UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 OPEN MEETING ON THE FOURTEENTH SERIES OF 

 PROPOSED RULEMAKINGS UNDER THE DODD-FRANK ACT 

 Washington, D.C. 

 Wednesday, April 27, 2011 
 2 

 1 PARTICIPANTS: 

 2 Commission Members: 

 3 GARY GENSLER, Chairman 

 4 BART CHILTON, Commissioner 

 5 MICHAEL V. DUNN, Commissioner 

 6 JILL SOMMERS, Commissioner 

 7 SCOTT D. O'MALIA, Commissioner 

 8 Presentation No. 1: Produce Definitions Contained 

 in Title VII of the Dodd-Frank Act 

 9 

 10 Office of General Counsel 

 11 TERRY ARBIT 

 12 JULIAN HAMMAR 

 13 DAVID ARON 

 14 DAN BERKOVITZ 

 15 Presentation No. 2: Protection of Cleared Swaps 

 Customer Contracts and Collateral; Conforming 

 16 Amendments to the Commodity Broker Bankruptcy 

 Provisions 

 17 

 18 Division of Clearing and Intermediary Oversight 

 19 ROBERT WASSERMAN 

 20 JOHN LAWTON 

 21 NANCY SCHNABEL 

 22 LAURA ASTRADA 
 3 

 1 PARTICIPANTS (CONT'D): 

 2 Office of General Counsel 

 3 MARTIN WHITE 

 4 Presentation No. 3: Capital Requirements of Swap 

 Dealers and Major Swap Participants 

 5 

 6 Division of Clearing and Intermediary Oversight 

 7 TOM SMITH 

 8 THELMA DIAZ 

 9 JOHN LAWTON 

 10 Presentation No. 4: Amendments to Adopt Certain 

 CFTC Regulations to the Dodd- Frank Act 

 11 

 12 Division of Clearing and Intermediary Oversight 

 13 JOHN LAWTON 

 14 PETER KALS 

 15 Division of Market Oversight 

 16 NADIA ZAKIR 

 17 Office of General Counsel 

 18 DAVID ARON 

 19 Also Present: 

 20 DAVID STAWICK, Office of the Secretariat 

 21 VINCENT A. McGONAGLE, Enforcement Division 

 22 * * * * * 
 4 

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

 2 (9:36 a.m.) 

 3 CHAIRMAN GENSLER: Good morning. This 

 4 meeting will come to order. This is a public 

 5 meeting of the Commodity Futures Trading 

 6 Commission to consider issuance of a proposed 

 7 rule-making under the Dodd-Frank Wall Street 

 8 Reform and Consumer Protection Act regarding four 

 9 proposed rules. 

 10 These proposed rules relate to product 

 11 definitions which is a joint rule with the 

 12 Securities and Exchange Commission. They relate 

 13 to segregation of customer collateral for cleared 

 14 swaps, those swaps taken to a clearinghouse, 

 15 capital requirements for non-bank swap dealers and 

 16 major swap participants, and then some conforming 

 17 amendments to certain CFTC regulations as we've 

 18 done at least twice during this proposed 

 19 rule-making phase. 

 20 In addition, the Commission will 

 21 consider aligning the comment period on the margin 

 22 rule that was proposed on April 12th, and this is 
 5 

 1 to align that rule with the capital rule. 

 2 I'd like to welcome members of the 

 3 public, market participants, and members of the 

 4 media to today's meeting as well as welcome those 

 5 listening to the meeting on the phone or watching 

 6 the live webcast. We look forward to receiving 

 7 public comments on the proposed rules we're 

 8 considering today, and the rules as well as 

 9 factsheets and Q&As and documents will all be 

 10 posted on our website shortly as we've done in our 

 11 prior meetings. This is the 14th meeting, 

 12 actually, as we consider Dodd-Frank rule- makings. 

 13 And at this point, as we consider these four rules 

 14 and, hopefully, share them with the public. With 

 15 the Commission's support we will have 

 16 substantially completed the proposal phase of our 

 17 rule-writing to implement the Dodd-Frank Act. 

 18 And so I want to take this opportunity 

 19 and thank the staff for their extraordinary work. 

 20 I think this is 40 weeks since the President 

 21 signed the bill; they're probably counting, the 

 22 staff. But it's just a remarkable work, with good 
 6 

 1 humor and thoughtfulness, to comply with 

 2 Congressional intent and the law, to take hundreds 

 3 of meetings -- in fact, between regulators and the 

 4 public, probably over 1,000 meetings. And they've 

 5 started to review what is now tens of thousands of 

 6 comments. 

