UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 OPEN MEETING TO CONSIDER A FINAL RULE ON CORE

 PRINCIPLES AND OTHER REQUIREMENTS FOR DESIGNATED

 CONTRACT MARKETS AND A PROPOSED ORDER AMENDING THE

 EFFECTIVE DATE FOR SWAP REGULATION

 Washington, D.C.

 Thursday, May 10, 2012
 2

 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 P. WETJEN, Commissioner

 8 Presentation 1: Final Rule on Core Principles and

 Other Requirements for Designated Contract Markets

 9

 10 NADIA ZAKIR, Division of Market Oversight

 11 NANCY MARKOWITZ, Division of Market

 Oversight

 12

 RICK SHILTS, Division of Market Oversight

 13

 DAVID VAN WAGNER, Division of Market

 14 Oversight

 15 RACHEL BERDANSKY, Division of Market

 Oversight

 16

 MIKE PENICK, Office of the Chief Economist

 17

 18 Others Present:

 19 DAVID STAWICK, Office of the Secretariat

 20 DAN BERKOVITZ, Office of General Counsel

 21

 22 * * * * *
 3

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

 2 (9:33 a.m.)

 3 CHAIRMAN GENSLER: Good morning. This

 4 meeting will come to order. This is a public

 5 meeting of the Commodity Futures Trading

 6 Commission to consider final rules under the

 7 Dodd-Frank Act.

 8 I'd like to welcome members of the

 9 public, market participants, and members of the

 10 media, as well as those listening on the phone and

 11 watching this webcast. Today is the 27th open

 12 meeting of the Dodd-Frank rules. We will consider

 13 a final rule on designated contract market core

 14 principles.

 15 I'd like to thank Commissioner Sommers,

 16 Chilton, O'Malia, and Wetjen for their significant

 17 contributions to the rule writing process and

 18 CFTC's hardworking and dedicated staff.

 19 I'm going to read my statement of

 20 support since there's just one rule here today.

 21 But I support the final rulemaking on designated

 22 contract markets, which includes rules, guidance,
 4

 1 and acceptable practices. It advances important

 2 Dodd-Frank Act transparency reforms. The act

 3 squarely addresses the historically opaque swap

 4 markets through its strong transparency

 5 provisions.

 6 A critical element to this is pre-trade

 7 transparency requiring standardized swaps between

 8 financial firms, but just those that are cleared

 9 and made available and those that are not blocks

 10 to be traded on exchanges such as designated

 11 contract markets, swap execution facilities, and

 12 on recently finished rules regarding foreign

 13 boards of trade. When markets are open and

 14 transparent, prices are more competitive, markets

 15 are more efficient and liquid, and costs are

 16 lowered for the companies and their customers.

 17 Now designated contracted markets have

 18 long demonstrated the value of open and

 19 competitive trading, and these exchanges, for the

 20 first time, will be able to list and trade swaps

 21 helping to bring the benefits of pre-trade

 22 transparency that designated contract markets have
 5

 1 had for decades to the swaps marketplace.

 2 In addition, the Dodd-Frank Act

 3 incorporated the previously existing eight

 4 statutory designation criteria for designated

 5 contract markets into what's called core

 6 principles. So it took designation criteria and

 7 folded it into core principles and expanded that

 8 list, adding five new core principles. So the

 9 final rulemaking from the Commission we'll

 10 consider today conforms to these various

 11 transparency reforms.

 12 I think it benefits from extensive

 13 public comment, provides exchanges, rules, as well

 14 as guidance and acceptable practice to comply with

 15 the new Dodd-Frank core principles. In many

 16 instances, we're codifying industry practices that

 17 the Commission has observed and found works within

 18 the marketplace.

 19 While preserving a principles-based

 20 regime, these regulations will provide greater

 21 legal certainty and transparency to the exchanges

 22 themselves in determining their compliance
 6

 1 obligations, as well as to market participants in

 2 determining their obligations, and will

 3 facilitate, from time to time when necessary,

 4 enforcement of such provisions.

 5 The final rulemaking is consistent with

 6 the core principles-based regime in the Commodity

 7 Exchange Act, and I think that the rule provides

 8 each exchange or designated contract market with

 9 the flexibility to deploy additional measures to

 10 address core principle requirements.

 11 As just one example, the final rule

 12 requires DCMs to put in place effective pre-trade

 13 risk filters, including pauses and/or trading

 14 halts to address extraordinary price movements

 15 that may result in distorted prices or trigger

 16 market disruptions, an important provision,

 17 particularly in today's increasingly electronic

 18 marketplace, a world with high frequency traders

 19 and algorithmic traders.

 20 But the rulemaking also recognizes that

 21 pauses and halts comprise only one category of

 22 risk controls and provides that additional
 7

 1 controls may be necessary and be put in place by

 2 exchanges to reduce potential for market

 3 disruptions. So the final guidance, as opposed to

 4 a rule, but the final guidance includes, for

 5 instance, that exchanges may possibly implement

 6 price collars or bands, maximum order size limits

 7 or message throttles. So it gives a sense of the

 8 flexibility that's built into the guidance.

 9 Today's rule does not yet finalize

 10 Commission's proposal relating to Core Principle

 11 9, which some in the public have called the 85

 12 percent provision, which requires designated

 13 contract markets to provide an open, competitive,

 14 and efficient market mechanism for transactions

 15 that protects the price discovery process on the

 16 central marketplace. I expect the Commission to

 17 consider a final rule on this matter when it takes

 18 up the SEF rulemaking later this summer, or, I

 19 should say, hope sometime this summer.

 20 The additional time, I believe, will

 21 allow the Commission to more fully analyze the

 22 many public comments on these provisions,
 8

 1 including comments on the implications for

 2 exchange of futures for swaps transactions,

 3 so-called EFS transactions, and I know I'm a

 4 little bit into the esoteric here. But I think

 5 it's important that we have some time to consider

 6 the relation of these transactions to the

 7 transparency reforms of Dodd-Frank as well as the

 8 requirement for non-discriminatory access to

 9 clearing. And I'm glad that we've arrived at a

 10 place where we can take up Core Principle 9 when

 11 we later take up the SEF rules.

 12 Before turning to my fellow

 13 Commissioner, I'd like to address a few other

 14 items the Commission has been considering and will

 15 take up in the near term. I usually get asked

 16 this question at the end, so I thought I'd just

 17 address it up front.

 18 We recently completed the joint rule

 19 with the Securities and Exchange Commission to

 20 further define the term "swap dealer." We're

 21 turning shortly to the rule to further define the

 22 term "swap" and "securities based swap."
 9

 1 The staff at the CFTC has made very good

 2 progress in putting forth to the Commission a

 3 final rule for our consideration. I would say

 4 working jointly with the SEC staff, and my

 5 compliments to them as well.

 6 In an effort to leverage these resources

 7 and complete the rulemaking, I'm pleased that

 8 we've also arranged for a staff member from the

 9 Office of Information and Regulatory Affairs to

 10 supplement the excellent work of the CFTC staff

 11 with technical assistance, particularly with

 12 respect to consideration of costs and benefits.

 13 In consideration of costs and benefits of

 14 financial reform, I believe the Commission should

 15 take into account the overall benefits to the

 16 American public and market participants of

 17 increased transparency, lower risk, and help

 18 protect against another such crisis that occurred

 19 in 2008. I don't know if anyone needs to be

 20 reminded, but eight million Americans lost their

 21 jobs as a result of that crisis. I believe

 22 Commissioner Chilton spoke well and made a similar
 10

 1 point on this in a speech he had earlier this

 2 week.

 3 The Commission also approved this

 4 morning a proposed exemptive order regarding the

 5 effective dates of certain Dodd- Frank provisions.

 6 It had originally been calendared for

 7 consideration at today's meeting, but we decided

 8 just to move it along.

 9 I have a longer statement of support for

 10 the record, but, most importantly, the proposed

 11 exemptive order provides additional relief through

 12 December 31st of this year. This is the third one

 13 of these that we've moved along. Furthermore, it

 14 addresses comments from market participants

 15 requesting clarity regarding the transactions in

 16 and clearing of agricultural swaps. We look

 17 forward to public comments on that, but I think

 18 we've addressed that concern well. As well as

 19 comments from unregistered trading facilities that

 20 offer swaps for trading.

 21 In addition, the Commission will soon

 22 complete a final rule establishing data
 11

 1 recordkeeping and reporting requirements for

 2 pre-enactment and transition swaps, collectively

 3 called historical swaps. We'll do this through

 4 what's called Part 46. This rule will promote

 5 transparency by helping to give regulators a

 6 fuller picture of the swaps market from prior to

 7 when we completed the Part 45 rules for data

 8 reporting.

 9 I also anticipate that we'll be seeking

 10 public comment in the near term on an exemptive

 11 order regarding certain contracts traded on

 12 regional transmission organizations, as well as an

 13 interpretive guidance on the cross-border

 14 application of the swaps provisions of Dodd-

 15 Frank.

 16 And with that, I think I will recognize

 17 Commissioner Sommers.

 18 COMMISSIONER SOMMERS: Good morning.

 19 Thank you, Mr. Chairman, and thank you to the

 20 whole team for all of your hard work and diligence

 21 in getting this final rule before us today. It's

 22 very much appreciated.
 12

 1 Core principles were designed to allow

 2 DCMs the flexibility to establish compliance

 3 regimes that fit with their markets and business

 4 models. This flexible approach has been very

 5 successful. The proposed DCM core principle rules

 6 published in late 2010 significantly and

 7 needlessly strayed from the flexible approach in

 8 favor of a prescriptive, one size fits all,

 9 rules-based approach. I did not and still do not

 10 support abandoning the flexible principles-based

 11 approach to regulation.

 12 I am pleased that in the final rules

 13 before us today we recognize the value of

 14 retaining flexibility and have pulled back from

 15 the overly prescriptive regime set out in the

 16 proposed rules. I understand that in a number of

 17 areas where we have established specific rules, we

 18 have codified the best practices already in place

 19 at DCMs today. While on the face this may seem

 20 reasonable, I have lingering concerns about

 21 whether codifying today's best practices will

 22 prevent exchanges from developing tomorrow's best
 13

 1 practices. Our industry evolves quickly, and we

 2 are on the cusp of regulating vast markets and

 3 diverse products that we have never regulated

 4 before. We must remain vigilant to ensure that

 5 our lack of experience in these markets and with

 6 these products does not cause us to stand in the

 7 way of continued evolution and progress.

 8 Conspicuously absent from the rules we

 9 vote on today are final rules relating to the Core

 10 Principle execution of transactions. The proposal

 11 requiring at least 85 percent of all trading in

 12 each contract to occur in the centralized market

 13 or risk for delisting was an unnecessary solution

 14 in search of a problem. Moreover, in my view, it

 15 was at odds with the Commodity Exchange Act, and,

 16 if challenged, likely would not withstand judicial

 17 scrutiny.

