for today, for right now, on Panel 1.

 11 I would like to thank the panel for a

 12 very spirited discussion. I think it's very

 13 obvious that you'd given a lot of thought to the

 14 subject, and on behalf of the staff the CFTC are

 15 very grateful for your time and your thoughts.

 16 So, thank you very much.

 17 We'll just spend a few minutes swapping

 18 out and invite the members of Panel 2 to come up,

 19 but thank you.

 20 Thank you very much.

 21 (Recess)

 22 MR. RADHAKRISHNAN: Start Panel 2, which
 108

 1 is Possible Methods for Remediating Conflicts.

 2 The topics will be, one, ownership and voting

 3 limits; two, structural governance arrangements;

 4 three, substantive requirements; and number four,

 5 the appropriateness of applying the same methods

 6 to each type of entity.

 7 I'm going to ask each of the panel

 8 members to introduce themselves and then we'll

 9 have questions.

 10 MR. BARNUM: I'm Jeremy Barnum from J.P.

 11 Morgan.

 12 MR. SCOTT: Hal Scott from Harvard Law

 13 School. I just want to give a disclaimer that I'm

 14 also the director of the Committee on Capital

 15 Markets Regulation, but I'm not speaking for the

 16 committee at this session.

 17 MR. GREENBERGER: Michael Greenberger,

 18 University of Maryland, School of Law.

 19 MR. PRAGER: Richie Prager from

 20 Blackrock.

 21 MR. LIDDEL: Roger Liddel from London

 22 Clearing House.
 109

 1 MS. MARTIN: Lynn Martin from NYSE Life,

 2 U.S.

 3 MR. KASTNER: Jason Kastner, Swaps and

 4 Derivatives Market Association.

 5 MR. McVEY: Rick McVey, MarketAxess.

 6 MR. BERNARDO: Shawn Bernado, WMBA.

 7 MS. SLAVKIN: Heather Slavkin, AFL-CIO.

 8 MR. RADHAKRISHNAN: Thank you. Andrea?

 9 MS. MUSALEM: Okay, so we spent the last

 10 two hours talking about the conflicts -- the

 11 potential conflicts of interest and now we turn to

 12 the possible methods of remediating those

 13 conflicts. The first topic is ownership and

 14 voting limits and the first question is: Would an

 15 ownership cap mitigate the actual or potential

 16 conflicts of interest identified in the previous

 17 two hours?

 18 MS. SCHNABEL: Go ahead, Hal.

 19 MR. SCOTT: I should say -- while I'm

 20 not speaking for the committee, the one thing the

 21 committee did say on this is that they opposed

 22 ownership restrictions, so I think I can speak for
 110

 1 the committee on that, the reason being that I

 2 think they're counterproductive in getting needed

 3 capital liquidity into the clearinghouses which, I

 4 think, should be our central focus in terms of

 5 systemic risk.

 6 In my view the potential conflicts

 7 should be generally handled by board governance

 8 rules and not by ownership restrictions.

 9 MR. GREENBERGER: Yeah, I feel exactly

 10 the opposite. First of all, what disturbed me

 11 about the first panel is talking about this in an

 12 isolated and not contextual viewpoint. The

 13 problem here, the origination for the Lynch

 14 amendment, which put a 20 percent cap on ownership

 15 was a concern that then existing clearinghouses

 16 were setting their requirements for membership

 17 unreasonably high, in a manner that was

 18 discriminatory.

 19 It is true that the central tenant of

 20 the statute is to require clearing and exchange

 21 trading. If you have one clearinghouse dominated

 22 by the major swaps dealers, they have several
 111

 1 conflicting incentives. One is, I reject the idea

 2 that somehow they do not want to keep a large and

 3 vibrant over-the-counter market. We're told that

 4 clearing is very profitable. If it was that

 5 profitable, where were these people when we were

 6 aggressively arguing for mandatory clearing and

 7 exchange trading? They were on the opposite side

 8 of that. The transaction fees and the spreads

 9 still make an unregulated market very, very

 10 profitable, probably more profitable than the

 11 profits that would derive from clearing. So, if

 12 you have the swaps dealers in control of a

 13 clearing facility, they have that incentive.

 14 Secondly, if they set their membership

 15 so high, they are going to sift away the strongest

 16 members of the swaps market and the other clearing

 17 facilities are going to be left with everyone

 18 else. That does not -- first of all, it's not

 19 open and fair access and it will create systemic

 20 risk in the other clearing facilities who have to

 21 take the leftovers from these clearing

 22 organizations.
 112

 1 Secondly, the argument that, for

 2 example, ICE Trust, which has nine banks taking 50

 3 percent of the profits, are the best judges of

 4 risk management, is belied by the credit crisis we

 5 went through in 2008. It was these very banks

 6 that caused the crisis because their risk

 7 management policies were so weak, and to

 8 centralize the too big to fail banks, and they are

 9 called too big to fail because there is a

 10 recognition that if they fail they will be

 11 rescued, that does not make them the ideal risk

 12 managers. Added to the fact that, yes, certain

 13 products will be cleared because they are

 14 profitable and they may over calculate and be over

 15 enthused about clearing things that are too risky.

 16 So, the Lynch amendment -- we now have

 17 Lynch Light, but the Lynch Light provision is

 18 extraordinarily broad, it gives the agencies power

 19 to put ownership restrictions in. I'm not saying

 20 that ownership restrictions have to be applied

 21 across the board, but when you've got something

 22 like ICE Trust with 9 banks taking 50 percent of
 113

 1 the profits, those banks have an oligopic residue

 2 of power from the OTC derivatives market, they

 3 translate it into the clearing, they keep -- they

 4 don't have open and fair access, they're making

 5 the decisions. I think ICE Trust advertises that

 6 its board is independent and I think the very fact

 7 that they claim independence when they were the

 8 target and poster child for the initial 20 percent

 9 restriction demonstrates that having independent

 10 directors is not enough.

 11 If there's a problem -- there should be

 12 ownership restrictions. It should -- swaps deals

 13 -- anybody defined as a swaps dealer or major swap

 14 participant should not own more than --

 15 collectively or individually -- more than 50

 16 percent of the market. By the way, Goldman has

 17 just announced that it's going to open its own

 18 clearing facility. How is that going to be

 19 managed?

 20 There are incentives -- and the open

 21 access has implications. If they do the clearing,

 22 it's been said earlier, they'll have control over
 114

 1 exchange trading. I think the only effective way

 2 -- the 20 percent rule was abandoned but you were

 3 given extraordinary power. You have the power to

 4 put ownership limits in and I strongly advocate

 5 that that's the only way you're going to get

 6 effective remedies.

 7 You've got to separate -- people have

 8 talked about United Trust powers --

 9 MS. SCHNABEL: Michael, sorry, we're

 10 just trying to get --

 11 MR. GREENBERGER: Okay, let me just

 12 finish. You talk about antitrust as a capability,

 13 people complaining about not getting membership as

 14 a capability. You do have the power to structure

 15 DCOs, but you have to look at all remedies and

 16 governance and ownership is a remedy, and that

 17 should be adopted.

 18 MR. BARNUM: There were a lot of

 19 statements made in there and I guess in the

 20 interest of allowing people to speak I won't try

 21 to refute all of them, but I think, I guess -- I

 22 guess I think it's important that we recognize
 115

 1 that the reason that the Commission is hosting

 2 this panel is that these issues are complicated

 3 and that there are, in fact, tensions. So we're

 4 having a conflict about -- we're having a panel

 5 about conflicts of interest and sort of directly

 6 related to that is the question of managing the

 7 tension between different useful social objectives

 8 on a continuum. So, on the question of -- on the

 9 question of ownership of clearinghouses and

 10 expertise and the Lynch amendment, the -- it is

 11 very appealing in principle to imagine that these

 12 systemically important financial players into

 13 which we are putting much more risk, could somehow

 14 be entirely free of the nefarious influence of the

 15 evil dealers who contributed to the crisis to

 16 quote Mr. Greenberger. But, unfortunately, they

 17 are, in fact, the market participants who need to

 18 use the clearinghouses.