 7 Similarly, I want to thank Commissioner 

 8 Mike Dunn and Commissioner Jill Sommers, Bart 

 9 Chilton, and Scott O'Malia for all of their hard 

 10 work during this process. The Commissioners and 

 11 their very able staff have diligently evaluated 

 12 all of these staff proposals, provided insightful 

 13 comments throughout, I think made the rules better 

 14 for the public. Since the President signed the 

 15 Act the Commission has promulgated rules and will, 

 16 with today, covering all of the areas set out in 

 17 the Act for swap regulation, with the exception of 

 18 the Volcker Rule, which the Act itself set a 

 19 different timeline for. 

 20 With this substantial completion of this 

 21 proposal phase of the rule-writing, the public now 

 22 has the opportunity to review the whole mosaic of 
 7 

 1 rules. This will allow the market and all the 

 2 market participants to evaluate the entire 

 3 regulatory scheme as a whole. And to further 

 4 facilitate this process, this morning we'll 

 5 consider possibly reopening or extending the 

 6 comment periods for most of the Dodd-Frank 

 7 proposed rules for an additional 30 days. 

 8 Specifically, for rules where the comment period 

 9 has closed, the comment period would be reopened 

 10 for 30 days. Or if it's about to close, it would 

 11 at least be extended so that the total would be 30 

 12 days. 

 13 This time will allow the public to 

 14 submit any comments they might have after seeing 

 15 the entire mosaic and, as part of this, I'm hoping 

 16 the market participants will continue to comment 

 17 about potential compliance cost as well as the 

 18 phasing and implementation dates with regard to 

 19 these rules. 

 20 One opportunity, actually a very key 

 21 opportunity, to comment will be next week. The 

 22 SEC and CFTC's staffs will have a two-day 
 8 

 1 roundtable to hear from the public on the best 

 2 schedule for implementation dates for effective 

 3 dates of these final rules. We've also opened, a 

 4 few weeks ago, a public comment file which is 

 5 open, I think, through June 10th or so on some of 

 6 these implementation and effective date processes. 

 7 Before we hear from staff on these four 

 8 rules that we'll consider today, I'd like to 

 9 recognize my fellow Commissioners. I believe that 

 10 Commissioner Dunn -- I don't see the camera, but 

 11 -- and Commissioner Chilton are together in 

 12 Chicago, so Commissioner Dunn? 

 13 COMMISSIONER DUNN: Thank you, Mr. 

 14 Chairman, and I want to thank all the folks 

 15 joining us today for this important meeting 

 16 regarding the implementation of the Dodd- Frank 

 17 Act. 

 18 Today, as we near the end of our 

 19 meetings regarding proposed rule, we will finally 

 20 consider our product definitions rule, a joint 

 21 rule with the SEC, which, in a perfect world, 

 22 would have been one of the first rules proposed 
 9 

 1 because meaningful input from those who will be 

 2 under the new regulatory regime depends upon 

 3 knowing precisely what constitutes a swap and what 

 4 does not. We will also discuss our conforming 

 5 rules whose purpose is, in part, to ensure that 

 6 what is required for swaps is required for futures 

 7 and visa versa. 

 8 In a perfect world conforming rules 

 9 would be the last proposed and final item because 

 10 to do them correctly depends on having a view of 

 11 all of the other rules. However, this is not a 

 12 perfect world and the Commission and its staff is 

 13 doing what it can, when it can, with the resources 

 14 we have. And, Mr. Chairman, I join you in 

 15 saluting the staff for doing an outstanding job. 

 16 In considering the proposed rule for 

 17 capital requirements for swap dealers and major 

 18 swap participants, I will be particularly 

 19 interested in hearing staff's thoughts on the 

 20 public comments on how much this rule will cost 

 21 not only the industry, but the CFTC. I believe 

 22 this rule is a necessity, but I'm interested to 
 10 

 1 hear if or how these proposed requirements will 

 2 affect the cost of transacting swaps. At the very 

 3 least, the proposed capital rules will increase 

 4 the burden on current Commission staff and will 

 5 require the hiring of additional staff. 

 6 I'm also very interested in hearing the 

 7 public comments regarding the proposed rule on 

 8 protection of clearance swap, customer contracts, 

 9 and collateral. While staff makes its specific 

 10 recommendations today regarding the approach that 

 11 the Commission should take, the proposed rule also 

 12 lays out a number of alternatives that staff has 

 13 considered. I look forward to reading the 

 14 comments on this rule, so that the Commission can 

 15 determine the best approach. 

