UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 OPEN MEETING ON THE 29TH SERIES OF RULEMAKINGS

 UNDER THE DODD-FRANK ACT

 Washington, D.C.

 Thursday, May 16, 2013
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 1 PARTICIPANTS:

 2 Commission Members:

 3 GARY GENSLER, Chairman

 4 BART CHILTON, Commissioner

 5 JILL E. SOMMERS, Commissioner

 6 SCOTT D. O'MALIA, Commissioner

 7 MARK WETJEN, Commissioner

 8 Presentation 1: Final Rule: Procedures to

 Establish Appropriate Minimum Block Size for Large

 9 Notional Off-Facility Swaps and Block Trades:

 10 JOHN DUNFEE, Office of the General Counsel

 11 ESEN ONUR, Office of the Chief Economist

 12 NHAN NGUYEN, Division of Market Oversight

 13 GEORGE PULLEN, Division of Market Oversight

 14 RICK SHILTS, Division of Market Oversight

 15 Presentation No. 2: Final Rule: Process for a

 Designated Contract Market or Swap Execution

 16 Facility to Make a Swap Available to Trade Under

 Section 2h(8) of the Commodity Exchange Act (CEA);

 17 Swap Transaction Compliance and Implementation

 Schedule; Trade Execution Required Under 2h of the

 18 CEA:

 19 NHAN NGUYEN, Division of Market Oversight

 20 RICK SHILTS, Division of Market Oversight

 21 DAVID VAN WAGNER, Division of Market Oversight

 22
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 1 PARTICIPANTS (CONT'D):

 2 SAYEE SRINIVASAN, Office of the Chief

 Economist

 3

 MICHAEL PENICK, Office of the Chief Economist

 4

 5 Presentation No. 3: Final Rule: Core Principles

 and Other Requirements for Swap Execution

 6 Facilities:

 7 AMIR ZAIDI, Division of Market Oversight

 8 RICK SHILTS, Division of Market Oversight

 9 DAVID VAN WAGNER, Division of Market Oversight

 10 JONATHAN MARCUS, Office of the General Counsel

 11 ADRIANNE JOVES, Office of the General Counsel

 12 MICHAEL PENICK, Office of the Chief Economist

 13 SAYEE SRINIVASAN, Office of the Chief

 Economist

 14

 Presentation No. 4: Anti-Disruptive Practices

 15 Authority -- Interpretive Guidance and Policy

 Statement:

 16

 17 DAVID MEISTER, Division of Enforcement

 18 ROBERT PEASE, Division of Enforcement

 19 JONATHAN MARCUS, Office of the General Counsel

 20

 21 * * * * *

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

 2 (10:00 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 is a public meeting of the Commodities Futures

 5 Trading Commission. I'd like to welcome members

 6 of the public, market participants, and members of

 7 the media, as well as those listening to this

 8 meeting on the phone and watching the webcast.

 9 We will consider today three Dodd-Frank

 10 reform rules that together bring transparency to

 11 the swaps market before a transaction takes place,

 12 so-called pre-trade transparency. These rules are

 13 (1) procedures to establish minimum block sizes

 14 for swaps; (2) a process for a swap execution

 15 facility or a designated contract market to make a

 16 swap available to trade; and (3) core principles

 17 and registration for swap execution facilities.

 18 In addition, we will consider today an

 19 interpretive guidance regarding anti-disruptive

 20 trading practices authority.

 21 I'd like to thank Commissioners Sommers,

 22 Chilton, O'Malia, and Wetjen for their
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 1 contributions to this rule-writing process and all

 2 of the CFTC's hard-working and dedicated staff. I

 3 also want to express my condolences to

 4 Commissioner Chilton and all of his family for the

 5 loss of his stepfather last week, Ron, and I hope

 6 that Bart has been able to join us. I think he's

 7 closer to family right now but I just want to

 8 check.

 9 Bart, are you on?

 10 COMMISSIONER CHILTON: I am, Mr.

 11 Chairman. Thank you for the condolences. But I'm

 12 with you. Thank you.

 13 CHAIRMAN GENSLER: Great. I see you're

 14 on the video link. Good.

 15 Today the CFTC is voting on reforms that

 16 will make public transparency in the swaps market

 17 a reality. These reforms will make a trade

 18 execution requirement come to life. And though

 19 many of the 50 or more rules we have completed

 20 before today have brought transparency to this

 21 once opaque swaps market, today we take a

 22 significant step to open up this market.
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 1 I want to underscore the significance of

 2 these three rules taken together. When light

 3 shines on a market, the economy and public

 4 benefit. These three rules -- the block swap

 5 rule, the made available for trading rule, and the

 6 swap execution facility rule taken together will

 7 provide the public with information trade-by-trade

 8 that it didn't have before. These three rules

 9 taken together will provide the public with the

 10 price and volume of every transaction in real-time

 11 -- and I mean in real-time as Congress says as

 12 soon as technologically practical. With these

 13 three rules taken together, they mean that anyone

 14 in the marketplace can compete and offer to buy or

 15 sell a swap and can communicate that to the rest

 16 of the public. And with these three rules today,

 17 no longer will this be a closed, dark market.

 18 The 2008 financial crisis, caused in

 19 part by the unregulated swaps market, led to 8

 20 million Americans losing their jobs. It led to

 21 millions being forced out of their homes. And in

 22 the aftermath of the crisis, President Obama,
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 1 along with the leaders of 20 other nations called

 2 the G-20 leaders, committed during a summit in

 3 Pittsburgh in 2009, nearly four years ago to bring

 4 needed transparency and oversight to the swaps

 5 marketplace. The leaders of the world's largest

 6 economies agreed, and I will quote, "All

 7 standardized OTC derivative contracts should be

 8 traded on exchanges or on electronic trading

 9 platforms where appropriate." It is that

 10 commitment of these G-20 leaders that we come

 11 together to consider to finalize rules today.

 12 Congress fulfilled this commitment by

 13 including trade execution requirements in the

 14 Dodd-Frank Act. This means that swaps subject to

 15 mandatory clearing and made available to trade

 16 will move to transparent trading platforms.

 17 Market participants will benefit from the price

 18 competition that comes from trading platforms

 19 where multiple participants have the ability to

 20 trade swaps by accepting bids and offers made by

 21 multiple participants. Congress also said that

 22 market participants must have impartial access to
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 1 such platforms so they would be open and

 2 competitive.

 3 In addition, Congress mandated that the

 4 public benefit from seeing the price and volume of

 5 swaps transactions smaller than a block size in

 6 real-time, or as Congress said, as soon as

 7 technologically practical after a trade is

 8 executed. So farmers, ranchers, producers, and

 9 commercial companies that want to hedge a risk by

 10 locking in a future price or rate will get the

 11 benefit of this competition and transparency

 12 through trading platforms called SEFs and

 13 designated contract markets. These transparent

 14 platforms will give everyone looking to compete in

 15 the marketplace the ability to see the prices of

 16 available bids and offers prior to making a

 17 decision on a transaction. And by the end of this

 18 year a significant portion of the interest rate

 19 and credit derivative swaps market will likely be

 20 in full view in the marketplace before a

 21 transaction occurs. This is a very significant

 22 shift towards market transparency away from the
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 1 status quo.

 2 Such common sense transparency has

 3 existed in the securities and futures markets for

 4 decades, and this transparency has lowered cost

 5 for investors, businesses, and consumers as it

 6 shifts information from the dealer community to

 7 the broader public. And it's that type of

 8 transparency that Congress mandated should be

 9 brought to this market, the swaps market. And as

 10 Congress made clear in the law, trading on SEFs

 11 and these designated contract markets will be

 12 required only when it's a financial institution

 13 transacting with another financial institution on

 14 swaps. End-users will benefit from the access to

 15 the information in these platforms but will not be

 16 required to use them. Further, companies will be

 17 able to continue relying on customized

 18 transactions, those not required to be cleared to

 19 meet their particular needs as well as to enter

 20 into large block trades. And consistent with

 21 Congress's directive that multiple parties have

 22 the ability to trade with multiple parties on
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 1 these trading platforms, these reforms require

 2 that market participants trade through an order

 3 book and provide the flexibility as well to seek

 4 requests for quotes.

 5 So to be registered as a SEF, these

 6 rules provide that a trading platform will be

 7 required to provide an order book to all its

 8 market participants. This alone is a very

 9 significant feature as for the first time the

 10 broad public will be able to gain access and

 11 compete in this market with the assurance that if

 12 they make a bid and they make an offer it will be

 13 communicated to the rest of the market. This

 14 provision alone will significantly enhance

 15 transparency and competition in the market. SEFs

 16 also will have the flexibility to trade through

 17 requests for quotes. The rule provides that such

 18 requests would have to go out to a minimum of

 19 three unaffiliated market participants before a

 20 swap is executed. This is just for those that are

 21 cleared and made available for trading and less

 22 than a block size.
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 1 There will be an initial phase-in period

 2 with a minimum of two participants to smooth this

 3 transition. As long as the minimum functionality

 4 is met, an order book, a request for COS model and

 5 so forth, as detailed in the rule, and the SEF

 6 complies with these rules and the core principles,

 7 the SEF can conduct business through any means of

 8 interstate commerce. Yes, that includes a

 9 telephone, even the mail, the Internet, computers.

 10 Thus, today's rule as we consider it is technology

 11 neutral.

 12 Under these transparency reforms, the

 13 trade execution requirement will be phased in for

 14 market participants giving them time to comply. I

 15 think that today's reforms also fulfill the

 16 congressional mandate for the CFTC to set up

 17 appropriate minimum block sizes. Trades smaller

 18 than a block will be reported as soon as

 19 technologically practicable, enhancing

 20 transparency, and this will build upon the public

 21 reporting that began last December 31st. With

 22 today's trade execution reforms, all the major
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 1 building blocks of swaps market reform will be

 2 complete -- transparency, clearing, and swap

 3 dealer oversight.

 4 Looking forward with over 90 percent of

 5 our rules behind us if we move forward today on

 6 these four rules, it's a priority that the

 7 Commission finalizes guidance on cross-border

 8 application of swaps market reform, ensuring it

 9 appropriately covers the risk of U.S. affiliates

 10 operating offshore. The Commission is also

 11 pursuing an appeal of the District Court's adverse

 12 ruling with regard to position limits. I have

 13 also directed the staff to prepare a new proposed

 14 rule for the Commission's consideration to

 15 implement the speculative position limits required

 16 by Dodd-Frank.

 17 And with that, before we hear from the

 18 staff that will consider their suggestions today,

 19 I will recognize my other fellow commissioners for

 20 their opening statements.

 21 Commissioner Sommers.

 22 COMMISSIONER SOMMERS: Good morning.
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 1 Thank you, Mr. Chairman.

 2 This is a momentous day for the

 3 Commission and for market participants because we

 4 are finalizing the long-awaited trade execution

 5 rules. And also for me personally because this is

 6 likely the last time I will participate in an open

 7 meeting to consider Dodd-Frank rules.

 8 It has been an incredible learning

 9 experience for me over the past three years, and

 10 although I think the Commission would have reached

 11 different conclusions on many of the foundational

 12 rules if we had been consulted earlier in the

 13 process, I really appreciate all the time that the

 14 staff has dedicated to this very challenging and

 15 oftentimes overwhelming task that we have been

 16 given.

 17 Today, we are considering rules on swap

 18 execution facilities, minimum block sizes for

 19 swaps, the process to make a swap available to

 20 trade under 2h(8) of the Commodity Exchange Act,

 21 and guidance on how we will interpret the

 22 disruptive trade practices authority contained in
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 1 4c(a)(5).

 2 That is a lot of ground to cover so I

 3 will make my comments brief.

 4 With respect to setting block sizes, I

 5 have acknowledged in the past the difficulty of

 6 establishing the appropriate minimum thresholds.

 7 The goal is to promote transparency as much as

 8 possible without reducing liquidity in various

 9 markets. The Commission cannot achieve this goal

 10 without appropriate data. When we proposed the

 11 block rules, I applauded the team's effort to

 12 analyze the data that was available at that time

 13 in interest rates and credit default asset

 14 classes, but noted that the team had only access

 15 to three months' worth of data from 2010.

 16 Regrettably, even though reporting has

 17 begun in the swaps markets, we are relying on the

 18 same stale data to support the final rule. We are

 19 also finalizing the 67 percent notional amount

 20 formula, which as I observed at the proposal

 21 stage, would allow for only the largest 6 percent

 22 of all interest rate and credit default swaps to
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 1 be executed as blocks, and we are applying the 67

 2 percent formula across all asset classes. This

 3 approach, in my view, ignores Congress's mandate

 4 that we take into account the impact of public

 5 disclosure on liquidity when setting block sizes.

 6 These are not "one size fits all" markets, and we

 7 should not be adopting a "one size fits all"

 8 approach.

 9 I appreciate that we will initially use

 10 a 50 percent notional amount formula in order to

 11 phase in the impact of the minimum block sizes,

 12 but the rules provide for an automatic adjustment

 13 to the 67 percent formula after one year no matter

 14 what the data shows at that time. Minimum block

 15 sizes should be driven by the most current

 16 objective data available, not an automatic across

 17 the board formula based on stale data.

 18 My objections to the made available for

 19 trading rules also remain the same as when we

 20 proposed these rules. A few minor revisions have

 21 been incorporated into the final rules, but as

 22 proposed, the final rules provide the designated
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 1 contract markets and SEFs, rather than the

 2 Commission, will make the determination of when a

 3 swap has been made available to trade by

 4 considering a list of factors that fail to contain

 5 any objective standards.

 6 Although we claim we will review the

 7 certifications or requests for approval to

 8 determine whether a swap is suitable for the

 9 mandatory execution requirements, in fact, our

 10 hands are tied. Unless a MAT determination is in

 11 consideration with the act or our regulations, we

 12 must approve it or deem it approved. But because

 13 neither the act nor the final rules contain any

 14 objective requirements that a swap must meet for a

 15 MAT determination to be valid, it is difficult to

 16 envision how we could ever find such a

 17 determination to be inconsistent with the act or

 18 regulation. This approach allows a SEF or DCM to

 19 bind the entire marketplace to a trade execution

 20 requirement as long as the swap must be cleared,

 21 even if liquidity is lacking. This is overly

 22 broad, potentially inconsistent with foreign
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 1 regulations, and just plain bad policy.

 2 I suppose we are crossing our fingers

 3 and hoping that SEFs and DCMs will be reasonable

 4 when they make their MAT submissions, and will

 5 submit only highly liquid products that are truly

 6 suitable for mandatory execution requirements.

 7 But I would not count on that.

 8 My comments on the disruptive trading

 9 practices guidance relate to my hope that the

 10 guidance has clarified how we intend to apply this

 11 authority in our enforcement actions. Guidance

 12 should be helpful and not create more questions

 13 than it answers. While we have made some

 14 improvements in the final guidance, I am hopeful

 15 that as time passes the Commission may be able to

 16 provide more clarity to help the market in certain

 17 areas.

 18 With regard to the SEF rulemaking,

 19 although a lot of noise has been made in the press

 20 about the request-for-quote number, I have a

 21 number of other concerns with the SEF final rules.

 22 As with many of our rules, we have gone beyond
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 1 congressional intent by imposing requirements not

 2 called for by the statute -- the order book and

 3 RFQ requirements, to name just a few. Nothing in

 4 the statute mandates these minimum trade

 5 functionalities. We made them up. This puts us

 6 out of sync with the SEC and I suspect with

 7 foreign regulators when they finalize their rules.

 8 I'm glad that we have lowered the RFQ

 9 requirement from 5 to 2 initially, but as with the

 10 block rules, the SEF final rules provide for an

 11 automatic bump to 3 after one year for all

 12 contracts that must be cleared, no matter what the

 13 data shows or how illiquid these contracts may be.

 14 We should base any decision to increase the RFQ

 15 requirements on objective data. There is no

 16 reason not to. We have taken a very narrow

 17 interpretation of what the statute allows and

 18 incorporated it into these final rules. I believe

 19 we will regret this restrictive approach because

 20 it may cause the U.S. to lose this business to

 21 foreign jurisdictions that do not stifle illiquid

 22 contracts in this way.
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 1 I also have questions about why we have

 2 refused to contemplate a framework that would

 3 allow for exempt SEFs and exempt DCOs, which are

 4 clearly included in the statute. Although both

 5 concepts are mentioned in the preamble, we fail to

 6 give any commitment to develop a process for

 7 determining this exempt status.

 8 I look forward to all of the staff

 9 presentations and to asking some additional

 10 questions but would like to finally say that I

 11 want to thank especially my staff that I have been

 12 privileged to work with over the last six years,

 13 as well as the entire Commission staff. Truly I

 14 want to thank you for everything that you've done

 15 for me and wish all of my colleagues my gratitude

 16 for their kindness and respect, and best wishes as

 17 you continue your public service. Thank you.

 18 CHAIRMAN GENSLER: I want to pause for a

 19 moment and thank Ms. Sommers for your service and

 20 for your friendship. I know that we sometimes

 21 come at these rules in the day-to-day life with a

 22 little bit different perspective. We've agreed
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 1 far more than we haven't, and anytime that we've

 2 disagreed we've always, I think, disagreed

 3 agreeably. And you have been a marvelous

 4 colleague and a remarkable, dedicated public

 5 servant. And I thank you. For four years we've

 6 served together.

 7 Commissioner Chilton, I think, on a

 8 video somewhere.

 9 COMMISSIONER CHILTON: Yeah, I'm here.

 10 Thank you, Mr. Chairman. Thank you, Commissioner

 11 Sommers for all your service. We came in at the

 12 same time and I very much enjoyed working with

 13 you, including on some work we did on the SEF

 14 rule, which quite frankly I think might have been

 15 a better compromise than we're dealing with today.

 16 But thank you for trying to work to get some of

 17 these things done. Whenever you had a suggestion

 18 it was always very thoughtful and a lot of times

 19 made the rules better, even if once in a while you

 20 didn't vote for it you made the rules better and

 21 that's very admirable. So we're going to miss

 22 you.
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 1 So I've never been a more sort of

 2 reluctant and reticent regulator than today on

 3 these rules. I think we need to do them. They've

 4 been out there for a long, long time -- too long.

 5 But I'm just not super plussed by what we have.

 6 I'm not saying they're bad and I'm not saying the

 7 staff didn't work hard, but I just wish we had

 8 reached a different compromise.

 9 You know, Churchill had this great quote

 10 about how the English always blurred the lines on

 11 everything, and I think we really blurred the

 12 lines on some of these proposals, in particular on

 13 SEF. And I think we could have had more

 14 transparency and still been totally consistent

 15 with the law. I think we've done just the bare

 16 minimum of what those who voted for Dodd-Frank

 17 envisioned.

 18 At the same time, I think those who

 19 voted for Dodd-Frank and the president who fought

 20 for it, I think they'd also say, well, look,

 21 there's two things that have been going on while

 22 we've been sort of messing around trying to figure
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 1 this out. One is that we've seen this

 2 futurization going on, so we've seen, you know,

 3 swaps getting moved to exchanges, some of the

 4 standardized swaps, and that brings a regulatory

 5 light to those swaps, but it also was a disservice

 6 to the would-be SEFs. By default, we've been

 7 creating winners and losers, and that's not

 8 appropriate.

 9 And the second reason that we really

 10 have to act is that something that the Chairman

 11 spoke about. These dark markets, the swap

 12 markets, they were part and parcel to the economic

 13 collapse. So if we don't do anything, they're

 14 totally unregulated and the futurization will

 15 continue. So as I said, I'm sort of a really

 16 reluctant, reticent regulator today, but I think

 17 we need to move forward.

 18 I do have some questions, and I do want

 19 to get some clarification on a few things as we go

 20 through, but at the end of the day Dodd-Frank was

 21 about getting rules and regulations for dark

 22 markets in place almost above all else. And I
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 1 hope that we end up doing that. Thank you.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner Chilton.

 4 Commissioner O'Malia.

 5 COMMISSIONER O'MALIA: Well, I guess I

 6 didn't appreciate the fact that this could be your

 7 last meeting. And I didn't write a speech for

 8 that.

 9 COMMISSIONER SOMMERS: You can sing a

 10 song.

 11 COMMISSIONER O'MALIA: I cannot sing a

 12 song. But what I propose to do since it's -- we

 13 only have the microphones, but I know everybody in

 14 the audience and the press at the staff table all

 15 appreciate your efforts. So I think it would be

 16 appropriate we all stand and recognize Jill for

 17 her efforts.

 18 (Applause)

 19 COMMISSIONER O'MALIA: It's really a

 20 remarkable career in public service, private

 21 sector. She was very helpful to me when I arrived

 22 here in helping me navigate the building,
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 1 understand the process, et cetera. So I am

 2 grateful for all your advice and counsel and

 3 recommendations. So, a great run. We look

 4 forward to seeing what you're going to do next.

 5 Mr. Chairman, thank you for calling this

 6 meeting to finalize a critical suite of rules

 7 regarding swap execution. The adoption of these

 8 rules will bring the Commission in compliance with

 9 three of the four principles agreed to by the G-20

 10 nations who finalized the Pittsburgh Communiqué

 11 back on September 25, 2009. The three principles

 12 that have been achieved so far are the reporting

 13 of all trades to a trade repository; requiring

 14 that all standard OTC derivatives be traded on

 15 exchange or electronic platform where appropriate;

 16 and clearing through central counterparties.

 17 Notably, the data rules were one of the

 18 first sets of rules implemented by the Commission.

 19 While these rules are not without flaws, data is

 20 the foundational element of which our regulatory

 21 oversight begins because it shines a light on the

 22 true makeup of the market, including the trading
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 1 and risk relationships of this previously opaque

 2 market. From this point forward, the excuse of

 3 "we don't have the data" simply does not hold

 4 water. We have three SDRs, all collecting

 5 information regarding real-time, historic, and

 6 regulatory data. The big question in my mind is

 7 will we use the data to support decisions by this

 8 Commission, or will we selectively ignore the

 9 facts when it doesn't suit our concerns and our

 10 outcomes?

 11 Of course, this achievement wouldn't be

 12 possible without the hard work and dedication of

 13 the staff, who have labored endlessly to put

 14 together the thousands of pages we're considering

 15 here today. Everybody at the table, everybody who

 16 is coming to the table, thank you very much for

 17 your patience and time and effort to help explain

 18 the rules to me, work through the comment letters,

 19 et cetera. I greatly appreciate all the work

 20 you've done and all the forces that have been upon

 21 you.

 22 I would also like to recognize Bella
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 1 Rozenberg, who had the responsibility for both the

 2 SEF and "made available for trade" rules prior to

 3 coming to my office. She has done a marvelous job

 4 in service to this Commission as well.

 5 Today, the big rule everybody is waiting

 6 for is the swap execution facility final rule. It

 7 has been over two years since the draft rule was

 8 first voted on back in January 2011. Since that

 9 date, the product has evolved, but it has always

 10 remained a little more prescriptive and limiting

 11 than what was required by the statute. Having

 12 said that, I'm excited about the opportunity SEFs

 13 will provide in bringing transparency to the swap

 14 market, and I support a flexible framework to

 15 ensure that all participants have the opportunity

 16 and frankly don't have the excuse not to trade on

 17 a SEF.

 18 Now let me turn to some of the

 19 particulars of the SEF rule. And I've argued

 20 strongly and encouraged the Commission to adopt a

 21 temporary registration process for SEFs that did

 22 not replicate the temporary registration process
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 1 for the swap data repositories. In that respect I

 2 believe we have succeeded. I believe a

 3 streamlined, temporary registration process will

 4 not disadvantage SEF applicants that are received

 5 later in the queue or as the big bulge of new SEF

 6 applications arrive on our doorstep in the coming

 7 days. More importantly, I am concerned with the

 8 process the Commission is using to shift the

 9 number of trades on an RFQ from two to three

 10 participants. It is incredible to me that the

 11 Commission rushed to implement the data rules to

 12 ensure that it can make informed decisions and yet

 13 has chosen to pick an unsubstantiated number

 14 without utilizing the available data. A

 15 transparent rulemaking process should utilize

 16 available data to make fact-based decisions.

 17 However, both the SEF rule and the swap block rule

 18 suffer from a willful refusal to utilize available

 19 and useful data.

 20 Now, as Commissioner Sommers noted in

 21 her remarks, it still remains to be seen how these

 22 rules will be coordinated internationally, and
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 1 that is an important feature. And I want to make

 2 sure that we are nimble enough to respond to that

 3 competitive imbalance, and we have created rules

 4 that will keep liquidity here in this country.

 5 With regard to the swap block final

 6 rule, my frustration lies more in the process than

 7 in the outcome. I agree with the premise the

 8 goals of promoting pre-trade price transparency in

 9 trading on a SEF. However, the foundation of any

 10 block size, whether it is a swap or a future,

 11 should be based on good data. Again, the

 12 Commission is forced to develop a rule without the

 13 benefit of extensive data in the financial

 14 products and no swap data in the case of foreign

 15 exchange and commodities. In fact, the

 16 Commission's meager data used to inform its

 17 decision on financial products comes from just

 18 three months worth of data back in 2010.

 19 Like the SEF rule, the Commission has

 20 not availed itself to available data and decided

 21 against making an informed decision regarding the

 22 block rules to automatically move to 67 percent of
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 1 notional value for each swap category after the

 2 initial period. Therefore, I'm prepared to offer

 3 an amendment to this rule to require the

 4 Commission set block rules based on the study

 5 using actual trade data. And I've circulated that

 6 at the table here among my colleagues and staff.

 7 Now, let me turn to the MAT

 8 determination. I recognize the challenge the

 9 Commission is facing in interpreting the "made

 10 available for trade" provision. Unfortunately,

 11 the Congress did not provide the Commission with

 12 any guidance as to how and under what condition

 13 the trade execution mandate must be considered or

 14 triggered. The rule, however, provides illusory

 15 comfort that the Commission will have the legal

 16 authority to review, and if necessary, challenge a

 17 mandatory trading determination made by a SEF or

 18 DCM. In fact, the only authority that the

 19 Commission has is to rubberstamp a SEF or DCM's

 20 initial determination.

 21 Finally, the process for removing a

 22 "made available for trade" determination lacks any
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 1 logical or legal basis and is the exact opposite

 2 of what is required to make the initial "made

 3 available for trade" determination.

 4 With regard to the disruptive trade

 5 practices, it has been a long process since the

 6 initial advanced notice of proposed rulemaking

 7 back in 2010, and the proposed guidance was

 8 published in 2011, in February, and finally now we

 9 are voting on the final guidance today. The team

 10 has made significant progress in giving meaning to

 11 the Commodity Exchange Act, section 4c(a)(5),

 12 which prohibits disruptive trading processes.

 13 While I applaud their work in this

 14 regard, I do have some concerns that the guidance

 15 provided with respect to interpretation of

 16 disruptive trading and spoofing. While the

 17 guidance we provide says, "It's always a facts and

 18 circumstances test," then we really aren't

 19 providing guidance. So I have some questions that

 20 hopefully will kind of further illuminate the

 21 guidance and how we're going to proceed on this in

 22 order to give the market some certainty in where
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 1 we're going.

 2 I do want to close again by thanking

 3 Commissioner Sommers and certainly the staff for

 4 all their work in putting all these pages of work

 5 together and these rules. They have increasingly

 6 gotten better as time has gone on and the input

 7 has been received. I look forward to finalizing

 8 these important rules so the market can move

 9 forward with a greater certainty surrounding the

 10 development of the swaps market. So thank you.