 19 There is a version of the market

 20 structure that you could put in place where they

 21 would be entirely state run utilities. You could

 22 do that. In many respects, from the perspective
 116

 1 of the dealer community, that would not be a bad

 2 outcome for us. We would, in many respects,

 3 speaking for J.P. Morgan, be perfectly happy with

 4 that outcome. We want to clear more trades.

 5 There's a mandate to clear more trades. It's very

 6 capital intensive to clear more trades. If you

 7 had a government-guaranteed, central counter party

 8 run as a not-for-profit utility, that would be a

 9 perfectly acceptable outcome for us.

 10 That's not where we are for a variety of

 11 historical reasons. Given that, then you've got

 12 some very complicated tensions that you have to

 13 manage. If the people with the expertise and the

 14 people who are paying the bills don't participate

 15 in the processes in any way, who's going to do it?

 16 What kind of market incentives are you going to

 17 create to make that happen?

 18 The traditional vertically integrated

 19 exchange model for futures works beautifully in a

 20 whole range of respects for those products from

 21 the perspective of liquidity and systemic risk,

 22 but it has a couple problems. It is -- it does
 117

 1 seem to create some natural monopoly properties.

 2 You can debate whether they're severe enough to

 3 warrant action or not and that's one of the kinds

 4 of tensions that needs to be balanced. In

 5 addition, they work very well for the types of

 6 products that naturally attract liquidity on

 7 exchanges. The whole premise of this is that

 8 we're pushing a whole new set of products with

 9 different liquidity characteristics into central

 10 counterparties. That means that you cannot apply

 11 exactly the same framework. There are new

 12 challenges that are being introduced. They create

 13 tensions. And those tensions need to be looked at

 14 rationally in a continuum framework that balances

 15 different social goods against each other.

 16 MS. SCHNABEL: Jason?

 17 MR. KASTNER: I think it's not credible

 18 to say it's complicated. The law says that you

 19 have to mitigate systemic risk, promote

 20 competition, and mitigate conflicts of interests,

 21 right, that's what the law is. So you have to

 22 look at whose incentives -- who -- what incentive
 118

 1 does my distinguished colleague, the professor,

 2 have? Is he operating in a socially optimal way

 3 or is he operating out of economic self-interest?

 4 What are the incentives here?

 5 The SDMA is not here to dance between

 6 the raindrops and say it's too complicated, and

 7 the SDMA is not here to say that J.P. Morgan

 8 cannot have an ownership stake in a clearinghouse.

 9 The SDMA strongly supports the Lynch Light

 10 provision such that no economically incentivized,

 11 monopolistic power can control and restrict

 12 access. And I'd like to thank again the professor

 13 for his very insightful remarks.

 14 MS. SCHNABEL: Roger?

 15 MR. LIDDEL: To go back to the question,

 16 I think with established organizations, then I

 17 think the concept of some combination of ownership

 18 limits and voting caps actually does make sense.

 19 For example, in the (inaudible) clearinghouse,

 20 we've got a 5 percent voting cap and have done for

 21 many years. And the reason for that was to take

 22 away any incentive for anyone to build up a stake
 119

 1 greater than that so that we would be highly

 2 unlikely to ever have less than 20 shareholders.

 3 That works well for us.

 4 However, to pick upon the point that Lee

 5 Olesky made before, I think you have to be a

 6 little bit careful in how you treat

 7 entrepreneurials or starter ventures because most

 8 of the successful starter ventures have started

 9 with a relatively small number of banks sharing an

 10 interest in creating something which then becomes

 11 a lot bigger. So, in general, for established

 12 organizations I think it makes sense.

 13 Also in terms of participation,

 14 ownership, and membership, you know, there is a

 15 risk that I think listening to the debates so far,

 16 that the impression could be left that in the case

 17 of our swaps business, for example, we've got a

 18 limited membership of about ten dealers who

 19 collectively control about 96 percent of the

 20 market. It's not true. Our membership is

 21 actually growing faster than it's ever done. It

 22 currently stands at, I think, now 32. We're going
 120

 1 to pipeline, which will take it up 40 within the

 2 next 9 months or so, and I would expect it to

 3 continue to grow beyond there.

 4 Now, the question is to whether the

 5 right number is 40, 50, or 60 is in my view not

 6 particularly relevant. The relevant thing is to

 7 make sure that the real customer's trades are able

 8 to get into the clearinghouse and that we take a

 9 lot of the risk out of the system and I think, you

 10 know, getting too obsessed with who actually

 11 qualifies and who doesn't, given the number is

 12 actually reasonably large and growing, is actually

 13 not the big issue.

 14 MS. SCHNABEL: Lynn?

 15 MS. MARTIN: I'd like to first thank

 16 both commissions for inviting NYSE Euronext to

 17 participate in this lively debate as it's been

 18 thus far.

 19 Specifically on the topic of ownership

 20 limitations and voting caps, NYSE Euronext opposes

 21 specific ownership limitations. We think that a

 22 more effective manner in controlling conflicts of
 121

 1 interest is around good governance structure at a

 2 board level.

 3 You may be aware that NYSE Euronext's

 4 U.S. Future Exchange -- NYSE Life U.S., is a

 5 semi-neutralized structure whereby we balance the

 6 views of both the independence criteria as

 7 required by core principle 15 in the CFTC-DCM

 8 requirements, as well as the views of NYSE

 9 Euronext and our external investor firms' views,

 10 such that no one board action may be enacted based

 11 on the views of any one of those constituents.

 12 So, it's our belief that a more balanced

 13 board structure, a more balanced governance

 14 structure, is the proper way to handle or

 15 potentially mitigate conflicts of interest.

 16 MR. McVEY: We would agree with that. I

 17 think when it comes to ownership we have to

 18 realize that we are embarking on a major

 19 transformation of OTC markets and all of these

 20 entities are going to need capital to provide the

 21 market efficiencies that we're all seeking to

 22 achieve. And rightly or wrongly, historically a
 122

 1 tremendous amount of the capital for clearing,

 2 e-trading, data and affirmation hubs, has come

 3 from the dealer community, and I think it would be

 4 very dangerous to cut off an important source of

 5 capital that can lead to some of the market

 6 improvements that we're all seeking to achieve.

 7 I think there are two important

 8 components. I think it's important to take a look

 9 at the governance structures to make sure that

 10 there's fair representation of all important

 11 market constituents at the board table and I think

 12 it's important to make sure that there is nothing

 13 that impedes competition, that different entities

 14 have the ability to compete, whether it be for

 15 clearing, trading, or data, and it's not

 16 restricted to just one entity.

 17 MS. SCHNABEL: Okay, I have a question

 18 about ownership. So, I think that right now we're

 19 discussing ownership in general and we may be

 20 lumping together voting ownership and economic

 21 ownership and I guess just going down the line,

 22 and people can raise hands, who supports caps on
 123

 1 economic ownership without voting rights?

 2 All right, can you please explain your

 3 views starting with Jason?

 4 MR. KASTNER: So, this goes back to

 5 something that I was talking about earlier which

 6 is the problem is not when the smallest member

 7 fails. We've had clearinghouses in this country

 8 for, you know, 150 years, and we've had numerous

 9 failures along the way. But the notion is too big

 10 to fail no more, to interconnected to fail no

 11 more. The only way to address that -- or, the

 12 most direct way to address that, is to encourage

 13 both control diversity in terms of voting rights,

 14 but also economic diversity in terms of

 15 participation such that you could have a situation

 16 where the risk is diversified over a larger amount

 17 of members. In fact, it's required because no one

 18 person can have more than 20 percent or whatever

 19 the number is.