 16 As we move from the process of proposing 

 17 rules to the process of final rules, I will rely 

 18 heavily on the comments we receive from the 

 19 public, informing my opinion on the final rules. 

 20 While I have specific questions regarding each 

 21 final rule, there are two broad themes of 

 22 questions that I have for each of the final rule 
 11 

 1 teams. 

 2 First, how can the rule be made more 

 3 principle- based and less prescriptive or 

 4 restrictive? And second, how much will the rule 

 5 cost the Commission to implement, maintain, and 

 6 enforce, particularly in terms of staffing? 

 7 I have provided a series of questions 

 8 regarding these themes to the rule teams and will 

 9 look forward to the answers to those questions as 

 10 we move to the final rules. I would like to once 

 11 again thank the staff at CFTC for all their hard 

 12 work on these very important proposed rules and I 

 13 look forward to their presentations. 

 14 CHAIRMAN GENSLER: Thank you. 

 15 Commissioner Chilton? Commissioner Sommers? 

 16 COMMISSIONER SOMMERS: Thank you, Mr. 

 17 Chairman. And I want to thank all the teams that 

 18 are here today for all of the hard work that they 

 19 have put in on the proposals that we are 

 20 considering today. 

 21 As all of you know, a number of these 

 22 proposals today are lynchpins in the new 
 12 

 1 regulatory structure that we are creating. And I 

 2 know that the public, end users, and members of 

 3 Congress have been anxiously awaiting these 

 4 proposals. 

 5 Before moving to the specific proposals 

 6 before us today, I would like to focus on the 

 7 Dodd-Frank repeal of certain provisions of the 

 8 Commodity Exchange Act that were added by the 

 9 Commodity Futures Modernization Act of 2000 to 

 10 provide legal certainty to over-the-counter 

 11 markets, namely 2(d), 2(e), 2(g), 2(h), and 5(d). 

 12 These provisions will be rescinded on July 16th, 

 13 less than 3 months from now, even though the new 

 14 regulatory framework for trading and clearing 

 15 swaps will most certainly not be operational by 

 16 that date. 

 17 Last September, the Commission issued an 

 18 order outlining a process for grandfather relief 

 19 for exempt commercial markets operating pursuant 

 20 to 2(h)(3), an exempt Board of Trade operating 

 21 pursuant to Section 5(d). 

 22 The Commission order is an order to be 
 13 

 1 entitled "Grandfather Relief." Among other things 

 2 to be entitled, the ECMs or EBOTs must have filed 

 3 a SEF or DCM application within 60 days after the 

 4 effective date. The final regulations 

 5 implementing Sections 733 or 734 of Dodd-Frank and 

 6 the SEF or DCM application must be currently 

 7 pending before the Commission. 

 8 The wording of these requirements 

 9 clearly presumed that final regulations 

 10 implementing Sections 733 and 734 would be issued 

 11 before July 16th and may not make sense in the 

 12 absence of final regulations. I believe the 

 13 Commission should re-address its order to ensure 

 14 that it provides market participants with 

 15 sufficient certainty as to the status of ECMs and 

 16 EBOTs on July 16th or thereafter, particularly in 

 17 light of the fact that it will likely be 

 18 impossible for ECM or EBOT to have an SEF 

 19 application currently pending on July 16th. 

 20 At the same time the Commission issued 

 21 its order outlining a process for granting 

 22 grandfather relief to ECMs and EBOTs, the 
 14 

 1 Commission declined to grant grandfather relief to 

 2 market participants transacting swaps in reliance 

 3 of Section 2(h)(1) and said nothing about Sections 

 4 2(d), 2(e), and 2(g). 

 5 With the Dodd-Frank effective date 

 6 looming and no grandfather relief or no action 

 7 relief process yet announced for market 

 8 participants transacting in reliance on these 

 9 critical provisions, the level of uncertainty in 

 10 these markets is mounting. Again, I think it is 

 11 imperative that the Commission publicly announce 

 12 as soon as possible how it intends to address the 

 13 legal uncertainty that will be reintroduced into 

 14 the OTC swaps market on July 16th when the Section 

 15 2 provisions are repealed and the certainty 

 16 provided by the CFMA goes away. 

 17 It is my hope that the Commission will 

 18 issue specific guidance to market participants as 

 19 soon as possible to clarify for them what happens 

 20 in these markets on Monday, July 18th. 

 21 I would also like to discuss the next 

 22 phase for us in the rule-making process. Although 
 15 

 1 I completely understand interested parties' 

 2 anxiety regarding the implementation phase or the 

 3 staggering of effective dates for final rules, I 

 4 am actually more concerned with our internal 

 5 process for moving forward with issuing final 

 6 rules. The process for issuing proposed rules was 

 7 rushed and, in my view, was guided by meeting the 

 8 tight deadlines that were set by the statute. 

