UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 SECURITIES AND EXCHANGE COMMISSION

 PUBLIC ROUNDTABLE TO DISCUSS INTERNATIONAL

 ISSUES RELATING TO THE IMPLEMENTATION OF TITLE VII

 OF THE DODD-FRANK ACT

 Washington, D.C.

 Monday, August 1, 2011
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 1 A G E N D A

 2 Opening Statements:

 3 JACQUELINE MESA, CFTC

 4 DAN BERKOVITZ, CFTC

 5 ETHIOPIS TAFARA, SEC

 6 ROBERT COOK, SEC

 7 Panel 1: Cross-Border Transactions

 8 DAVID KELLY, UBS

 9 DENNIS KLEJNA, MF Global

 10 WILLIAM MANSFIELD, Rabobank

 11 JOHN NICHOLAS, Newedge

 12 ROBERT REILLY, Shell

 13 THOMAS RIGGS III, Goldman Sachs

 14 MARCUS STANLEY, Americans for Financial Reform

 15 WALLY TURBEVILLE, Better Markets

 16 SUPARNA VEDBRAT, Blackrock

 17 LUKE ZUBROD, Chatham Financial

 18 Panel 2: Global Entities

 19 CHRIS ALLEN, Barclays

 20 ANGIE KARNA, Nomura Securities

 21 SARAH LEE, Bank of America

 22 JOHN MCCARTHY, GETCO
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 1 A G E N D A

 2 STEPHEN O'CONNOR, Morgan Stanley

 3 ROBERT REILLY, Shell

 4 MARCELO RIFFAUD, Deutsche Bank

 5 MARCUS STANLEY, Americans for Financial Reform

 6 WALLY TURBEVILLE, Better Markets

 7 Panel 3: Market Infrastructure

 8 PETE AXILROD, DTCC

 9 JAMES CAWLEY, Javelin Capital Markets

 10 MATTHIAS GRAULICH, Eurex

 11 IONA LEVINE, LCH

 12 VERETT MIMS, Boeing

 13 STEPHEN O'CONNOR, Morgan Stanley

 14 LEE OLESKY, Tradeweb

 15 JONATHAN SHORT, ICE

 16 KIM TAYLOR, CME

 17 WALLY TURBEVILLE, Better Markets

 18 Also Present:

 19 BRIAN BUSSEY, SEC

 20 ANANDA RADHAKRISHNAN, CFTC

 21

 22 * * * * *
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 1 P R O C E E D I N G S

 2 (9:00 a.m.)

 3 MS. MESA: Good morning. I want to

 4 thank all of you for being here today on the

 5 Roundtable on International Issues relating to

 6 Title VII of the Dodd-Frank Act. I'm going to

 7 make a few opening remarks and allow my colleagues

 8 at the CFTC and SEC to do the same before we start

 9 Panel 1.

 10 The CFTC has been hard at work proposing

 11 rules required to implement Title VII of the

 12 Dodd-Frank Act relating to swaps oversight

 13 reforms. We've heard from the industry in formal

 14 and informal comments about international issues

 15 and concerns relating to implementation of the

 16 Dodd-Frank Act. We look forward to your input on

 17 not just the issues, but also potential solutions.

 18 Although each of our agencies has

 19 different statutory provisions regarding the

 20 international reach of Title VII, we have a

 21 similar need to address the scope of our reach.

 22 722(d) of the Dodd-Frank Act states that
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 1 provisions of the Act relating to CFTC regulated

 2 swaps shall not apply to activities outside the

 3 U.S. unless those activities, one, have a direct

 4 and significant connection with activities on or

 5 affect on commerce of the U.S.; or, two,

 6 contravene the rules and regulations promulgated

 7 by the CFTC as necessary or appropriate to prevent

 8 evasion of the Dodd-Frank Act. I realize the

 9 swaps industry is waiting for guidance on this

 10 provision as the CFTC's application of it is

 11 important in light of the global nature of the

 12 swaps market.

 13 The CFTC has a history of working out

 14 solutions to international issues. For example,

 15 for many years we have relied on foreign

 16 regulators to regulate foreign intermediaries and

 17 exchanges if they have comparable regulation.

 18 These programs are based in part on the fact that

 19 the participants, the products and the

 20 infrastructure are all foreign. The swaps market

 21 is more complex. Moreover, we have different and

 22 in some cases more limited authority to provide
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 1 exemptions or recognition abroad under Title VII.

 2 Before I turn it over to Dan Berkovitz,

 3 I would like to give a short review of the day.

 4 We have three panels that will consider the

 5 international issues relating to the Dodd-Frank

 6 Act. Panel 1 addresses cross-border transactions.

 7 The first panel is intending to address issues

 8 relating to when transactions should be subject to

 9 U.S. regulation. In this regard, it will be

 10 helpful to hear from panel members on how our

 11 respective agencies should define the words direct

 12 and significant as used by 722(d) of the

 13 Dodd-Frank Act. We also want to see if it would

 14 be useful and necessary to define U.S. persons and

 15 if so how should we define U.S. persons. Finally,

 16 there are certain things that apply to all persons

 17 under the Dodd-Frank Act including clearing,

 18 trading and reporting and we would like to hear

 19 about those requirements under this panel.

 20 The second panel although similar to the

 21 first panel is regarding global entities. We hope

 22 to ask panelists about issues of the level of
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 1 activity that would have a direct and significant

 2 effect on U.S. commerce thus triggering

 3 registration as a swap dealer or major swap

 4 participant. There are specific issues we'd like

 5 to hear about relating to subsidiaries, branches

 6 and affiliates of U.S. firms and the requirements

 7 that should apply.

 8 Finally, Panel 3 addresses market

 9 infrastructure. It's our final panel and we want

 10 to cover clearinghouses, trading venues such as

 11 swap execution facilities, securities swaps

 12 execution facilities on foreign exchanges and

 13 trade repositories. With respect to all types of

 14 market infrastructure, we are interested in your

 15 views on the differences between regulatory

 16 requirements that would make it difficult or

 17 impractical for a global entity to comply with

 18 both U.S. and foreign requirements and whether

 19 there are competitive issues or concerns that we

 20 should take into account.

 21 We have a lot of material to cover and I

 22 look forward to today's discussion. I appreciate
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 1 the thoughtful comments we've received so far, and

 2 now I'll turn it over to Dan Berkovitz for some

 3 comments.

 4 MR. BERKOVITZ: Good morning, and thank

 5 you, Jackie. Good morning, panelists, my

 6 colleagues at the CFTC, the SEC and members of the

 7 public. Before I provide a few remarks, I'd like

 8 to thank the staffs of both commissions, both the

 9 CFTC and the SEC, for organizing today's

 10 roundtable. I'd also like to thank the panelists

 11 for agreeing to participate, sharing their

 12 perspective and taking the time to participate on

 13 the panel today as we discuss the extraterritorial

 14 application of the new regulatory landscape for

 15 swaps transactions under the Dodd-Frank Wall

 16 Street Reform and Consumer Protection Act.

 17 Since the passage of the Act, CFTC staff

 18 has held many meetings with market participants

 19 and has received hundreds of comment letters, many

 20 of which have focused on the extraterritorial

 21 application of the Act and the CFTC's rules

 22 promulgated thereunder. Under our transparency
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 1 policy, comment letters and summaries of these

 2 meetings are all posted on the CFTC website.

 3 During these meetings and in the comment

 4 letters, market participants have raised concerns

 5 regarding how the United States and other

 6 jurisdictions will apply supervisory or regulatory

 7 responsibilities for swap entities, trading

 8 platforms, trade repositories and swaps

 9 transactions that span multiple jurisdictions. I

 10 can assure you that both Commissions are working

 11 diligently to implement needed reforms in the

 12 swaps market and are actively consulting and

 13 coordinating with each other and international

 14 regulators to promote robust and consistent

 15 standards. In "Morrison v. National Australia

 16 Bank," the Supreme Court took note of the

 17 longstanding principle of American law that unless

 18 Congress clearly expresses an affirmative

 19 intention to give a statute extraterritorial

 20 effect, we must presume it is primarily concerned

 21 with domestic conditions. The Dodd-Frank Act

 22 expresses clear congressional intent that it apply
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 1 to certain extraterritorial activities. Section

 2 722(d) of the agency Act states that the

 3 provisions of the Act relating to swaps shall not

 4 apply to activities outside the U.S. unless those

 5 activities have, "A direct and significant

 6 connection with activities in or effect on

 7 commerce of the United States or those activities

 8 are intended to contravene the Act or the CFTC's

 9 regulations promulgated thereunder."

 10 A key inquiry therefore is to determine

 11 which activities outside the U.S. meet these

 12 tests. This is not our only inquiry, however. As

 13 the Commission noted in the proposed rule

 14 regarding registration of entities, considerations

 15 of international comity also play a role in

 16 determining the proper scope of extraterritorial

 17 application of federal statutes. We must also

 18 consider the circumstances in which international

 19 comity may affect the application of Dodd-Frank

 20 provisions extraterritorially and how much

 21 considerations will affect the application of the

 22 Act outside the U.S. I am hopeful that today's
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 1 roundtable will help inform the Commission not

 2 only on the panelists' views of the ultimate

 3 questions of how Dodd-Frank should apply

 4 extraterritorially, but also of the process that

 5 the Commission should use to make these

 6 determinations.

 7 I personally am co-moderating today's

 8 second panel which will focus on global entities.

 9 In several comment letters filed in response to

 10 the CFTC proposals defining and registering swap

 11 dealers and major swap participants, commenters

 12 have emphasized the importance of establishing an

 13 appropriate regulatory framework for the

 14 cross-border swaps activities of U.S. and foreign

 15 banks. The CFTC recognizes that defining the

 16 scope of the Dodd-Frank Act with respect to the

 17 cross-border activities of U.S. and foreign banks

 18 is crucial to preserving the continuity of global

 19 business operations and the risk management tools

 20 that swaps provide. It is necessary that we

 21 accomplish the overall objectives of improving

 22 transparency, mitigating systemic risk and
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 1 protecting against market abuse in the swaps

 2 markets, and with these objectives in mind we are

 3 asking these questions regarding extraterritorial

 4 application.

 5 Today's roundtable will play a

 6 significant part in achieving these objectives.

 7 That is why I look forward to our dialogue on

 8 these important issues and am confident that staff

 9 will be informed by the remarks of today's

 10 panelists. Thank you very much.

 11 MS. MESA: Thanks, Dan. Now I'm going

 12 to allow Ethiopis Tafara, Director of the Office

 13 of International Affairs at the SEC to also

 14 provide some remarks.

 15 MR. TAFARA: Good morning. I'm Ethiopis

 16 Tafara, Director of the Office of International

 17 Affairs at the SEC and on behalf of SEC staff I'd

 18 like to welcome you to this joint SEC/CFTC

 19 roundtable on international issues relating to the

 20 implementation to Title VII of the Dodd-Frank Act.

 21 I'd like to start off by thanking my

 22 colleagues here at the CFTC for hosting today's
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 1 roundtable and staff at the CFTC and SEC who

 2 tirelessly worked together in organizing the

 3 program. I also would like to thank all of the

 4 panelists for their participation in today's

 5 discussion. We appreciate your willingness to be

 6 here and to share your thoughts and perspective on

 7 the cross-border issues arising from Title VII of

 8 the Dodd-Frank Act.

 9 These roundtables are immensely helpful

 10 as they give us the opportunity to hear firsthand

 11 how our rulemaking activities may impact you, the

 12 market participants, investors and other members

 13 of the public. In turn, your comments will assist

 14 in developing approaches that will enhance the

 15 efficiency of the cross-border derivatives market

 16 while advancing our mission of protecting

 17 investors, ensuring the maintenance of safe, fair

 18 and honest markets and facilitating capital

 19 formation. Before I make a few remarks about

 20 today's roundtable, I'd like to remind everyone

 21 that the views we express today are our own and do

 22 not reflect the views of the Commission, the
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 1 Commissioners or our fellow staff members and I

 2 think that should apply throughout the day for all

 3 of us from the regulatory agencies.

 4 The purpose of the roundtable is to

 5 explore the international issues raised by new

 6 CFTC and SEC rules to regulate the swaps and

 7 securities-based swap markets. The

 8 interconnection of markets around the world has

 9 opened a new frontier. It is true that our

 10 capital markets have always had an international

 11 component in that cross-border transactions have

 12 always been with us. But it's the exponential

 13 advances in computer and telecommunication

 14 technologies that have altered the dimension. The

 15 promises of this new frontier are many. These

 16 promises include lower transaction costs, greater

 17 choice and greater competition among financial

 18 service providers to the benefit of end users.

 19 But this new frontier also presents risks. We

 20 must keep in mind that as national markets become

 21 integrated, global risks become domestic risks.

 22 The cross-border consequences of the Asia crisis
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 1 of 1997 and the more recent subprime crisis are

 2 evidence of that fact.

 3 Previous regulatory approaches to

 4 cross-border financial services were devised when

 5 the world was a different place and markets were

 6 more self-contained and isolated from the outside

 7 world. One approach for dealing with this new

 8 environment is isolation. We can try to seal our

 9 borders. Much like the sheriffs of old required

 10 all strangers to check in upon approval, we can

 11 insist that all entities whether foreign or

 12 domestic providing financial services for products

 13 come fully under our regulatory control in every

 14 detail. We might also be tempted to open up the

 15 town gates and let everyone in who wishes to do

 16 business with our citizens, declare caveat emptor

 17 and accept the resulting playing field. Neither

 18 of these approaches is economically efficient and

 19 both seriously test our ability to meet our

 20 regulatory charge.

 21 International collaboration is a third

 22 and likely better alternative. We're well aware
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 1 that we will be regulating a market that is

 2 already global in nature. First, the main players

 3 in the market are global. Currently, large banks

 4 and other financial institutions dominate the

 5 derivatives markets. These firms have offices,

 6 branches, subsidiaries and affiliates in multiple

 7 jurisdictions and serve clients and customers

 8 around the world. At the same time, key market

 9 infrastructure entities such as exchanges, trading

 10 platforms and clearinghouses increasingly serve an

 11 international customer base and compete on a

 12 global level.

 13 Second, a large portion of the

 14 derivatives transactions engaged by U.S. persons

 15 is cross-border. Federal Reserve economist Sally

 16 Davies estimated in her 2008 study that 55 to 75

 17 percent of U.S. banks' total exposure to

 18 derivatives involved counterparties resident

 19 outside the United States. More recent data from

 20 the Bank for International Settlements supports

 21 the conclusions that cross-border exposure remains

 22 at the same levels today if not higher.
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 1 Third, we recognize that one of the

 2 great advantages of derivatives products is that

 3 derivatives can offer investors exposure to almost

 4 any type of asset and in almost any market without

 5 the need to take possession of such assets or be

 6 fixed in a certain location and often at a lower

 7 cost. It is this flexibility that makes

 8 derivatives such popular financial instruments.

 9 Thus we face a challenge in regulating

 10 derivatives. We believe and Congress has

 11 determined in the Dodd-Frank Act that the size and

 12 importance of the derivatives markets require

 13 robust regulation. Such regulation will improve

 14 transparency, market efficiency, investor

 15 protection and financial stability. However, the

 16 global nature of derivatives markets means that

 17 entities around the world have the ability to

 18 significantly impact U.S. financial markets.

 19 Let me conclude my opening remarks by

 20 noting that while our roundtable consists only of

 21 members of the public and market participants, the

 22 SEC and CFTC are actively speaking with foreign
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 1 counterparts about many of the same issues being

 2 discussed today. As you know, pursuant to the

 3 G-20 commitment regarding the clearing, reporting

 4 and trading of standardized OTC derivatives

 5 contracts by the end of 2012, many foreign

 6 jurisdictions are also drafting legislation and

 7 implementing rules relating to derivatives. The

 8 Dodd-Frank Act notes the importance in working to

 9 ensure that the U.S. and other countries'

 10 regulatory regimes are based on the same robust

 11 international standards and to that end requires

 12 the SEC and the CFTC to consult and coordinate

 13 with foreign regulators on the establishment of

 14 those standards where possible. In the last year,

 15 the SEC and CFTC have engaged in regular

 16 discussions with foreign counterparts on a

 17 bilateral basis and through multilateral fora such

 18 as the IOSCO Task Force on OTC Derivatives

 19 Regulation which is currently drafting

 20 international standards or derivatives regulation

 21 in the area of clearing, reporting and

 22 intermediary oversight. Our goal is to develop a
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 1 comprehensive approach to international issues

 2 raised by Title VII that strikes balance between

 3 facilitating robust an active global derivatives

 4 market while remaining faithful to the spirit and

 5 letter of the Dodd-Frank Act and vigorously

 6 upholding our mandate to protect investors and

 7 preserve the integrity of our markets. Today's

 8 roundtable should help inform our work.

 9 I again would like to thank our

 10 distinguished panelists for their participation.

 11 The insights that you provide today will be

 12 extremely valuable to us as we finalize our

 13 implementation of Title VII. Thank you.

 14 MS. MESA: For final remarks I would

 15 like to introduce Robert Cook who is Director of

 16 Trading Markets at the SEC.

 17 MR. COOK: Thank you, Jackie, and good

 18 morning. I'm joined today by Brian Bussey who

 19 heads up our Office of Derivatives Policy and

 20 Trading Practices at the SEC in the Division of

 21 Trading and Markets. I would like to briefly echo

 22 the thanks that have already been given to our
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 1 panelists for taking their time to join us today.

 2 We very much look forward to your insights and

 3 recommendations. Also to echo the thanks to the

 4 CFTC for hosting this event and to the staffs of

 5 the two agencies for organizing it. I'd like to

 6 make two very brief remarks before we begin.

 7 One is that from our perspective, one of

 8 the key areas that we look forward to hearing

 9 discussion on is the detailed application of our

 10 rules under Title VII to, what I'll call,

 11 cross-border transactions. More specifically, how

 12 the registration, reporting, mandatory clearing

 13 and mandatory trading requirements should apply to

 14 securities-based swap transactions that involve a

 15 U.S. counterparty, a U.S. intermediary or that

 16 otherwise involves U.S. jurisdictional means.

 17 Second, we recognize the uncertainty that

 18 currently exists in this area and, frankly, the

 19 difficulties that places some of the international

 20 institutions in that have operations in various

 21 jurisdictions in and trying to plan for the

 22 future. The Chairman of the SEC has stated in
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 1 recent congressional testimony that the SEC

 2 intends to address the relevant international

 3 issues holistically in a single proposal which

 4 we're actively working on. This will allow market

 5 participants to comment on our proposed approach

 6 to cross-border transactions involving the U.S. as

 7 an integrated whole. The roundtable discussion

 8 today will help inform our thinking regarding this

 9 proposal as will the various comments that we very

 10 much appreciate having received to date through

 11 our SEC mailbox. I believe there's also a comment

 12 file that's been opened in connection with this

 13 roundtable that people should feel free to submit

 14 comments to to help inform the thinking of both

 15 agencies. Again, thank you for joining us today

 16 and we look forward to your participation.

 17 MS. MESA: Thank you. Welcome Panel 1.

 18 I would like to take a moment for you to do

 19 self-introductions. If you could introduce who

 20 you are and who you're with and then we'll

 21 formally get started. Can we start right here at

 22 the end with you?
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 1 MR. REILLY: I'm Bob Reilly from Shell

 2 Trading, and as of last Friday, Shell had 1,144

 3 subsidiaries operating in 105 countries so

 4 extraterritorial issues and issues involving

 5 inter-affiliate transactions is very important to

 6 us. Thank you for letting me be here today.

 7 MS. MESA: Thank you. Also as a

 8 reminder, if you can speak into your microphone,

 9 that will help the whole room to hear.

 10 MR. NICHOLAS: John Nicholas, Newedge.

 11 Thank you.

 12 MR. MANSFIELD: Bill Mansfield with

 13 Rabobank, a global bank located in the

 14 Netherlands. I'm responsible for the capital

 15 market activities and the financial market

 16 activities in the Americas region.

 17 MR. KLEJNA: Dennis Klejna, MF Global.

 18 MR. KELLY: David Kelly from UBS.

 19 MR. RIGGS: Tom Riggs from Goldman

 20 Sachs.

 21 MR. STANLEY: Marcus Stanley, Americans

 22 for Financial Reform.
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 1 MR. TURBEVILLE: Wally Turbeville,

 2 Better Markets, a nonprofit, nonpartisan

 3 organization whose mission is to express the

 4 public interest in regard to reform.

 5 MR. ZUBROD: Luke Zubrod, Chatham

 6 Financial. Chatham is an adviser to about a

 7 thousand end users in the U.S., Europe and Asia.

 8 MS. MESA: One person who didn't give a

 9 formal introduction sitting on my left is Ananda

 10 Radhakrishnan who is Director of our Clearing and

 11 Intermediary Oversight Division.

 12 For Panel 1, I made some introductory

 13 remarks earlier that I think what is important

 14 regarding cross-border transactions perhaps as a

 15 first step is whether or not the CFTC and SEC need

 16 to have a definition for "U.S. Persons." Many of

 17 the rules may relate to whether or not you are a

 18 U.S. person. I think there are differing

 19 definitions of U.S. person for the SEC and the

 20 CFTC. My first question is first do you panelists

 21 think that we need a definition for U.S. person

 22 and if we do what is your recommendation for that
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 1 definition?

 2 MR. NICHOLAS: Thanks, Jackie. Yes, I

 3 think it would be useful to have a definition of

 4 U.S. person, but I think you hit the nail on the

 5 head when you noted that the SEC and CFTC already

 6 have different definitions. I believe the SEC

 7 under Reg S has one definition which I also think

 8 is used for 15(a)(6) purposes, and then the CFTC

 9 has another definition. Two comments in that

 10 respect. One is I think it would be useful to the

 11 extent possible to try to harmonize the

 12 definitions. I know that harmonization in

 13 securities and futures law is one of the dictates

 14 that we're supposed to follow.

 15 The other one is I think that in general

 16 the definition should take into account the

 17 differences between funds and nonfunds, funds

 18 having potentially to the extent there's a

 19 look-through requirement that it be a relatively

 20 low threshold, and to the extent that there's not

 21 a look-through requirement that it be based on the

 22 headquarters of the entity.
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 1 MR. TURBEVILLE: The question of whether

 2 there should be a definition or not, going back to

 3 that, should be measured by what's convenient for

 4 folks in the business and also needs to be looked

 5 at in the context of the statute which is to me

 6 the guiding light as opposed to convenience,

 7 although, convenience is an important thing of

 8 course. I look at Section 722 and 772 of the

 9 statute and it seems to me that one might look to

 10 those provisions for guidance in definition. 722

 11 relates to the SEC, describes activities that have

 12 a direct and significant connection with the

 13 activities and/or effect on commerce of the U.S.

 14 That would suggest to me that activities-based

 15 analysis is quite important. 772 is somewhat

 16 different. It talks about business being

 17 conducted in securities-based swaps beyond the

 18 jurisdiction of the U.S. so that it's a

 19 business-based orientation. I'm curious in that

 20 while it might be convenient to categorize

 21 jurisdiction by the way companies are organized,

 22 it would seem it's more likely to be productive
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 1 under the terms of the statute by looking at what

 2 their activities are and what their business is

 3 and whether a company is organized in a certain

 4 place may not be so relevant as what their

 5 activities are and what their businesses are. For

 6 instance, a parent who guarantees all the

 7 activities of a subsidiary that may be not U.S.

 8 based and combines all of the swaps in a common

 9 book, uses common systems and management and those

 10 kinds of things, all of those to me would be

 11 indicia of what the statute was intended to govern

 12 and show that the whole purpose may be very

 13 different from other statutes or other regulatory

 14 regimes, the Fed and others, the SEC and CFTC. So

 15 I would go back to those sections and look at

 16 what's substantively going on.

 17 MR. RIGGS: Thank you. First of all, we

 18 do need a definition obviously. Since the SEC and

 19 the CFTC already have definitions, I assume that

 20 you would work with what you have and not start

 21 from scratch. I think it's important, and I know

 22 you guys are going to focus on this, the
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 1 definition for futures and securities have existed

 2 with differences because those markets are quite

 3 different. Now if you have a single name credit

 4 derivative and an index credit derivative with the

 5 same counterparty under the same agreement to be a

 6 U.S. person for one of the transactions and not a

 7 U.S. person for the other transaction is just not

 8 tenable so that it's a high priority more than

 9 ever on the SEC and the CFTC harmonizing that

 10 definition. And more importantly as well,

 11 whatever the definition is, it needs to be

 12 harmonized internationally so you don't fall into

 13 a situation where someone is a U.S. person for

 14 U.S. rules and also an European person for the

 15 European rules, and again we get back to the issue

 16 of having potentially conflicting multiple sets of

 17 rules applying to the same person.

 18 MS. MESA: Luke?

 19 MR. ZUBROD: End users are primarily

 20 concerned with being able to continue to

 21 efficiently and effectively manage their risks and

 22 I think contributing to that cause is being
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 1 subject to a single set of clear rules to the

 2 extent practicable in any given circumstance. So

 3 I think clearly defining U.S. person will

 4 contribute to this clarity though international

 5 coordination is also essential for the purposes of

 6 achieving harmony in the absence of duplicativity.

 7 I think at a minimum we believe it would

 8 be helpful to clarify what does not constitute a

 9 U.S. person. A foreign subsidiary of a U.S.

 10 person should not be a U.S. person if it has no

 11 significant connection to the U.S. and we believe

 12 it's important that the mere ownership or

 13 guarantee by a U.S. parent should not form the

 14 sole basis for determining that a foreign

 15 subsidiary has a significant connection to U.S.

 16 law. It's important that U.S. law acknowledge

 17 that many U.S. companies set up foreign

 18 subsidiaries not for the purposes of evasion but,

 19 rather, because it makes good business sense in

 20 operating a regular business. These subsidiaries

 21 may be physically located abroad and have business

 22 operations abroad, et cetera, and will thus be
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 1 subject to regulatory requirements from foreign

 2 regulators. I think one important guiding

 3 principle should be that if you're subject to

 4 regulation elsewhere, you shouldn't be subject to

 5 the U.S.'s regulatory regime as well. Though I

 6 think an important consideration in establishing

 7 this principle is working through timing

 8 considerations. To the extent that the U.S.'s

 9 regulatory regime will become effective first, the

 10 fact that other countries or other jurisdictions

 11 have not yet completed their regulations and

 12 should not de facto then subject that entity to

 13 U.S. law. So I think coming up with a mechanism

 14 that accommodates timing differences relative to

 15 the implementation of regulations in multiple

 16 jurisdictions is important.

 17 MR. RADHAKRISHNAN: That's a big issue

 18 for us, or for me anyway, and this argument has

 19 been made before, wait until country X finishes.

 20 What that means is that if we did that, we are

 21 going to peg ourselves the last person, the last

 22 jurisdiction that finalizes these rules so the
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 1 concern we have is you've got a statute out there,

 2 you've got an obligation to finish regulations in

 3 1 year, which we didn't do, but still it doesn't

 4 mean that we're not going to finish it. So why

 5 should we wait? That's a critical question. Why

 6 should we wait until country X or country Y

 7 finishes it 5 years down the road, because then

 8 the momentum goes away. I realize some of you

 9 want that momentum to go away. I think that's

 10 fine. But from our perspective we can't let it go

 11 away.

 12 MR. ZUBROD: I would certainly

 13 acknowledge that that's a complicated process to

 14 figure out how to implement this, but I think it's

 15 important to note that many of the activities that

 16 could be subject to regulation in foreign

 17 jurisdictions either have limited or no connection

 18 to U.S. law and to the mitigation of systemic

 19 risk. So I think balancing the desire to have a

 20 robust regulatory framework should also be in

 21 tension with the desire to ensure that end users

 22 are not subject to regulation that does not
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 1 contribute materially to the mitigation of

 2 systemic risk.

 3 MS. MESA: Marcus?

 4 MR. STANLEY: I wanted to respond to

 5 that by saying that it's a good thing to avoid

 6 duplicative or multiple regulatory regimes and

 7 where it's possible it should certainly be done,

 8 but it's not a statutory goal as I see it. The

 9 goals of the statute are pretty clear, and to me

 10 should take precedence over some of these issues,

 11 and that's protecting the U.S. economy from risk

 12 and from exposure. One thing, this issue of

 13 foreign subsidiaries has also come up of course in

 14 margin requirements and in comments on the

 15 prudential regulators' rules. One thing I don't

 16 see in these comments is any explanation of how

 17 the U.S. parent is protected from losses in the

 18 subsidiary. To me if the U.S. parent is going to

 19 be responsible for the subsidiary's losses, that's

 20 a connection to the U.S. economy right there. We

 21 have seen derivatives losses spread

 22 internationally before. To comment on the timing
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 1 to reinforce what the gentleman at the end said,

 2 it seems to me there's a certain first mover

 3 advantage here. If you can be the one to get out

 4 the details of our rules first then there may be a

 5 tendency for other countries to follow you and I'm

 6 an "America first" kind of guy so I think there

 7 are some advantages to that especially when we're

 8 looking at a situation where the whole G-20

 9 committed in 2009 to a similar set of conceptual

 10 goals, so we're all following the same path here

 11 and there might be advantages to being the first

 12 to get the details of that path in.

 13 MS. MESA: Bill?

 14 MR. MANSFIELD: A comment back to not

 15 waiting for the rest of the world. I think that's

 16 a legitimate concern, but I also think that these

 17 rules are complex and I think the international

 18 markets are complex. I think we need to do it

 19 carefully. I think we need to take our time. I

 20 think the U.S. regulators can set the standard

 21 with regard to how they expect swaps to be

 22 regulated and derivatives to be regulated, and
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 1 they can watch the rest of the world follow suit

 2 or not and if they don't, it's within your purview

 3 to further broaden your scope. It's a legitimate

 4 concern, but I do think that we need to carefully

 5 implement these rules and regs over a period of

 6 time and we need to see how other international

 7 regulators are implementing similar types of

 8 rules.

 9 Back to U.S. person, I think as to the

 10 definition, I think I'm somewhat opposed to Wally.

 11 I think the definition for U.S. person is more

 12 transactional. How I think about it is what

 13 transactions are in scope and I don't think of it

 14 as an entity-level type of definition. I hear

 15 Marcus and it's a correct concern, but how about

 16 the risk everywhere and what does that mean? I

 17 think to take that a step further, the risk of an

 18 institution isn't just derivatives. The risk of

 19 an institution is the lending business, it's the

 20 deposit taking business, it's all the other

 21 businesses in Robobank's example that an

 22 international bank will engage in. So you can't
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 1 just say, I need to regulate all of these

 2 derivatives because that's going to make them safe

 3 and sound. You need to take a very holistic

 4 approach with regard to regulating the risk of an

 5 institution and that's when we talk to the

 6 prudential regulator that will look at all of our

 7 risk including derivatives.

 8 MS. MESA: Ethiopis?

 9 MR. TAFARA: I think it would be

 10 particularly helpful if people could be specific

 11 as to the consequences of not waiting. I've heard

 12 general statements as to the need to wait in the

 13 interests I guess of a level playing field, but

 14 the question that comes to my mind is what would

 15 the specific consequences be of not waiting? One.

 16 Two, I wonder whether or not it doesn't make some

 17 sense to draw a distinction between conflicting

 18 requirements and duplicative requirements.

 19 Conflicting requirements put in the position of

 20 not being able to comply with different sets of

 21 rules at the same time. Duplicative requirements

 22 are of a different nature and they have a cost and
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 1 they have varying costs depending on the nature of

 2 the duplication. I think it would be useful and

 3 I'd like to hear whether or not it is your view

 4 that there is a difference between those two and

 5 whether or not duplicative requirements are

 6 actually of much lesser concern than conflicting

 7 requirements.

 8 MS. MESA: I know I have a few questions

 9 out there and your names have been up for a while.

 10 Dennis?

 11 MR. KLEJNA: I think it's inarguable the

 12 strictly legal point that Ananda makes, but I

 13 really do agree with the general sentiment as to

 14 what is going to be alternative. We've heard

 15 repeatedly and it's clearly true that the

 16 Commissions are working aggressively with foreign

 17 regulators to try to get these things to be as

 18 consistent as possible. The statute is explicit

 19 too about the ability to rely on comparable

 20 regulation which this agency has done for a

 21 generation. So inevitably, and this is the timing

 22 issue, there is going to be a time when there is
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 1 going to be in all likelihood some meaningful

 2 comparable regulation. I wish I had an exact

 3 answer for Ananda's question because I understand

 4 the point that he has the statute, but I do think

 5 that there's room within the statute, and we all

 6 know because we've had separate talks previously

 7 about particular problems for example when a

 8 non-U.S. entity has become designated as a

 9 clearing organization and the provision in the

 10 statute that if you're going to clear you've got

 11 to be a registered FCM that goes to the heart of

 12 the whole omnibus concept that's worked so

 13 efficiently in the Part 30 regime.

 14 But the alternative to not waiting is

 15 having firms comply and do whatever structural or

 16 organizational alterations are necessary to meet

 17 the American requirements and then in a matter of

 18 time having to either change them or having to

 19 think about the opportunity of changing them and

 20 that's an expensive process. I guess I wonder if

 21 we can't think of a way in which -- it's like this

 22 definition of U.S. person. To me the most
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 1 important thing might be whatever the definition

 2 is, is there a way to pick out the elements of

 3 regulation that are really the goal of the statute

 4 and the goal of the G-20 undertaking and come up

 5 with a way, even in a developing way, that through

 6 information sharing, through reporting, that while

 7 this process is ongoing in these other

 8 jurisdictions, the American regulators could reach

 9 an appropriate level of satisfaction that they

 10 have an idea of what's going on, that the thrust

 11 of Dodd-Frank is not being evaded. This is all

 12 very, I know, amorphous sounding stuff, but the

 13 timing issue is really a critical one and maybe if

 14 we just thought in terms of the different pieces

 15 of the regime that Dodd-Frank contemplates and

 16 figure out a different way to reach a level of

 17 satisfaction we could maybe find a way to bridge

 18 this timing gap.