 20 Now, it's not like we're saying no one

 21 person can have more than 1 percent, and it's that

 22 we're saying that you can't have a 20 percent
 124

 1 stake in 5 different DSOs, but it's all about too

 2 big to fail, too interconnected to fail. And if

 3 we put stuff in a clearinghouse and it's the same

 4 5 guys in the room, and the biggest 3 of them

 5 start to wobble, you know, it's going to be back

 6 to Congress with a 1-pager asking for $750

 7 billion, which is not want the American public

 8 wants. And so that's why it's critically

 9 important that these ownership -- economic, both,

 10 and voting, be instituted.

 11 MS. SCHNABEL: Heather?

 12 MS. SLAVKIN: Sure. What I'm hearing

 13 from the people who support governance as opposed

 14 to real caps on ownership is an argument in favor

 15 of the status quo, and I think that when

 16 Congressman Brown -- I'm sorry, when Congressman

 17 Lynch proposed this amendment that was passed in

 18 the House legislation, and when Senator Brown

 19 proposed, you know, the Lynch Light version that

 20 was passed by the entire Congress, their intention

 21 was to create real change in recognition of the

 22 fact that the current system is broken. It
 125

 1 doesn't work. That's why we're all sitting around

 2 this table today. Governance is a valuable tool,

 3 it's not the only tool, and I think it's our

 4 responsibility to try to examine other options and

 5 I think that the ownership cap is a real valuable

 6 tool that can be used to mitigate the problems

 7 that exist in the current system.

 8 MS. SCHNABEL: Okay, Roger?

 9 MR. LIDDEL: Yes, I mean, I disagreed, I

 10 think, with everything that Jason said except for

 11 one thing and that is having the same five guys in

 12 the room would be a bad thing, and we certainly

 13 would not want to have that small a number of

 14 financial institutions dominating any structure,

 15 that would not be appropriate any way.

 16 The concept of too big to fail is

 17 obviously of crucial importance, but also,

 18 frankly, I think the concept of too small to

 19 survive in a crisis is also important. The

 20 situation today is that every clearinghouse that

 21 clears futures in the world, to my knowledge, is

 22 capable of managing a default of any one of its
 126

 1 members. It's a well- established process, it's

 2 not that difficult, and it can do it reasonably

 3 reliably. You've got access to good liquid

 4 markets on exchanges to hedge and then you can

 5 auction a portfolio relatively quickly and

 6 relatively easily.

 7 There is, however, not one clearinghouse

 8 in the world today that is itself, on its own,

 9 capable of managing the default of an (inaudible)

 10 swap participant, including us. And what we need

 11 in a venture like that is to call on a bunch of

 12 market participants to come in and work on our

 13 behalf to manage risk and that creates this sort

 14 of mutuality of risk that actually is completely

 15 different from the futures markets.

 16 So, I think as we move into this next

 17 phase, which is crucially important and very, very

 18 beneficial at moving the OTC derivative market

 19 onto clearing systems, we must make sure we don't

 20 just make the assumption that they then will

 21 behave like futures because for the foreseeable

 22 future, in our view, they won't.
 127

 1 MS. SCHNABEL: Michael?

 2 MR. GREENBERGER: I find it very

 3 troubling that LCH says they do not have the

 4 capital resources to clear interest rate swaps.

 5 MR. LIDDEL: No, that isn't what I said.

 6 MR. GREENBERGER: Well, you said you'd

 7 have to bring in other parties to help you.

 8 MR. LIDDEL: No, I said we bring in

 9 other parties to help us manage the risk, not to

 10 provide the capital initially.

 11 MR. BARNUM: I think I may actually be

 12 able to clarify this one and I actually think it's

 13 an extremely important point that has bearing both

 14 on the previous panel and on this one.

 15 The market is obviously changing a lot

 16 and there's obviously a lot of friction, and I

 17 don't think anyone can argue that the status quo

 18 as of, say, 2007, was exactly the optimal, most

 19 efficient situation you would have had as a result

 20 of totally unfettered competition. However, there

 21 was a significant free market element to that

 22 market structure and that element was that, as I
 128

 1 said before, the traditional exchange model works

 2 extremely well for -- in almost every important

 3 respect, for the products that naturally attract a

 4 lot of liquidity in that kind of execution

 5 structure, and for the products that don't work as

 6 well in that structure, the OTC market essentially

 7 serves as an outlet that provides different modes

 8 of execution and different degrees of

 9 customization to serve different needs. I'm well

 10 aware that there are arguments about spurious

 11 customization and OTC products that should

 12 naturally be on exchange, that's fine. My

 13 argument doesn't depend on saying that that's not

 14 true.

 15 The point is, in the new world, what we

 16 are doing is putting a new set of products that

 17 did not naturally gravitate onto exchanges, into

 18 some parts of the traditional exchange

 19 infrastructure, clearing, and then some kind of

 20 organized training, but critically it's happening

 21 in a de-verticalized way, we're going from a

 22 vertical world to a horizontal world. When you do
 129

 1 that and you have a close-out process that you

 2 need to execute because of a failing party or you

 3 need prices for the purposes of margining at end

 4 of day, you don't have access to one single

 5 attached trading venue for the purpose of doing

 6 that. So, what do you do? You need to do

 7 something else and people are developing different

 8 models for how to do that, but Roger's point was

 9 that the close-out process, which LCH did in fact

 10 run, extremely successfully, in the case of

 11 Lehman's default, requires the active

 12 participation of the clearing members to supply

 13 liquidity because the product is not traded

 14 through a central (inaudible).

 15 MS. SCHNABEL: I just want to bring the

 16 panel back to, I guess, the topic, which is

 17 ownership caps. Basically, I mean, what Jeremy

 18 just said, I, you know, I want to get some

 19 clarification about that because it seems that

 20 there is some conflation between ownership and

 21 membership and also some conflation between

 22 economic ownership and voting equity. And so I
 130

 1 just want to see, I guess, could we separate out

 2 each of these elements and who's supporting what?

 3 Hal?

 4 MR. SCOTT: Yes. When I spoke, I was

 5 saying I opposed ownership restrictions, I was not

 6 talking about voting restrictions which I think is

 7 a different issue, and the way I would put it is

 8 not a voting restriction. I would turn it around

 9 to a duty of fair representation, which the SEC is

 10 quite familiar with, and is applied to their

 11 regulated entities which ensures that the users,

 12 more broadly defined of the exchange. And maybe

 13 if you translated this into the clearinghouse, the

 14 users, but not necessarily the members of the

 15 clearinghouse, would have representation in terms

 16 of governance. I'm just saying, this is a

 17 different approach than having an ownership

 18 restriction, so people would be free to own the

 19 exchange singly or in groups -- or, excuse me, the

 20 clearinghouse -- but that there would be some duty

 21 of fair representation. ICE doesn't have that

 22 requirement at the moment, but they have
 131

 1 independent directors. I think, you know, that's

 2 a different idea than fair representation.

 3 Independent directors, to me, are most needed with

 4 public companies as under SOX when there was a

 5 broad duty to shareholders. But I think what's

 6 needed in this context is more the expert, and we

 7 heard before that it's very important that people

 8 that know what they're doing have input into

 9 those, and clearly major users of these

 10 clearinghouses, that is customers who clear

 11 through a member. Major hedge funds, for

 12 instance, have a lot of expertise, okay, in these

 13 areas, they're big traders, so, you know, I think

 14 we should think in terms of maybe that kind of

 15 requirement as opposed to an ownership

 16 restriction.

 17 MS. SCHNABEL: Richard?

 18 MR. PRAGER: My comments would support

 19 good governance. And when I say "governance," I

 20 am talking about governance with teeth. So as the

 21 soul fiduciary on this panel, we talk about

 22 membership, we talk about ownership, we believe
 132

 1 that very strong governance with the participation

 2 of the users of these venues is critically

 3 important. And as the fiduciary representing many

 4 clients and many types of clients -- and I think

 5 in the first panel we talked a lot about the

 6 financial resources of the members. And I think,

 7 Nancy, it was you who actually mentioned that the

 8 customer money, the margin, is the one that gets

 9 hit first. I think because we do get hit first --

 10 I thought because we are the ones that are hit

 11 first, we have an absolutely vested interested in

 12 how well these things are -- these venues are run.