 9 There was often insufficient time for us to fully 

 10 consider the implications of all aspects of some 

 11 of the proposals, particularly when we were 

 12 getting revisions the night before the vote and 

 13 sometimes on the morning of a vote. 

 14 I would have preferred that the 

 15 Commission spend more time on many of the 

 16 proposals to get them in the state as close to 

 17 final as possible. We often did not do that. On 

 18 the contrary, we have issued a number of proposals 

 19 in which at least three Commissioners have voiced 

 20 concerns regarding the possibility of unintended 

 21 consequences. 

 22 While there is room for error when 
 16 

 1 issuing proposed rules, there is no room for error 

 2 when issuing final rules, which is why I believe 

 3 our internal process for finalizing rules is 

 4 vitally important. We must ensure that we have 

 5 sufficient time to analyze each and every rule, 

 6 that final rules changed at the last minute are 

 7 not called up for a vote, and that we set a 

 8 meeting schedule to allow sufficient time between 

 9 meetings for serious internal consideration by all 

 10 of us of the views of staff, the views of the 

 11 commenters, and, most importantly, the views of 

 12 each other. 

 13 I am, of course, looking forward to the 

 14 guidance from the joint roundtable next week on 

 15 implementation, but I also look forward to 

 16 finalizing the specific process we will operate 

 17 under internally to make sure that we move forward 

 18 in an orderly fashion, guided by policy and not by 

 19 deadlines. 

 20 Finally, before I address the proposals 

 21 before us today, I would like to say that I 

 22 wholeheartedly agree to us extending or reopening 
 17 

 1 the comment periods for most of the proposals that 

 2 we have issued. However, I'm objecting to this 

 3 today since I did not receive it until late last 

 4 night and haven't had the chance to look at it. 

 5 Given the number of proposals and the complexity 

 6 of the proposals that we are reopening, I also 

 7 question whether 30 days is sufficient time to 

 8 comment on over 32 different releases. 

 9 And finally, to the agenda before us 

 10 today, I think it represents an enormous effort on 

 11 the part of our staff and the work that they have 

 12 put into the giant stack of paper that we have in 

 13 front of us. While I have a number of concerns 

 14 with regard to these proposals, my votes in no way 

 15 express dissatisfaction with the quality of work 

 16 that's been done to get these proposals ready for 

 17 today's vote. 

 18 On the Product Definitions Proposal, 

 19 obviously I'm pleased that we're finally able to 

 20 get to this critical proposal. But as has been my 

 21 practice throughout the rule- making process, I 

 22 have voted against proposals that I thought were 
 18 

 1 over-reading our mandate or simply overreaching. 

 2 I think that the proposed anti-evasion provisions 

 3 within this document do just that. 

 4 I agree that Section 721(c) directs the 

 5 Commission to modify certain definitions to 

 6 include products or entities that may be 

 7 structured to evade the requirements of 

 8 Dodd-Frank. However, I don't agree that being 

 9 directed to modify definitions equates being 

 10 directed to propose broad anti-evasion provisions 

 11 and I think it's an overreach. 

 12 I'm also troubled that this proposal 

 13 does not discuss issues raised by multilateral 

 14 development institutions in which the United 

 15 States is a member -- such as the World Bank, the 

 16 Bank of International Settlements, the 

 17 International Bank for Reconstruction and 

 18 Development, and the International Finance 

 19 Corporation, among others -- that have come to us 

 20 with very specific concerns. All of these 

 21 organizations share the same fundamental mission, 

 22 which is to provide economic development and 
 19 

 1 reduce poverty in developing countries, and I do 

 2 not believe they should be included in the 

 3 proposal that we have before us. 

 4 The draft that I received two weeks ago 

 5 included a discussion of their issues and 

 6 contained a number of questions for the public to 

 7 comment on. All of that has been omitted in the 

 8 document before us today, and I think that is a 

 9 mistake. These entities have legitimate issues 

 10 and I do not see the harm in highlighting them and 

 11 asking questions. I don't recall us highlighting 

 12 their issues in any other proposals, so I 

 13 question, why not include them in this proposal? 

 14 Not raising the issues at all because we 

 15 think the entities will comment anyway may not 

 16 cause others that are not directly impacted with 

 17 helpful information that may want to comment on 

 18 these issues. As a result, in my dissenting 

 19 statement on this specific proposal, I will 

 20 include the discussion and questions as written by 

 21 staff that they provided in their earlier draft, 

 22 and I hope that the public will take the 
 20 

 1 opportunity to comment. 