 19 MS. MESA: David, why don't you take the

 20 next comment and then we'll go to Brian?

 21 MR. KELLY: You stole a fair amount of

 22 my thunder, actually. One, I think you have a
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 1 fair amount of flexibility, you are going to be

 2 first, you're going to regulate U.S. markets and

 3 that will happen well before Europe and some of

 4 the other countries are finished, but you can be

 5 cautious about how you define the extraterritorial

 6 scope because you do have to make a finding that

 7 what you're looking at has a direct and

 8 significant effect in the United States. And I

 9 think if you look at some of the other legal areas

 10 where that language has been used, particularly in

 11 antitrust, it is actually fairly narrowly

 12 construed. So I think you have the flexibility to

 13 do what you need to do for your core markets in

 14 the United States, to tread carefully

 15 extraterritorially. For a number of the firms

 16 around the table who are large global firms, we

 17 have a very complicated implementation job ahead

 18 of us knowing what we have to implement and to

 19 whom and to what transactions your rules apply is

 20 absolutely critical for us. And I think you have

 21 flexibility to define a reasonable scope and to

 22 work closely with the regulators in other
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 1 countries as they develop their rules as the

 2 statute contemplates. I agree with Ethiopis that,

 3 yes, there are conflicts and they're duplicative.

 4 At the simplest level, you can't clear the same

 5 trade in two different places. Duplicative trade

 6 reporting, as an example of a duplication, will be

 7 expensive. I think it will probably degrade the

 8 quality of information that's available to you as

 9 regulators if we have to report the same trade to

 10 two different transaction repositories.

 11 MS. MESA: Let's take some more and try

 12 to clear through this issue. Suparna?

 13 MS. VEDBRAT: To answer your question on

 14 what may be an impact if we don't wait for the

 15 harmonization, we have a concern that if we are

 16 unable to achieve a high degree of harmonization

 17 both in the rules themselves as well as in timing,

 18 then the deep and liquid derivative markets that

 19 we currently have will get fragmented and that's

 20 going to impact competitive pricing that clients

 21 receive today. It's important for us that the

 22 U.S. remains a competitive trading jurisdiction.
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 1 There are many investment dollars that must remain

 2 in the U.S. and we don't want them to be

 3 disadvantaged because we were the first to put

 4 forward the rules and they may overall impact the

 5 way we invest.

 6 The other question related with U.S. --

 7 and I think we all greatly benefit from clarity

 8 within that definition because if you were to take

 9 a case just as an example, if we were to trade a

 10 foreign domiciled account with a foreign branch or

 11 institution but it's managed by a U.S. manager or

 12 it's a subdelegation to a U.S. manager then what

 13 purview would that fall under? So that definition

 14 would really help us to define how our business

 15 model needs to change to accommodate all the rules

 16 with the various differences.

 17 MS. MESA: Thank you. Tom?

 18 MR. RIGGS: I guess one another example,

 19 Ethiopis, in particular is since we're focused on

 20 the competitiveness of U.S. firms, one concern is

 21 whether there's a first move disadvantage in fact

 22 which is that while we're completely supportive if
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 1 going live in your timeframe with U.S. clients

 2 however defined, one from a U.S. dealer

 3 perspective is since it's very easy for clients

 4 outside the U.S. to just go to somebody else

 5 that's not a U.S. person or a sub of a U.S.

 6 person, once you have this gap period between when

 7 the U.S. goes live and the rest of the world goes

 8 live creates a period in which business, client

 9 relationships, liquidity, whatever flows somewhere

 10 else, and then ultimately when the rest of the

 11 world harmonizes with the U.S. approach, the

 12 question is, can you get it back and then what's

 13 happened in that interim period? It's highly

 14 competitive and this isn't about dealers being

 15 able to tell clients what to do, this is about

 16 clients telling us what they're going to do so

 17 that I think is a real point.

 18 And to your point about obviously

 19 duplicative is not as bad as inconsistent. The

 20 industry has got a big lift to get clearing and

 21 execution and trade reporting up and running and

 22 obviously that's of primary importance and any
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 1 costs that slow that down from a policy

 2 perspective, if you can avoid that, obviously that

 3 would be a good thing to be as harmonized and

 4 internationally consistent as possible and take

 5 advantage of one method or type of reporting that

 6 works for everybody.

 7 MS. MESA: Wally and then Brian.

 8 MR. TURBEVILLE: So much to talk about

 9 and so little time. First, the whole issue of

 10 standards and clarity. I suppose if I were

 11 sitting up there I would be thinking in terms of

 12 looking at the statutory things. By the way, you

 13 may disagree with what I said about the standards,

 14 I was reading from the statute. What I would do

 15 is look at using examples. In other words, I

 16 wouldn't try to tie down what is a U.S. entity or

 17 non-U.S. entity when you have standards that you

 18 can deal with in terms of what kind of business it

 19 is or what kinds of activities they are.

 20 Certainly examples would be helpful to give

 21 people, pick a number, 99 percent of the certainty

 22 that they need and the 1 percent that's on the
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 1 margin may or may not be coverable, but on the

 2 other hand that might be just the one you need to

 3 deal with.

 4 The second issue that I think we should

 5 drop back and think about is all these firms, I

 6 did it myself, that's what I did for a living for

 7 a while, participate in the derivatives market.

 8 Derivatives are ephemeral, they defy the notion of

 9 territoriality, they defy a lot of things -- they

 10 defy understanding. And I think we have to

 11 recognize that we can't wallow around in the

 12 who-goes-first thing and end up in what is in

 13 effect a race to the bottom or what would move

 14 this whole thing toward the derivatives markets

 15 being in an extralegal environment at the end of

 16 the day as everybody waits for what's going to go

 17 on. The fact is, I think that the duplicative

 18 issue is important. I was in a briefing with

 19 Senate staff on Friday where we were talking more

 20 in terms of overlap rather than duplicative, but

 21 that's the same point. I think that has to be

 22 embraced because it's going to occur, and I think
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 1 one thing that industry needs to do is recognize

 2 that the regulators are not foolish, they're not

 3 here or in Europe or anywhere else, they're going

 4 to deal with overlapping regulation and

 5 overlapping regulation is inevitable in such an

 6 ephemeral market and I think that's an important

 7 thing to think through. Again, things that

 8 require contrary behaviors are problematic, but

 9 overlap and duplication is inevitable in a

 10 marketplace like this.

 11 Last, the whole issue of entity versus

 12 transactional. I know the industry wants that. I

 13 can't figure out what the justification of it is.

 14 The statute gives a pathway to deal with these

 15 issues and in my way of thinking there are

 16 transactions that are jurisdictional that are

 17 covered and then your behavior with respect to

 18 those transactions might constitute you a swap

 19 dealer, whether your country or origin is Pakistan

 20 or the United States, you might become a major

 21 swap participant. The question is whether the

 22 transactions are jurisdictional and the activity
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 1 is jurisdictional and that's in the statute. So I

 2 don't see some giant divide which would say

 3 certain kinds of attributes of entities

 4 categorically eliminate them from jurisdiction

 5 under the statute. Maybe I'm missing something,

 6 but the argument is made that way. I've read

 7 every law firm paper I can find in terms of

 8 comment. I can't find the justification for it

 9 and maybe folks could enlighten us all.

 10 MR. BUSSEY: Thank you. I wanted to

 11 drill back down on something that Luke, Wally and

 12 Marcus talked about a bit earlier which is about

 13 foreign subs, both where there's just ownership

 14 and then there's a guarantee. And I guess for

 15 Wally and Marcus, let's take the situation of a

 16 dealer in London that's owned by a U.S. entity,

 17 just ownership, no guarantee, what's the concern?

 18 I think I heard you suggest that that should be of

 19 concern to U.S. regulators. What's the concern

 20 there? Then on the guarantee side, why for

 21 example is not the MSP category if you have a

 22 U.S.-based parent guaranteeing a foreign sub you
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 1 would aggregate up I think under our proposal to

 2 the parent company for purposes of MSP but you

 3 wouldn't necessarily apply dealer regulation to

 4 the foreign entity? And I guess Luke asking the

 5 exact opposition question so I sound fair and

 6 balanced, if a U.S. parent decides to guarantee

 7 the activities of a foreign-based dealer, why

 8 shouldn't that be within the purview of U.S.

 9 regulators? Or asked a different way, why isn't

 10 that a pathway to avoid Dodd-Frank? And I open

 11 that up to the rest of you as well.

 12 MR. STANLEY: I do think that in 2008 we

 13 saw a number of balance sheet entities that didn't

 14 have an explicit guarantee but had an implicit

 15 guarantee for reputational reasons of the parent

 16 company and that was an issue. Also I'm going to

 17 confess to not being a lawyer now, but as I

 18 understand it, it's also an issue in the laws of

 19 various countries whether you can pierce the

 20 corporate veil and get up to the parent even

 21 without an explicit guarantee and what I wasn't

 22 seeing in the industry comments is a specific
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 1 explanation of why that is not going to happen and

 2 I would think that would be important. I'll leave

 3 it there.

 4 MR. TURBEVILLE: Everything I agree with

 5 there in terms of guarantee. My familiarity with

 6 doing swaps is if the swap is with an entity which

 7 is guaranteed, it's the parent that you're dealing

 8 with. Further, I think the key issues are what is

 9 the business and what are the activities so that

 10 there is more than just guarantee. There's is it

 11 a composite book? Is it a combined book that

 12 they're looking at? Are they sharing systems?

 13 Are they sharing management? Is the decision

 14 making and the strategy in common? I think those

 15 are very pertinent issues and I think again to me

 16 Dodd-Frank gives you the thrust of what you're

 17 getting to that it's not just financial guarantee,

 18 it's, is it all part of the same business, is the

 19 activity the same because the effect on the

 20 markets is important.

 21 MR. BUSSEY: Are you suggesting that

 22 it's not a guarantee alone or ownership alone is
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 1 enough, it's both that needs to be something more

 2 like common systems?

 3 MR. TURBEVILLE: No. What I'm saying is

 4 beyond guarantee there are other issues,

 5 either/or, it's a matrix of things.

 6 MS. MESA: Bob, you've had your name up

 7 for a while. Did you have a comments on Brian's

 8 question or something previously?

 9 MR. REILLY: Nothing on Brian's

 10 question.

 11 MS. MESA: Let's try to keep with this

 12 one question and stay with the theme. David?

 13 MR. KELLY: I'll put this in Ethiopis's

 14 conflicts category and I'll take Shell as an

 15 example. If Shell has a subsidiary in Germany and

 16 I want to trade derivatives with it today, I would

 17 do that through a German-organized entity or

 18 another E.U. passported entity because derivatives

 19 are a regulated activity in Europe. Neither of

 20 those entities would otherwise likely to be

 21 registered as swap dealers. So it's a reasonable

 22 possibility that Shell trading in Germany would
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 1 not find a U.S. firm that could be a counterparty.

 2 The way we are all organized today we are

 3 generally going to have an E.U.-facing entity.

 4 We're optimistic that in the MiFID revisions there

 5 will be a greater accommodation for cross-border

 6 activities into Europe, but I'm not sure that

 7 reaching out with this broad a scope is going to

 8 help that debate within Europe. So there's just a

 9 plain conflict that we may not be able to deal

 10 with Shell's non-U.S. subsidiaries.

 11 MS. MESA: Luke?

 12 MR. ZUBROD: Brian, with respect to your

 13 question, I'll answer it from a policy

 14 perspective, putting the end user hat on and maybe

 15 we'll use margin as the sort of window through

 16 which to examine this question. End users would

 17 be concerned with the potential for a diminishment

 18 of essentially good pricing or a degradation in

 19 transparency that might occur from the scenario

 20 which you describe. To put forth an example, if

 21 we're a foreign subsidiary of a U.S. company

 22 operating in Europe and if we have the ability to
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 1 trade with say Barclays and BNP Paribas and other

 2 foreign banks and the ability to trade with the

 3 foreign branch of a U.S. bank, if the requirements

 4 on the foreign branch of the U.S. bank are more

 5 severe than the requirements on the foreign bank,

 6 it will certainly influence with whom we'll

 7 transact. If those more severe requirements cause

 8 us to avoid interacting with the foreign branch of

 9 the U.S. bank, it could have the unfortunate

 10 consequences of increasing the pricing or at least

 11 the competitive dynamics that are available in

 12 that particular situation. So I think that's a

 13 policy concern that would be there for end users.

 14 MS. MESA: On Brian's question, I'm

 15 looking at Bill.

 16 MR. MANSFIELD: I don't know if it's

 17 specific to Brian's question, but it's related to

 18 the general themes and that is starting with the

 19 harmonization. Harmonization is happening and

 20 that regulates not just derivatives but it

 21 regulates the whole entity of a banking

 22 organization. It includes new regulations with
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 1 regard to liquidity rules and regulations. So the

 2 global rules are taking place. They're going into

 3 effect. In Europe you have EMIR and, as was

 4 mentioned, MiFID too that are going to regulate

 5 the derivatives. So this harmonization of these

 6 global markets is happening. It's not going to

 7 happen at the same time and it's probably likely

 8 going to be staged by different legal

 9 jurisdictions.

 10 The solution to that not happening at

 11 the same time and having them all be the same from

 12 my perspective isn't to take a global approach and

 13 say then I'm going to regulate everything around

 14 the world because that isn't up to my standards

 15 and what I want to do. I think that's the wrong

 16 approach to take with regard to concerns around

 17 rules and regs within other legal jurisdictions.

 18 The reason I think that is, it gets to the point

 19 of if you do have conflicting rules. By nature if

 20 there's a conflicting rule, then what do I do? Do

 21 I not trade? Do I not offer that product?

 22 Because if I do, I'm wrong here but I'm right here
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 1 -- but which one do I care about more? The whole

 2 nature of conflicting rules with regard to

 3 derivatives is a big one and I think that we need

 4 to mindful that there will be conflicts, but will

 5 these conflicts that exist in other regulatory

 6 regimes be acceptable to U.S. regulators and my

 7 guess is that they will because the conflicting

 8 rules will be specific to those local markets.

 9 MS. MESA: I want to finish Brian's

 10 question on foreign subsidiaries ownership and

 11 guarantees. Does anyone have one last comment?

 12 MR. RIGGS: I would note that obviously

 13 we're moving into a world in which we no longer

 14 have unregulated activities or unregulated

 15 entities. Everybody is going to be registered as

 16 a swap dealer or regulated in the world in those

 17 activities. All the holding companies are now

 18 regulated and subject to prudential regulation.

 19 And in particular, all of the swap-dealing

 20 entities are now going to have their own capital

 21 requirements. It strikes me that the guarantees

 22 have ceased to be as relevant from a risk
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 1 perspective. Counterparties like them because

 2 typically the guaranteeing entities are the ones

 3 that have the rated debt which is a proxy for

 4 understanding the credit rating of your

 5 counterparty rather than having each entity around

 6 the world have a stand-alone rating. But given

 7 the capital requirements and other regulation of

 8 all the swap dealers now it strikes me that the

 9 guarantee issue from your perspective is less of

 10 an issue than it was before.

 11 MS. MESA: Dan, would you like to ask a

 12 question?

 13 MR. BERKOVITZ: Thank you, Jackie. Much

 14 of the discussion is we've talked about various

 15 results, what the result of the extraterritorial

 16 application should be, how should it apply in this

 17 circumstance or how should it apply in that

 18 circumstance, transaction-based, entity-based or

 19 whatever. Sitting here from the agency's

 20 perspective, equally important for the result is

 21 how do we get to the result. How are we going to

 22 make those determinations and in what context? Is
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 1 this something that would be done through a

 2 rulemaking? Should the agency say, here are the

 3 various circumstances and here we are going to

 4 apply our rules in these various circumstances.

 5 The one issue with that approach is obviously

 6 there are a variety of circumstances and a variety

 7 of circumstances I've been through personally in a

 8 number of meetings and there's a variety of

 9 different structures and countries, and we're also

 10 talking about global harmonization and waiting on

 11 jurisdictions, but there are multiple

 12 jurisdictions that we end up maybe waiting on, so

 13 that there is not necessarily a one-size-fits-all

 14 answer for the various jurisdictions. Or an

 15 alternative approach is in a registration-specific

 16 or a transaction-specific determination, the

 17 agency has the flexibility to either make

 18 determinations by rulemakings or by individual

 19 adjudications and applicants could come to the

 20 CFTC and say here is my bank and I'm on this

 21 country with this type of regulation applicable.

 22 I think these regulations should apply or
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 1 Dodd-Frank should apply to these transaction

 2 requirements but my home regulation should apply

 3 to these other types of requirements. That would

 4 be a more individual determination based on

 5 individual registration proceedings. For the

 6 agencies that's a much more resource-intensive

 7 determination. There is also much less certainty

 8 for market participants as to the ultimate result,

 9 but it could be more tailored. On the other hand,

 10 a rulemaking approach could either by

 11 overinclusive or underinclusive. I think in a

 12 general approach it could be that some entities

 13 could feel my specific situation doesn't

 14 particularly apply to how the rule is being

 15 developed. So we'd be interested in participants'

 16 views on the method by which we should be

 17 resolving some of these questions in addition to

 18 the result to be achieved.

 19 MS. MESA: John?

 20 MR. NICHOLAS: Thanks, Jackie. Dan, in

 21 answer to your question, it's a good question, I

 22 think setting it out in a rulemaking is important
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 1 to give market participants a roadmap and some

 2 clarity in terms of how to set up their business

 3 and so forth. I think the agencies clearly have

 4 the discretion to do that. I think the agencies

 5 have the expertise and the expectation to do that.

 6 What I would say in terms of general thoughts on

 7 the matter is look to what is already in place.

 8 Look to what has worked in the past. I think the

 9 CFTC's Part 30 framework has worked. I think that

 10 it held up very well during the financial crisis

 11 and should be looked to as a guide. I understand

 12 the differences between the swaps markets and the

 13 futures markets, but I also think that the swaps

 14 markets are clearly moving toward the futures

 15 markets in terms of centralization of execution

 16 and clearing which would probably make a little

 17 more sense in terms of a Part 30 framework, and

 18 not to discount the SEC's 15(a)(6) framework

 19 either that also I think takes into account to a

 20 certain extent comparability of foreign

 21 regulation.

 22 The other point I wanted to throw in
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 1 there is in terms of the language relating to a

 2 significant and direct impact, I have to confess

 3 that I haven't read the legislative intent on

 4 that, but I wonder whether that may be more

 5 related to a catch-all type provision for

 6 enforcement purposes as opposed to language which

 7 is set out to establish things like registration

 8 and reporting requirements. Obviously the

 9 agencies have to have broad enforcement authority,

 10 but I'm not sure that that language is necessarily

 11 put in the statute in terms of setting up the

 12 initial regulatory structure. Thanks.

 13 MS. MESA: Bill?

 14 MR. MANSFIELD: Dan, I would certainly

 15 with you and I think most participants in the swap

 16 market would agree that having a clear guideline

 17 as to how the market is going to work is

 18 preferable to having bilateral discussions of this

 19 is how I am and this is how I think I should do

 20 it. I think the discussion we're having right now

 21 is very direct toward that, and that's defining

 22 what's in scope and if we define what's in scope,
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 1 clearly define what's in scope, then the

 2 organizational aspects and the differences between

 3 entities can be resolved. Again, defining what's

 4 in scope is U.S. person. I think the Reg S

 5 definition is one that has been cited as a good

 6 reference to point with regard to the definition

 7 of a U.S. person. I'm not a lawyer, but it seems

 8 reasonable and logical to base the definition on

 9 the scope of the transactions or what would be a

 10 Reg S determination, and similar to John in that

 11 direct and significant is something that's in

 12 addition to this. I would think that it does give

 13 the regulators and also the market participants

 14 that we should determine when we see something

 15 direct and significant and I think that would more

 16 like a manipulative or fraudulent type of

 17 activity. So we have a very high hurdle to

 18 overcome with regard to direct and significant. I

 19 think that having the definitions of a U.S. person

 20 clearly defined is going to resolve a lot of the

 21 issues with regard to the differences among

 22 entities.
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 1 MS. MESA: Suparna?

 2 MS. VEDBRAT: I second that more

 3 harmonization and clarity in the rules themselves

 4 perhaps maybe phased in on the effectiveness of

 5 these rules is a better approach. If you were

 6 consider the second alternative that was presented

 7 which is highly customized, for an end user that

 8 has many counterparties that they deal with, not

 9 only would we have to understand their customized

 10 structure, then we would have to overlay our own

 11 account structure on top of that which could

 12 become a very complex exercise.

 13 MS. MESA: Wally?

 14 MR. TURBEVILLE: I think that given the

 15 nature of the swaps market and the derivatives

 16 market and its breadth and the ephemeral stuff

 17 that I was talking about earlier, it seems to me

 18 that the right approach is to again embrace

 19 overlap and duplicative so long as conflict is

 20 taken into consideration which means that I think

 21 the right approach is not to make some sort of

 22 cosmic high-level definitional construct but,
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 1 rather, deal with the standards and say these

 2 activities aren't included. The reason I'm saying

 3 that is, while overlap if properly done and

 4 internationally is inevitable and something to be

 5 dealt with, gaps would be problematic because the

 6 other part of the swaps market is it's very

 7 portable and it's very easy to exploit gaps. So

 8 what I would do is go with a broader sort of

 9 approach but with some concrete examples to

 10 provide people guidance.

 11 One more thing real quick, the whole

 12 issue of the materials I was reading and I'm sure

 13 a lot of folks are familiar with it, it's not an

 14 issue of manipulation of the market, it's really

 15 the standards for extraterritorial application. I

 16 get most of my learning from Sullivan & Cromwell

 17 writing for the industry and that's what they were

 18 thinking. I don't know. I got it from those

 19 folks. I think those issues really do apply by

 20 the way they were intended to apply to the

 21 extraterritorial issue.

 22 MS. MESA: I'm going to take one more on
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 1 this issue and then we're going move on. I know

 2 you haven't had a chance to speak, Bob. Go ahead.

 3 MR. REILLY: First, to Dan's point, you

 4 can't do it transaction by transaction or entity

 5 by entity. I think you have to set up categories

 6 of different types of transactions. I think one

 7 of the things you need to look at when you set up

 8 those categories is the location of the underlying

 9 product. Commodities are a little bit different

 10 than financial products that we've heard a lot

 11 about this morning. Commodities are tangible,

 12 they're used by real people and they're used in

 13 real places. So I think that you have to take

 14 that into account when you think about what is

 15 something that has a direct and significant impact

 16 on U.S. commerce.

 17 Going to David's example for just a

 18 second, if we have a German subsidiary of UBS

 19 dealing with a German subsidiary of Shell and

 20 they're trading German fuel oil, I think it's

 21 pretty clear that Title VII would not apply. On

 22 the other hand, if trade is involving a U.S. bank,
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 1 say a German branch of a U.S. bank, then perhaps a

 2 little bit closer call, but I would argue that if

 3 we're talking about the underlying commodity being

 4 German fuel oil, that should not a jurisdictional

 5 transaction.

 6 MS. MESA: I want to move on. I know a

 7 lot of people want to keep going on this one.

 8 Ananda?

 9 MR. RADHAKRISHNAN: One of the

 10 considerations is the desire to treat people in

 11 the same circumstance the same. What do I mean by

 12 that? I'm going to pick two banks here, Goldman

 13 Sachs and UBS. You're headquartered in

 14 Switzerland and you're headquartered in New York.

 15 Let's say the Commission were to say, Goldman

 16 Sachs, you need to register the swap dealer and

 17 let's say both of you do activities that bring you

 18 within the definition of a swap dealer and the two

 19 Commissions were to say, Goldman Sachs, you have

 20 to register with us and with the SEC. UBS, you

 21 don't have to because you're subject to regulation

 22 in Europe. A question, is that fair? Because I
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 1 think that's one of the things that we have to

 2 grapple with which is how do you treat people --

 3 you choose to do business in a particular way.

 4 Now I guess UBS could set up shop in the United

 5 States and do it that way. That's up to you. But

 6 I think from my perspective, that's a critical

 7 element of what do the Commissions have to do

 8 which is treat people the same.

 9 MS. MESA: Tom and then Dennis.

 10 MR. RIGGS: First of all, it's not fair.

 11 But I think what we're saying is that with respect

 12 to U.S. people, everybody is going to have to

 13 comply with the rules whether they're based in

 14 Switzerland, based in New York or wherever they're

 15 based, so that's not in question. The issue is

 16 with respect to activities outside the United

 17 States. We have global entities with U.S. and

 18 non-U.S. clients so how do you treat the non-U.S.

 19 activities of these global entities?

 20 From our perspective, the prudential

 21 regulators' margin rule is very unfair. It's

 22 asymmetric. It applies one set of rules to
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 1 U.S.-based organizations and a different set of

 2 rules to non-U.S.-based organizations. We're not

 3 sure why the activities of a non-U.S. bank who has

 4 significant U.S. activities don't need to be

 5 regulated but our offshore activities do. We

 6 think that the rules should be fair. We think

 7 everyone is going to have to comply with U.S.

 8 rules. And with respect to the non-U.S. rules we

 9 think there should be an even playing field

 10 between U.S.-based firms and non-U.S. based firms

 11 with respect to their non-U.S. activity.

 12 MS. MESA: Dennis and then David.

 13 MR. KELLY: I think that that's pretty

 14 clear and I think it's important to have brought

 15 that point out because if you're dealing with an

 16 American resident counterparty then it's pretty

 17 difficult to get yourself out of American

 18 regulation. There may be some de minimis

 19 exceptions to that, and by de minimis I don't mean

 20 de minimis, minimis, minimis that's been proposed,

 21 but that's really it. The rest of it really it

 22 seems to me ought to be dealt with through some
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 1 information sharing and an aggressive use of

 2 enforcement authority on this like, for example

 3 market manipulation. And I do agree with Wally

 4 and a little less with John about what this

 5 language is intended in the statute. I think it

 6 is a regulatory provision. I think the

 7 Enforcement Division would consider that to be a

 8 pretty constrained reach on its ability to go --

 9 and certainly historically it's been much more

 10 aggressive than that in terms of manipulating a

 11 market. Personally, I don't know the difference

 12 between German oil and American oil. I appreciate

 13 the attempt to distinguish them, but I understand

 14 from a manipulation on a market price standpoint

 15 and from the enforcement ability, that's a

 16 separate category. But my point is that that is

 17 there and that is available and has been and will

 18 continue to be. So if you're going to regulate

 19 anybody who's dealing with an American resident

 20 counterparty which is the what the bulk of this

 21 really ought to be all about, then I think the

 22 rest of it as difficult as it is, to me that's why
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 1 I keep coming back to the timing issue. The talk

 2 about duplicative and conflicting to me would

 3 almost be the good news at this point because that

 4 would mean that there's something out there that

 5 you can compare it to and we can make some

 6 intelligent decisions about how to apply it.

 7 We're not even there yet which is Ananda's point.

 8 But I think that as I said before, if there are

 9 ways to parcel out the elements of what you care

 10 about, I think when you consider that this is a

 11 great success for what the G-20 wanted. Everybody

 12 in the universe agrees with this fundamentally or

 13 at least generally that all regulators want to

 14 force everything to clear, all regulators want

 15 more transparency and that's where everybody is

 16 going. So trying to accommodate a harmonized way,

 17 and harmony is impossible really, but in a

 18 mutual-reliance way of dealing with that when

 19 everybody is sort of generally moving in the same

 20 direction I think ought to be an achievable goal.

 21 MS. MESA: David?

 22 MR. KELLY: Responding more to Tom's
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 1 point, I think for internationally active

 2 financial institutions, we think there should be a

 3 level playing field so that if Goldman Sachs is

 4 acting through its U.K. branch or a U.K.

 5 subsidiary, the same rules ought to apply. We

 6 care about it. Some foreign banks active in the

 7 United States may well end up registering their

 8 main bank as a swaps dealer in which case we would

 9 expect if our London branch is dealing with a

 10 French counterparty or a German counterparty that

 11 it would generally not have to follow U.S. rules,

 12 but if it's dealing with a U.S. counterparty,

 13 absolutely. Every requirement applicable to a

 14 swap dealer must be complied with. Without that I

 15 think a number of institutions will run into

 16 serious difficulties in how they structure their

 17 operations certainly in the near-term and with

 18 constraints on their operations in the

 19 longer-term.

 20 MS. MESA: Let's take one more. Wally?

 21 MR. TURBEVILLE: Some great comments.

 22 Dennis, especially that was a very wise discussion
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 1 of things. Tom was talking about the fairness and

 2 fell into activities, and then Bob was talking

 3 about physical commodities and how they're

 4 different and I sort of put those things together.

 5 It's kind of an interesting thing that really goes

 6 to the issue that makes this so hard, that makes

 7 it so that broad rules perhaps are best with

 8 carve-outs. Petroleum products may be different

 9 in Europe, but on the other hand, community index

 10 funds shifts famously between West Texas

 11 Intermediate and Brent in favor of Brent in

 12 February which after that for whatever reason,

 13 possibly for that reason itself, there was this

 14 huge disparity between Brent and West Texas

 15 Intermediate and prices changed on West Texas

 16 Intermediate oil in the United States. My point

 17 being, activities in physical and not in our

 18 country have a huge effect back into this market.

 19 So I think that really speaks to the question of

 20 how extraterritoriality has to be flexible enough

 21 to deal with the kinds of effects that come back

 22 into the market and because of the way swaps are
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 1 structured and the marketplace has grown up, I

 2 think flexibility is really called for and we

 3 would really endorse that as a concept and then

 4 carve-outs for activities that do seem to be

 5 nonjurisdictional.

 6 MR. COOK: We've spent a lot of time

 7 talking about who should be and who should not be

 8 a U.S. person and it feels a little bit like it's

 9 an all-or-nothing thing, that we haven't been very

 10 nuanced I think about whether are you in for all

 11 requirements. So I wanted to ask whether that's

 12 intentional? Do you believe that if you're in,

 13 you're in for everything? We have a number of

 14 requirements that are in play here. One is the

 15 entity registration and the entity conduct rules.

 16 Another is the trade reporting rules. We have

 17 mandatory trading requirements. We have mandatory

 18 clearing requirements. Should the way we think

 19 about who is subject to those rules differ based

 20 on -- between those rules or are you thinking that

 21 once you're in the regime, you're in for all

 22 purposes?
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 1 MS. MESA: Marcus?

 2 MR. STANLEY: I think this goes back to

 3 something that I think John was saying earlier

 4 when he was talking about the

 5 direct-and-significant test possibly not applying

 6 to certain kinds of registration or structure and

 7 reporting, that it was more limited. I disagree

 8 with what he was saying in that case. I think the

 9 direct-and-significant test goes to the overall

 10 goals of the statute and I think what you want to

 11 do is you want to trace back the various

 12 requirements to the key underlying goals of the

 13 statute which involve transparency and systemic

 14 stability. So I don't think anybody really cares

 15 if a company is reporting some information about

 16 its swap on page 4 on the German form when it

 17 would be page 2 on the U.S. form, but you care a

 18 lot about whether it's reporting all the necessary

 19 information on that form because that goes to the

 20 transparency issue and this to me is why it's so

 21 potentially worrisome that people are talking

 22 about exempting from margin requirements that goes
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 1 directly -- margining uncleared derivatives goes

 2 very directly to the stability requirement.

 3 I also want to mention a few things that

 4 people have been saying on this

 5 direct-and-significant connection, that there

 6 seems to be sort of an attempt to inflate how

 7 important that connection has to be. We heard the

 8 word "dramatic" used before. I think that was

 9 David and that's not in the statute. And the

 10 statute itself says a direct-and-significant

 11 connection with activities in or affect on, so

 12 that affect on is also important to think about.

 13 One last point, something Suparna said

 14 before and I think often gets said in connection

 15 with this discussion is that the argument is made

 16 that we need to limit our extraterritorial reach

 17 in order to preserve investment dollars that we

 18 want to remain in the U.S. in order to help the

 19 U.S. economy by making U.S. companies more

 20 competitive. If that's the case, then that's a

 21 connection back to the U.S. economy. It almost

 22 seems to be the case that people argue that we
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 1 have to restrict the extraterritoriality on the

 2 one hand because you want to help U.S.

 3 competitiveness which will help the U.S. economy

 4 because those profits will flow back to the U.S.

 5 But on the other hand, if we limit it, those risks

 6 will not affect the U.S. economy because the

 7 losses will not flow back to the U.S., that we're

 8 going to sort of have our cake and eat it too and

 9 that seems to me to be a contradiction. If you

 10 want to make the argument that the profits are

 11 going to come back to the U.S. economy, you should

 12 have to be very specific about how those risks

 13 won't come back to the U.S. economy as well.

 14 MS. MESA: Thank you. Bill?

 15 MR. MANSFIELD: It's a good question. I

 16 think the answer has to be you're in, and what

 17 does that mean? I think with regard to that

 18 particular transaction, all the transactional

 19 requirements with that which is reporting,

 20 clearing, et cetera. Then it gets a little bit

 21 more difficult when you think of other elements

 22 within the rules and regs which are margin. I
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 1 think it's possible to be in on margin. It gets

 2 even more complex when we think about capital so

 3 with that particular transaction I need to hold

 4 this amount of capital because this is where this

 5 jurisdictional rule applies for this particular

 6 transaction. That I think gets more problematic

 7 because the whole concept of netting and the

 8 global transactions that I'd have with the

 9 counterparty. So largely you have to be in. I do

 10 think that it does get back to a question that I

 11 think we'll discuss hopefully sometime this

 12 morning, on the affiliate transactions because

 13 then I think about you're in but then I think

 14 about how I've managed my book and market risk and

 15 being able to transact with affiliates is

 16 important to have those out in order to be in with

 17 regard to transactions with U.S. clients.