 18 An unfortunate result of these proposed

 19 rules has been that exchanges, particularly

 20 smaller and newer exchanges, have been reluctant

 21 to list and, in some cases, have decided not to

 22 list new contracts because of the uncertainties
 14

 1 surrounding the possibility of forced delisting if

 2 liquidity did not grow within the specific time

 3 frame set by the government.

 4 When we take up final rules relating to

 5 Core Principle 9 in the near future, we must seek

 6 to establish certainly so DCMs can get on with

 7 listing new products without fear of forced

 8 delisting. And we should reject any construct

 9 that fails to recognize that the Commodity

 10 Exchange Act does not require every listed

 11 contract to serve a price discovery function by

 12 trading in the centralized market.

 13 Another core principle that is of

 14 particular concern to me is Core Principle 21

 15 relating to financial resources. Nobody can argue

 16 against the notion that DCMs must be financially

 17 secure and must have sufficient resources

 18 available to continue their operation. The

 19 challenge becomes balancing the need for DCMs to

 20 set aside capital for regulatory purposes with the

 21 need for the DCMs to deploy their capital to build

 22 robust, competitive businesses that create jobs
 15

 1 and additional opportunities for market

 2 participants and American businesses.

 3 The rules we are voting on today allow

 4 for sufficient flexibility to appropriately

 5 achieve that balance. Flexibility, however, when

 6 not carefully and appropriately exercised, can

 7 upset that balance. We need to make sure that

 8 does not happen.

 9 Finally, last month we finalized the

 10 further definition of "swap dealer," "major swap

 11 participant," and "eligible contract participant."

 12 And rumor has it, and the Chairman has just

 13 confirmed, that we're getting close to finalizing

 14 the product definitions. Once that happens, there

 15 will be a date certain for entities to register as

 16 swap dealers or major swap participants.

 17 It appears that the date certain for

 18 required registration will be well before the

 19 Commission issues final rules or guidance related

 20 to the extraterritorial application of Dodd-Frank

 21 and before the Commission issues final rules on

 22 capital and margin.
 16

 1 As we sit here today, I have yet to see

 2 a term sheet, a comment summary, or a working

 3 draft of the extraterritoriality release. And I

 4 have not seen any drafts of final rules for margin

 5 and capital. I have no reason to believe that

 6 either will be final before registration is

 7 required. Requiring registration before critical

 8 rules are finalized makes no sense and is contrary

 9 to the approach being taken by the SEC.

 10 It is my understanding that the SEC does

 11 not play to require registration until after all

 12 of their substantive rules are finalized. This

 13 gives market participants the ability to fully

 14 evaluate what activity triggers the registration

 15 requirement and all the costs and benefits

 16 associated with registration before this decision

 17 to register must be made. This is a reasonable

 18 approach and one I would hope we would consider.

 19 As I have said many times before, this

 20 process is complex, and these rules have

 21 consequences for market participants. We are all

 22 aware of the importance of making this new
 17

 1 regulatory framework for derivatives successful.

 2 With every step forward, we must try to avoid

 3 taking an unnecessary step backwards. But we seem

 4 to have a penchant for putting the cart before the

 5 horse.

 6 I strongly support a concise, clear, and

 7 comprehensive implementation plan that can

 8 harmonize the efficacy of these rules with both

 9 domestic and global regulators. I'm concerned

 10 that as we get closer to the finish line, we may

 11 look back only to realize that no one is capable

 12 of crossing it. Thank you.

 13 CHAIRMAN GENSLER: Thank you,

 14 Commissioner Sommers. Commissioner O'Malia?

 15 COMMISSIONER O'MALIA: Thank you. Today

 16 the Commission will consider a final rule on core

 17 principles for designated contract markets. I'd

 18 like to thank the team for their hard work. It's

 19 a large rule, and there's a lot of moving pieces.

 20 You've done a great job to help keep us informed

 21 and to walk us through all the pieces. So I

 22 greatly appreciate that and to adopt many of our
 18

 1 changes.

 2 Before I get into my statement, Mr.

 3 Chairman, you mentioned the joint memo with OIRA,

 4 which is the Office of Intergovernmental

 5 Regulatory Affairs. And I greatly appreciate this

 6 new level of cooperation that you have engaged. I

 7 think that OIRA and OMB are the keepers of the

 8 gold standard for cost benefit analysis, and to

 9 bring them into our process, albeit late, is going

 10 to be a great step, and it's going to make our

 11 rules better, enable to withstand legal challenge.

 12 I wholeheartedly support it, and I greatly

 13 appreciate this cooperation between OMB and this

 14 agency.

 15 CHARIMAN GENSLER: I thank you for that,

 16 Scott. I mean, I think it's helpful to get the

 17 technical assistance. I think we have excellent

 18 staff here. But particularly as we started to

 19 look at this product roll and trying to get it

 20 across the line, we made this arrangement. I

 21 thank everybody because we did enter into this

 22 memorandum of understanding that we're still an
 19

 1 independent regulatory agency, and we're trying to

 2 get some technical assistance from their great

 3 staff.

 4 COMMISSIONER O'MALIA: Independent or

 5 not, they have kind of the collective wisdom on

 6 cost benefit analysis and whether we're going to

 7 by letter or by memo adhere to it. It's a great

 8 step. I'm not going to bite the hand that feeds

 9 me on this one and be able to support this.

 10 Let me go back to the core principles

 11 for the DCM. When the Commission proposed the

 12 original proposal in December 2010, I expressed

 13 some serious concerns regarding the overall

 14 prescriptive approach to this rule. I believe the

 15 Commission core principle regime for DCMs has

 16 worked well, and has provided important price

 17 discovery and hedging functions, and has adapted

 18 to the market as we've seen it. I think the clear

 19 port issue that Commissioner Sommers has referred

 20 to and the Chairman responded to regarding EFS was

 21 an important adaption at a time, post-Enron, that

 22 allowed for more companies to bring -- to clearing
 20

 1 some important products, mitigating fellow

 2 customer risk.

 3 Congress left the core principles

 4 largely intact, recognizing the futures market has

 5 weathered the financial crisis far better than

 6 other markets. And I'm pleased the Commission is

 7 going to adopt a rule that has scaled back many of

 8 the prescriptive rules that were originally

 9 proposed. And at the proposal stage and since

 10 that time, I've expressed serious concerns

 11 regarding Core Principle 9, which, as proposed,

 12 required an 85 percent centralized market trading

 13 requirement. Under the 85 percent test, the DCM

 14 would be forced to delist any futures or swaps

 15 contract it failed to meet that trading volume of

 16 85 percent in a centralized market over a 12-month

 17 period. Not surprising, this rule is highly

 18 controversial and was widely opposed.

 19 I am able to support the rule today

 20 because the Commission has decided to delay that

 21 decision and have a comprehensive discussion on

 22 the execution alongside of the Commission's SEF
 21

 1 rules, core principles. And hopefully we'll have

 2 some better insight as to what mandatory trading

 3 requirements we'll have.

 4 So there are three goals I hope that we

 5 can accomplish in doing this temporary delay of

 6 Core Principle 9. One is to consider available

 7 alternatives to the 85 percent test. Two is to

 8 anticipate and calculate the associated costs and

 9 benefits of Core Principle 9 to the overall swap

 10 trading infrastructure. And three is to address

 11 the related implications of the rules for

 12 transactions executed on SEFs for all exchange

 13 transaction, including blocks and exchange for

 14 derivatives positions.

 15 To this end, I hope the Commission will

 16 hold a roundtable on the execution of futures and

 17 swaps platform rules and the mandatory trading

 18 requirement in order to develop a more complete

 19 understanding of how the execution rules will

 20 impact both the futures and swaps markets.

 21 I'd also like to note the Commission has

 22 made changes to the rules and guidance under Core
 22

 1 Principle 21, which will enable the Commission to

 2 consider alternative financial packages. And if

 3 the Commission hopes to create competition in this

 4 space, we must be flexible and cannot expect all

 5 DCMs to meet a core principle that is a one-size-

 6 fits-all approach.

 7 Additionally, I'd like to mention Core

 8 Principle 4, which I think gives DCMs greater

 9 flexibility regarding the monitoring for market

 10 anomalies. I also appreciate the recognition that

 11 the staff included in the preamble regarding the

 12 Technology Advisory Committee and our efforts to

 13 understand pre-trade functionality and high

 14 frequency trading. And I do appreciate that they

 15 did not front run on us one and are going to let

 16 the process work.

 17 As the Chairman noted, it's not

 18 presented here because the Commission signed it,

 19 took action to further modify the temporary

 20 exemptive relief. This action would propose,

 21 among other things, to extend the temporary relief

 22 from July 16th of this year to December 31st.
 23

 1 Based on the Chairman's statements at a

 2 recent industry conference, the Commission will

 3 complete Dodd-Frank rules by the end of the year.

 4 Assuming this to be true, I think the proposed

 5 amendment is appropriate and will provide the

 6 industry with the necessary comfort, and the new

 7 swaps regulatory regime will not disrupt current

 8 market practices.

 9 The big question in my mind, however,

 10 remains, which rules are we talking about, and

 11 what is the order that we will consider them?

 12 Notwithstanding the proposed amendment on

 13 exemptive relief, I believe the market continues

 14 to seek guidance regarding the timing of the

 15 remaining rules. I see no reason why we shouldn't

 16 make the process completely transparent and

 17 outline all the remaining rules and the proposed

 18 schedule for their consideration. For that

 19 reason, I have included, along with my concurrence

 20 on that seriatim vote, a list of what I believe

 21 are the Commission rules, orders, and guidance, as

 22 well as a timetable of when I understand the
 24

 1 Commission expects to vote on these rules, orders,

 2 and guidance based on conversations I've had with

 3 staff.

 4 Now this is a draft. I've color coded

 5 it by foundational rules, clearing and trading

 6 rules, et cetera, and I will put it on my website.

 7 I'll include it as part of my concurrence, and

 8 I'll make it available to anybody that wants to

 9 take a look at it. But it looks to be about 30

 10 more rules we have yet to do. Not all of them are

 11 Dodd-Frank. There's an OCR rules, for example.

 12 There are a couple of other things in here. But I

 13 think that these are all things that the

 14 Commission is going to consider over the next

 15 couple of months, or over the next six months as

 16 we try to meet this year-end deadline.