 2 With regard to the segregation in 

 3 bankruptcy proposal, I have a number of 

 4 reservations because I think it mistakenly fails 

 5 to retain sufficient optionality for FCMs and DCOs 

 6 to implement different models based upon the needs 

 7 of their customers. The proposal clearly favors 

 8 adopting the complete legal segregation model as 

 9 providing the best balance between benefits and 

 10 costs. I'm not convinced of that and I welcome 

 11 comments on the bankruptcy rules and other issues 

 12 surrounding optionality. 

 13 I also believe that the contrast between 

 14 Sections 4d(b) and 4d(f).6 of the CEA -- namely 

 15 the use of the terms "customer" versus "customers" 

 16 -- is suggestive of nothing more than a drafting 

 17 error. 

 18 Finally, I also have strong objections 

 19 to including two important substantive provisions 

 20 within the conforming amendments today: One 

 21 governing bunched orders, and the other one 

 22 requiring new duties with respect to creating and 
 21 

 1 maintaining audio files of all oral communications 

 2 leading to the execution of a transaction in a 

 3 commodity interest or cash commodity. I believe 

 4 these significant issues should be addressed 

 5 separately and do not belong in a conforming 

 6 amendments document. I encourage the public to 

 7 read these conforming amendments very closely and 

 8 to comment as appropriate. 

 9 Again, I want to thank all of the teams 

 10 for their hard work today on these very 

 11 significant proposals and I look forward to 

 12 hearing your presentations. 

 13 CHAIRMAN GENSLER: Thank you, 

 14 Commissioner Sommers. Commissioner Chilton, back 

 15 to Chicago. 

 16 COMMISSIONER CHILTON: Thanks, Mr. 

 17 Chairman. I actually agree with Commissioner 

 18 Sommers on a few things, but I diverge at one 

 19 point here, maybe a couple of points. 

 20 You know, I don't think that it was 

 21 possible for us to get these rules right 

 22 immediately out of the gate. Some of them we had 
 22 

 1 a very steep learning curve on. And the reason 

 2 that we put them out, in my view, is that we 

 3 needed to get comments to further fine-tune the 

 4 rule. I agree with her that it's really the final 

 5 rules where the rubber meets the road -- and 

 6 Commissioner Dunn's talked about that, also -- 

 7 that we need to get it right, and we will. 

 8 And, as the Chairman said, we're not 

 9 going to get things done on time as Congress 

 10 suggested, so I think we are going to be 

 11 deliberate. I think we have been deliberate. I 

 12 think this effort that the Chairman's put forward 

 13 for an additional 30 days on some selected rules 

 14 -- and I'm going to ask some questions about that 

 15 later -- but I think that's a good effort. But I 

 16 do get concerned and I want to make sure I'm 

 17 specifically not talking about Commissioner 

 18 Sommers or anybody else at the CFTC. 

 19 I think the deadlines that Congress 

 20 passed are important deadlines for us. I think 

 21 that the urgency that existed last year when 

 22 Congress passed the bill and the President signed 
 23 

 1 it, that urgency still exists today. And there 

 2 are dangers out there in the OTC world that we've 

 3 got to get a handle on with these rules and 

 4 regulations. 

 5 But obviously we want to do them right, 

 6 but I think there are some out there that want to 

 7 sort of run out the clock, and, again, I'm not 

 8 talking about anybody in this meeting or at the 

 9 CFTC. But I think some -- and I think many of 

 10 these people are folks that oppose the bill to 

 11 begin with, really want to run it out until maybe 

 12 after the next presidential election. Maybe 

 13 consumers will not be as hot on financial reform 

 14 then. And I think that would be a mistake. 

 15 So I know my colleagues and I, all of 

 16 us, want to do what we believe is the right thing, 

 17 but we want to be deliberate about it. And I 

 18 respect that and I think we'll get there. We may 

 19 need some pushing from the outside once in a 

 20 while, and that's all well and good, but we need 

 21 to be thinking about these things as we go 

 22 forward. Thank you, Mr. Chairman. 
 24 

 1 CHAIRMAN GENSLER: Thank you, 

 2 Commissioner Chilton. Commissioner O'Malia? 

 3 COMMISSIONER O'MALIA: Thank you, Mr. 

 4 Chairman. And let me thank the teams who have 

 5 spent many, many long hours negotiating and 

 6 developing the rule proposals before us today. 

 7 Greatly appreciate your hard work and being on the 

 8 front line on negotiations. 