 18 MS. MESA: Dennis?

 19 MR. KLEJNA: I want to make one point

 20 about the statutory language, have a

 21 direct-and-significant connection with activities

 22 in or affect on commerce of the United States. It
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 1 says the commerce of the United States. It

 2 doesn't say commerce in the United States.

 3 Commerce of the United States is a pretty profound

 4 thing, it seems to me. You can affect commerce by

 5 picking up the phone from some place and having a

 6 baseball mitt delivered to where you are, but to

 7 affect the commerce of the United States, in a

 8 direct-and-significant way, is a pretty high bar,

 9 I would think.

 10 MS. MESA: Suparna?

 11 MS. VEDBRAT: I think it's also

 12 important to understand what touch points in the

 13 transaction are the entities involved would bring

 14 you into the purview of Dodd-Frank. There are

 15 some less obvious than just the counterparty

 16 themselves or the client such as if you have some

 17 operational efficiencies in your process where you

 18 may handle all your confirms within the U.S. or

 19 your collateral management may be U.S. based or

 20 U.S. dollar denominated. Things like that. Would

 21 that include you if you are dealing with a foreign

 22 entity from a trading perspective and the client
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 1 is also domiciled outside the U.S.?

 2 MS. MESA: Thank you. Ethiopis and then

 3 I'm going to jump in.

 4 MR. TAFARA: Thanks, Jackie. I wanted

 5 to get back to something Dennis said earlier and I

 6 think he's right in that I would say it's a pretty

 7 significant achievement to get the G-20

 8 jurisdictions to agree on trading, trade reporting

 9 and dealing and dealer regulation. Of course they

 10 agreed at a relatively high level and the devil

 11 will be in the details, and until we've seen how

 12 various jurisdictions give effect to those

 13 principles, it's hard to say what the level of

 14 comparability really will be and depending on the

 15 level of comparability we may be able to get to

 16 reliance or not. But as a complement to that, I

 17 wanted to probe something David Kelly said earlier

 18 or I think you said in that you were saying the

 19 timing issue which is of concern here as I hear it

 20 is of lesser consequence if the scoping is right

 21 or the scoping of our rules, or are you saying

 22 that even if we scope them correctly that timing
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 1 remains of consequence and of concern in light of

 2 competitive concerns you may have or competitive

 3 issues that arise?

 4 MR. KELLY: It remains a concern but I

 5 think that with a narrower extraterritorial scope

 6 at least initially for your rules, it makes our

 7 implementation jobs and our compliance programs

 8 easier to develop if we know what we're doing.

 9 There is clearly still potential for conflicts of

 10 regulation between the United States and other

 11 jurisdictions. We have some of that today. This

 12 will surely give us 100 new problems to solve and

 13 I'm sure we'll be working with you to try to do

 14 that. But I think as a practical matter our

 15 implementation time schedule is probably not going

 16 to be the same as certainly the slower people in

 17 the rest of the world.

 18 MS. MESA: John?

 19 MR. NICHOLAS: In answer to Ethiopis's

 20 question, I think timing is less of a concern if

 21 you do get the scope right, in particular thinking

 22 about the potential issue of retaliation. I think
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 1 if we are overreaching or over inclusive we invite

 2 that from European and Asian regulators. Just to

 3 throw out an example, requiring a non-U.S.

 4 clearinghouse to register with the agency as a DCO

 5 for example or to require every clearing member of

 6 a non-U.S. clearinghouse to register as an FCM, we

 7 need to think very hard about that I think and I

 8 understand there are issues with that on the

 9 regulatory side absolutely that need to be worked

 10 out. But again I think if we get the scope right,

 11 I think timing is less of an issue.

 12 MS. MESA: Tom?

 13 MR. RIGGS: On your point, Ethiopis, I

 14 generally agree with your statement. I think with

 15 respect to, let's assume the rules are just

 16 applying to U.S. people for example, I think

 17 within that scope we still have to be focused on

 18 what you guys obviously have been doing a lot of,

 19 phase-in and sequencing. So how we sequence the

 20 implementation of the rules and how they're

 21 phased-in will have a big impact on how much we

 22 can get one and how quickly. Because some things
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 1 arguably go before others in the implementation

 2 timeline thing, but as a general matter I agree

 3 with your scoping point.

 4 MS. MESA: The last comment here.

 5 Wally?

 6 MR. TURBEVILLE: Quickly, again U.S.

 7 persons, that is the task ahead of us. But in

 8 terms of scope, keeping in mind that the U.S.

 9 regulatory scheme is an articulation of what the

 10 legal and business communities -- how the border

 11 has been drawn between unacceptably risky behavior

 12 and less risky behavior so that the competition

 13 issue is by definition talking about engaging in

 14 riskier behavior that the culture has sort of

 15 suggested is the proper behavior to engage in. I

 16 know it's not as simple as that, but we should

 17 keep in mind that -- and I understand folks just

 18 want to do business and make money, I got it --

 19 but we should keep in mind in saying that's

 20 problematic to me because I can't compete in that

 21 kind of activity, that that is specifically the

 22 kind of activity that the culture has said is too
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 1 risky to do.

 2 MS. MESA: When I opened this panel I

 3 talked about that we would address clearing,

 4 reporting and trading, those issues that apply to

 5 all persons and we've danced around whether there

 6 are true conflicts or whether it's mainly overlap

 7 that we see developing, and understanding that the

 8 rest of the world doesn't have a solidified

 9 position on anything yet really, but we have seen

 10 Europe emerge with proposals and Japan. I want to

 11 ask the panelists if they see any true conflicts

 12 emerging regarding clearing, trading and

 13 reporting. Are there real conflicts or might we

 14 see emerging overlap and duplication? Luke?

 15 MR. ZUBROD: One significant conflict

 16 would result if the scope of the end user

 17 exemption in one regulatory jurisdiction is

 18 different from that in another. And whereas the

 19 scope is firmly set here in the U.S., it remains

 20 fluid abroad. One area where there is current

 21 disharmony or is trending to be current disharmony

 22 is with respect to the real estate sector in terms
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 1 of how Dodd-Frank treats that sector and how EMIR

 2 treats that sector in European proposals. Real

 3 estate is fundamentally nonfinancial in nature and

 4 real estate companies use derivatives to hedge

 5 commercial risk, but it can often be owned by

 6 entities that are financial in nature. Dodd-Frank

 7 took a nuanced approach in assessing whether or

 8 not real estate entities were financial or

 9 nonfinancial using a two-pronged test considering

 10 both the legal structure and the underlying

 11 business activity. EMIR is currently drafted such

 12 that it focuses exclusively on legal structure and

 13 consequently many real estate companies in Europe

 14 and American companies operating in Europe could

 15 be subject to a different availability with

 16 respect to the end user exemption. So we would

 17 encourage, to the extent possible, that U.S.

 18 authorities work with their foreign counterparts

 19 to ensure that for the benefit of competitiveness

 20 any disharmonies between the U.S. and foreign

 21 approaches are resolved with respect to the end

 22 user exemption.
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 1 MS. MESA: Sticking to true conflicts,

 2 Suparna and then Tom.

 3 MS. VEDBRAT: On the clearing front

 4 there is a difference emerging currently on the

 5 collateral protection for clients in the U.S. We

 6 have the omnibus structure and the CFTC has put

 7 forward an alternative approach. In Europe you

 8 see more of its aggregated model so that's one of

 9 the areas where there is a difference. Related

 10 with reporting, I'm not sure if this would be a

 11 conflict or duplicative, but a U.S. entity account

 12 that's a non-MSP were to trade with a foreign swap

 13 dealer, then the reporting requirements falling on

 14 the U.S.-domiciled entity which could be a little

 15 bit problematic because it's just a small set of

 16 transactions so we would like to see maybe the

 17 reporting to reside with the swap dealer even if

 18 it is a foreign registered swap dealer.

 19 MR. RIGGS: I would note that there is a

 20 lot of uncertainty still with European rules for

 21 example, so people are projecting out what they

 22 perceive what will be real conflicts. For
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 1 example, if there a European margin rule that has

 2 a similar European-centric approach to the U.S.

 3 approach on collecting dollar margin or treasuries

 4 and the Europeans say you have to collect

 5 collateral-denominated euros, that would be a

 6 clear conflict if you're a U.S.-registered swap

 7 dealer. Also for a European client trading with a

 8 European entity that's a registered swap dealer,

 9 if they trade a 5-year interest rate swap that's

 10 mandatorily cleared here and then Europe also

 11 requires clearing of that same transaction, I

 12 think people are wondering how that's going to

 13 work.

 14 MS. MESA: Bill?

 15 MR. MANSFIELD: I agree with the concept

 16 that Luke mentioned in that it's important to

 17 identify scope and then once we can identify scope

 18 then we can understand what the conflicts are. I

 19 think that the conflicts that were mentioned are

 20 going to be the conflicts within the regulations

 21 that will develop. I also want us to put

 22 ourselves in the shoes of the European regulators
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 1 and their thinking of this as well. If they take

 2 a broad interpretation of scope that is beyond

 3 their borders let's call it, we're going to run

 4 into similar conflicting rules and regs with

 5 regard to transactions here with U.S. customers.

 6 Scope is an important one and I think if we can

 7 clearly define the scope I think we can eliminate

 8 a lot of the conflicts that may exist.

 9 MS. MESA: Bob?

 10 MR. REILLY: In terms of conflicts, I

 11 also think requirements for exchange trading is an

 12 area where we could have some discontinuities, the

 13 role of brokers bringing counterparties together

 14 and I might point out that the definition of hedge

 15 and differences in how hedging might be defined

 16 would have major implications both in the area of

 17 position limits and also the application of the

 18 end user exemption.

 19 MS. MESA: Thank you. Dennis?

 20 MR. KLEJNA: I wanted to make the

 21 observation that in the call for clarity which is

 22 hard to argue with, the concern would be that
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 1 that's great as long as you get the clarity you

 2 want because you may get a lot of clarity and I

 3 don't know where that takes me. Going through the

 4 list of differences that have already been

 5 identified that people have pointed to, you get

 6 into the weeds on this stuff. This is pretty

 7 serious stuff and pretty serious differences as to

 8 how you're going to reach harmony on these kinds

 9 of things. No one envies the job that you have.

 10 I certainly don't. But I think that that really

 11 drives toward a more conceptual approach and a

 12 communicative way of dealing with this with other

 13 regulators. Maybe that gets you nowhere because

 14 people are definitely going to have to make a

 15 decision on where they're going to clear that

 16 5-year interest rate swap. Something like that

 17 somebody is going to have to decide what you do

 18 because you can't violate one law by complying

 19 with the other. I don't know what you're going to

 20 do about that other than have more meetings with

 21 your colleagues. I guess I'll stop there.

 22 MS. MESA: Thank you.
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 1 MR. BUSSEY: I wanted to come back to

 2 U.S. person to focus on it from the perspective of

 3 the intermediary being the U.S. person. For

 4 example, UBS's New York desk of Goldman's New York

 5 operations intermediating a transaction between

 6 its affiliates or its home bank and a Canadian

 7 counterparty where the two counterparties to the

 8 transaction are not U.S. but the intermediary is a

 9 U.S. person. First, does that actually happen in

 10 the real world right now? Second, if it does, how

 11 should these three requirements, the reporting,

 12 the trading requirements and the clearing

 13 requirement apply when the only U.S. person is the

 14 intermediary and not a counterparty to the

 15 transaction?

 16 MS. MESA: Suparna, did you have a

 17 comment?

 18 MS. VEDBRAT: Brian, I wanted to add to

 19 that that the intermediary could also be the asset

 20 manager.

 21 MR. BUSSEY: You mean where the manager

 22 is U.S. based but the account is actually a
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 1 foreign owned account?

 2 MS. VEDBRAT: Yes, exactly, and also the

 3 counterparty that you trade with is a foreign

 4 counterparty.

 5 MR. BUSSEY: Right.

 6 MR. KLEJNA: The answer is, yes, it's

 7 real. It probably happens every day at least at

 8 Tom's firms and mine so that Blackrock in New York

 9 calls my trading desk in Stamford and trades a

 10 10-year interest rate swap for a Brazilian

 11 counterparty for a Brazilian client whose money is

 12 managed by Blackrock.

 13 MR. BUSSEY: And you're setting it up

 14 with somebody overseas as well with your home

 15 bank, for example.

 16 MR. KLEJNA: UBS AG's London branch

 17 trades with a Brazil company.

 18 MR. BUSSEY: So how should the rules

 19 apply? You answered the easy question and not the

 20 hard one.

 21 MR. KLEJNA: I'll start fairly simply,

 22 and I don't know the answers to all of these
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 1 questions, I just know that I don't want there to

 2 be a different answer to the question or I don't

 3 want to be required to clear in the trade in two

 4 places. I suspect given the involvement of a

 5 European entity and a U.S. entity in the short-run

 6 we will probably have duplicative transaction

 7 reporting because both of you will want

 8 transaction reports. I'd like hopefully between

 9 you and Europe and the rest of the world you'd get

 10 over that at some point and we can report it once.

 11 At the very least it would be nice to be able to

 12 report one set of information and not have to

 13 report three or four different sets. In terms of

 14 clearing, if it's a clearable product I suspect

 15 Blackrock will want to clear it, and if it can

 16 clear in the U.S. and Europe, I think actually

 17 we'd prefer that the choice be directed by the

 18 client. I think it will ultimately be the end

 19 user at least on the institutional side who will

 20 be driving where trades get cleared.

 21 MS. MESA: Ananda?

 22 MR. RADHAKRISHNAN: So if we took the
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 1 approach that the requirements apply to the people

 2 responsible as opposed to people who may have --

 3 I'll pick Suparna's company for example. I

 4 suspect right now that Blackrock is not a

 5 counterparty to the swaps. It's your client

 6 because the client is financially responsible. So

 7 in the example we just gave let's say we said the

 8 large Brazilian company is the counterparty and

 9 UBS AG is the counterparty and let's assume UBS AG

 10 registers because the branch is not a legal person

 11 so it's you go back. Nobody has been able to

 12 convince me that a branch is a legal person.

 13 MS. MESA: Next panel.

 14 MR. RADHAKRISHNAN: Next panel. Then

 15 the question is, is the Brazilian company subject

 16 to Dodd-Frank, that's the question, as opposed to

 17 -- maybe I'm wrong. Maybe people are saying it

 18 should be Blackrock that's -- because Blackrock is

 19 exercising a certain amount of discretion or

 20 whatever it is that they have to register. I

 21 don't know. I know what your answer is but I want

 22 to know other people's answers.
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 1 MS. MESA: Luke?

 2 MR. ZUBROD: I'll add to the complexity

 3 of this question by noting that the issue also

 4 arises with end users who have centralized

 5 treasury groups that execute for the ultimate

 6 benefit of affiliates and we would certainly

 7 welcome clarity on how interaffiliate transactions

 8 might be handled. In this case end users

 9 typically view the intercompany, the

 10 interaffiliate transactions that they execute as

 11 mechanisms that simply transfer risk within a

 12 corporate group so would hope for or look for any

 13 requirements that not apply to those

 14 interaffiliate transactions except perhaps for

 15 reporting because those don't have a material

 16 bearing on systemic risk concerns.

 17 MS. MESA: Tom?

 18 MR. RIGGS: Obviously it's a hard

 19 question. One obvious answer may be that the

 20 Brazilian client is not a U.S. person and the

 21 rules shouldn't apply to them. But obviously one

 22 of the concerns we have, or one of the concerns I
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 1 have, is a lot of the focus on international

 2 issues is focused on Europe and there's a big

 3 world of clients out there in Asia, South and

 4 Latin America and Canada where clearly the

 5 regulatory regimes are even further behind where

 6 Europe is. How do we make sure that the

 7 regulatory issues are dealt with but don't

 8 wholesale those markets to other people away from

 9 U.S. firms? Because, the Brazilian client will

 10 say I'm not going to follow the U.S. margin rules

 11 when I can trade with an Asian bank and not have

 12 to. I think this issue of where the globe is, is

 13 it different places, is actually a big issue

 14 because we're so focused on Europe versus the

 15 United States.

 16 But I also think another issue we see

 17 quite frequently, is that the risk is moved into

 18 the United States because a client outside the

 19 United States wants to trade an S&P 500 swap, so a

 20 non-U.S. entity may book the trade but the risk

 21 may get moved internally to a U.S. swap dealer

 22 which gets to the whole question of whether
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 1 intercompany trading subjects you to registration,

 2 margin, SEF, clearing and all those kinds of

 3 things which is a big issue because if you can't

 4 move the risk to the place where you have the

 5 expertise, that makes everything more expensive

 6 and makes you less competitive as well.

 7 MS. MESA: Wally?

 8 MR. TURBEVILLE: I think we've just seen

 9 the discussion that suggests that all of these

 10 things should be within the jurisdiction of

 11 Dodd-Frank but might be treated differently rather

 12 than making some giant decision in scope saying

 13 that categorically the scope of Dodd-Frank is

 14 limited more narrowly than what's completely

 15 suggested by the statute itself. So a transaction

 16 that's really between the Brazilian and Swiss

 17 entities might have a different result and even

 18 though it comes through the United States it's

 19 clearly activity inside the United States, part of

 20 that activity is, and that might have a different

 21 result than an activity where an end user or

 22 anyone else actually through affiliate swaps put
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 1 the risk in a combined comprehensive book as part

 2 of one business notwithstanding the fact that

 3 maybe it originated with a swap by a subsidiary,

 4 but it's really part of the whole business. Say

 5 it's in the same book, it's guaranteed by the

 6 parent and all that, that's a duck. I think the

 7 gist of it all is that probably all of these are

 8 within the scope of Dodd-Frank but might have

 9 different outcomes from a regulatory standpoint

 10 because of policy considerations.

 11 MR. BUSSEY: Can you drill down, Tom or

 12 Wally? If the rules do apply to the New York

 13 desk, why isn't the result Goldman and UBS move to

 14 Toronto, the desk that does that activity, so that

 15 they can intermediate the UBS AG London branch and

 16 the Brazilian account, or Blackrock moves from

 17 Connecticut or wherever you're located up to

 18 Toronto so that you don't have this type of

 19 transaction subject to Dodd-Frank?

 20 MR. TURBEVILLE: Let me say, yes, I

 21 understand what you're saying, and if the scoping

 22 is done so that you allow people to use
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 1 subsidiaries, to move a subsidiary up to Toronto,

 2 yes, you make it really easy for them to do so.

 3 However, I don't know how you get around the fact

 4 that you've got a concept of territoriality where

 5 there's the United States, Canada, Europe or

 6 Japan, and you're trying to regulate a business

 7 which by definition defines the concept of

 8 territoriality? If we give in to that we end up

 9 with mathematically, and I'm not mathematician,

 10 I'm a lawyer for crying out loud, but I think

 11 mathematically you end up with virtual

 12 lawlessness. I think you eventually get to the

 13 lowest, lowest denominator so soon you're worried

 14 about people going off to, I don't want to offend

 15 anybody, some country in the Pacific, a tiny

 16 island in the Pacific. I think, yes, you're

 17 right, but that calls for a broader scoping

 18 definition with pragmatic rules so that you don't

 19 make it easy for people to move across the border

 20 to Toronto or to Pago Pago.

 21 MR. TAFARA: Tom raises an interesting

 22 point with regard to this coordination in terms of
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 1 timing as between us and some other regions other

 2 than Europe. But I think the example you raise

 3 leads to a question for Suparna which is, is that

 4 the choice that you would make or is that the

 5 choice that your client would make? In other

 6 words, if the choice is between working with

 7 Goldman Sachs in New York or dealing with some

 8 intermediary in Hong Kong that's unregulated, are

 9 there pressures that actually push you toward

 10 Goldman Sachs as opposed to, and this is probably

 11 a policy question, but what is the choice you

 12 would make in that situation?

 13 MS. VEDBRAT: I think that you would

 14 need to consider where you get competitive pricing

 15 and also overall strong counterparties for your

 16 clients so I think it would depend who's on the

 17 other. If you have an equally strong counterparty

 18 that's in Hong Kong and you're able to get good

 19 liquidity and pricing available there, you're

 20 going to see a gravitation of choice moving

 21 overseas.

 22 MS. MESA: John?
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 1 MR. NICHOLAS: Quickly, I think to take

 2 Brian's example, it seems to me that if you have a

 3 U.S.-based intermediary and two non-U.S. customers

 4 on either side, that the U.S.-based intermediary

 5 is going to have some registration requirement, be

 6 it FCM or a BD, in which case it itself should be

 7 subject to all of the relevant Dodd-Frank rules.

 8 The transactions on either side I would think

 9 would be also subject to the Dodd-Frank rules as

 10 well. I'm not sure how you can get around that or

 11 would want to get around that, frankly.

 12 To Ethiopis's point, I think it's a good

 13 point which is, we tend to be thinking about

 14 regulation in a negative connotation for business,

 15 but having worked with many of our customers, I

 16 know that being able to conduct business in a

 17 robust regulatory framework is generally

 18 considered a pretty good thing.

 19 MS. MESA: That sounds like a great note

 20 to end on, people choose robust regulation. Why

 21 don't we conclude Panel 1. We have a 15-minute

 22 break before Panel 2. We're going to get to do a
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 1 deeper dive into the same issues regarding

 2 entities. Thank you, and thanks to all of our

 3 Panel 1 participants.

 4 (Recess)

 5 MS. MESA: Let's prepare to get started.

 6 So if you could grab a seat. So, I want to

 7 welcome our second panel for the day. I'm going

 8 to do what we did with the first panel, which is

 9 could we just go around and do a self-introduction

 10 of your name and who you're with, and this time

 11 let's start with -- actually, we know Bob but

 12 we'll start with Bob again.

 13 Bob?

 14 MR. REILLY: Bob Reilly from Shell

 15 Trading.

 16 MR. McCARTHY: John McCarthy from GETCO.

 17 MS. LEE: Sarah Lee from Bank of

 18 America.

 19 MS. KARNA: Angie Karna from Nomura.

 20 MR. ALLEN: Chris Allen from Barclays.

 21 MR. O'CONNOR: Hi, Steve O'Connor from

 22 Morgan Stanley.
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 1 MR. STANLEY: Marcus Stanley from

 2 Americans for Financial Reform.

 3 MR. TURBEVILLE: Wally Turbeville,

 4 Better Markets.

 5 MR. RIFFAUD: Marcelo Riffaud from

 6 Deutsche Bank.

 7 MS. MESA: Okay, I'm going to ask Dan

 8 Berkovitz, our General Counsel, to ask the first

 9 question and get started.

 10 MR. BERKOVITZ: Thank you, Jackie, and

 11 welcome to our second panelists.

 12 I'd like to start off with a question

 13 that's somewhat a follow-up from much of what was

 14 discussed on the first panel, but perhaps we can

 15 get into it with a little more specificity on this

 16 panel.

 17 The question would be specifically which

 18 activities should trigger -- which activities

 19 outside the United States should trigger a

 20 registration requirement for a swap dealer? Would

 21 it be only the activities dealing with U.S.

 22 persons within the United States, or would it also
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 1 potentially be activities with U.S. persons

 2 outside the United States?

 3 And then the second question would be

 4 once registered, which Dodd-Frank provisions

 5 should apply? Should it be transactional

 6 requirements that would apply to specific

 7 transactions or, as you're aware, Dodd-Frank for

 8 swap dealers, major swap participants, not only

 9 has transactional requirements but has a number of

 10 entity-wide requirements. Those would be capital

 11 requirements; those could be business conduct

 12 standards, internal business conduct standards, as

 13 well as external business conduct standards. And,

 14 for example, the external business conduct

 15 standards would be how you deal with certain

 16 counterparties; internal business conduct

 17 standards would be things like chief compliance

 18 officer, risk management procedures, documentation

 19 procedures. If you're a U.S. swap dealer solely

 20 dealing within the U.S. or MSP and you become

 21 designated, all those requirements apply to all

 22 your transactions. But if you are a swap dealer
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 1 outside the United States, who becomes a swap

 2 dealer by virtue of your dealings with U.S.

 3 persons, which of these transaction requirements

 4 should apply? Which of the entity-wide

 5 requirements apply?

 6 So, the first question would be the

 7 threshold question -- which activities count

 8 towards the determination of whether an entity

 9 outside the United States is a swap dealer? And

 10 then the second question would be once the

 11 threshold is triggered and you become a swap

 12 dealer or MSP, which of the Dodd-Frank

 13 requirements would apply?

 14 MR. TAFARA: Right. Why don't we start

 15 with Marcelo, and then we'll turn to Angie.

 16 MR. RIFFAUD: Thank you very much. I

 17 think the answer to the first question -- which

 18 activities would make you a swap dealer -- it's in

 19 the statute, and the prior panel, the entire

 20 discussion about whether you're facing a U.S.

 21 person, however defined or involved in the U.S.

 22 transaction, however defined, that would be what
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 1 should give rise to whether you're a swap dealer

 2 subject to registration.

 3 On the question of what rules would

 4 apply at that point, I think the trivial answer is

 5 all of them, and -- but then when would you apply

 6 those? You would apply the entity-wide rules by

 7 definition, apply to the entire entity at all

 8 times. So, to the extent your concern about

 9 capital, it's entity-wide and you're measuring it

 10 at all times.

 11 When you're talking about the

 12 transaction-based rules, that is where a swap

 13 dealer should need to be compliant only when

 14 facing U.S. persons on U.S. transactions. So, a

 15 bank that has activity both with U.S. and non-U.S.

 16 persons, the transaction-based rules should attach

 17 only to the former category. That would be

 18 another proposal. But that non-U.S. activity does

 19 impact the entity-wide activity, and so that's why

 20 you're measuring that at the entity, all the other

 21 activity.

 22 MR. TAFARA: Angie.
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 1 MS. KARNA: Further, I agree with what

 2 Marcelo said about activities with U.S. persons.

 3 I would also take us back to the first panel. We

 4 think the definition of "U.S. persons" really

 5 should stem from existing law, and so, for

 6 example, one of the points that had been made

 7 earlier related to offshore affiliates or offshore

 8 branches of U.S. institutions. Under existing

 9 law, under securities laws, if Nomura's foreign

 10 dealer provides a risk management solution to a

 11 Japanese subsidiary of a U.S. company or provides

 12 a risk management solution to a U.S. investment

 13 manager, who is managing Japanese risk for a

 14 foreign client, then we don't believe that the

 15 foreign dealer needs to register in the United

 16 States of America. We believe that that's

 17 offshore activity.

 18 MR. TAFARA: Chris?

 19 MR. ALLEN: Thank you. I agree with

 20 that. I think it does stem from the definition of

 21 U.S. person, and I agree with Angie's comments in

 22 terms of how one might look at that question by
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 1 reference to existing law, particularly, for

 2 example, Reg S.

 3 I think what -- going to the second

 4 question, though -- as to what it might be that

 5 then kicks in under Dodd-Frank when one is on the

 6 face of it when the scope of the regime. It

 7 strikes me that quite usefully the distinction is

 8 much (inaudible) between entity-style regulation

 9 and transactions specific to that basis of

 10 regulation is an important one. On the face of

 11 it, you might obviously have the notion if you're

 12 looking at capital and prudential regulation,

 13 clearly that only makes real sense when

 14 contemplated at an entity level.

 15 At the same time, I think, on that

 16 score, it's important to recognize the importance

 17 of potentially deferring to home state regulators.

 18 In circumstances where those home state regulators

 19 have a comprehensive and globally recognized

 20 standard of regulation of, for example, capital or

 21 other aspects of prudential regulation. And that,

 22 obviously, would be a test that would have to be
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 1 satisfied on a jurisdiction-by-jurisdiction basis.

 2 When it comes to the transaction level

 3 regulation, and obviously aspects of conduct of

 4 business that would fall within that, it strikes

 5 me as most useful to apply or to require the

 6 embassy's entity which is a registered swap dealer

 7 -- apply those conducts of business standards in

 8 circumstances where it is dealing with a U.S.

 9 person. So, for example, it strikes me as

 10 entirely sensible that the U.K. -- and see which

 11 is a registered as a swap dealer but which has

 12 entered into transactions with a U.S investor. It

 13 should be required to apply U.S. conducts of

 14 business standards relationship. However, the

 15 London entity of the U.K. firm entering into

 16 transactions with an Italian client, for example

 17 -- it strikes me that the most appropriate

 18 conducts of business standards to apply there

 19 would be those that apply innocently or

 20 potentially in the United Kingdom but certainly

 21 easily.

 22 MS. LEE: I don't think I've actually
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 1 got much to add, because you've thought of

 2 everything that I was going to say. So, I mean, I

 3 agree completely with Chris and Angie and Marcelo,

 4 particularly as well in terms of the registration

 5 requirement really applying when you're dealing

 6 with entities domiciled in the U.S., U.S. persons.

 7 And in terms of when the entity registers and how

 8 those requirements apply, I agree whole heartedly

 9 with Chris, that I think the distinction needs to

 10 be made between entity-level requirements, and

 11 transaction-level requirements, and in relation to

 12 the entity-level requirements I do think some

 13 thought should certainly be given to comparable

 14 regulation of those entities in those foreign

 15 jurisdictions that they could be relied on, and at

 16 the transactional level, I think certainly

 17 transactional-level requirements should be applied

 18 around business contacts, clearing, reporting to

 19 that entity's trading activities with U.S. persons

 20 domiciled in the U.S., but not to the transaction

 21 requirements of that entity with foreign persons

 22 outside the U.S.
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 1 MR. TAFARA: Wally.

 2 MR. TURBEVILLE: We slipped into

 3 domiciled. Sorry. So, I think that it's clear

 4 that if you defer to U.S. persons, that's an issue

 5 that's not very Dodd-Frankish and has standards,

 6 and from our perspective domiciled wouldn't be the

 7 issue. But I'm also sort of struck by what

 8 appears to be a thought that at any level kinds of

 9 regulation, capital and others, that the sense is

 10 that you would be a Dodd-Frank jurisdictional

 11 entity but there would be some deference to other

 12 entities, which I think is -- you know, the

 13 standards are another issue, but that being an

 14 approach recognizing there could be duplicative

 15 regimes that might apply sounds like a sensible

 16 one, too -- is to understand which particular

 17 requirements are ones that are absolutely required

 18 by the U.S. regulatory regime and others for which

 19 some sort of deference might be provided.

 20 MR. TAFARA: Brian, did you want to

 21 probe with regard to that a little bit?

 22 MR. BUSSEY: Yeah, so to sum up the
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 1 answers, if it's -- regardless of whether the

 2 dealer is domiciled in the U.S. or overseas, it

 3 turns on whether the counterparty is a U.S.

 4 person. Is that what I'm hearing from the

 5 panelists? And if that's the case what side of

 6 the line -- so that you're taught making a

 7 distinction between entity level and transaction

 8 level, which side of the line does margin fall on

 9 in that divide?

 10 MR. TAFARA: Robert, I don't know

 11 whether that was something you planned on

 12 addressing. Why I don't let you pick up and then

 13 maybe turn to Stephen, who I think is trying to be

 14 responsive to Brian, so go ahead, Robert Reilly.

 15 MR. REILLY: Well, first -- just going

 16 back to the original question, I just want to

 17 emphasize the transactions between affiliates

 18 should not be covered by Dodd-Frank whether in the

 19 U.S. or if they're between affiliates in the U.S.

 20 and another country. Other than that, I think

 21 that only entities that have a direct and

 22 significant connection with U.S. commerce ought to
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 1 be covered and I think "significant" means

 2 something. It doesn't mean a hypothetical

 3 connection. It means something that's very direct

 4 and very tangible. So, I think some of the things

 5 you would look at in that regard are well, gee,

 6 does the company have a U.S. presence; is it

 7 trading in U.S. markets with non-affiliates; and

 8 what is its volume of bilateral trading in

 9 commodities with U.S. underliers?

 10 MR. TAFARA: Stephen, did you want to

 11 tell Brian on which side of the line you would

 12 place margin?

 13 MR. O'CONNOR: Yes. But before that, I

 14 think it's worth stating that we would all like

 15 all the rules globally to change on the same day

 16 and to be the same rules in each jurisdiction with

 17 mutual recognition of authority between regulators

 18 of a certain standing and mutual recognition of

 19 infrastructure such as CCPs and dates of

 20 repositories. And when you -- and clearly we're

 21 not in that world, so that's where

 22 extraterritoriality comes in, and I think the U.S.
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 1 going first is fine, but the extraterritorial

 2 components of that are very important. And then

 3 the most important thing is to reserve a level

 4 playing field within a market. So, U.S. clients,

 5 when trading with U.S. or European banks, should

 6 be the same rules applying to both banks, and

 7 within Europe I think U.S. banks and European

 8 banks have to be treated the same as well.

 9 So, specifically answering Brian's

 10 question, I agree with the comments made earlier

 11 that the transactional-level rules should, with

 12 regard to European entities, apply only to

 13 transactions with U.S. counterparties. And to the

 14 extent that European operations, for instance, of

 15 U.S. banks, trade with European clients, they

 16 should not be subject to the Dodd-Frank

 17 transactional rules, including the margin rules,

 18 because if they did then you would not have a

 19 level playing field in Europe. European clients

 20 would be incented to not trade with those European

 21 operations of U.S. banks, which leads to reduced

 22 liquidity in those markets, reduced competition.
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 1 Other consequences would be jobs and tax impacts

 2 in the U.S. U.S. banks would be hampered in their

 3 ability to nudge a capital formation, including in

 4 the U.S., because the global reach is important to

 5 provide those services even to U.S. clients. It's

 6 either geographical shift of liquidity, mentioned

 7 earlier, from the U.S. into Europe, including for

 8 U.S. products; and U.S. regulators would have less

 9 visibility into global markets as product move

 10 offshore, including into U.S. product, which

 11 itself might move more offshore. So, I think the

 12 consequences of having an unlevel playing field in

 13 Europe -- was the example I gave -- or in the U.S.

 14 would have profound impacts on markets.