 17 So my hope is to put this in with the

 18 exemptive relief, to get some input on it to see

 19 what the market thinks of the proposal, to give

 20 comment on which rule should go first. I did this

 21 about a year ago. You know, we're in kind of the

 22 last six months of this rulemaking, so I want to
 25

 1 make sure that we -- as we go in, we pick our

 2 priorities and we figure out what it's going to

 3 take to get across the line to complete all of our

 4 rules within the appropriate deadlines and the

 5 schedule the Chairman has set. So that'll be

 6 available on my website, and we'll put it as part

 7 of the Federal Register as well.

 8 I'd like to thank Nadia and her team

 9 again and everybody on the team for their hard

 10 work and patience to accommodate many of our

 11 requests. Thank you very much for that. Thank

 12 you, Mr. Chairman.

 13 CHARIMAN GENSLER: Thank you,

 14 Commissioner O'Malia. Commissioner Chilton.

 15 COMMISSIONER CHILTON: Thank you, Mr.

 16 Chairman. Sometimes I think this process is a

 17 little bit like, you know, a Rorschach that it

 18 just looks different to different people.

 19 I think actually we've done a really

 20 remarkable job. We've had 62 percent of the

 21 Dodd-Frank rules -- there are 300 Dodd-Frank rules

 22 out there in the government, and, you know, we've
 26

 1 got a little more than 50. But 67 percent have

 2 not been done. Sixty-percent of the 300 have not

 3 been done. But we're well over half. I mean,

 4 we've produced, what did you say, 32 today. So,

 5 you know, the process doesn't always go along

 6 swimmingly absolutely. I mean, I'd agree. But

 7 we've got a lot of rules. We've got more work

 8 than this agency has ever had, and, you know, you

 9 do the best you can in life, right? That's what

 10 you do. And, you know, all of us get frustrated

 11 at times.

 12 But I really want to thank the Chairman

 13 because the staff, you know, you're a taskmaster,

 14 and you've been out there whipping them. And

 15 they've taken it, and once in a while we hear

 16 screams up on the 9th floor, but by and large, you

 17 kept it under control, and you've done a very good

 18 job, and you've kept the trains moving on time.

 19 And when you look at all of the other

 20 agencies, all of the other agencies that are

 21 working on Dodd-Frank, nobody comes close to doing

 22 what we've accomplished. They don't hold a candle
 27

 1 to it. I mean, I won't mention it by name, but

 2 there's one agency that they've only met one time

 3 this year, and they got a lot more rules than we

 4 do.

 5 So I just want to say, we've produced a

 6 lot. The Chairman's produced a lot. The

 7 Commission has produced a lot. Staff has produced

 8 a lot. And I thank you for one.

 9 Now on cost benefit, just a brief thing.

 10 I mean, I appreciate the dialogue we've had in the

 11 past and appreciate what Commissioner O'Malia has

 12 said. And we all want to get to a good cost

 13 benefit analysis. And I think this OIRA thing,

 14 this MOU will be helpful. But, you know, it is in

 15 no way any commentary on any past or current

 16 litigation. These things are a dime a dozen,

 17 these MOUs. I'm not making light of the

 18 importance. It's important that we have it, look

 19 forward to the technical expertise. If we can get

 20 a full-time equivalent staff person here to help

 21 us since we're under funded, then so much the

 22 better.
 28

 1 If you ask people in the countryside,

 2 well, why do you have to do these memorandums of

 3 understanding, these MOUs? I mean, shouldn't you

 4 guys just work together? I mean, I understand

 5 that perspective, but, you know, we've got to

 6 protect confidential information. We want to

 7 guard against disclosure. So you have to do these

 8 documents to protect markets, protect businesses.

 9 And so we're always trying to do things

 10 better, get more advice. And in that regard, I

 11 want to again thank the Chairman for another

 12 thing, and that's being responsive to other ideas,

 13 not only Commissioner O'Malia's, but the thought

 14 that, you know, I had yesterday and spoke about,

 15 looking at what are the costs of not doing these

 16 regulations. Not just the profit and loss

 17 statements on a balance sheet, which is important,

 18 but, you know, what are the costs if we didn't

 19 have oversight of the hundreds of trillions of

 20 dollars in swaps? Could we be back where we were

 21 or where we still are trying to crawl out of?

 22 So I thank the Chairman for being
 29

 1 responsive on that, for continuing to be open to

 2 ideas, and trying to incorporate them as best you

 3 can as you see fit. We've produced a lot.

 4 So I guess my parting thing would be

 5 let's keep the hammer down. Let's keep going.

 6 There was a vegetable who, when I was working on a

 7 farm bill one time, you know, in urging me to get

 8 it done, he said, let us produce. Get it?

 9 "Lettuce" "produce." So thank you.

 10 CHAIRMAN GENSLER: Thank you,

 11 Commissioner Chilton, for all those comments.

 12 Commissioner Wetjen.

 13 COMMISSIONER WETJEN: Thanks, Mr.

 14 Chairman. I want to thank the staff, too, for all

 15 your hard work on this rule. Appreciate your

 16 flexibility in the last couple of weeks

 17 accommodating a lot of the changes that I have

 18 requested. The final rules before us today codify

 19 and interpret the core principles that apply to

 20 designated contract markets, or DCMs. As with so

 21 many of our rules, today's recommendations are

 22 designed to protect the public and ensure fair
 30

 1 competition between exchanges and markets.

 2 The recommendations seek to accomplish

 3 this objective in multiple ways. They require,

 4 for example, risk controls and safeguards for

 5 trading unregulated exchanges, which better ensure

 6 that our markets remain transparent and stable.

 7 They also require that DCMs as self-regulatory

 8 organizations are capable of detecting and

 9 preventing position limit violations, disruptive

 10 practices, and manipulation.

 11 Additionally, the rules protect the

 12 efficiency of our markets both by ensuring the

 13 integrity of listed contracts and by ensuring that

 14 participants have appropriate clearing

 15 arrangements, thereby mitigating counter party

 16 credit concerns that could impede liquidity. And

 17 the rules set for a number of additional

 18 requirements that will enable DCMs to transition

 19 from trading venues solely for futures contracts

 20 to venues facilitating trading and swaps as well.

 21 As we consider these rules, it is

 22 important to acknowledge that the Commodity
 31

 1 Exchange Act's principles-based regulatory regime

 2 was retained in Dodd-Frank. Indeed, Congress not

 3 only retained much of the previous DCM regime, but

 4 also expanded that regime to new registered

 5 entities, like swap data repositories and swap

 6 execution facilities, or SEFs.

 7 But it is equally important to

 8 acknowledge that Dodd-Frank did not merely restate

 9 the existing regulatory responsibilities of DCMs.

 10 It expanded those responsibilities by authorizing

 11 DCMs to facilitate trading in swaps, and to

 12 facilitate such trading between retail market

 13 participants. These swap-related functions and

 14 responsibilities in the evolution of the futures

 15 markets over the past decade inform Congress'

 16 decision to add several new core principles to the

 17 DCM regime, as well as provide the Commission the

 18 authority to specify the means of compliance.

 19 It is important, however, that the

 20 Commission use its authority cautiously and avoid

 21 unnecessarily upsetting the expectations of those

 22 who depend on the exchanges. To be sure, private
 32

 1 incentives are not always aligned with the public

 2 interest, but in seeking to align those

 3 incentives, we must take care to avoid doing harm

 4 to what is now a functional and effective

 5 marketplace.

 6 In light of these considerations, the

 7 swap market structure poses difficulty policy

 8 questions for the Commission and equally difficult

 9 operational questions for DCMs. The rules before

 10 us today will not answer all of these questions.

 11 Perhaps most consequentially, the

 12 Commission today is not considering Core Principle

 13 9 so that it can fully evaluate it in the context

 14 of the swap execution rules. Many DCMs and

 15 potential SEFs no doubt would like regulatory

 16 certainty on this matter, but I am confident that

 17 the public will be best served by a continued

 18 dialogue on Core Principle and related issues.

 19 Public input remains our best protection against

 20 unintended consequences.

 21 The debate about Core Principle 9 is not

 22 and should not be about a particular trading venue
 33

 1 or business model, nor is it about the value of

 2 trading through the centralized market.

 3 Centralized trading enhances the transparency and

 4 efficiency of markets, and centralized trading

 5 generally means increased pre-trade transparency,

 6 and, more specifically, order book transparency,

 7 which provides important information about the

 8 supply of and demand for a particular commodity or

 9 contract. In short, centralized trading

 10 facilitates price discovery, provided there is

 11 sufficient trading interest to discover.

 12 I believe there is consensus on the

 13 objectives of increasing centralized trading and

 14 pre-trade transparency. There remain, however,

 15 many challenging questions about the best means

 16 for achieving these objectives. For instance,

 17 there can be tension between our centralized

 18 trading objective and our statutory objectives of

 19 reducing systemic risk and promoting responsible

 20 innovation at exchanges. I look forward to

 21 engaging with the public on these questions in the

 22 months ahead. For now I am confident that these
 34

 1 final rules appropriately carry out the relatively

 2 modest changes to the core principles regime for

 3 DCMs.

 4 The other Commissioners mentioned our

 5 completion of the exempt -- proposal on the

 6 exemptive order, and I obviously supported that.

 7 I look forward to the comments on that.

 8 Commissioner Sommers and I were talking ahead of

 9 time. I think one area of particular concern that

 10 I'm going to be in reviewing comments about is

 11 whether it's better to have a sunset date as we've

 12 done the last couple of times now, or whether we

 13 consider some other approach. So I look forward

 14 to the comments on that.

 15 Thanks again to all the professional

 16 staff and the DCM rule team. Appreciate all your

 17 hard work on this, and look forward to continuing

 18 our discussion on Core Principle 9 and other

 19 matters. Thanks.

 20 CHAIRMAN GENSLER: Thank you to all the

 21 Commissioners. With that, I think I'll turn it

 22 over to the staff. But if I would note, I think
 35

 1 on the sunset date, which is important. I guess

 2 it went back to when Mike Dunn first suggested

 3 ago. It has allowed us -- it wasn't anticipated a

 4 year ago that we would do a third one, but it has

 5 allowed us to refresh it, and, for instance, now

 6 address ourselves specifically to what I think

 7 were important comments that came from the

 8 agricultural community from packers, and

 9 merchants, and farmers that said we needed to

 10 address something.

 11 So we hadn't focused on something like

 12 that a year ago, and I'm glad we're able to

 13 address that. And that's just one example, but,

 14 you know, it may well be that come November if we

 15 need -- hopefully we don't need another one, but

 16 if we do need another one, there'll be some new

 17 issues that will, you know, have emerged that we

 18 need to incorporate.

 19 So I think we've -- it's a balancing.

 20 It was Commissioner Dunn's suggestion, but I think

 21 it's -- allowed us to refresh this and bring it --

 22 particularly this agriculture issue I know was an
 36

 1 important one.