 9 Let me begin by making a comment on the 

 10 rule- making process going forward. After the May 

 11 2nd and May 3rd staff roundtables on the 

 12 implementation process, it is my hope that the 

 13 Commission will release a comprehensive schedule 

 14 of the sequencing of final rule-makings and a 

 15 proposed implementation plan to be put in the 

 16 Federal Register to allow public comment on it 

 17 before we finalize the rules under Dodd-Frank. 

 18 Like you, Mr. Chairman, I believe 

 19 transparency will benefit this process by allowing 

 20 the public to comment on both the sequencing of 

 21 the final rules and the proposed implementation 

 22 plan. Those affected by the rules will have the 
 25 

 1 transparency and certainty they will need to make 

 2 budget, investment, and staffing decisions. 

 3 Now let me turn to the proposed 

 4 rule-makings. After almost 10 months, the 

 5 products rule that will define the definition of a 

 6 swap is finally before us. I think the public 

 7 will be surprised that this rule-making is over 

 8 300 pages in length and by the number of 

 9 differences that still exist between the two 

 10 commissions with respect to insurance products, 

 11 foreign sovereign debt instruments, and swap 

 12 indexes. 

 13 I have a particular concern about the 

 14 anti- evasion proposal and how the Commission will 

 15 conduct its analysis and implement this provision 

 16 going forward. While I believe that our 

 17 implementation of the forward exclusion is 

 18 consistent with the years of Commission practice, 

 19 I would like to hear from the public whether they 

 20 will allow the forward market to continue to 

 21 operate under Dodd-Frank in the same manner as it 

 22 does today. 
 26 

 1 With regard to the financial 

 2 transmission rights and electricity markets, this 

 3 proposal recommends the Commission use the Public 

 4 Interest Waiver authority provided under 722(f) of 

 5 Dodd-Frank Act. And I believe that is the 

 6 appropriate process. 

 7 As I was reviewing the treatment of 

 8 single name CDS and index credit default swaps in 

 9 the proposal, it struck me that the market 

 10 participants who purchase these products will not 

 11 be able to margin them on a portfolio basis. 

 12 Congress gave the SEC and the CFTC a mandate under 

 13 Section 713 of the Dodd-Frank Act to propose a 

 14 joint rule on portfolio margining. Unfortunately, 

 15 we're now at the end of the proposed rule-making 

 16 process and we have not proposed a portfolio 

 17 margining rule. Portfolio margining is 

 18 non-controversial and the entire market wants it. 

 19 And it is one of the few, if not the only, cost 

 20 savings tools in the entire Title VII. 

 21 Now let me turn to the Capital Rule. 

 22 Let me first say that I strongly believe that swap 
 27 

 1 dealers must be adequately capitalized, a swap 

 2 dealer with enough regulatory capital to stand 

 3 behind a trade, give the comfort to 

 4 counterparties. While I realize that 

 5 undercapitalized financial institutions were at 

 6 the heart of the financial crisis, I want to point 

 7 out the commercial entities that used swaps and 

 8 were not the root of the problem. And this 

 9 proposal seems to ignore the flexibility of the 

 10 statute and the congressional direction as it 

 11 relates to the application of capital charges on 

 12 end users. 

 13 With that said, I want to read the 

 14 language of Section 731 of the Dodd-Frank Act 

 15 which states: To offset the greater risk to swap 

 16 dealer in the financial system, capital 

 17 requirements for uncleared swaps shall be 

 18 appropriate for the risk associated with the 

 19 non-cleared swap held by the swap dealer or major 

 20 swap participant. 

 21 I cite this language because I do not 

 22 feel the proposal gives enough consideration to 
 28 

 1 the phrase "as appropriate for the risk." In 

 2 particular, non-bank, non- FCM swap dealers will 

 3 be required to calculate and hold capital for each 

 4 and every swap they enter into with a commercial 

 5 end user, beginning with the first dollar of 

 6 exposure. This regulation provides no thresholds, 

 7 no exemptions, and certainly no consideration of 

 8 the statutory flexibility in the Dodd-Frank Act. 

 9 Just so we're clear, commercial end 

 10 users are cooperatives, captive finance companies, 

 11 farmers, municipalities, and other non-financial, 

 12 non-systemically risky counterparties. If a 

 13 commercial swap dealer does not collect margin 

 14 from the commercial end user, then it must take a 

 15 capital charge equal to its credit risk, exposure 

 16 to the end user, and the market risk of the swap. 