 13 So, you know, we would be in support of a very

 14 inclusive participation and governance with teeth.

 15 MS. SCHNABEL: Lynn?

 16 MS. MARTIN: I just wanted to respond to

 17 one of the items that was just recently discussed.

 18 We disagree with the fact that without -- with

 19 ownership limitations or without the imposition of

 20 ownership limitations, we are maintaining the

 21 status quo. If anything, bringing market

 22 participants into a more active dialogue with
 133

 1 exchanges, with clearing organizations, and with

 2 each other, benefits us as we move to central

 3 clearing and as we move these products to central

 4 clearing. Basically we are asking the market

 5 experts to opine on what structures work for them

 6 and we're asking them to help us solve these

 7 issues that caused or contributed to the financial

 8 crisis together in a collective manner as opposed

 9 to in silos.

 10 MR. RADHAKRISHNAN: Before we go on to

 11 Michael, I'd also like the panel's views on

 12 ownership -- the ownership and governance

 13 structure of exchanges and SEFs. Because so far

 14 the discussion seems to be focused on clearing and

 15 that's not a bad thing, but, you know, there are

 16 also exchanges and SEFs, and if the panelists

 17 would address that, it would be much appreciated.

 18 Michael?

 19 MR. GREENBERGER: Yeah, I think

 20 basically, you know, something that the CFTC

 21 should go back and look at is your 2007 rule. The

 22 result of that rule I'm not very crazy about, but
 134

 1 there was a lot of thinking that went into that

 2 that's applicable to this now. And one of the

 3 thoughts there -- that's the Chicago Mercantile

 4 Group's, which is an exchange and a clearing

 5 facility board of governance in a regulated market

 6 -- basically, you know, I think the vertical

 7 relationship between clearing and exchange trading

 8 is very, very strong, and so whatever we say here

 9 I think goes for both clearing and exchange

 10 trading. And I think as this market develops,

 11 it's going to develop like the regulated futures

 12 market where the clearing is not the big dog and

 13 the exchange following it, it'll be the exchange

 14 with clearing following it, as is true in the

 15 regulated markets.

 16 I still -- if we want governance with

 17 teeth, governance with teeth will have ownership

 18 limitations. You can talk about fair

 19 representation, board governance, the fact of the

 20 matter is, and I think this will bear its way out

 21 in the comments to you, that does not protect fair

 22 and open access. The way fair and open access
 135

 1 will be maintained is I'm not saying that every

 2 bank cannot be part of the majority ownership, but

 3 the big swaps dealers who have an oligopic

 4 interest in the OTC market, 5 of them had 90

 5 percent of the market, they've now set up their

 6 own exchange in effect. Some of them now want to

 7 set up their own individual clearing facilities,

 8 there will be lock outs there not because of

 9 capital that conforms to what traditional

 10 clearinghouses require, but capital requirements

 11 and other discriminatory rules that are excessive

 12 to the risk management function and shut people

 13 out. You can't compare OCC to a swaps clearing

 14 facility that is dominated by swaps dealers. I

 15 completely agree OCC, CME, the traditional

 16 clearinghouses, must have strong risk management,

 17 should have input from their members. They are a

 18 model, but their membership acceptance is not as

 19 restricted as what we are seeing with the swaps

 20 clearing facilities that are being brought about

 21 by the banks. And I think in those situations --

 22 I shouldn't say banks, I should say swaps -- major
 136

 1 swaps dealers. In those situations, not every

 2 situation, ownership limitations should be imposed

 3 so they do not have majority control of the

 4 institution.

 5 MS. SCHNABEL: Just to transition into

 6 the next topic, which is the board of directors,

 7 composition of the board of directors and

 8 composition of board committees, for those of you

 9 who do not support caps on voting, voting rights,

 10 or voting equity, how do you, I guess, think about

 11 the relationship between voting equity and the

 12 board of directors? Because ultimately the board

 13 of directors would be elected by the voting

 14 shareholders.

 15 MR. SCOTT: I would just like to make a

 16 general point, maybe I should have been on the

 17 first panel to make this point, but -- I've been

 18 holding it in so I've got to get it out.

 19 You know, it seems to me that there's

 20 one major regulator who has a big interest in this

 21 who's not at this table: It's the Federal

 22 Reserve.
 137

 1 MS. SCHNABEL: They're here in this

 2 room, by the way.

 3 MR. SCOTT: Well, I'm glad. Maybe they

 4 should move to the table because, as you know,

 5 under Dodd-Frank, they have the power to declare

 6 clearing organizations as systemically important

 7 and thereby become their major regulator. Now, as

 8 we sit here, CFTC and SEC, adopting or thinking

 9 about conflict rules, these rules have a major

 10 impact on the systemic risk. And we've talked a

 11 lot about that in the first sessions of these

 12 (inaudible). So, it seems to me that this process

 13 needs to be coordinated. Now, this is another

 14 advertisement for a recommendation for committee

 15 that fell on deaf ears which was serious

 16 structural reform, but I would say that at the

 17 minimum, given where we are, you know, I hope that

 18 the Fed becomes a major party to this discussion.

 19 MR. RADHAKRISHNAN: You should be aware

 20 that, you know, the SEC and us are in very close

 21 consultation with the Fed, but a couple of points,

 22 it's the FSOC, the Stability Oversight Council,
 138

 1 that makes the determination and we still remain

 2 the primary regulators. So, I think it's only

 3 when we are found to be deficient that the Fed

 4 gets defensive.

 5 MR. SCOTT: Well, again, not an

 6 advertisement for structural reform, but, you

 7 know, if we don't get the regulatory structure

 8 right on this, we could make a lot of mistakes

 9 here. And all I'm saying is, yes, you are the

 10 functional regulator, but they are the party, if

 11 these institutions are designated as systemically

 12 important, who have overall responsibility for the

 13 systemic stability of our system. So you're going

 14 to have to work out amongst you how that happens.

 15 MR. RADHAKRISHNAN: Here's a question on

 16 --

 17 MR. SCOTT: I'm sorry. I apologize for

 18 this digression. I do think it's important that

 19 as we go forward on this conflicts issue we take

 20 this into account.

 21 MR. RADHAKRISHNAN: So, to follow up on

 22 Nancy's question, the compositions of boards of
 139

 1 directors, not just at the clearinghouses, but

 2 also at DCMs themselves, should our two agencies

 3 mandate how that board should be composed? Should

 4 we impose a certain amount of independent

 5 directors? And please tell us how we should

 6 address boards of publically traded companies

 7 because I believe, you know, under the SEC rules

 8 there are different requirements if you happen to

 9 be a publically traded company, so should we defer

 10 to SEC rules of publically listed companies or

 11 should our rules be different assuming that we can

 12 get there?

 13 MR. BARNUM: I'm going to take a shot at

 14 actually answering some of these questions as

 15 briefly as possible because we all have other

 16 things we want to say, too, so a couple things.

 17 One, I think it's clear that economic stakes are

 18 less risky and problematic than voting stakes.

 19 Does that mean that there's no appropriate

 20 regulatory oversight of those whatsoever? No,

 21 clearly not, but on the scale of things that I

 22 would worry if I were regulating this thing, I
 140

 1 would worry the least about non-voting economic

 2 stakes because those are the ones that are going

 3 to have the least impact on things like

 4 governance, strategy, innovation, membership, and

 5 all the things that directly feed into the policy

 6 objectives which are, in my opinion, primarily

 7 systemic risk and secondarily, you know,

 8 competition and maximum liquidity and access. So,

 9 I think that's the first thing.

 10 Now, to go to the next question, if you

 11 then talk about composition of boards and public

 12 companies, the answer probably has to depend a

 13 little bit on, again, private versus public. So,

 14 private companies will have boards. Probably in

 15 private company boards that board will drift in

 16 more to some of the issues which might involve

 17 systemic risk, the public company board is going

 18 to be more constrained by traditional fiduciary

 19 responsibilities to the shareholders so

 20 realistically, I think the regulatory process is

 21 going to have to differentiate between those

 22 aspects of governance which speak directly to the
 141

 1 policy objectives of systemic risk and will

 2 probably have to have segregated boards for those

 3 types of decisions that are to some degree

 4 different from the boards that are in charge of

 5 the commercial objectives of the entity in

 6 question.