 11 CHAIRMAN GENSLER: Thank you,

 12 Commissioner O'Malia.

 13 Commissioner Wetjen.

 14 COMMISSIONER WETJEN: Thanks, Mr.

 15 Chairman. Since joining the Commission I've had

 16 the good fortune and pleasure of meeting a lot of

 17 good friends but no one has been a better friend

 18 to me since I've arrived than Commissioner

 19 Sommers, and no one has provided more useful,

 20 interesting, insightful counsel and just overall

 21 very helpful insights about these markets and the

 22 work of the Commission than you have, Commissioner
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 1 Sommers. I know our friendship will continue

 2 beyond you tenure here at the Commission, and I

 3 look forward to remaining friends and also seeking

 4 your counsel even after you leave. So thank you

 5 again for your service.

 6 Today's releases will fundamentally

 7 restructure the over-the-counter markets for swap

 8 trading and increase pre-trade transparency and

 9 participation for many that were previously unable

 10 to access or compete for liquidity in the OTC

 11 marketplace. This is a landmark achievement for

 12 the Commission. I believe that taken as a whole,

 13 the Commission has struck an acceptable balance in

 14 these final rules. I'm certainly confident that

 15 the next execution framework recommended by the

 16 professional staff in consultation with public

 17 interest groups, the industry, and the regulatory

 18 community over the course of the past two years or

 19 so represents a fundamental shift away from the

 20 OTC model as it existed only a few years ago.

 21 The benefits of this shift are many.

 22 For example, many swaps will for the first time
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 1 trade on regulated platforms and benefit from

 2 market-wide pre-trade transparency which should

 3 improve pricing for the buy-side commercial

 4 end-users and other participants that use these

 5 markets to manage risk. Additionally, SEFs, as

 6 registered entities, will be required to establish

 7 and enforce comprehensive compliance and

 8 surveillance programs that simply do not exist in

 9 the swap markets today.

 10 Another potentially significant benefit

 11 not as often discussed is the improved ability for

 12 clearinghouses and their members to manage risk

 13 during times of market stress, effectuated by

 14 liquidity formation on SEFs should these platforms

 15 function as envisioned by these rules. The final

 16 rules also will facilitate compliance with

 17 Dodd-Frank's other derivatives reforms, especially

 18 real-time reporting, clearing, and

 19 straight-through processing. In this respect, the

 20 execution rules complement the Commission's other

 21 efforts to streamline participation in the markets

 22 by doing away with the need to negotiate bilateral
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 1 credit and other provisions in order to access

 2 liquidity. This not only benefits the end-users

 3 that the markets are intended to serve, but also

 4 new entrants that intend to compete for liquidity

 5 and now will be able to access the markets on

 6 impartial terms. In essence, the final execution

 7 rules support a transparent, risk-reducing swap

 8 market structure under the oversight of the

 9 Commission.

 10 Like all the Commission's rules, today's

 11 releases require the Commission to make a number

 12 of policy judgments that necessarily involve

 13 tradeoffs. And in making those judgments, the

 14 Commission faces the challenge of creating a new

 15 market structure on paper while being informed

 16 only by what we know or think we know about the

 17 swap markets today. The Commission, therefore,

 18 must remain open to reassessing the policy

 19 judgments in these final rules as the markets

 20 evolve, as the Commission has provided new

 21 information, and as the Commission benefits from

 22 its experience overseeing the new SEF market
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 1 structure. In short, the Commission must remain

 2 open to course correction where necessary and

 3 ensure that the swap regulatory regime keeps pace

 4 with the markets that it governs.

 5 One difficult and widely reported policy

 6 judgment concerns the required trading protocols

 7 for executing certain swaps subject to the trade

 8 execution mandate. A significant number of

 9 commenters cautioned the Commission against

 10 imposing specific trading protocols on the

 11 marketplace. Comment letters suggested, for

 12 example, that such rules might have the unintended

 13 effect of increasing hedging costs for liquidity

 14 providers, thereby adversely affecting pricing for

 15 the firms that depend on these providers to assume

 16 risk.

 17 Other participants have expressed

 18 concerns that relatively illiquid swap markets,

 19 like off-the-run credit, might be dislocated if

 20 the Commission tries to force immediate changes to

 21 the currently used means of execution. These

 22 concerns and others have contributed to a
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 1 constructive dialogue both inside and outside of

 2 the Commission. Having considered the panoply of

 3 execution issues and policy tradeoffs at length, I

 4 am confident that the final execution rules before

 5 us today contain appropriately flexible trading

 6 protocols.

 7 Furthermore, it is also my belief and

 8 understanding that if questions of interpretation

 9 arise from market participants concerning

 10 permissible trading protocols, the Commission

 11 staff should air on the side of flexibility when

 12 providing interpretive guidance.

 13 Incidentally, flexible trading protocols

 14 is not code for status quo as some might suggest.

 15 It is not code for pro-dealer trading protocols,

 16 nor is it code for pro buy-side or pro-retirees,

 17 pensioners, endowment beneficiaries and end-user

 18 trading protocols, although I do believe it is

 19 these constituencies who stand to benefit the most

 20 from this flexibility. Instead, what flexible

 21 trading protocols really means is consistency with

 22 congressional intent as it relates to swap trade
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 1 execution under Dodd-Frank, which on its own was

 2 destined to bring dramatic change to the OTC swap

 3 markets.

 4 Again, the changes are many. Under

 5 Dodd-Frank and our implementing rules before us,

 6 every SEF will be required to have an order book,

 7 another transparency enhancing change to the

 8 existing market structure. But a number of

 9 important safeguards built into our rules also

 10 ensure that participants continue to have access

 11 to competitive, timely, and representative prices,

 12 as well as liquidity when order book trading may

 13 be somewhat premature.

 14 One such safeguard, of course, is the

 15 block trading rule, which sets the thresholds

 16 above which certain swaps can be executed through

 17 even more flexible trading protocols. In my view,

 18 the long-awaited block rule is consistent with

 19 Congress's intent to drive a significant portion

 20 of OTC swap activity into a multilateral trading

 21 environment, and as a compliment to the SEF

 22 regime, the block rule will for the first time
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 1 usher in real-time post-trade transparency

 2 throughout the swap markets.

 3 This rule, though perhaps not ideal in

 4 several respects, is undoubtedly improved from the

 5 uniform social-size approach first proposed in the

 6 real-time reporting rule in 2010. Public comment

 7 has been essential in this regard. Many

 8 commenters raised concerns about the methodology

 9 for reaching the block trading thresholds, the

 10 dataset upon which the staff has applied that

 11 methodology, and definitional judgments that

 12 impact transaction distributions and therefore,

 13 outcomes, under the final rule. The Commission

 14 will need to keep a close eye on these matters

 15 once the rule becomes effective. As the markets

 16 evolve and the Commission receives new data with

 17 which to analyze and set the block thresholds, the

 18 Commission has a responsibility to revisit our

 19 approach and consider whether this rule has, in

 20 fact, landed in the right place. The final rules

 21 approach is admittedly blunt, but the Commission

 22 has attempted to balance as best it could
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 1 potentially conflicting objectives.

 2 As a final note, I've been especially

 3 concerned about supporting a competitive landscape

 4 for derivatives execution. Recent actions and

 5 comments by some have suggested that certain of

 6 the Commission's rules unfairly or inappropriately

 7 favor futures execution. Again, the intent of

 8 these execution rules before us today is not to do

 9 away with flexibility but rather to protect it.

 10 What should be clear in the Commission's rules is

 11 that participants will have clear choices --

 12 choices concerning margin treatment, modes of

 13 execution, clearing venues, and in some cases

 14 counterparties. If participants weigh carefully

 15 the available choices and choose a particular

 16 execution venue based upon their own economic

 17 interests, the Commission should not second guess

 18 that decision and substitute its own. In the end,

 19 it is the participants, not the Commission and its

 20 staff, who will determine the types of risks that

 21 firms should retain or lay off in the markets and

 22 the means for doing so. The Commission has
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 1 strived to promulgate these rules in a manner that

 2 will avoid putting its thumb on the scale for any

 3 particular marketplace.

 4 Thank you again to the staff for all of

 5 your hard work on all of these rules today, and I

 6 look forward to discussing a few questions a

 7 little bit later. Thanks.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Wetjen. Thank you again to all of my

 10 fellow commissioners for all their input on these

 11 rules. I think they have tremendously benefitted

 12 from each of the input. And though we might not

 13 go over the line unanimously today as I sense from

 14 the opening statements, I think that the rules

 15 have each benefitted from the input and I want to

 16 thank particularly if I might, Commissioner

 17 Wetjen. It seems that you and I have been getting

 18 some press recently. But I think this is a far

 19 better rule and I agree with your statement that

 20 these fulfill the congressional mandate and really

 21 do deliver to the American public in a balanced

 22 way with transparency.
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 1 But with that I think that I'm going to

 2 invite the first panel. The staff will make

 3 presentations concerning their recommendations of

 4 the final rules implementing the Dodd-Frank Act,

 5 as well as the interpretive statement. After each

 6 presentation the floor will be open for questions

 7 and comments from each of the commissioners.

 8 Following these discussions, the Commission may

 9 take votes on the recommendations as presented.

 10 All final votes conducted in this public meeting

 11 shall be recorded votes and the votes will be

 12 included in the relevant Federal Register

 13 releases.

 14 I think I'm supposed to ask for

 15 unanimous consent to allow staff to make technical

 16 changes.

 17 COMMISSIONER SOMMERS: So moved.

 18 CHAIRMAN GENSLER: It being unanimously

 19 consented. At this point I also ask unanimous

 20 consent to allow -- oh, no, I did that one. All

 21 right. So presentation number one. The Swaps

 22 Block Rule or Procedures to Establish Appropriate
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 1 Minimum Block Sizes. And I want to invite Rick

 2 Shilts, the head of the Division of Market

 3 Oversight; George Pullen, who is from the Division

 4 of Market Oversight; Nhan Nguyen. You'll be

 5 helping on this one as well, Nhan? All right.

 6 Nhan Nguyen from the Division of Market Oversight;

 7 and then from the Office of General Counsel, John

 8 Dunfee, who is now, I guess, our team lead on

 9 this. And then Esen Onur from our Chief Economist

 10 Office.

 11 So I turn it over to the team. I guess

 12 that's to you, John.

 13 MR. DUNFEE: Thank you, Mr. Chairman and

 14 Commissioners for the opportunity to present this

 15 final rule-making today. I would like to thank

 16 each of the members past and present of the Swaps

 17 Block Rule Team for their hard work and

 18 contributions to this final rule, which we present

 19 to you today for your consideration and vote.

 20 Staff is recommending for the Commission's

 21 consideration final rules establishing appropriate

 22 minimum block sizes for large notional
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 1 all-facility swaps and block trades, as well as

 2 measures to protect the identities of parties to

 3 swap transactions.

 4 Section 727 of the Dodd-Frank Act

 5 created section 2(a)(13) of the Commodity Exchange

 6 Act. Section 2(a)(13) requires the Commission

 7 issue rules regarding the real-time public

 8 reporting of swap transaction and pricing data.

 9 The section specifically requires the Commission

 10 to do three things that we do in this final rule.

 11 First, specify the criteria for determining what

 12 constitutes a large notional swap transaction or

 13 block trade. Second, to ensure that the public

 14 dissemination of swap data does not reveal the

 15 identities or business transactions of swap

 16 counterparties, and third, the Commission must

 17 take into account whether public disclosure will

 18 materially reduce market liquidity.

 19 In December 2011, the Commission adopted

 20 the real-time reporting requirements in new part

 21 43 of its regulations. In that final rulemaking,

 22 the Commission adopted several provisions relevant
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 1 to today's final rule.

 2 The real-time final rule established

 3 five asset classes for swaps: Interest rates,

 4 credit default, foreign exchange, equity, and

 5 other commodity. The real-time reporting final

 6 rule also established a series of time delays for

 7 the public dissemination of swap data. Because

 8 the Commission did not establish a block size

 9 methodology at the time of the real-time rule, the

 10 real-time rule provided that all swap trades would

 11 be subjected to the block time delay specified in

 12 the real-time rule, pending a Commission rule

 13 establishing minimum block sizes.

 14 In February 2012, the Commission issued

 15 a further proposal regarding block sizes and

 16 anonymity protection. In issuing that proposal,

 17 the Commission was informed by many comments

 18 received regarding the initial real-time rule

 19 regarding blocks. Today, staff recommends for the

 20 Commission's consideration final rules springing

 21 from that proposal that establish minimum block

 22 sizes for swaps and anonymity protections for
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 1 parties to swap transactions. Today's final rule

 2 benefits from numerous comments from those who are

 3 potentially impacted by the rule.

 4 The rule also benefits from the fact

 5 that staff was able to collect and review relevant

 6 data for two asset classes -- interest rate swaps

 7 and credit default swaps. Based upon this data

 8 and comments received, the final rule establishes:

 9 First, detailed criteria for grouping swaps based

 10 upon the primary economic indicators within each

 11 asset class; second, tailored and measured

 12 methodologies for determining minimum block levels

 13 in a two-phased approach; and third, additional

 14 measures to protect anonymity related to the

 15 public dissemination of swap data.

 16 I will briefly explain the major

 17 components of the block trade rule as well as the

 18 anonymity measures. With respect to blocks, the

 19 final rule breaks down the five asset classes that

 20 I mentioned a moment ago established by the

 21 real-time reporting final rule and breaks them

 22 down into smaller swap categories. Swaps within
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 1 each asset class are generally grouped based on

 2 common risk and liquidity profiles. For swaps in

 3 the interest rate asset class, the final rule

 4 establishes 27 swap categories based on nine tenor

 5 band groups and three currency groups. For swaps

 6 in the credit asset class, the final rule

 7 establishes 18 swap categories based on six tenor

 8 band groups and three conventional spread groups.

 9 For the FX asset class, the final rule

 10 establishes approximately 85 swap categories based

 11 on unique currency combinations. For the other

 12 commodity class, the final rule establishes

 13 approximately 120 swap categories based on

 14 groupings of economically related swaps and

 15 groupings of swaps sharing a common product type.

 16 In establishing methodologies for

 17 determining appropriate minimum block sizes, staff

 18 sought to balance the goals of transparency and

 19 protecting market liquidity. The final rule

 20 establishes that the Commission will prescribe

 21 appropriate minimum block sizes for the swap

 22 categories within each asset class through a
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 1 two-period phase-in approach. The first phase,

 2 called the initial period, includes different

 3 methodologies based on the availability of data.

 4 For the initial period, the final rule sets block

 5 sizes in the interest rate and credit default

 6 asset classes based upon data obtained and

 7 analyzed by the Commission staff.

 8 Sizes will be applied to each swap

 9 category within these asset classes based on a 50

 10 percent notional amount calculation methodology.

 11 That methodology determines block sizes by looking

 12 at the net notional distribution of swaps and

 13 setting the block size at the one-half mark within

 14 that distribution. Staff believes that the

 15 notional determination methodology is a better

 16 measure of risk than other alternatives, such as

 17 setting the block size so a specific number of

 18 trades could be done as blocks. This notional

 19 amount methodology focuses upon the amount of risk

 20 in a given swap category. For example, a two-year

 21 cross currency U.S. dollar-euro interest rate swap

 22 will have a block size of $460 million.
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 1 For the FX and other commodity asset

 2 classes during the initial period, the final rule

 3 sets block sizes based upon DCM block sizes set

 4 for economically-related futures contracts. Staff

 5 believes that DCM-set block sizes for economically

 6 related futures contracts are a good comparative

 7 measure for setting swaps blocks. For the initial

 8 period, the final rule sets out in appendix F the

 9 specific minimum block sizes by swap category

 10 based on these methodologies.

 11 The initial period will last until SDRs

 12 have collected one year of data for each asset

 13 class. After the initial period, the final rule

 14 states that the Commission will establish

 15 post-initial minimum block sizes for each swap

 16 category in the interest rate, credit default, FX,

 17 and other commodity asset classes based off data

 18 collected by SDRs using a 67 percent notional

 19 amount calculation. The rules also provide that

 20 the Commission will update minimum block sizes no

 21 less than once each year using the same 67 percent

 22 notional amount calculation. Post-initial block
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 1 sizes will be published on the Commission's

 2 website and will become effective on the first day

 3 of the second month after publication.

 4 For equity swaps, under the final rule,

 5 these swaps will not be eligible for block

 6 treatment, and thus these swaps will be publicly

 7 disseminated in real time in both the initial and

 8 post-initial periods. This is because of the

 9 existence of a highly liquid underlying cash

 10 market which is where price discovery occurs, the

 11 absence of time delays for reporting blocks in

 12 that market, and the relative size of the equity

 13 swaps market relative to futures, options, and

 14 cash index markets.

 15 The rule also establishes a series of

 16 special rules to deal with complex issues, such as

 17 how to determine block sizes for swaps with

 18 optionality, how to determine block sizes for

 19 swaps in other currencies, and how to address a

 20 situation in which a member state is removed from

 21 the Euro zone. The rule also prohibits

 22 aggregation of orders to satisfy block
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 1 requirements. The rule establishes a process for

 2 market participants to elect to treat their swaps

 3 as blocks and how notice of that election will be

 4 sent to a SEF or DCM if such swap is traded

 5 pursuant to the rules of a SEF or DCM, or if it's

 6 traded bilaterally, how reporting parties would

 7 provide notice to a SDR. Also, the rule allows

 8 the Division of Market Oversight to undertake all

 9 responsibilities related to the establishment of

 10 block sizes.

 11 As I mentioned earlier, this final rule

 12 addresses more than just block trades. It also

 13 includes measures to protect anonymity related to

 14 swap data. First, the rule amends part 43 of the

 15 Commission's regulations to establish a permanent

 16 system, establishing cap sizes for masking

 17 notional amounts of swap transactions reported to

 18 the public. Cap sizes will be set using a 75

 19 percent notional amount calculation, similar to

 20 the methodology used for setting block sizes.

 21 Secondly, in regard to anonymity, the rule

 22 establishes that certain commodity swaps will be
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 1 subject to real-time reporting with masking of the

 2 specific geographic delivery or pricing point

 3 detail related to these swaps.

 4 This concludes my prepared remarks

 5 regarding the block trade final rule. My

 6 colleagues and I would be happy to answer any

 7 questions you may have regarding the rule.

 8 CHAIRMAN GENSLER: The chair will now

 9 entertain a motion to accept the staff

 10 recommendation concerning the final rule.

 11 COMMISSIONER SOMMERS: So moved.

 12 COMMISSIONER O'MALIA: Second.

 13 CHAIRMAN GENSLER: Motion made and

 14 seconded. Then it's open for discussion and

 15 questions.

 16 I don't have any questions for John and

 17 the team, but I do support the final block rule

 18 which is, I think, critical to promoting

 19 transparency in these markets. I think that with

 20 this rule the public will benefit from seeing the

 21 price and volume on transactions post-transaction

 22 as soon as technologically practical. Those are
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 1 words that Congress put in the statute and we will

 2 fulfill that mandate initially for approximately

 3 50 percent of the market and subsequent to the

 4 post-initial period to 67 percent of the market.

 5 So half of the market wouldn't tighten up to that

 6 period or after the post-initial, a third of the

 7 market will not. But I think that it's critical

 8 for the non-blocks to have that which Congress

 9 wanted is real time, real-time reporting. And it

 10 also, in conjunction with the swap execution

 11 facility rules that we'll consider later today,

 12 brings to light the trade execution mandate. And

 13 together is very critical.

 14 I do think the Commission has benefited

 15 from significant public input on these rules. We

 16 first proposed a block rule as Commissioner Wetjen

 17 noted, and it had a different methodology called

 18 social size, I think, if I remember the words we

 19 used. And we got significant public input

 20 suggesting that we should move to a different

 21 methodology. And, in fact, many of the commenters

 22 then suggested moving to something similar to what
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 1 we have in front of us today. We took those

 2 comments to heart and we decided to repropose a

 3 block rule. And that reproposal benefitted from

 4 the first set of comments, and it also laid out a

 5 significant number of alternative methodologies,

 6 but the bulk of the commenters came back and said

 7 this methodology, percentage-based as it is, to be

 8 addressed on an annual basis with an initial

 9 period and a post-initial was an appropriate

 10 approach. There were comments that some thought

 11 we should be higher, some thought we should be

 12 lower, and there was a significant comment or

 13 support ultimately going to 67 percent. So I

 14 think the Commission has already noted in this

 15 context that it has had substantial public input

 16 but also we have delayed the movement up to 67

 17 percent until there is one year of data which is

 18 already coming into the swap data repositories as

 19 has been noted. I think the 67 percent formula

 20 has been well-noticed. It's been subject to

 21 public comment and there is ample support in the

 22 public record for adopting that but having that
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 1 methodology apply to data that we later collect.

 2 So I support the rule. I'm going to

 3 turn it to Commissioner Sommers for her questions.

 4 COMMISSIONER SOMMERS: Thank you, Mr.

 5 Chairman. I just have a couple of questions about

 6 the methodology. And as I said in my opening

 7 statement, this has been a challenge, I realize,

 8 and the Commission has struggled with block sizes

 9 for many years in trying to determine an

 10 appropriate methodology. So just to kind of walk

 11 through this specific methodology and the 67

 12 percent that when you use this formula based on

 13 the notional value in a market, then it gives you

 14 a percentage to which would set the threshold for

 15 block sizes.

 16 So when you're looking at whether 67

 17 percent is an appropriate number and specifically

 18 applying it gets you I think it was 6 percent of

 19 the interest rate market based on the data that

 20 we're using would be your block threshold, do you

 21 decide that 6 percent is what we're looking for;

 22 therefore, 67 percent is right? Or do you know
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 1 that 67 percent is right and it doesn't really

 2 matter where the threshold is because based on the

 3 notional value of that class, what if you end up

 4 getting 20 percent of the market as a block? Do

 5 you then decide that 67 percent may not be the

 6 right number? I mean, is that going to be

 7 flexible for us? Or no matter what, 67 percent is

 8 the number? Just sort of walk through with me how

 9 we decided that those are the appropriate numbers.

 10 MR. DUNFEE: Okay. And just to clarify

 11 for a moment, the 67 percent notional amount

 12 calculation is going to give you a block level in

 13 notional. And so based upon that level, in

 14 notional terms, 67 percent of the market will not

 15 be blocks; 33 percent of the market will be

 16 blocks. The numbers that you're referring to are

 17 in regard to number of transactions, right? So on

 18 the data that we have for interest rates and

 19 credit default swaps, applying the 67 percent

 20 notional number, 94 percent of the transactions

 21 for the time period that we looked at would not be

 22 blocks.
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 1 In crafting the 67 percent and initially

 2 proposing the 67 percent, we were guided by the

 3 very goals that you were mentioning in your

 4 opening statement, which were to bring real-time

 5 transparency to a significant amount of the

 6 market, but at the same time to protect liquidity

 7 by saying that very large transactions could be

 8 done with a time delay. And we thought that the

 9 67 percent test, which as you say, did cover 94

 10 percent, ultimately being not blocks, that that

 11 did those two things.

 12 Now, as the Chairman was pointing out

 13 earlier in terms of the comment process, we've

 14 gotten a lot of comments in regard to the 67

 15 percent, so the way that we went about this

 16 enabled us to tell people we're going to do 67.

 17 Here are the numbers. You know, not just this is

 18 the methodology for commenters to comment on, but

 19 also here are the results of that methodology and

 20 here's what the exact block number is going to be

 21 in the initial period at least based on these

 22 numbers. And so we sort of have a dual benefit in
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 1 terms of the comments both for the methodology and

 2 the result, and so based on the comments that we

 3 got we think that 67 percent is still the right

 4 notional methodology.

 5 COMMISSIONER SOMMERS: Have we ran this

 6 methodology using even a subset of the current

 7 data that we're collecting to know that we may get

 8 the same sort of result? At least some sort of

 9 consistent result with current data?

 10 MR. DUNFEE: George.

 11 MR. PULLEN: I think the best way to

 12 answer that is to look at the way 67 percent works

 13 out in the current dataset that we've used, which

 14 is the OSG Volunteer Dataset of 2010 that you've

 15 mentioned that we got in 2011. When you look at

 16 that dataset, the numbers as you mentioned come

 17 around 90-95 percent end up not being blocked.

 18 But because of a no-show methodology, if you have

 19 -- regardless of the dataset, whether someone in

 20 our current SDR or the SDR a year from now, if you

 21 had completely uniform distribution of size -- and

 22 that would mean that everybody within one of our
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 1 250-plus swap categories all traded a size of one

 2 million, for example -- what ends up happening is

 3 you could have up to, with complete uniformity, 33

 4 percent being blocks. So in the dataset we had,

 5 of course, we ran into the situation and the

 6 numbers that we supplied to you where you have

 7 approximately 5 percent being blocks, but you

 8 could have in the future an example where 33

 9 percent -- and again, even in the future, it's

 10 always based on a historical look back. It's the

 11 method of any statistical sample. It's always

 12 going to be a historical look back.

 13 COMMISSIONER SOMMERS: Okay. My

 14 additional concern with this approach is just the

 15 inconsistency that could arrive between DCMs and

 16 SEFs because we're setting the block sizes for

 17 SEFs; DCMs set their own block sizes. And if

 18 there are economically equivalent contracts, you

 19 know, at least some may say that DCMs have an

 20 advantage. Do we intend to take a second look at

 21 how we approach block sizes for DCMs? Or, I don't

 22 know, Rick, you may want to take this.
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 1 MR. DUNFEE: If I could just clarify

 2 real quickly, this rule is a swaps block rule, so

 3 it applies to swaps, whether they're on a SEF, a

 4 DCM, or off-facility. So in regard to swaps,

 5 there's not a distinction in terms of where the

 6 block level should be.

 7 COMMISSIONER SOMMERS: I'm sorry. I

 8 should have made that distinction. I meant

 9 futures that are traded on a DCM that could be

 10 economically equivalent.

 11 MR. SHILTS: And I think a couple

 12 points. One (cough) excuse me, is that I think

 13 some of these issues are mostly raised in

 14 connection with other commodities. And as this

 15 rule adopts in the initial period, it's looking to

 16 the DCM's block sizes for equivalents. So in that

 17 sense we address...

 18 CHAIRMAN GENSLER: You may want to pull

 19 your mic closer, and John, if you'd turn yours

 20 off.

 21 MR. SHILTS: Okay. And the second point

 22 is yes, the staff, there is an interdivisional
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 1 team that is looking at issues related to the

 2 setting of block sizes on DCMs and is

 3 contemplating some sort of potential commission

 4 action or regulations, or rulemaking that would

 5 address issues related to the setting of block

 6 sizes on DCMs, in particular with respect to the

 7 so-called futurization of swaps that happened last

 8 year, where a lot of them were listed, especially

 9 in the energy area, listed swaps as futures. So

 10 it is something that we're looking at.

 11 COMMISSIONER SOMMERS: A year from now,

 12 when those block sizes for SEFs are no longer --

 13 when they're no longer using the DCM block sizes

 14 for SEFs in the other asset classes, will we go

 15 out for additional public comment on those asset

 16 classes to make sure that everyone's aware of how

 17 this is going to work for those additional asset

 18 classes?