 17 Two outcomes will result from this 

 18 regulation: Either the swap dealer will require 

 19 commercial end users to post margin to avoid 

 20 taking a capital charge or they will point to the 

 21 regulation as a reason to increase the bid-ask 

 22 spread of swaps for end users to cover the capital 
 29 

 1 charge mandated by this rule. Either way, the 

 2 cost of hedging commercial risk for end users is 

 3 going up. 

 4 What I've described is contrary to the 

 5 intent of Congress. I quoted from the 

 6 Lincoln-Dodd letter in the last meeting, but I 

 7 feel compelled to do it again. It says that, 

 8 "Congress clearly stated in this bill that the 

 9 margining capital requirements are not to be 

 10 imposed on end users." The letter goes on to say 

 11 that "the capital in margin standards should be 

 12 set to mitigate risk in our financial system, not 

 13 punish those who are hedging their own commercial 

 14 risk." 

 15 Our proposed capital rule does just 

 16 that. As a result, I will not support this 

 17 proposal. 

 18 Another concern that I have is with the 

 19 impact the rule will have on non-bank, non-FCM 

 20 commercial firms that are likely to be captured by 

 21 the overly broad definition of "swap dealer" 

 22 proposed by the Commission. A non-bank, non-FCM 
 30 

 1 swap dealer is an entity that generates the 

 2 overwhelming majority of its income from 

 3 commercial activities and engages in de minimis 

 4 dealing activities. 

 5 I predict this capital rule, combined 

 6 with a broad swap dealer definition, will drive 

 7 commercial firms to pose little, if any, systemic 

 8 risk to the financial system out of the 

 9 market-making business and concentrate the swap 

 10 dealing business with the Wall Street banks. 

 11 Higher costs and less competition for commercial 

 12 end users is not a proposition I favor, especially 

 13 when I consider the source of the financial 

 14 contagion in 2008. 

 15 Be it as the Commission put forward as 

 16 swap dealer rule-making in December 2010 -- long 

 17 before the capital and margin rules were completed 

 18 -- the swap dealer team did not have the benefit 

 19 of comparing the costs impact to the broad swap 

 20 dealer definition with the margin and capital 

 21 rules proposed in the last two meetings. 

 22 I also believe that the recently 
 31 

 1 released CFDC Inspector General report on 

 2 cost-benefit analysis has appropriately 

 3 highlighted the lack of attention that was paid to 

 4 assessing the true cost of the swap dealer rule in 

 5 the first place. The agency needs to take that 

 6 report very seriously. 

 7 I'm in favor of a complete re-proposal 

 8 of the swap dealer definition rule. The 

 9 re-proposal must narrow the definition of a swap 

 10 dealer and perform a more rigorous analysis of the 

 11 costs of the rule-making to both the market and 

 12 the Commission. 

 13 Finally, let me turn to individual 

 14 segregation. As my colleagues have noted, this is 

 15 a complicated issue on how clear customer 

 16 collateral should be segregated, and this was a 

 17 significant debate back in December. After 

 18 receiving several comments on the proposal, the 

 19 Commission has narrowed its options by eliminating 

 20 the complete physical segregation model from 

 21 consideration. The current proposal leans toward 

 22 adopting a complete legal segregation model. To 
 32 

 1 get this issue right, though, I believe we need to 

 2 continue to consider other options that are viable 

 3 alternatives and let the market decide which model 

 4 best balances higher operational costs against the 

 5 benefit of increased levels of consumer collateral 

 6 protection. 

 7 As a result, I've asked the team to 

 8 consider the current futures model as well, and 

 9 this proposal signals in its preamble that the 

 10 Commission is still considering that alternative. 

 11 I recognize, though, that the futures model 

 12 represents certain challenges to fellow customers 

 13 of an FCM who don't currently have the benefit of 

 14 knowing enough about the risk profile of their 

 15 fellow FCM customers. I'm particularly interested 

 16 in comments regarding how we might address that 

 17 challenge, including requiring certain disclosures 

 18 by FCMs. 

 19 I'm pleased to see that the preamble 

 20 reflects the strong debate inside the Commission 

 21 on the effect of each option under the bankruptcy 

 22 code as well. Finally, I'm pleased that the 
 33 

 1 preamble to this proposal includes language that 

 2 will allow the Commission to adopt a final rule 

 3 which lets a DCO choose which model is right for 

 4 its business. I believe this flexibility allows 

 5 the market to determine which option is the best 

 6 way to move forward in the cleared swaps world. 

 7 All in all, I recognize the hard work of 

 8 the teams and greatly appreciate their efforts in 

 9 putting these extensive and very detailed rules 

 10 together. Thank you. 