 7 Unfortunately, I think what that means

 8 is that you wind up with kind of a wishy-washy

 9 answer, which is that it depends and it's case by

 10 case and it's going to be tedious and intensive

 11 rulemaking. But the alternative is to wind up

 12 with a very course tradeoff between the need to

 13 allow people to have commercial incentives to

 14 develop useful pieces of market infrastructure and

 15 insuring that once those things are developed,

 16 they don't create either anti-competitive patterns

 17 or excessive systemic risk.

 18 MS. SCHNABEL: Jason?

 19 MR. KASTNER: I've got several points

 20 that I'm going to make very quickly, but first I'm

 21 going to give a history lesson on the Federal

 22 Reserve system. We have a decentralized system
 142

 1 and there's a very good precedent and a good

 2 reason for decentralization and federalism and the

 3 same principles when they were crafting the

 4 Federal Reserve Act in 1913 apply today which is

 5 that you don't put all your eggs in one basket and

 6 you spread it around, and the best way to do that

 7 is to put ownership restrictions on SEFs,

 8 exchanges, DCOs, the idea is to diversify.

 9 Now, this point about the status quo or

 10 not, it's -- if we allow risk to be concentrated

 11 in centrally cleared environments with the same

 12 three guys, five guys, it's worse than the status

 13 quo because now you've got all this stuff

 14 concentrated in a clearinghouse whereas before it

 15 was bilateral and there's all these ISDA

 16 agreements and everything's -- you know, at least

 17 maybe if the one thing fell over, it certainly

 18 wouldn't fall over, but I would say it's the

 19 status quo but worse.

 20 Thirdly, this point about too small to

 21 survive, again, the problem is not when your small

 22 clearing member falls over, it's when the big
 143

 1 three guys -- so, as long as the clearinghouse is

 2 robust and diversified and decentralized, right,

 3 it's a robust system which addresses the issue of

 4 too big to fail.

 5 MS. SCHNABEL: Richard?

 6 MR. PRAGER: I think perhaps to answer

 7 Ananda's question, if you go back to Jeremy's

 8 example, if this was, in fact, a utility, a

 9 government-owned utility, and then you first ask

 10 yourself, now we're taking away the economic

 11 incentives, how would you want to govern that

 12 utility and what are the appropriate oversight

 13 boards or committees, whether they be a risk

 14 committee or a new product approval committee? So

 15 I think there's where perhaps the agencies should

 16 look at some sort of governance structure that

 17 should be followed with, you know, with all the

 18 prudence and risk management tools available run

 19 by the experts with a very inclusive participation

 20 of all of those who truly has their money at risk,

 21 which, of course, I would argue includes the buy

 22 side.
 144

 1 I think once that has been established

 2 then you can layer on the question in a public

 3 context of what -- whether it matters, if it's

 4 voting shares or non-voting shares, but at least

 5 you know you have a very solid structure that the

 6 agencies themselves would have oversight of.

 7 MR. WORKIE: If I could just briefly go

 8 back to the ownership issue, should we be thinking

 9 differently about ownership with respect to

 10 individuals as opposed to groups? In other words,

 11 should we -- are there differences in the way we

 12 should be thinking about restrictions based on the

 13 cost of people as opposed to a certain person or

 14 certain individual can't own more than a certain

 15 percentage? Something like that.

 16 MR. GREENBERGER: I think it's hard to

 17 answer that question because for example in the

 18 situation of Goldman, you don't know whether

 19 Goldman is bringing in other -- is Goldman going

 20 to be the only guarantor or are they going to

 21 bring other members in the organization?

 22 Certainly to the extent there's a one-member
 145

 1 clearinghouse you've got real problems on your

 2 hand in terms of you're putting all the risk in

 3 the hands of one institution, so I think you need

 4 to find out what these ideas are of single

 5 corporation clearinghouses and how they're going

 6 to work.

 7 Getting back to the original question,

 8 again, and I think in 2004 to 2007 the CFTC

 9 thought these issues through very carefully. They

 10 originally proposed for exchanges, regulated

 11 exchanges, 50 percent independent boards of

 12 directors. My view would be no matter who owns --

 13 there's a sliding scale here. If the ownership

 14 requirements are tough in terms of restrictions,

 15 then you would worry less about the board, but

 16 even with the toughest ownership restrictions, 50

 17 percent -- I believe at least 50 percent of the

 18 board should be independent and I would -- I see

 19 my good friend Mark Young sitting over there -- I

 20 would adopt 80 percent of what the Futures

 21 Industry Association advocated with regard to the

 22 need for impendence on the board of the Chicago
 146

 1 Mercantile Group in that period. Their arguments

 2 for independence, how it's defined, look-back

 3 periods, are very, very strong. They were in the

 4 situation then of being Wall Street, being shut

 5 out of Chicago, and they advocated for open and

 6 fair markets and their arguments, I think, should

 7 carry the day for all exchanges.

 8 MS. SCHNABEL: All right, only if you're

 9 very brief, Jeremy.

 10 MR. BARNUM: I just wanted to say, look,

 11 again, unfortunately, there is a tension, there is

 12 a balancing act. Anyone who's been part of a risk

 13 management organization at a large bank knows that

 14 there is a risk of groupthink and so we know the

 15 focus here has got to be about risk committee. If

 16 the risk committee suffers from groupthink, then

 17 that creates systemic risk. That's bad.

 18 Independence is good. There should be as much

 19 independence as is possible on the risk committee.

 20 But there's another side to that which is that

 21 whether we like it or not, expertise in these

 22 markets is not broadly available and so you have
 147

 1 to have a balance between your desire for

 2 independence and the need to have expertise. And

 3 when you sacrifice independence in favor of

 4 expertise, it's important to remember that if you

 5 have non-independent people of expertise whose

 6 capital is at risk, then at least from the

 7 perspective of systemic risk -- I'm not speaking

 8 to open access independently of that -- but at

 9 least from the perspective of systemic risk, you

 10 could be reasonably assured that the incentives

 11 are aligned.

 12 MR. RADHAKRISHNAN: We've got a few more

 13 questions that we need to ask. Jordan, go ahead.

 14 MS. O'REGAN: Although Michael just

 15 answered this question, could other panelists

 16 discuss whether there is a certain percentage of

 17 independent directors or public directors that

 18 would alleviate the concerns we've been

 19 discussing.

 20 MS. SCHNABEL: Okay, actually I'm going

 21 to take a vote if that's okay because that might

 22 be the easiest.
 148

 1 MR. RADHAKRISHNAN: And also the other

 2 issue is, what does independent mean?

 3 MS. SCHNABEL: Okay, let's start with

 4 what does independence mean because then we can do

 5 the vote on percentages. Hal?

 6 MR. SCOTT: Well, there's no one

 7 definition of independence. You can start with,

 8 you know, the New York Stock Exchange's

 9 definition. Numbers of exchanges have adopted

 10 definitions as (inaudible) and probably Sarbanes-

 11 Oxley. So basically -- but I would make the point

 12 that, you know, we don't necessarily need

 13 independence here, what we need is a

 14 non-membership point of view and expertise, the

 15 users of the system. You know, we need to ensure,

 16 if we're going to independent directors, they have

 17 expertise.

 18 The most important thing is containing

 19 systemic risk and we need to make sure that the

 20 people who are participating in this understand it

 21 and know what it is. So I would not go -- I think

 22 we need independence on publically owned
 149

 1 companies, publically owned exchanges to protect

 2 the shareholders. But in non-publically owned

 3 institutions I would focus on the user's

 4 representation rather than independent directors

 5 which is a concept that we've mainly, to this

 6 point, applied to public companies.