 19 MR. SHILTS: Well, as you know, the

 20 rules provide that there would be an automatic

 21 adjustment in the post-initial period, but

 22 depending on what the Commission does with respect
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 1 to future rulemakings in the DCM block size

 2 calculations or whatever, it's hard to -- I can't

 3 say what would happen a year from now, but

 4 potentially there would be reconsideration of

 5 that.

 6 COMMISSIONER SOMMERS: Thank you.

 7 CHAIRMAN GENSLER: Thank you,

 8 Commissioner Sommers.

 9 Commissioner Chilton.

 10 COMMISSIONER CHILTON: I just have one

 11 question. I'm curious why the block and the

 12 trading mandate rules don't seem to go effective

 13 at the same time. If the block rule goes into

 14 effect prior to a trading mandate and a trader

 15 wants to trade a smaller than the block size trade

 16 with one dealer, which they could do, it seems

 17 like they could only do it off SEF, away from the

 18 SEF, and that would seem to punish the SEF. And

 19 it would also deny the regulator, us, with an

 20 audit trail. Can you respond to that?

 21 MR. DUNFEE: Well, it may be good that I

 22 have Nhan up here for this question also. But
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 1 just in regard to the swaps block piece of that

 2 question, I believe that both the swaps block rule

 3 and the SEF rule have the same effective date.

 4 And so -- and I understand you're sort of saying

 5 when does the trading mandate go effective. But

 6 it is at least theoretically possible, I think,

 7 that the trade that you're describing actually

 8 could occur on a SEF after the block rule goes

 9 effective.

 10 So that's sort of answer one in regard

 11 to the swaps block rule. But also, I don't think

 12 that the swaps block rule itself in terms of how

 13 it's effective date matches up with other

 14 effective dates really makes a difference in terms

 15 of what one's choices would be in transacting that

 16 swap. So if one could do it off-facility today

 17 and then the block rule goes effective, that's

 18 still how they would be able to do it. And so I

 19 don't think that there's sort of an execution

 20 difference that's based on the block rule for that

 21 trade. And I also don't think that there's really

 22 an audit trail difference. There may be a
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 1 difference in terms of when the public and when

 2 the Commission would see the information in terms

 3 of how quickly, but ultimately, I think the audit

 4 trail would be the same. The transaction would

 5 still be subject to reporting.

 6 COMMISSIONER CHILTON: Okay. Thank you

 7 for that. I appreciate it.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Chilton.

 10 Commissioner O'Malia.

 11 COMMISSIONER O'MALIA: Thank you, Mr.

 12 Chairman. I think it's important to make sure

 13 that I get consideration on this motion. I make a

 14 motion to adopt my amendment to the swap block

 15 rule at this point.

 16 CHAIRMAN GENSLER: I have to check

 17 whether I'm supposed to let people ask questions

 18 first.

 19 COMMISSIONER O'MALIA: We don't have to

 20 adopt it.

 21 CHAIRMAN GENSLER: What's that?

 22 COMMISSIONER O'MALIA: We can make the
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 1 motion now and then we'll get back to --

 2 COMMISSIONER SOMMERS: Second.

 3 CHAIRMAN GENSLER: Thank you.

 4 COMMISSIONER O'MALIA: All right. Thank

 5 you, Mr. Chairman. Thank you, Commissioner

 6 Sommers.

 7 Reading the preamble, and I think the

 8 Chairman mentioned it and Commissioner Wetjen

 9 mentioned it, that there was support for the 67

 10 percent. In reading the document, on page 79, it

 11 says 28 commenters provided general comments on

 12 the post-initial -- the 67 percent. Of that, 12

 13 supported 67 percent; 14 opposed; 2 kind of said

 14 we don't have enough information largely based on

 15 the data. A lot of people who opposed the number

 16 were also concerned that they did not have enough

 17 information based on the data that was in the rule

 18 when it was drafted in the proposal stage to make

 19 a comment as to whether that's accurate. And

 20 Commissioner Sommers and I both raised a concern

 21 about the data. Not much we could do about it

 22 beforehand when we were developing this rule. I
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 1 appreciate that fact, but since January, we've

 2 been receiving data. And have you run the

 3 calculations based on that data? And what does

 4 that data tell us so far about these rules? And

 5 why is it not in this document?

 6 MR. DUNFEE: In regard to the data that

 7 we get as of now, because reporting has not -- it

 8 hasn't started for all asset classes and all

 9 participants, we actually don't have the complete

 10 data that would be necessary to run the

 11 calculation as we were able to based upon data

 12 that we have.

 13 COMMISSIONER O'MALIA: What impact has

 14 the no-action letters, et cetera had on this and

 15 you coordinating and looking at the data? Within

 16 the data fields do you have a designated -- are

 17 people saying I'm not reporting subject to

 18 no-action relief?

 19 MR. PULLEN: No, that's not a data

 20 field.

 21 COMMISSIONER O'MALIA: So you couldn't

 22 -- in assembling this you either have to know what
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 1 no-action relief we've offered or guess as to why

 2 that field isn't filled out?

 3 MR. PULLEN: Correct. But the way that

 4 it's working is that people will be back-loading,

 5 and so as the backload is completed we'll have a

 6 robust dataset. So anyone who currently might

 7 have one of those reliefs, that isn't a pass

 8 during this period of time. They'll be expected

 9 to backload and bring up their information to the

 10 same robust level as everyone else.

 11 COMMISSIONER O'MALIA: At the expiration

 12 of the no-action relief?

 13 MR. PULLEN: That's my understanding.

 14 I'd defer to one of the lawyers here.

 15 COMMISSIONER O'MALIA: And most of this

 16 no-action relief kind of dissipates out over the

 17 next year or so; right?

 18 And of course, you know, with Rick at

 19 the table I do want to thank the DMO team.

 20 George, you've been helpful as well. And the ODT

 21 team, John Rogers in particular, after our TAC

 22 meeting, moving to the next steps about
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 1 standardizing data, improving the quality of the

 2 data and working with the SDRs to really put a

 3 finer point on this so we can use the data is an

 4 essential tool because it's a huge missed

 5 opportunity if we've mandated all this and we

 6 don't fully utilize it. So I look forward to

 7 explaining my amendment when it's appropriate at

 8 the end of the questions, but I will end my

 9 questions here.

 10 CHAIRMAN GENSLER: Commissioner Wetjen.

 11 COMMISSIONER WETJEN: I just, for now, I

 12 have one, possibly two questions.

 13 I think we all can anticipate the answer

 14 but is it possible that the ultimate thresholds in

 15 the post-initial period could be different than 67

 16 percent?

 17 MR. PULLEN: Yes.

 18 COMMISSIONER WETJEN: Is it possible

 19 that the ultimate thresholds -- The post-initial

 20 -- for the post-initial period could be something

 21 other than 67 percent?

 22 MR. DUNFEE: Not with the rule as it is,
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 1 no. So the 67 percent notional amount calculation

 2 is what will be used to determine the post-initial

 3 block sizes.

 4 COMMISSIONER WETJEN: Well, but there is

 5 a new provision in the document. I'll just read

 6 it. It says that the Commission notes that in

 7 response to either a submission or its own

 8 surveillance of swap market activity, the

 9 Commission may exercise its legal authority to

 10 take action by rule or order to delay the

 11 imposition of post-initial appropriate minimum

 12 block sizes, particularly with respect to swap

 13 categories in the other commodity asset class.

 14 CHAIRMAN GENSLER: Page 90.

 15 MR. DUNFEE: Right. That is correct.

 16 COMMISSIONER WETJEN: That's all I have

 17 for now. Thanks.

 18 CHAIRMAN GENSLER: Thank you,

 19 Commissioner Wetjen. I don't know whether

 20 Commissioner O'Malia, you wanted to say something

 21 about your amendment before we call the roll on it

 22 because I think it's --
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 1 COMMISSIONER O'MALIA: I'd love to

 2 explain.

 3 CHAIRMAN GENSLER: It's made a motion.

 4 It's duly seconded. And before we call the roll I

 5 don't know if you wanted to say something.

 6 COMMISSIONER O'MALIA: So to be clear,

 7 my amendment does not do anything to change the

 8 either 50 percent initial phase. So this is not

 9 delaying block rules. It does not change the FX

 10 or commodity levels set at the DCM equivalent. So

 11 we are going to have upon enactment of this 50

 12 percent block levels. What it does require is

 13 that we conduct a study over a year's worth of

 14 trade data to decide whether the 67 percent or

 15 some other percentage is the appropriate level for

 16 making notional value calculations. That

 17 percentage will form the basis for setting the

 18 post-initial swap block levels that will be voted

 19 on by the Commission. The amendment also removes

 20 the delegated authority from the director of DMO

 21 in setting the first post-initial block size and

 22 requires the Commission to make this
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 1 determination. So a year's worth of data,

 2 recommendation to what the data tells us based on

 3 that, and then we vote on that. That's what this

 4 does. This does not take away the 50 percent. We

 5 will have block levels in the same manner. It

 6 leaves it up to the staff on how quickly, but we

 7 do require a minimum of one year. And the data

 8 must go out for public comment, which is an

 9 important feature to any of our APA features. So

 10 we will be making post-initial block

 11 determinations, whether it's 67 percent, 75

 12 percent, 62 percent, whatever the number, whatever

 13 the data tells us, the staff recommendation after

 14 public comment will make a recommendation to us.

 15 We will vote on it and implement it at that point.

 16 That's all it does. It does not take away blocks.

 17 It does not radically delay and undermine

 18 transparency, et cetera. It is a fact-based

 19 decision.

 20 COMMISSIONER SOMMERS: If I could just

 21 make a comment. I think certainly from my

 22 perspective, looking at this from sort of the
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 1 opposite perspective, when you have the data in

 2 front of you, a year's worth of data that will

 3 show you what percentage of transactions in a

 4 specific class will end up being blocks, it may

 5 give you a better judgment of where to set the

 6 percentage. So you may decide that 10 percent of

 7 transactions should be the threshold and the

 8 percentage may end up being 70 percent. But it's

 9 based on the data.

 10 CHAIRMAN GENSLER: Commissioner O'Malia,

 11 I appreciate all the work that you've put into

 12 this and on this amendment. I am not able to

 13 support this amendment. I feel that the rule

 14 that's in front of us today and the staff

 15 recommendation is based on data, and it's also,

 16 I'd say for four or five other reasons, I am not

 17 supporting it. This rule today has benefitted

 18 from significant public consultation, and as I

 19 mentioned, it's not the first time we proposed it.

 20 It's the second time, and we had the benefit of

 21 that first comment file to address ourselves to

 22 this issue.
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 1 I think also as you rightly noted, the

 2 commenters -- and it's not a polling, but if there

 3 were 12 commenters that said 67 percent is correct

 4 and 14 were somewhere else, that seems pretty

 5 close to me. It's not like there weren't people

 6 that truly supported 67 percent.

 7 I note also what Commissioner Wetjen

 8 said that was inserted and is in this very clearly

 9 on page 90 in the document, that we have this

 10 opportunity, whether market participants come in

 11 by petition or other facts come in to us, that

 12 this Commission, through appropriate orders and

 13 notice and comment and so forth can do what you're

 14 suggesting in your document. But that we

 15 basically finalize today that in a year's time

 16 based on additional data it moves to 67 percent.

 17 We have set in place the formula, but that if

 18 people petition us or others come in, this

 19 Commission, through notice and comment, can do

 20 something.

 21 I would also note two other things from

 22 the congressional record. Dodd-Frank said we had
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 1 to complete these rules in one year. I think

 2 Congress meant something by that. They didn't

 3 mean that we would never come back and change them

 4 but just that we had to put them in place. I do

 5 think, as all the Commissioners have said at

 6 different times, that we constantly have to come

 7 back and look. Do we change them? Do we modify

 8 them? And so forth. And then just lastly as we

 9 note in our document on page 15 that -- and this

 10 was just from the congressional record -- I think

 11 it was from Chairman Lincoln, but it's in the

 12 congressional record -- she noted that the guiding

 13 principle in setting appropriate block trade is

 14 that the vast majority of swaps transactions

 15 should be exposed to the public market through

 16 exchange trading. I mean, I think that's what

 17 this is trying to meet that congressional intent,

 18 at least as expressed by one chairman that worked

 19 on Dodd-Frank.

 20 COMMISSIONER O'MALIA: If I may respond

 21 to a couple of those concerns.

 22 I don't disagree at all with Chairman
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 1 Lincoln on this either. She said do it. Do it

 2 quickly. That's what we're proposing. We're just

 3 adding the requirement that we do it based on data

 4 and the facts. This rule automatically goes to 67

 5 percent. Now, I wish -- as I'm frequently on the

 6 losing end of a vote, and if I got to win the vote

 7 and still have the losing number of votes, then

 8 that would be an interesting outcome, which is

 9 kind of the way this rule came out. Twelve were

 10 for it, 14 were against it, but a lot of them,

 11 including -- and this is the craziest part -- if

 12 you look on page -- where is it? Page 87.

 13 There's a discussion about -- no, page 83. A

 14 number of commenters expressed concerns regarding

 15 imposing the proposed 67 percent notional

 16 calculation priori to analysis of swap data

 17 collected by SDRs.

 18 Now, two of the entities in here are

 19 Barclays and Better Markets in this category that

 20 are really supporting a fact-based determination.

 21 And I think these are just fundamental, good

 22 government kind of solutions that we can take from
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 1 the data that we're collecting. This was a

 2 priority. Get the data out there. We're working

 3 to make the data better and I support the

 4 Commission's efforts, everybody's efforts to make

 5 it good, robust data so we can really surveil the

 6 markets. This is not a delay tactic. This is the

 7 50 percent block is ineffective upon this rule.

 8 This only says let's look at the data before we

 9 set the number.

 10 CHAIRMAN GENSLER: And I think this is

 11 -- this rule in front of us is fact-based and has

 12 been exposed to the public and has also looked at

 13 data, and we went back when we reproposed and

 14 looked at significant data as it was available to

 15 us then. As we move forward, we can certainly,

 16 and I think at all times, look to whether we

 17 reconsider things. So I'm not able to support.

 18 COMMISSIONER WETJEN: I'd like to make

 19 just a couple of comments. My 12th grade Math

 20 teacher famously said, "There's more than one way

 21 to the mall." And I'm not going to pass judgment

 22 on whether this amendment is a better way to get
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 1 to where we need to go or not, but I think with

 2 the benefit of a little bit more notice about the

 3 amendment I could have gotten a better handle on

 4 this, which is I don't have a sense today what

 5 sort of procedural problems could arise by virtue

 6 of us adopting this amendment right now.

 7 Commissioner O'Malia just referred to a couple of

 8 comment letters but I think I would need more time

 9 and the advice of counsel to consider whether or

 10 not this inappropriately falls within the APA if

 11 we were to accept it, which is the main reason I

 12 can't support it.

 13 COMMISSIONER O'MALIA: Fair enough. But

 14 we would have, based on this requirement, a vote

 15 by the Commission to set the level based on public

 16 comment. So I think we would be not only with the

 17 letter of the law but the spirit of the law as

 18 well.

 19 I won't belabor this point. I'm happy

 20 to vote and look forward to the positive outcome.

 21 COMMISSIONER CHILTON: Mr. Chairman.

 22 CHAIRMAN GENSLER: Yes, Commissioner
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 1 Chilton.

 2 COMMISSIONER CHILTON: I just want to

 3 say, I mean, I appreciate Commissioner O'Malia's

 4 effort, but I believe that what we have before us

 5 is based on facts and data and a fulsome review of

 6 the comments. And I echo your concerns, Mr.

 7 Chairman, but thank Commissioner O'Malia for his

 8 effort but I think what we have is totally

 9 justifiable. Thanks.

 10 CHAIRMAN GENSLER: I guess we have a new

 11 secretary. Ms. Jurgens, do you want to call the

 12 roll?

 13 MS. JURGENS: This vote is on the

 14 amendment to the preamble language and the rule

 15 text to require fact-based determination of

 16 appropriate percentages of notional amount

 17 calculations.

 18 Commissioner Wetjen:

 19 COMMISSIONER WETJEN: No.

 20 MS. JURGENS: Commissioner Wetjen is no.

 21 Commissioner O'Malia.

 22 COMMISSIONER O'MALIA: Yes.
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 1 MS. JURGENS: Commissioner O'Malia is

 2 aye. Commissioner Chilton. Commissioner Chilton.

 3 COMMISSIONER CHILTON: No.

 4 MS. JURGENS: No. Commissioner Chilton

 5 is no. Commissioner Sommers.

 6 COMMISSIONER SOMMERS: Aye.

 7 MS. JURGENS: Aye. Commissioner Sommers

 8 is aye. Mr. Chairman.

 9 CHAIRMAN GENSLER: No.

 10 MS. JURGENS: No. Mr. Chairman, no.

 11 Mr. Chairman, on this question the ayes are two

 12 and the nos are three.

 13 CHAIRMAN GENSLER: Thank you. Do I call

 14 you Madam Secretary?

 15 Ms. Jurgens, do you want to call the

 16 roll?

 17 COMMISSIONER O'MALIA: Mr. Chairman, I

 18 make a motion to consider a second amendment.

 19 This amendment is -- do I have a second on that?

 20 COMMISSIONER SOMMERS: Second.

 21 COMMISSIONER O'MALIA: Thank you. This

 22 amendment does not change the percentage at all.
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 1 Do you want to hand it out? It says, "In making

 2 the determination of 67 percent that we have set

 3 in this rule that we will at least conduct a study

 4 beforehand and get public comment and then have a

 5 Commission vote." We also have protected the

 6 delegated authority as well to make sure that the

 7 Commission has the opportunity to vote on this.

 8 So we keep the 67 percent in. We don't -- we

 9 don't try to come up with another number, so we're

 10 protecting that number. So I just ask that we

 11 take a study, public comment, and vote on it.

 12 Did you give it to the secretary as

 13 well? I promise this is the last one. Maybe.

 14 We'll see how it turns out.

 15 CHAIRMAN GENSLER: It being motioned and

 16 duly seconded, are there any questions?

 17 COMMISSIONER SOMMERS: I actually have a

 18 question for the team.

 19 I just want to confirm because there

 20 were a couple of questions asked about this in the

 21 round of questioning for the final rule. Did we

 22 consider additional data from when we proposed the
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 1 block rule until now finalizing the block rule?

 2 Because I thought that we used the exact same

 3 data. And maybe I'm wrong. I didn't know we

 4 considered additional data in trying to figure

 5 this out.

 6 MR. DUNFEE: Right. We did not consider

 7 additional data.

 8 COMMISSIONER SOMMERS: I thought that

 9 that's what I had understood but then the comment

 10 was made that we considered additional data and we

 11 did not. So I just wanted to confirm that.

 12 CHAIRMAN GENSLER: Commissioner O'Malia,

 13 again, each of these amendments are only handed to

 14 us on the dais but this one I have had less time

 15 with than the earlier, but I feel I am not able to

 16 support this amendment. Like Commissioner Wetjen

 17 mentioned, I don't know what I would have done if

 18 I had had this a week or two weeks ago but I don't

 19 feel I can support this at this point in time. I

 20 do think that the Commission always has the

 21 opportunity to take petitions, to even to slow

 22 down the director of DMO or any director from
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 1 doing something if they think it's appropriate,

 2 but I think the rule that we have in front of us

 3 is a good rule. And so I'm unable to support this

 4 amendment.

 5 COMMISSIONER O'MALIA: Mr. Chairman, let

 6 me just, for the benefit of kind of the public

 7 watching, so what this does, prior to establishing

 8 the post-initial appropriate minimum block size as

 9 well as the post-initial capsize is the Commission

 10 shall complete a study that will assess whether

 11 the 67 percent is the appropriate percentage to be

 12 used for the notional amount calculation after the

 13 initial minimum block size period has expired. If

 14 based on the study the Commission determines that

 15 67 percent is not appropriate for any asset class,

 16 it will determine an alternative percentage or

 17 percentages to be used for notational amount

 18 calculation. The Commission notes that it will be

 19 able to make an informed evaluation of the

 20 appropriate percentages since it now receives

 21 swaps data from SDRs.

 22 I won't go into the rest of it. But
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 1 that's all it does.

 2 CHAIRMAN GENSLER: See, I don't accept

 3 the premise. I think that we have made and are

 4 about to make an informed determination based on

 5 notice and comment and a full public record and

 6 data with regard to this. And so I'm not able to

 7 support this.

 8 COMMISSIONER O'MALIA: Fair enough, but

 9 with all due respect, the data is three years old

 10 and it was only three months worth of data. So,

 11 and that was only for financial products; nothing

 12 for FX and commodities.

 13 COMMISSIONER CHILTON: Mr. Chairman.

 14 CHAIRMAN GENSLER: Commissioner Chilton.

 15 COMMISSIONER CHILTON: Mr. Chairman. It

 16 took us months to get to this point, so it seems

 17 to me we need to move on this stuff and get it in

 18 place. And after my thoughtful 60-second review

 19 of the amendment I can't support it.

 20 CHAIRMAN GENSLER: Ms. Jurgens.

 21 MS. JURGENS: This vote is on the second

 22 amendment to require fact-based determination of
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 1 appropriate percentages for notional amount

 2 calculations.

 3 Commissioner Wetjen.

 4 COMMISSIONER WETJEN: No.

 5 MS. JURGENS: Commissioner Wetjen, no.

 6 Commissioner O'Malia.

 7 COMMISSIONER O'MALIA: Aye.

 8 MS. JURGENS: Commissioner O'Malia, aye.

 9 Commissioner Chilton. Commissioner Chilton.

 10 COMMISSIONER CHILTON: No.

 11 MS. JURGENS: Commissioner Chilton, no.

 12 Commissioner Sommers.

 13 COMMISSIONER SOMMERS: Aye.

 14 MS. JURGENS: Commissioner Sommers, aye.

 15 Mr. Chairman.

 16 CHAIRMAN GENSLER: No.

 17 MS. JURGENS: Mr. Chairman, no. Mr.

 18 Chairman, on this question the ayes have two and

 19 the nos have three.

 20 CHAIRMAN GENSLER: Now, Ms. Jurgens,

 21 could you call the roll on the question, I

 22 believe, the staff proposal that was motioned and
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 1 duly seconded?

 2 MS. JURGENS: This vote is on the final

 3 rule procedures to establish appropriate minimum

 4 block sizes for large notional off-facility swaps

 5 and block trades.

 6 Commissioner Wetjen.

 7 COMMISSIONER WETJEN: Aye.

 8 MS. JURGENS: Commissioner Wetjen, aye.

 9 Commissioner O'Malia.

 10 COMMISSIONER O'MALIA: No.

 11 MS. JURGENS: Commissioner O'Malia, no.

 12 Commissioner Chilton.

 13 COMMISSIONER CHILTON: Aye.

 14 MS. JURGENS: Commissioner Chilton, aye.

 15 Commissioner Sommers.

 16 COMMISSIONER SOMMERS: No.

 17 MS. JURGENS: Commissioner Sommers, no.

 18 Mr. Chairman.

 19 CHAIRMAN GENSLER: Aye.

 20 MS. JURGENS: Mr. Chairman, aye. Mr.

 21 Chairman, on this question the ayes have three and

 22 the nos have two.
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 1 CHAIRMAN GENSLER: I thank you. Let me

 2 just say the ayes having or majority voting for

 3 it. We will send it along with any technical

 4 corrections to the Federal Register. And I want

 5 to thank John and George and Esen and Rick and

 6 Nhan. I assume that a couple of you, Rick and

 7 Nhan, you're staying at the table, maybe others as

 8 well, because the next presentation is on the

 9 staff recommendation on a rule called Made

 10 Available to Trade Process for Designated Contract

 11 Market or Swap Execution Facility to make a Swap

 12 Available to Trade under the Dodd-Frank Act and

 13 the Commodity Exchange Act.

 14 I want to thank -- we have some new

 15 colleagues joining at the table, I think.

 16 Rick Shilts, the head of the Division of

 17 Market Oversight; David Van Wagner, deputy and

 18 chief counsel for the Division; Nhan Nguyen, who

 19 is the team lead; Sayee Srinivasan and Mike

 20 Penick, who are both from the Office of Chief

 21 Counsel and have spent many, many months, nights,

 22 days looking at the economics of the swap
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 1 execution facility rules, the designated contract

 2 market rules that we moved on last summer, and

 3 this important made available for trading rule.

 4 Do I hand it over to Nhan? Is that

 5 right?

 6 MR. NGUYEN: That's right. Thanks.

 7 Good morning, Mr. Chairman and Commissioners.

 8 Today staff is recommending for the

 9 Commission's consideration rules that establish a

 10 process for designated contract markets (DCMs) and

 11 swap execution facilities (SEFs) to make a swap

 12 available to trade and establish a schedule to

 13 phase-in compliance with the trade execution

 14 requirement under section 2h(8) of the Act.

 15 First, we'd like to thank our colleagues

 16 in the Division of Market Oversight, the Office of

 17 the General Counsel, and the Office of the Chief

 18 Economist for all of their hard work, advice, and

 19 support during this rulemaking process. The

 20 available to trade rule was proposed as a Further

 21 Notice of Proposed Rulemaking in December of 2011.

 22 The Commission hosted a public roundtable on the
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 1 issue in January 2012. The Commission

 2 subsequently received over 30 comment letters on

 3 this proposal and held a number of meetings with

 4 market participants. The discussions and comments

 5 arising out of the roundtable and letters were

 6 informative and insightful and have led staff to

 7 suggest a number of changes and clarifications to

 8 the proposed rule.

 9 The statutory basis for this rule lies

 10 in section 723 of the Dodd-Frank Act, which

 11 establishes the trade execution requirement under

 12 section 2h(8) of the Commodity Exchange Act.

 13 Under the trade execution requirement, swaps

 14 transactions that are subject to the clearing

 15 requirement must be traded on a DCM or a SEF

 16 unless no DCM or SEF makes the swap available to

 17 trade or the transaction otherwise is not required

 18 to be cleared. The final rules implement the

 19 trade execution requirement by allowing a DCM or

 20 SEF to submit a rule filing to the Commission

 21 stating its determination that a swap is available

 22 to trade either under the Commission's 40.5 rule
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 1 approval process or the 40.6 rule certification

 2 process.

 3 In response to comments received, the

 4 final rules established two prerequisites

 5 regarding its review of these determinations.

 6 First, the Commission will only review submissions

 7 with respect to swaps that are already subject to

 8 the clearing requirement. Second, the final rules

 9 require that a DCM or SEF submitting an initial

 10 determination must actually list or offer that

 11 swap for trading on its own trading platform or

 12 system.

 13 In making its determination, the DCM or

 14 SEF must consider, as appropriate, one or more of

 15 the following factors with respect to the swap:

 16 (1) whether there are willing buyers and sellers;

 17 (2) the frequency or size of transactions; (3) the

 18 trading volume; (4) the number and types of market

 19 participants; (5) the bid-ask spread; and (6) the

 20 usual number of resting firm or indicative bids

 21 and offers.

 22 The proposed rule included eight
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 1 factors, one of which would have allowed a SEF or

 2 DCM to consider any factor that it considered to

 3 be relevant. In response to comments, this factor

 4 has been withdrawn from the final rules. Another

 5 factor, whether a SEF or DCM will support trading

 6 in the swap, has also been withdrawn given the

 7 adoption of the listing requirement.