 2 We're going to have Rachel Berdansky,

 3 Rich Shilts, Nancy Markowitz, Nadia Zakir, David

 4 Van Wagner, all from the Division of Market

 5 Oversight, and Mike Penick from the Office of

 6 Chief Economist, present to us.

 7 MS. ZAKIR: Thank you, Chairman and

 8 Commissioners. I'd like to thank --

 9 CHAIRMAN GENSLER: Could you move the

 10 mic a little closer?

 11 MS. ZAKIR: Sure. Is this better?

 12 Thank you, Chairman and Commissioners.

 13 I'd like to thank our DCM rulemaking

 14 team, and, in particular, Nancy Markowitz, Aaron

 15 Brodsky, and each of the persons at this table, as

 16 well as all of the hardworking and dedicated staff

 17 of the Commission, for helping with this

 18 particular rulemaking.

 19 This final rulemaking establishes the

 20 regulatory obligations that each DCM must meet in

 21 order to comply with Section 5 of the CEA,

 22 Commodity Exchange Act, as amended by the
 37

 1 Dodd-Frank Act initially upon designation, and

 2 thereafter on an ongoing basis.

 3 Section 735 of the Dodd-Frank Act

 4 amended Section 5 of the Commodity Exchange Act

 5 pertaining to the designation and operation of

 6 contract markets by, first, eliminating the eight

 7 designation criteria, then amending most of the

 8 core principles, including and incorporating most

 9 of the subset of elements of the former

 10 designation criteria, and finally by adding five

 11 new core principles.

 12 In addition, Section 723(a)(3) of the

 13 Dodd-Frank Act added Section 2(h)(8) to require,

 14 among other things, that swaps that are required

 15 to be cleared must be executed either on a DCM or

 16 on a swap execution facility, or SEF, unless no

 17 DCM or SEF or makes the swap available to trade.

 18 On December 22nd, 2010, the Commission

 19 established and published proposed regulations to

 20 implement the statutory provisions of the

 21 Dodd-Frank Act relevant to the designation and

 22 operation of DCMs under Part 38 of the
 38

 1 Commission's regulations. The Commission received

 2 numerous written comments from members of the

 3 public, and Commission staff participated in

 4 several meetings with market participants,

 5 including representatives of both

 6 currently-designated and prospective contract

 7 markets.

 8 In this notice of final rulemaking,

 9 staff is requesting that the Commission adopt many

 10 of the proposed rules, guidance, and acceptable

 11 practices. However, as a result of the written

 12 comments received and dialogue with market

 13 participants, the substance of a number of the

 14 proposed regulations have been revised, and in

 15 several instances, the proposed rules are replaced

 16 with more flexible guidance and/or acceptable

 17 practices.

 18 By way of background, the Commission has

 19 regulated designated contract markets since the

 20 enactment of the Commodity Futures Modernization

 21 Act of 2000. Through its oversight of these

 22 markets over the past 10 plus years, Commission
 39

 1 staff has gained a substantial understanding of

 2 the practices that DCMs have adopted in complying

 3 with the various core principles. In implementing

 4 the relevant provisions of the Dodd-Frank Act,

 5 staff first undertook a comprehensive evaluation

 6 of its preexisting regulations, guidance, and

 7 acceptable practices to determine whether any core

 8 principles would benefit from new or revised

 9 guidance or acceptable practices, and which core

 10 principles would be better served by the

 11 codification of rules.

 12 In some instances, this final rule is

 13 converting proposed rules to guidance and/or

 14 acceptable practices largely based on specific

 15 comments that address the need for greater

 16 flexibility. In other instances, the final

 17 rulemaking is maintaining the proposed rules with

 18 appropriate revisions arising from the

 19 Commission's consideration -- staff's

 20 consideration of comments. These rules largely

 21 implement new statutory mandates or codify certain

 22 requirements and practices that have evolved, are
 40

 1 commonly in industry, and that staff has found

 2 based on experience in overseeing DCMs to

 3 represent the appropriate means of complying with

 4 the core principle.

 5 Many of the final rules also reflect

 6 conclusions and determinations contained in the

 7 rule enforcement reviews that staff periodically

 8 carry out to examine a DCM's compliance with

 9 specific core principles. Commission believes

 10 that the codification of clear-cut rules that

 11 reflect the statutory mandate and existing

 12 practices will provide greater transparency and

 13 regulatory certainty to DCMs in determining their

 14 compliance obligations, and to market participants

 15 in determining their obligations as DCM members.

 16 These rules will also improve the

 17 ability of the Commission to enforce its

 18 regulations. These final rules, guidance, and

 19 acceptable practices implement and clarify the

 20 obligations of DCMs with respect to the core

 21 principles, while at the same time preserving the

 22 principle-based regulatory framework under the
 41

 1 Commodity Exchange Act.

 2 In the interest of time, I will provide

 3 a general overview of selected aspects of the

 4 final rulemaking, and will look forward to

 5 responding to any questions on specific aspects of

 6 the rulemaking.

 7 As an initial matter, the final

 8 rulemaking includes additional regulations and

 9 revisions to the existing regulations in Part 38

 10 pertaining to the process of applying for

 11 designation as a contract market and to certain

 12 other designation-related requirements.

 13 The final rulemaking provides a

 14 comprehensive application form for contract market

 15 applicants, along with a specified list of

 16 documents and information that must accompany the

 17 application in order to provide additional

 18 transparency and efficiency to the designation

 19 procedures. The rulemaking also eliminates the

 20 accelerated approval procedures for DCM

 21 applications, requiring instead that all

 22 applications be reviewed under the 180-day
 42

 1 statutory review period and procedures.

 2 The final rulemaking also adopts rules

 3 governing the dual registration of a board of

 4 trade as both the DCM and the swap execution

 5 facility. In particular, a board of trade that is

 6 designated as a contract market also may operate a

 7 SEF, provided that it separately registers

 8 pursuant to the SEF registration requirements, and

 9 on ongoing basis complies with the SEF rules and

 10 core principles under Section 5(h) of the

 11 Commodity Exchange Act.

 12 Moreover, any board of trade intending

 13 to operate a DCM and a SEF may use the same

 14 electronic trade execution system for listing and

 15 executing swaps, provided that they make it clear

 16 to market participants whether the electronic

 17 trading of such swap is taking place on the SEF or

 18 the DCM platform.

 19 For the 23 core principles, I will

 20 briefly highlight some of the key proposals.

 21 Several core principles require a DCM to

 22 establish and enforce compliance with the rules of
 43

 1 the DCM. Amendment Core Principle 2, for example,

 2 requires a DCM to establish, monitor, and enforce

 3 rules relating to access requirements, terms and

 4 conditions of contracts to be traded on its

 5 system, and rules prohibiting abusive trading

 6 practices. The core principle also requires the

 7 DCM to have the ability to detect rule violations

 8 and sanction persons that violate the rules.

 9 The implementing regulations for Core

 10 Principle 2 in this final rulemaking are derived

 11 from a number of sources, which include specific

 12 statutory mandates, current standard industry

 13 practices, and existing guidance and acceptable

 14 practices, and practices stemming from rule

 15 enforcement reviews and staff experience in

 16 regulating DCMs. For example, the proposed

 17 regulations would require all DCMs to prohibit a

 18 list of abusive trade practices, all of which are

 19 already prohibited by most DCMs today, and others

 20 prohibited by statute or under Commission

 21 regulations.

 22 In many instances, the regulations
 44

 1 codify existing practices, including those

 2 requiring automated trade surveillance system,

 3 real-time market monitoring, and regulations

 4 pertaining to investigations and investigation

 5 reports.

 6 The final rules also include a

 7 requirement that DCMs must obtain from their

 8 members and market participants consent to the

 9 DCM's jurisdiction prior to granting access to its

 10 markets. Staff believes this is an essential

 11 pre-condition to a DCM's ability to carry out its

 12 statutory obligations under the core principles.

 13 Core Principle 6 also imposes compliance

 14 obligations on DCMs with respect to emergency

 15 actions. Under the people, a DCM is required to

 16 have rules to provide for the exercise of

 17 emergency intervention in the market. Recognizing

 18 that DCMs may have different procedures for taking

 19 emergency action, staff believes it is appropriate

 20 to maintain an expanded version of the existing

 21 guidance that includes provisions emphasizing

 22 cross-market coordination of emergency action, and
 45

 1 to have alternate lines of communication and

 2 approval procedures in order to be able to address

 3 in real time emergencies that may arise.

 4 Staff believes that this is an important

 5 obligation in light of the need for DCMs to be

 6 able to react quickly to market events and to

 7 intervene without delay. Over the years, DCMs

 8 have developed certain standard practices for

 9 emergency programs which are included in this

 10 final rulemaking as acceptable practices.

 11 In the Notice of Proposed Rulemaking,

 12 the Commission proposed regulations implementing

 13 amended Core Principle 9, which required, among

 14 other things, that DCMs provide a competitive,

 15 open, and efficient market and mechanism for

 16 executing transactions that protects the price

 17 discovery process of trading in the centralized

 18 market.

 19 The proposed regulations included, among

 20 other things, a rule requiring that 85 percent of

 21 the total trading volume of any contract listed on

 22 the DCM must consist of centralized market
 46

 1 trading. The rule included a mandatory delisting

 2 requirement for noncompliant contracts, specified

 3 procedures for treatment of preexisting contracts,

 4 and provided a limited exemption for certain

 5 contracts upon petition to the Commission. The

 6 proposed rule also included guidance and rules

 7 pertaining to requirements for block trades and

 8 futures contracts and other oft exchanged

 9 transactions, including exchange of derivatives

 10 for related positions.

 11 The Commission received a significant

 12 number of comments on many aspects of the proposed

 13 rules under Core Principle 9, including comments

 14 pertaining to the Commission's interpretation of

 15 the core principle as proposed. Staff has

 16 considered these comments and believes that

 17 additional time is appropriate before finalizing

 18 the proposed rules for Core Principle 9.

 19 In particular, staff recommends that the

 20 Commission take up the proposed rules under Core

 21 Principle 9 when the Commission considers the

 22 final SEF rulemaking. The additional time will
 47

 1 allow the Commission to consider the available

 2 alternatives for contracts that may not comply

 3 with the proposed centralized market trading

 4 requirement, as well as any related implications

 5 of the rules pertaining to off-ft exchanged

 6 transactions, including exchange of derivatives

 7 for related position transactions.

 8 Another group of core principles pertain

 9 to the requirements for contracts traded on a DCM

 10 and the DCM's obligation to monitor trading

 11 activities. Core Principle 3, for example,

 12 requires that contracts listed on a DCM must not

 13 be readily subject to manipulation. The final

 14 rule maintains the existing guidance for Core

 15 Principle 3, with necessary revisions to provide

 16 greater detail to DCMs regarding relevant

 17 considerations when listing a contract, including

 18 swap contracts.