 7 MS. SCHNABEL: Michael?

 8 MR. GREENBERGER: I again would go back

 9 to the Futures Industry Association comments.

 10 Their definition was no material relationship, but

 11 no relationship with the company. There was a

 12 one-year look back, they proposed a two-year look

 13 back. I think the look back could be even

 14 stronger. There was a limit to $100,000 in a

 15 service provider. If you had more than that you

 16 couldn't be a member. FIA said there should be no

 17 client-customer relationship and that it should

 18 extend to close relatives as well.

 19 MS. SCHNABEL: Did you have something

 20 that you wanted to say?

 21 MR. McVEY: Just a couple of things and

 22 we've touched on a number of topics, public versus
 150

 1 private and independence of directors and we have

 2 a little bit of experience with both having been a

 3 private company and now in the public arena. And

 4 I think that there are already significant

 5 obligations of independence on public companies,

 6 some of which serve as a good model, I think, for

 7 good governance structures that should apply to

 8 clearinghouses and SEFs and data warehouses and

 9 the like.

 10 I personally think that one of the most

 11 important areas to focus on is the governance and

 12 nominating committee. How do people get on these

 13 boards? And if there is a requirement that that

 14 process be independent I think you would get both

 15 qualified people that are going to look after the

 16 best interest of the company, and you would get

 17 better independence on these boards.

 18 The second requirement that I would look

 19 to is that most major industry groups should be

 20 represented on these boards. I don't think that

 21 there's a hard limit on the number of seats that

 22 can be held by any one constituent but certainly I
 151

 1 think when you look at the importance of these

 2 entities, the dealer community should be

 3 represented, the investment community should be

 4 represented, there should be quality risk

 5 management capabilities around that board, so I

 6 think broad industry representation should be a

 7 key principle as well.

 8 I also think that to increase the level

 9 of duty and care among the directors on the entity

 10 itself, there should be a requirement that the

 11 directors are able to be compensated for their

 12 work. Some of them go into these jobs without

 13 being able to take compensation because they know

 14 there's a conflict of interest because they're

 15 there primarily to represent the interests of

 16 their own firm. So, I think if you would really

 17 look into the corporate and governance --

 18 nominating process, you require industry

 19 representation from all groups and you require

 20 that directors are able to be compensated, we

 21 would have a better model.

 22 MR. GREENBERGER: Can I make one quick
 152

 1 point? I wanted to make clear the $100,000 would

 2 not apply to compensation, that's in the -- in the

 3 rules they apply it, but as a director -- I don't

 4 put any limits on directors' compensation.

 5 MS. SCHNABEL: Heather?

 6 MS. SLAVKIN: I agree that the SEC has

 7 some good provisions in place with regard to

 8 public companies that provide for independence on

 9 the board. I think, though -- I agree also that

 10 governance and nominating committee independence

 11 is important, but I think one thing in addition

 12 that needs to be considered here is that there

 13 needs to be a real democratic process in place for

 14 actually electing the members of the board of

 15 directors. The current process for public

 16 companies where you could either vote for the

 17 board nominee or not vote for the board nominee,

 18 but can't actually vote against anybody or put up

 19 an opposing candidate doesn't result in a real

 20 democratic process and that causes some concerns.

 21 I also want to go back to the issue that

 22 was raised before about ownership restrictions
 153

 1 versus voting caps. I actually disagree with what

 2 the gentleman from JP Morgan said when he said

 3 that he doesn't think that having an economic

 4 stake without having a voting interest is a

 5 concern. I think most of us can imagine a

 6 situation where someone owns 5 percent of our

 7 company and asks us to do something. I don't

 8 think it matters if that person gets to vote for

 9 the board of directors, that person has real

 10 influence regardless of whether it's formal

 11 influence, there is going to be influence over the

 12 decision making, there's going to be influence

 13 over the strategy and innovation and the

 14 trajectory of the institution in general, so I do

 15 think we need to look at ownership restrictions

 16 related to voting interests as well as related to

 17 economic interests even when they're not tied to

 18 actual voting shares.

 19 MR. BARNUM: One sentence response. I

 20 didn't say it didn't matter at all, I said that on

 21 the scale of priorities, it would be at the

 22 bottom.
 154

 1 MR. BERNARDO: And I think as a SEF we

 2 can manage the conflicts of interest and the act

 3 doesn't require ownership limits but it does

 4 require compliance with the core principles and we

 5 need to have rules that are limiting that access.

 6 MS. SCHNABEL: Okay. I actually have a

 7 very simplistic question. Given that

 8 independence, you know, has not yet been defined,

 9 I know that this is hard, but in terms of board of

 10 directors, 50 percent independent, who supports

 11 it, who doesn't? Sorry, raise hands.

 12 MR. SCOTT: Of what are we talking

 13 about? Any entity? All entities?

 14 MS. SCHNABEL: DCOs.

 15 MR. SCOTT: Publically owned? Privately

 16 owned?

 17 MS. SCHNABEL: Okay, clearing agencies,

 18 exchanges, swap execution facilities. Okay, let's

 19 start with privately owned.

 20 Fifty percent, who's for it? I've got

 21 Michael. Anybody else? I've got Heather. Okay.

 22 Less than 50 percent, let's say 40 percent.
 155

 1 Anybody?

 2 UNIDENTIFIED: Still private.

 3 MS. SCHNABEL: Still private. Okay.

 4 Thirty percent?

 5 MR. BARNUM: I would say 30 percent is

 6 desirable. It would be nice if you get it. If

 7 you mandate it, it could be a problem.

 8 MS. SCHNABEL: Okay, and now public, 50

 9 percent? All right, Hal, Michael, Heather. All

 10 right, now we're going to move on to committees.

 11 Lois, the next question?

 12 MS. GREGORY: I have a question. In

 13 terms of board committees, what board committees

 14 are conflicts of interest most manifest on and how

 15 do we address that? With independence

 16 requirements? And if so, what percentage there?

 17 MS. SCHNABEL: Okay, Hal.

 18 MR. SCOTT: Again, I would not have -- I

 19 wouldn't answer this question any differently for

 20 the committee than I answered it for the

 21 organization as a whole, so if it's private, I

 22 would not insist on any independent directors on a
 156

 1 committee since I haven't insisted on it for the

 2 board as a whole. But I think narrowing in on the

 3 other aspect to your question as to what are the

 4 key committees we need to worry about, where I

 5 think the issue should be solved by representation

 6 of the users, not by independence requirements,

 7 would be the membership committee, the risk

 8 management committee, and probably the governance

 9 committee which would be, you know, if the

 10 organization had such a governance committee.

 11 So, I think those would be three key

 12 committees where you would want to have

 13 representation from not just the members of the

 14 organization.

 15 MS. SCHNABEL: So, let's talk about fair

 16 representation a little bit more. We recognize

 17 that's a question that's separate from

 18 independence. What -- I guess, at what threshold

 19 is representation fair? What should we look at to

 20 make sure that all market participants or all

 21 users have a say in the operation of a clearing

 22 agency or an exchange or a swap execution
 157

 1 facility?

 2 MR. RADHAKRISHNAN: And then to add to

 3 that, how do we include them? For example, let's

 4 say you have an organization which says, I

 5 represent this group of people and I want to be

 6 represented, as opposed to a citizen of the

 7 street. Why should he or she not be included?

 8 MR. SCOTT: I would address this, first

 9 of all, by not a one-size-fits-all approach. I

 10 think if you have a duty of fair representation

 11 you should allow each organization to come forward

 12 with a plan that in their view justifies or takes

 13 account of this fair representation. Different

 14 organizations may have different ways of doing

 15 this. I don't think we should set a magic number,

 16 but I think there should be a duty and, you know,

 17 so I guess that would be my answer.