 8 In response to commenters, the preamble

 9 to the final rule states that the Commission will,

 10 for an initial period of time, extend the review

 11 periods for these determinations as permitted

 12 under section 40.5 and 40.6 to 90 and 100 days,

 13 respectively, to allow market participants to

 14 submit and for the Commission to consider public

 15 comments. The proposed rules also requested

 16 comment on whether a SEF or DCM should be allowed

 17 to submit a determination with respect to a group,

 18 category, type, or class of swap. In response to

 19 those comments, the final rules allow a SEF or DCM

 20 to do so with discretion given to the SEF or DCM

 21 to define that group, category, type, or class of

 22 swap. However, such a determination must address
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 1 how the factors apply to all the swaps in the

 2 group, category, type, or class that has been

 3 submitted to the Commission. The proposed rules

 4 also request a comment on whether a SEF or DCM, in

 5 evaluating a swap, should be able to consider

 6 activity regarding the same swap on other SEFs,

 7 DCMs, or activity in the bilateral market. In

 8 response to comments, the final rules allow a SEF

 9 or DCM to do so.

 10 Upon approving or deeming a swap is

 11 available to trade, the final rules clarify that

 12 all of the DCMs and SEFs that list or offer that

 13 swap for trading must do so in accordance with the

 14 trade execution requirement and the Commission's

 15 regulations with respect to methods of execution.

 16 The final rules also clarify that subsequent SEFs

 17 and DCMs will not be required to submit separate

 18 determinations for that swap.

 19 The proposed rule had included and

 20 requested comment on a requirement that

 21 economically equivalent swaps that are listed or

 22 offered for trading must also be made available to
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 1 trade and therefore, subject to the trade

 2 execution requirement. In response to commenters,

 3 the final rules do not adopt this requirement.

 4 The proposed rules also request a comment on

 5 whether there should be a process by which a swap

 6 is deemed no longer available to trade. The final

 7 rules clarify that when all SEFs and DCMs that had

 8 listed or offered that swap for trading no longer

 9 list or offer that swap for trading, then the

 10 Commission will deem that swap as no longer

 11 available to trade. Given this clarification, the

 12 final rules do not adopt a required annual review

 13 of all swaps that are available to trade as had

 14 been proposed. The final rules also provide that

 15 the Commission will post all available to trade

 16 determinations on its website.

 17 The final rules also include a schedule

 18 to implement the trade execution requirement.

 19 This schedule was proposed in a proposed

 20 rulemaking in September of 2011, and the

 21 Commission received over 30 comment letters. The

 22 final rules adopt the schedule as proposed which
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 1 requires market participants to comply with the

 2 trade execution requirement at the later of the

 3 applicable deadline established under the clearing

 4 requirement compliance schedule under the

 5 Commission's regulations or 30 days after the swap

 6 is deemed available to trade by the Commission.

 7 At this time we would be happy to

 8 address any questions that you may have.

 9 CHAIRMAN GENSLER: Thank you, Nhan. I'd

 10 consider a motion on the staff recommendation.

 11 COMMISSIONER SOMMERS: So moved.

 12 COMMISSIONER O'MALIA: Second.

 13 CHAIRMAN GENSLER: Thank you. I don't

 14 have questions. I do support this final

 15 rulemaking to implement the process for swap

 16 execution facilities in designated contract

 17 markets to "make a swap available to trade" or

 18 what has come to be known as the MAT rule, though

 19 MAT is not sitting at the table.

 20 Today's rule also finalizes a separate

 21 Commission rule proposal on phased-in compliance

 22 for the trade execution requirements, so there's
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 1 actually -- this is one of those moments -- I say

 2 this for the public -- where we took two rules and

 3 we're pulling them together in one. Completion of

 4 these two rules facilitates the congressionally

 5 mandated -- and I would say critical -- reform

 6 promoting pre-trade transparency in the swaps

 7 market. The trade execution facility of

 8 Dodd-Frank requires that swaps be traded on SEFs

 9 or DCMs that: (1) are subject to mandatory

 10 clearing; and (2) made available to trade. Now,

 11 this Commission made significant progress through

 12 many rulemakings and we now have clearing

 13 requirements in four major interest rate markets

 14 and a number of credit default swap indices.

 15 Those are the indices that are at the center of

 16 last year's very public events around JPMorgan

 17 chief investment office and what has been called

 18 the London Whale.

 19 Such platforms, these SEFs and DCMs,

 20 will allow participants the ability to trade swaps

 21 by accepting bids and offers made by multiple

 22 participants with all market participants given
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 1 impartial access. We've had impartial access or

 2 similar broad access to designated contract

 3 markets but that is what Congress said would also

 4 be on these swap execution facilities.

 5 The MAT rule establishes, I believe, a

 6 flexible process for a SEF or DCM to make a swap

 7 available to trade. And I would note while

 8 Congress mandated and had a very specific process

 9 for clearing determinations, Congress did not

 10 mandate that this Commission have a process for

 11 this. It simply said -- and Nhan, you'll tell me

 12 what the statutory language -- was it 5h -- what

 13 is it? Or David? What's that? Two?

 14 MR. VAN WAGNER: The trade execution

 15 mandate 2h(8).

 16 CHAIRMAN GENSLER: 2h(8) that these two

 17 conditions required clearing and made available

 18 for trading.

 19 So I think this flexible process is

 20 appropriate; that the trading platforms will

 21 determine first which swaps they wish to make

 22 available to trading on their platforms, and that
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 1 these determinations will be submitted to the

 2 Commission either as self-certified or seeking

 3 approval under part 40.

 4 We did actually propose something about

 5 made available for trading in the first SEF

 6 proposal back in December of 2010 or it may have

 7 been in the Federal Register in January of 2011.

 8 Is that correct, Nhan and David?

 9 MR. NGUYEN: Yes. It was originally

 10 proposed in the SEF.

 11 CHAIRMAN GENSLER: And that would have

 12 allowed swap execution facilities just to put it

 13 up on their website with no Commission

 14 involvement. I think that this proposal as

 15 modified through the comment process is flexible

 16 but provides the public with ample public notice

 17 and opportunity to be heard through the process

 18 and the Commission process under part 40 I think

 19 is appropriate.

 20 We also have a phase-in rule here. The

 21 phase-in rule we proposed in I believe September

 22 of 2011. And that got significant public comment.
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 1 The phase-in would provide market participants

 2 with 30 days after the SEF or DCM

 3 self-certification process or rule approval had

 4 finished. And as that self-certification or rule

 5 approval process may take as much as 100 or so

 6 days, it's in essence 30 days after that process.

 7 And I know some of the commenters said that such

 8 determination should not be taken up until after

 9 there's a clearing mandate, and I support the

 10 changes the staff made also to ensure as I

 11 corrected -- David, you know it says Dan on your

 12 card there instead of David? That this MAT

 13 determination is only taken up after there's a

 14 clearing requirement. Is that right?

 15 MR. NGUYEN: Yes, that's correct.

 16 CHAIRMAN GENSLER: So I support the

 17 rule. Commissioner Sommers.

 18 COMMISSIONER SOMMERS: Thank you, Mr.

 19 Chairman. And thank you to this team for all of

 20 your hard work in helping us navigate what I will

 21 or what I always have considered a very

 22 significant determination for this Commission.
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 1 And I know it hasn't been easy to figure out how

 2 we apply the statute in this context but this does

 3 determine what contracts will be mandated to be

 4 traded on exchange. So I think I can't

 5 over-exaggerate the significance of this process

 6 and the significance of the determination of this

 7 Commission to allow SEFs and DCMs to be making the

 8 determination of what is mandated.

 9 My fear, and I guess assumption, has

 10 always been that everything that is mandated to be

 11 cleared will end up being mandated to be traded on

 12 a platform because of the way we have structured

 13 this rule. And because we made broad clearing

 14 determinations, and I'm not saying that I disagree

 15 with that, but we made broad determinations in

 16 what's mandated to be cleared. There are a lot of

 17 contracts that I fear are not appropriate to be

 18 mandated and I think will be subject to this

 19 mandate.

 20 I just have a couple of questions. Is

 21 there anything in our act or in our rules that

 22 would prevent a SEF or a DCM from making a MAT
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 1 determination for an illiquid, off-the-run credit

 2 default swap as long as it trades once in a while?

 3 MR. NGUYEN: Commissioner Sommers, I

 4 think it's difficult given the novelty of this

 5 process to prejudge which swaps, you know, may be

 6 deemed not made available to trade. I think what

 7 we have here is a process by which a SEF or DCM

 8 can submit its initial determination to the

 9 Commission with the factors that are in this rule

 10 and to allow public comments for a period of time

 11 to come in. And on the basis of how the factors

 12 are applied and the explanation that a SEF or DCM

 13 gives us along with perhaps different perspectives

 14 from public comments, at that point we'll be able

 15 to make a determination of whether the swap is

 16 available to trade or inconsistent with the Act or

 17 the regs.

 18 COMMISSIONER SOMMERS: Thank you. I

 19 appreciate that but I also, you know, I'm

 20 concerned that because there aren't really

 21 objective standards that it's going to be

 22 difficult for the Commission and the Commission
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 1 staff.

 2 The preamble says that satisfying any of

 3 the determination factors would sufficiently

 4 indicate that a contract is suitable for mandatory

 5 trade execution. How will a DCM or SEF satisfy

 6 any of the factors given that they don't

 7 incorporate objective standards?

 8 MR. NGUYEN: Well, Commissioner Sommers,

 9 we think that the factors are each and of

 10 themselves indicative of trading liquidity and

 11 what we have here as I stated is a flexible

 12 process by which we expect in a rule filing the

 13 SEF or DCM to give us a submission containing an

 14 explanation or analysis based on one or more of

 15 these factors, how that swap that they've

 16 submitted is available to trade, and as we stated

 17 in the preamble that we expect that explanation to

 18 be clear and informative. It's our hope and

 19 expectation that, you know, we will get public

 20 comments on those determinations that will help us

 21 inform whether that swap should be made available

 22 to trade or not.
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 1 COMMISSIONER SOMMERS: Thank you. As I

 2 said in my opening statement, I fear that this

 3 rule in particular has the greatest prospect of

 4 putting us at odds with some of our colleagues in

 5 foreign jurisdictions because I fear that they

 6 will not adopt this sort of process. So once we

 7 know, especially those major jurisdictions such as

 8 Europe, once we know where they may be in making

 9 mandatory trade determinations, what process could

 10 the Commission take to make a step backwards from

 11 any of these determinations? How can we remove a

 12 swap from the MAT determination?

 13 MR. NGUYEN: Well, as the final rules

 14 clarify, once all SEFs -- one SEF or DCM, they

 15 make the swap available to trade and the trade

 16 execution requirement would apply, when all -- if

 17 there are subsequent SEFs or DCMs that list or

 18 offer this swap for trading and therefore they're

 19 subject to the trade execution requirement. When

 20 all those SEFs or DCMs have delisted that swap it

 21 would be in our judgment that that swap would no

 22 longer meet any of the six factors set forth in
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 1 the rule and at that point the Commission would

 2 deem that swap no longer available to trade.

 3 COMMISSIONER SOMMERS: I think that's

 4 what I was afraid of. As long as a SEF or a DCM

 5 continues to list a swap and it's already been

 6 subject to a MAT determination, there's no way to

 7 remove it from that determination unless the SEF

 8 or the DCM -- this is a question -- unless the SEF

 9 or DCM delists it?

 10 MR. VAN WAGNER: Just -- right. But in

 11 addition to that -- because I thought when you

 12 started you were referring to things that the

 13 Commission could do of its own initiative. And I

 14 think of its own initiative it could take 8a(7)

 15 action vis-à-vis the various exchanges that list

 16 that product.

 17 COMMISSIONER SOMMERS: If you could

 18 elaborate on that. I'm sorry, I didn't

 19 understand.

 20 MR. VAN WAGNER: 8a(7) gives the

 21 Commission authority of its own initiative to

 22 basically impose rule changes on SEFs or DCMs. So
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 1 in this case, because the determination itself was

 2 prompted by a rule change, essentially you could

 3 reverse that by taking action vis-à-vis the

 4 exchanges that list that and basically say you

 5 want to unwind the determination. And again --

 6 COMMISSIONER SOMMERS: So we could use

 7 8a(7) to only unwind the MAT determination, not

 8 tell them to delist it?

 9 MR. VAN WAGNER: Yeah, theoretically.

 10 Right.

 11 COMMISSIONER SOMMERS: Okay, thank you.

 12 CHAIRMAN GENSLER: Can I just follow up?

 13 But it's the MAT determination that leads to a

 14 trade execution requirement; a simple listing does

 15 not.

 16 MR. VAN WAGNER: Correct.

 17 MR. NGUYEN: Commissioner Sommers, I

 18 would also note as we discussed in the preamble to

 19 the final rules, insofar there is a listing

 20 requirement for the swaps that are submitted to us

 21 as available to trade, they're submitted to the

 22 Commission initially as a product listing or a
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 1 product filing under 40.2 or 40.3. And under the

 2 part 40 rules, we, the Commission, are allowed to

 3 request of a SEF or DCM that's listing that swap

 4 additional information that would --

 5 hypothetically speaking, that would demonstrate

 6 that the swap continues to be available to trade.

 7 CHAIRMAN GENSLER: Thank you,

 8 Commissioner Sommers. I think that last exchange

 9 is very helpful, the 8a(7) can be used by this

 10 Commission or future commissions to in essence

 11 address itself or reverse a MAT determination.

 12 David, do you just want to confirm that

 13 again?

 14 MR. VAN WAGNER: Correct.

 15 CHAIRMAN GENSLER: Without requiring

 16 delisting though.

 17 MR. VAN WAGNER: Correct.

 18 CHAIRMAN GENSLER: Commissioner Chilton.

 19 Commissioner Chilton, did you have any questions?

 20 COMMISSIONER CHILTON: I'm sorry, the

 21 audio wasn't on yet. Yeah, sorry.

 22 How will folks be notified when a MAT
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 1 determination has been made? There has to be some

 2 sort of market-wide dissemination, right?

 3 MR. NGUYEN: Commissioner Chilton, as we

 4 noted in our final rule the part 40 submissions,

 5 as with other part 40 submissions, are currently

 6 posted on our website, and as we also stated in

 7 the preamble, we plan on listing on a centralized

 8 area of our website a list of all the swaps that

 9 are approved as available to trade and therefore

 10 subject to the trade execution requirement. This

 11 would, we believe, give market participants notice

 12 of which swaps are subject to the trade execution

 13 requirement.

 14 COMMISSIONER CHILTON: Okay. And will a

 15 DCM be able to trigger the trading mandate in

 16 advance of SEF being registered? Can they trigger

 17 it like that?

 18 MR. NGUYEN: No. What a DCM could do on

 19 the effective date they could make a filing or

 20 make a determination and submit a filing to the

 21 Commission that that swap is available to trade,

 22 but the actual trade execution mandate wouldn't
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 1 take effect until after the part 40 review process

 2 occurs and after the implementation period that we

 3 have for market participants to prepare to comply

 4 with the trade execution requirement passes.

 5 COMMISSIONER CHILTON: Okay, thank you.

 6 CHAIRMAN GENSLER: Thank you,

 7 Commissioner Chilton.

 8 Commissioner O'Malia.

 9 COMMISSIONER O'MALIA: Thank you very

 10 much. Thank you to the team for trying to make

 11 this process workable with little congressional

 12 direction and advice.

 13 Can you provide an example of a cleared

 14 trade that you believe would be unacceptable to

 15 receive the MAT determination?

 16 MR. NGUYEN: Commissioner O'Malia, it's

 17 difficult to prejudge, you know, which swaps, you

 18 know, at this moment we would deem as not made

 19 available to trade. I think it would depend on

 20 the swaps that SEF or DCM subsequently decides to

 21 list first and then to submit to us. And also,

 22 what we would do, expect to do is review the
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 1 explanation analysis and how they've applied to

 2 the factors in that determination and also look at

 3 the public comments before making that

 4 determination.

 5 COMMISSIONER O'MALIA: Could a SEF

 6 submit the entire rates curve for MAT

 7 determination as part of its group grouping that

 8 they could submit, that they provide in here?

 9 MR. NGUYEN: Well, as long as the SEF is

 10 listing or offering swaps for trading that cover

 11 that curve that you speak of out to a certain

 12 year, then yes, it could submit all those swaps as

 13 a group, type, category, or class. But as the

 14 final rules stated, they would have to apply at

 15 least one or more of the factors to all the swaps

 16 and explain how the swaps in that grouping are all

 17 available to trade.

 18 COMMISSIONER O'MALIA: Do you see any

 19 reason why they wouldn't?

 20 MR. NGUYEN: It's difficult to determine

 21 at this point.

 22 COMMISSIONER O'MALIA: Of the six
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 1 criteria you've selected to make the MAT

 2 determination, do you believe one or more of these

 3 is relevant to our determination? Or more

 4 important? Greater weight?

 5 MR. NGUYEN: Well, as we discussed in

 6 the preamble to our final rule, we think that each

 7 of the six factors are relevant to -- could be

 8 relevant to an available to trade determination

 9 and they all could be indicators of trading

 10 liquidity. But, you know, depending on the swap

 11 that's submitted to us as available to trade, one

 12 or more of the factors could be more relevant than

 13 the other depending on the determination and how

 14 the factors are applied.

 15 COMMISSIONER O'MALIA: I love all my

 16 children equally, right?

 17 MR. NGUYEN: Perhaps. Yes.

 18 COMMISSIONER O'MALIA: So in the period

 19 between the compliance date, this is date 61 and

 20 the effective date, which is date 120, will we be

 21 using trade data -- actual trade data to make any

 22 informed decisions about an eventual MAT
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 1 determination? And will we use accept pre

 2 Dodd-Frank, you know, any trades that are

 3 occurring today, for example, as part of a MAT

 4 determination?

 5 MR. NGUYEN: Well, Commissioner O'Malia,

 6 the final rules state that we would consider the

 7 information, evidence, or data that would come in

 8 at filing and perhaps with public comments, but to

 9 the extent that we have data or information

 10 available to us in our role, our market oversight

 11 role that would help inform us about whether a

 12 swap is available to trade, I think we would be

 13 able to use that information in the review

 14 process. I think it would be -- we would have to

 15 disclose what information it is we used to make

 16 that consideration as part of the administrative

 17 record. And I think this approach is consistent

 18 with our practice when we review other part 40

 19 filings.

 20 COMMISSIONER O'MALIA: So what about

 21 futures data? Would that be relevant? I know you

 22 don't have an economic equivalency requirement,
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 1 but could a firm submit or a SEF submit as

 2 evidence of tradability futures data?

 3 MR. VAN WAGNER: I don't think they're

 4 foreclosed from using it to make that argument.

 5 I'm not an economist but I don't think they're

 6 foreclosed from using that.

 7 COMMISSIONER O'MALIA: So like our six

 8 factors, all data we view in a very similar,

 9 favorite-no favorite children status; it's all

 10 good as long as it's data? Relevant trade data.

 11 Relevant to the topic.

 12 MR. VAN WAGNER: It goes into the

 13 administrative record that the Commission would

 14 consider when it makes that evaluation at the end

 15 of the review period. I don't think there's

 16 anything. So it has whatever weight you would

 17 eventually want to give it when you consider it.

 18 COMMISSIONER O'MALIA: David, can you go

 19 through this 8a(7) process for delisting? Is

 20 there a notice and comment period? Does somebody

 21 submit a request or is this a self-executing

 22 thing?
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 1 MR. VAN WAGNER: There's obviously

 2 enough -- it can be informally prompted by

 3 somebody filing a petition with us or basically

 4 complaining to the Commission. The way the

 5 process basically -- there are a number of steps.

 6 The Commission itself would basically have to --

 7 the particulars -- presumably the particular swap

 8 that's in question, the Commission would actually

 9 basically have to pose, send a letter to the

 10 exchange or the exchanges basically saying, you

 11 know, why do you think that this continues to be a

 12 made available for trading, an indication being

 13 that this would be an 8a(7) letter and the end

 14 result might eventually be the Commission actually

 15 moving to change the rule. The DCM or SEF that

 16 receives it would have an opportunity to respond.

 17 The Commission would consider it and then if the

 18 Commission wanted to force a rule change on the

 19 DCMs or SEFs involved it would actually have to

 20 put out a Federal Register notice to that effect.

 21 There would be a comment process. I don't think

 22 there's any embedded particular number of days but
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 1 there would be a comment process, and ultimately,

 2 the Commission would make a determination whether

 3 or not the made available to trade determination

 4 with respect to a particular product should stand.

 5 And if I remember correctly, it actually

 6 -- it ends up even being in our regulations. We

 7 actually had -- some years back we had a number of

 8 regs which actually said the CBT must -- the Board

 9 of the Chicago Exchanges must change a particular

 10 arbitration rule and the rule itself was laid out

 11 in our rules. I can't remember whether that's

 12 still in 8a(7) itself but it's basically the

 13 Commission imposing a rule on a DCM or a SEF.

 14 COMMISSIONER O'MALIA: And how

 15 frequently have we used that?

 16 MR. VAN WAGNER: Very infrequently. I

 17 will not oversell it. It's probably been 20

 18 years.

 19 COMMISSIONER O'MALIA: Okay.

 20 MR. VAN WAGNER: But the threat is out

 21 there.

 22 COMMISSIONER O'MALIA: There you go. So
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 1 the Clear-port situation and with the energy

 2 contracts, and we don't have an energy clearing

 3 mandate so therefore you don't have a mandatory

 4 trade determination pending. But it does -- we

 5 have a lot of cleared contracts, right? Thousands

 6 of contracts that are cleared, yet the liquidity

 7 and the onscreen trading is a little light, so to

 8 speak. How do we create a mandatory trade

 9 determination in situations like that? How do we

 10 say yes, we understand it's clearable?

 11 Eventually, these energy products will be

 12 mandatorily cleared, and required to be cleared,

 13 but how do we make a determination that there is

 14 sufficient liquidity to trade using Clear-port

 15 energy contracts as an example?

 16 MR. NGUYEN: Well, Commissioner, I think

 17 in your particular scenario it would be up to the

 18 DCM or SEF that's listing these contracts to make

 19 the case to us based on the factors set forth that

 20 there is, you know, sufficient I guess or enough

 21 trading liquidity that it's available to trade and

 22 therefore subject to the trade execution
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 1 requirement we would expect with the public

 2 comment period we're offering, you know, we'd have

 3 market participants weigh in on their thoughts on

 4 whether these swaps should be subject to the trade

 5 execution requirement.

 6 MR. SHILTS: And also the requirement,

 7 it doesn't go into effect or can't even be

 8 considered until there's a clearing mandate for

 9 these particular swaps.

 10 COMMISSIONER O'MALIA: No, I understand.

 11 MR. VAN WAGNER: Until that's done

 12 there's really not --

 13 COMMISSIONER O'MALIA: No, this is more

 14 of a hypothetical but, you know, eventually we'll

 15 get there. I'm a big fan of data and comments,

 16 so. It's really up to the SEF is what you're

 17 saying.

 18 MR. NGUYEN: In so far as they're making

 19 an initial determination and presenting their

 20 determination of filing for the Commission's

 21 review. That's their role in the process.

 22 COMMISSIONER O'MALIA: I have no further
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 1 questions. Thank you very much.

 2 CHAIRMAN GENSLER: Before I hand over to

 3 Commission Wetjen, I just want to note I'm sure

 4 that Claire, Kelsey, and Macy are very happy to

 5 hear that you love them all equally, and I would

 6 say the same thing about Anna, Lee, and Isabelle.

 7 So, good going, Dad.

 8 Commissioner Wetjen.

 9 COMMISSIONER WETJEN: If my

 10 three-year-old had slept through the night last

 11 night, I might agree with you.

 12 I don't have any questions.

 13 CHAIRMAN GENSLER: Ms. Jurgens.

 14 MS. JURGENS: This vote is on the final

 15 rule process for a designated contract market or

 16 swap execution facility.

 17 CHAIRMAN GENSLER: I'm sorry. I'm

 18 sorry. Mr. -- yes, we did Commissioner Chilton.

 19 Yeah.

 20 MS. JURGENS: To make a swap available

 21 to trade under section 2(h)(8) of the Commodity

 22 Exchange Act or CEA, swap transaction compliance
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 1 and implementation schedule, trade execution

 2 requirement under 2(h) of the CEA.

 3 Commissioner Wetjen.

 4 COMMISSIONER WETJEN: Aye.

 5 MS. JURGENS: Commissioner Wetjen, aye.

 6 Commissioner O'Malia.

 7 COMMISSIONER O'MALIA: No.

 8 MS. JURGENS: Commissioner O'Malia, no.

 9 Commissioner Chilton.

 10 COMMISSIONER CHILTON: Aye.

 11 MS. JURGENS: Commissioner Chilton, aye.

 12 Commissioner Sommers.

 13 COMMISSIONER SOMMERS: No.

 14 MS. JURGENS: Commissioner Sommers, no.

 15 Mr. Chairman.

 16 CHAIRMAN GENSLER: Aye.

 17 MS. JURGENS: Mr. Chairman, aye. Mr.

 18 Chairman, on this question the ayes have three;

 19 the nos have two.

 20 CHAIRMAN GENSLER: The ayes having it,

 21 the staff recommendation is accepted. And with

 22 any technical edits it will be sent to the Federal
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 1 Register.

 2 I thank you all for all this work. I

 3 gather Mr. Shilts, Van Wagner, Sayee, and Mike,

 4 you're staying up, too, as well, right? And is

 5 Amir Zaidi coming up? Great.

 6 Do you want to take a break or anything?

 7 I want to introduce to the public the team that's

 8 been working on the swap execution facility rule

 9 from the Division of Market Oversight, David Van

 10 Wagner and Amir Zaidi; from the Office of Chief of

 11 Counsel, Sayee Srinivasan and Mike Penick; from

 12 our General Counsel's Office, Adrianne Joves; and

 13 it looks like Jonathan Marcus is joining us as

 14 well. Rick Shilts from the Division of Market

 15 Oversight I assume will be joining us.

 16 I also just want to give a shout out to

 17 Bella Rozenberg, who had team led this for a while

 18 before she went to work for Commissioner O'Malia's

 19 office. Joe Cisewski who is in Commissioner

 20 Wetjen's office who was on the team. It seems

 21 this team feeds the commissioners' offices. Riva

 22 Adriance, who had been working on it initially.
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 1 Mauricio and others. There's a lot of people.

 2 Carlene Kim, and Steve Seitz, who have been

 3 working on this rule.

 4 But I thank you all. I know it's been a

 5 lot of long nights, a lot of consultation with all

 6 five commissioners and their legal assistants, and

 7 many a public comments.

 8 Who do I turn it over to? Amir. You've

 9 got the table.

 10 MR. ZAIDI: Good morning, Mr. Chairman

 11 and Commissioners.

 12 Today staff is recommending that the

 13 Commission approve for publication in the Federal

 14 Register final rules pertaining to the core

 15 principles and other requirements for swap

 16 execution facilities. I would also like to thank

 17 the many staff members who contributed to this

 18 final rulemaking for their hard work and

 19 dedication.