 19 Amended Core Principle 5 requires DCMs

 20 to adopt for each contract, as is necessary and

 21 appropriate, position limitations or position

 22 accountability, and requires that this limit
 48

 1 cannot be higher than the position limit

 2 established by the Commission for any contract.

 3 The implementing rule for this core principle

 4 requires that each DCM comply with the

 5 requirements of Part 150 or 151 of the

 6 Commission's regulations as applicable.

 7 Core Principle 4, now titled Prevention

 8 of Market Manipulation, was amended to require

 9 DCMs to take an active role not only in monitoring

 10 trading activities within their markets, but also

 11 in preventing market disruptions. The

 12 implementing rules include a requirement that DCMs

 13 have the ability to conduct real-time trade

 14 monitoring and comprehensive trade reconstruction.

 15 In order to prevent market disruptions

 16 due to sudden volatile price movements, the rules

 17 also require DCMs to establish and enforce trade

 18 risk controls, including, but not limited to,

 19 market restrictions that pause or halt trading in

 20 the event of extraordinary price movements that

 21 may result in distorted prices or trigger market

 22 disruptions.
 49

 1 In response to comments received on this

 2 topic, the final rulemaking includes acceptable

 3 practices that provide a non-exhaustive list of

 4 additional risk controls that DCMs may implement

 5 to further reduce the potential of market

 6 disruptions. The rules also require DCMs to

 7 require all traders on their markets to keep

 8 trading records that are available to the DCM to

 9 enable it to carry out its obligations under this

 10 core principle.

 11 Core Principles 11 and 21 pertain to the

 12 financial integrity of markets and the financial

 13 resource obligations of DCMs, respectively.

 14 Amended Core Principle 11 requires DCMs

 15 to establish and enforce rules and procedures for

 16 ensuring the financial integrity of transactions

 17 entered into on or through the DCM, including the

 18 clearing and settlement of the transactions with

 19 the DCM. This core principle also requires DCMs

 20 to establish and enforce rules to ensure the

 21 financial integrity of any FCM, futures commission

 22 merchant, FCM and introducing broker.
 50

 1 In particular, the rules require DCMs to

 2 adopt establishing minimum financial standards for

 3 both member FCMs and introducing brokers and

 4 non-intermediated participants, and to conduct

 5 ongoing financial surveillance of the risk created

 6 by FCM customer positions on DCMs. Under the

 7 final rules, DCMs must have rules prescribing

 8 capital requirements for member FCMs and

 9 intermediated brokers. And to the extent that a

 10 DCM allows customers direct access to its

 11 contract, they must implement certain access

 12 controls and procedures in order to provide member

 13 FCMs with tools to manage their financial risk.

 14 The FCM would continue to have primary

 15 responsibility for overall risk management, but

 16 the DCM would be required to establish an

 17 automated risk management system permitting an FCM

 18 to set appropriate risk limits for each customer

 19 with direct access to the contract market.

 20 New Core Principle 21 requires that a

 21 DCM must have adequate financial resources to

 22 discharge its responsibilities and to maintain
 51

 1 financial resources sufficient to cover operating

 2 costs for a period of at least one year,

 3 calculated on a rolling basis. To implement this

 4 core principle, the final rulemaking includes

 5 regulation addressing the types of financial

 6 resources available to DCMs to satisfy the

 7 financial requirements, valuation and calculation

 8 requirements, and financial resource reporting

 9 requirements.

 10 Finally, new Core Principle 20

 11 establishes operational and system safeguard

 12 requirements for all DCMs. The rules implementing

 13 this core principle require that DCMs establish

 14 and maintain a program of risk analysis and

 15 oversight to identify and minimize sources of

 16 operational risks, emergency backup procedures,

 17 and a disaster recovery plan, including resources

 18 sufficient to enable resumption of trading and of

 19 all responsibilities and obligations during the

 20 next business day following any disruption of its

 21 operation.

 22 The rules also require DCMs to notify
 52

 1 Commission staff of various system

 2 security-related events, including providing

 3 relevant documents and to conduct regular,

 4 periodic, and objective testing and review of its

 5 automated systems.

 6 The Commission also received a number of

 7 comments pertaining to the cost and/or benefits of

 8 certain proposed regulations. Staff has

 9 undertaken an extensive review of the cost and

 10 benefits of the regulations being adopted in this

 11 release, and has determined that the final rules

 12 appropriately balance the cost and benefits

 13 associated with the oversight of DCMs pursuant to

 14 the Commodity Exchange Act, as amended by the

 15 Dodd-Frank Act.

 16 I would be happy to answer any questions

 17 at this time.

 18 CHAIRMAN GENSLER: Thank you, Nadia.

 19 With that, I'll consider a motion on accepting the

 20 staff recommendation on the rules, guidance, and

 21 acceptable practices for DCMs.

 22 COMMISSIONER SOMMERS: So moved.
 53

 1 COMMISSIONER O'MALIA: Second.

 2 CHAIRMAN GENSLER: Nadia and team, I'm

 3 going to do something a little unusual. But

 4 Commissioner O'Malia and I both have some

 5 questions around Core Principle 3. And

 6 particularly Core Principle for the public is

 7 about contract markets ensuring that their

 8 contracts are not susceptible to manipulation.

 9 I'm saying it in lay terms.

 10 But I think we're both interested, and

 11 I'm going to take Commissioner O'Malia take the

 12 lead, on how this relates to price reporting

 13 agencies. For instance, many of the contracts

 14 relate to in the energy markets to things from

 15 Platts, or in the financial markets to things from

 16 something -- from the British Bankers Association

 17 called LIBOR. And so it's very relevant.

 18 So I'm going to -- Commissioner O'Malia

 19 is going to ask some questions, but we both might

 20 have some questions here on this.

 21 COMMISSIONER O'MALIA: All right. Thank

 22 you, Mr. Chairman.
 54

 1 CHAIRMAN GENSLER: So he's taking part

 2 of my time.

 3 COMMISSIONER O'MALIA: Appendix C

 4 guidance to Core Principle 3, as the Chairman

 5 noted, provides that where a private sector price

 6 reporting agency calculates settlement prices,

 7 DCMs "should verify that the third party utilizes

 8 business practices that minimize the opportunity

 9 or incentive to manipulate the cash market price

 10 area." This core principle is not new, and

 11 neither are the use of PRAs.

 12 How have DCMs complied with Core

 13 Principle 3, and do you expect the compliance

 14 obligations to change with respect to the use of

 15 the PRA settlement price under this new rule?

 16 MR. SHILTS: Yes, Commissioner. As

 17 you've noted, Core Principle 3 has been around for

 18 a long time. It is not new, and PRAs are not new

 19 either.

 20 I think generally the way the exchanges

 21 the DCMs have looked at -- well, first let me say

 22 there's nothing in the DCM final rulemaking that
 55

 1 addresses PRAs specifically. It really is talking

 2 about exchanges using -- for cash settle contracts

 3 setting prices based on some third party, which

 4 could be another exchange, you know, like a

 5 look-alike, or it could be a price reporting

 6 agency. But the same principles would apply.

 7 But I think in general when many of the

 8 exchanges have looked to listing contracts based

 9 on indexes or whatever, that the industry

 10 generally used either for, in many cases, for swap

 11 contracts, are based on those. And I think to a

 12 large extent, they've relied on the reputation and

 13 industry acceptance of a particular index, whether

 14 it be a Platts price or a British Bankers

 15 Association price or whatever. And I think to a

 16 large extent, our staff have generally kind of

 17 looked to the reputation of these entities, to

 18 some extent, ensuring compliance with Core

 19 Principle 3, that this is something the industry

 20 has accepted, that everybody -- there hadn't been

 21 necessarily issues raised with the methods or the

 22 procedures used by these price reporting agencies.
 56

 1 I think of late, and I know you've been

 2 very interested in this, there's been both when

 3 the industry in general and the DMO staff has

 4 taken a closer look at some of these price

 5 reporting agencies, or the indexes that they're

 6 using for settling various contracts, whether it

 7 be in the energy space or financial contracts, and

 8 looking at going back to the exchanges and taking

 9 a closer look because of some issues that have

 10 been raised about the ability to get precise

 11 information about how the PRAs are actually

 12 computing their prices and how robust the prices

 13 are, and whether there are potential, or there

 14 would be potential for entities that have

 15 positions in swaps or futures markets to distort

 16 those prices.

 17 So to some extent, the guidance that --

 18 the additional guidance that you referred to was

 19 an attempt to have the exchanges do, I guess, a

 20 more robust due diligence review of these -- the

 21 prices that they're selecting, the PRA prices that

 22 they're being used for settling cash settle
 57

 1 futures, and then ultimately swaps. And that

 2 they, in addition, make sure that not only that to

 3 do a better evaluation of what they're using, but

 4 also that they, in effect, do have the rights to

 5 that. In some cases we found that they didn't,

 6 and that there's an ability to get information to

 7 look to the extent possible from the price

 8 reporting agency so that they and then ultimately

 9 our staff or surveillance staff can assess whether

 10 those that are contributing to the price reporting

 11 have positions in futures or ultimately in swaps

 12 as we get that data for doing oversight to make

 13 sure that they -- those that have an incentive to

 14 distort the PRA price, that we can take action

 15 against if they're doing that to benefit on a

 16 position in the futures markets.

 17 So we don't have -- as I said, there

 18 aren't specific rules or guidance that goes

 19 directly to PRAs, but this is an ongoing -- as I

 20 said, you've shown a strong interest in this.

 21 This is an issue that we are exploring in a number

 22 of contexts, and I know IASCO has a project going
 58

 1 on to look at this. So ultimately it may lead to

 2 further guidance, or rules, or just inform how the

 3 staff looks at these contracts that are submitted.

 4 I don't know if that answered your question.

 5 CHAIRMAN GENSLER: I think all five of

 6 us are interested, but Commissioner O'Malia and I

 7 decided to sort of share this line of questions.

 8 I take it from what you say that under

 9 Core Principle 3, that you do believe that

 10 contract markets have had and will continue to

 11 have some obligations to ensure that if they're

 12 relying on an index, whether it's an oil index or

 13 a financial index, that that is not readily

 14 susceptible to manipulation.

 15 MR. SHILTS: Yes, that is correct. And

 16 the additional language and the guidance was kind

 17 of to flesh that out, things that we felt the

 18 exchanges should look at when they're making their

 19 assessments and making the determination about a

 20 particular price reporting index to use for

 21 settlement, yes.

 22 CHAIRMAN GENSLER: I mean, in essence,
 59

 1 if the underlying index is susceptible to

 2 manipulation, then it calls into question the

 3 contract itself.

 4 MR. SHILTS: Yeah. It calls into

 5 question its compliance with the core principle,

 6 yes.