 18 MR. PRAGER: I think if you do -- I do

 19 think it is important to look at the

 20 participation. This is meant to address market

 21 reform and what's good for all the markets and

 22 healthy, stable financial markets. So, you know,
 158

 1 there is empirical evidence of who, in fact, is

 2 participating in these markets so I think there

 3 you can get a pretty good sense of the dealers,

 4 the investors, end users, corporations, and they

 5 need to have a seat at the table so I would be in

 6 favor of reserving certain seats at these

 7 respective committees. I'm probably a little bit

 8 less of the mind you have to be absolutely --

 9 prescribe how many and in what committees, but

 10 there will be basic committees where you could

 11 have conflicts to your question before of what

 12 products can come on and, you know, there's this

 13 concern that there might be some perverse

 14 incentive not to have a product come on. Well, if

 15 the users are sitting there at those committees

 16 and saying, yes, please, we need that, it can be

 17 prudently managed, and you listen to some of the

 18 comments from the earlier panel about, you know,

 19 balancing those needs of what can be prudently

 20 risk- managed, and if it meets those criteria, I

 21 think that's where you get a very balanced view of

 22 what should be accepted as a clearable product or
 159

 1 not.

 2 So, I do think that, you know, we're

 3 trying to serve the needs of the entire

 4 marketplace and, you know, each of those

 5 constituents should have a seat at these

 6 respective committees.

 7 MS. SCHNABEL: Roger?

 8 MR. LIDDEL: First of all, I think -- I

 9 don't think everybody can be represented but I

 10 think you can have, you know, individual

 11 organizations that are representative of a sector

 12 and that, I think, can be quite successful.

 13 Similarly, I don't think you need many truly,

 14 truly independent directors. A small number, I

 15 think, can keep a board honest.

 16 And indeed I think this is an important

 17 time in our evolution, in the market evolution,

 18 and we're -- I mean, we're actively discussing

 19 now, internally, you know, bringing in different

 20 representations into our board potentially and

 21 onto some of our committees, you know, getting

 22 some significant buy side involvement, but frankly
 160

 1 that's not because of any views we've got on any

 2 conflict of interest, and that really rarely comes

 3 up at all, it's simply that we would actually

 4 benefit as an organization from having more input

 5 in expertise than a different sector of the market

 6 that is now becoming more important to us. So,

 7 that's the reason and motivation for doing it but

 8 it has the same end result, I think.

 9 MR. BARNUM: I just wanted to expand

 10 briefly on what Mr. Prager said from Blackrock

 11 because I think that you raise a very useful point

 12 which is that one of the really big benefits, I

 13 think, of the legislation is the swap data

 14 repository requirement and that's going to mean

 15 that the regulatory community has a complete

 16 visibility over (inaudible) and that makes it

 17 quite easy to sort of monitor this and surveil it

 18 and sort of say, hey, wait a second, it appears

 19 that there's this community of people who's

 20 critical of this market. I can see it from the

 21 data, and they're not represented. And I think

 22 that's a very useful tool. In fact, in a number
 161

 1 of these policy issues, the increased visibility

 2 of both volumes and positions will, I think,

 3 enable this to be done much more fairly.

 4 MR. GREENBERGER: I don't think fair

 5 representation can be viewed in isolation from the

 6 other issues. If you've got a small number of

 7 swaps dealers running a company I think you'll

 8 find that both the independent directors and the

 9 fair representers are going to fall short of the

 10 kind of concerns from the broker community that

 11 you've heard today. So, it's not an isolated

 12 situation. To the extent there is broader

 13 ownership and there will be the intermediaries who

 14 will want ownership, you're going to have a better

 15 board, whether it's independent or not, and better

 16 fair representation. I think somebody who's there

 17 for fair representation in an oligopic thing is

 18 really never going to be able to do their job and

 19 so I would just say that I think there's a

 20 relationship.

 21 MR. SCOTT: Just one last point. I have

 22 to go early. There's another leg of this stool
 162

 1 here, this is the regulators. So, whatever these

 2 organizations do with respect to governance

 3 membership criteria or whatever, should be

 4 reviewed and reviewed in detail, okay, by the

 5 primary regulator. So, this is another protection

 6 of the system. So, you know, we heard from the

 7 first panel potential conflicts around things like

 8 how much capital you require of the member, do you

 9 -- nobody brought it up, but it's an issue,

 10 whether you accept a parent guaranty of a member

 11 in lieu of the member's own capital. Whether the

 12 member itself has the ability to resolve contracts

 13 in the extent of default, or could this be

 14 contracted out to a third party which have that

 15 capability. A number of these issues, and, you

 16 know, new products, whatever it is -- these rules

 17 should come to the regulator and the regulator

 18 should review these rules. So, another key part

 19 of the protection of the public here, an essential

 20 part, is not just the governance structure, but

 21 it's the regulatory structure that is looking over

 22 all of this. And so, Michael, I would say that --
 163

 1 you know, I think you would agree, whatever you do

 2 in ownership, we need a strong regulatory review

 3 function. In my view, that plus governance is

 4 enough, but others may and have disagree.

 5 MR. RADHAKRISHNAN: So, while I think

 6 it's fair to say that the regulators represent the

 7 views of -- well, are here to make sure that the

 8 public interest is protected, do you think that

 9 there is a place for the American public, however

 10 you pick them, to be on the boards? Or is that

 11 completely unrealistic? Because all we've talked

 12 about is interest of market participants, but as,

 13 you know, Jason mentioned, one of the reasons why

 14 Congress went through this exercise is because the

 15 taxpayer footed an enormous bill. So, to make

 16 sure that the taxpayer doesn't do that again, is

 17 there a place for the average man or woman on the

 18 street to be represented, realizing that how you

 19 pick that man or woman on the street is going to

 20 be quite difficult?

 21 MR. GREENBERGER: I think I'm going to

 22 give you a surprisingly conservative answer on
 164

 1 this. I do agree with what has been said, that

 2 you need experts on the board. What I disagree

 3 with is that all expertise comes from five swaps

 4 dealers or it all comes from people who work for

 5 banks. There are academics, former regulators,

 6 and, you know, other participants in the market

 7 who have talked today about their need for open

 8 and fair access. I think that kind of diversity

 9 on the board is important. I would worry very much

 10 about putting somebody on the board as a

 11 representative of the American public who isn't

 12 going to be able to abide by the fiduciary

 13 relationship to the institution, and these

 14 clearinghouses and exchanges and swaps execution

 15 facilities have a public -- I think that's what

 16 you're saying. Congress clearly sees them not as

 17 private, but having a public merit of stabilizing

 18 the economy, but I think to fulfill that you do

 19 have to have expertise on the board.

 20 MR. PRAGER: Yeah, and I would agree

 21 that you need that expertise to really add value

 22 to the equation and if you do have, you know,
 165

 1 balanced participation, including fiduciaries like

 2 ourselves, we do represent the person on the

 3 street through their pension funds and other

 4 monies.

 5 MR. BERNARDO: I just wanted to

 6 emphasize that the corporate governance core

 7 principles applicable to derivatives, clearing

 8 corps., and exchanges, is not applicable to SEFs.

 9 MS. SLAVKIN: I think if the question is

 10 do we want regulators to pick a random person from

 11 the street and put them on the board of directors,

 12 that would be problematic. I think if you're

 13 talking in the context of a public company where

 14 the representative of the public would most likely

 15 be somebody who was selected by the shareholders,

 16 they would have to win an election and most of the

 17 votes in that election would be placed by

 18 institutional investors who are sophisticated, who

 19 understand the markets, who simply aren't going to

 20 vote for somebody who doesn't know what's going

 21 on, that doesn't have the sophistication and the

 22 expertise to make a significant contribution to
 166

 1 the board. And the people who are responsible for

 2 selecting that individual and running them as a

 3 candidate aren't going to put somebody up who

 4 doesn't have the expertise because oftentimes

 5 these are the same people that have an ownership

 6 interest and want to see the very company succeed.

 7 So, I do think there could be a place for an

 8 independent individual that's nominated by

 9 shareholders who have an economic interest in the

 10 financial stability and the success of the firm

 11 to, you know, have a seat on the board, but I

 12 don't think any random person off the street

 13 should have that position.