 20 I'll first provide a little bit of

 21 background and then go into the proposal and

 22 final.
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 1 Title 7 of the Dodd-Frank Act

 2 establishes a comprehensive regulatory framework,

 3 including registration, operation, and compliance

 4 requirements for SEFs. Section 733 of the

 5 Dodd-Frank Act added section 5h of the CEA,

 6 Commodity Exchange Act, which sets forth

 7 registration and compliance requirements for SEFs,

 8 including 15 core principles that SEFs must comply

 9 with in order to register and maintain

 10 registration as a SEF. Section 5h of the CEA also

 11 states that the goal of this section is to promote

 12 the trading of swaps on SEFs and to promote

 13 pre-price transparency in the swaps market.

 14 Section 721 of the Dodd-Frank Act added

 15 section 1a(50) of the CEA which defines SEF as "a

 16 trading system or platform in which multiple

 17 participants have the ability to execute or trade

 18 swaps by accepting bids and offers made by

 19 multiple participants in the facility or system

 20 through any means of interstate commerce."

 21 Section 723 of the Dodd-Frank Act

 22 amended section 2(h) of the CEA which sets forth a
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 1 trade execution requirement in section 2(h)(8) of

 2 the CEA. Swaps subject to the clearing

 3 requirement and made available to trade must be

 4 traded on a DCM or SEF.

 5 On January 7, 2011, the Commission

 6 published for comment a combination of proposed

 7 regulations, guidance, and acceptable practices

 8 pertaining to SEFs. The Commission reviewed many

 9 comment letters from and participated in numerous

 10 meetings with members of the public in connection

 11 with the SEF proposal. The Commission also

 12 consulted with the Securities and Exchange

 13 Commission and International Regulators on

 14 numerous occasions. This final rulemaking is

 15 informed by and benefits from those public

 16 comments and meetings. In this final rulemaking,

 17 staff is recommending that the Commission adopt

 18 many of the regulations that were proposed with

 19 respect to how SEFs comply with section 5h of the

 20 CEA. However, as a result of public comments and

 21 meetings, this final rulemaking revises or

 22 eliminates a number of proposed regulations and in
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 1 a number of instances establishes guidance and/or

 2 acceptable practices in lieu of the proposed

 3 regulations.

 4 In determining the scope and content of

 5 the final SEF rules, the cost and benefits for

 6 each rule were carefully considered in light of

 7 the public comments. In the interest of time I'll

 8 give a general overview of selected aspects of

 9 this final rulemaking and then we'll be happy to

 10 answer any questions.

 11 Section 5h(a)(1) of the CEA sets forth a

 12 broad registration requirement which states that

 13 no person may operate a facility for the trading

 14 or processing of swaps unless the facility is

 15 registered as a SEF or DCM. This final rulemaking

 16 adopts a registration requirement for any person

 17 who operates a facility that meets the SEF

 18 definition. Accordingly, this final rulemaking

 19 states that any person operating a facility that

 20 offers a trading system or platform in which more

 21 than one market participant has the ability to

 22 execute or trade swaps with more than one other
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 1 market participant on the system or platform must

 2 register as a SEF or DCM.

 3 In response to commenters' requests,

 4 this final rulemaking provides examples of whether

 5 certain better understood categories of facilities

 6 fall within the registration requirements. In

 7 addition, consistent with the 2(h)(8) execution

 8 requirement, swaps subject to the trade execution

 9 requirement, those swaps that are subject to the

 10 clearing requirement and made available to trade

 11 are required to be executed on a SEF or DCM. The

 12 rulemaking also states that swaps not subject to

 13 the trade execution requirement may be executed on

 14 a SEF or DCM or an entity that is not required to

 15 register as a SEF.

 16 The final rulemaking also provides

 17 procedures for full and temporary registration.

 18 An applicant seeking registration as a SEF may

 19 request that the Commission grant the applicant

 20 temporary registration. The Commission will grant

 21 a request for temporary registration upon a

 22 determination that the applicant has filed a
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 1 complete form SEF and submitted a notice to the

 2 Commission requesting that the Commission grant

 3 the applicant temporary registration. Complete

 4 form SEF means that the applicant provides

 5 appropriately responsive answers to each of the

 6 items set forth in form SEF. Staff will not

 7 conduct a substantive review before granting

 8 temporary registration. An applicant may operate

 9 as a SEF under temporary registration upon a

 10 notice from staff granting temporary registration

 11 but in no case before the effective date of the

 12 SEF rules.

 13 The final rulemaking adopts the minimum

 14 trading functionality requirement as noted in the

 15 SEF proposal, which is now termed an order book.

 16 An order book is similar to the definitions in the

 17 SEF proposal, that is an electronic trading

 18 facility as defined under the CEA, a trading

 19 facility as defined under the CEA, or a platform

 20 in which all market participants have the ability

 21 to enter multiple bids and offers, observe or

 22 receive bids and offers entered by other market
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 1 participants, and transact on such bids and

 2 offers.

 3 An entity that must register as a SEF

 4 must ensure that its operations comply with this

 5 order book minimum trading functionality

 6 requirement. This final rulemaking also

 7 distinguishes between transactions that are and

 8 those that are not subject to the CEA section

 9 2(h)(8) trade execution mandate and provides

 10 execution methods for each category.

 11 As I noted earlier, swaps not subject to

 12 the trade execution mandate may be executed on a

 13 SEF or DCM or an entity that is not required to

 14 register as a SEF. If a SEF chooses to list such

 15 swaps defined as permitted transactions in the

 16 release, this rulemaking does not limit the

 17 execution methods that are available to market

 18 participants or require market participants to

 19 utilize certain execution methods for such

 20 permitted transactions.

 21 On the other hand, transactions

 22 involving swaps that are subject to the trade
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 1 execution requirement must be traded on a SEF or

 2 DCM. This final rulemaking provides that

 3 transactions in such swaps defined as required

 4 transactions in this release and that are not

 5 block trades must be executed on a SEF in

 6 accordance with the order book or RFQ system and

 7 order book execution methods.

 8 I previously described the order book so

 9 I'll now go into the RFQ system. An RFQ system

 10 means a trading system or platform in which a

 11 market participant transmits a request for a quote

 12 to buy or sell a specific instrument to no less

 13 than three market participants in the trading

 14 system or platform to which all such market

 15 participants may respond. This final rulemaking

 16 lowers the minimum market participant requirement

 17 from the proposed five market participant

 18 requirement to the final three market participant

 19 requirement. Several commenters expressed

 20 concerns about the risk with respect to

 21 information leakage and a potential winners' curse

 22 for the market participant whose quote is accepted
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 1 by the RFQ requester under the proposed five

 2 market participant requirement.

 3 To address the concerns of commenters

 4 while still complying with the statutory SEF

 5 definition and promoting the goals provided in

 6 section 5h of the CEA that is pre-trade price

 7 transparency and the trading of swaps on SEFs,

 8 this final rulemaking adopts the market

 9 participant requirement of three. This final

 10 rulemaking also provides a phase-in for the RFQ to

 11 three requirement to assist market participants

 12 and SEFs to make an efficient transition from the

 13 swap industry's current market structure to the

 14 more transparent market structure set forth in

 15 this final rulemaking. From the effective date of

 16 the final SEF rules until one year from the

 17 compliance date of these final rules, a market

 18 participant transmitting an RFQ for required

 19 transactions may transmit the quote to no less

 20 than two market participants.

 21 As I noted earlier, the SEF definition

 22 includes the phrase "through any means of
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 1 interstate commerce." Given this phrase, the

 2 final rulemaking allows a SEF to use any means of

 3 interstate commerce, including but not limited to

 4 mail, Internet, email, and the telephone, in

 5 providing the execution methods for required

 6 transactions. The execution methods are

 7 technology-neutral given the "any means of

 8 interstate commerce" language. However,

 9 regardless of the means of interstate commerce

 10 utilized, a SEF must comply with the Act and the

 11 Commission regulations including but, not limited

 12 to, the execution methods, impartial access, audit

 13 trail, and surveillance requirements.

 14 The SEF proposal included a time delay

 15 requirement for cross trades that are required

 16 transactions. The SEF proposal set the time delay

 17 at 15 seconds. This final rulemaking notes that

 18 the purpose of the time delay is to ensure a

 19 minimum level of pre-trade price transparency for

 20 required transactions on a SEF's order book. The

 21 time delay requirement is similar to time delays

 22 in the futures markets for cross trades. The
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 1 final rulemaking adopts the time delay requirement

 2 but in response to commenters' concerns allows

 3 SEFs to adjust the time period of the delay based

 4 on liquidity or other product-specific

 5 considerations. The final SEF rules will become

 6 effective 60 days after publication in the Federal

 7 Register and there is a general compliance date of

 8 120 days after publication in the Federal

 9 Register.

 10 That concludes my remarks, and we would

 11 be happy to take any questions at this time.

 12 CHAIRMAN GENSLER: Thank you, Amir. Now

 13 I entertain a motion to consider the staff

 14 recommendation on the swap execution facility rule

 15 set.

 16 COMMISSIONER SOMMERS: So moved.

 17 COMMISSIONER O'MALIA: Seconded.

 18 CHAIRMAN GENSLER: I thank you. Once

 19 again I want to thank the tremendous dedication of

 20 this team and the many people that have helped

 21 before we got here and the dedication of each of

 22 the Commissioners and their legal assistants.
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 1 I do support this rule. I support this

 2 final rulemaking as I think it's a key to

 3 fulfilling the transparency reforms that Congress

 4 and the President came together and laid out in

 5 2010. It's been subject to significant public

 6 input. I think the file shows at least 100

 7 comment letters, but I'm led to believe that there

 8 have been more meetings with market participants

 9 than even comment letters. And that's all noted

 10 on our website. There's also been big public

 11 conferences that are called like SEFCOM. Do I

 12 have this right? SEFCOM1 and SEFCOM2 that a

 13 number of us on this panel have talked with.

 14 Congress included a trade execution

 15 requirement in the law and this means that swaps

 16 that are subject to mandatory clearing and made

 17 available to trade would move to a trading

 18 platform, and so the swap execution facilities are

 19 quite important along with designated contract

 20 markets to fulfill that mandate. And Congress

 21 also provided the swap execution facilities would

 22 allow multiple participants the ability to trade
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 1 swaps by accepting bids or offers made by multiple

 2 participants, the so-called multiple to multiple

 3 provision.

 4 And I think that the public really

 5 benefits by transparency, that farmers and

 6 ranchers and commercial companies, municipal

 7 governments and the like, whether it's a mortgage

 8 company, a community bank, or local insurance

 9 company benefits from this transparency. Many

 10 end-users will not be required to use this. If

 11 it's a nonfinancial end-user you get a choice but

 12 you get the benefit of seeing that competition and

 13 transparency. And competition does narrow bid ask

 14 spreads and competition does benefit the

 15 marketplace overall and the economy overall. But

 16 it does shift some of the information advantage

 17 from Wall Street to Main Street. So it should be

 18 no surprise that the record shows that many

 19 dealers have had concerns about these rules

 20 because they have a different job than this

 21 Commission has. This job's Commission (sic) is to

 22 comply with the law, implement the law, but as
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 1 Congress mandated, it's to bring transparency to

 2 the marketplace. And as I think Commissioner

 3 Wetjen earlier noted, this is a very significant

 4 change coupled with the other two rules that will

 5 bring significant transparency to this

 6 marketplace.

 7 I do believe that this rule also strikes

 8 an appropriate balance of flexibility. That

 9 flexibility I want to express in a number of ways.

 10 Though it does require an order book, and the

 11 order book means anybody in the marketplace who is

 12 guaranteed by a futures commission merchant I

 13 should note, but who is guaranteed to do a trade,

 14 has the financial resources, can leave a live,

 15 executable bid or offer on these platforms. And

 16 if they want to communicate to the whole

 17 marketplace, that's how they can do it. That's

 18 competition. It's very critical. But also, if

 19 they want the flexibility to just request from a

 20 small number of participants who are unaffiliated

 21 with the responses, they can do that as well. And

 22 they can do that with what's called the
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 1 request-for-quote approach.

 2 There are other comments that commenters

 3 have raised with us about whether is something

 4 called a work-up, whether you do a transaction at

 5 some level -- let's say it's a $10 million or $50

 6 million trade, can you add to it or work it up?

 7 And the rule appropriately addresses that and says

 8 swap execution facilities can have rules about

 9 workups so that all the market participants can

 10 benefit from that as well to the extent they want

 11 to come in with a smaller transaction and then

 12 work it up.

 13 So I think it provides significant

 14 flexibility in that way. In addition, as Congress

 15 said in the definition of a swap execution

 16 facility that it could be by any means of

 17 interstate commerce. This rule is technology

 18 neutral. Telephones work. Maybe it's because I'm

 19 55 years old, but I think Congress made the

 20 decision, and we're just implementing that

 21 decision that this rule is technology neutral. As

 22 long as there is an order book and somebody can do
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 1 the minimum functionality around requests for

 2 quotes, have an audit trail and the other

 3 provisions of the rule, it's technology neutral.

 4 I do have a question for the team. I

 5 just want to ask specifically David if you can

 6 take this one up. We at the Commission in 2011

 7 and 2012 issued a series of exemptive orders and

 8 then subsequently I think the Division of Market

 9 Oversight issued a no-action letter which

 10 preserved certain exemptions under the Commodity

 11 Exchange Act until the completion of the SEF final

 12 rulemakings and various rulemakings on contract

 13 markets. If we adopt this SEF rule today, how

 14 will that relief measure now operate?

 15 MR. VAN WAGNER: You're correct. There

 16 were a number of Commission exemptive orders and

 17 then in December of 2012 the Division of Market

 18 Oversight issued a no-action letter 12-48, which

 19 basically permitted facilities that rely on some

 20 of the old CFMA exclusions and exemptions -- the

 21 ones we know about are exempt commercial markets

 22 and exempt boards of trade -- but also there are
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 1 markets that would have previous to now been

 2 opaque to us, like relying on 2(d)(2) and

 3 provisions like that. So essentially, we are

 4 proposing that no-action letter is due to expire

 5 on June 30th, so if the SEF rulemaking is adopted

 6 today, the Division of Market Oversight intends to

 7 issue a follow-up no-action letter to that 12-48,

 8 which would essentially extend the relief that was

 9 provided there until the proposed compliance date

 10 of the SEF rulemaking, which is 120 days after

 11 publication in the Federal Register. The relief

 12 would end on that compliance date unless, of

 13 course, one of these trading facilities actually

 14 have pending before us at that time a DCM or a SEF

 15 application. Essentially, the point of this

 16 relief was to transition these facilities to the

 17 Dodd-Frank regime and they got to take a look at

 18 both the DCM and the SEF rules and they decide

 19 which way they're going to go when they're moving

 20 into a regulated environment. So that's DMO's

 21 plan.

 22 CHAIRMAN GENSLER: So in essence your
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 1 plan is to extend the relief that was granted

 2 earlier beyond June 30th to effectively four

 3 months after this gets in the Federal Register,

 4 and as Amir laid out, during that period of time

 5 people can get temporarily registered, which is

 6 similar to notice registration?

 7 MR. VAN WAGNER: Correct.

 8 CHAIRMAN GENSLER: Thank you.

 9 Commissioner Sommers.

 10 COMMISSIONER SOMMERS: Thank you, Mr.

 11 Chairman. I have a couple of different questions.

 12 First of all, on the effective date versus

 13 compliance date, and I think if you could confirm

 14 for me that what we had in our proposal was a

 15 90-day -- was it an effective and compliance date

 16 in our proposal?

 17 MR. ZAIDI: Correct. Yes, it was 90

 18 days.

 19 COMMISSIONER SOMMERS: So now we're

 20 being a little bit more aggressive about this

 21 effective date, and I think if there's been one

 22 takeaway that we've gotten form many of our SEF
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 1 meetings that we've had is to make sure that

 2 there's a level playing field established for

 3 those platforms that are currently operating

 4 versus maybe new startups that want to be SEFs,

 5 that they can be in a place where they all have

 6 the ability to start on the same day. So can I

 7 assume the starting day for people that have

 8 applications pending before us would be on the

 9 60th day they could start?

 10 MR. ZAIDI: Yes, depending on when

 11 applicants get their applications ready and submit

 12 them to us. They could submit them after the

 13 publication of these final rules in the Federal

 14 Register, and depending on our timeframe of

 15 reviewing the applications, there's a possibility

 16 that they could be starting on day 60.

 17 COMMISSIONER SOMMERS: But then they

 18 have until the 120th day to come into compliance,

 19 so you wouldn't have to have an application, and

 20 if you don't care about being one of the first

 21 movers --

 22 MR. ZAIDI: Right.
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 1 COMMISSIONER SOMMERS: -- as long as you

 2 have an application in before the 120th day you're

 3 okay?

 4 MR. ZAIDI: Right.

 5 COMMISSIONER SOMMERS: For those

 6 currently operating?

 7 MR. ZAIDI: Right. So, as David

 8 mentioned, those who are operating under the

 9 no-action relief could still continue to operate

 10 under that no-action relief and take additional

 11 time to get their application ready and submit it

 12 to us as long as it's before the 120-day

 13 compliance date and then we would review the

 14 application and grant temporary registration. For

 15 entities that want to come in after 120 days who

 16 aren't operating right now, they have the

 17 flexibility to do that as well.

 18 COMMISSIONER SOMMERS: Okay. And just

 19 to clarify for everyone, on the 121st day, if you

 20 are operating a multiple to multiple platform and

 21 you still don't have an application in to the

 22 Commission, you would be found in violation --
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 1 MR. ZAIDI: Correct.

 2 COMMISSIONER SOMMERS: -- of the act? I

 3 am a little concerned about how ambitious this

 4 seems for our staff to be able to potentially get

 5 through these registrations even for temporary

 6 status within 60 days, especially if we have

 7 everyone that we believe may want to be SEFs, you

 8 know, 15-20 of these different entities putting

 9 applications in to us for temporary registration.

 10 I am concerned that 60 days is pretty aggressive

 11 for us.

 12 My next set of questions is with regard

 13 to a piece that was actually just added last night

 14 in a redline that considers my dissent from the

 15 proposal. And there's a footnote, footnote 117

 16 that says that "section 13.2 will allow the

 17 Commission to consider if a broader model for

 18 executing on SEFs consistent with the suggestion

 19 in Commissioner Sommers' dissent would be

 20 appropriate on a case by case basis in conformance

 21 with the CEA and Commission regulations, core

 22 principles, and other requirements for swap
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 1 execution facilities."

 2 In my dissent I suggested that the

 3 Commission had gone beyond the mandate by

 4 requiring that there be a minimum functionality

 5 for SEFs. If you could just explain to me how

 6 section 13.2 will work on a case-by-case basis.

 7 MR. ZAIDI: Section 13.2 of the

 8 Commission's regulations, from what I understand,

 9 allows any person to file a petition with the

 10 Commission to issue, amend, or repeal a rule. So

 11 a participant or a person could come in and ask

 12 for a rulemaking as far as the execution methods

 13 or ask us to look at the execution methods and

 14 either issue a rule or amend what's in the current

 15 rules.

 16 COMMISSIONER SOMMERS: So potentially

 17 somebody could come in as a SEF and petition us if

 18 they don't have the minimum functionality

 19 requirement and petition us to allow them to be

 20 registered as a SEF under 13.2?

 21 MR. VAN WAGNER: Correct. But 13.2 is

 22 forcing -- basically, it's forcing a regulatory
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 1 change. So during the pendency of any Commission

 2 consideration of that petition the reg that's

 3 being suggested there be revisions to would stand.

 4 So they would, presumably if they wanted to

 5 operate or continue operations they would have to

 6 comply with the SEF requirements.

 7 COMMISSIONER SOMMERS: Okay. Thank you.

 8 And then finally, I have questions regarding the

 9 concept of exempt DCOs and exempt SEFs. So,

 10 sorry, Dodd-Frank has required me to use reading

 11 glasses because of the thousands of pages that

 12 we've been going over has made me lose my

 13 eyesight.

 14 So on page 38 -- well, I'm sorry, this

 15 is potentially an older version, but we recognize

 16 that we're authorized to notice register SB-SEFs

 17 under 5h(a)(2) and 5h(g) of the Act. And we say

 18 that the Commission must comprehensively review

 19 and understand a SEF's proposed training models

 20 and operations which will facilitate trading for a

 21 more diverse universe of financial instruments and

 22 underlying commodities than SB-SEFs could offer.
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 1 But at this time the Commission is not permitting

 2 notice registration given the differing

 3 requirements and we also note that form SEF may

 4 differ from the SEC's registration form.

 5 So we acknowledge that the Commission

 6 has the ability to notice register entities or

 7 exempt SEFs and we do the same for exempt DCOs.

 8 There's a section in the preamble where we

 9 acknowledge that the statute clearly allows for

 10 the Commission to exempt SEFs. However, until

 11 such time as the Commission determines to exercise

 12 its authority to exempt DCOs from the application

 13 registration requirement, SEFs must rattle swaps

 14 through registered DCOs. So we acknowledge that

 15 we have this ability, yet we don't set out any

 16 type of framework to allow these entities to be

 17 recognized as exempt DCOs or exempt SEFs. If you

 18 could just outline for me whether we have plans to

 19 do this or what the Commission intends.

 20 MR. ZAIDI: Sure. You mentioned 5h(g).

 21 Under 5h(g), the Commission, as you said, may

 22 exempt a SEF from registration but it's also if
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 1 the facility is subject to comparable

 2 comprehensive supervision and regulation by the

 3 SEC, another prudential regulator, or governmental

 4 entity in the facility's home country. We note

 5 that at this time the SEC or other regulators

 6 don't have comprehensive comparable supervision

 7 and regulation for SEFs to what the Commission is

 8 considering today. So at this time we're not

 9 going to consider exempt SEFs or allow for exempt

 10 SEFs, but it doesn't foreclose the possibility in

 11 the future that we could consider exempt SEFs and

 12 also as we discussed, 13.2 of the Commission's

 13 regulations, if at some time in the future an

 14 entity wants to come in and petition the

 15 Commission for a rule with respect to exempt SEFs

 16 then the Commission could consider it at that

 17 time.

 18 COMMISSIONER SOMMERS: What about

 19 entities that are just comparably regulated by the

 20 SEC or prudential regulators, not necessarily as

 21 an SB-SEF? Have we made the determination that

 22 just because they're not currently being regulated
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 1 as a SEF that they're not comparably regulated as

 2 a trading platform? They could be registered as

 3 an ATS with the SEC and be comparably regulated.

 4 MR. ZAIDI: We haven't made any

 5 determinations at this time.

 6 COMMISSIONER SOMMERS: Okay.

 7 MR. ZAIDI: It's just if those entities

 8 want to come in and petition, then we can decide

 9 at the time whether they're comprehensive and

 10 comparable regulation.

 11 COMMISSIONER SOMMERS: Okay. Thank you.

 12 My last meeting wouldn't be complete without being

 13 able to put Ananda on the spot. So can I ask

 14 Ananda to answer the question about exempt DCOs?

 15 CHAIRMAN GENSLER: I want to thank

 16 Commissioner Sommers because I always enjoy this.

 17 MR. RADHAKRISHNAN: Thank you for

 18 inviting me. Court reporter, my name is Ananda

 19 Radhakrishnan. I'm director of the Division of

 20 Clearing and Risk.

 21 Commissioner Sommers is correct. The

 22 statute does provide for an exempt DCO and the
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 1 standard the statute lays is comparable and

 2 comprehensive supervision and regulation by either

 3 the SEC or foreign regulators. To date, no one

 4 has asked the Commission or petitioned the

 5 Commission to exempt them as an exempt DCO, and if

 6 you're wondering why we don't have a process it's

 7 a function of the fact that nobody has asked. And

 8 also, because of the tremendous amount of work

 9 that not just DCR but other people have had, we

 10 believe it is time better spent dealing with

 11 issues that we've got to deal with rather than

 12 dealing with issues that might arise.

 13 The other consideration is as follows:

 14 An exempt DCO cannot legally segregate customer

 15 money. And if you look at the structure of the

 16 statute, for customers who want to trade and clear

 17 swaps, if they're not a direct clearing member of

 18 a registered DCO, they must go through a

 19 registered FCM. And a registered FCM is obliged

 20 to segregate customer funds. At the clearinghouse

 21 level, that segregation must also take place,

 22 legal segregation, otherwise, in the event of a
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 1 bankruptcy there will be all sorts of issues and

 2 it's highly doubtful that there will be customer

 3 protection.

 4 So anyone who is exempt cannot claim to

 5 legally segregate customer funds. They may be

 6 able to physically segregate it but they cannot

 7 legally segregate it. The reason I bring this up

 8 is if we do have exempt DCOs clearing for a SEF,

 9 then by definition that SEF can only transact

 10 dealer-to-dealer business; it cannot transact

 11 customer business because it cannot send the

 12 customer transaction to a DCO. So something for

 13 the Commission to think about in considering

 14 whether to exempt DCOs. Is the Commission going

 15 to be satisfied having a dealer-to-dealer SEF?

 16 COMMISSIONER SOMMERS: Thank you. And

 17 one last question on this point. If an entity

 18 were to ask us for exempt status as a SEF, is that

 19 a Commission decision or is that a decision that

 20 the division can make on its own?

 21 MR. ZAIDI: I believe under 13.2 that's

 22 a Commission decision.
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 1 COMMISSIONER SOMMERS: Thank you.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner Sommers.

 4 Commissioner Chilton. Commissioner

 5 Chilton.

 6 COMMISSIONER CHILTON: Thank you. Thank

 7 you, Mr. Chairman.

 8 On voice brokers, and Mr. Chairman, you

 9 spoke about being technology neutral and we've

 10 heard it from staff but since this is something

 11 that I've been really an ardent advocate for from

 12 the beginning from the time we had the proposal, I

 13 just want to get a simple answer. Can we be sure

 14 that under this rule that voice brokers, who have

 15 been executing trades, will continue to be able to

 16 execute trades on SEFs?

 17 MR. ZAIDI: Yes. Voice brokers will

 18 continue to --

 19 COMMISSIONER CHILTON: Thank you.

 20 That's good. That's all I need. Thank you.

 21 Okay. And Commissioner Sommers asked

 22 some good scheduling questions but I have a follow
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 1 on. So under the proposal would a platform

 2 operating prior to the registration have to stop

 3 trading like the day before they go live as a SEF?

 4 How would that actually work? That wouldn't make

 5 sense, right? That's not what we're saying?

 6 MR. VAN WAGNER: Right, Commissioner

 7 Chilton. That's actually an interesting point,

 8 and I think that we just realized that there is a

 9 little bit of a gap here. And I think you're

 10 referring to the fact that you're an entity right

 11 now who is operating, relying on the no-action

 12 letter, and then you are temporarily registered on

 13 a particular day. And then as a SEF at that point

 14 you would have to file all your products with us

 15 pursuant to part 40, and that's actually a process

 16 that might take a few days. So I think that we

 17 probably have to take care of that in the

 18 no-action letter that I described at the top of

 19 the meeting or this segment of the meeting to sort

 20 of cover that gap because we certainly don't want

 21 there to be any exposure for somebody who is

 22 coming in to be a regulated SEF. So I think we're
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 1 going to take care of that but it's actually a

 2 very good observation. Thank you.