 7 CHAIRMAN GENSLER: Well, as I said

 8 earlier, I support the rule. And so I had lots of

 9 questions for you over the last 18 months, but I

 10 think that this really finds the right balance. I

 11 think it's benefitted from public comment,

 12 including rules, but also acceptable guidance and

 13 practices. As Commissioner Sommers says, it dials

 14 back on the rules and puts more into guidance.

 15 And I use the one example on risk mitigation or

 16 pre-trade risk filters, and I think it will

 17 benefit the markets by giving greater clarity to

 18 exchanges and contract markets moving forward.

 19 Commissioner Sommers.

 20 COMMISSIONER SOMMERS: Thank you. I

 21 have just a couple of different questions. First

 22 of all, with regard to Core Principle 2 and under
 60

 1 the access requirements, there's a provision that

 2 requires DCMs to obtain in writing from market

 3 participants the consent to the DCM's

 4 jurisdiction. And I just wanted to talk through

 5 how we would expect the DCMs to accomplish this

 6 and how flexible we will be with their approaches.

 7 MS. BERDANSKY: I'll take that question.

 8 I mean, staff's expectations, we actually

 9 purposely in the rule didn't, you know, state how

 10 an exchange would -- has to go about this. We

 11 think it's important that an exchange has the

 12 flexibility for itself to figure out how it's

 13 going to work, to go ahead and obtain the

 14 jurisdiction. There will be various ways that I

 15 can envision they could do this.

 16 Some exchanges, those that don't have

 17 any intermediation, they'll have the names,

 18 addresses of their market participants to directly

 19 contact them and to secure those agreements.

 20 Other exchanges with intermediation, it could be a

 21 mix of they will have, you know, names, addresses

 22 of some market participants, even those that
 61

 1 aren't members because some of those people are

 2 registered at the exchange for fee programs.

 3 They'll also utilize the services I would imagine

 4 of their clearing firms to secure those

 5 agreements. But they will have the flexibility to

 6 determine for themselves how to do this.

 7 COMMISSIONER SOMMERS: Can you talk a

 8 little bit about what this accomplishes for us,

 9 and without this type of consent from market

 10 participants what our concerns would be?

 11 MS. BERDANSKY: Our concern in this area

 12 -- well, let me just start with saying that it was

 13 important -- basically we think this rule codifies

 14 the requirements in Core Principle 2 that a DCM

 15 have the capacity to detect, and investigate, and

 16 impose sanctions for rule violations.

 17 In the past, something that we have

 18 found in conducting our rule enforcement review

 19 examinations is that there have been several

 20 instances where an exchange has seen a potential

 21 violation, and they refer it over to the

 22 Commission. And the Commission will take a look
 62

 1 and enforcement determines, and they can bring in

 2 action. But when the Division of Enforcement

 3 brings an action, they will bring it for, you

 4 know, violation of Commission regulations or the

 5 statute. They don't bring actions typically for

 6 violations of the exchange rules.

 7 We think it's important to establish,

 8 and for exchanges to do it up front, that all

 9 market participants understand their obligation

 10 to, you know, comply with exchange rules,

 11 participate in investigations, and to participate

 12 in the disciplinary process. So that would be

 13 what is behind these rules.

 14 COMMISSIONER SOMMERS: So this is

 15 nothing really new. We've always thought that

 16 these market participants had this obligation, but

 17 this just puts it in writing.

 18 MS. BERDANSKY: This puts it in writing,

 19 and there have been instances where the DCMs

 20 haven't believe that they have had the

 21 jurisdiction. And we think clearly now with this

 22 language in Core Principle 2 in this rule that it
 63

 1 sets forth our expectation that they exercise this

 2 jurisdiction.

 3 COMMISSIONER SOMMERS: Thank you. Then

 4 I have a couple of questions about Core Principle

 5 21. And the preamble language, and I think Nadia

 6 talked a little bit about this in her opening with

 7 the flexibility that we would provide to a DCM in

 8 calculating their operating expenses. And I

 9 wondered if you could talk a little bit about how

 10 that would work.

 11 MS. MARKOWITZ: I'll take that question.

 12 I think we contemplate a continuation of what

 13 we've done in the past year or so or a couple of

 14 years in connection with similar financial

 15 resource requirements that are in designation

 16 orders for DCMs I think in the last three years.

 17 And we've approached this in a practical

 18 manner on a case by case basis. And I think we

 19 will continue to do this, being mindful of the two

 20 goals that you mentioned, which is to secure --

 21 you know, have financial security of DCMs. On the

 22 other hand, recognizing the capital requirements
 64

 1 of the DCM.

 2 And the way we've approached this is the

 3 flexibility and cost. We've had some internal

 4 guidance that we've applied -- tried to apply

 5 consistently, but also with some flexibility,

 6 depending on the particular situation of the DCM.

 7 And, for example, we've, in terms of cost, we've

 8 approached relatively new or, let's say, DCMs that

 9 have not had as much financial resources, we've

 10 been -- view costs to not include such things as

 11 non-cash costs, like depreciation or amortization.

 12 Also we've basically looked at cost as

 13 those costs that are needed to continue to be

 14 compliant with the core principles. So we've

 15 excluded things like growth costs. And so in that

 16 way, many DCMs, and particularly new DCMs, have

 17 been able to meet the cost requirements to, you

 18 know, to meet the financial requirements.

 19 So I think we contemplate continuing to

 20 do that, being consistent as we can, but on the

 21 other hand, providing flexibility on a case by

 22 case basis.
 65

 1 COMMISSIONER SOMMERS: Okay. With

 2 regard to those entities that may have multiple

 3 registration and share costs, how do we do those

 4 types of evaluations, and how do we ensure that

 5 there's no double counting?

 6 MS. ZAKIR: Sure. Regulation 38.1101

 7 under the final rule provides that an entity that

 8 is registered, for example, as both a derivative

 9 clearing organization and a designated contract

 10 market has to comply with the financial resource

 11 requirements of both of those entities under our

 12 regulations. However, what it would have to do is

 13 demonstrate that it has sufficient resources to

 14 operate the single combined entity.

 15 And so staff anticipates that a

 16 corporate entity that operates both -- more than

 17 one registered entity would be able to share

 18 certain costs. And to give you a specific example

 19 of that, if you have, you know, a corporate entity

 20 that operates both a DCO and a DCM, and they have

 21 an employee that works for both, I would say, we

 22 would not -- we don't contemplate that we would
 66

 1 require that corporate entity to count that full

 2 salary of that employee, both for the DCO and then

 3 again for the DCM, but rather would be able to

 4 share that cost.

 5 COMMISSIONER SOMMERS: Okay. I really

 6 appreciate this type of flexible approach, and I

 7 think it's important because I think we will have

 8 a number of new registrants that are in much

 9 different positions than our typical situations in

 10 the past. So I appreciate that. Thank you.

 11 CHAIRMAN GENSLER: Before I go to

 12 Commissioner Chilton, I just remembered, I believe

 13 it's Core Principle 11, but I'm just highlighting

 14 it a little bit for the public, but confirming

 15 this, Nadia and Nancy, that we did finalize in

 16 this, or we're about to finalize in this, what we

 17 propose that parties who have direct access to

 18 exchanges have to have a futures commission

 19 merchant, somebody checking that they actually are

 20 guaranteed before the trade is sent to the

 21 clearinghouse. Is that correct? Do I have this

 22 -- yeah.
 67

 1 MS. ZAKIR: The direct market access

 2 provision pertaining to the IOSCO Core Principle 6

 3 and 7, I think that's what you're referring to,

 4 Chairman?

 5 CHAIRMAN GENSLER: I can't --

 6 MS. ZAKIR: Is it the rule that's

 7 designed to ensure that declared clearing members of

 8 guaranteed trades have a means to risk manage and

 9 the trades of their customers who enter their trades

 10 directly? That's correct, we do have a rule that

 11 would --

 12 CHAIRMAN GENSLER: So, in essence, it's

 13 consistent with that which we did about a month

 14 ago when we finished rules for futures commission

 15 merchants also, then finalized some rules that

 16 they have pre-trade risk filters to ensure that

 17 somebody standing behind the trade before it goes

 18 to the clearinghouse.

 19 MS. ZAKIR: Correct.

 20 CHAIRMAN GENSLER: And we have that --

 21 we have sort of the -- this marries up with that

 22 rule to help promote anonymous trading on contract
 68

 1 markets. I thought it was part of Core Principle

 2 11, financial integrity of transactions when you

 3 gave the shout out to the Tech Advisory Committee.

 4 What's that, Scott?

 5 COMMISSIONER SOMMERS: Eleven.

 6 CHAIRMAN GENSLER: Core Principle 11?

 7 MS. ZAKIR: Chairman, I would just say

 8 that we put the obligation on the DCM that direct

 9 market access provision requires that the DCM be

 10 able to facilitate the FCM's risk controls, their

 11 management of risk, to the extent that there is a

 12 direct market access participant that bypasses the

 13 FCM's own controls.

 14 CHAIRMAN GENSLER: I see. I see.

 15 MS. ZAKIR: The obligation --

 16 CHAIRMAN GENSLER: So the DCM has to

 17 facilitate the FCM --

 18 MS. ZAKIR: That's right.

 19 CHAIRMAN GENSLER: -- doing their job.

 20 MS. ZAKIR: That's correct.

 21 CHAIRMAN GENSLER: But it marries up so

 22 that when swaps or futures come to a contract
 69

 1 market, somebody's guaranteeing it in the

 2 clearinghouse.

 3 MS. ZAKIR: I believe so, correct.

 4 CHAIRMAN GENSLER: All right, thanks.

 5 COMMISSIONER CHILTON: I want to thank

 6 the team. I think you did a very good job. I

 7 don't have any questions, although we've asked

 8 some in our briefings. But, you know, like all of

 9 these rules, we may need to do some interpretive

 10 guidance. And this is all an effort to make a

 11 more perfect regulation. We may not be exactly

 12 perfect, but we'll have to do some guidance

 13 probably as we have on others. You know, like I

 14 said earlier, doing the best we can, and

 15 particularly when we're talking about a market

 16 that we heretofore hadn't regulated and is so

 17 large.

 18 I did want to make one point because I

 19 saw this mischaracterized in the media recently

 20 about core principles. By and large, the core

 21 principles have added a whole lot of flexibility

 22 to what the exchanges can do. And if you look at
 70

 1 the volume in the futures industry between 2000

 2 and 2005, there was a five-fold increase in volume

 3 in the U.S. compared to a three-fold increase in

 4 futures other places around the world. So maybe

 5 that had something to do with core principles,

 6 things like exchanges offering products, offering

 7 a contract, you know.