 15 MR. TAFARA: Okay, Marcus, Wally, then

 16 Ananda, and then Marcelo.

 17 MR. STANLEY: Yeah, I'm not sure we want

 18 to get completely hung up on this transaction

 19 entity level distinction. I mean, it's, to a

 20 degree, a real distinction, but our focus ought to

 21 be on the statutory goals of the Act, and to me it

 22 seems like margin, whichever side of the line it
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 1 falls on -- it falls on the side of the line where

 2 you want to do it -- because fundamentally the Act

 3 is meant to avoid a situation where the U.S.

 4 market is exposed to the risk created by the

 5 failure of a major derivatives dealer, and we

 6 know, because this entity has registered as a

 7 swaps dealer under Dodd-Frank that it's doing

 8 activities that have a direct and significant

 9 connection to the U.S. economy, and presumably its

 10 failure would expose the U.S. economy to some

 11 negative fallout as well. And margin -- here, you

 12 know, the line between margin and capital --

 13 they're very interrelated to me, because they're

 14 both a means of sort of making sure that you have

 15 the funds available to protect yourself in case

 16 you end up very far out of the money on a

 17 derivatives transaction. And presumably,

 18 actually, if you weren't taking margin, your

 19 capital requirements should actually be higher.

 20 So, I think it makes a lot of sense for the margin

 21 requirements to be, in effect, for anybody who

 22 registers as a swaps dealer under Dodd-Frank.
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 1 And in response to Stephen's point that

 2 this would -- that a loss of business in Europe

 3 for U.S. subsidiaries would result in a hampered

 4 ability to provide capital to firms in the U.S.,

 5 this goes back to something I said in the first

 6 panel, that to me this just demonstrates what

 7 global entities these are, that profits and losses

 8 in subsidiaries can affect the flow of capital

 9 into the U.S. And I'd really want to see if the

 10 profits are affecting the flow of capital into the

 11 U.S.; I'd really want to see some very hard-core

 12 proof that the losses won't flow into the U.S. as

 13 well.

 14 MR. TURBEVILLE: Margin -- the

 15 philosophy behind the proposed regulations that

 16 are out there is that margin is taken by swap

 17 dealers to protect them from harm along the lines

 18 of systemic risk issues and, like Marcus was

 19 saying, it's a aligned with capital, so that would

 20 be an entity purpose. However, if you read our

 21 comment letters, we think there are other reasons

 22 for margin to be there. They just don't happen to
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 1 appear in the proposed regulations yet. So, we're

 2 hopeful that in the final they do. But at least

 3 there's an entity-level purpose behind the

 4 regulations; ergo, margin is at least entity

 5 based.

 6 MR. TAFARA: Ananda?

 7 MR. RADHAKRISHNAN: I want to pick up at

 8 the point that Stephen made, which is -- and I see

 9 the attraction of treating people the same, right,

 10 irrespective of where you're located. In other

 11 words, Morgan Stanley, you should be treated the

 12 same as Barclays; you're both swap dealers. And I

 13 think the point you made was we should only

 14 regulate you for your activities with other U.S.

 15 persons on a transactional basis. I think that

 16 was the point that was being made.

 17 Now, the question is this, if we

 18 accepted their proposition, basically what we're

 19 saying is whatever Morgan Stanley does outside the

 20 United States does not have a direct and

 21 significant connection with activities in the

 22 United States, because that would have to be it,
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 1 because -- and so I'm trying to reconcile the

 2 approach you're suggesting with our duty to

 3 enforce the statute.

 4 MR. O'CONNOR: Right. And I understand

 5 the struggle you face. But also the G-20 talks

 6 are having a level playing field and not creating

 7 situations of regulatory arbitrage, so I think to

 8 some degree there is a balance needed here.

 9 And the point made about financial

 10 institutions being global entities is quite true,

 11 so the point I made at the outset was that ideally

 12 we'd want to have the same rules in all

 13 jurisdictions, and I think energy should be spent

 14 on trying to reconcile the rule set and the timing

 15 between Europe and the U.S. primarily but other

 16 jurisdictions as well, and that's the solution to

 17 regulating global entities rather than going first

 18 -- and as I said earlier, going first is a good

 19 thing, and it shows that the U.S. is taking a

 20 lead, but going first and then hampering the

 21 businesses of the U.S. banks seems to be -- will

 22 be harmful and is the opposite protectionism
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 1 basically.

 2 MR. TAFARA: To follow up on what Ananda

 3 has just said and to pick up on a couple of points

 4 that Wally made earlier, we haven't responded to

 5 the approach whereby you don't defer or there is

 6 no deference with respect to the conduct rules,

 7 one, because there is a timing issue -- in other

 8 words, what are we deferring to? Two, why not

 9 have complementary requirements whereby the

 10 requirements are more or less the same at least in

 11 terms of outcomes without necessarily having to

 12 defer to a home regulator or have the entity level

 13 -- I think that's what was being suggested. I

 14 think it's probably worthwhile to try and respond

 15 to that point and as was raised by Wally.

 16 So, I see a number of flags up. Chris.

 17 Sarah I think was next, Angie, Wally, and then

 18 Marcelo.

 19 MR. ALLEN: I was just going to comment

 20 that it strikes me that when we talk about

 21 potential deference to home state regulation,

 22 that's not in some way a suggestion that the
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 1 standard that should be applicable to that

 2 institution should be in any way less, because I

 3 think it is quite important that that approach be

 4 underpinned by an acceptance by U.S. regulations.

 5 But the overseas standard of regulation is

 6 appropriate, comprehensive, and conforms to

 7 requisite global standards in terms of the

 8 integrity of that regulatory approach. And if

 9 that is not the case in terms of the overseas

 10 regulatory cultural approach, then that regulation

 11 would not be in place on the capacity to defer.

 12 It just wouldn't apply. So, I think there was a

 13 safety mechanism, if you like, embedded within

 14 that.

 15 I'd also just to -- I agree with the

 16 comment -- I can't remember who it was made it,

 17 but there is obviously a very close nexus between

 18 capital regulation and margining, in that of

 19 course the less collateral and institution-sought

 20 dealer holds on its booking relations to its

 21 counterparty trading lines, so the amounts of

 22 risk-rated asset and (inaudible) capital that it
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 1 has put behind that business increases

 2 significantly. So, of course there is an

 3 important connection between those two concepts.

 4 It doesn't necessarily strike me, though, that

 5 that takes us to the conclusion that one should

 6 look at margin from an entity perspective, because

 7 it strikes me fundamentally that it does fall

 8 within a kind of conduct of business conceptual

 9 type of rule and because not least of the

 10 difficulty that derives from the fact that

 11 different regulations around the world are also

 12 looking at that same question in terms very much

 13 of the conducts of business standards that should

 14 apply to dealers and market participants in their

 15 respective markets. If you take the European

 16 example, which is the one I am closest to, and the

 17 EMIR regulation, which provides for, among other

 18 things, principle trade reporting and managed

 19 claim rate (inaudible) derivatives. Of course,

 20 one of the provisions in that regulation, which I

 21 appreciate, is behind the U.S. In terms of timing

 22 but has still relatively progressed. That
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 1 specifically contemplates margin requirements for

 2 uncleared transactions. I think trying to apply

 3 in Europe between transactions entered into why a

 4 swap dealer registered UKMC and its Italian

 5 client, for example. A margin requirement, which

 6 was in any way different from the one which was

 7 required to be applied by the U.K. and Italian

 8 regulators to govern that relationship, I think,

 9 could be highly problematic.

 10 MR. TAFARA: Sarah.

 11 MS. LEE: Yeah, I wanted to touch upon

 12 margin requirements as well, in particular, I

 13 mean, a lot of people have been talking a lot

 14 about Europe, but lesser about Asia and where that

 15 market is at the moment in terms of its margin

 16 requirements. I mean, Asia is still what I call,

 17 many Asian jurisdictions are still, in the very

 18 early stages of derivatives development. So,

 19 there you have the fully bank market practices

 20 that we might see in the West. So, jurisdictions

 21 like China, India, Taiwan currently don't have

 22 market practice to call for margin in those
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 1 jurisdictions. So, I think one of the challenges

 2 that we face is if we require a margin at the

 3 entity level, it becomes difficult, then, for

 4 entities that have registered in the U.S. to

 5 operate in those jurisdictions, because local

 6 banks will not be asking for margin. And so to

 7 manage the risk of trading activity in those

 8 jurisdictions where isn't margining, capital -- as

 9 Chris was referring to -- can be used as a tool to

 10 help manage the risk of those jurisdictions not

 11 yet having the same sort of margining practices

 12 that we see in the rest but then allowing global

 13 institutions like ourselves to be able to operate

 14 in those jurisdictions.

 15 MR. TAFARA: Chris, was a two-handed

 16 intervention? Did you want to follow up very

 17 quickly on what Sarah just said?

 18 MR. ALLEN: I agreed with what Sarah was

 19 saying, but the point I wanted to make was the

 20 potential consequence or conclusion if one pursued

 21 the notion of margin -- as an example, applying at

 22 the entity level -- which is touching on a point
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 1 which was raised in the first panel, which is the

 2 potential fragmentation at the legal entity level

 3 of the different participants in the markets in a

 4 manner which could be unhelpful when it comes to a

 5 host of issues, but not least for failure

 6 margining taxation on capital. Because if it were

 7 the case, that's the requirements complying with

 8 Dodd-Frank margin rules for a European entity,

 9 brought that entity into conflict with obligations

 10 it might have under the European regulation regime

 11 touching on the same issue. There may be an

 12 inevitable consequence of that, which is that in

 13 order to be able to continue with both European

 14 and the U.S. businesses, the interesting question

 15 has to subsidiarize its operations. And that

 16 strikes me from a capital vetting in various

 17 perspectives, essentially unhelpful. And also

 18 query, why does it really take the systemic risk

 19 debate further forward.

 20 MR. TAFARA: Angie.

 21 MS. KARNA: Yeah, I think Chris

 22 mentioned one of the things I was quite focused on
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 1 as well. You had asked the question earlier,

 2 Ethiopis, about what's the consequence of no

 3 deference. For us at an entity level, the

 4 consequence of no deference is the line of the

 5 spectrum that was mentioned at the beginning of

 6 today, which is isolation, and specifically

 7 subsidiarization and having regionalized pools of

 8 capital and a lack of liquidity for global end

 9 users and global end clients who want to access

 10 markets in different jurisdictions. So, we think

 11 it's critical that there be deference at entity

 12 levels, and for us capital is a primary example,

 13 and we agree that margin and capital are linked

 14 and raise challenging questions. But we also

 15 agree that a level playing field is critical for

 16 functioning markets globally and for U.S.

 17 investors and end users of derivatives to be able

 18 to access those markets globally.

 19 MR. TAFARA: Angie, can I press just a

 20 bit on that point --

 21 MS. KARNA: Sure.

 22 MR. TAFARA: -- to ask why deference if
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 1 the requirements are complementary and indeed may

 2 be highly comparable? In other words, as long as

 3 the standards are comparable, need there be

 4 deference in terms of saying we're going to simply

 5 leave it to you to oversee the entity, whereas you

 6 could, if they were complementary requirements,

 7 have a relationship whereby it is a coordinated,

 8 collaborative effort on the part of the

 9 regulators?

 10 MS. KARNA: Capital, to me, is the

 11 fundamental issue, and there are global capital

 12 standards that all of the major global

 13 institutions are applying based on their local

 14 regulatory interpretations of those standards.

 15 So, capital is assessed for an entity looking at

 16 all of its risks, not just a piece of its risk.

 17 And when I speak to risk managers at Nomura or

 18 anywhere else, they tell me that they speak Greeks

 19 not grids and that they look at capital and they

 20 look at risk across all of their entities. So,

 21 it's very critical for us to manage our risk and

 22 manage along one set of rules, not slight
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 1 differences in rules between different

 2 jurisdictions.

 3 MR. TAFARA: I see a number of the

 4 regulators have raised their flags, so maybe I'll

 5 turn to them quickly and then turn to the other

 6 side of the table.

 7 So, I think, Jackie, you had your flag

 8 up first, and then Dan.

 9 MS. MESA: Just wanted to follow up on

 10 something actually Sarah said, that I'm hearing

 11 sort of two different lines here. One is that,

 12 you know, in Europe we want you to defer on the

 13 entity level regulations, and Sarah pointed out

 14 the Asian situation where maybe they won't have

 15 margin applied in the same way or margin at all as

 16 it's developing OTC market. And so my question

 17 really is, in that situation, are you saying that

 18 we shouldn't defer, because there isn't something

 19 to defer to? I mean, you were saying there's a

 20 competition concern you have, but if we completely

 21 leave that unregulated then we haven't done our

 22 jobs, have we, in the systemic risk oversight?
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 1 MS. LEE: Yeah, I wasn't saying that you

 2 should just stick in all that situation, but I

 3 think there are other tools that you can use

 4 instead of margin to manage the risk of that

 5 trading activity, which is unmargined, which is

 6 capital and that you can hold more capital in

 7 those jurisdictions where you don't feel the

 8 regime is the same as the U.S. or the margining

 9 requirements are the same, which still allows

 10 participants to operate in those regimes by

 11 following the local requirements for that trading

 12 activity but also balances back with the capital

 13 that's held against a perceived increased risk.

 14 MR. TAFARA: Dan?

 15 MR. BERKOVITZ: I'm intrigued by the

 16 notion that it's simply a question of the capital

 17 requirements entity and entity-wide capital

 18 requirements. In Dodd-Frank, at least for the

 19 U.S. swap dealers, the bank swap dealers are the

 20 capital requirements, and that will be determined

 21 by the prudential regulators. But then there's

 22 also the other entity-wide business conduct
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 1 standards in terms of risk management

 2 documentation, the other entity level. We call

 3 them prudential regulations. I guess to take that

 4 approach would be almost for us to say that those

 5 are not of any significance in terms of any level

 6 regulation or systemic risk reduction.

 7 How do we -- how would we get beyond

 8 that hurdle of basically saying these are not

 9 necessary for prudential regulation of these or

 10 entity-wide regulation?

 11 MS. KARNA: And just because you're

 12 looking at me, I think you think I said something

 13 earlier that I didn't say. I think capital is the

 14 quintessential entity-level requirement but not

 15 the only entity-level requirement. For example,

 16 our internal conduct standards, our chief

 17 compliance officer standards, our walls, and our

 18 barriers can only be assessed at an entity level

 19 as opposed to at a transactional level, and so I

 20 think that there's a host of issues and those are

 21 other examples of what I would consider to be

 22 appropriate prudential standards that, as Chris
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 1 mentioned earlier, I wouldn't expect you to defer

 2 to all of those prudential standards without an

 3 assessment that the particular regime has

 4 appropriate and comparable standards to what you

 5 would expect in the United States.

 6 MR. TAFARA: Marcelo, you've been

 7 waiting patiently.

 8 MR. RIFFAUD: That's okay. Most of what

 9 I was going to say has been said. Thank you,

 10 Ethiopis.

 11 Let me take your question, Dan,

 12 consistent with what Angie just said. We think of

 13 the entity-wide rules as we don't -- when we say

 14 "deference," we're just -- we're not saying that

 15 it's a complete delegation, right? We're saying

 16 that you've made an assessment consistent with

 17 what historically has been done in the banking

 18 sector for cross-border banking supervision.

 19 There's an assessment that there's comfort.

 20 There's comparability with the home country

 21 regime, right? And then so there should be some

 22 comfort there to defer to the home country
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 1 regulator. The rules, though, that are

 2 entity-wide -- some are more prudential than

 3 others. Some go to capital, centralized risk

 4 management, etc., but then there are some in

 5 Dodd-Frank that are less prudential in nature but

 6 are still entity-wide. So, CCO rules. Conflicts

 7 of interest. Diligent supervision, right?

 8 Monitoring of trade. Those are rules that the

 9 deference there -- if you choose not to defer,

 10 those are rules that when you promulgate them, you

 11 should think seriously about adopting a flexible

 12 approach that accommodates preexisting

 13 organizational structures and approaches that we

 14 have in our home countries that have been required

 15 or that we have put in place to comply with our

 16 own local regulation.

 17 MR. TAFARA: Thank you. Wally.

 18 MR. TURBEVILLE: Margin and capital are

 19 related, but they're different. They're not

 20 transferable. Margin is micro. It's about

 21 transactions and correlations and offsetting, and

 22 all that good stuff. Capital -- proper capital
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 1 should assume -- it should be set at the level

 2 required, assuming that you actually margin like a

 3 sane person. So, those are two different things.

 4 However, they both, under the philosophy that's

 5 being adopted by our hosts here, have to do with

 6 entity level. For instance, the Asian

 7 transaction, what the problem with it is -- you

 8 allow a company to have a subsidiary in Asia who

 9 could run up all kinds of exposure -- unmargined

 10 exposure -- on transactions, which then blows back

 11 on the U.S. entity, and the whole point of

 12 margining as it was set up was to protect that

 13 entity. So, in other words, that's -- so, what

 14 you -- that's what the real issue is, is that

 15 margin requirements were set up to protect

 16 entities and allowing extraterritoriality issues

 17 that aren't necessary, given the -- even

 18 reasonable given the actual statute to come into

 19 play, you allow that whole policy to be

 20 undermined, right? So, margin and capital are two

 21 different things, and we shouldn't ignore the fact

 22 that a dealer in the U.S. is supposed to get
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 1 margin for its positions in order to protect it,

 2 in order to protect the whole economy.

 3 MR. TAFARA: We'll turn to Marcus, then

 4 John, and then I think we've exhausted this series

 5 of questions and we'll move onto the next and

 6 Jackie will get us started.

 7 So, Marcus?

 8 MR. STANLEY: Well, Wally really said a

 9 lot of what I wanted to say there on margin and

 10 capital. They're related, but they're not the

 11 same thing, and they have complementary strength.

 12 And just seconding what Wally said, I'd

 13 also point to the experience with risk-weighted

 14 capital before the crisis when capital

 15 requirements were arbitraged very significantly,

 16 and it's much easier to arbitrage a set of capital

 17 requirements for the entire entity where you can

 18 have claims about hedges that are being made

 19 across many, many different subsidiaries, where

 20 there's a lot of complex processing, where you're

 21 trying to put all of the entity's exposures into

 22 one number, whereas with margin -- margin is
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 1 something that happens at the transaction level

 2 but contributes to the health of the whole entity,

 3 because you're forced to take some margin for each

 4 and every transaction. So, they are different.

 5 It's a belt-and-suspenders approach. It was

 6 clearly contemplated in Dodd-Frank.

 7 And the only other point I wanted to

 8 make was that there was some discussion of

 9 regionalized pools of capital and fragmentation

 10 around the world. Well, a goal of Dodd-Frank is

 11 to shield or protect the U.S. economy from

 12 practices that create excessive risk, and,

 13 frankly, if we get some fragmentation where you

 14 have one market over there which is not taking

 15 margin, which is engaging in risky practices, and

 16 then connections from that market into the U.S.

 17 economy are perhaps reduced or cut, that's to me

 18 perfectly in line with what Dodd-Frank intends.

 19 MR. TAFARA: I said John. I meant

 20 Robert. Apologies. And then Jackie.

 21 MR. REILLY: That's fine just as long as

 22 you smile when you say it.
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 1 First of all, I think margin

 2 requirements should be transactional, but I think

 3 we should take a step back -- and, remember, we're

 4 talking about margin requirements on uncleared

 5 swaps. So, really, to me the first question is

 6 we're looking at different countries -- are the

 7 clearing requirements comparable? Will other

 8 countries have something that looks like our

 9 end-user exemption? How about hedging? How does

 10 that fit into the end-user exemption? So, all

 11 those things have to be lined up if we're going to

 12 take something other than a non-transactional

 13 approach to it.

 14 The other point I would make, is that

 15 for non-banks, swap dealers that are not

 16 affiliated with banks, the capital requirements

 17 are very much tied to the level of uncleared

 18 swaps, so to the extent you don't have a cleared

 19 swap the capital requirement does go up. And so

 20 there is a bit more of a relationship between

 21 margin and capital.

 22 MR. TAFARA: Okay, thank you. Jackie,
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 1 if you may, get us started on the next series of

 2 questions.

 3 MS. MESA: This morning we spoke a

 4 little bit about branches and affiliates and

 5 subsidiaries of U.S. parents, and I want to dive

 6 into that a little deeper regarding registration.

 7 We also talked about direct and significant effect

 8 on the U.S. And so my question is when should a

 9 branch -- and you can treat these differently --

 10 affiliate or a subsidiary of a U.S. parent located

 11 abroad be subject to registration? Should it

 12 depend on just the fact that there is risk

 13 transfer to the U.S. parent unless there is direct

 14 and significant effect on the U.S.? Or should it

 15 be subject to the level of trades it has with the

 16 U.S.?

 17 MR. TAFARA: Thank you, Wally.

 18 MR. TURBEVILLE: I was waiting. I

 19 wanted to counterpunch.

 20 The answer is affiliate branch. The

 21 issue is not about that. The issue, to me, is a

 22 two-prong issue. One is, is the risk of that
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 1 entity effectively transferred to the U.S. bank?

 2 And the second is are they, in effect, the same

 3 businesses, right? So, guarantees, those sorts of

 4 issues are very important. But also are they same

 5 business? Do they run a consolidated book?

 6 One of the things that is talked about

 7 here is the agony of having to use subsidiaries.

 8 The other thing that gets argued about in this

 9 whole area is well, we want to consolidate our

 10 books with our subsidiaries. So, you know, I

 11 think the fact is that it's a -- probably most

 12 books are consolidated above the banks that we're

 13 talking about here. That infers strongly that

 14 it's all the same business, and it's not that hard

 15 to consolidate books with disparate branches and

 16 affiliates involved. So, I think in most cases

 17 it's actually going to be the same entity. That's

 18 just based on what I've heard people say, but that

 19 is the test as far as I'm concerned. It's not a

 20 question of where is it organized? Is it a

 21 branch? Is it an affiliate? Is it the same

 22 business? Is the risk transferred?
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 1 MR. TAFARA: This time, John.

 2 MR. McCARTHY: I mean, GETCO is a firm

 3 that trades only on centrally cleared exchange

 4 traded markets, and -- I'm sorry -- so if we're

 5 required to register our affiliates in Singapore

 6 and London simply because we're a U.S.-based

 7 market maker, it will put us in a unique

 8 position -- vis-à-vis does the (inaudible)

 9 providers that are obviously located only in those

 10 other jurisdictions, and we would -- you know, I

 11 don't want to say we would have -- you know, we

 12 would obviously have additional requirements, but

 13 we would basically have to comply with two

 14 regimes, and I think it's fair to say that could

 15 put us at a competitive disadvantage in terms of

 16 just burdening us with costs that our, you know,

 17 competitors would not have. And it's a very, very

 18 competitive environment in both the U.K. and Asian

 19 markets. So, again, a lot of the regulations

 20 would be duplicative and probably could leverage

 21 off each other. But, again, I think it would put

 22 us likely at a disadvantage, in my judgment.
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 1 MR. BUSSEY: John, wouldn't you just put

 2 a U.K. holding company over GETCO and have the

 3 foreign affiliates subs of the U.K. holding

 4 company, thus getting out of this?

 5 MR. McCARTHY: Could do that, and

 6 obviously there's costs associated with that.

 7 But, again it seems to be -- it's not really the

 8 preference that the regulators want for us to kind

 9 of create, you know, a much more -- to create an

 10 infrastructure that is only designed to basically

 11 avoid registration. It just doesn't make sense to

 12 me.

 13 MR. BUSSEY: I'm not suggesting that's

 14 the preference; it just -- I'm trying to get it

 15 for making a distinction it is really turning on

 16 who the parent is and where they're located.

 17 MR. McCARTHY: And that's, you know,

 18 with our outside counsel that's kind of the

 19 suggestion they've made. But, again, it seems to

 20 be -- you know, it seems to be hopefully

 21 unnecessary is what --

 22 MR. TAFARA: Thanks for stirring things
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 1 up a bit, Brian.

 2 Marcelo?

 3 MR. RIFFAUD: Yeah, I have a problem

 4 with the whole idea that if I'm a -- and I don't

 5 have dog perhaps in this particular fight. Let me

 6 start with that. But if I'm a U.S. company and I

 7 set up a subsidiary overseas for reasons of

 8 employment rules, local tax rules, etc., and I'm

 9 engaged in the swap business, absent my guarantee

 10 in that subsidiary's performance, I don't see why

 11 that should subject it to registry, and it's doing

 12 offshore business, so it's not dealing with U.S.

 13 persons. I do not understand why that should

 14 subject that subsidiary or the parent to

 15 registration under Dodd-Frank. I don't see that.

 16 You could get there perhaps in some other odd way

 17 of Dodd-Frank. I don't know if you think that

 18 somehow it is such a material subsidiary and the

 19 U.S. entity is somehow a SIFI. I don't know. But

 20 from the perspective of Title VII, I just do not

 21 see that. I do not see that happening.

 22 And I would go a little bit further.
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 1 I'm not entirely sure the guarantee carries you

 2 into a conclusion.

 3 MR. TAFARA: Well, nobody's spoken to

 4 Ananda's point from earlier where he raised the

 5 directness and the significance and the impact on

 6 the U.S. marketplace. So, it is very possible

 7 that you would have an entity that is not U.S.

 8 based that has enough of an impact such that your

 9 answer or your conclusion is different.

 10 And maybe Ananda has raised his flag to

 11 say it again and probe a little bit more, so I'll

 12 turn it to Ananda.

 13 MR. RADHAKRISHNAN: The other concern is

 14 let's say that there is a concern that if our

 15 reach did not go into a subsidiary or an affiliate

 16 but that's the way you structure business. I'm

 17 not saying any of these fine companies here would

 18 do that, but let's say you have another company --

 19 that's how you'd structure your business to evade

 20 -- avoid -- whatever -- this Dodd-Frank, that you

 21 would not do any business out of the U.S. bank but

 22 you'd rather do it out of your subsidiary. Now,
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 1 is that realistic, No. 1? And if you guys are

 2 saying no, never going to happen, maybe we should

 3 think -- I don't know that it will affect the way

 4 we think.

 5 MR. TAFARA: Given that challenge, why

 6 don't we start with Stephen and then Marcus.

 7 MR. O'CONNOR: So, I think that to start

 8 booking business offshore to escape the reach of

 9 Dodd-Frank wouldn't help with regard to U.S.

 10 clients, right, because those -- by the fact the

 11 clients were in the U.S., that would capture --

 12 they would be captured by the transactional-level

 13 rules of Dodd-Frank. And I think, though, where

 14 we're going to end up, which is a trend we've seen

 15 already, is that when trading in a particular

 16 jurisdiction that banks globally will tend toward

 17 booking transactions in a legal entity in that

 18 jurisdiction. So -- but I don't see that as being

 19 arbitrage or rule avoidance. I think if European

 20 subsidiaries of U.S. banks trading with Europeans

 21 clients -- I think that's a fact (inaudible)

 22 that's fine as is booking U.S. client business
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 1 onshore in the U.S. and a branch for all

 2 subsidiary for overseas banks. So, I think that

 3 you will see that pattern developing, but I'm not

 4 sure it's avoidance. It's more just censoring

 5 businesses in the right jurisdiction and local --

 6 as mentioned earlier by Marcelo -- local tax rules

 7 or business conduct rules or regulation might

 8 force that even more than it has been in the past.

 9 But I don't think -- by virtue of the fact that

 10 the clients in the U.S. will be captured whatever,

 11 I don't think there's a good tool for institutions

 12 not in the room to employ with that regard.

 13 MR. TAFARA: Marcus.

 14 MR. STANLEY: Just in response to what

 15 Marcelo said earlier about the guarantee. It only

 16 seemed to apply that even if there was a guarantee

 17 it wouldn't be appropriate for the subsidiary to

 18 be regulated. We really have to make sure -- I

 19 think we have the tools here to avoid kind of a

 20 Cayman Islands situation, and I think the burden

 21 of proof needs to be very, very much on the bank

 22 itself to show that the U.S. entity is not going
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 1 to end up being responsible for those losses. As

 2 I said during the first panel, before the crisis

 3 the argument was made -- this was the whole

 4 justification for off balance sheet entities was

 5 that the parent company would not be responsible

 6 for their debts. And of course no one would have

 7 loaned to them unless it was known that implicitly

 8 the parent company, through a wink and a nod,

 9 actually would be responsible for their debts, and

 10 indeed the parent companies did have to take those

 11 entities back on their balance sheet when they got

 12 in trouble. So, you really want to cease an iron

 13 clad wall, it seems to me, and you want the burden

 14 of proof to be on the bank that's claiming that

 15 subsidiary is fully walled off in order to really

 16 demonstrate that.

 17 MR. TAFARA: This affords me an

 18 opportunity to ask a question I had wanted to ask

 19 during the first panel of Thomas from Goldman

 20 Sachs, and I think he suggested that --

 21 SPEAKER: Go ahead.

 22 MR. TAFARA: Yeah, well, I'm asking you
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 1 now, though. (Laughter) He had suggested that

 2 guarantees in essence were a surrogate for

 3 regulation, and now that you have regulation of

 4 all these entities in the derivatives base, that

 5 it may be less necessary, but the question I had

 6 was had we seen them disappear? Are there

 7 guarantees still being provided and asked for?

 8 And I think that's a question probably I'd like to

 9 hear an answer from a number of people around the

 10 table. So, Sarah, since you have your flag up,

 11 why don't you go first.

 12 MS. LEE: Sure. But I just first want

 13 to answer Ananda's question. I mean, we are Bank

 14 of America, so I think it's going to be difficult

 15 for us just to suddenly (inaudible) overnight and

 16 become banks of Singapore or something like that.

 17 I mean, we have a massive customer base in the

 18 U.S., and it would require all those U.S.

 19 customers just to move offshore as well. And I

 20 think the key points that I want to make are in

 21 terms of how we set up our business, and I'm sure

 22 many other large financial institutions are the
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 1 same. You know, we set ourselves up with

 2 subsidiaries and branches around the world. In

 3 Europe we have subsidiaries that we operate out

 4 just to comply with the European passporting

 5 requirements. In Asia, many of the jurisdictions

 6 require either a local banking entity or a foreign

 7 branch of a bank to operate onshore in those

 8 jurisdictions. And those subsidiaries and

 9 branches have been set up for decades, operating

 10 under legitimate business reasons. They were not

 11 set up to evade Dodd-Frank.

 12 And I think I do want to re-emphasize

 13 the point that if we -- yeah, I know we've got

 14 this challenge that the U.S. is first at the

 15 moment and the rules and regulation around the

 16 world is a different pace. But I think the

 17 challenge for us as a U.S. financial institution

 18 is, if we are required to comply with the U.S.

 19 rules in those foreign jurisdictions with our

 20 foreign clients, we will struggle to continue to

 21 do business in those jurisdictions, and we will

 22 struggle not only to compete but also to manage
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 1 risk of those transactions to be able to book and

 2 manage the risk in those jurisdictions. So, I

 3 recognize there is a challenge in terms of how do

 4 we deal with ensuring that we as an institution

 5 are safe and sound, particularly as we own

 6 companies all around the world.

 7 And again, I go back to my point. I

 8 think it's important that we use tools, other

 9 entity-level tools like capital, to manage that in

 10 this interim period while the rest of the world is

 11 sort of catching up with our regulation.

 12 MR. TAFARA: Angie, and then I think

 13 I'll turn to the regulators who raise their flags,

 14 and then Chris and then Stephen, too. So, Angie,

 15 why don't you go first.

 16 MS. KARNA: Sure. Just addressing your

 17 question and Tom's earlier point and something

 18 else that was said. It's important to

 19 re-emphasize that one of the changes in Dodd-Frank

 20 that is not going to go away is we are not going

 21 to be able to do swap-dealing activities with U.S.

 22 clients out of unregulated entities -- period. We
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 1 could pre-Dodd-Frank. We can't now. And that's a

 2 fundamental change that we can't lose sight of. I

 3 don't see any discussion about comparable

 4 standards abroad. We'll also be referencing for

 5 all of the institutions in this room

 6 well-regulated entities, and we wouldn't expect

 7 you to ever sign off on an unregulated entity.

 8 And in fact, we have three primary trading

 9 entities around the world, all of which are

 10 regulated -- all of which will be regulated

 11 post-Dodd-Frank. Our U.S. entity actually is the

 12 only one that hasn't been regulated, but the

 13 majority of our business is done out of our

 14 European entity, which is regulated and our

 15 Japanese entity, which is regulated. So, I wanted

 16 to just highlight that that is a distinction with

 17 pre- and post-Dodd-Frank in the United States.

 18 We're not going to have an unregulated entity

 19 facing U.S. clients.

 20 MR. TAFARA: Dan --

 21 MR. BERKOVITZ: Thank you. I'd just

 22 like to follow up on a point that was made about a
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 1 European affiliate or subsidiary that is -- in any

 2 foreign jurisdiction that is set up for tax

 3 reasons -- whatever reasons -- and that if it's

 4 really a separate entity, then the Dodd-Frank

 5 requirements shouldn't apply. But then we get

 6 into the question, on the other hand, of inter-

 7 affiliate transactions where entities are also

 8 asking, at the same time, although, for certain

 9 purposes, that these entities are considered

 10 separate entities and now you don't apply

 11 Dodd-Frank requirements to the other entities.

 12 And yet for the inter-affiliate transaction

 13 exception, for lack of a better term, we're also

 14 being asked to provide an exception, because,

 15 really, they're the same entity and this is just

 16 distributing risk internally, and we just want one

 17 single entity to face the market. And yet not all

 18 of those single entities are being regulated under

 19 Dodd-Frank when they face the market. So, I'm

 20 just wondering if there's a disconnect or an

 21 incongruity between, on the one hand, not applying

 22 Dodd-Frank to an affiliate or a subsidiary because
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 1 it's established in a different jurisdiction and

 2 also at the same time requesting an inter-

 3 affiliate exemption from clearing requirements and

 4 other requirements to Dodd-Frank, because they're

 5 really the same entity.