 3 COMMISSIONER CHILTON: Thank you, David.

 4 Two others. On these workups, I'm okay with them

 5 but I'm a little reluctant. What would we do to

 6 ensure that these workups, where somebody may go

 7 out for a small amount and then not have to go out

 8 for a full meal deal RFQ to work that amount up.

 9 What procedures or policies should the SEF have or

 10 would we have as part of our oversight to ensure

 11 that this isn't some big gaping loophole to get

 12 around going out for RFQs?

 13 MR. ZAIDI: Sure. So first of all, the

 14 SEFs would have to have rules about their workups

 15 and as far as how that mechanism would operate,

 16 and they would also have to have systems in place

 17 so that all the market participants can

 18 participate in the workup and also that the

 19 information from the workup session are

 20 distributed to all market participants.

 21 Furthermore, workups can actually promote

 22 pre-trade price transparency where all the market
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 1 participants are able to participate in a workup

 2 session. And by having other market participants

 3 who didn't participate in the initial trade

 4 participate in the workup session can actually

 5 promote liquidity as well.

 6 COMMISSIONER CHILTON: Okay. So just to

 7 stray out a little bit more, so is there any

 8 potential -- think about this theoretically -- any

 9 sort of fact pattern that where, you know, a

 10 trader might be out there and continually use the

 11 workups to -- you could do a workup all the way up

 12 to the block size, right? So is there some sort

 13 of fact pattern that we would look at and if we

 14 could potentially take an action on or would we

 15 have to amend the rules? I mean, it would be

 16 consistent with the SEF rules, I suppose, but

 17 could we, for example, if we saw the spec pattern

 18 of people doing the workups and always going right

 19 up to the block size, for example, say no, that's

 20 not what we intended? Or would we have to provide

 21 some further clarity either as part of a, you

 22 know, a letter or would we have to amend the
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 1 rules?

 2 MR. ZAIDI: Sure. Well, with respect to

 3 the block size, the proposal or the final rules

 4 note that workup trades, you can't just work up a

 5 trade to the block size and consider it a block.

 6 It would actually be individual trades. And

 7 you're --

 8 COMMISSIONER CHILTON: Yeah, but what

 9 I'm saying is as long as long as you're under the

 10 block size you could work it up until that point.

 11 MR. ZAIDI: Correct.

 12 COMMISSIONER CHILTON: So as long as you

 13 keep it under the block size, then you put it out

 14 there for a small trade and then you work all the

 15 way up just below the block size.

 16 MR. ZAIDI: Sure.

 17 COMMISSIONER CHILTON: Look, if that

 18 happens, you know, sporadically, okay. I'm just

 19 concerned that people are going to try to drive a

 20 truck through the workup provision. And I know

 21 the SEFs don't want to do that. They're just

 22 happy to get rules. I also don't want to just
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 1 allow it to happen without having some oversight.

 2 MR. ZAIDI: Sure. And that's why

 3 opening it up to the whole market will probably

 4 mitigate your concerns there because it's not just

 5 the two original counterparties who are doing a

 6 small sized trade and then working it up to almost

 7 the block size; it would be opened up to the whole

 8 market. So other market participants could

 9 participate in that workup session.

 10 COMMISSIONER CHILTON: Okay. Thank you.

 11 The last thing I had was something that -- and I

 12 prepared an amendment on this but it doesn't look

 13 like I need one assuming I get the answer I think

 14 I'm going to get from you all. And that is

 15 dealing with this whole debacle with Bloomberg and

 16 maybe, you know, having information that was sort

 17 of misappropriated from the terminals. And my

 18 question is, presuming that a firm like a

 19 Bloomberg would register as a SEF, and once

 20 they've done that if we, you know, smelled

 21 something fishy with this potential SEF, could we

 22 then go after them under 1.59 to further review,
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 1 probe, investigate, et cetera whether or not they

 2 misused material, non-public information?

 3 MR. VAN WAGNER: Yes, Commissioner.

 4 Regulation 1.59 would apply to SEFs and SEF

 5 employees. They would have to have rules

 6 prohibiting their employees, governing board

 7 members, disciplinary committee members from

 8 misusing and disclosing material non-public

 9 information. And we could also pursue them. And

 10 I should point out it's not in the part 37 rules

 11 that are being considered today; that is by

 12 application of a number of rules which have

 13 broader application to not only SEFs but DCMs.

 14 And as sort of a public service announcement to

 15 prospective SEFs they should beyond whatever

 16 publication comes out of today's meeting, they

 17 should look at 77 FR 66288, which actually has

 18 1.59 and a number of other provisions that are

 19 going to be more broadly applicable to SEFs and

 20 DCMs post Dodd-Frank.

 21 COMMISSIONER CHILTON: Great. That's

 22 why I asked. Good public service. Thank you,
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 1 David.

 2 That's all I have, Mr. Chairman.

 3 CHAIRMAN GENSLER: Thank you,

 4 Commissioner Chilton.

 5 Commissioner O'Malia.

 6 COMMISSIONER O'MALIA: Mr. Chairman, I

 7 make a motion that my amendment that I circulated

 8 earlier be adopted.

 9 COMMISSIONER SOMMERS: So moved. Sorry,

 10 second.

 11 CHAIRMAN GENSLER: Being motioned and

 12 seconded it's part of the record.

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

 14 like to follow up on two lines of questions that

 15 Commissioner Sommers started, and this is the

 16 temporary registration. And I think we've made a

 17 lot of progress. I'm quite pleased with where we

 18 are, and I think Commissioner Sommers raised a

 19 good point, you know, with this new compliance and

 20 effective date split. The ability to put and

 21 approve the multitude of SEFs and put them in a

 22 position so that there is not a competitive
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 1 disadvantage as a result of the first mover and

 2 not being ready to go, how are we going to ensure

 3 that? She does bring up a good point. And

 4 certainly, if you look at our SDR track record,

 5 our ability to pencil-whip an application seems to

 6 be endless. How are we going to learn from that

 7 mistake and not get in the same position that we

 8 found ourselves in SDRs?

 9 MR. ZAIDI: Sure. I'll note this

 10 process is very different from what they did in

 11 the SDR rulemaking. From what I understand, that

 12 process, there had to be substantial compliance

 13 with the requirements in the SDR rule. Here it's

 14 just a complete application review, so basically

 15 we're just looking for appropriately responsive

 16 answers to all the questions and exhibits in form

 17 SEF and we're not doing a substantive review like

 18 they did in the SDR space. So this process is

 19 meant to be an expedited process because as you

 20 noted, a lot of SEFs could come in here and staff

 21 has resource constraints, so we're well aware that

 22 we don't want to drag this process out. So it's
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 1 meant to be an expedited process for temporary

 2 registration.

 3 CHAIRMAN GENSLER: Can I just ask,

 4 because I can't remember the page number, but I

 5 think some of us have used the expression "notice

 6 registration." I know technically it's temporary

 7 registration but could you point to where we put

 8 that in the preamble?

 9 MR. ZAIDI: Sure. The version --

 10 CHAIRMAN GENSLER: I see page 38.

 11 MR. ZAIDI: I believe it's on --

 12 CHAIRMAN GENSLER: I'm pleased to see --

 13 I'm pleased to see this, the Commission notes that

 14 there is -- or wait.

 15 MR. ZAIDI: I believe it's on page 48 --

 16 47-48.

 17 CHAIRMAN GENSLER: Forty-seven, 48?

 18 MR. ZAIDI: Yeah.

 19 CHAIRMAN GENSLER: Okay.

 20 MR. ZAIDI: And there's also reference

 21 to it, I think around page 46, too.

 22 CHAIRMAN GENSLER: I just think that
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 1 Commissioner O'Malia raises a very good point.

 2 We're resource constrained and there's 15 to 20

 3 aspiring swap execution facilities who are ready

 4 to get going. It's been nearly three years since

 5 Dodd-Frank passed and two and a half years since

 6 this rule was put out. And as we all know, about

 7 six or seven months since we've been debating it

 8 intensely. And we want to see that happen. We

 9 don't want our resource constraints to limit that

 10 and we've had a lot of discussions up on the panel

 11 but David, you and Amir and Rick, as head of DMO,

 12 you've explained it to me that you're going to

 13 take these 15 or 18 applications that may come in,

 14 not do a substantive review. It's similar to a

 15 notice registration, and then over what might be a

 16 two-year period after that, you know, work with

 17 those SEFs and work with whether there's issues

 18 that might be there and how they have come in. Is

 19 that correct?

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

 21 CHAIRMAN GENSLER: I think that's an

 22 appropriate compromise with the realities of our
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 1 resources. I just think that that's -- and

 2 coupled with the public policy imperative to get

 3 these entities, in essence be licensed or

 4 registered and operating.

 5 COMMISSIONER O'MALIA: That's great

 6 news. I appreciate that. Obviously, it does

 7 require the prospective SEFs to do their job and

 8 put together a really adequate application to make

 9 sure that they answer all of the questions that

 10 we're looking for, but the reality is that we're

 11 going to make sure that they've done their job and

 12 then we can quickly approve them so we can have a

 13 good, robust, competitive market.

 14 Now, another area that I'm concerned,

 15 again, Commissioner Chilton -- Commissioner

 16 Sommers raised this, and it's the international

 17 differences. Right? We've got -- we're waiting

 18 on the MiFiD rules. They have these MTEFs and

 19 OTEFs which are different from the standards that

 20 we have but they're not final yet is my

 21 understanding, and it's going to take a year or

 22 two before they are final, at least in Europe, and
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 1 it could even take longer in Asia. So there could

 2 be some differences. And one thing I don't want

 3 to create is a situation where we pass our rules

 4 and then not look back and make any corrections

 5 that we need to fix our rules to remain

 6 competitive internationally and to make sure that

 7 liquidity resides here to the extent that we can

 8 compete for it and it's transparent in our markets

 9 and people have the ability to transact

 10 domestically. It's a competitive business. I

 11 don't, you know, want to make any misunderstanding

 12 about that.

 13 Now, I know that Europeans and Asians

 14 are thinking about the same thing when they put

 15 their things together, but I do not want to put

 16 forward a rule that is cast in stone that we

 17 cannot have the opportunity to look back and make

 18 a response in case we're left out and we're

 19 uncompetitive in this environment. Is there

 20 anything that we can -- that provides this rule to

 21 really go back and fix problems in light of the

 22 international situation?
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 1 MR. ZAIDI: Sure. I'll come back to

 2 regulation 13.2, that petitioners or persons can

 3 come in here and petition for a rulemaking or to

 4 amend a rule such as these SEF rules. But also,

 5 we've included in these final rules a review.

 6 Commission staff will conduct a review of the

 7 execution methods within four years of the

 8 effective date of the rules and provide

 9 recommendations to the Commission, so that could

 10 address some of your concerns there as far as --

 11 COMMISSIONER O'MALIA: I'll be honest.

 12 That one -- that is a study in four years with no

 13 requirement to make a recommendation or have the

 14 Commission act. And I'm a little concerned that

 15 that is just cover.

 16 CHAIRMAN GENSLER: Commissioner O'Malia,

 17 if I can address a little bit and enter into a

 18 discussion here if that's all right on the

 19 international.

 20 I think that we've done a number of

 21 steps, but I agree with you that we have to stay

 22 very vigilant going forward. But let me just
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 1 mention some of the steps we have taken. I think

 2 as Commissioner Sommers noted, we have clearly

 3 stated that a swap execution facility may also

 4 refer trades or execute trades that go to an

 5 exempt clearing organization to which Ananda spoke

 6 to earlier. And I know Sarah Josephson, our new

 7 head of the international office was actually over

 8 in Europe -- was it earlier this week? I'm losing

 9 -- yes, earlier this week. And that was very

 10 constructively received. We have a lot more work

 11 as Commissioner Sommers noted as to what

 12 processes. We don't have any applications but I

 13 think that's an important way to keep swap

 14 execution facilities that might be registered with

 15 us competitive if, for instance, they might have

 16 international parties that don't necessarily want

 17 to come into a clearinghouse here and have some

 18 exempt DCO. I think that's very relevant to this.

 19 But I also concur with you that I think we stay

 20 vigilant, whether it's through rule 13.2 or any

 21 other means that people come in.

 22 The Europeans look close to passing
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 1 their legislative initiative but it will be nearly

 2 three years after our legislative initiative. And

 3 they will go forward with rulemaking and sometime

 4 in 2014 or maybe 2015, they'll land somewhere

 5 around order books and requests for quote models

 6 and all that we've debated here, and I share your

 7 view that this Commission should relook at this

 8 and be open because these are international

 9 platforms ultimately. Some of these swap

 10 execution facilities will be located actually

 11 offshore which is fine as well.

 12 COMMISSIONER O'MALIA: Well, it's

 13 reassuring to know that I have your commitment

 14 that we'll reopen this if we get in kind of a

 15 regulatory imbalance here because we are going

 16 first, and going first you could possibly make

 17 some mistakes and over-reach or under-reach,

 18 frankly, but I want to be in a position that this

 19 Commission is doing this with its eyes wide open

 20 and we're prepared to make adjustments if

 21 necessary. And while we haven't gone back to fix

 22 any of our rules that I would argue that need
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 1 fixing, I will take you at your word and your

 2 commitment that we will revisit this one as well

 3 if we're out of kilter internationally.

 4 CHAIRMAN GENSLER: I think it's

 5 appropriate. I also share you view with some of

 6 our others we're going to have to go back. And

 7 we're learning. As you go from a law to a rule to

 8 an actual compliance --

 9 COMMISSIONER O'MALIA: We could start a

 10 list right now.

 11 CHAIRMAN GENSLER: -- things get very

 12 granular. I know. I know.

 13 COMMISSIONER O'MALIA: How about part

 14 45?

 15 CHAIRMAN GENSLER: I know about part 45.

 16 We actually apparently have a lawsuit on that,

 17 too.

 18 But on the swap execution facility, as

 19 other jurisdictions take this up, I think these

 20 will provide flexible means of liquidity and that

 21 market participants will come to them, but as you

 22 say, other jurisdictions set something up. If
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 1 they're slightly different we should really look

 2 at conflicts and inconsistencies and be creative

 3 about it.

 4 COMMISSIONER O'MALIA: Well, being

 5 nimble and adjusting is a great opportunity.

 6 Thank you very much for that, Mr.

 7 Chairman. Now, it appears by reading the preamble

 8 that the rule will permit voices and independent

 9 method of execution. Why wouldn't the rule

 10 expressly state so? We've had this discussion a

 11 little bit but execution by voice is buried within

 12 the definition of RFQ. So why don't we just call

 13 it out, A, B, C, by any means of interstate

 14 commerce? For those watching at home it's A and B

 15 and then some subcategories within B that provide

 16 for the voice. I'm wondering why we didn't

 17 expressly and specifically state it as a third

 18 prong.

 19 MR. ZAIDI: Sure. As you noted, the

 20 rule text does provide for any means of interstate

 21 and it includes voice or the telephone in the rule

 22 text. When we came up with the execution methods
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 1 for the required transactions which are similar to

 2 what was in the SEF proposal, we looked at the SEF

 3 definition and also the goals in 5h of pre-trade

 4 transparency and also promoting trading of swaps

 5 on SEFs, and we also note the any means of

 6 interstate commerce language in the SEF

 7 definition. And we believe that by looking at the

 8 SEF regulatory regime as a whole and not in a

 9 vacuum of just looking at the SEF definition, that

 10 the order book and the RFQ, in conjunction with

 11 the order book are the appropriate methods that

 12 meet the SEF definition and also the SEF regime in

 13 5h. And as you noted, any means of interstate

 14 commerce is included in the SEF definition and

 15 that also includes a telephone, so we are saying

 16 you can use the telephone to meet the order book

 17 or the RFQ system in conjunction with the order

 18 book requirement. So there can be a voice system

 19 as long as it meets those.

 20 COMMISSIONER O'MALIA: Excuse me. How

 21 do you execute on the phone?

 22 MR. ZAIDI: Sure.
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 1 COMMISSIONER O'MALIA: Is there the

 2 opportunity --

 3 CHAIRMAN GENSLER: Can I try this? From

 4 the old Wall Street days you say you're done.

 5 COMMISSIONER O'MALIA: Walk me through

 6 -- so walk me through done backwards. If Chairman

 7 Gensler wants to be done on the phone and he wants

 8 -- and you have a requirement to interact with the

 9 order book and the RFQ, how does that function?

 10 MR. ZAIDI: Sure.

 11 COMMISSIONER O'MALIA: Does he have to

 12 post something?

 13 MR. ZAIDI: As we noted in the final

 14 rule there's a couple of examples of how this

 15 would work. I'll just go through one

 16 hypothetical.

 17 Say Chairman Gensler calls you on the

 18 phone and wants to execute a trade and you're the

 19 SEF, you're a SEF employee. In keeping with the

 20 RFQ to three requirement you can go out to -- you

 21 would go out to three market participants to try

 22 to fill Chairman Gensler's order. And then you
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 1 could use the telephone to go back to him and say

 2 these are the three responsive orders. And also

 3 --

 4 COMMISSIONER O'MALIA: Would you have to

 5 put -- can I clarify something?

 6 MR. ZAIDI: Sure.

 7 COMMISSIONER O'MALIA: As the RFQ

 8 employee, would you have to type his order into a

 9 screen?

 10 MR. ZAIDI: No, you could --

 11 COMMISSIONER O'MALIA: You could call

 12 other people?

 13 MR. ZAIDI: You could call other people

 14 on the telephone or use a squawk box or use email

 15 or chat. And ping three market participants and

 16 you can take whatever responses you get back,

 17 either one, two, or three, go back to Chairman

 18 Gensler with the responsive orders and also

 19 telling him what is resting on the order book and

 20 he can say I want this one and you are done on the

 21 phone. So that's kind of one example of how it

 22 could work.
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 1 CHAIRMAN GENSLER: So I can say I hit

 2 that bid or I lift that offer?

 3 MR. ZAIDI: Yes, you may.

 4 CHAIRMAN GENSLER: And you would say

 5 you're done?

 6 MR. ZAIDI: Exactly.

 7 CHAIRMAN GENSLER: Thank you.

 8 COMMISSIONER O'MALIA: Thank you very

 9 much. Can you explain how we treat EDRP exchange

 10 for derivative positions in this on a SEF footnote

 11 216?

 12 MR. VAN WAGNER: We got a comment from

 13 MFA, I believe. Essentially, it was not in the

 14 proposal but there was a comment requesting that

 15 exchange of derivatives -- well, actually, three

 16 particular types of EDRPs (exchange of derivatives

 17 for related positions) that the commenter asked to

 18 permit SEFs to list as an exception to the trade

 19 execution mandate. They basically analogized the

 20 three transactions to the types of EDRPs that core

 21 principle 9 permits on DCMs. So essentially at

 22 the outset we would note that Congress obviously
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 1 enough in the context of DCMs explicitly

 2 recognized exceptions to the centralized

 3 marketplace trading requirement for DCMs for

 4 EDRPs. There is the absence of any such exception

 5 to the trade execution mandate for SEFs.

 6 COMMISSIONER O'MALIA: Are they

 7 prohibited on SEFs?

 8 MR. VAN WAGNER: Excuse me?

 9 COMMISSIONER O'MALIA: Did they prohibit

 10 them on SEFs?

 11 MR. VAN WAGNER: No, they did not.

 12 COMMISSIONER O'MALIA: They're just

 13 silent?

 14 MR. VAN WAGNER: Excuse me?

 15 COMMISSIONER O'MALIA: Congress is

 16 silent on this issue?

 17 MR. VAN WAGNER: That's correct. Right.

 18 So what we worked through was to look at each one

 19 because they did not really offer any clear bona

 20 fide purpose in discussing them in their comment

 21 letter, so there were two that essentially -- that

 22 they didn't quite justify or we didn't quite
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 1 understand what the rationale for the exception

 2 would be. There was one in particular I think

 3 that had some -- basically had some traction. And

 4 that is EDRP, which would be a swap in exchange

 5 for a physical commodity. At this time, obviously

 6 enough physical commodities are not yet subject to

 7 the clearing mandate, therefore, not subject to

 8 the trade execution mandate, so they would not be

 9 mandated to be on a SEF and subject to the trade

 10 execution mandate. And even if they were, we

 11 would anticipate that most of them would be used

 12 by end-users who would be able to -- would be

 13 exempted from the trade execution mandate. At the

 14 end of this little thing, we did recognize that

 15 there might be a possibility that non-end-users

 16 might want to do this transaction in the future,

 17 and so we basically in the release indicate that

 18 we'll take it under consideration if and when

 19 physical commodities have become subject --

 20 physical commodity swaps ever become subject to

 21 the trade execution mandate.

 22 COMMISSIONER O'MALIA: So is there a
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 1 process that people have to apply to get these

 2 things -- to trade some sort of exchange for

 3 derivative position on a SEF?

 4 MR. VAN WAGNER: At this point there's

 5 nothing that explicitly recognizes them in the

 6 context of part 37, no.

 7 COMMISSIONER O'MALIA: So what does that

 8 mean? So is there or is there not a process that

 9 they would have to come back to apply?

 10 MR. VAN WAGNER: The request was to make

 11 it an exception to the trade execution mandate,

 12 when a swap is subject to the trade execution

 13 mandate. And we said at this point in time,

 14 because those swaps are not yet subject to the

 15 trade execution mandate, we were not going to be

 16 granting an exemption in advance of that fact. I

 17 mean, obviously enough if they're permitted

 18 transactions that are involved, if the swaps are

 19 not yet subject to the trade execution mandate,

 20 you know, a swap -- excuse me, a SEF wouldn't be

 21 restrained.

 22 COMMISSIONER O'MALIA: Okay. So --
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 1 MR. VAN WAGNER: Yeah, right,

 2 ultimately, they could always come to us with a

 3 no-action request, too.

 4 COMMISSIONER O'MALIA: But that is not

 5 for a non-required transaction. They don't need

 6 to come to you for --

 7 MR. VAN WAGNER: Well, I was jumping

 8 ahead to when they might need it as an exception

 9 to the trade execution mandate.

 10 COMMISSIONER O'MALIA: Right. So they'd

 11 have to come ask for no-action relief for required

 12 transactions?

 13 MR. VAN WAGNER: Right.

 14 CHAIRMAN GENSLER: David, I gather --

 15 MR. VAN WAGNER: It's still a

 16 hypothetical situation.

 17 CHAIRMAN GENSLER: Your point of view

 18 and one that I support is that this comment from

 19 -- was it MFA?

 20 MR. VAN WAGNER: Right.

 21 CHAIRMAN GENSLER: This comment was

 22 sufficiently generalized that it didn't get down
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 1 to this narrow point.

 2 MR. VAN WAGNER: Right. I mean, we --

 3 CHAIRMAN GENSLER: But that when you get

 4 to the narrow point you say in exchange for swap

 5 for swap, well, that's what a SEF is about. But

 6 an exchange for swap for something that's

 7 physical, you note in the footnote that we don't

 8 have any required or clearing mandate, physical

 9 commodity swaps at this point in time. If that

 10 were to occur in the future, many people would be

 11 out because they would be end-users, but if it was

 12 a financial company doing a transaction with a

 13 financial company, and it was cleared and required

 14 to be cleared and they wanted to do an exchange

 15 for a swap for a physical --

 16 MR. VAN WAGNER: ESP.

 17 CHAIRMAN GENSLER: What would that be?

 18 An ESP?

 19 MR. VAN WAGNER: ESP, I guess. I don't

 20 know.

 21 CHAIRMAN GENSLER: Then you note in the

 22 bottom of this footnote for the officionados that
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 1 they'll end up looking at what, footnote 219 --

 2 that at that time the Commission could consider

 3 it.

 4 MR. VAN WAGNER: Correct.

 5 COMMISSIONER O'MALIA: David, is there

 6 another option using -- if a SEF wanted to put in

 7 their own rule book and use part 40 to petition

 8 us, would that been an acceptable use? An

 9 acceptable application I guess?

 10 MR. VAN WAGNER: I mean, I'd have to

 11 think about that one but obviously the words that

 12 are in the mouth of the Commission in that

 13 footnote is not at this time.

 14 COMMISSIONER O'MALIA: So we've created

 15 --

 16 MR. VAN WAGNER: If you accept the

 17 footnote.

 18 COMMISSIONER O'MALIA: -- a lot of

 19 uncertainty around where Clear-port is and kind of

 20 how those are treated. And there's been a number

 21 of press articles recently about that and there's

 22 a lot of uncertainty about what their standing is
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 1 and how we're going to treat them, et cetera. It

 2 seems as though we're creating the same thing. If

 3 it's a non-required -- what do we call those?

 4 Non-permitted transaction, anything goes.

 5 MR. VAN WAGNER: Right.

 6 COMMISSIONER O'MALIA: But all of a

 7 sudden when you get to required, what if those

 8 products that have been permitted all of a sudden

 9 want to leap the required? All of a sudden we're

 10 back in regulatory limbo again.

 11 MR. VAN WAGNER: I take your point but

 12 there's issues on the DCM side in core principle

 13 9. I guess in staff's view that should inform us

 14 at this point in saying go slow before creating

 15 exceptions to the trade execution mandate.

 16 COMMISSIONER O'MALIA: Go slow and/or

 17 create regulatory uncertainty doesn't sound like

 18 the same thing. And I think that's where we find

 19 ourselves on this one.

 20 CHAIRMAN GENSLER: If I might,

 21 Commissioner O'Malia, wouldn't it be possible to

 22 take -- if we actually had a physical commodity
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 1 swap clearing determination as part of that

 2 process at that time to address now that we're

 3 doing this, a year from now or three years from

 4 now or whenever we might, to simultaneously take

 5 up what to do about what staff is now calling an

 6 ESP, an exchange for a swap for a physical.

 7 COMMISSIONER O'MALIA: Well, that in and

 8 of itself is a better process than what we've

 9 provided in this footnote because what we provided

 10 in this footnote doesn't provide you the

 11 certainty. It doesn't say, "Oh, by the way, when

 12 you come in as a required from a permitted, that

 13 we'll consider this as a solution." It doesn't

 14 say that. And it would be really useful to say

 15 either you could use part 40 or in part of a

 16 determination for required transaction we will

 17 revisit this issue.

 18 CHAIRMAN GENSLER: With regard to

 19 exchange for swaps for physicals as opposed to the

 20 broader request was more general, which could have

 21 included exchange for swaps for swaps. Yeah, that

 22 doesn't. But exchange of swap for a physical is
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 1 the question for you.

 2 COMMISSIONER O'MALIA: Could we just put

 3 in a sentence that says that this is a path and

 4 how we address it and warn anybody who might be

 5 considering, well, where does this really stand?

 6 At least we'll tell them, you know, we're willing

 7 to consider this as part of the --

 8 CHAIRMAN GENSLER: I think as part of

 9 the administrative record I'm saying right now I

 10 think -- and you're saying -- I think that it's

 11 appropriate if we take up a physical commodity

 12 clearing mandate at that time to consider this

 13 exchange for a swap for physical.

 14 COMMISSIONER O'MALIA: Let's put those

 15 words in this footnote.

 16 CHAIRMAN GENSLER: Somebody found the

 17 transcript of what I just did, that's your first

 18 amendment on this rule?