 14 MS. SCHNABEL: Lynn.

 15 MR. RADHAKRISHNAN: Lynn, yeah.

 16 MS. MARTIN: I just wanted to respond to

 17 one item that was just brought up around the

 18 application of the core principles that apply to

 19 exchanges applying to swap execution facilities.

 20 I would actually argue that it's important for

 21 those same core principles that apply to DCMs and

 22 DCOs, particularly around conflicts of interests,
 167

 1 governance manners, and independence requirements

 2 potentially, so specifically core principles 15,

 3 16, and 17, they actually provide a useful

 4 framework for mitigating these type of conflicts

 5 on the boards of exchanges and the boards of DCOs.

 6 So I think that we should think about potentially

 7 extending those core principles to apply not only

 8 to DCMs and DCOs, but to swap execution facilities

 9 as well.

 10 MS. SCHNABEL: Okay, Jeremy.

 11 MR. BARNUM: Sorry, just because I think

 12 that's actually a really important point because

 13 so far all the questions that I've been asked have

 14 sort of presumed that exchanges, SEFs and DCOs are

 15 sort of the same for the purposes of these

 16 governance issues and I actually think -- I

 17 believe that they're extremely different and that

 18 understanding those differences and getting it

 19 right is really critical. That doesn't mean that

 20 we're against, obviously, appropriate

 21 representation and governance on SEFs, but I think

 22 you have to look kind of at the scale and for me
 168

 1 the scale is the most critical, trickiest place

 2 where you have to balance systemic risk with other

 3 interests is the risk committee of the DCO.

 4 That's on one end of the continuum. On the other

 5 end of the continuum is the board of directors of

 6 a publically traded company where, you know,

 7 really, the real question is, these traditional

 8 questions that have obviously been heavily debated

 9 for years about how to manage that governance

 10 process (inaudible) shareholders, but it's pretty

 11 well removed from the micro functioning of the

 12 market as it relates to systemic risk. And I

 13 think SEFs, on that continuum, kind of lie in an

 14 interesting place. I've heard this is a

 15 controversial view but I think it's -- in my

 16 opinion, SEFs are not particularly important from

 17 a systemic risk perspective. I think SEFs serve a

 18 very important and relevant role in the

 19 legislation, but on the scale of things they don't

 20 do that much about systemic risk. Systemic risk

 21 is more happening in clearing and in post trade

 22 than happening in pre trade. There are other
 169

 1 policy objectives that are being served by SEFs.

 2 MS. SCHNABEL: Okay, it's 12:00, so

 3 we're going to try to wrap up. So, I have one, I

 4 guess, thematic question. Just playing off of

 5 what Hal had been saying, and unfortunately he's

 6 not here to really defend himself, but it seems as

 7 if there is a three-legged stool that we've been

 8 all talking about and the first leg is ownership

 9 and voting; the second leg is board of directors

 10 and their composition and fair representation; and

 11 the third leg is objective criteria that

 12 regulators should be looking at and reviewing.

 13 Of those three legs, which do you think

 14 are important or are they all important?

 15 MR. BARNUM: They're all important and

 16 objective criteria is the most important.

 17 MR. GREENBERGER: They're all important

 18 and ownership is the most important. It's the

 19 only -- Hal made the point that I can't argue

 20 with, that regulation is very important, but you

 21 as regulators -- because I was once in somewhat

 22 similar situation -- do not want to be on the
 170

 1 phone every day with people complaining about not

 2 having access, this, that, and the other thing.

 3 That's something you have to deal with up front to

 4 limit your regulatory responsibilities on the back

 5 end.

 6 If you set this up so that an antitrust

 7 complaint or a phone call is the remedy, it's not

 8 going to work. This is one part -- the board

 9 governance or an ownership structure is one part

 10 of many powers you have. Don't let people talk

 11 you into the fact that, oh, you have these other

 12 powers, so don't worry about this. Because when

 13 you get to the other powers they'll be saying, oh,

 14 you had the board governance power, don't worry

 15 about this. They all have to go into effect at

 16 the same time.

 17 The final point I would make, SEFs

 18 should not be treated any differently. It is well

 19 known that in the legislative process there was a

 20 big concern that SEFs were going to be a less

 21 regulatory environment to satisfy the need for

 22 exchange trading. You cannot let that happen. I
 171

 1 think the final legislation doesn't let that

 2 happen, and SEFs have to have the same governance

 3 process as everyone else.

 4 MR. PRAGER: I think all three are very

 5 important. As I spoke earlier, I think the fair

 6 representation in governance is very important and

 7 I also think the regulation is important. These,

 8 certainly the DCOs, are the new too big to fails

 9 so they need to be monitored very carefully.

 10 MR. LIDDEL: I think they are all

 11 necessary. I think they have different

 12 importance. I think that governance and

 13 regulation are the two most important legs. I

 14 think ownership is less important, frankly. I

 15 mean, our organization has had lots of changes in

 16 ownership structure over the years, small number

 17 of banks, huge number of financial institutions,

 18 exchanges, back and forth, and it's never, as far

 19 as I can tell, made any meaningful difference to

 20 how the company operates.

 21 MS. MARTIN: I believe they're all

 22 important. Regulation is one of the most
 172

 1 important. We should look at what worked well

 2 during the financial crisis and those would be the

 3 exchanges, the centrally cleared markets, and we

 4 should take that into account when we're

 5 promulgating policies for swap execution

 6 facilities.

 7 MR. KASTNER: I think they're all

 8 important but I would think that the most

 9 important question is, what does the customer

 10 want? What is good for the buy side customer?

 11 And we apply that with transparency, and we apply

 12 that by looking at different incentives. And the

 13 question, as you write the rule, should be, what

 14 is the incentive, really, behind this position or

 15 that position, and what is good for the customer

 16 first?

 17 MR. McVEY: I think they are all

 18 important. I would put them in the order of,

 19 first, objective criteria around some of the key

 20 issues that have been discussed this morning in

 21 terms of which swaps are eligible for clearing

 22 which then triggers the exchange or SEF
 173

 1 requirement at the top of my list. I would put

 2 good governance and the board and decision-making

 3 process second and ownership third.

 4 MR. BERNARDO: I think they're all

 5 important. I do think the objectiveness is

 6 possibly -- is probably the most important, but

 7 going back to the crisis, I don't think that the

 8 markets would have acted as efficiently as they

 9 did if it were not for the inter deal brokers who

 10 were the members of the WMBA.

 11 MS. SLAVKIN: I think they're all

 12 equally important.

 13 MR. RADHAKRISHNAN: All right. Well,

 14 thank you. This brings us to an end of this

 15 roundtable. We really appreciate the spirited

 16 discussion and the preparation that the panelists

 17 have shown.

 18 I again will remind you of our

 19 invitation to send us comments at the Federal

 20 Register. Please send us your comments so that we

 21 can do thoughtful rulemaking.

 22 Thank you so much.
 174

 1 (Whereupon, at 12:06 p.m., the

 2 PROCEEDINGS were adjourned.)

 3 * * * * *

 4

 5

 6

 7

 8

 9

 10

 11

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22
 175

 1 CERTIFICATE OF NOTARY PUBLIC

 2 I, Carleton J. Anderson, III do hereby

 3 certify that the forgoing electronic file when

 4 originally transmitted was reduced to text at my

 5 direction; that said transcript is a true record

 6 of the proceedings therein referenced; that I am

 7 neither counsel for, related to, nor employed by

 8 any of the parties to the action in which these

 9 proceedings were taken; and, furthermore, that I

 10 am neither a relative or employee of any attorney

 11 or counsel employed by the parties hereto, nor

 12 financially or otherwise interested in the outcome

 13 of this action.

 14 /s/Carleton J. Anderson, III

 15

 16

 17 Notary Public in and for the

 18 Commonwealth of Virginia

 19 Commission No. 351998

 20 Expires: November 30, 2012

 21

 22