 6 MR. TAFARA: Let's take some answers to

 7 Dan's question and then turn to Jackie and to

 8 Robert.

 9 MR. RIFFAUD: You're asking me, Dan.

 10 We're just asking for a lot more than we should.

 11 No, when I think of the inter-affiliate

 12 transactions -- and I may be coming at this from

 13 my own paradigm -- for us it's inter-branch,

 14 right? So, we don't have this situation where we

 15 have a subsidiary that is doing swaps. We book

 16 all of the soon-to-be-regulated businesses in

 17 branches of our New York branch, London branch,

 18 branches of our home bank. So, when we think

 19 about inter-affiliate transactions regardless of

 20 the initial trigger to the market, whether it's a

 21 U.S. person or non-U.S. person, we think of it as

 22 moving the risk within the same legal entity from
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 1 a corporate structure and from a credit exposure

 2 perspective but across branches, which really are

 3 regulatory concepts that come out of the banking

 4 world. And then therefore at some level it's

 5 tantamount to a journal, but you need to have good

 6 books and records to manage it. And it all serves

 7 centralized management. You have human resources

 8 that have the right expertise in particular

 9 jurisdictions, etc., and you want to have the same

 10 risk management, risk compliance function over it,

 11 so you move it to the logical central location.

 12 But you do make a good point, and I do not know

 13 the answer. If I was subsidiaries doing business

 14 outside and it's on a U.S. asset and you end up

 15 doing inter-affiliate -- truly inter-affiliate

 16 trades, different legal entities back to some

 17 central book -- it's a good question.

 18 Now, I would say that if you are -- if

 19 one of the entities that's receiving that, the

 20 central -- if it is already a regulated entity, it

 21 has its own -- that's an exposure that has its own

 22 capital that attaches to that activity, there may
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 1 not be inter-affiliate margin. But it needs to

 2 manage that risk, so our prudential rules are

 3 already attached to that. So, I'm sure I see an

 4 end run unless it starts at an unregulated entity

 5 and ends up at an unregulated entity.

 6 MR. TAFARA: Wally.

 7 MR. TURBEVILLE: To me, that's all part

 8 of the same issue of is it a common business? Is

 9 the -- how inter-affiliate transactions work,

 10 because I think in fact it will track back to what

 11 is the real business involved. So, if the real

 12 business is a U.S. bank and there are subsidiaries

 13 through inter-affiliate arrangements, it becomes

 14 obvious that the whole thing is run -- risk

 15 management, personnel, everything is run from one

 16 entity, and the risk is in one entity and the

 17 profit eventually gets to one entity. It seems

 18 like that should be the same entity. And the

 19 result shouldn't be any different if a U.S.

 20 domiciled company does an activity as opposed to a

 21 subsidiary who then has that kind of relationship

 22 with a parent. The result should be the same as
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 1 far as Dodd-Frank goes.

 2 And I think in actuality whether there

 3 are branches or not, it just makes -- it actually

 4 should be expected that in a lot of these

 5 organizations there are centrally managed books.

 6 Risk is centrally managed. The risk professionals

 7 are in common. And ultimately the profit-and-loss

 8 is a result that's important to the parent. So,

 9 in fact, why it's really important -- that's sort

 10 of how it all works, and it just strikes us as not

 11 being sensible, that in fact, yes, all the

 12 subsidiaries are out there. The branches are out

 13 there for regulatory and tax and other

 14 motivations. But if the business is really in one

 15 place, that's where it should be regulated.

 16 MR. TAFARA: Chris, I realize you had

 17 your flag up before Dan's question. I don't know

 18 whether there was something else you wanted to get

 19 to before we moved on or whether you want to get

 20 to that as well as Dan's question. We're going to

 21 turn to you.

 22 MR. ALLEN: I think I'm about three
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 1 questions behind, actually, in terms of the list

 2 of notes I've made here, but just very quickly on

 3 the most recent question, I mean, I think there is

 4 that tension. I think there is the difficulty

 5 embedded within that (inaudible). But I want to

 6 just comment though as a bit of a qualification,

 7 too, that even in today's environment entities

 8 don't just liberally take exposure on that kind of

 9 inter-group basis without proper consideration of

 10 a number of the factors that can really drive

 11 whether that makes economic sense to do, such as

 12 capital, because, for example, there are many

 13 circumstances. It depends where the entities are

 14 allocated as to how this exactly plays out. But

 15 there are circumstances in which if U.S. and the

 16 European entities take derivative exposure to each

 17 other which is not collateralized, then you can

 18 attract one for one capital deduction in respect

 19 of every dollar of exposure that sits behind that

 20 relationship. So, there are other incentives

 21 which go beyond what we might describe as conducts

 22 of business over the forms of application of the
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 1 rules, which will incentivize behaviors which are

 2 already there, and so I'd simply encourage that

 3 those be borne in mind and factored into the

 4 consideration for this point.

 5 The other point I just wanted to mention

 6 was -- it was two very brief (inaudible) things,

 7 if I may. One was the motivation behind European

 8 incorporation, for example. Somebody touched upon

 9 the passports. It's hugely important for firms,

 10 both those that are outside the European economic

 11 area and also those that are within it. Quite

 12 frankly, to (inaudible) avail themselves of the

 13 passporting rights which you can obtain under the

 14 banking consolidation directive or MiFID depending

 15 on the type of MC in question. This is very solid

 16 reasons for wishing to incorporate and establish

 17 in European countries if you are intending to have

 18 a client investor base which has a European focus

 19 to it.

 20 And the final point was -- I think

 21 Stephen may have mentioned this -- but it's just

 22 to reiterate perhaps the obvious point, which is
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 1 in circumstances where you have that non-U.S.

 2 incorporated MNC. Of course as soon as it touches

 3 the U.S. in terms of whatever formulation of the

 4 U.S. person test reapply it is, of course,

 5 straight back into the realms of developing

 6 conducts of business rules that would be required

 7 to govern that activity. We've already talked

 8 about prudential regulation and how that might be

 9 subject to home state deference. But we mentioned

 10 before about it would only be in circumstances

 11 where the U.S. authorities were satisfied that the

 12 standards batch prudential regulation was

 13 comparable and robust. Thanks.

 14 MR. TAFARA: Angie, is your flag up from

 15 last time, or is up again -- before I turn to

 16 Jackie?

 17 MS. KARNA: I think it's still relevant.

 18 MR. TAFARA: It's not your question.

 19 MS. KARNA: It actually relates to Dan's

 20 question and also what Chris just said, and just

 21 following up what Marcelo had said earlier.

 22 We are an institution that does not have
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 1 branches, so I just wanted to clarify the facts

 2 around inter-affiliate trades for us since we

 3 don't have branches and Marcelo was talking about

 4 branches.

 5 As Chris said, whichever regulated

 6 entity directly deals with a U.S. client will be

 7 registered under Dodd-Frank. That U.S. client,

 8 however, may like -- the typical reason why we

 9 would have inter-affiliate transactions is because

 10 that client wants to get exposure to an asset

 11 class that is risk managed more appropriately in

 12 another region. So, from the first panel, an

 13 institutional investor who wants to risk manage a

 14 risk in Tokyo may enter into a swap with the

 15 entity that directly transacts with U.S. clients,

 16 but that entity will do a back-to-back swap of

 17 that Tokyo best managed risk with our Japanese

 18 broker-dealer. So, it's not just that it's the

 19 same legal entity. The entity that is facing the

 20 U.S. client will be well regulated, and we see no

 21 reason why because that client wants to get

 22 exposure to something that is best risk managed in
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 1 another reason why that inter-affiliate swap

 2 should be subject to additional regulation.

 3 MR. TAFARA: I'm going to take questions

 4 from the regulators. We'll take a series of

 5 questions here and then turn to the panel. So,

 6 Jackie first, then Robert, then Brian.

 7 MS. MESA: Before we completely shift

 8 from this topic, I just had one more follow-up,

 9 and it has something to do with what Steve

 10 O'Connor said earlier, which is that businesses

 11 set up affiliates and subsidiaries and have them

 12 today in foreign locations for legitimate business

 13 purposes. But the SEC and CFTC both have an

 14 anti-evasion provision in the statute that allows

 15 us to apply Dodd-Frank regulation to anticipate

 16 evasion or to prevent evasion. And my question is

 17 this, how do we determine what is a legitimate

 18 business shift, so doing business out of your

 19 affiliates with other U.S. parent affiliates, and

 20 what is an evasion? So, I look to our panel of

 21 experts on this question.

 22 MR. TAFARA: Why don't we answer that
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 1 one first before we move to Robert and Brian. So,

 2 how do we judge anti-evasion? Starting with

 3 Marcus.

 4 MR. STANLEY: I think it shouldn't

 5 revolve around the subjective motivation of the

 6 entity for moving the -- for perhaps creating a

 7 subsidiary or taking an action outside of the

 8 U.S., because there's always a set of reasons that

 9 one can cite for that. It really has to go back

 10 to the basic goals of the statute in terms of

 11 protecting the U.S. economy against risk. And if

 12 there's an action that would end up that has the

 13 capacity to rebound on the U.S. economy in a

 14 significant way, then it really doesn't matter why

 15 the entity started to take that action in the

 16 first place. It's evading the goals of the

 17 statute.

 18 MR. TAFARA: Marcelo?

 19 MR. RIFFAUD: Thank you. I disagree a

 20 little bit with that answer. Maybe a lot. But

 21 it's disagreement at whatever percent. I do in

 22 fact think that scienter matters when you're
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 1 talking about evasive activity or not. I think

 2 it's one thing for someone to create a shingled

 3 entity incorporated in a foreign jurisdiction and

 4 not do everything that one would normally do when

 5 you create an entity to actually go into business

 6 in a foreign jurisdiction, which includes

 7 registrations, human resources of a physical

 8 plant. There's a lot that is present when you're

 9 not in an evasive mode.

 10 The fact that someone chooses to create

 11 an entity and conduct non-U.S. business outside of

 12 that entity as a subsidiary of the parent of the

 13 U.S. parent in a foreign jurisdiction is not, per

 14 se, evasive. The minute you touch a U.S. person,

 15 as we've said repeatedly, you now have U.S. rules

 16 that will attach. So, your concern -- and I don't

 17 think it's invalid, but your concern is going to

 18 some of more systemic, right? Is there something

 19 systemic about that? And at that point you go

 20 back to significant and direct effects. I see

 21 that as a very high hurdle to pass before you get

 22 there. We had a little research done on
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 1 significant and direct effects, and it is not a

 2 merely adverse, competitive effect in the U.S,

 3 market. It is more, it would be manipulating a

 4 market that has effect in the U.S., something of

 5 that significance.

 6 MR. TAFARA: Your approach makes it not

 7 a matter of policy but a matter of law

 8 enforcement. I mean, scienter in essence requires

 9 that we investigate and make a determination that

 10 there was the intent to not comply with knowledge

 11 and forethought. Is that the right line to draw?

 12 Is the right line to draw as between policy and

 13 law enforcement into fall on the side of law

 14 enforcement? Or is the anti-evasion consideration

 15 something that goes beyond simple law enforcement?

 16 I'll let you go, and then Wally wants to

 17 jump in on the subject.

 18 MR. RIFFAUD: Okay, just one answer. I

 19 find -- because I come at it from the position of

 20 scienter and evasion -- I don't think you can

 21 conclude ex ante that you are -- that there is

 22 evasive activity occurring.
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 1 MR. TAFARA: Wally.

 2 MR. TURBEVILLE: About three decades ago

 3 I went to law school. Scienter is a term of art

 4 as I recall, is a term of art that has a fairly

 5 high level of proof required to it, so that's a

 6 loaded term, and I see nothing in here that would

 7 suggest that you have to have scienter to meet the

 8 standard. It's a -- there are levels of intent

 9 and mental approach to things, and scienter just

 10 isn't -- sorry, I understand what's being said,

 11 and I understand that the level is being set high

 12 for a reason.

 13 Another thing that I wanted to say is

 14 just everybody remember, there's -- for both the

 15 SEC and for the CFTC, there are two completely

 16 separate things going on. One is the evasion

 17 issue, and the other is do the activities have the

 18 requisite effect or is there a business going on

 19 from the SEC side? So, there's two different

 20 things. So, the evasion is a different kind of

 21 activity, which assumes that the first test, which

 22 is -- there's the activity that has the effect on
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 1 the economy going on, or is there a business being

 2 conducted that's a U.S.-based business in reality?

 3 If it's not caught by one of the first test, then,

 4 well, it might be because there was an evasionary

 5 purpose to it. So, basically two things: two

 6 levels of tests and scienter is not necessary in

 7 my view.

 8 MR. TAFARA: I see nobody else

 9 volunteering to answer this question. Maybe we

 10 should then turn to Robert to ask his question and

 11 then to Brian.

 12 MR. COOK: Thanks. I wanted to ask a

 13 follow-up question of Stephen about something Tom

 14 said (laughter), something I think he said of

 15 Stephen, and it has echoes of something that Angie

 16 was touching on, too, I believe. I think you said

 17 -- correct me if I got this wrong -- that you

 18 think we may be heading towards an approach where

 19 global firms have a local entity that faces a

 20 counterparty, and I presume that part of that

 21 general model would be that essentially client

 22 risk is being managed local to the client and
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 1 market risk is being managed local to the market.

 2 So, U.S. counterparties would face a U.S. entity,

 3 and if the risk was dealing with a European

 4 underlier, that would be moved over to Europe

 5 where the European experts could manage it and

 6 vice versa and that that might be a way that the

 7 market will evolve in light of the direction you

 8 perceive the regulatory environment moving. So,

 9 first, did I get that right? Is that -- do you

 10 think that's where we're heading? And I welcome

 11 other people to come in on this as well, on these

 12 questions.

 13 No. 2, is that a good thing or a bad

 14 thing? Are you saying we're heading that

 15 direction and it's unfortunate, or that that's a

 16 logical place for us to end up in a way that

 17 resolves some of these questions? And I guess how

 18 does this compare to the concept of one global

 19 booking entity in terms of the policy prospective

 20 -- the advantages and disadvantages?

 21 MR. TAFARA: I'm conscious of time,

 22 Stephen, so I want Brian to get his question in as
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 1 well and we can answer all the questions --

 2 MR. BUSSEY: This was -- the key

 3 question.

 4 MR. TAFARA: I've been overruled.

 5 Stephen.

 6 (Laughter)

 7 MR. O'CONNOR: I think yes, you

 8 correctly interpreted what I said. And this has

 9 been the situation for, you know, a long time, but

 10 for varying reasons, typically that local clients

 11 are more comfortable with a local entity, local

 12 regulations, or tax rules or other might require

 13 that, or capital treatments also. So -- but I

 14 think the trend will accelerate to the extent that

 15 -- for instance, financial institutions had

 16 previously booked European client business in U.S.

 17 institutes that might now get booked more in

 18 Europe.

 19 And I think those drivers that I

 20 mentioned, that you mentioned, another one might

 21 be that clients typically would have one master

 22 agreement with a local entity. So, to the extent
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 1 that they traded in multiple markets, that's a

 2 case where there would be a local entity with the

 3 relationship and the principle counterparty risk,

 4 but then the market risk would be better managed

 5 elsewhere around. So, that's where you get the

 6 inter-affiliate transactions.

 7 So, I think it's a trend. It's a model

 8 that has always existed and I think that will

 9 continue to be the trend. As to whether that's

 10 good or bad, I think I'd go back to my opening

 11 point, which was to the extent we can have

 12 harmonization of rules and proper recognition of

 13 the jurisdiction of, you know, co-regulators

 14 around the world, then I think that's an okay

 15 outcome.

 16 MR. TAFARA: So -- but the second part

 17 of this question -- I'm not sure I understood the

 18 answer to it. In other words, you have local

 19 entities manage local risk. What does that mean

 20 for global risk management at the end of the day?

 21 Is that something that will be complementary? Can

 22 it be done in a complementary fashion despite
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 1 moving toward local entities for management --

 2 MR. O'CONNOR: No, I think it can be,

 3 but it does involve inter-affiliate transactions

 4 that we mentioned earlier. So, if you take the

 5 case of a bank that has -- or a client in Europe

 6 that has its main relationship with a bank entity

 7 in Europe, be that a subsidiary of a U.S. bank or

 8 a European bank, then that bank will probably have

 9 trading desks in the U.S., certain U.S. product,

 10 and I think it's most efficient and provides most

 11 liquidity to markets if all the risk in the U.S.

 12 product is managed in the U.S. And so that's how

 13 you see these patents of booking entities

 14 evolving. Is that -- that can be done?

 15 It is done today and, you know, will be

 16 done in the future, and just picking up, actually,

 17 on something that was said earlier, I think that

 18 the capital is the key here. I think it's Angie

 19 who said that. And I would agree with that. I

 20 would also disagree with the point made that

 21 capital and collateral are both needed. I think

 22 it is, you know, someone who's been fairly close
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 1 to development of BIS. So, I think that the

 2 capital regimes as they've evolved over the years

 3 have one goal, and that's to ensure that the

 4 financial institution at the end of the day is

 5 robust and, to the extent that our counterparty

 6 relationships that are not margined, then capital

 7 goes up, and it goes up punitively with regard to

 8 inter-affiliate transactions, as mentioned before.

 9 So, if you took a look at global

 10 institutions now, you would see in many cases that

 11 banks voluntarily decided to post margin on

 12 affiliate transactions to keep risk down from a

 13 capital perspective. So, I think the models exist

 14 today and they will continue, and it is possible

 15 to manage risk on the one hand from a global

 16 perspective and to have the client relationship

 17 booked at the local level.

 18 MR. TAFARA: So, Wally, then Chris, then

 19 Angie, and then Marcelo.

 20 So, Wally?

 21 MR. TURBEVILLE: Banks have crude oil

 22 desks, natural gas desks, interest rate desks,
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 1 Japanese desks. To me, it's -- of course there

 2 are different ways to compartmentalize risk and to

 3 address them, and the people who have a good

 4 handle on those kinds of risks should be

 5 responsible for doing that. But then there's also

 6 the global risk issue, and certainly the fact is

 7 that the business -- if you define the business --

 8 if the business defines itself globally, then that

 9 is the entity; that's the one doing business;

 10 that's the one that should be the focal point.

 11 And, unfortunately, you know, in a perfect world

 12 all the regulation would be completely harmonized

 13 and uniform and then all of these -- there

 14 wouldn't be any difference between the crude oil

 15 desk and the interest rate desk versus U.S.

 16 business and Japanese business. Then having said

 17 all that, it isn't true. It isn't -- we do

 18 organize ourselves territorially. So -- but the

 19 fact is that's fine, the argument for the greatest

 20 flexibility possible, and not shutting yourself

 21 off with, like, universal rules that create

 22 definitions that are very restrictive I think is
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 1 so very important in this area, because one would

 2 want to replicate as much as possible a harmonious

 3 regulatory environment that recognizes the

 4 international quality of the business.

 5 MR. ALLEN: Right. I just wanted to

 6 reiterate the point which Stephen made there about

 7 that relationship between capital and margin,

 8 because it does strike me it is important, even in

 9 the context, as I mentioned before, of inter-group

 10 transactions, because the capital consequence of

 11 not collateralizing those transactions on

 12 occasions depending on the fact that you have can

 13 be very substantial indeed. And so there is that

 14 embedded and sensitive to consider

 15 collateralization on an inter-affiliate basis over

 16 and above the conducts of business requirements to

 17 do so.

 18 The other point I just wanted to make,

 19 though, and it's slightly a variance of Stephen's

 20 comments about the use of local entities.

 21 Obviously, there are institutions that are

 22 organized that way, but I just wanted to make the
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 1 point that there are a number of -- a lot of

 2 organizations that are organized completely

 3 differently according to a universal banking model

 4 with universal booking sensors that tend to use a

 5 single legal entity structure pretty much

 6 throughout the world. My observation around that,

 7 among many other things, is that that doesn't in

 8 any way find the face of the capacity to risk

 9 manage at the local basis, so an institution such

 10 as Barclays will transact swaps in the United

 11 States currently through its main London legal

 12 entity. But that doesn't detract from the fact

 13 that the specialists in the swaps market are those

 14 based in New York for the institution trading in

 15 that local market.

 16 The other thing that it doesn't

 17 frustrate in any way is the capacity to comply

 18 with local conducts of business rules as they are

 19 applied throughout the world. Operating on a

 20 universal bank model through the same legal entity

 21 doesn't in any way diminish the obligation on

 22 Barclays to comply with the MAS' conducts of
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 1 business rules in Singapore or those that might

 2 apply in Hong Kong or, quite frankly, any of the

 3 markets. So, I just wanted to put that

 4 counterpoint in there because we'll all have to

 5 see a lot of institutions that operate on that

 6 global model, but clearly as a consequence of what

 7 we were describing before, the risk of

 8 subsidiarization, which derives from standards of

 9 conducts of business applying to, for example,

 10 U.K. entities in respect of its global businesses,

 11 not just those that have the U.S. connection could

 12 cause that to change. But I wouldn't say that

 13 that's the case as it stands today.

 14 MR. TAFARA: Okay, I have Angie, then

 15 Marcelo, then Marcus, followed by Robert, and then

 16 we'll wrap up with Sarah and then turn to Brian's

 17 question.

 18 So, Angie, please.

 19 MS. KARNA: Sure, just following up on

 20 something that Chris and Stephen just said. We

 21 are -- we do see the direction of the market that

 22 Stephen highlighted with a potential for localized
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 1 client facing and market risk-containing entities,

 2 but we don't like it very much. In particular, we

 3 don't like it because many of our clients don't

 4 like it. Some clients absolutely would like to

 5 face a U.S. entity for U.S. regulatory reasons --

 6 and when I say "face," I mean have the U.S. entity

 7 being a booking entity. But, for the most part,

 8 the very large, internationally focused

 9 institutions would like to have all of their risk

 10 in as few entities as possible. So, one thing

 11 that we have thought about a lot when we think

 12 about how we conduct our business today is we

 13 fully recognize that under Dodd-Frank you need a

 14 swap dealer or a securities-based swap dealer to

 15 interact with U.S. clients. But we think that if

 16 you look at something like the securities world

 17 today, we will have a fully regulated U.S. entity

 18 face U.S. clients, be responsible for all

 19 transactional requirements under Dodd-Frank, but

 20 then allow those transactions to be booked in the

 21 entity that they wanted to be booked in, which is

 22 outside of the United States of America, and have
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 1 the entity requirements for that booking entity be

 2 something that the CFTC and the SEC decide are of

 3 a comparable standard. So, we think that model of

 4 having a fully regulated swap dealer or

 5 securities-based swap dealer in the United States

 6 that the SEC and CFTC can look to, to meet and be

 7 responsible for all Dodd-Frank transaction

 8 requirements, works. And it also allows our

 9 clients to have as much market risk as possible

 10 in, let's say, a foreign entity where they have a

 11 lot of other transactions.

 12 MR. RADHAKRISHNAN: So, I hate to

 13 interrupt. So, you're saying -- the example --

 14 that entity A is the registrant.

 15 MS. KARNA: Yes.

 16 MR. RADHAKRISHNAN: Entity B is the

 17 party that's actually the legal counterparty to a

 18 U.S. person.

 19 MS. KARNA: Correct.

 20 MR. RADHAKRISHNAN: And that don't

 21 regulate entity B?

 22 MS. KARNA: You don't regulate entity B
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 1 if you're satisfied that entity A is an affiliated

 2 entity, and entity B's entity-level requirements

 3 are of a comparable standard.

 4 MR. RADHAKRISHNAN: There is a mismatch,

 5 right? There's a mismatch, because entity A is

 6 not the counterparty, so the same plan I'm going

 7 to make goes to branches of U.S. -- of foreign

 8 banks. (A) We cannot register a branch. A branch

 9 is not a legal person. Nobody's been able to

 10 convince me that a branch is a legal person, so we

 11 have to register a legal person. That's my

 12 thinking. I'm not finding permission. But the

 13 example you gave, Angie, why are we doing it?

 14 Because we're not regulating the entity that is

 15 contracting with the U.S. counterparty.

 16 MS. KARNA: You're regulating the entity

 17 that's on the hook for making sure that the

 18 transaction is clear --

 19 MR. RADHAKRISHNAN: Right.

 20 MS. KARNA: -- that the transaction is

 21 trade reported; that the transaction is traded on

 22 a U.S.-regulated SEF --
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 1 MR. RADHAKRISHNAN: Which is not

 2 accountable. Would you admit that the entity --

 3 what you're proposing is we do not regulate the

 4 entity that is the counterparty to the U.S.

 5 person.

 6 MS. KARNA: Assuming that you're

 7 comfortable that that entity is regulated in a

 8 regulatory environment that you're comfortable

 9 with and that you have some kind of information

 10 sharing and a way to get it through the U.S.

 11 registrant.

 12 MR. RADHAKRISHNAN: Okay.

 13 MR. BUSSEY: Angie, you're suggesting

 14 that in a situation where it's just a booking

 15 entity; it's not having any other type of

 16 interaction with this person.

 17 MS. KARNA: Correct. Correct. I think

 18 there's two potential -- for the client who wants

 19 to face the global non-U.S. entity, there's two

 20 options. All the client contacts are the

 21 responsibility can be, one, by that foreign entity

 22 or, alternatively, all of the client contacts, all
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 1 of the responsibility for compliance with

 2 Dodd-Frank can come from a U.S.-registered

 3 affiliate that's a swap dealer. In either model,

 4 both of them we think should be feasible under the

 5 rules, and both of them give you the right to

 6 regulate a swap dealer or securities-based swap

 7 deal.

 8 MR. TAFARA: Marcelo.

 9 MR. RIFFAUD: I just wanted to add to

 10 Chris' point that in lieu with Angie's, we are not

 11 seeing this move that Stephen is seeing maybe that

 12 we are at Universal Bank. We're seeing -- there

 13 was a little of that immediately post-Lehman.

 14 People were concerned about the workout and all

 15 these types of issues, right? But what we are

 16 continuing to see is that people want to face the

 17 highest credit quality entity in the organization,

 18 and they want the benefits -- very few of our

 19 clients are not international. They're trading

 20 everywhere. They want the netting benefits, the

 21 offset of exposure benefits that you get by facing

 22 the single entity through a master agreement.
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 1 MR. TAFARA: Marcus.

 2 MR. STANLEY: Just to repeat a couple of

 3 things -- one, this issue of deference versus

 4 delegation that came up before, you could

 5 certainly maintain your authority under Dodd-Frank

 6 over these entities and examine the regulations

 7 that these other regulated entities fell under and

 8 find that they satisfied Dodd-Frank requirements.

 9 It's a little different than completely -- than

 10 saying that you're going to permit a company that

 11 is not regulated under Dodd-Frank to transact with

 12 a U.S. person. But it could get to the same goals

 13 in terms of reducing duplication or extra

 14 bureaucracy.

 15 And I just also wanted to say something

 16 about this margin versus capital issue. The two

 17 are related, and the costs of margin drop when you

 18 take into account a good capital regime. But,

 19 once again, they are not the same. One is a

 20 bottom-up approach to risk management; the other

 21 is a top-down. And I think that one of the goals

 22 of margining is to sort of build in from the
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 1 bottom up in the system of better habits of

 2 looking ahead to possible risks and managing

 3 possible risks from the moment that you start sign

 4 up that transaction to get people to think about

 5 the potential costs if the transaction goes south

 6 on them.

 7 And there are some other issues of

 8 potential capital arbitrage. Those are affected

 9 by Basel III, but I'm completely sure that Basel

 10 III will seal all of those avenues, so -- but

 11 that's another topic.

 12 MR. TAFARA: Okay. Robert, then Sarah,

 13 and then we'll see if Brian still has a question

 14 left.

 15 MR. REILLY: When Dan asked his question

 16 about affiliates, he was looking at me, so I

 17 wanted to be sure that I answered it.

 18 Let me give you a hypothetical. It

 19 certainly can simplify -- but consider a

 20 FSA-regulated U.K. trading company that does not

 21 do fiscal or financial business with any U.S.

 22 counterparty other than its U.S. affiliate. Now,
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 1 you have the U.S. affiliate, and it does no

 2 business outside the United States other than with

 3 its affiliates, all right? They're Conway owned.

 4 There's no systemic risk. So, what justifies all

 5 additional cost related to clearing and margining

 6 and all of the other administrative requirements?

 7 Further, if the CFTC takes jurisdiction over the

 8 U.K. entity, don't you expect that FSA will then

 9 take jurisdiction over the U.S. entity? So, I

 10 just question what benefits, sir.

 11 MR. TAFARA: Sarah?

 12 MS. LEE: Yeah, I was going back to

 13 Robert's question on the global entity concept and

 14 just talk from our perspective. I mean, ideally

 15 we would like a global booking entity construct.

 16 I mean, it's easier from a risk management

 17 perspective. That's complicated for clients and

 18 ultimately I think easier for regulators if the

 19 risk is consolidated in one entity.

 20 I think, you know, one of the things

 21 that will -- there's a difference between where we

 22 are today and where we would like to be. I think
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 1 one of the challenges here is that we need more

 2 mutual recognition amongst countries, because if

 3 you take, for example, Europe, in order to benefit

 4 from passporting in Europe we have to book trades

 5 when we trade with the European counterparties and

 6 any E.U. affiliate. We can't have our U.S. bank

 7 go into Europe. We'd have to go and get licenses.

 8 Now, I know that Europe was working on a sort of

 9 mutual recognition construct, and I think, to the

 10 extent that regulators work towards harmonized

 11 approaches and have mutual recognition, that will

 12 basically incentivize people to have harmonized

 13 regulation as well as allow entities like

 14 ourselves to potentially have a global booking

 15 entity that is based in the U.S. where our parent

 16 is and be able to trade around the world in those

 17 jurisdictions where there's mutual recognition.

 18 At the moment, we as an institution have to book

 19 our trades around lots of different companies

 20 around the world due to the local licensing

 21 requirements in those other regions. So, it will

 22 help us a lot if the regulators work together to
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 1 work toward some sort of mutual recognition.

 2 MR. BUSSEY: Sarah, to put a fine point

 3 on that, that's not the case with your competitors

 4 in Europe who are able to book transactions with

 5 U.S. customers in Europe, is that right?

 6 MS. LEE: You mean, that they have -- if

 7 they're set up in Europe, then they've already got

 8 an E.U. affiliate. But they don't -- when they

 9 come and source the U.S., they don't have to use a

 10 U.S. subsidiary.

 11 MR. BUSSEY: That's right. In other

 12 words, you're not able, because you're based in

 13 the U.S., to run a single global booking entity,

 14 but a European-based entity would be able to

 15 because it's really the passporting in Europe

 16 that's driving --

 17 MS. LEE: Yes.

 18 MR. BUSSEY: -- your need to be based in

 19 Europe as well as in the United States.

 20 MS. LEE: That is correct.

 21 MR. TAFARA: Brian, do you have a

 22 question?
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 1 MR. BUSSEY: I actually want to see if I

 2 can bait somebody into a vociferous discussion

 3 with Ananda on the branch issue. If -- five

 4 minutes.

 5 I guess does anyone want to take a

 6 different view on whether we should be looking at

 7 registering branches? And I know there's

 8 authority under the definition to look at

 9 activities' lines of business and call those

 10 entities dealers, and if we do, how do we deal

 11 with the capital and margin or capital, margin,

 12 and other entity-level requirements when it's a

 13 branch as opposed to the whole entity? And this

 14 goes not only for, for example, your entity,

 15 Marcelo, having a New York branch but also

 16 U.S.-based entities having branches in other

 17 countries.

 18 MR. TAFARA: Marcelo raised his flag

 19 before you even finished your question. And we'll

 20 take some other answers and then I think Dan will

 21 get the last question. We'll try to do this

 22 quickly. Again, we only five minutes left, so,
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 1 Marcelo, why don't you go first.

 2 MR. RIFFAUD: Okay, lamb to the

 3 slaughter I guess.

 4 So, the statute speaks to limited

 5 designated and so contemplates actually something

 6 much less juridical than even a branch. It

 7 contemplates divisions. So, it contemplates an

 8 activity-based approach where God knows how you

 9 delineate the activity. On the other hand, when

 10 you have a branch, while it is from a credit

 11 perspective the same legal entity and all those

 12 entity-wide rules will attach, it is also a

 13 well-understood -- there's a well-understood

 14 perimeter around that branch such that if the

 15 statute already allows someone to come to you and

 16 to register a division or something else, for them

 17 to come and say hi, this is my New York branch, I

 18 want to register as a swap dealer because I've got

 19 a huge book already of swaps and I'm a dealer, I

 20 don't see why that would not be sufficient for

 21 your purposes when needing to ensure compliance.

 22 All the rules that attach to Deutsche Bank, New
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 1 York Branch, that are about capital, about

 2 prudential management -- all of those rules are

 3 entity-level rules, and we're hoping that you find

 4 the German regime to be comparable, right? It's

 5 not that you're delegating and then losing or

 6 assigning; you're just deferring. So, I view it

 7 that way.

 8 And then for the transaction-based

 9 rules, you already have that, because when the New

 10 York branch is speaking to a U.S. person or

 11 trading with a U.S. person you have jurisdictional

 12 role of that activity.

 13 And this isn't a jurisdictional

 14 question.