 19 COMMISSIONER O'MALIA: Well, I make a

 20 motion to --

 21 CHAIRMAN GENSLER: No, that's your

 22 second amendment.
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 1 COMMISSIONER O'MALIA: That would be my

 2 second amendment. But, you know, I think that's

 3 just -- what's the path forward? How might

 4 people? And I'd frankly be interested in the part

 5 40 submission. Could they, as part of that and

 6 part of their rulebook, say we're going to adopt

 7 these things. We think as a SEF that serves kind

 8 of this physical market, that we're going to make

 9 this part of our solution and put it in the rule

 10 book and then we'll have to review it under the

 11 part 40 submission. That's another way of doing

 12 it. But you weren't as equivocal on that one.

 13 MR. VAN WAGNER: I guess I'm still

 14 thinking of it but I mean it seems to me that,

 15 again, I mean, this is obviously somebody coming

 16 in well in advance of even the trade execution

 17 mandate pertaining to any particular commodity

 18 yet, I mean, the trade execution mandate does not

 19 have -- it does have exceptions carved into

 20 2(h)(8) and it's for 2(h)(7), the clearing

 21 exemptions. And there is not embedded any other

 22 exceptions that are akin to what's in core
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 1 principle 9 for DCMs, which is obviously the

 2 analogue that the commenter was trying to go

 3 towards.

 4 COMMISSIONER O'MALIA: But they're also

 5 not banned either.

 6 MR. VAN WAGNER: I'm sorry?

 7 COMMISSIONER O'MALIA: They're also not

 8 banned.

 9 MR. VAN WAGNER: I mean, in a case such

 10 as that, I mean, I would think that it would

 11 probably be wise to accompany -- since there is

 12 some ambiguity around it I would think it would be

 13 wise to accompany the rule submission with either

 14 a no-action or 4c petition for absolute certainty.

 15 COMMISSIONER O'MALIA: I'm not a big fan

 16 of the --

 17 MR. VAN WAGNER: I can't prejudge part

 18 40 filings here.

 19 COMMISSIONER O'MALIA: So I'm a little

 20 uncertain. Are we going to change that they can

 21 submit this as part -- and change the footnote to

 22 reflect that it's part of their submission that
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 1 they could -- that's how they could address this

 2 for a required transaction?

 3 CHAIRMAN GENSLER: Well, I think what I

 4 was suggesting, and I think it's appropriate, is

 5 it concurrent with any future action of this

 6 Commission on a clearing mandate for physical

 7 commodities that at that time market participants

 8 could come to us, petition with regard to exchange

 9 for swaps for physical, the ESP part of it? And

 10 that I would be comfortable. And if people by

 11 unanimous, if Commissioners by unanimous consent

 12 want to amend the footnote to add that type of

 13 language, I'm comfortable with that.

 14 COMMISSIONER O'MALIA: I'm comfortable

 15 with that as well. Thank you.

 16 CHAIRMAN GENSLER: Any objection for it?

 17 COMMISSIONER O'MALIA: Thank you, David.

 18 Rick, can I ask a question on technology? There

 19 are 18 proposed SEFs that have been registered

 20 with the NFA to conduct their market surveillance.

 21 I've even toured the NFA market surveillance

 22 floor, and it was explained to me that with all
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 1 the API connections, the NFA will be able to

 2 monitor across its registrants and see across all

 3 SEFs in real-time, you know, an effective

 4 real-time market watch room. Are we going to have

 5 that same capability?

 6 MR. SHILTS: No. We've never had the

 7 capability to monitor any markets in real time. I

 8 mean, all of our oversight has been on a T+1 basis

 9 whether it is large trader or trade information.

 10 COMMISSIONER O'MALIA: Right. How will

 11 we interface with NFA to help them with their

 12 market surveillance? Are we going to expect each

 13 SEF to download its position and information data

 14 or can we work with NFA to get a more

 15 comprehensive view?

 16 MR. SHILTS: Well, we'll be working with

 17 NFA. I mean, NFA is operating on behalf of the

 18 SEFs, who they've delegated the responsibility to

 19 do the oversight. We'll be getting information,

 20 you know, from them as well as from the SDRs and

 21 then from the clearing organizations for the swaps

 22 that are cleared. So it would be a -- we haven't
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 1 actually set up processes yet but that's something

 2 as the SEFs start coming in and if the rules are

 3 approved, we can start working with them to get

 4 the information to do oversight. To some extent

 5 the obligation is on us to do the overall

 6 oversight of the markets because each SEF is only

 7 responsible for its particular exchange.

 8 COMMISSIONER O'MALIA: It's probably not

 9 lost on you but that's only 60 days away.

 10 Do we have a technology strategy? Do we

 11 need to buy more computers? Move desks? Do

 12 something to prepare for that technology?

 13 MR. SHILTS: I'd have to talk with John

 14 Rogers and others. I don't have that answer right

 15 now.

 16 COMMISSIONER O'MALIA: That's all I

 17 have. Thank you very much.

 18 CHAIRMAN GENSLER: Thank you very much.

 19 Commissioner Wetjen.

 20 COMMISSIONER WETJEN: Thank you, Mr.

 21 Chairman. I don't have a lot of questions, just a

 22 couple here. I thought maybe it might be helpful
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 1 for the benefit of the public -- I know your

 2 presentation got into this some and my opening

 3 statement alluded to it as well as the Chairman's,

 4 but it might be helpful, I think, to reiterate

 5 just what the key differences are between the

 6 environment we'll now see in light of the SEF rule

 7 and the related rules compared to the current OTC

 8 market. A lot of focus has been paid to trading

 9 protocols, but what are some of the other things

 10 that might be useful to review as required in this

 11 rule that will bring some additional benefits to

 12 the public?

 13 MR. ZAIDI: Sure. In addition to the

 14 trading protocols that you mentioned, and another

 15 requirement that will be in effect if these rules

 16 become final is the impartial access requirement.

 17 So all market participants will have impartial

 18 access to -- that ECPs will have impartial access

 19 to SEFs market. Another --

 20 COMMISSIONER WETJEN: I'm sorry to

 21 interrupt but with this -- I'll just jump in with

 22 a follow-up.
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 1 MR. ZAIDI: Sure.

 2 COMMISSIONER WETJEN: In rough terms

 3 anyway, how is impartial access going to be

 4 provided for or monitored by the Commission? How

 5 are we going to measure whether a SEF is

 6 permitting impartial access? What's the standard?

 7 MR. ZAIDI: The impartial access

 8 standard is for a SEF to provide impartial access

 9 to ECPs and ISVs so they have to have

 10 nondiscriminatory rules in place when they're

 11 considering whether to grant access to ECPs. So

 12 the SEFs will have the rules in place and then

 13 obviously we'll have our oversight authority

 14 through rule enforcement reviews or other

 15 mechanisms to oversee that.

 16 A couple other benefits that I didn't

 17 mention in my remarks, there will be audit trails

 18 and surveillance requirements that SEFs will be

 19 required to keep that is not necessarily true in

 20 today's OTC market. And also --

 21 COMMISSIONER WETJEN: And again, sorry

 22 again to interrupt, Amir, but why is that
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 1 important? I mean, why is that an important

 2 reform that the Commission today feels needs to be

 3 part of this rule?

 4 MR. ZAIDI: Sure. Well, for the audit

 5 trail requirement, the SEF will have to be able to

 6 reconstruct transactions and keep audit trail from

 7 the time orders come in through the time of fill

 8 or allocation or other. So that's very important

 9 for our oversight responsibility to look into if

 10 there is some prohibited trading practices going

 11 on or other disruptions in the market. We can

 12 gain access to that data to find out what's going

 13 on similar to the real-time trade monitoring that

 14 SEFs have to implement and also automated trade

 15 surveillance as well. So that will be very

 16 important to us for our oversight responsibilities

 17 and my colleagues and DMO for them to review on a

 18 daily basis.

 19 A couple other things --

 20 COMMISSIONER WETJEN: Again, just to

 21 interject again, I agree these are important

 22 provisions that benefits pre-trade transparency or
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 1 multiple -- obviously, one has a lot to do with

 2 pricing of these contracts, but through these

 3 other mechanism and other requirements, under the

 4 core principles of SEFs, it's also going to be

 5 extremely important that the Division of

 6 Enforcement, as they monitor for manipulation --

 7 well, for DMO and surveillance as well -- but

 8 these will all be very, very useful tools just to

 9 ensure against manipulation.

 10 MR. ZAIDI: True. Yes. Also, the CCO

 11 requirement for SEFs, that will also be

 12 implemented, and these final rules when they

 13 become effective, if they become effective, that's

 14 also another important aspect to these rules so

 15 the SEF can have the rules in place, they can have

 16 somebody at the SEF overseeing the rules, and also

 17 the compliance measures that we just went through.

 18 So that's another important aspect to these rules

 19 that is not in place today in today's OTC market.

 20 And also just from another aspect, the

 21 clearing will be mandatory clearing obviously that

 22 has started to take into effect right now and the
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 1 real-time reporting, that will be in effect when

 2 the SEFs get up and operating. So there are many

 3 benefits that these rules will provide for the

 4 marketplace.

 5 COMMISSIONER WETJEN: Thank you for

 6 going through that.

 7 MR. VAN WAGNER: Can I just add one

 8 thing because we sort of forget. I mean,

 9 obviously enough, SEFs are building out the

 10 requirements that they have but, I mean, at the

 11 outset when we were talking about the no-action

 12 letter and some of the entities that are relying

 13 right now on that no-action letter because they

 14 were real relying on CFMA exclusions and

 15 exemptions.

 16 I mean, there are markets that we

 17 literally do not know who they are prior to Dodd_

 18 Frank. I mean, they relied on 2(d)(1) and 2(d)(2)

 19 to trade interest rate swaps on trade facilities

 20 and nontrading facilities. Without any notice to

 21 us. Obviously, no data provisions, et cetera, you

 22 know, since Dodd-Frank there is obviously
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 1 reporting requirements that have kicked in. And

 2 then moving them to a regulated space. So I think

 3 we get lost in the details as the big picture

 4 changes that have happened post-Dodd-Frank.

 5 COMMISSIONER WETJEN: I agree. I

 6 appreciate you pointing that out.

 7 And again, as it relates back to

 8 protocols, the trading protocols, I said in my

 9 remarks I thought it was important. I thought

 10 that Congress was informing or directing the

 11 Commission to be flexible in that regard. And

 12 again, I think we've provided for appropriate

 13 flexibility in this rule.

 14 But in any event, isn't there a baseline

 15 level of pre-trade transparency that's always

 16 going to be required to be met by virtue of us

 17 requiring trading protocols in the first place,

 18 again, in a way that's different from what we

 19 might see in the current OTC space.

 20 MR. ZAIDI: So for required

 21 transactions, transactions that are subject to the

 22 trade execution requirement, we've laid out the
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 1 baseline execution methods that market

 2 participants and SEFs will have to comply with,

 3 and we've taken into account the pre-trade price

 4 transparency goals of section 5h, and we believe

 5 that, as you said, it provides appropriate

 6 flexibility to SEFs and market participants.

 7 CHAIRMAN GENSLER: Commissioner Wetjen,

 8 if I can add, I think that even parts of the

 9 market that are not required to use a SEF will

 10 benefit because there will be an order book there

 11 and if somebody wants to leave quotes, that will

 12 be relevant to their thinking, too. They'll be

 13 able to see that. They might not execute against

 14 it because they're permitted not to, but I think

 15 that just actually having a place that any market

 16 participant can come to, who, of course, is

 17 appropriately guaranteed to be there and so forth,

 18 that really is a big part of this benefit well

 19 before you get to whether it's a required trade

 20 execution mandate swap; well, before you get to

 21 whether the request-for-quote model is 2/3/5 or

 22 something else.
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 1 COMMISSIONER WETJEN: Well, and

 2 similarly, again, I alluded to it in my statement

 3 but there might be some enhancements to risk

 4 management for clearinghouses and clearing firms

 5 alike.

 6 CHAIRMAN GENSLER: No, I agree with that

 7 because I think as the Congress said that so much

 8 has to come to clearinghouses, clearinghouses

 9 benefit by having that available pricing data, as

 10 well as the liquidity that swap execution

 11 facilities will provide, and it will lower some of

 12 the risk of clearinghouses. And I think that's a

 13 major -- when we think about cost and benefits,

 14 that's a major benefit that clearinghouses, this

 15 will help lower their risk.

 16 COMMISSIONER WETJEN: I appreciate the

 17 staff working with me on this exchange. Again,

 18 the moment we're at right now as a Commission is

 19 pretty important and transformative, and I thought

 20 it was useful for the public to just understand a

 21 little bit better and in more detail all the

 22 different ways this rule set today brings about
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 1 reform. So I appreciate that.

 2 That's all I have.

 3 CHAIRMAN GENSLER: Before calling the

 4 roll I didn't know whether --

 5 COMMISSIONER O'MALIA: I'd like to

 6 explain what my amendment does and I'd be happy to

 7 entertain any questions.

 8 So this is very similar to what we

 9 discussed in terms of block rules. This is a data

 10 requirement that would require the Commission to

 11 conduct a study based on a year's worth of swap

 12 trade data in order to make an informed decision

 13 about the appropriate minimum RFQ requirements.

 14 Based on this study and after public comment, the

 15 Commission will be required to vote on the

 16 appropriate changes based on the recommendations

 17 of the study. My amendment binds the Commission

 18 to act before two years but there is no

 19 requirement why it can't act prior, so long as the

 20 completed study has had the benefit of public

 21 comment and review.

 22 Obviously, it goes without saying we've
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 1 discussed it here at the dais. By requiring the

 2 Commission to act in this amount of time and after

 3 some time has gone by in terms of moving this, we

 4 would also have the opportunity to see where

 5 Europe is in terms of its RFQs. And we would

 6 obviously have a forcing mechanism to adopt our

 7 rules in light of the MiFiD final rules. This

 8 amendment does not change the bias of the rule

 9 towards a minimum RFQ of three; it simply ensures

 10 that we undertake our appointed responsibilities

 11 and they are done so based on the facts and the

 12 data before us.

 13 So if anybody has any questions or

 14 concerns, let me know. I'd be happy to answer

 15 them.

 16 COMMISSIONER SOMMERS: Just to clarify,

 17 this does not do anything to the timing of the SEF

 18 rule. The SEF rule will still go into place. It

 19 just requires us to look at the data before the

 20 RFQ automatically goes to three?

 21 COMMISSIONER O'MALIA: That is correct.

 22 COMMISSIONER SOMMERS: I guess, sorry,
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 1 one more question.

 2 In looking at the data, the Commission

 3 then would have the ability to decide whether some

 4 more liquid contracts would be appropriate for a

 5 higher RFQ versus a lower RFQ number for more

 6 liquid?

 7 COMMISSIONER O'MALIA: The facts in the

 8 data would tell us.

 9 CHAIRMAN GENSLER: I'm not able to

 10 support your amendment, Commissioner O'Malia.

 11 We've come a far way, this Commission, and you and

 12 I have in these three years of discussing this. I

 13 think that this Commission included at your good

 14 suggestion in the initial proposal phase a

 15 request-for-quote model recognizing that we would

 16 provide market participants flexibility in the

 17 swaps market that was not necessarily in the

 18 futures market; that that request-for-quote model

 19 was appropriate, and I still support that, that we

 20 have a request-for-quote model here. In the

 21 futures market for the public, if you want to

 22 request a quote, the information has to go out to
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 1 all of the market and the responses come back.

 2 Everybody gets to see that.

 3 Fairly different here, what we proposed

 4 is you could go out to a minimum of five and the

 5 responses didn't have to be shared with the

 6 market. I feel that based on the comments in the

 7 public record that we've come out in an

 8 appropriate place based on the data and the facts

 9 that we know it as of May 16, 2013, is that

 10 there's a request-for-quote minimum of going out

 11 to three. Now, if the three parties don't come

 12 back and only one comes back, you can execute by

 13 any means of interstate commerce. For a phase-in

 14 period, which is approximately, what, about 16

 15 months, to one year from the four months --

 16 MR. ZAIDI: It's one year from the

 17 compliance date, so about 14 months.

 18 CHAIRMAN GENSLER: Well, isn't the

 19 compliance date four months?

 20 MR. ZAIDI: Yes, sorry. Yeah, you're

 21 right. Sorry.

 22 CHAIRMAN GENSLER: I'm sorry. All
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 1 right, so 16 months. Has a phase-in at two that

 2 again helps the market adjust if there's any

 3 adjustment. I feel that it's appropriate. I

 4 would note that these are highly liquid markets

 5 because we've already determined that they're

 6 under the clearing mandate and one of the five

 7 factors that Congress asked us to determine and we

 8 went out to notice and comment was the liquidity

 9 of these markets. But I would further note that

 10 we have 77 registered swap dealers and 66 of them

 11 registered before December 31st, which meant that

 12 they passed the de minimis of $8 billion of

 13 trading. And that was an annual de minimis they

 14 passed in just 18 days in October of last year.

 15 Now, of course, that's not necessarily 77

 16 independent, unaffiliated members, but I think

 17 it's 35 unaffiliated members. And this is that

 18 they are registered and making markets as dealers

 19 in the credit derivative indices and the interest

 20 rate markets.

 21 I also feel it's an appropriate

 22 balancing because each of the market participants
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 1 could, if they wish, also have other means

 2 available to them. They can use the order book.

 3 We have a crossing rule that was proposed and is

 4 still in here. Some people call it the 15 second

 5 rule, but a party could one-on-one do a

 6 transaction and bring it to the swap execution

 7 facility and the swap execution facility by any

 8 means of interstate commerce would have to note

 9 that a cross was happening and somebody could

 10 improve on it. This is a mechanism that's used

 11 with quite success in the options market. Options

 12 on futures markets today. And as we talked

 13 earlier today there is also the work-up rule to

 14 the extent if somebody feels that they would

 15 somehow have a bit of a winner's curse or

 16 something on something they could come in, let's

 17 say at 50 million rather than 300 million and then

 18 work up the transaction without going back to

 19 three parties. So I think it's an appropriate

 20 balance, and I'm going to continue to support

 21 what's in the staff recommendation, and with all

 22 respect, decline to support your amendment.
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 1 COMMISSIONER WETJEN: I'm just going to

 2 make a couple of quick comments, too.

 3 Over the course of the last week or so

 4 we spent considerable time carefully calibrating

 5 all the words of the preamble to make sure that

 6 this is a bulletproof document in some respects.

 7 And so, again, my fear here is that without the

 8 benefit of the sort of labored study and analysis

 9 that we've gone through over the last week or so

 10 in making the final edits to the rulemaking, I

 11 worry that by accepting this amendment now without

 12 that same level of analysis we'd be taking a risk

 13 that I just can't, well, tolerate at the moment.

 14 In other words, I don't want to delay this rule

 15 any further and bring about some of the

 16 uncertainty that we're resolving by adopting this

 17 rule today. And so I think the policy we've

 18 struck here is appropriate in this rule. Again,

 19 there's a number of different ways we could have

 20 done it but we've settled on where we've settled,

 21 so I think I'm going to have to reject the

 22 amendment as well.
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 1 COMMISSIONER O'MALIA: Well, I -- go

 2 ahead.

 3 COMMISSIONER SOMMERS: I just have a

 4 couple of comments.

 5 I think certainly based on everything

 6 that we've been reviewing over the past two and a

 7 half years to be able to get to the place we are,

 8 the data that we have been receiving even over the

 9 past four months has shown us that the contracts

 10 that are now being cleared and reported are not

 11 all liquid contracts. So being able to use the

 12 data and to consider the data and how we set the

 13 RFQ I think would be helpful to the Commission,

 14 and I'm hopeful that if this amendment doesn't

 15 pass today that future commissions will consider

 16 the data when making any determinations.

 17 COMMISSIONER WETJEN: Just one quick

 18 follow-up. I think Jill made an excellent point,

 19 and we actually do have in the rule a requirement

 20 that the Commission do conduct a study, and the

 21 purpose of the study is going to review the

 22 trading protocols that are contained in the
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 1 rulemaking today and to review whether they've

 2 been appropriate in light of what the Commission

 3 sees after some amount of time. I don't remember

 4 the exact amount of time laid out by the rule, so

 5 I think that's an important part of this

 6 rulemaking as well that gives me a little bit more

 7 assurance that we've landed in an appropriate

 8 place.

 9 COMMISSIONER O'MALIA: Let me respond to

 10 both the Chairman and Commissioner Wetjen.

 11 You're right. We do have a three-year

 12 study in here, exactly two years after we make a

 13 decision unfortunately. Or a decision is just

 14 automatically made for us, actually, based on this

 15 rule.

 16 The other thing that I think you

 17 highlighted, Mr. Chairman, was the transparency.

 18 That's what this is about. We insist that the

 19 market have pre-trade transparency. You mentioned

 20 the 15-second crossing rule. We mention the RFQ.

 21 We make sure the industry does all these things

 22 for transparency, yet we don't spend a single
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 1 second to consider the data before we make a

 2 decision. I think it's just upside down. I'm

 3 disappointed that we're not going to take the data

 4 and make the decision, but let's vote and figure

 5 out where we go. But I certainly hope going

 6 forward that we will consider the data more

 7 carefully.

 8 COMMISSIONER WETJEN: One last time. I

 9 agree with Scott, and I think the study that's

 10 part of the rule has to be taken very, very

 11 seriously, and I expect and hope and believe that

 12 Commission staff will, in fact, do that.

 13 CHAIRMAN GENSLER: And I expect that the

 14 Commission staff and the Commission will do that.

 15 I do feel that we've taken to heart all of the

 16 obligations we have, though it is three years and

 17 Congress gave us one year to do this. And we have

 18 considered the data at the proposal stage and at

 19 this possible point of finalizing this rule.

 20 I didn't know if Commissioner Chilton

 21 had anything before we called the roll. I just

 22 want to make sure.
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 1 Commissioner Chilton.

 2 COMMISSIONER CHILTON: I'm still holding

 3 my nose and biting my tongue. I think I'll just

 4 be quiet here. Thank you. No.

 5 CHAIRMAN GENSLER: Ms. Jurgens.

 6 MS. JURGENS: This is a vote on the

 7 amendment to require fact-based analysis of RFQ

 8 minimum.

 9 Commissioner Wetjen.

 10 COMMISSIONER WETJEN: No.

 11 MS. JURGENS: Commissioner Wetjen, no.

 12 Commissioner O'Malia.

 13 COMMISSIONER O'MALIA: Aye.

 14 MS. JURGENS: Commissioner O'Malia, aye.

 15 Commissioner Chilton.

 16 COMMISSIONER CHILTON: No.

 17 MS. JURGENS: Commissioner Chilton, no.

 18 Commissioner Sommers.

 19 COMMISSIONER SOMMERS: Aye.

 20 MS. JURGENS: Commissioner Sommers, aye.

 21 Mr. Chairman.

 22 CHAIRMAN GENSLER: No.
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 1 MS. JURGENS: Mr. Chairman, no. Mr.

 2 Chairman, on this amendment the ayes have two, the

 3 nos have three.

 4 CHAIRMAN GENSLER: All right. So Ms.

 5 Jurgens, you can call the roll on the base

 6 recommendation that had been duly motioned and

 7 seconded. The swap execution facility rule.

 8 MS. JURGENS: This is the final rule,

 9 core principles and other requirements of swap

 10 execution facilities.

 11 Commissioner Wetjen.

 12 COMMISSIONER WETJEN: Aye.

 13 MS. JURGENS: Commissioner Wetjen, aye.

 14 Commissioner O'Malia.

 15 COMMISSIONER O'MALIA: Aye.

 16 MS. JURGENS: Commissioner O'Malia, aye.

 17 Commissioner Chilton.

 18 COMMISSIONER CHILTON: Aye.

 19 MS. JURGENS: Commissioner Chilton, aye.

 20 Commissioner Sommers.

 21 COMMISSIONER SOMMERS: No.

 22 MS. JURGENS: Commissioner Sommers, no.
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 1 Mr. Chairman.

 2 CHAIRMAN GENSLER: Aye.

 3 MS. JURGENS: Mr. Chairman, aye. Mr.

 4 Chairman, on this matter the ayes have four, the

 5 nos have one.

 6 CHAIRMAN GENSLER: The swap execution

 7 facility rule with the ayes in the majority with

 8 technical edits and that unanimous consent

 9 amendment on footnote 219 will be sent to the

 10 Federal Register.

 11 I want to thank all the team. I want to

 12 thank my fellow Commissioners. This is all, I

 13 will say, just part of a journey, and I do concur

 14 that we have to be open, whether it's because of

 15 international regimes, new data as it becomes

 16 available. This is a paradigm shift for the

 17 American markets that will bring transparency but

 18 we have to be open to revising based on new

 19 information along the way.

 20 David Meister is coming. But does

 21 anybody want a break or should we just get on and

 22 just do it?
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 1 All right. We've deliberated, and David

 2 Meister is here.

 3 We have in front of us David Meister,

 4 the head of the Division of Enforcement; Robert

 5 Pease, who is in the Division of Enforcement, and

 6 who have worked on a staff recommendation on an

 7 interpretive guidance with regard to disruptive

 8 trading practices. So I hand the floor over to

 9 you, David.

 10 MR. MEISTER: Thank you, Mr. Chairman.

 11 Thank you, Commissioners.

 12 Today the staff is recommending that the

 13 Commission issue a final interpretive guidance and

 14 policy statement or interpretive statement for

 15 short concerning the Commission's prohibitions of

 16 destructive practices. I'll summarize the

 17 highlights of the interpretive statement and then

 18 we'll take the Commission's questions.

 19 In the Dodd-Frank Act, Congress adopted

 20 a provision prohibiting certain disruptive

 21 practices. The provision took effect on July 16,

 22 2011, and it applies to violations arising after
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 1 that date. The provision prohibits three types of

 2 conduct on a registered entity. First, violating

 3 bids or offers; second, recklessly disregarding

 4 orderly execution during a closing period; and

 5 third, spoofing, an example of which is given in

 6 the provision as "bidding or offering with the

 7 intent to cancel the bid or offer before

 8 execution."

 9 This Dodd-Frank law, now numbered

 10 section 4c(a)(5) of the Commodity Exchange Act is

 11 an important and welcomed new enforcement tool to

 12 be used against persons who employ these

 13 destructive practices which harm the critical

 14 price discovery function of CFTC regulated

 15 markets. It can and will be used in furtherance

 16 of the Commission's core mission to protect market

 17 participants and promote market integrity.

 18 This Dodd-Frank provision provides the

 19 Commission with rulemaking authority but it does

 20 not mandate the promulgation of rules.

 21 Nonetheless, beginning in November 2010, the

 22 Commission took steps to inform the market as to
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 1 how the Commission interprets and intends to apply

 2 this provision. Those steps, which included a

 3 public roundtable and opportunity for the public

 4 to submit comments in response to Commission

 5 proposals, are now culminating today with today's

 6 recommended interpretive statement.

 7 As a threshold matter, the interpretive

 8 statement sets forth the Commission's

 9 interpretation that all three categories of

 10 prohibitions apply only with respect to violations

 11 on a registered entity, such as DCM or a SEF.

 12 They do not apply to bilateral, off-exchange

 13 trades conducted in accordance with Commission

 14 rules.