 8 I was told that it could've taken in the

 9 past five, six months to approve something, and

 10 now they can self- certify. We have the ability,

 11 you know, question it. There's a whole list of

 12 things we can do. But it allows them to be more

 13 nimble and to be more quick, and I think that's

 14 been good.

 15 But the point I wanted to make is that

 16 just because we have core principles and we're

 17 expanding them into the OTC land, that that

 18 doesn't mean that under the Commodity Exchange Act

 19 that we don't have the law behind us with regard

 20 to not only oversight, but enforcement. I mean,

 21 we can still very aggressively -- in fact, more

 22 aggressively because I think the core principles
 71

 1 enhance our ability to go after violations of the

 2 Commodity Exchange Act. So these aren't separate

 3 things. It's not core principles versus the law.

 4 The law overreaches all of it. The core

 5 principles enhance us, enhance our ability to

 6 oversee and enforce markets, and I think it also

 7 enhances the flexibility of the exchanges.

 8 So I just wanted to sort of correct that

 9 because I read it some place that core principles

 10 were just loosey- goosey, and, you know, nobody

 11 went under in the financial collapse. No firm

 12 went under because of their position in the

 13 regulated futures world. It was you know, OTC

 14 land that was a problem.

 15 Thanks, Mr. Chairman.

 16 CHAIRMAN GENSLER: Thank you,

 17 Commissioner Chilton. Commissioner O'Malia, take

 18 two.

 19 COMMISSIONER O'MALIA: Thank you. To

 20 kind of start this one, I do appreciate the

 21 Commission taking kind of the unorthodox step of

 22 removing a core principle and considering it later
 72

 1 in order to understand better how this transaction

 2 space is going to work. And I think that's a

 3 great solution to this proposal, and we'll be able

 4 to see how swaps and futures integrate and are

 5 going to transact. So I set that up with that

 6 caveat.

 7 CHAIRMAN GENSLER: I think it was the

 8 right thing. I mean, I think we all five of us

 9 sort of were grappling. Core Principle 9 has

 10 changed. Congress did change the language about

 11 ensuring for the price discovery on the

 12 centralized market. We put a proposal out. We

 13 got a lot of comments, as you say. But the inner

 14 section, you listed three things. I listed a

 15 fourth thing. Also the intersection to me with

 16 direct, open access to clearing, you know, I think

 17 will benefit from another, whether it's another

 18 month or two or, as Commissioner Wetjen said,

 19 months, I don't know. But however it is until we

 20 get to that to that SEF role.

 21 COMMISSIONER O'MALIA: Now you're

 22 getting into my question, so let me ask it. So
 73

 1 what is going to happen, though, with regard to

 2 implementation of -- and this is for the team --

 3 this goes into effect 60 days after this hits the

 4 Federal Register. And as we work through the

 5 integration and discussion, what will DCMs have to

 6 do to comply with Core Principle 9 in the

 7 meantime?

 8 MS. ZAKIR: Yeah. So the core

 9 principles have been effective since the

 10 Dodd-Frank Act took effect, which was last June.

 11 And so the DCMs today are currently complying with

 12 each of the core principles, but use their

 13 reasonable discretion in determining the method in

 14 doing that. We anticipate that DCMs would

 15 continue to do that for Core Principle 9 in the

 16 way that they've complied over the past, I guess,

 17 until final rules are adopted.

 18 COMMISSIONER O'MALIA: Terrific. Thank

 19 you. We asked the Core Principle 3 -- I think

 20 Commissioner Sommers took care. Core Principle

 21 21, which I think greater flexibility is a great

 22 solution there to facilitate competition in this
 74

 1 space.

 2 Core Principle 4 I mentioned in my

 3 opening remarks. You have changed it to be,

 4 again, this is another area where it's more

 5 flexible than the original proposal. Can you kind

 6 of explain how you've -- what accommodations

 7 you've made to this core principle and your

 8 expectations for it?

 9 MS. ZAKIR: Sure. So in the NPRM,

 10 Notice of Proposed Rulemaking, we posed questions

 11 to market participants as to what types of risk

 12 controls were appropriate. And based on the

 13 comments that we received, we determined that --

 14 and based on the TAC Subcommittee report, we

 15 determined that there were was some level of

 16 standardization that was important, particularly

 17 in extreme market disruptions.

 18 The rule requires that designated

 19 contract markets must implement risk controls as

 20 appropriate to ensure that there aren't

 21 disruptions in the underlying -- in the markets.

 22 And those risk controls must include, but not be
 75

 1 limited to, trade pauses and halts.

 2 What we've done is essentially then also

 3 included acceptable practices, which have a

 4 non-exhaustive list of enumerated trade risk

 5 controls that DCMs can implement depending on

 6 their particular markets, the products, the

 7 parameters of which they themselves would set and

 8 would submit to the Commission, but essentially

 9 would leave it in the DCM's court to be able to

 10 make those determinations.

 11 And that is sort of consistent with the

 12 TAC subcommittee report findings and would also

 13 leave room there for any additional guidance or

 14 interpretation or rulemakings that the Commission

 15 may in the future decide to put together in order

 16 to mandate additional risk controls if necessary.

 17 COMMISSIONER O'MALIA: Thank you very

 18 much. That's all I have, Mr. Chairman.

 19 CHAIRMAN GENSLER: Thank you,

 20 Commissioner O'Malia. Commissioner Wetjen?

 21 COMMISSIONER WETJEN: Thanks, Mr.

 22 Chairman. One of the -- when Congress put
 76

 1 together the Dodd-Frank Act, it had -- well, I

 2 guess the first choice it had was to decide

 3 whether swaps should be executed on these

 4 platforms. And the answer to that was yes. And

 5 then the next question was, well, should we just

 6 use DCMs or is there some other way to go about

 7 this? And so in Dodd-Frank there was created this

 8 new registration category for swap execution

 9 facilities. I think the thinking behind it was

 10 that there would probably more competition among

 11 execution platforms if this new registration

 12 category were created, and all the attendant

 13 benefits that come with that.

 14 And so in recent days we've -- I think

 15 all the Commissioner have heard from a community

 16 of folks who might try and become SEFs at some

 17 point, and there have been some concerns about

 18 anti-competitive behavior of DCMs that could make

 19 it more difficult for SEFs to get off the ground.

 20 And in light of -- the purposes behind Dodd-Frank

 21 actually have some sensitivity to those concerns.

 22 And there are a variety of
 77

 1 considerations that swap users are going to have

 2 to make related to both clearing and then

 3 execution in terms of how they decide and where

 4 they decide to do these contracts. But focusing

 5 on what's in front of us today, the DCM rule, the

 6 one place where this issue could be addressed is

 7 in our Core Principle 19, the antitrust core

 8 principle.

 9 So I just wanted to ask the staff, you

 10 know, how would this work? If there were a

 11 potential SEF out there or an existing SEF at some

 12 point in the future, who suspected some type of

 13 illegal anti-competitive activity, what would be

 14 the process by which the Commission would consider

 15 that? I presume it would be something that would

 16 have to be brought to our attention, brought to

 17 the Commission's attention. But if that's the

 18 case, what would be the process after the

 19 Commission were made aware of this?

 20 MS. MARKOWITZ: Well, I think it may

 21 come to our -- well, let me just back up and say

 22 that we are aware of recent days letters that were
 78

 1 submitted to the Commission, to the Commissioners,

 2 and to us about potential problems with

 3 competition between existing DCMs and the SEFs.

 4 And we are cognizant of the concerns because in

 5 those couple of days, it's something that was not

 6 addressed particularly in this rulemaking.

 7 We recognize the concerns, and we fully

 8 intend to fully explore those concerns and work

 9 with all the Commissioners and their offices as to

 10 delve into these concerns. It's fairly

 11 complicated. Issues that are raised, antitrust

 12 theory issues as well as some factual issues. So

 13 we can't really opine on the antitrust or other

 14 kind of legal basis for this.

 15 I can address how this may come to our

 16 attention outside of the letters that we've

 17 received, which may be a rule that one of the

 18 exchanges may promulgate and self-certify to us

 19 saying that they are going to maybe bundle or cut

 20 fees, and that's something that we would then have

 21 an opportunity under our Part 40 to review. And

 22 we have a 10-day, but with the option if it's
 79

 1 complicated and novel to turn it over to a 90-day

 2 review. And we take every opportunity to do that.

 3 COMMISSIONER WETJEN: Well, I appreciate

 4 that answer, Nancy, and that's the answer I was

 5 looking for. I think the point I was trying to

 6 get across to the public and, in part, to these

 7 same people that you heard from was that we do

 8 have the tools available to us through this rule

 9 to respond to any kind of behavior like that even

 10 if it wasn't specifically addressed in this rule

 11 in quite the way that they might've expected. So

 12 I appreciate that answer. Thank you. That's all

 13 I have.

 14 CHAIRMAN GENSLER: Can I just follow up

 15 on Commissioner Wetjen's question? I think that

 16 he's absolutely right that we have that

 17 opportunity. We used it once when -- sorry, it

 18 was called ELX, right? It was under Core

 19 Principle at that point.

 20 MS. MARKOWITZ: Eighteen at the time.

 21 CHAIRMAN GENSLER: What was it called?

 22 MS. MARKOWITZ: Eighteen at the time.
 80

 1 CHAIRMAN GENSLER: Eighteen. Core

 2 Principle 18, which was -- so there is an example

 3 at least in my nearly three years here, one

 4 example where ELX raised, in essence,

 5 anti-competitive issues, and the Commission took a

 6 lot of time and the Commission staff took a lot of

 7 time addressing that. So that is an example of

 8 it.

 9 I think the bundling issues also relate

 10 to another provision of Dodd-Frank, that Congress,

 11 to promote competition amongst trading venues as

 12 Commissioner Wetjen noted, also provided that

 13 clearinghouses provide non-discriminatory open

 14 access to trading venues. So I think that's a --

 15 and I would hope that during this period, whether

 16 it's a month, whether it's three months, but

 17 whatever time we take as we're considering Core

 18 Principle 9 and the SEF rules that market

 19 participants continue to give us their best

 20 thoughts as to the intersection of

 21 non-discriminatory open access as well, that swap

 22 execution facilities really are not required by
 81

 1 Congress to be vertically integrated with a

 2 clearinghouse, but have access on a

 3 non-discriminatory basis. And sometimes bundling

 4 to one person appears non-discriminatory, but to

 5 another person appears to discriminatory. And

 6 that would be helpful to understand.

 7 COMMISSIONER WETJEN: I appreciate your

 8 comment, Mr. Chairman. Again, I think the

 9 importance here is that the Commission has

 10 historically shown a real responsiveness to these

 11 types of concerns, and you gave one example -- and

 12 it took place before it came -- but that should be

 13 reassuring to people as well.