 15 MR. TAFARA: Chris, why don't we let you

 16 go, then since we're trying to engage Ananda, see

 17 if he's got anything he wants to add to the point

 18 he made earlier. And as I said we'll finish up

 19 with Dan. So, Chris?

 20 MR. ALLEN: Thank you. My point is

 21 going to be very similar to Marcelo's, just to

 22 articulate it, which I think you have to ask the
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 1 question -- one has to ask the question in

 2 conjunction with, going back to the first question

 3 of the panel, what is the consequence of that

 4 registration? So, on one level logically the

 5 notion of the registration of something which

 6 doesn't have distinct legal form is clearly quite

 7 conceptually challenging. But I think the

 8 question naturally segues quickly into what does

 9 that mean? Where does that take you in terms of

 10 the conducts of business and/or prudential

 11 regulations that might then apply?

 12 And to go back to the point which I made

 13 in answer to that first question of the panel,

 14 which is I don't think it's incompatible with that

 15 approach to say you would still -- of course as

 16 soon as you have the U.S. nexus in terms of U.S.

 17 person investor involvement -- have all of the

 18 conducts of business rules applying to -- at the

 19 transaction level to what the firm based in

 20 London, for example, or elsewhere does. But that

 21 doesn't necessarily require you, notwithstanding

 22 that that entity is a registered swap dealer, to
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 1 then extend conducts of business obligations to

 2 the business conducted between that entity in

 3 London and a counterpart or client that it has in

 4 France, Italy, or Spain and so on. So, I think

 5 it's -- my point is I think you have to look at

 6 potentially the consequences of registration in

 7 conjunction with the notion of what it is that is

 8 the registrant.

 9 MR. TAFARA: Ananda, did you want to

 10 react?

 11 MR. RADHAKRISHNAN: Yeah. I still can't

 12 get that, because -- and maybe I'm being too much

 13 of a lawyer. Who is the legal person? That's my

 14 first question. Who is the legal person? The

 15 legal -- the branch -- is there a legal person in

 16 the United States, right? Which means that it's

 17 the mother ship, which is the legal person, so

 18 that's where I go -- or father ship, whatever it

 19 is. I go there and say you must register.

 20 It's different if you -- and then the

 21 second question is where do I go -- where does the

 22 CFTC send its staff to look for compliance? Now
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 1 then maybe, you know, we can go to the branch

 2 office and say okay, you know, it's like how do we

 3 regulate BD/FCMs, right? We know who to talk to,

 4 to look for compliance with the CFTC world, right?

 5 So, that's what I'm thinking about. I just cannot

 6 get in -- this concept of registering a division

 7 -- a division -- to me it's meaningless. It's not

 8 a legal person.

 9 MR. TURBEVILLE: Would it be helpful if

 10 I read the phrase? Because I think you're right

 11 completely and a thousand percent. It says, "A

 12 person may be designated a swap dealer for a

 13 single type or single class or category of swap

 14 activities and considered not to be a swap dealer

 15 for other types." So, it's a person that gets

 16 registered. And what you're saying is that for a

 17 class of activity, they fulfill the swap dealer

 18 criteria, and for another class they may not, so

 19 you may not require them to be a swap dealer for

 20 that other class or you may. So, it's a person,

 21 not a branch, and it's crystal clear, and I can't

 22 understand what's in a lot of the comment letters
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 1 around this --

 2 MR. BUSSEY: Wally, can't you read that?

 3 It says, "suggest you register the person but it's

 4 only with respect to the activities in the

 5 branch"? I'm not a lawyer, but --

 6 MR. TURBEVILLE: Yeah, but it is a

 7 person -- you're not registering a branch, you're

 8 registering a person and you may limit the

 9 applicability of the registration requirements to

 10 a silo of activities.

 11 MR. TAFARA: So, now I'm going to turn

 12 to general counsel with the CFTC for a legal

 13 answer. (Laughter)

 14 MR. BERKOVITZ: That was going to be my

 15 question. But it was basically the same. There's

 16 just two aspects to the question. One is can you

 17 have a branch or can you have part -- partial

 18 registration, and Wally's correctly read the

 19 statute on it. But then my question was, was the

 20 intent by doing that to not have the parent, not

 21 have the main company -- which would be the

 22 booking agent -- that they wouldn't register at
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 1 all? We would just defer? Or would it be they

 2 would also register, but then in our application

 3 of the requirements we say well, you're a

 4 registrant but through comity or deference or

 5 whatever we would not apply. I don't -- it wasn't

 6 clear to me that the other side of that was that

 7 the main booking entity would not be a registrant.

 8 Or is that the goal, you just -- you want the

 9 branch to be the registrant and the main booking

 10 entity not to be the registrant at all, or it

 11 would be okay to have the booking agent to be the

 12 registrant, too, but the application not apply on

 13 the reasons of deference or whatever?

 14 MR. TAFARA: Angie, let me let Chris go

 15 first and then I'll have you speak, okay?

 16 MR. ALLEN: No, I was going to say I

 17 think you captured exactly what I think would have

 18 to be the approach, which is the notion that you

 19 can register something which doesn't have legal

 20 personality. Of course it's very difficult to

 21 comprehend what does that really mean, but then

 22 the better question which naturally flows is what
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 1 is the consequence of that registration and is it

 2 a particular activity or series of activities

 3 which might, for example, be defined by reference

 4 to a more tightly defined U.S. nexus, which then

 5 defines the consequences of that registration?

 6 And I think that's -- the two questions have to

 7 sit side by side. So, the point I was trying to

 8 make just before -- I think it's clear, from the

 9 point of view of who signs what piece of paper, it

 10 has to be a legal entity level.

 11 MR. TAFARA: Angie, it's your model that

 12 started all of this, so it may be appropriate for

 13 you to end.

 14 MS. KARNA: It's my model, but I want to

 15 reiterate that my model doesn't involve branches,

 16 so this very interesting legal question is

 17 actually not something that I spent a lot of time

 18 on. However, if I think about dealing activity,

 19 if I'm not -- if my foreign entity isn't

 20 interacting with U.S. clients at all, if there is

 21 always a registered U.S. swap dealer who is on the

 22 hook for every single requirement of Dodd-Frank,
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 1 I'm not sure what the regulatory problem is with

 2 that. I see the counter side. I see that one

 3 could also require my foreign entity, because the

 4 booking entity to register and then defer to all

 5 of the entity-level requirements defer to the

 6 foreign regulator and at the U.S. level have all

 7 the transactional requirements. But backstage

 8 challenging to have -- even though we say

 9 "deferral," it's challenging in practice to talk

 10 about an entity being regulated by two different

 11 parts of the world. You know, and honestly I

 12 haven't looked through it all, because it's hard

 13 enough to talk to the JFSA or the FSA about

 14 whether they would contemplate us registering that

 15 entity in the United States of America. But I

 16 think -- I see those two approaches, but I do

 17 think that the regulators get what they need with

 18 a fully -- with a substantial intermediary in the

 19 United States of America who's registered, who's

 20 completely on the hook.

 21 MR. TAFARA: One thing I think needs to

 22 be added to the statement you made, Angie, is that
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 1 for a number of us, we live in a world where you

 2 do have dually regulated and dually registered

 3 entities. And we make it work. It can be made to

 4 work. That's not to say that the model you've put

 5 forward is not something that's worth considering.

 6 But I think it's not right to also come to the

 7 conclusion that it would be impossible to live in

 8 a world where you have an entity that is regulated

 9 by two regulators. And granted they would have to

 10 work collaboratively and you'd try to make things

 11 work as smoothly as possible, but it's not in the

 12 realm of the impossible. In fact, it's reality

 13 for us with respect to a number of entities.

 14 But I see that, Sarah, you've got your

 15 flag up, and we are five minutes over, so you get

 16 the last word.

 17 MS. LEE: Well, I was just looking at it

 18 from a different perspective, because we have our

 19 bank, but then we have foreign branches outside

 20 the U.S. that we use to transact business,

 21 particularly in Asia.

 22 Angie, I think to your question, we
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 1 would be registering the bank as a swaps dealer,

 2 and so then that bank would be subject to the

 3 entity-level requirements of capital prudential,

 4 other prudential requirements, and credit risk

 5 management. I think that the point that we'd like

 6 to make is in relation to that foreign branch's

 7 activities and the transactional-level

 8 requirements only applying to transactions it does

 9 with U.S. persons, not with its foreign clients.

 10 That's really the perspective that we're looking

 11 at it from.

 12 MR. TAFARA: Sarah, I was wrong, you

 13 don't get the last word. Chairman Gensler does,

 14 so let me get out of the way.

 15 MR. GENSLER: Mine's an easy one. I

 16 just wanted to thank all of you. I think this is

 17 the 14th roundtable we've had. No doubt we'll

 18 have more roundtables. We've had hundreds of

 19 meetings. I think we're approaching a thousand.

 20 I don't know which one of you has the lead on it,

 21 but somebody in the press will probably survey and

 22 say who's got more meetings.
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 1 It's been enormously beneficial for -- I

 2 can speak for the CFTC and all of my

 3 Commissioners; I think it's probably true for the

 4 SEC -- to have these roundtables. I know at the

 5 heart of many of your dealings is this

 6 international issue -- which transactions are in,

 7 which entities are in, to the branch issues, and

 8 so forth -- and I'm not here to address any of

 9 them. I'm just here listening, and it's very

 10 helpful, and I thank you.

 11 We're going to seek further public

 12 comment at the CFTC around these international

 13 issues. I think you kind of know the team here.

 14 Carl back here is our new team lead. I think the

 15 SEC can speak on how they're seeking further

 16 public comment. So, you'll be able to look at a

 17 document and actually, you know, get your lawyers

 18 and run up the, you know, send us your legal

 19 briefs on it. But, you know, this is enormously

 20 helpful.

 21 The core of Dodd-Frank is about

 22 protecting the American public and promoting
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 1 transparency in these markets and lowering risk.

 2 Hopefully, that aligns with your interests.

 3 Sometimes it won't, and, you know, that's what the

 4 comment period's about.

 5 But I just want to thank you again.

 6 MR. TAFARA: Thank you, Chairman. We'll

 7 break until 2:15 and resume at 2:15 in this room.

 8 Thank you.

 9 (Recess)

 10 MS. MESA: Okay. Is everybody ready to

 11 start with our final panel today?

 12 I want to thank our third panel

 13 participants for participating today and I'm going

 14 to do what we've done with all the other panels.

 15 If you could just go around the room and introduce

 16 yourselves and your organizations, that would be

 17 great.

 18 Kim, I caught you -- do you want to

 19 start and just introduce yourself and who you are

 20 with?

 21 MS. TAYLOR: Kim Taylor, CME Clearing

 22 and also CME Group.
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 1 MR. SHORT: Jonathan Short,

 2 Intercontinental Exchange.

 3 MR. OLESKY: Lee Olesky, Tradeweb.

 4 MR. TURBEVILLE: Wally Turbeville,

 5 Better Markets.

 6 MR. O'CONNOR: Steve O'Connor, Morgan

 7 Stanley.

 8 MR. AXILROD: I'm Pete Axilrod, DTCC.

 9 MR. CAWLEY: James Cawley, Javelin

 10 Capital Markets, also here for the SDMA.

 11 MR. GRAULICH: Matthias Graulich, Eurex

 12 Clearing.

 13 MS. LEVINE: Iona Levine, LCH.

 14 MS. MIMS: Verett Mims, Boeing.

 15 MS. MESA: Thank you. Our first panels

 16 this morning really addressed transactions and

 17 swap dealers and major swap participants, and this

 18 is our chance to learn more about global

 19 infrastructures. And by that we mean

 20 clearinghouses, repositories, exchanges, and

 21 potential SEFs.

 22 So the first question I'm just going to
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 1 turn it over to Ananda Radhakrishnan to lead off.

 2 MR. RADHAKRISHNAN: Thank you, Jackie.

 3 As people know, Dodd-Frank has a clearing

 4 requirement and I admit it took me quite a while

 5 to figure out what the requirement was. But

 6 basically the requirement is that if the

 7 Commission determines that a particular type or

 8 class of swaps has to be cleared, in other words,

 9 mandated to be cleared, then certain types of

 10 people have to clear it. Specifically, swap

 11 dealers, major swap participants, and those people

 12 who come within the definition of a financial

 13 entity. And the requirement is that you clear it

 14 through a DCO that's registered with the

 15 Commission or a clearinghouse that is exempted by

 16 the Commission from registration if there is a

 17 comparable regime.

 18 So the question is -- as several of you

 19 may know I personally am not in favor of giving

 20 anybody a break so people have asked me, you know,

 21 should we do this? And I said -- my answer is,

 22 you know, well, no because we don't even know how
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 1 this whole clearing thing is going to work out.

 2 Right? Number one. Number two, we have right now

 3 two foreign located clearinghouses who are DCS.

 4 Right? LCH and ICE Clear U.K., and we have an

 5 application from CME Clearing Europe to be a DCO.

 6 So in other words, if you are a clearinghouse

 7 located outside, it's not difficult to become a

 8 DCO. It's not easy but it's not difficult.

 9 But having said that let's say that the

 10 Commission is determined to recognize foreign

 11 clearinghouses. How should we do that? What

 12 should we be looking to determine that a regime is

 13 comparable? And how should we tackle the specific

 14 issue of letting people know, letting U.S. people

 15 know that if they do clear through a non-DCO they

 16 do not get the segregation protections of the

 17 United States nor do they get bankruptcy

 18 protection.

 19 So the first question is what -- how do

 20 we go about determining comparability? And two,

 21 it's not a simple matter of giving somebody an

 22 exemption. Other things flow from it. Right?
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 1 Because clearing is not done in isolation. People

 2 have to clear through intermediaries so other

 3 things flow from it. And you cannot represent

 4 that you are segregating funds pursuant to the CEA

 5 unless you are an FCM. Right? And at the

 6 clearinghouse level you cannot represent that

 7 unless you are a registered DCO. So if we give

 8 somebody an exemption, how do we tell the whole

 9 world if something goes wrong don't come looking

 10 at me. That's basically what my question is.

 11 MS. MESA: I notice that Ananda is

 12 drinking Bob Marley's "Mellow Mood." I don't know

 13 if one of you gave that to him but it hasn't

 14 affected him yet. So we're going to let him keep

 15 going until that sets in.

 16 So I'm looking at the clearinghouses

 17 specifically because this seems to be a

 18 clearinghouse question. So I'm looking at Iona or

 19 Kim or Jonathan. Do any of you want to take the

 20 first -- the first hit at tackling Ananda's

 21 question?

 22 MR. SHORT: I'll jump in and just start
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 1 us off, Jackie.

 2 Jonathan Short with Intercontinental

 3 Exchange. We are one of the clearinghouses that

 4 Ananda mentioned. We do have a foreign

 5 clearinghouse, a recognized clearinghouse in

 6 London, ICE Clear Europe that is also a DCO. So I

 7 acknowledge what Ananda said. It is possible to

 8 become a DCO and still have your primary

 9 regulatory status in your home jurisdiction.

 10 That said, I think where the challenge

 11 comes in that would probably tip me in favor of

 12 some sort of exemptive and mutual recognition

 13 regime is that if you play that out across all of

 14 the jurisdictions that might have an interest here

 15 when you take into account where Europe may be

 16 going in its regulation, things can get a lot more

 17 complicated. You may be talking about more than

 18 being a recognized clearinghouse in a DCO. You

 19 may have other iterations that you have to comply

 20 with and I think that some sort of mutual

 21 recognition or exemptive relief is appropriate.

 22 I do also think that Ananda is right in
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 1 that I think there are some assumptions that

 2 people make about the protections that you get

 3 from being a DCO. I personally think that that

 4 should be addressed through disclosure. I mean,

 5 if you have consenting parties that understand the

 6 insolvency and bankruptcy regimes of the, you

 7 know, of the country in question and the rules,

 8 they should be permitted to have their positions

 9 in clearinghouses that may not provide the last

 10 level of protection that a DCO might provide.

 11 MS. TAYLOR: I would agree with what

 12 Jonathan is talking about about a mutual

 13 recognition regime having some significant

 14 benefits because there could be a

 15 multijurisdictional impact and every time an

 16 entity is required to directly adhere to even

 17 slightly different sets of regulatory requirements

 18 it becomes a complication. Certainly it can be

 19 done but it becomes a complication. And one

 20 aspect that I would hold out as a potential model

 21 would be what the U.K. has done for a number of

 22 years with its recognized overseas clearinghouse
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 1 and recognized overseas investment exchange

 2 programs. CME has both of those statuses for our

 3 U.S. entities and they were both highly reliant on

 4 the FSA satisfying themselves that our home

 5 country regime was comparable enough with the

 6 regime in the U.K. that they allowed us to operate

 7 in their jurisdiction with the same kind of

 8 bankruptcy protection as a local clearinghouse but

 9 without having to explicitly meet all of their

 10 express requirements. And it seems like something

 11 like that would be a model for the regulators to

 12 work collectively toward in the future. It would

 13 have been preferable from our point of view if

 14 that would have extended beyond the U.K. into

 15 other, you know, other parts of the European

 16 Union. So something that would be broader I think

 17 would be more preferable.

 18 MS. LEVINE: I think the answer might be

 19 slightly more complicated than that. We're a DCO

 20 and obviously we're sort of in the U.K. as well

 21 and we haven't to date found any problems at all

 22 whatsoever with the current system. Now, we feel
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 1 incredibly comfortable with the current system and

 2 I think perhaps this will come out of the

 3 questions slightly later on. Where could it go

 4 wrong? And once we're completely comfortable with

 5 the current system, what we're worried about going

 6 forward -- and I don't want to go into details now

 7 because I'm sure it's another question -- is any

 8 sort of inconsistencies between the sort of number

 9 of regimes that you have to actually comply with.

 10 And I can see very good reasons why one would want

 11 to continue to be a DCO here if in fact one was

 12 offering client clearing.

 13 And perhaps the trick is to look at this

 14 slightly differently. The trick is to say, what

 15 is it that's being cleared? Is it just interbank

 16 clearing? And if you're doing a minute amount of

 17 interbank clearing, do you need to be really

 18 regulated? Or is it in fact customer clearing

 19 that you're looking at? And so we took a decision

 20 that basically we want to be able to give U.S.

 21 customers U.S. protections. We didn't want there

 22 to be any confusion about this so we've completely
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 1 embraced the whole sort of U.S. client segregation

 2 and we think that that's very good. What we don't

 3 want to be banned from doing though, is to be able

 4 to offer different kinds of segregation in

 5 different jurisdictions.

 6 And this probably comes onto something

 7 slightly later. Say for example if one kind of

 8 client protection was available in Europe, we'd

 9 want to be able to offer that to European clients.

 10 If the Japanese decided to do something different

 11 for their clients, we want to be able to offer

 12 that. And we want to also be able to offer U.S.-

 13 client segregation in a way in which the U.S.

 14 finally determines that they want to do it.

 15 MR. GRAULICH: Well, from my perspective

 16 recognition (inaudible) clearinghouses is a very

 17 important aspect. And I'm not looking only at the

 18 relationship between the U.S. and Europe as Eurex

 19 is Europe-domiciled. I mean, if you look at the

 20 G-20 -- so we're talking about 20 countries, all

 21 are setting up their rules. If you now look at

 22 the U.S. approach, if you say a U.S. transaction
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 1 involving a U.S. client needs to be cleared by a

 2 DCO. If the Japanese say, well, if a Japanese

 3 client is to be cleared by a clearinghouse

 4 registered in Japan, and if you go around the

 5 world we as a clearinghouse are regulated by 15,

 6 20 regulators globally. I don't say that it's not

 7 possible but it is very inefficient.

 8 And if you look, there are already rules

 9 existing like the CPSS-IOSCO recommendations for

 10 CCPs which are of global nature. So I think we

 11 need to have an international recognition

 12 framework based on, for example, CPSS-IOSCO

 13 recommendations to allow clearinghouses a

 14 simplified process to be recognized in foreign

 15 countries and also from an auditing perspective

 16 that while the practices of the local regulator

 17 are to some degree acknowledge by the foreign

 18 regulatory authorities.

 19 MS. MIMS: Well, as a non-clearinghouse

 20 user I think the one thing you have to keep in

 21 mind is netting agreements. In the sense that we

 22 don't have mutual agreements out there, what will
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 1 happen is I only have to increase the amount of

 2 collateral I'm going to put up because I'm not --

 3 if a foreign clearinghouse isn't recognizing a

 4 U.S.-based, you know, subsidiary outside the

 5 country then I have to put up even more money.

 6 And so right now as I agree with them it's

 7 relatively efficient if people are having to clear

 8 in Japan and Australia. But I think part of the

 9 problem is you can't say to yourselves or U.S.

 10 corporate, most of them are used to netting out

 11 those transactions. And if they have multiple

 12 exchange now with multiple regulations then it's

 13 going to be really difficult. To their point not

 14 impossible but more difficult and more costly.

 15 MS. MESA: I'm going to allow Ananda

 16 just to follow up on his question if he has it and

 17 then I have a follow-up as well.

 18 MR. RADHAKRISHNAN: Yeah. So I think

 19 Matthias is suggesting that what we could do if we

 20 went down this route was to look at compliance

 21 with the CPSS-IOSCO standards because that, you

 22 know, as all of you know, the Dodd-Frank Act
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 1 basically codified the current version of the

 2 CPSS-IOSCO standards. And in our rulemakings

 3 we're trying to be as consistent with the latest

 4 draft which (inaudible) for public consultation.

 5 But the other question I want to ask is

 6 should the Commission condition it on reciprocity,

 7 number one? And number two, can we do it legally

 8 given the number of trade agreements that the

 9 United States has signed? So I guess it would be

 10 rather unfortunate if the CFTC and/or the SEC were

 11 the only two regulators who had such a program and

 12 nobody else did.

 13 MS. MESA: By the way, if you want to

 14 speak, please put up your placard and then I can

 15 call you in order. But I see Kim wants to say

 16 something so go ahead.

 17 MS. TAYLOR: Personally I think from our

 18 point of view the reciprocity, the mutuality of

 19 the arrangement would be important because I think

 20 we would want to be able to be assured that if

 21 competitors were able to easily enter our

 22 jurisdiction that we would be equally easily able
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 1 to enter other jurisdictions. So I think that

 2 that would be an important feature.

 3 I think though it's perhaps a little bit

 4 off the topic of your original question but I

 5 think one of the points that Matthias was making

 6 was I think very important. There's actually an

 7 aspect of the whole thing that I think produces an

 8 extra layer of complexity and that is the tendency

 9 that is being shown right now in the rulemaking at

 10 various stages an various places of requiring that

 11 certain types of parties have to clear in certain

 12 places. And I think that particularly in the

 13 over-the-counter swaps arena the customers have a

 14 certain level of sophistication just by being able

 15 to be participants in that market. And I think

 16 that it is creating an artificial set of

 17 requirements to require certain types of

 18 transactions by certain types of parties to clear

 19 in certain jurisdictions. So that would be

 20 something that I would also encourage us to think

 21 long and hard about doing.

 22 MS. MESA: Wally.
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 1 MR. TURBEVILLE: A couple of things to

 2 keep in mind is it will be a new world and

 3 clearing as a concept has become really central to

 4 the Dodd-Frank structure. And along with that I

 5 think people's faith in clearing is heightened as

 6 well. And clearing can be thought of as a panacea

 7 for many kinds of risks. And so the concern is

 8 that while certainly operationally to make things

 9 as efficient as possible, the notion of

 10 substantive inquiry into not only the rules but

 11 the performance under the rules and the level of

 12 enforcement by regulators in another jurisdiction

 13 is quite important.

 14 One of the things that we get concerned

 15 about is the potential for the interconnectedness

 16 of clearing and how you could imagine a situation

 17 where a clearinghouse might run into trouble and

 18 that could infect other clearinghouses and the

 19 faith in other clearinghouses which would be

 20 problematic. So the point being in substance

 21 there really does have to be a certain level of

 22 meaning to what clearing is and certain basic
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 1 standards have to be fulfilled. And certainly

 2 disclosures have to be complete. So that's -- I

 3 think we do look at the situation now as being

 4 with clearing so much more pervasive, the whole

 5 question of interconnectedness is very important

 6 in making sure certain standards are maintained.

 7 MS. MESA: One last comment on this.

 8 James.

 9 MR. CAWLEY: If -- Javelin is an

 10 electronic swaps execution venue that expects to

 11 file as a SEF once the rules have been finalized.

 12 For us, one of the key things you've got to look

 13 at when it comes to foreign entities trading here

 14 or clearing here is that they comply with all the

 15 provisions of the act. And where we sit,

 16 specifically we focus a lot in our interaction

 17 with clearinghouses, especially when it comes to

 18 access. And that they allow SEFs to connect in

 19 and to launch all on the same day. And we haven't

 20 seen that. We've seen it from the CME. We're

 21 negotiating with ICE right now. And frankly, you

 22 know, not to put anyone on the spot but LCH told
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 1 us that they're going to launch with Bloomberg and

 2 Tradeweb before they launch with us.

 3 So, you know, these are the issues that

 4 we focus on. If you're going to open for business

 5 on one day, let's all open on the same day and

 6 let's not show favoritism to one execution venue

 7 or the other. I thought I might kick off with

 8 that.

 9 MS. LEVINE: Guys --

 10 MS. MESA: Before this just shifts into

 11 access, why don't you Iona, have the chance to go

 12 back to James about this comment and then we'll

 13 continue on some of the clearing questions. Go

 14 ahead, Iona.

 15 MS. LEVINE: Okay. I'm not sure this is

 16 quite the right form for who said what to who and

 17 whose e-mail was whatever. Anyway, look, what I

 18 would say is that a clearinghouse would be crazy

 19 not to want to have every SEF that was

 20 operationally -- and I won't use the word

 21 competent as sort of a slur on anybody. I would

 22 just say the word competent is a sort of base
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 1 level assuming, you know, that it is and not

 2 making any sort of aspersions to anybody. We

 3 would want everybody to connect to us. We think

 4 that everybody should be mandated to connect to us

 5 because that's where we get our business from.

 6 I cannot speak to why people are having

 7 some sort of sideways spat on who is the first one

 8 that could test. We're not talking about

 9 connecting; we're talking about running a pilot

 10 program within API. And I cannot believe that a

 11 clearinghouse can be mandated to run a pilot

 12 program with absolutely everybody on the planet to

 13 see if they can connect first off. I think that

 14 Dodd-Frank is not trying to micromanage everybody

 15 to say that in fact, you know, LCH has to allow, I

 16 don't know, 20 SEFs, 30 SEFs, some of whom are not

 17 ready, some of whom are ready, to test something.

 18 LCH simply doesn't have the resources, nor does

 19 anybody. You should be able to test with one or

 20 two that seem readier, provided that when the day

 21 comes you've tested with them and your API is open

 22 to everybody. I think you'll go back and find
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 1 that that's the subject of the e-mails. But look,

 2 I think this is enough of a spat.

 3 MR. CAWLEY: If I may respond.

 4 MS. MESA: Wait, wait, wait. One last

 5 response.

 6 MR. CAWLEY: Okay.

 7 MS. MESA: And then we might come back

 8 as we address some SEF and open access issues.

 9 MR. CAWLEY: So we don't see these

 10 issues with domestic clearinghouse. We've

 11 connected into the CME for months and we've been

 12 operationally ready there for months. We do have

 13 issue with foreign entities that come in and

 14 expect to do business in this country and look for

 15 reasons to circumvent some of the issues.

 16 So not to put LCH, you know, on the

 17 spot. But the practical reality is that we've

 18 been waiting to connect in for months now and it

 19 shouldn't take us two months to negotiate an NDA.

 20 MS. LEVINE: It's very interesting.

 21 Before I came here I said -- I never sat on one of

 22 these panels. I said what's it like? Is it like,
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 1 you know, in the Roman amphitheater where they

 2 throw you to the lions if you get the answers

 3 wrong? And I was assured no, no. It's far more

 4 charming than that and people are just interested

 5 in the answers.

 6 MS. MESA: We just let the lions eat

 7 each other.

 8 MS. LEVINE: Somebody wrongly briefed

 9 me. Listen, one, I take real exception to being

 10 called a foreign entity, okay, because I'm not a

 11 foreign entity. I'm a DCO. Okay? I don't like

 12 being called a foreign entity. But apart from

 13 that, why don't we go and have a coffee and sort

 14 this out?

 15 MR. CAWLEY: Fair enough.

 16 MS. MESA: Okay, good. Well, if we keep

 17 having more of those you've kind of let the

 18 moderators off the hook with conversations. But

 19 Wally, did you want to say something on this issue

 20 or something new?

 21 MR. TURBEVILLE: Sort of new.

 22 MS. MESA: Go ahead.
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 1 MR. TURBEVILLE: In terms of making this

 2 a teaching moment, the -- I guess what we've

 3 discovered here -- I didn't get any of the

 4 e-mails. But what we've discovered here is that

 5 there are other issues. Right? Which not only is

 6 Dodd-Frank about creditworthiness and making sure

 7 there are standards, there are also access issues.

 8 So I think the significant issue, significant

 9 point here is that the whole notion of looking to

 10 exemption and looking to other ways to broaden

 11 different forms of the infrastructure and how they

 12 all work, those sorts of issues are unfortunately,

 13 I think, it sounds like they're sort of in your

 14 court as well. It's not just pure credit but

 15 other kinds of issues that are reflective of what

 16 Dodd-Frank wants to achieve in terms of a market

 17 structure.

 18 MS. MESA: I want to pick up on this

 19 thought of recognition because it's something that

 20 none of the panelists have mentioned yet. It came

 21 back earlier. But regarding clearinghouses and

 22 SEFs where we do have the ability to recognize,
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 1 right now there is nothing to recognize to. There

 2 is no law in place in other parts of the world.

 3 So what do the panelists suggest regarding this

 4 timing issue?

 5 MR. GRAULICH: Well, I think we have to

 6 distinguish. I mean, if we look at, for example,

 7 SEFs or trade repositories, this is pretty new to

 8 the marketplace. And rules are drafted all around

 9 the world now. If we talk about clearinghouses,

 10 clearinghouses have been around for many years.

 11 There is regulatory oversight for almost -- well,

 12 many clearinghouses around the globe since many

 13 years, there are standard rules and I think these

 14 standard rules are all around proper margin

 15 regimes, risk models, stress testing, back

 16 testing, access requirements. So all these rules

 17 are there since many years. So I think even the

 18 fact that the swaps regulation or the clearing

 19 obligations in different stages around the world

 20 shouldn't be an argument to say we have to wait

 21 until everything in this particular area is ready

 22 because clearinghouses are there and
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 1 clearinghouses have their regime and everything.

 2 So I think that should be taken into consideration

 3 as it is little different to other elements of

 4 this new world.

 5 MS. MESA: Pete and then Lee.

 6 MR. AXILROD: I was just going to make a

 7 general comment that -- I've now lost my train of

 8 thought. Why don't we go to Lee and then Pete.

 9 MS. MESA: Lee, are you ready?

 10 MR. OLESKY: Yes, thanks. I think the

 11 question is what do we do in this interim period

 12 before the rules are exactly clear? I can't speak

 13 for clearing corps. I can speak for electronic

 14 trading venues and hopefully those that intend to

 15 become SEFs.

 16 We've been in the business of trading

 17 electronically for 12 years. We've traded

 18 derivative instruments for five years. We trade

 19 250 to 300 billion per day among institutions

 20 around the world with 50 banks and 2,000

 21 institutions and all the World Central Banks.

 22 Given that, I guess the message I would like to
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 1 send is I think we should be encouraging more

 2 activity to happen on electronic venues that

 3 afford all the policy objectives that Dodd-Frank

 4 was about in terms of enhanced transparency,

 5 easier access, more efficient markets, and a safer

 6 environment.

 7 So in this interim period, while you

 8 have businesses that have taken advantage of

 9 technology over the last 12 to 15 years and

 10 started to connect people up electronically -- and

 11 it's not just Tradeweb, there's plenty of others,

 12 Bloomberg, etcetera -- I think we should be

 13 encouraging that kind of activity because it's

 14 ultimately serving the same policy objectives that

 15 the law was set out to do.

 16 And not to discourage that kind of

 17 activity. I think the good news is -- I can speak

 18 for Tradeweb and I'm sure it's the same with many

 19 other market participants -- our derivative

 20 activity has more than doubled in the last year.

 21 Very simply put, they're doing it. The customers

 22 are doing it -- the institutions and dealers --
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 1 with an expectation of rules that will come into

 2 play. And they're preparing themselves for it and

 3 they're preparing for this new environment, which

 4 by the way they would have been doing anyhow and

 5 they have been doing for the last 12 to 15 years.

 6 It's just going to happen at a faster pace now.

 7 So I would say anything that kind of encourages

 8 more of that activity is a good thing from a

 9 policy standpoint.

 10 Obviously, we're very interested in

 11 seeing what the final rules are and developing the

 12 technology and the response to the rules so that

 13 we meet all of the criteria. And the sooner that

 14 happens, the better from our perspective. But in

 15 this interim period I think we should be

 16 encouraging all market participants to be

 17 following this path that's been laid out within

 18 the law which is transparency. It's not per se

 19 electronic trading but transparency, greater

 20 efficiency, capturing data, which allows for, you

 21 know, a better review of the marketplace in times

 22 of stress.
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 1 MS. MESA: On the question on

 2 recognition and timing, Pete, you're up with that.

 3 MR. AXILROD: Okay. I remembered now.

 4 I mean, essentially everybody is sort of

 5 addressing the recognition issue as, you know,

 6 there are a lot of jurisdictions who are

 7 interested in what I do. So who is going to be

 8 the regulator? We've operated for many years with

 9 multiple regulators, some of our entities. And I

 10 can guarantee you that most of the trade

 11 repositories that are going to apply for

 12 registration as an SDR are going to carry another

 13 regulator with them for one reason or another.