 15 Now, taking each of the three types of

 16 prohibitions in turn, the highlights include the

 17 following: First, with respect to the prohibition

 18 on violating bids or offers, the interpretative

 19 statement makes several points clear. When a

 20 person buys on a registered entity higher than the

 21 lowest price offered or sells lower than the

 22 highest priced bid, the Commission's
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 1 interpretation is that the law is violated

 2 regardless of the person's intent. This conduct

 3 is disruptive. It impedes the price discovery

 4 function, and therefore, Congress made this a per

 5 se or strict liability offense.

 6 The interpretive statement also makes

 7 clear the Commission's policy that there are

 8 limitations on the reach of this first category.

 9 For example, as to SEFs, the prohibition on

 10 violations of bids and offers applies only when a

 11 person is using the SEF's order book but not with

 12 respect to other SEF execution methods such as a

 13 request-for-quote system. The provision also does

 14 not create a best execution standard between

 15 different trading platforms within a particular

 16 DCM or SEF or across multiple registered entities.

 17 Second, with respect to the prohibition

 18 concerning orderly execution during the close, the

 19 interpretive statement makes clear that the

 20 Commission interprets this to cover not only

 21 intentional but also reckless conduct. It also

 22 makes clear that the violative conduct does not
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 1 necessarily have to be undertaken during the

 2 closing period. Reckless, a common term in the

 3 law, means conduct that departs so far from the

 4 standards of ordinary care that it is very

 5 difficult to believe the actor was not aware of

 6 what he or she was doing.

 7 The closing is a particularly important

 8 period because many derivative contracts are

 9 valued based upon closing period prices. The

 10 interpretive statement confirms what the

 11 Commission understands closing period to mean in

 12 the context of this provision. As to what is

 13 orderly, the interpretive statement highlights

 14 that the fundamental concepts of orderly trading

 15 are similar in the CFTC regulated markets and the

 16 securities markets and that there is a substantial

 17 body of judicial precedent applying the concept of

 18 orderly trading in the securities markets. The

 19 interpretive statement sets forth the policy of

 20 the Commission to be guided by, but not controlled

 21 by, that precedent.

 22 Third, with respect to the prohibition
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 1 of spoofing and similar practices, the

 2 interpretive statement makes clear that the

 3 Commission intends to apply the provision only

 4 when the actor engages in intentional conduct. It

 5 does not cover reckless conduct. This limitation

 6 flows directly from the statute. The interpretive

 7 statement states that the Commission's position

 8 that it intends to employ -- let me start that

 9 again.

 10 The interpretive statement states the

 11 Commission's position that it intends to employ

 12 this prohibition against a person who at the time

 13 he or she places an order intends to cancel it

 14 prior to execution. The interpretive statement

 15 provides that the statutory prohibition applies to

 16 conduct on all registered entities, regardless of

 17 the trading system. It can apply to partial fill

 18 situations, and it can apply to one instance of

 19 misconduct or to a pattern. On the other hand,

 20 the interpretive statement makes clear that the

 21 Commission does not intend to apply the

 22 prohibition to good faith order cancelations or
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 1 modifications.

 2 The statement lists four possible

 3 examples of violations under this spoofing

 4 paragraph of the provision but these are just by

 5 way of example, and they do not limit the

 6 Commission's authority to consider the facts and

 7 circumstances of a given situation to determine

 8 whether the conduct meets the elements of the law

 9 as provided by Congress. One of the Commission's

 10 core missions is to protect against disruptions of

 11 market integrity. In that vein, staff believes

 12 that this interpretive statement, which takes into

 13 consideration comments that we have received and

 14 constructive dialogue with commissioners will help

 15 market participants abide by the law.

 16 I'd like to thank my staff colleagues

 17 who worked on the interpretive statement and other

 18 prior initiatives on this project and on this

 19 subject, Vince McGonagle and Bob Pease from the

 20 Division of Enforcement.

 21 With that, I'll entertain any questions

 22 that you may have.
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 1 CHAIRMAN GENSLER: I'll entertain a

 2 motion to adopt the staff recommendations on

 3 disruptive trading practice guidance.

 4 COMMISSIONER SOMMERS: So moved.

 5 COMMISSIONER O'MALIA: Second.

 6 CHAIRMAN GENSLER: I support the

 7 interpretive guidance and policy statement with

 8 regard to disruptive trading practices for swap

 9 execution facilities in designated contract

 10 markets.

 11 As part of reform, Congress actually

 12 included a new section about various abusive

 13 practices, the three that Mr. Meister just went

 14 through, and expressly prohibited certain

 15 activity. And what we found after Dodd-Frank

 16 passed is many market participants asked what does

 17 this mean? And we went out and we actually had a

 18 lot of discussions, and we had an advance notice

 19 that we put out with 17 or 20 questions. Is that

 20 right, David?

 21 MR. MEISTER: I think it was 19, Mr.

 22 Chairman.
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 1 CHAIRMAN GENSLER: Nineteen questions.

 2 We had a roundtable, and I think separately it

 3 also probably came up at the Tech Advisory

 4 Committee a number of times as well if I remember,

 5 Commissioner O'Malia.

 6 But based on that roundtable and the

 7 advanced notice and some of the advisory

 8 committee, then we put out this proposed

 9 interpretive guidance. And I think that it's

 10 helpful to the markets. The guidance addresses

 11 the comments the Commission received during that

 12 process, and I support it. And I have a longer

 13 statement that will go in the record but I'm going

 14 to let others ask you questions.

 15 Commissioner Sommers.

 16 COMMISSIONER SOMMERS: Thank you, Mr.

 17 Chairman. I just have a couple of questions. One

 18 is specifically to the disregard for orderly

 19 execution of transactions during the closing

 20 period, and the guidance recommends that market

 21 participants should assess market conditions. And

 22 I'm just wondering if you could give us a little
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 1 bit of color on that because market conditions are

 2 constantly changing and one market participant's

 3 view of a market condition versus another one

 4 could be very different. How are we going to

 5 evaluate whether a market participant adequately

 6 assessed market conditions?

 7 MR. MEISTER: The guidance provides the

 8 language that you're talking about. I look at

 9 that in terms of the overall interpretive

 10 statement that says that this applies to reckless

 11 conduct. And reckless is defined in the rule, as

 12 I said, it's sort of department very far from the

 13 standards of ordinary care. And so under the law

 14 what people do in determining whether or not

 15 someone acted recklessly is they look at what did

 16 the person observe? What did the person try to

 17 observe? You know, what is the evidence that

 18 reflects on the person's mental state? One thing

 19 that we suggest, and the statement says that one

 20 ought to look at is, you know, what does the

 21 market look like at the time that you're entering

 22 the market. It's really -- that's a long way of
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 1 saying it's really all wrapped up in an assessment

 2 of whether or not one acts recklessly.

 3 And as I say, the word "recklessly" is a

 4 common word in the law. It appears also actually

 5 in the Commodity Exchange Act as well, and it

 6 appears in many statutes across the spectrum of

 7 the law and ultimately the assessment of whether

 8 or not someone acts recklessly does depend upon,

 9 in part, what the person knew and was observing at

 10 the time.

 11 COMMISSIONER SOMMERS: I also wonder,

 12 because our registered DCMs did comment during

 13 this process and I wonder whether or not we've

 14 reviewed the exchanges' trade practice rules to

 15 make sure that this guidance, it doesn't conflict

 16 with what exchanges might have in their own rules.

 17 MR. MEISTER: We certainly did review

 18 all of the comments. We received more than 50,

 19 and we received some, I agree, from registered

 20 entities. It's the goal of this guidance to give

 21 the market and market participants an

 22 understanding as to how we interpret the statute.
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 1 But I will say that whether or not the interpret

 2 -- I'm sorry, whether or not the statute conflicts

 3 with a DCM's rule -- and I'm not saying that it

 4 does -- we would still be bound to apply the

 5 statute as written.

 6 COMMISSIONER SOMMERS: Of course. I'm

 7 just saying if perhaps something that may be

 8 conflicting or confusing in an exchange rule, you

 9 know, conflicts with the guidance that we've given

 10 here, you know, I assume that the Exchange will

 11 just have to change their rule.

 12 MR. MEISTER: I think that's -- I would

 13 agree. I mean, if the Exchange has written a

 14 rule, say, making lawful spoofing, just by way of

 15 example, but without getting into something

 16 granular or some sort of conduct that violates

 17 congressional statute, I think it would behoove

 18 them to change the rule as well.

 19 CHAIRMAN GENSLER: Thank you,

 20 Commissioner Sommers.

 21 Commissioner Chilton.

 22 COMMISSIONER CHILTON: Thank you, Mr.
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 1 Chairman. Mr. Meister, with regard to the

 2 "cheetahs", with regard to HFTs, you know, since

 3 they don't have phone messages that we would, you

 4 know, recordings that we would get or maybe

 5 instant messages, what sort of circumstantial

 6 evidence would you look for for spoofing for those

 7 guys?

 8 MR. MEISTER: Thank you, Commissioner.

 9 Your question about circumstantial evidence is a

 10 good one. Just to remind everyone, under the law

 11 the weight of circumstantial evidence and the

 12 weight of direct evidence is the same. And what

 13 we would -- and we often, in the Division of

 14 Enforcement, rely on circumstantial evidence.

 15 Circumstantial evidence can take various forms,

 16 including pattern of trading. It could include,

 17 you know, for example, how a particular algorithm

 18 is coded. For example, if an algorithm was coded

 19 to cancel trades from the get-go. In other words,

 20 if an algorithm was coded that before an order was

 21 placed there was an intent to cancel it, then that

 22 would be a level of circumstantial evidence that
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 1 we would actually, definitely look at.

 2 COMMISSIONER CHILTON: Thank you. I'll

 3 put on my Scott O'Malia hat for a minute. Do we

 4 have the tools, the technology tools to really

 5 detect this sort of in a real-time -- on a

 6 real-time basis? I mean, I know we can go in and

 7 respond to complaints, referrals that we get, but

 8 do we have at this point the technology tools

 9 available to detect this? I'm particularly

 10 interested in it, by the way, during the closing

 11 period. I think you addressed this a little bit

 12 but give me a little bit more flavor.

 13 MR. MEISTER: With respect to the

 14 surveillance tools that we have, I don't have a

 15 DMO colleague sitting next to me here. You know,

 16 so I just don't have a direct answer to your

 17 question.

 18 CHAIRMAN GENSLER: Rick Shilts, do you

 19 want to come up to the table?

 20 Sorry, David. You seemed to call out

 21 for a lifeline. You get two more lifelines.

 22 MR. MEISTER: It was a phone a friend.
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 1 MR. SHILTS: Yeah. I guess the short

 2 answer is no, we don't have that capability. To a

 3 large extent it would involve looking at messaging

 4 data, which is something we're just starting to

 5 look at and we would need more people that are

 6 familiar with algos, you know, computer programmer

 7 types that would be able to look at that. So

 8 that's something that we would be wanting to do

 9 down the road but as I think we mentioned at the

 10 last -- as Commissioner O'Malia asked, we're now

 11 working to integrate our oversight of SEFs. We're

 12 also trying to integrate SDR data into our

 13 oversight of the swaps markets and the futures

 14 markets. So frankly, I don't see with our current

 15 resources that's something that we'll have the

 16 capability to do in the near term.

 17 COMMISSIONER CHILTON: Mr. Shilts, if

 18 you want to answer this one too then, because my

 19 next question was about the prohibition on

 20 violating bids and offers operate sort of a SEF

 21 world. And you know, where there's no best

 22 execution requirement. How does this work in the
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 1 SEF world? And maybe back to you, David. I'm

 2 sorry, whoever.

 3 MR. MEISTER: That's okay. I'll take

 4 it. The violation -- you're talking about the

 5 first paragraph of the provision, which makes it a

 6 prohibitive practice to violate bids or offers.

 7 That works in the SEF world only with respect to

 8 the order book. It doesn't work with respect to

 9 RFQs.

 10 COMMISSIONER CHILTON: Okay. I do think

 11 it's significant that, you know, what Mr. Shilts

 12 just said is we don't have the tools to stop this

 13 stuff. So we can put the rule in place or we can

 14 put your guidance in place and it's concomitant

 15 with all the other rules but the bottom-line is,

 16 you know, we may not be able to catch these people

 17 until we go after them and it could be a long

 18 time. So it's just another really shout out to

 19 Congress to say if you want us to abide by our

 20 rules, you want us to be able to enforce this, we

 21 need the technology tools and the people power to

 22 do so.
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 1 Thank you.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner Chilton.

 4 Commissioner O'Malia.

 5 COMMISSIONER O'MALIA: He actually said

 6 that he was intentionally going to proffer me on

 7 that question. He should be brought up on

 8 charges.

 9 So I do have a number of questions.

 10 David, I've sent you a list of three ATS

 11 strategies which I think probably I'll give to the

 12 reporter. I don't want to have to go through

 13 these, but you and I -- I sent you the specific

 14 strategies.

 15 MR. MEISTER: The ones you sent me last

 16 night?

 17 COMMISSIONER O'MALIA: Yeah.

 18 MR. MEISTER: Yes.

 19 COMMISSIONER O'MALIA: Strobing,

 20 priority positioning or laddering, and front

 21 running. You've had the opportunity to review

 22 those. These are a variety of different
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 1 strategies that involve high level cancelations,

 2 flashing liquidity and pulling it back real quick.

 3 Where does that fall in terms of our guidance?

 4 Maybe if you could kind of go by each strategy. I

 5 mean, if we try to explain it here it might be a

 6 little difficult.

 7 CHAIRMAN GENSLER: And David, as you

 8 think that through I'm just asking unanimous

 9 consent to put those three things fully in the

 10 record.

 11 Hearing no objection --

 12 COMMISSIONER O'MALIA: I've got actually

 13 a pretty good little explanation on each one of

 14 them.

 15 CHAIRMAN GENSLER: All right. So

 16 they'll all go fully in the record. Thanks.

 17 MR. MEISTER: What's going to go in the

 18 record is as sent to --

 19 COMMISSIONER O'MALIA: As sent to you.

 20 The questions I sent to you.

 21 MR. MEISTER: Okay. So your first

 22 category concern is labeled strobing. I can't
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 1 tell you I've had a ton of opportunity to consider

 2 it but it does -- something that leaps out with

 3 respect to strobing, which as described in this

 4 document is an HFT strategy that rapidly sends and

 5 cancels the same order many times to create the

 6 false appearance of liquidity. That one certainly

 7 seems like a problem to me under the provision.

 8 And I would be thinking about the third category

 9 of the provision which concerns spoofing because I

 10 think what this is talking about is intentionally

 11 placing an order with an intent to cancel it

 12 before execution, which would meet the

 13 prohibition's language.

 14 COMMISSIONER O'MALIA: So in this they

 15 do flash orders. They just do it quickly. And if

 16 they are lifted then that obviously -- the intent

 17 to cancel is, you know, that intent seems to be

 18 mitigated if they actually did get lifted. This

 19 is a tough one to solve and obviously a tough one

 20 to describe in terms of what good and bad behavior

 21 is. So wouldn't the response be, well, we are

 22 placing orders. The question is how fast do they
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 1 get out.

 2 MR. MEISTER: Right. I think that's a

 3 very good question and good to clarify here.

 4 The offense is complete if someone

 5 places an order with the intent to cancel it at

 6 the time it's placed. It doesn't -- I would

 7 suggest to you that it's not a defense if, in

 8 fact, that order is ultimately executed on. Just

 9 like, for example, in manipulation space just by

 10 way of analogy, sometimes people will try to

 11 manipulate the market by putting in orders to move

 12 a market price. That's not spoofing; that's in

 13 the manipulation space. It's not a defense if, in

 14 fact, that order is executed on. That just so

 15 happens. Perhaps it's the cost of doing business.

 16 But so with respect to your question, I don't

 17 think that it's a valid defense to say, oh, the

 18 order was executed on.

 19 I should also point out that just so the

 20 record is clear here, your definition or this

 21 strobing hypothetically talks about an intent to

 22 create a false appearance of liquidity. That is
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 1 not a necessary element of spoofing.

 2 COMMISSIONER O'MALIA: That's good to

 3 know. Thank you.

 4 Do you want to address either priority

 5 positioning in laddering or front running?

 6 MR. MEISTER: With respect to laddering

 7 -- and maybe I should just read what is laddering

 8 here.

 9 COMMISSIONER O'MALIA: Sure.

 10 MR. MEISTER: It says it's an HFT

 11 strategy for highly liquid markets, extracts

 12 profits from a market by using speed to gain

 13 superior positioning. This strategy adds very

 14 little or no benefit or even harms the marketplace

 15 as it seeks to intercept trading that would

 16 otherwise take place and extract profits from the

 17 system without participating in the transference

 18 of risk.

 19 This one we would have to study further.

 20 This certainly suggests there may be a market

 21 structure issue and may well violate other

 22 provisions in the act, but one question that would
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 1 come to my mind is whether or not there was a

 2 disruptive -- this was disruptive of orderly

 3 execution in the close. I don't see in the

 4 hypothetical on the other hand, if you were trying

 5 to analyze this under spoofing, whether there was

 6 an intent to cancel. So it raises questions in my

 7 mind but I wouldn't be able to answer those

 8 questions here on the spot.

 9 COMMISSIONER O'MALIA: Fair enough.

 10 MR. MEISTER: And then with respect to

 11 the last point, which is front running, and I'll

 12 just read that quickly, front running defined here

 13 is an HFT strategy that relies on ultrahigh speeds

 14 to observe a trade take place in the marketplace

 15 that they took no part in so as to rush and buy or

 16 sell the underlying stock or future in front of

 17 the anticipated forthcoming hedge orders. I read

 18 this to say there's some strategy to watch trading

 19 take place, to sort of make observations about

 20 what trading is taking place and then once you get

 21 that observation you take advantage of the

 22 information that you've gathered.
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 1 Again, for this one I'd want to study

 2 this further. I don't see anything about -- on

 3 the spoofing side about intending to cancel

 4 orders, so that seems out. But with respect to

 5 does it -- and I'll assume there's no violation of

 6 bids or offers, which is a per se event. So

 7 again, it just raises a question about whether

 8 this is during the close and whether the trading

 9 conduct disrupts orderly execution.

 10 COMMISSIONER O'MALIA: Now, you brought

 11 up disruptive trading in the closing period. And

 12 since trades outside the closing period may affect

 13 the trading during the closing period, the portion

 14 of the rule effectively applies to all trading

 15 activities taking place on the registered entity's

 16 order book. Is that correct? Because we say

 17 anything -- doesn't the guidance say that there is

 18 a closing period and if you execute trades outside

 19 the closing period that affects the closing period

 20 then that, too, would be considered affecting the

 21 close? Is that how you interpret it?

 22 MR. MEISTER: Yeah. It's conceivable
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 1 that conduct that occurs outside of the closing

 2 period could disrupt the orderly execution. And

 3 the way the statute is written it makes sense to

 4 consider conduct that occurs outside as possibly

 5 disruptive.

 6 COMMISSIONER O'MALIA: Would it possibly

 7 include trading that occurs in the open might

 8 affect the close? Is that how broad this is?

 9 MR. MEISTER: I wouldn't limit it.

 10 First of all, you keep on saying trading and I

 11 keep on saying conduct. Conduct outside the close

 12 can disrupt the close. Could it be conduct during

 13 the opening? I guess it would depend upon the

 14 facts and circumstances. Obviously, as you get

 15 further and further away of a closing period on a

 16 particular day it gets harder to prove that

 17 someone was acting recklessly with respect to the

 18 close. And we would certainly take that into

 19 consideration.

 20 COMMISSIONER O'MALIA: And this is one

 21 of your facts and circumstances kind of guidances?

 22 MR. MEISTER: That would certainly
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 1 depend upon the facts and circumstances.

 2 COMMISSIONER O'MALIA: What about the

 3 practice of multiple trading strategies within a

 4 firm and kind of coming back to trade the S&P. If

 5 there were an equity strategy and a commodity

 6 strategy and they happened to cross in the S&P,

 7 same firm but different trading strategies and

 8 they essentially cross themselves in the S&P but

 9 executing different strategies on different

 10 markets, do you believe that's disruptive?

 11 MR. MEISTER: I think you're talking

 12 about again about disrupting the orderly execution

 13 during the close. Just to be clear, there's the

 14 violation of bids or offers, there's disrupting

 15 the close, and then there's spoofing. There's no

 16 cancelation in your hypothetical. And I'm

 17 assuming you're not worried about violating bids

 18 and offers. So you're talking about if there was

 19 disruption of a closing period because two

 20 different strategies from the same company hit

 21 themselves during the close. We would look at

 22 whether or not there was -- whether it was
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 1 disorderly and whether the conduct was reckless.

 2 COMMISSIONER O'MALIA: Would it be under

 3 your new manipulation authorities a violation?

 4 MR. MEISTER: Under the new manipulation

 5 authorities there is, you know, that prohibits,

 6 again, all reckless conduct or reckless conduct

 7 but there has to be some level of deception in the

 8 fraud-based manipulation space. So we would opt

 9 to see whether or not there was some sort of

 10 deception of the market in that context.

 11 COMMISSIONER O'MALIA: Are there any

 12 other authorities that that would be illegal?

 13 MR. MEISTER: Well, if a firm is meeting

 14 itself, it raises questions about whether there's

 15 a wash trade problem. That comes to mind. You

 16 know, I'd have to crack the book to look for

 17 others.

 18 COMMISSIONER O'MALIA: I should have put

 19 that in my written submissions for you.

 20 MR. MEISTER: And frankly, what you say,

 21 when we look at facts we sort of look at the facts

 22 carefully and then we look to see whether or not
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 1 there are any prohibitions that are violated.

 2 COMMISSIONER O'MALIA: As I said in my

 3 opening statement, you know, I'm pleased that we

 4 have reserved some activities and clarified that

 5 they are not captured into this disruptive. I

 6 think we have a long way to go in terms of really

 7 illuminating where this authority starts and

 8 stops. And we attempted to do some of that here,

 9 obviously. But, you know, the market, there's a

 10 lot of gray area in this one and hopefully we'll

 11 continue to define the space a little better so

 12 everybody understands where good and bad behavior

 13 resides. So I appreciate your looking at those

 14 strategies and giving me your assessment. I look

 15 forward to following up with you on those. Thank

 16 you.

 17 MR. MEISTER: Thank you.

 18 CHAIRMAN GENSLER: Thank you,

 19 Commissioner O'Malia.

 20 Commissioner Wetjen.

 21 COMMISSIONER WETJEN: I don't have any

 22 questions. Thanks.
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 1 CHAIRMAN GENSLER: All right. If there

 2 are no amendments, absent hearing any amendments,

 3 Ms. Jurgens.

 4 MS. JURGENS: This is a vote on the

 5 anti-disruptive practices authority --

 6 interpretive guidance and policy statement.

 7 Commissioner Wetjen.

 8 COMMISSIONER WETJEN: Aye.

 9 MS. JURGENS: Commissioner Wetjen, aye.

 10 Commissioner O'Malia.

 11 COMMISSIONER O'MALIA: Aye.

 12 MS. JURGENS: Commissioner O'Malia, aye.

 13 Commissioner Chilton.

 14 COMMISSIONER CHILTON: Aye.

 15 MS. JURGENS: Commissioner Chilton, aye.

 16 Commissioner Sommers.

 17 COMMISSIONER SOMMERS: Aye.

 18 MS. JURGENS: Commissioner Somers, aye.

 19 Mr. Chairman.

 20 CHAIRMAN GENSLER: Aye.

 21 MS. JURGENS: Mr. Chairman, aye. Mr.

 22 Chairman, on this question the ayes have five, the
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 1 nos have zero.

 2 CHAIRMAN GENSLER: The vote being

 3 unanimous, with any technical corrections, Mr.

 4 Meister, if you can send this along with the

 5 secretary to the Federal Register.

 6 Before I ask for a motion to adjourn I

 7 just want to again thank all of the staff. This

 8 is a very significant day for this Commission and

 9 I think for the American public that a market that

 10 is measured in vast numbers, nearly $20 of swaps

 11 for every dollar in our economy, we took a step

 12 closer today to enhance transparency, both after

 13 the transaction and before the transaction. And I

 14 know a lot will be written about whether the

 15 request-for-quote model was two, three, or five,

 16 and it seems that that's caught a lot of public

 17 attention. I frankly think that's only part of

 18 the story, and it's a small part of the story. I

 19 think what we really did today said swap execution

 20 facilities can come alive, compete with each

 21 other, provide transparency to the markets, that

 22 everybody in the marketplace is going to benefit
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 1 and have an opportunity, that the block swap rule

 2 set appropriate, that approximately half the

 3 market will benefit from greater post-trade

 4 transparency and later after a transition,

 5 two-thirds. I think these are very significant

 6 accomplishments for the American public and

 7 deliver on what Congress asked for. And I know

 8 all five Commissioners have spent it feels like a

 9 lifetime on this particular set of rules.

 10 I want to thank Commissioner O'Malia who

 11 first led the way in how to do a swap execution

 12 facility rule because I know we spent a lot of

 13 time.

 14 I want to thank Commissioner Chilton,

 15 who, though he lost his stepdad just a week ago,

 16 has really participated, but also over these last

 17 three and a half years, really looking out and I

 18 think Bart, you really brought many excellent

 19 suggestions to this rule. I know as you said, it

 20 wasn't exactly the rule you would have wanted.

 21 Commissioner Wetjen, you and I have

 22 spent more time on this rule probably than any
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 1 other rule but I think we found the appropriate

 2 balance. I really do, and I know we both seem to

 3 be getting some press over this but I really think

 4 this rule brings the appropriate transparency to

 5 the markets.

 6 Commissioner Sommers, although you

 7 didn't necessarily support the final rule, all of

 8 your suggestions were helpful. I think

 9 particularly on the international front we made

 10 really good progress in making this rule more

 11 accessible internationally. And I'm going to miss

 12 you as a Commissioner here. You have served the

 13 American public for -- what is it, seven years?

 14 COMMISSIONER SOMMERS: Six years.

 15 CHAIRMAN GENSLER: Six years. Since the

 16 day Bart was sworn in. And you've really served

 17 the public, and we all owe you a closing round of

 18 applause.

 19 (Applause)

 20 CHAIRMAN GENSLER: Do you want to say

 21 anything before I take a motion to adjourn?

 22 Motion to adjourn the meeting.
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 1 COMMISSIONER SOMERS: So moved.

 2 COMMISSIONER O'MALIA: Second.

 3 CHAIRMAN GENSLER: All in favor?

 4 COMMISSIONERS: Aye.

 5 CHAIRMAN GENSLER: The meeting is

 6 adjourned. Thank you.

 7 (Whereupon, at 2:20 p.m., the

 8 PROCEEDINGS were adjourned.)

 9 * * * * *

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 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Debra S. Derr, notary public in and

 4 for the District of Columbia, do hereby certify

 5 that the forgoing PROCEEDING was duly recorded and

 6 thereafter reduced to print under my direction;

 7 that the witnesses were sworn to tell the truth

 8 under penalty of perjury; that said transcript is a

 9 true record of the testimony given by witnesses;

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

 11 employed by any of the parties to the action in

 12 which this proceeding was called; and, furthermore,

 13 that I am not a relative or employee of any

 14 attorney or counsel employed by the parties hereto,

 15 nor financially or otherwise interested in the

 16 outcome of this action.

 17

 18

 19 (Signature and Seal on File)

 20 -----------------------------------

 21 Notary Public, in and for the District of Columbia

 22 My Commission Expires: March 14, 2014