 14 CHAIRMAN GENSLER: If there are no

 15 further questions --

 16 COMMISSIONER CHILTON: I have one quick

 17 -- I'm sorry.

 18 CHAIRMAN GENSLER: Commissioner Chilton.

 19 No, no, this is helpful.

 20 COMMISSIONER CHILTON: You know, I'm

 21 wondering. I've been a little bit concerned about

 22 the APA and comments that we get past the comment
 82

 1 period. And I just wonder -- I don't have a firm

 2 opinion on this, but with regard to Core Principle

 3 9 if we should open up the comment period for some

 4 length of time certain. I don't know what it

 5 would be or what staff or you, Mr. Chairman,

 6 think. But I'm just curious whether or not we

 7 should do that because the comment period is

 8 closed on this. We're doing the rule.

 9 CHAIRMAN GENSLER: But as -- Mr.

 10 Berkovitz, you can come forward and let us know.

 11 You're going to get a mic, question here. We've

 12 used our discretion to continue to take comments,

 13 post them on our website, post the meetings as

 14 well as the actual comments. But, Dan, do you

 15 want to address --

 16 MR. BERKOVITZ: Generally the staff has

 17 been operating under a policy of accepting late

 18 comments, provided that it's not so late in the

 19 process that it would actually impede the ability

 20 of the Commission to deliberate. So until very

 21 close up to the Commission's consideration, the

 22 staff has been exercising its discretion generally
 83

 1 to consider late comments.

 2 CHAIRMAN GENSLER: And does that -- I

 3 mean, you feel comfortable that we could do that

 4 in this circumstance?

 5 MR. BERKOVITZ: The staff could continue

 6 to exercise that discretion, yes.

 7 CHAIRMAN GENSLER: And can we direct

 8 them to continue to do that discretion?

 9 MR. BERKOVITZ: Certainly. Certainly.

 10 CHAIRMAN GENSLER: So following

 11 Commissioner Chilton's suggestion on hearing the

 12 public, I'm directing you all to continue to

 13 consider and post into the administrative record

 14 and on to our public website so everybody can see,

 15 and there's transparency.

 16 COMMISSIONER CHILTON: Yeah, that's

 17 good. Thank you. You know, my concern in general

 18 is, you know, we set these timelines that say

 19 we're going to accept comments until this date,

 20 and then we have -- we've provided flexibility to

 21 staff to still look at things afterwards. Well,

 22 you know, you've got a lobbyist or you're a big
 84

 1 firm and you know how we operate. You know, you

 2 can come in and talk to us. But the general

 3 public may not be aware that you can continue that

 4 and that we do have this discretion.

 5 So I'm fine going forward, as the

 6 Chairman suggested. But that's my -- had been my

 7 concern.

 8 CHAIRMAN GENSLER: And to give a little

 9 bit more transparency. And I've yet to look at

 10 Commissioner O'Malia's list, but I will give

 11 thoughts to it even before it goes on the website

 12 hopefully. But our hope is, and I think, Nancy,

 13 you can give us feedback because the relevant

 14 folks -- Bella and others -- report into DMO is to

 15 get to a version to put in front of Commissioners

 16 either by the end of this month or early in June.

 17 I see Bella there. She might be wincing a little

 18 bit as to when you think you would be getting a

 19 SEF document in front of Commissioners.

 20 But if that were by in June, then we

 21 could possibly be taking it up and voting on it in

 22 July. Bella, is that, you know, roughly possible,
 85

 1 or is it probably later?

 2 MR. SHILTS: I think our goal is to have

 3 a draft early June to --

 4 CHAIRMAN GENSLER: And then

 5 Commissioners could start to give feedback and so

 6 forth. Yeah.

 7 MR. SHILTS: Yeah, sometime in June,

 8 yeah.

 9 COMMISSIONER SOMMERS: I have a question

 10 on the same subject.

 11 CHAIRMAN GENSLER: Sure.

 12 COMMISSIONER SOMMERS: If we were to

 13 propose something or try to come up with something

 14 completely different than the 85 percent forced

 15 delisting that we put out in 2010. Would we be

 16 able to just go final with that without soliciting

 17 comment?

 18 CHAIRMAN GENSLER: I think Dan's going

 19 to come back up and best be able to answer that.

 20 MR. BERKOVITZ: In terms of final from

 21 the -- what the Commission could do in a final

 22 rule, variations from the proposed rule, the basic
 86

 1 test is whether the final rule would be a logical

 2 outgrowth from the proposed rule, so it would

 3 depend on exactly what the final rule was. But as

 4 long as it was something that the public had an

 5 opportunity to comment on, and then the particular

 6 could be termed a logical outgrowth of what was

 7 proposed. So it could be different, but it would

 8 be a logical outgrowth.

 9 CHAIRMAN GENSLER: Yeah. I mean, an

 10 example is the block area we re-proposed. I mean,

 11 we have a couple of others that weren't as noted

 12 as the block rule, but we re-proposed, went

 13 straight through processing, though. Again,

 14 didn't get a lot of publicity. And other

 15 circumstances where we have -- it's been a logical

 16 outgrowth, and we've often been less prescriptive.

 17 We've, I think, been advised that we can finalize

 18 in those circumstances.

 19 COMMISSIONER CHILTON: So, Dan, if we

 20 went -- hypothetically, if we went one percent or

 21 we went 100 percent, would those be logical

 22 outgrowths?
 87

 1 MR. BERKOVITZ: I think it's difficult

 2 to -- I wouldn't want to give a definitive answer

 3 right here and now. But the fact --

 4 COMMISSIONER CHILTON: Theoretically it

 5 could potentially be a logical outgrowth.

 6 MR. BERKOVITZ: If it's --

 7 COMMISSIONER CHILTON: Two caveat words

 8 there, "theoretically" and "potentially."

 9 MR. BERKOVITZ: Yes. Yes. Yes, I would

 10 agree on that, Commissioner.

 11 COMMISSIONER CHILTON: Thank you.

 12 MR. BERKOVITZ: Yes.

 13 COMMISSIONER O'MALIA: Mr. Chairman,

 14 again, we delayed Core Principle 9, not because it

 15 was a bandwidth problem. We could've voted yes or

 16 no on Core Principle 9 and we would've had, at

 17 least in my opinion, a different outcome. But I

 18 think we were searching for the right answer on

 19 execution. So I do hope, and this is an appeal to

 20 the public, so long as we have the opportunity,

 21 and you've instructed the staff to talk about

 22 this, you know, putting this in a box, the four
 88

 1 corners of what is clearing -- the trading mandate

 2 going to be. The issue of straight through

 3 processing and clearing that you mentioned, and

 4 the execution on DCMs versus SEFs. All of that

 5 comes into play.

 6 You know, we need input from the public

 7 on how that will impact trading in this market,

 8 the new larger Dodd-Frank regulated market. So I

 9 think if anybody's listening and watching, and I

 10 suspect a few are, think about it. Provide

 11 comment. The door, window, whatever is open, and

 12 that would be helpful.

 13 I would urge that we do a roundtable

 14 because then you could sit down and have that, and

 15 it's open. Everybody would see that. It would be

 16 the public could see it to Commissioner Chilton's

 17 point, and it wouldn't be a bunch of, you know,

 18 high-paid lobbyists and firms here that would have

 19 an input on this, but people could watch an open

 20 meeting and discussion about a roundtable. And I

 21 think that would be -- then we could have all the

 22 points discussed in the trade-offs.
 89

 1 CHAIRMAN GENSLER: As you've observed

 2 over these last 18 or 24 months, I've been a big

 3 proponent of transparency and roundtables, and I

 4 think we're up to 16 or 17. And we're about to

 5 have another one in late May on -- here I'm

 6 announcing something. Sorry, Steve Adamske. But,

 7 you know, we're about to probably have one on the

 8 Volcker Rule, which I think would be very helpful,

 9 that working with other agencies we get input.

 10 I think there is some bandwidth issues

 11 just in terms of -- but I leave it to staff to

 12 sort through that as to what's the best way to get

 13 input. Mr. Stawick?

 14 MR. STAWICK: Commissioner Wetjen?

 15 COMMISSIONER WETJEN: Aye.

 16 MR. STAWICK: Commissioner Wetjen, aye.

 17 Commissioner O'Malia?

 18 COMMISSIONER O'MALIA: Aye.

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

 20 Commissioner Chilton?

 21 COMMISSIONER CHILTON: Aye.

 22 MR. STAWICK: Commissioner Chilton, aye.
 90

 1 Commissioner Sommers?

 2 COMMISSIONER SOMMERS: Aye.

 3 MR. STAWICK: Commissioner Somers, aye.

 4 Mr. Chairman?

 5 CHAIRMAN GENSLER: Aye.

 6 MR. STAWICK: Mr. Chairman, aye. On

 7 this question, the yeas are five, the nays are

 8 zero.

 9 CHAIRMAN GENSLER: Thank you, Mr.

 10 Stawick. Thank you to all the Commissioners.

 11 The ayes being unanimous, we'll be

 12 sending it to the Federal Register. Do I need a

 13 unanimous consent on technical corrections?

 14 MR. STAWICK: Yes, sir.

 15 CHAIRMAN GENSLER: So I ask for

 16 unanimous consent on also allowing for technical

 17 corrections?

 18 (No response.)

 19 CHAIRMAN GENSLER: Without objection. I

 20 want to thank Nadia, Nancy, Rick, David, Rachel,

 21 and Mike, who sat at the table, but all of the

 22 many other people, probably dozens, who have
 91

 1 worked on this. I think it is a very important

 2 rule to help promote the transparency reforms of

 3 Dodd-Frank, but also to give clarity to these

 4 exchanges in contract markets on how to best

 5 comply, and, where appropriate, to ensure that

 6 they're not competing on risk mitigation and other

 7 things, that futures commission merchants and

 8 market participants have sort of something

 9 consistent to work with. So I thank you. I know

 10 it's been a lot of work, and this is hundreds of

 11 detailed provisions, but I thank you all.

 12 If there's nothing else, I'll take a

 13 motion to adjourn the meeting.

 14 COMMISSIONER SOMMERS: So moved.

 15 COMMISSIONER O'MALIA: Second.

 16 CHAIRMAN GENSLER: All in favor?

 17 (Chorus of ayes.)

 18 CHAIRMAN GENSLER: Any opposed?

 19 (No response.)

 20 CHAIRMAN GENSLER: We all are unanimous

 21 on adjournment. Thank you.

 22 (Whereupon, at 11:03 a.m., the
 92

 1 PROCEEDINGS were adjourned.)

 2 * * * * *

 3

 4

 5

 6

 7

 8

 9

 10

 11

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22
 93

 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Christine Allen, 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 (Signature and Seal on File)

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

 20 Notary Public, in and for the District of Columbia

 21 My Commission Expires: January 14, 2013

 22