 14 We've got a regulated repository, a supervised

 15 repository today that's based in New York. It's

 16 primarily supervised by the Federal Reserve Bank

 17 of New York and the New York State Banking

 18 Department. We've got another one in London that

 19 is primarily supervised by the FSA. I guess I've

 20 got a question for the panel. It's quite likely

 21 that these are the entities we are going to come

 22 in and try to register as SDRs. So are you going
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 1 to make us shed our current regulation? Are you

 2 happy to regulate with these people? How is this

 3 going to work?

 4 MS. MESA: I don't think we can tell

 5 another regulator to just leave because we have an

 6 interest. So I don't think that's our right. We

 7 can express an interest and regulate you but we

 8 can't force somebody else to get out of your

 9 business if they require you to also be

 10 registered. So I don't know if that was your

 11 question but that's --

 12 MR. AXILROD: I guess it sounds like

 13 you're happy to live in a world where there are

 14 multiple supervisors of the same infrastructure.

 15 MS. MESA: I think what we said earlier

 16 is we recognize that there are issues and that's

 17 why we're trying to coordinate to the maximum

 18 extent possible so that, you know, we don't create

 19 sort of multiple conflicts for you but in the

 20 situation where we are going to regulate I think

 21 we can work with the other regulators as well.

 22 And you already said you're regulated by multiple
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 1 people as it is and you're still around.

 2 MR. AXILROD: Yeah, as opposed to the

 3 other, I guess repositories are a little

 4 different. We don't mind having many regulators

 5 because in effect the world works like that today.

 6 We're responsible to many regulators.

 7 MR. BUSSEY: Jackie, I'm one of the

 8 regulators of DTC affiliates and we actually find

 9 that it helps to have multiple perspectives

 10 brought to bear on important infrastructures like

 11 clearinghouses. So we regulate with the Fed and

 12 with the New York State Banking Authority and we

 13 find that to be actually helpful. Market

 14 regulators bring different perspectives to the

 15 table as opposed to prudential regulators. We

 16 think it's a good combination. So we have

 17 experience with it and we're going to have a lot

 18 more in the new Dodd-Frank world.

 19 MS. MESA: Kim.

 20 MS. TAYLOR: You know, I was going to

 21 speak to the recognition issues. Do you still

 22 want to talk about that?
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 1 MS. MESA: Please, yes.

 2 MS. TAYLOR: I guess I would suggest --

 3 I would agree with -- I think it was Matthias that

 4 said you don't really need to have the regulations

 5 fully in place in other places in order to have

 6 recognition. I would suggest that probably you

 7 already have a number of things where you have

 8 agreements with other regulators -- you already

 9 have a sense of where you've got comparability of

 10 regimes and I would suggest that maybe you use

 11 that as a baseline. Certainly with

 12 over-the-counter swaps you need to make sure that

 13 there is kind of a legal enforceability of a

 14 cleared transaction in that product set in the

 15 jurisdiction. And beyond that a lot of the things

 16 would be just the same basic things that you would

 17 look at in evaluating any clearinghouse -- risk

 18 management, bankruptcy, clarity, customer

 19 protection. Is their disclosure -- I don't think

 20 it would be necessary that the regs would be fully

 21 implemented in other jurisdictions before you

 22 would be able to do it.
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 1 MS. MESA: Lee.

 2 MR. OLESKY: Yeah, I agree with that. I

 3 mean, I can only sort of speak for the SEF side of

 4 the world but I think it's a situation where if

 5 you think they're heading in the same -- with the

 6 same policy objectives and the same sort of

 7 critical things as it relates to the execution

 8 side, are these going to be regulated entities?

 9 You know, as you said, is this going to be

 10 required to be cleared centrally? Is there going

 11 to be the same transparency elements that we

 12 expect to see out of Dodd-Frank? Is there going

 13 to be a central repository? I think if you check

 14 on those four or five key points and you see

 15 that's the direction, that's the right answer.

 16 And then ultimately in terms of once the rules are

 17 out on all sides of the Atlantic, then you can

 18 make determinations in terms of reciprocity or

 19 exemptive decisions or customers to do business as

 20 you've done with futures exchanges and other types

 21 of entities.

 22 MS. MESA: Jonathan and then Ethiopis.
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 1 MR. SHORT: I just wanted to go back to

 2 swap data repositories for a moment and talk about

 3 what we found to be one interesting part of that

 4 statute. And that is the obligation of an SDR to

 5 obtain an indemnity from a foreign regulator if

 6 you're going to share information. I never

 7 understood why that was in the statute and I

 8 scratch my head as to how I'm going to approach

 9 the foreign regulator and ask for an indemnity

 10 which I can pretty much guarantee you what the

 11 response is going to be. But does that suggest

 12 that we're going to be SDRs that are regulated

 13 everywhere and that's the way we get around this

 14 indemnity issue? We share the information with

 15 them directly and it's everybody's information?

 16 MS. MESA: The CFTC and the SEC have

 17 been working on this issue. We know it's

 18 problematic. We know it is not the goal to keep

 19 information from regulators that need it. So we

 20 recognize the issue that the indemnity clause

 21 brings.

 22 That said, I think there are a couple of
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 1 ways for regulators to get the information.

 2 Foreign regulators. One is through the normal

 3 channels, which is through the regulator. And so

 4 if the CFTC or SEC directly regulates the

 5 repository and the foreign regulator needs the

 6 information they can come to us -- for an express

 7 regulatory purpose and get the information. And

 8 then second, if separately regulated by that

 9 foreign regulator in their own right, they can

 10 access the information without the indemnity.

 11 Pete, did you want to say something on

 12 that?

 13 MR. AXILROD: Well, we all know that the

 14 indemnity provision is an issue. I very much like

 15 the idea that if there are multiple regulators,

 16 each regulator gets to see it without an

 17 indemnity. So I guess I would urge the

 18 Commissions -- I know you've got your own lawyers

 19 but if you can see your way clear to a solution

 20 like that I think it would make everybody happy.

 21 The other thing is, of course, that

 22 we've had a lot of discussions with regulators
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 1 that wanted access to the data we currently have.

 2 And it was fairly clear as it would be to the U.S.

 3 regulators that nobody wants to have to ask

 4 another regulator for the data. Right now there

 5 are 30 regulators around the world that have

 6 automatic sort of online access to our data. They

 7 like that. That means they don't have to ask.

 8 People don't have to know what they're

 9 investigating. All that sort of thing.

 10 So I'm hoping that we can get towards a

 11 conclusion that doesn't require one regulator

 12 asking permission of anybody to get data that

 13 today they can get without asking permission.

 14 MS. MESA: And you, Kim.

 15 MS. TAYLOR: We seem to have moved onto

 16 the SDR topic.

 17 MS. MESA: It's running away from us.

 18 MS. TAYLOR: One of the aspects of the

 19 SDR topic that I wanted to be sure that we talked

 20 about was the sense that I have that

 21 clearinghouses are going to function as natural

 22 SDRs for the transactions that they clear. And I
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 1 think that it will be fairly quickly if clearing

 2 adoption goes, you know, according to the mandate

 3 certainly or if there are mandates that emerge in

 4 other jurisdictions as well. I think very soon

 5 there will be an abundance of transactions that

 6 are cleared and I think that I would caution us

 7 from developing a market structure that requires

 8 that an additional third party be a part of every

 9 transaction because I think at some point once

 10 clearing is adopted it will become almost an

 11 unnecessary additional cost and operational burden

 12 for all cleared transactions to be reported also

 13 to another third party.

 14 And what I'm wondering is if there's an

 15 opportunity to use as somewhat of a model the

 16 CFTC's large trader reporting system which allows

 17 a regulator to take a standard format, input

 18 format from a variety of different sources. Think

 19 of it as a variety of SDRs in this case as opposed

 20 to a variety of markets. And accumulate that

 21 information and be able to use it either on a

 22 routine basis for its own purposes or use it on an
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 1 ad hock basis for its own purposes. I'm somewhat

 2 concerned about creating a market structure that

 3 requires kind of duplicative reporting of all

 4 transactions. Certainly, the uncleared

 5 transactions -- not all clearinghouses may decide

 6 to become a SDR for those transactions if that's

 7 allowed. I think there's a little bit of a gray

 8 area there but I would encourage us not to create

 9 an infrastructure that requires duplicative

 10 processing of all the cleared transactions.

 11 MS. MESA: Pete.

 12 MR. AXILROD: Yeah, I guess I would take

 13 very strong issue with Kim's characterization of

 14 duplicative reporting. In fact, that is -- the

 15 structure Kim is suggesting is likely to end up

 16 with inaccurate reporting to the regulators and

 17 difficulty for the market participants who have

 18 the ultimate reporting obligation under

 19 Dodd-Frank. As you heard this morning, the market

 20 participants, the ones with the ultimate reporting

 21 obligation, really want one point of control. Not

 22 that there has to be one repository but they want
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 1 to pick one place as a point of control for their

 2 reporting obligations. And to relate this back to

 3 international provisions, most of these firms will

 4 have reporting obligations in multiple

 5 jurisdictions that they have to manage. The only

 6 way the firms that I've talked with have seemed to

 7 be able to manage these reporting obligations is

 8 to have a single point of control. And if they so

 9 choose to have a single repository for reporting

 10 of all of their transactions, it doesn't seem to

 11 me that the regulators should mandate otherwise

 12 because that's the way they think they can best

 13 control the information falling in. Furthermore,

 14 I guess I would say that it doesn't have to be

 15 duplicative reporting if the DCOs would report to

 16 the repositories at the request of our mutual

 17 clients.

 18 MR. RADHAKRISHNAN: So what if it

 19 transpired that in order for a DCO to be an SDR it

 20 must also accept reports on uncleared

 21 transactions? Were you suggesting, Kim, that you

 22 would only be the SDR for cleared transactions or
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 1 would you be willing to do uncleared? If the

 2 Commission said you've got to do both would you be

 3 willing to do both?

 4 MS. TAYLOR: If it turned out that we

 5 had to do both my expectation is that we probably

 6 would if we found that our clients valued that

 7 service. I think my point really was that

 8 clearinghouse is a natural automatic SDR for the

 9 transactions that it clears. And for those

 10 transactions I would hate for there to be a

 11 mandate, a regulatory mandate that they also be

 12 reported somewhere else if the clients choose to.

 13 I'm not suggesting that there be a mandate that

 14 the clients aren't allowed to report their

 15 transactions someplace else; I'm just suggesting

 16 that there should not be a mandate that requires

 17 clients to use an additional service that I think

 18 over time will end up being more duplicative than

 19 that.

 20 MR. RADHAKRISHNAN: But then if you all

 21 or ICE or LCH say, look, you know, we want to be

 22 an SDR and if people choose to report uncleared
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 1 transactions to us we'll be happy to accept them,

 2 that's fine with you guys?

 3 MS. TAYLOR: I mean, I can't speak for

 4 ICE or LCH but certainly that would be something

 5 that we would consider doing.

 6 MR. SHORT: For ICE, yes.

 7 MS. LEVINE: Yes, we would as well.

 8 MR. RADHAKRISHNAN: So what are the SDRs

 9 -- sorry, what do the SEFs think about this?

 10 Those of you who may want to be SEFs?

 11 MR. CAWLEY: From the SEF standpoint I

 12 think, you know, Kim is certainly correct. I

 13 think it's a good idea that you have -- you don't

 14 want to have unnecessary duplication throughout

 15 the system. And today while there's not a lot of

 16 transparency in prices we crave this reporting

 17 function. I think over time you're going to --

 18 the importance of it is going to decay over time

 19 as the market becomes more and more transparent.

 20 MR. RADHAKRISHNAN: Sorry, in terms of

 21 what?

 22 MR. CAWLEY: In terms of the information
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 1 in terms of the hunger for the information because

 2 right now we don't have that information. But it

 3 should be come fairly ubiquitous if this thing

 4 works. Right?

 5 So from the SEF standpoint, you know,

 6 SEFs under the rules that you've written are also

 7 required to report trades. And from where we sit

 8 from Javelin, we're certainly willing to work with

 9 clearinghouses and also in terms of reporting that

 10 information because we're the point of execution.

 11 Likewise, we're also happy to pick up information

 12 on trades that haven't been executed on our

 13 platform. So it's a catchall because if we have

 14 that plumbing to -- be it CCPs or indeed

 15 regulators, we should be able to use it and profit

 16 from it to collect other data and to make that

 17 data more valuable both to regulators and to the

 18 market as a whole.

 19 MS. MESA: Ethiopis, did you want to

 20 interject something here?

 21 MR. TAFARA: Stir things up a little bit

 22 maybe and play devil's advocate vis-à-vis what Kim
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 1 was saying.

 2 Don't we run the risk without mandating

 3 a central third party location for the data that

 4 we'll get data fragmentation? Data fragmentation

 5 that's not in the interest of systemic risk

 6 management or risk management generally?

 7 MS. TAYLOR: I mean, what I would

 8 suggest is that if a party decided that they were

 9 going to SDR their cleared trades wherever they

 10 cleared them, and SDR their uncleared trades

 11 wherever they chose -- could be one of the

 12 clearinghouses they participate in; it could be a

 13 separate third party -- that there would not be --

 14 the parties would need to make sure that they are

 15 not duplicate reporting. I agree with that. But

 16 then all you need is a standard kind of mechanism

 17 for regulators or interested parties to be able to

 18 pull data out or for the entities acting as SDRs

 19 to be able to deliver data to that central

 20 repository. And I know that a mechanism like this

 21 -- that this can work because I really think it is

 22 very similar to the type of mechanism that the
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 1 CFTC has long had in place with reporting of the

 2 large trader positions. They're reported by the

 3 individual market participants and actually their

 4 dealers tend to report them for them. Reported to

 5 different markets who then pass through the

 6 information in the standard format to the CFTC.

 7 So the markets get to use the same information for

 8 market surveillance. It's passed through to the

 9 CFTC for its own market surveillance and its own

 10 risk management across the broad industry. And

 11 it's done very effectively on a daily basis with a

 12 single reported -- a single reporting act and a

 13 single reporting format by market participants.

 14 So it's very efficient.

 15 MR. TAFARA: But if my recognition

 16 serves, there is no public dissemination of that.

 17 Right? I mean, this is not consolidated

 18 information.

 19 MS. MESA: But it is aggregated by the

 20 CFTC at the end of the week. I mean, I think one

 21 thing I was just going to follow on what Ethiopis

 22 was saying is that I think the burden shifts. The
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 1 burden then is on the regulator to sort of

 2 aggregate and assess rather than what the goal was

 3 from the repositories I think was somebody who

 4 would just shovel this aggregated information to

 5 -- in whatever form to the regulator. I mean, I

 6 think it just shifts the burden perhaps is what

 7 you're talking about.

 8 MR. CAWLEY: If I could --

 9 MS. MESA: Let's go in order. Let's

 10 see. I think you all -- all ahead, Lee.

 11 MR. OLESKY: I just wanted to respond to

 12 Ananda's question about what the SEFs would think

 13 about it and then get to your two points. I think

 14 there are two different policy goals out of what

 15 we're talking about. One is to give the

 16 regulators a place to go to where they can look at

 17 a view of the market in a consolidated way and

 18 assess what's happening. And that is a unique

 19 goal that's not necessarily a transparency goal

 20 per se but an observing the market goal. And I

 21 think that that is best served by things being in

 22 one place. Given the complexity of these markets,
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 1 you know, aggregating it from a bunch of different

 2 places I'm sure can be accomplished but I think

 3 there are some questions about how that would all

 4 come together. And technically anything can be

 5 done. That can be done. The question is what

 6 does it look like? And I think it does shift the

 7 burden to the regulators to really then have that

 8 element under control which is this aggregation.

 9 The second objective I think out of

 10 these types of entities is transparency, which is

 11 price transparency to the public. And that's one

 12 where I think competition is a good thing. I

 13 think it's a good thing to allow anyone to do

 14 this, to allow anyone to commercialize this data,

 15 and more importantly, to have a requirement to get

 16 the data out which is part of the whole rule set

 17 to get it out within a specific period of time.

 18 And I think once it's out in the public

 19 environment there's going to be all sorts of

 20 commercial interests that are going to come in and

 21 try and aggregate that information, capture that

 22 information, disseminate that information, and
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 1 make it commercially viable and acceptable and

 2 usable by the marketplace.

 3 So I think there are two different

 4 objectives in my mind between these two things and

 5 the one that would concern me is given the

 6 complexity of the derivative markets and the

 7 number of different instruments, you know, to put

 8 that on the shoulders of the regulators to

 9 reaggregate so that it works I think would be a

 10 challenge across all asset classes. I mean, it

 11 gets complicated.

 12 MS. MESA: I don't know who was first

 13 but Steve and then Wally.

 14 MR. O'CONNOR: Yes. I think I would

 15 agree with Lee there. It's important to make the

 16 distinction between public reporting and

 17 regulatory reporting. And I think the SDRs are

 18 the regulatory reporting. And I imagine that SDRs

 19 are a giant spreadsheet that allows you guys to

 20 sort by any column that you want to to pick up the

 21 next AIG or long-term capital or whatever. And to

 22 have a system where you have multiple versions of
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 1 that spreadsheet that need to be aggregated

 2 presents an enormous challenge I think.

 3 MR. TURBEVILLE: I believe that

 4 fragmentation is the issue, not difficulty

 5 reporting. And I think fragmentation is

 6 potentially a behemoth issue. And a concern is

 7 that there is sort of -- there will be an

 8 electronic swap data Tower of Babel running around

 9 and anyone sort of silo of the information is

 10 potentially volatile and damaging in itself. In

 11 other words, the only way to truly understand the

 12 market is to understand the market and the

 13 relationships between all of these things. There

 14 is -- there would be a great burden on the

 15 regulators at this point. We had hoped months ago

 16 that the regulators would have the capacity in

 17 terms of budget and all the rest to actually do

 18 the proper aggregation of the data and make sense

 19 of it. That may or may not be the case now but

 20 one thing that we have stressed in our comment

 21 letters relating to SDRs is that as SDRs are

 22 registered that a part of that is -- one way to
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 1 make the data more usable and more aggregatable is

 2 if all of the information as it comes from the SDR

 3 is in a format and style that allows you to do

 4 that more easily. Right. Instead of having

 5 multiple spreadsheets that somehow have to get

 6 pushed together, to have some kind of a

 7 standardized language as it comes from the SDR.

 8 In other words, they're writing to your API as

 9 opposed to you having to take down all of the

 10 different forms of language and make it a common

 11 language.

 12 MR. O'CONNOR: Yeah. So then you're

 13 into the SDR of SDRs, which itself is a new

 14 behemoth that I don't think you guys should be

 15 running.

 16 MS. MESA: Understood. Who was next?

 17 Mathias.

 18 MR. GRAULICH: Well, perhaps I am

 19 mistaken but there is no requirement for one

 20 global TR. Right? So there will be multiple TRs

 21 globally and also under your jurisdiction. So the

 22 effort for the regulators to aggregate information
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 1 will be there in any way. So the key question is

 2 or, well, what I think would simplify this whole

 3 process is that there is a standardized plummet

 4 making it much easier for the regulator to collect

 5 the data and aggregate the data from the different

 6 trade repositories. Therefore, and I agree with

 7 what Kim said, I wouldn't see a big additional

 8 effort if clearinghouses would act also as a trade

 9 repository for clear transactions because it is

 10 the natural home. All information is there. It's

 11 just unnecessary and duplicative work if it is

 12 additional transmitted to a trade repository where

 13 the same data is then made available.

 14 MS. MESA: Okay. Go ahead.

 15 MR. CAWLEY: Yeah. I would say that,

 16 you know, one of the things you have to remember

 17 is the Acts didn't contemplate one SDR. They

 18 contemplated many SDRs. And in that is the

 19 tension of fragmentation or the risk of

 20 fragmentation. So unfortunately, that's something

 21 we all have to live with, especially you. The

 22 reality though is that there are already
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 1 repositories for trades naturally at

 2 clearinghouses and also as they occur on execution

 3 venues that they be captured there. It's not

 4 necessarily as Wally would suggest a Tower of

 5 Babel situation if managed correctly. It's very

 6 easy to take, and I would hope that any SDR

 7 doesn't use necessarily a spreadsheet or a fax

 8 machine these days but indeed use a commonly

 9 accepted protocol and API infrastructure through

 10 which this data could be collected. So whether it

 11 come from SEFs or come from CCPs, it's not that

 12 difficult to aggregate it such that the data

 13 doesn't fall through the cracks.

 14 MS. MESA: Pete?

 15 MR. AXILROD: I guess I just wanted to

 16 double-check something because it sounded like Kim

 17 and I ended up being in violent agreement about

 18 something. And I also wanted to respond to James.

 19 I do think, I mean, we spent over $100 million on

 20 inventory control among other things. I think it

 21 is more difficult than people might first imagine

 22 if they haven't tried to do it to aggregate
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 1 correctly. But I'm quite happy and I think it's

 2 DTCC's position that the market should and

 3 probably will work itself out on this. At this

 4 point we've had a lot of discussions. It seems to

 5 be relatively clear that the consensus view of the

 6 regulators both here and abroad is that they're

 7 not going to mandate a single repository. I do

 8 think though that, you know, it sounds -- if it's

 9 up to the users, the people with the reporting

 10 obligations to choose, I'm, you know, so be it. I

 11 just want to make sure that the playing field is

 12 level and that there's no sort of vertical

 13 bundling of services that amounts to some sort of,

 14 you know, unfair trade practices. But as long as

 15 the playing is level, I think, you know, I think

 16 the users themselves or the market participants

 17 themselves will work it out and you'll end up with

 18 what you end up with.

 19 MR. TAFARA: I think I need to say I was

 20 playing devil's advocate and I think it's clear

 21 that the statute doesn't call for us placing our

 22 finger on the scale in favor of a single point of
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 1 reporting. But by the same token I don't think it

 2 also calls for us to put our finger on the scale

 3 in favor of reporting through a clearing agency.

 4 And as I think Pete is saying, if that ends up

 5 being the choice of the participants, so be it.

 6 But I don't think we should be in the business of

 7 putting our finger on the scale one way or the

 8 other.

 9 MS. MESA: Verett.

 10 MS. MIMS: So as a corporation I think

 11 the one thing to keep in mind when we're talking

 12 about these SDRs is the notion that we have an

 13 end-user exemption. But in the sense like our

 14 capital corporation may not and now they're a

 15 reporting entity. And so we're saying we'll have

 16 a single standard, I mean, for some corporations

 17 we use SWIFT. We're not a member of SWIFT at

 18 Boeing. And a lot of other big corporations

 19 aren't. So in terms of having the standard

 20 language now, you know, we still have a budgeting

 21 process as well that says, okay, how do I budget

 22 for being in compliance with these regs since I
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 1 don't know what SEFs are going to be accepted? Of

 2 course, as a corporate we want more than, you

 3 know, than less. And still I'd have to budget for

 4 which SEF because we've used Tradeweb in the past

 5 and it's, you know, it costs money. And so at the

 6 end of the day it's like, you know, if we have

 7 more than 20 or however many we're going to have I

 8 think for a corporation there's this notion that

 9 more is better.

 10 But back to this notion of cleared

 11 versus uncleared because we know that the regs are

 12 going to set margin requirements much higher for

 13 uncleared swaps. I'll give you an example. So at

 14 BCC, if they wanted to as Capital Corp, they

 15 wanted to do one single swap to swap out their

 16 fixed rate debt to floating, they could do one

 17 swap and do like a half a billion dollars in one

 18 swap. And so now that I have to now do a cleared

 19 trade I may have to do 500 different transactions

 20 and do them more frequently. So now I have that

 21 additional transaction cost. Now I have the

 22 additional transaction cost of now reporting that
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 1 trade if I am the reporting entity which they

 2 would be. So I think the one thing to keep in

 3 mind, for us it just becomes more and more

 4 additive in terms of cost versus the way OTC is so

 5 customized now where we pick up the phone, call a

 6 bank, shop the trade, hang up the phone, and

 7 confirm it.

 8 So I just think we have to keep all

 9 these things in mind when we're setting up these

 10 structures for the end user because you guys,

 11 being, you know, you already have as you say the

 12 natural thing is for clearinghouses do have all

 13 these systems set up. Corporations do not. So I

 14 just want everybody to keep that in mind when

 15 setting up the market infrastructure.

 16 MS. MESA: Dan?

 17 MR. BERKOWITZ: I was just going to add

 18 my recollections from the debate on the

 19 legislation when this issue was debated in the

 20 legislation. Should we have one SDR or multiple

 21 SDRs? What Ethiopis was saying, as I recall it,

 22 the sentiment in the Congress and certain in this
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 1 agency was participating in the legislative

 2 process. The feeling was it wasn't -- people were

 3 reluctant to decide. We determined there shall be

 4 one SDR or we shall determine how many SDRs there

 5 shall be. It's, let's let the market decide how

 6 many SDRs there shall be. Clearly it contemplates

 7 that there might not be an SDR for a particular

 8 type of swaps in which case the Commission is

 9 directed to essentially perform that function.

 10 I would also note that there's also a

 11 difference when we're talking about whether there

 12 are multiple SDRs for the same class of swaps or

 13 there's multiple SDRs for different classes of

 14 swaps. And I think then again we'll see what the

 15 market brings in terms of consolidation of

 16 multiple classes of swaps and a single SDR. Or

 17 we're going to have multiple SDRs based upon

 18 different classes of swaps. But I think the

 19 legislation clearly contemplated the marketplace

 20 would decide and then the Commission would have

 21 some type of rule for what the market is not

 22 covering.
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 1 MS. MESA: Lee, did you have another

 2 point? Sure.

 3 MR. OLESKY: Just a quick follow-up. I

 4 wanted to follow up on both those points. I

 5 think, a, very important to have flexibility here

 6 and a competitive environment among different

 7 participants because I think that's how, you know,

 8 clients will be best served. Whether they're

 9 institutional clients or frankly we in some

 10 respects will think of us as a SEF but we're in a

 11 sense a client of the clearing corps and other

 12 entities that are participating in this space. So

 13 we want to see flexibility. We want to see a

 14 number of different competitors because we think

 15 that's the way you get the best product and the

 16 best service and the best pricing. But I guess

 17 the last thing I wanted to add is we need

 18 certainty of timing, too, because I think that the

 19 cost associated with the uncertainty that

 20 continues to go on for month to month and year to

 21 year is going to start to have an impact on the

 22 willingness of entities to invest capital in
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 1 different spaces. So I can speak for my company,

 2 Tradeweb, where we invest a lot in R&D. We're

 3 spending a lot on technology and the longer it

 4 goes not knowing precisely what the rules are, the

 5 harder and harder it gets.

 6 And I've got a board meeting this week

 7 to go in and explain to my shareholders why we're

 8 going to spend on, you know, a technology that

 9 supports a certain type of trading model, you

 10 know, when the impact is actually going to occur,

 11 when we have an opportunity to make profits on

 12 those investments. And I think the longer the

 13 process goes on the more uncertainty there is over

 14 the months. I think it's likely to push out

 15 certain people who would invest in the space and

 16 it's not going to be us because we're in it for

 17 the long haul. But I think it's a cost. It's a

 18 cost to our clients in terms of figuring how to

 19 get set up to deal in this new environment. And I

 20 think that it's not just a question of, you know,

 21 the fear that things will leave the U.S.

 22 jurisdiction and go to other jurisdictions. I
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 1 think there's also a fear that it will just slow

 2 down innovation and investment and that's

 3 obviously not a good thing to be doing right now.

 4 I think we want to get through these rules as

 5 quickly as possible so people can start to invest

 6 and develop and deploy.

 7 MS. MESA: Brian.

 8 MR. BUSSEY: I wanted to kind of shift

 9 the topic a little bit. Stay on SDR but address

 10 another aspect of an international situation where

 11 you have a cross border transaction. A dealer

 12 here, a dealer in Europe and subject to

 13 potentially different reporting requirements. And

 14 I think there's two variations on this. One is

 15 where the two entities are not members of the same

 16 SDR. That's the first thing. And then the second

 17 thing in going to Kim's suggestion from a

 18 different area, what if the regulators have

 19 different reporting requirements for transactions

 20 that they're not completely mapped with each

 21 other. So I guess I have questions both for the

 22 infrastructures, the potential SDRs and the panel,
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 1 how you are going to deal with this type of

 2 situation from a business perspective. And then,

 3 for example, the intermediaries, how you view this

 4 situation as working out. How the regulators

 5 should best address these issues.

 6 MS. MESA: Pete.

 7 MR. AXILROD: I guess the nice thing

 8 about the SDR situation is that there's going to

 9 be a race to the top. You know, the opposite of

 10 whatever the lowest common denominator means.

 11 Most firms that trade in multiple jurisdictions

 12 know they're going to have reporting obligations

 13 in multiple jurisdictions. Not only that, for any

 14 trade, multiple, you know, both parties may have

 15 reporting obligations depending on the

 16 jurisdiction.

 17 So the only way for this to work without

 18 it being a big mess is to have a reporting

 19 infrastructure that will satisfy as many of the,

 20 sort of what I'll call, high volume jurisdictions

 21 as you can where most of the trading takes places

 22 and where it's important for reporting to be as
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 1 automated and controlled as possible. And the

 2 only way to do it is to have a reporting

 3 infrastructure that as best you can will satisfy

 4 all of the requirements of all of the major

 5 jurisdictions. So we've built to satisfy what we

 6 think are going to be the EMIR requirements.

 7 We've built essentially to satisfy the proposed

 8 rules. They might change but we think that's a

 9 good indication of where things are going to end

 10 up. We've been in discussion with Asian

 11 regulators. It would be a lot easier if everybody

 12 got together and had the same requirements but we

 13 know that while they will be similar, they won't

 14 be exactly the same in all respects. And you're

 15 just going to end up with a race to the top.

 16 Anyone who purports to bill just for one

 17 jurisdiction is unlikely to be able to attract

 18 customers. And so I think it's actually a good

 19 thing rather than a bad thing as long as the

 20 requirements are similar enough that it's possible

 21 to satisfy all of them with one structure.

 22 MS. MESA: Jonathan.
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 1 MR. SHORT: Yeah, I'll just amplify on

 2 one thing that Kim said previously. When you

 3 think about that situation where you've got a U.S.

 4 entity and a foreign entity and the potential for

 5 different reporting obligations, what I keep

 6 coming back to is that if you're going to posit a

 7 market structure where a lot of that business will

 8 be cleared, the clearinghouse is a natural place

 9 for that trade to reside. So if you have a

 10 situation where a clearinghouse can be a SDR which

 11 Dodd-Frank clearly contemplates, you could have

 12 that in a foreign jurisdiction. And you know, the

 13 problem seems to be addressed right there because

 14 in all likelihood unless Ananda gets, you know,

 15 quite liberal in what he's going to permit amongst

 16 clearinghouses, that trade is going to reside in

 17 one clearinghouse. It's going to be in one place.

 18 And if that place is also a SDR, that situation

 19 seems to be addressed at least for a cleared

 20 trade.

 21 MS. MESA: Steve.

 22 MR. O'CONNOR: Just touching on the public
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 1 reporting. I think I'm going to agree with Pete here.

 2 I think to the extent one trade gets reported in two

 3 places, then that's a recipe for disaster. So I think

 4 the industry has to move. And maybe it's covering the

 5 high volume jurisdictions. But infrastructure where

 6 -- and there may be multiple versions or reporting

 7 infrastructure but where there is commonality of rules

 8 and people understand that it's okay to add metrics

 9 coming from real-time reporting system A to those in

 10 system B because A and B only have one instance of

 11 each trade, then that's fine. But if you have the

 12 same trade going through A and B at the same time,

 13 catastrophic I think in terms of the meaningfulness of

 14 the numbers.

 15 MS. MESA: Brian, did you have another

 16 thought on this?

 17 MR. BUSSEY: I'm just -- so does

 18 industry just work this out then? Is that what

 19 you're suggesting, Steve?

 20 MR. O'CONNOR: I think that certainly in

 21 the, you know, yes. But working with regulators

 22 would be the easy answer. But I think that
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 1 clearly people have -- this has got people's

 2 attention and smarter people than me are thinking

 3 about these kind of issues. So I think, yes,

 4 working with regulators, the industry will get to

 5 the right place.

 6 MS. MESA: I've just got a question on

 7 predictions. So for a while there was a fear that

 8 certain jurisdictions would require reporting

 9 within that jurisdiction that's fragmenting or

 10 causing double reporting. So if you were doing a

 11 trade with -- and I don't think the fear is with

 12 Europe anymore but perhaps with an Asian

 13 jurisdiction. Let's just say that someone in the

 14 U.S. does a trade with someone in Japan and the

 15 Japanese regulators say, well, that trade is of

 16 utmost concern to us and must be reported here.

 17 And let's say at a repository that the U.S.

 18 doesn't register or recognize and must be reported

 19 to a different repository. This is the situation

 20 I assume that everybody is trying to avoid, having

 21 this potential double reporting. Is there a fear

 22 that that exists today or is this just, you know,
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 1 warning, we don't want this to exist. Is there

 2 something tangible that the industry is aware of

 3 or -- anything?

 4 MR. AXILROD: Were you going to answer

 5 that question, Steve?

 6 MR. O'CONNOR: No, I was hoping you

 7 would.

 8 MR. AXILROD: Okay. Okay. Yeah, the

 9 answer is, you know, we have heard ourselves from

 10 many jurisdictions outside the U.S. and Europe.

 11 Essentially the refrain has been it's very nice

 12 that you've developed a way to assure both

 13 European and U.S. regulators that neither can cut

 14 the other off from the data essentially by having,

 15 you know, fully redundant data centers in both

 16 places. But that doesn't do it for us. That's

 17 just good for the E.U. and the U.S. And they are

 18 -- everyone is taking the G-20 commitment

 19 seriously and so they all think they need trade

 20 repositories. They all think that they need

 21 access to trades that are relevant to their

 22 jurisdictions. I think they all realize that the
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 1 jurisdictional -- that what they have available

 2 today, however imperfect, goes way beyond the

 3 jurisdictional reach of any jurisdiction just

 4 because per the guidelines that the OTC

 5 derivatives regulators form provided, which were

 6 by some miracle fully and formally endorsed by

 7 over 40 regulators around the world, if there are

 8 essentially offshore trades on onshore underliers

 9 yet to be seen by the onshore regulator, in

 10 general, you know, there may not be another sort

 11 of legal way of getting at that information. So

 12 this is sort of something that the industry has

 13 voluntarily done. The infrastructure today allows

 14 that sort of viewing of offshore trades that are

 15 relevant to the onshore jurisdiction.

 16 One of the things that I think is going

 17 to happen if people can't stay coordinated on

 18 this, is all the regulators are going to lose easy

 19 access to that sort of information. Just the

 20 recent sovereign debt trading is a good example of

 21 why that's not good. I know that the U.S.

 22 authorities wanted to understand credit default
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 1 swap trading on U.S. sovereign debt even if it

 2 took place offshore. The Greek regulators and the

 3 E.U. authorities certainly wanted to understand

 4 the offshore trading on Greek sovereign debt.

 5 It's easily available today. It's on a voluntary

 6 basis. It's going to be very hard to make that

 7 mandatory and enforce it. So there is some

 8 motivation for regulators to get together because

 9 there is a carrot to go along with the stick. But

 10 right now the non-E.U., non-U.S. jurisdictions are

 11 feeling kind of left out and are going down their

 12 own path and we're trying to -- I think we have

 13 come up ourselves with a way to try to manage the

 14 inventory control so there's not double counting

 15 but it's a little bit premature to talk about it

 16 in this forum. I'm happy to talk about it with

 17 your staff offline.

 18 MR. TAFARA: I just wanted to probe on

 19 that a little bit. The non-E.U. regulators with

 20 whom you've been speaking, are they saying they

 21 need a repository or that they need access to

 22 information at repositories would be my first
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 1 question. And two, I know you've put in place a

 2 program whereby access is afforded to regulators

 3 around the world based on relevance. And my

 4 question as how did you define relevance? How did

 5 you determine what it is you would provide access

 6 to and what it is you would not?

 7 MR. AXILROD: With regard to the first

 8 question, they want a repository, not just access

 9 to the information. With regard -- oh, you want

 10 --

 11 MR. TAFARA: And my question obviously

 12 is why.

 13 MR. AXILROD: You'd have to ask them.

 14 With regard to your second question, we didn't

 15 come up with the definition of relevance. That's

 16 -- the OTC Derivatives Regulators Forum came up

 17 with a three- or four-page guidance on what that

 18 was. And we, although it was voluntary, anything

 19 signed by 40 regulators doesn't feel voluntary to

 20 us. So we implemented that and are using the ODRF

 21 definition of material interest. It's not

 22 entirely clear around the edges but it's for the
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 1 most part a pretty good definition.

 2 MR. BUSSEY: Pete, just a clarification.

 3 Do they want their own SDR or a mirror-type of

 4 situation that you've put in place with E.U. and

 5 U.S.?

 6 MR. AXILROD: It varies. Some want

 7 their own SDR. Some want a mirror-type situation.

 8 I think the mirror situation was put in place

 9 really before we had the technology in place to

 10 sort of say which regulator got to see what in

 11 accordance with the ODRF guidelines. So we're

 12 hoping that we can -- we don't have to mirror the

 13 entire global data set in 27 jurisdictions but it

 14 did seem to us as if you're likely going to end up

 15 in a place where you have sort of three hot sites,

 16 one in Europe, one in the U.S., one in Asia. You

 17 can switch between any of the three at will. You

 18 don't know which one is live at any one time.

 19 It's the same technology we put in place here in

 20 the U.S. It can work globally. And you have the

 21 ability if one regulator sort of cuts off access,

 22 which is what the other regulators are worried
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 1 about, that you can operate out of the other two.

 2 It's not perfect. All three regulators could cut

 3 off access to everybody else but that's unlikely.

 4 That still makes certain jurisdictions feel left

 5 out but when you look at -- the great bulk of the

 6 derivatives trading takes place jurisdictionally

 7 in the E.U. and in the U.S. I think actually by

 8 booking location, Switzerland probably follows and

 9 then Japan after that and that covers, you know,

 10 well over 95 percent of the activity. I think

 11 Singapore is starting to step up but that's -- I

 12 think that's pretty much where we are. Those

 13 aren't exact numbers.

 14 MS. MESA: Does somebody have something

 15 on this? Steve.

 16 MR. O'CONNOR: Yeah, I would echo Pete's

 17 comment. I think they do want their own SDR. So

 18 the trick is selling them or building something

 19 that's accessible. It's not exactly a local SDR

 20 only. It's just a view of their local market from

 21 the global system. And the trick is going to be

 22 permissioning. And we've been talking about
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 1 different instances in the U.S., you know,

 2 (inaudible) versus the clearinghouses. These guys

 3 would have 20 versions of that confusion. So

 4 that's got to be avoided at all costs. And

 5 permissioning is key and in the same way U.S.

 6 regulators would not want to have foreign

 7 regulators particularly to see transactions in

 8 U.S. product between U.S. bank and U.S. clients.

 9 They would not want you to see transactions

 10 between German Central Bank and German Bank in

 11 euro for the same reasons. And that's the trick

 12 of Pete job for the next few years I think.

 13 MS. MESA: Do you have anything else?

 14 Ananda, did you have another?

 15 MR. RADHAKRISHNAN: Yes. I wanted to

 16 ask a question about registration of SDRs. Our

 17 statute does not allow us to garner an exemption

 18 for registration similar to the power we have with

 19 DCS and SEF, which might mean that if you want to

 20 operate overseas -- well, what we cannot do is

 21 recognize you if you're registered overseas. So

 22 is that a good thing or is that a bad thing?
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 1 Well, we're stuck with it. You know, there is

 2 this requirement that we coordinate with foreign

 3 regulators. And so the question is should we be

 4 looking at a mammoth information sharing

 5 arrangement among regulators to get information

 6 providing we assure ourselves that we can get the

 7 information that we want? Because if you think

 8 about it, an SDR is basically an information

 9 gathering mechanism. Right? So the question is

 10 if you are satisfied with what you get and there's

 11 no cutoff of the information, why do you care

 12 whether you regulate them? So. What do people

 13 think about that?

 14 MR. AXILROD: Amen. If you could

 15 achieve that, that would be great. We're happy to

 16 have multiple regulators. We're not wedded to the

 17 model where everybody recognizes one regulator and

 18 so forth. And if you could use -- I understand

 19 that there's this indemnity provision in the

 20 statute but if -- I think the ODRF is a pretty

 21 good model in terms of process where you did get a

 22 lot of regulators worldwide to unofficially but
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 1 formally agree as to who got to see what and how

 2 information was going to be shared, that would be

 3 wonderful.

 4 MS. MESA: Brian, did you want to -- I

 5 think you were going to switch a little bit.

 6 Nobody had anything else on that?

 7 MR. BUSSEY: I wanted to go back to

 8 something that I think Kim said earlier in the

 9 session. Did I hear you speaking against the

 10 so-called geographic mandates that may be popping

 11 up in some jurisdictions? And if you were, I

 12 guess a two-part question. One for you: how would

 13 you suggest that we deal with those issues as

 14 regulators here in the states? And then I guess

 15 to the intermediaries, how are you thinking about

 16 dealing -- to the extent that we're not able to

 17 deal with the geographic mandates and there are

 18 going to be those in the world we're operating in

 19 three years how. How are you planning on dealing

 20 with those -- dealing with those types of

 21 mandates?

 22 MS. TAYLOR: I was speaking in a
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 1 cautionary way about the geographic mandates. And

 2 I think -- I think I would expand what I said

 3 earlier to actually apply on two levels now. I

 4 think -- my concern originally was related to

 5 concerns about either the execution or the

 6 clearing of a transaction in a certain product

 7 with a certain relevant underlying or by a certain

 8 entity or the combination of product and entity.

 9 There seemed to be early on quite a push by

 10 regulators that I don't think is gone to have

 11 those types of -- certain types of transactions be

 12 required to be cleared in certain jurisdictions.

 13 I think that is going to end up being problematic

 14 because it's a global market and different parties

 15 need to meet. And if you have a situation where

 16 the same product with different entities requires

 17 that it be cleared in two places, we've got a

 18 problem that is going to actually show itself by

 19 fragmenting the liquidity in the market and having

 20 people have less access to better pricing which I

 21 think was kind of one of the reasons for the

 22 legislation in the first place -- was to improve
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 1 market transparency and perhaps to improve market

 2 access. So I'm concerned about that.

 3 And then I would add to it, I think,

 4 this concern about the regulators mandating that

 5 there be duplicative reporting in different

 6 jurisdictions from the SDR point of view. I

 7 really do think that -- I really do think we can

 8 end up in a place where at least a cleared

 9 transaction ought to be able to be reported in one

 10 place, the place that it's cleared, and then there

 11 needs to be a mechanism for that data to be

 12 amalgamated in with data from either other places

 13 where trades are cleared or other places where

 14 trades are SDR'd if they are SDR'd and not cleared

 15 or if they're SDR'd in different places from where

 16 they're cleared. So I think there needs to be --

 17 unfortunately I'm not sure I see a way for the

 18 regulators to end up in a place where there's not

 19 more than one location for the information. And I

 20 do think as Ananda mentioned they're probably -- I

 21 think it was Ananda -- that there probably is

 22 going to be need to be a large regulatory
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 1 information sharing agreement that is kind of like

 2 beyond the scope of what has been in place before.

 3 I know there have been arrangements in place

 4 before but they seem conceptual more so than

 5 practical in a lot of cases. I don't know if

 6 they're really used a lot. It probably is hard

 7 for me to tell if they're really used a lot.

 8 But I would think that the access to

 9 information that regulators would need goes beyond

 10 caring about transactions in a certain underlying

 11 that would be relevant to them or I think as a

 12 risk management matter you would want to know what

 13 transactions, a party that you have a regulator

 14 nexus with clears or doesn't clear -- the

 15 transactions that AIG has regardless of what

 16 entity did them or where they are cleared or SDR'd

 17 or in what product they are, if it is related to

 18 taking down an entity you regulate I would think

 19 you'd want to have access to that. So I think

 20 it's a complex problem that you need to solve.

 21 But I don't think the right way to solve it is to

 22 have everybody mandate, clear it here, SDR it
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 1 here.

 2 MS. MESA: Iona.

 3 MS. LEVINE: I want to move it away from

 4 SDRs because we're not an SDR. And the more I

 5 listen to this the more I actually think the DTCC

 6 are welcomed to the market frankly. But that's

 7 not our official line. However, I want to sort of

 8 move us back to what you were talking about which

 9 was the sort of different geographical areas and

 10 what we sort of call the "balkanization" of

 11 clearing. So sort of the idea that either Japan

 12 or Australia or Canada would want its own

 13 clearinghouse.

 14 Leaving aside Japan, I think it's very

 15 interesting to note that they're sort of -- 95

 16 percent of all swaps are done in say four

 17 different jurisdictions. And I think there's a

 18 huge amount of machismo going around from the sort

 19 of smaller jurisdictions. They all sort of seem

 20 to be saying, well, we now want our own

 21 clearinghouse in which our domestic members have

 22 to be sort of clearing members. And I think
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 1 that's very interesting if Australia wants to set

 2 itself up or somebody else wants to set itself up

 3 with its own clearing members. The question is

 4 who else is going to play in the sandpit with

 5 them?

 6 And what this actually leads to is

 7 something that I'm less concerned about but which,

 8 you know, my clearing members should be more

 9 concerned about because if they're then required

 10 to go over to various other jurisdictions and also

 11 become members of those very much smaller CCPs,

 12 they then have to have another completely distinct

 13 booking office. They then have to become members.

 14 And I don't want to see -- and this is not an

 15 anti-competitive statement. I better kind of get

 16 that on the table first off. I don't want to sort

 17 of see a huge proliferation of clearinghouses. I

 18 really don't think that's the right way to go and

 19 I really think what you're talking about about

 20 links and examining links and how all of that

 21 works is important to throw into the pot. So I

 22 want to get away from SDRs and back to
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 1 clearinghouses, back to should we "balkanize" it?

 2 Should we allow the markets to become fragmented?

 3 Or, shouldn't we just say they're global markets.

 4 Let's regulate them properly. Let's not

 5 overregulate them. Let's regulate them to the

 6 right standard. Let's have memorandums of

 7 understanding in place and let's do it properly

 8 because we don't get another chance to do this

 9 again.

 10 MR. RADHAKRISHNAN: Thank you, Iona.

 11 This leads to an interesting question because one

 12 of the tasks that the regulatory community has

 13 been challenged to look at is this concept of

 14 interoperability which I believe was warded before

 15 in Europe and then it died because nobody quite

 16 understood what it was.

 17 MS. LEVINE: It's very popular in the

 18 equity space which we would say was a completely

 19 different asset class. And a lot of, you know,

 20 people looking at this from the risk perspective

 21 don't believe it's easy. It's not easy on default

 22 management. And so I think that the sort of
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 1 considered advice on the risk side is that there

 2 shouldn't be interoperability for these more

 3 complex projects -- products, rather and that it

 4 should be allowed with equities. And even with

 5 equities, it's slightly challenging.

 6 MR. RADHAKRISHNAN: The recent news

 7 we've heard in Europe about I think

 8 interoperability goes towards equity products,

 9 cash equities. So here's a question. What do

 10 people think about interoperability? Should it be

 11 mandated by regulators or should it be left up to

 12 CCPs to decide if they want to interoperate and

 13 ask for approval?

 14 MS. MESA: Steve.

 15 MR. O'CONNOR: Thank you. To quickly jump

 16 back to Brian's point on the interoperability, I think

 17 I agree with Kim and Iona that in a world that was

 18 free from the politics we would, you know, the markets

 19 would choose. There will be winners and losers. I

 20 think we're not in that world. I think certain

 21 jurisdictions have seen a little bit already.

 22 Dictate, you know, what they require in their own
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 1 jurisdiction. The market will just have to live with

 2 that. So if there are countries that require onshore

 3 clearing for certain products in their jurisdiction,

 4 clearly, you know, the participants will be there,

 5 which either leads to fragmented markets, which is not

 6 good for systemic risk and it's highly inefficient.

 7 Or you have to solve the interoperability riddle. And

 8 I think that's an enormous challenge. I mean, I've

 9 looked at that quite a lot and I think that the

 10 challenges in the OTC markets and particularly in

 11 terms of the risk management, the default management,

 12 margin policy, how losses become a monumental task

 13 that is sort of on the agenda at the same time as, you

 14 know, launching clearing itself. So getting more

 15 product into dealer clearing, launching client

 16 clearing, building FCMs where you didn't have them

 17 before, etcetera, etcetera. There's so much on the

 18 plates of the CCPs now to have any meaningful

 19 interoperability discussion is almost impossible I

 20 think. As a user, we would love that further; I just

 21 don't think it's feasible in the short-term.

 22 MR. BUSSEY: Will you, for example, in
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 1 Japan will you just -- if you want to do Japanese

 2 CDS, will you just have your Japanese affiliate

 3 member of the clearinghouse clear the trade for

 4 you as a client of the Japanese member so your

 5 U.S. affiliate would?

 6 MR. O'CONNOR: Well, that's starting off

 7 in the interdealer space so we are there, you

 8 know, we clear already through that onshore

 9 clearinghouse.

 10 MR. BUSSEY: Who does that?

 11 MR. O'CONNOR: Morgan Stanley's local

 12 subsidiary.

 13 And you know, it's worth noting that if

 14 I do trades with other U.S. banks or European

 15 banks in yen, that's already cleared offshore from

 16 Japan. So this is just for the local onshore.

 17 But, you know, if intermediaries want to be in

 18 those markets then they have to play by the rules

 19 and that's the cost of doing business there.

 20 Which may not be the right, you know, solution for

 21 global systemic risk but that's where we are.

 22 MS. MESA: Let's go Matthias, and then
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 1 Kim, and then Jonathan.

 2 MR. GRAULICH: Well, to the

 3 interoperability point, I think that, well, the

 4 mandate of the G-20 was to reduce systemic risk

 5 and I think there are a lot of studies and papers

 6 out which say, well, in particular for derivatives

 7 and I wouldn't limit it to OTC derivatives but all

 8 derivatives, interoperability is something which

 9 would introduce additional systemic risk. There

 10 are so many elements which, well, are really

 11 difficult to handle in particular in a crisis

 12 situation. We have now this discussion in Europe

 13 on cash equities. I mean, the risk is there today

 14 so it's, well, manageable. But still, as Iona

 15 said, it's still a challenge to get it done for

 16 cash equities and it should be a market, well,

 17 market-driven approach and not a regulatory-driven

 18 approach. So clearly interoperability shouldn't

 19 be mandated.

 20 MS. TAYLOR: I don't have really

 21 anything more to add to what Matthias said. Just,

 22 I would just I think reemphasize the point that
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 1 we're a big proponent of links between

 2 clearinghouses where they make commercial sense

 3 and risk management sense. And I think that

 4 warehousing the risk that happens with a

 5 derivatives transaction is a very different

 6 activity than managing the kind of t-plus x-days

 7 settlement risk that comes with cash equities. So

 8 I would echo the comments that have been made

 9 about the -- there are a lot of downsides in terms

 10 of the systemic risk protection I think that come

 11 from mandating interoperability in derivatives.

 12 MR. SHORT: I would echo those comments

 13 and emphasize that I don't think cash equities is

 14 a particularly good analogy to managing risks in

 15 the broader derivatives space where you can be

 16 talking about exposures that stretch out years.

 17 The other thing I would just note is when you look

 18 at the fundamental problem that I think Dodd-Frank

 19 was intended to address, we had the financial

 20 crisis with many institutions that were linked

 21 together and things started to get wobbly and

 22 people were afraid of one domino causing another
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 1 domino to fall, the idea that you're going to pass

 2 a law and funnel all of this supposedly dispersed

 3 OTC risk into a limited number of clearinghouses

 4 and then you're going to connect all of them

 5 together, that just doesn't seem like a

 6 particularly good idea to me if it's mandated by a

 7 regulator. If there's a point down the road where

 8 it makes sense and the people that are managing

 9 that risk believe that they can do it, that's

 10 another issue. But to have it mandated, I think

 11 is a terrible idea.

 12 MS. MESA: Wally.

 13 MR. TURBEVILLE: You might expect

 14 somebody from an organization like mine to say

 15 this is just a way for the big clearinghouses to

 16 keep the little guys out. However,

 17 interoperability is simply a transmittal device

 18 for risk and consequence. And one foul up at one

 19 clearinghouse could easily go to another

 20 clearinghouse. Ba-boom. So, in fact, I think it

 21 is in the public's interest for there not to be

 22 interoperability. However, I think it's very much
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 1 in the public's interest for the regulators to

 2 urge the major clearinghouses to have a form of

 3 hotline, people being able to talk to each other

 4 and be able to manage through events and make sure

 5 that those lines of communication are out there so

 6 that they can work together. But interoperability

 7 itself is maybe the worst of all the

 8 possibilities. I mean, a single clearinghouse for

 9 the world would be better than interoperability.

 10 MS. MESA: That's a statement. Ananda.

 11 MR. RADHAKRISHNAN: I wanted to ask a

 12 question which is sort of related to what I asked

 13 in the beginning of this panel session which is

 14 hinted at in the morning's panel, which is as

 15 follows, for those DCOs that are located outside

 16 the United States. Notice, Iona, I didn't say

 17 foreign DCOs. Those DCOs located outside the

 18 United States. The firms have come to us and have

 19 asked us to initiate a part 30-like regime, which

 20 -- and I don't think, with all due respect, I

 21 don't think they understand what it is they're

 22 asking for because if I understand what they're
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 1 asking for it is let the current clearing regime

 2 or clearing mechanism continue. The current

 3 clearing mechanism is, for example, in ICE Clear

 4 U.K., a U.S. customer has an account on the books

 5 of an FCM. That FCM has an anonymous account on

 6 the books of a U.K. firm. Right now that's fine.

 7 That complies with the law. Once Dodd-Frank

 8 becomes effective, you know, after the

 9 Commission's temporary exemptive order expires,

 10 that's not okay because that intermediary has to

 11 be a registered FCM.

 12 Now, I believe the DCOs have proceeded

 13 on that assumption but nevertheless this call,

 14 this cry almost for relief will not stop. I can

 15 bet you it will not stop. It's already out there.

 16 What do you guys -- what do you guys think about

 17 it, number one? And number two, if the Commission

 18 were inclined to do this, should we not also do it

 19 for all DCOs? Because otherwise we may be giving

 20 an advantage to some DCOs which we don't give to

 21 others. Question number two. Question number

 22 three, if we do this we will also have to give an
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 1 exemption to the segregation requirement and we'll

 2 have to make clear that the bankruptcy court

 3 doesn't apply because as I said in the beginning,

 4 everything flows from the fact that you're an FCM.

 5 So what do you think of the idea? Should we

 6 entertain it or should we say part 30 applies to

 7 foreign futures. These are not foreign futures.

 8 These are “Dodd-Frank swaps." No exceptions.

 9 MS. MESA: I'm going to let Jonathan

 10 answer that. He did mention ICE Clear Europe in

 11 the example. So Jonathan, do you want to --

 12 MR. SHORT: Thanks, Iona. I always

 13 believe in siding with the customer, Ananda, so I

 14 think it's a fabulous idea what they're

 15 suggesting.

 16 No, I mean, I think you do kind of hit

 17 the nail on the head though, when you say that a

 18 lot of the protections under the act flow from

 19 being an FCM. So it's not -- it's not as easy as

 20 saying, okay, let's grant relief and everything's

 21 fantastic. You know, I think what you described

 22 at the beginning about how accounts are set up to
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 1 clear at ICE Clear Europe is accurate. That is

 2 what happens today. That said, I think we've had

 3 good uptake from our clearing participants moving

 4 down the road towards getting their business set

 5 up through FCMs. You know, in all candor, you

 6 know, our customers are being asked to do a lot of

 7 things right now and they, like everybody else,

 8 have limited resources and they're being pulled in

 9 a lot of different directions. So I guess I'll

 10 kick it back to Iona on that.

 11 MS. LEVINE: Gee, thanks, Jonathan. I

 12 think that there's a difference between temporary

 13 relief and sort of permanent relief. And I don't

 14 think we've got any problems with the FCM model at

 15 all. In fact, we've completely embraced it. It's

 16 been running for some time. It's completely

 17 successful. Everybody understands what they're

 18 getting. They understand the segregation. You

 19 know, they've all sort of stepped up to the plate.

 20 I think that there's a difference where what you

 21 were running with an exempt commercial market and

 22 if you were running an exempt commercial market,
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 1 say you weren't regulated, okay, and you know, you

 2 were doing it through people who run FCMs, I think

 3 there is a sort of short order to switch over and

 4 make sure customers get the protection through

 5 FCMs. So I can see, you know, temporary relief

 6 being good but I think it should be a level

 7 playing field and I think it should be all FCMs.

 8 MR. GRAULICH: Well, I think emphasize

 9 it at the beginning. I think it's a good idea to

 10 entertain that. I think reciprocity is a very

 11 important aspect. I think that it's been up for

 12 discussion between the regulators at the end to

 13 make sure that, well, this reciprocity is

 14 established. The other element on client asset

 15 protection, I think what should be entertained is

 16 there are different solutions to make sure that

 17 client assets are protected. And this pretty much

 18 depends on the bankruptcy regime in the country

 19 where the CCP is domiciled. And I think there is

 20 not one solution fits all. And what I believe,

 21 and this is also part of the CPSS. I asked for

 22 recommendations where it says, well, CCP needs to
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 1 make certain that it is legally enforceable or has

 2 legally enforceable powers and a framework. And,

 3 I mean, what you can demand, for example, is to

 4 say, well, you need to show me a legal opinion

 5 that this segregation regime is under your service

 6 offering enforceable and I think with that element

 7 you can give, well, different solutions a chance

 8 or different solutions can be there for different

 9 frameworks.

 10 MS. MESA: Kim.

 11 MS. TAYLOR: Yeah, I would -- I can't

 12 help but point out that's actually where we

 13 started with the customer protection mechanism for

 14 the OTC derivatives. I do think it is

 15 inconsistent with some of the other concerns that

 16 customers are voicing at this point in time so I

 17 think that would need to be certainly resolved so

 18 that it's clear that we're solving the right

 19 problem or that you're solving the right problem.

 20 But I think the main thing I would want to say is

 21 that if this were an exemption that were available

 22 to DCOs that are not located here, I think you
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 1 would probably want to consider making it

 2 available for DCOs who are located here or you

 3 could find yourself, if it's an attractive option

 4 for the customers, with no DCOs located here. So

 5 I would encourage the level playing field aspect.

 6 MR. RADHAKRISHNAN: That's a good point.

 7 I think, if the Commission were minded to go this

 8 way, we would have to offer it to DCOs located in

 9 the United States -- physically located in the

 10 United States -- DCOs not located in the United

 11 States, and do it in conjunction with a

 12 comparability regime just so the playing field is

 13 level for everybody. Otherwise, if we were to go

 14 down the you don't have to register with us if

 15 you're comparably regulated, that's not fair on

 16 those of you who register as DCOs. Right? So I

 17 think that -- this is what I think. I think you

 18 can't have one without the other. And I agree

 19 with you, Kim. I think if we were to allow

 20 intermediation at a DCO not to take place through

 21 a FCM, it shouldn't make a difference whether it's

 22 a DCO located in the United States or a DCO
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 1 located outside the United States.

 2 MS. MESA: Well, I know the time is

 3 coming to an end but I just have one more

 4 question. In case you feel like your one point

 5 didn't get addressed today during the panel, is

 6 there one issue that is troubling you? When you

 7 think about the global swaps market and rules that

 8 we're applying in the U.S. and the potential

 9 legislation around the world, what is your number

 10 one concern? Not everyone has to answer and no

 11 one has to answer. But if you have something that

 12 you really want to talk about, let's hear it now

 13 before we conclude.

 14 Okay, Pete.

 15 MR. AXILROD: Yeah. Simply put, if the

 16 market participants around the world have their

 17 interests actually line up with the regulators'

 18 interests around the world -- it doesn't happen

 19 that often but I think it will happen in the area

 20 of repositories just to keep market -- publication

 21 of macro facts about the market accurate -- take

 22 yes for an answer.
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 1 MS. MESA: Kim.

 2 MS. TAYLOR: I think that the point that

 3 I would like to make, and I probably should have

 4 raised it when we were talking about comparability

 5 regimes and cross recognition, is actually that --

 6 I would encourage regulators to take a very hard

 7 look at what I'll call the capital reserve

 8 situation at clearinghouses. And for a

 9 clearinghouse, the capital reserve is actually the

 10 financial safeguards package, primarily the

 11 guaranteed funds. Sometimes assessment power.

 12 Sometimes contributions by the clearinghouse or

 13 the entity that owns the clearinghouse itself.

 14 But if I think back at what actually was kind of

 15 the strong contributor to the crisis situation, I

 16 think if I had to boil it down to one thing I

 17 would boil it down to lack of appropriate capital

 18 reserves at certain types of financial entities to

 19 cover the tail risk on the exposures that they

 20 had.

 21 And the clearinghouse covers tail risk

 22 in two ways. One is by margin and one is by the
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 1 guaranty fund. But no matter what you do with the

 2 margin, you want to make sure that you have enough

 3 capital reserve at the clearinghouse to withstand

 4 a failure of your assumptions or a failure of your

 5 model, or a set of different conditions. You can

 6 always have a worst case scenario that's worse in

 7 the future than anything that you would have

 8 estimated in the past. And since everything is

 9 being encouraged to funnel through the

 10 clearinghouses as intermediaries, I think it's

 11 important that they have appropriate capital

 12 reserves.

 13 MS. MESA: Wally.

 14 MR. TURBEVILLE: I got -- this is not my

 15 real point -- Kim is completely right. And I also

 16 encourage folks to look at capital reserves and

 17 not be bound by historic events. And I think

 18 events applied to historic events are good enough

 19 because there are black swans.

 20 The most important thing I think is from

 21 -- is the information and not the collection of

 22 the information but what is done with the
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 1 information for both -- the trade data -- for both

 2 dissemination, which was not discussed really

 3 today but is actually a mission of Dodd-Frank to

 4 cause dissemination to occur. And for the

 5 regulators so that the information is usable,

 6 uniform, and understandable on a very rapid basis.

 7 And if -- otherwise, I really do fear that the

 8 gathering of the information will be much less

 9 useful than it could be.

 10 MS. MESA: So Steve, Jonathan, and then

 11 Iona and Matthias.

 12 MR. O'CONNOR: If I may jump back to the

 13 morning, I would say that the most important thing

 14 is to have a level playing field between market

 15 participants, both in the U.S. and in Europe.

 16 Those playing fields don't themselves have to be

 17 at the same level but when trading with clients in

 18 either location the rules have to be the same for

 19 all banks, all dealers in those markets. Because

 20 otherwise, particularly from the U.S. bank

 21 perspective it would be ironic if the reach of

 22 Dodd-Frank with the U.S. going first and setting
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 1 an example to the world, had an adverse impact on

 2 U.S. institutions and was most harmful to them.

 3 MR. SHORT: I think this point has been

 4 touched on in different ways but just going back

 5 up to 50,000 feet I would just say that in

 6 promulgating the rules that are about to be

 7 promulgated, I think it's important just to

 8 maintain flexibility to take into account what is

 9 going to be happening in other countries. I mean,

 10 I think it's a source of pride that we got

 11 Dodd-Frank out and everybody has, you know, worked

 12 for the last year to promulgate these rules. But,

 13 you know, there will be differences in the

 14 regulatory regimes and I think it's important for

 15 us to maintain enough flexibility to take into

 16 account what other countries may be doing because

 17 ultimately all of this needs to bolt together and

 18 it's a global market and what we went through is a

 19 global problem.

 20 I think it's good that Dodd-Frank came

 21 out first but it means that you're in this sort of

 22 unenviable position of being thought leaders. So
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 1 everybody is really looking to you guys to get it

 2 right.

 3 From my perspective there are a couple

 4 of things. I think the thing that bothers me the

 5 most and makes me sleep at night the least is not

 6 the fact that the rules won't be identical because

 7 I doubt if they will be identical. But it's the

 8 consequences of them not being identical that

 9 matters to me. Say, for example, if I'm quite

 10 able to ring fence one rule and do it one way and

 11 ring fence another rule and do it the other way

 12 and it's still acceptable to everybody, then

 13 that's fine. But if differences are not allowed

 14 to persist through rules that have been

 15 promulgated by the regulators, then I think that's

 16 going to be a problem for the markets and a

 17 problem for everybody. So let's say if we can't

 18 get consistency, at least let's go to the highest

 19 standard of all rules which we can live with and

 20 make sure that nobody has a problem with that.

 21 The second thing that bothers me is

 22 actually -- and here I'll jump to this, LCH being
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 1 (inaudible) focus now -- it's sort of what happens

 2 to my clients, my clearing members. How many

 3 different kinds of entity need to join the

 4 clearinghouses in how many different guises? You

 5 know, I think that's the sort of thing that the

 6 previous panel dealt with.

 7 MS. MESA: Matthias and then James.

 8 MR. GRAULICH: Yeah, I think, well,

 9 reduction of systemic risk is well on our agendas

 10 and there are many initiatives going on to make

 11 that work. I think what shouldn't be forgotten is

 12 the efficiency aspect. So we're doing a lot to

 13 reduce systemic risk. Sometimes it appears that

 14 it is at the cost of efficiency, so that element

 15 shouldn't be forgotten. And I think one remark

 16 towards the regulator, I think international

 17 cooperation between regulators is really a key

 18 topic which would help a lot to avoid double

 19 regulation and a loss in efficiency.

 20 MR. CAWLEY: Just one thing that, you

 21 know, we look at is there's naturally going to be

 22 a tension between, you know, rules that come from
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 1 Dodd-Frank here in the United States relative to

 2 rules overseas. And I think that the expectation

 3 that you're going to have perfect lining up of

 4 rules across the world is just not going to happen

 5 and one has to live with in reality. What Iona

 6 said is correct, the United States has gone first

 7 here and we should remember, you know, what we're

 8 here to do and that is where on one hand not lose

 9 the competitiveness of the U.S. capital markets

 10 but also protect the American public and the

 11 taxpayer. And one of the things to that end is to

 12 ensure that you do have an open and level playing

 13 field that's transparent.

 14 And I think if you look within

 15 historical context and you look back to the

 16 creation of let's say the SEC back in the 30s,

 17 you'll see that there were the same arguments that

 18 were used. Should we delay things relative to

 19 what our foreign counterparts do? Or should we go

 20 ahead? And I think it's proven the test. It's

 21 stood the test of time and that is that rational

 22 investors gravitate towards fair, level, and
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 1 transparent playing fields that are consistent.

 2 And I think you can look back to the ‘30s for that

 3 for your further guidance there.

 4 MS. MESA: Well, I want to thank the

 5 panelists today. Your input was really important

 6 and we will take back what we've learned and think

 7 a little bit more.

 8 I want to thank the SEC for traveling

 9 our way for this roundtable and for the staff of

 10 the CFTC and SEC for all their work. I just have

 11 to point out Anuradha Banerjee and Warren Gorlick

 12 who worked really hard from my staff on every

 13 logistical detail and the substance. So thanks to

 14 everyone.

 15 (Applause)

 16 (Whereupon, at 4:09 p.m., the

 17 PROCEEDINGS were adjourned.)

 18 * * * * *

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