 11 CHAIRMAN GENSLER: Thank you, 

 12 Commissioner O'Malia. Thank you to all of my 

 13 fellow Commissioners and I think now the staff 

 14 will present their proposals and recommendations. 

 15 After each of these presentations the floor will 

 16 be open for questions and comments from each of 

 17 the Commissioners and, following that, we'll take 

 18 a vote. 

 19 To that end, let's see, I think I've 

 20 already done this, but it says I'm supposed to ask 

 21 for unanimous consent that final votes on the 

 22 proposed rules be done by recorded vote and it be 
 34 

 1 put in the Federal Register. I thought we did 

 2 that already, always, but in case I hadn't, not 

 3 hearing any objections, we'll do this by recorded 

 4 votes. 

 5 And so then I'm going to turn to this 

 6 team that's been working with the Securities and 

 7 Exchange Commission on further defining swap, 

 8 securities-based swap, securities- based swap 

 9 agreement, and the regulation of mixed swaps as 

 10 the Dodd-Frank was very specific on these matters 

 11 but asked the SEC and CFTC to jointly give further 

 12 clarification. Dan Berkovitz, our general 

 13 counsel, and with him Terry Arbit, Julian Hammar, 

 14 and David Aron from the Office of General Counsel, 

 15 the floor is yours. 

 16 MR. HAMMAR: Good morning. This 

 17 rule-making proposal and interpretive guidance, 

 18 which is being proposed jointly with the SEC, 

 19 further defines the terms swaps, security-based 

 20 swap, and security-based swap agreement. It 

 21 provides for the regulation of mixed swaps and 

 22 addresses books and records requirements for 
 35 

 1 security-based swap agreements. 

 2 I'd like to thank my CFTC colleagues on 

 3 the definitions team, including from OGC, Terry 

 4 Arbit, Mark Fajfar, and David Aron, in particular; 

 5 Dan Berkovitz, our general counsel; and members 

 6 from other divisions, including Rose Troin, Somi 

 7 Seong, and Steve Cane; as well as our SEC 

 8 colleagues, including Brian Bussey on the SEC 

 9 team, for their contributions to the proposal. 

 10 I should say this really was a team 

 11 effort. In a wide-ranging rule-making we tapped 

 12 into the expertise of a lot of people and I'm very 

 13 grateful for that. 

 14 In developing this proposed rule in 

 15 Interpretive Guidance we reviewed more than 80 

 16 written comments in response to an Advance Notice 

 17 Of Proposed Rule-Making that the Commission issued 

 18 last summer. We met with market participants, 

 19 trade associations, and other members of the 

 20 public. We had many meetings with our SEC 

 21 colleagues and consulted with the Federal Reserve 

 22 Board as well as the other credential regulators. 
 36 

 1 We're grateful for the input we've had so far and 

 2 we look forward to continuing to meet with the 

 3 public and our fellow regulators to develop the 

 4 final rules in Interpretive Guidance. 

 5 The Dodd-Frank Act contains detailed and 

 6 specific definitions of the terms "swap" and 

 7 "security-based swap," which were designed to 

 8 comprehensively cover previously unregulated 

 9 derivatives, including interest rate swaps, 

 10 currency swaps, commodity swaps, equity swaps, and 

 11 credit default swaps. We do not believe that 

 12 extensive further definition of these terms is 

 13 necessary. Many commenters to the ANPR pointed 

 14 out, however, if read expansively, the definitions 

 15 could cover other products, such as insurance, 

 16 that traditionally have not been considered to be 

 17 swaps. And nothing in the legislative history of 

 18 the Dodd-Frank Act suggests that Congress intended 

 19 such products to be regulated as swaps or 

 20 security-based swaps. 

 21 To address these concerns raised by the 

 22 commenters, the proposal clarifies that certain 
 37 

 1 products are not swaps or security-based swaps. 

 2 In brief, with respect to insurance -- without 

 3 going into the details -- the proposal provides 

 4 that regulated insurance products that are offered 

 5 by regulated insurance companies are not swaps or 

 6 security-based swaps. 

 7 In addition, commenters to the ANPR 

 8 requested that the Commissions clarify that 

 9 certain consumer and commercial arrangements that 

 10 historically had not been considered swaps or 

 11 security-based swaps -- such as consumer mortgage 

 12 rate locks, contracts to lock the price of home 

 13 heating oil, and contracts related to inventory or 

 14 equipment in someone's business -- should not be 

 15 considered within the swap definition. The 

 16 proposal contains interpretive guidance to clarify 

 17 that these types of products are not swaps or 

 18 security-based swaps. 

 19 Commenters to the ANPR also asked for 

 20 clarification regarding the forward contract 

 21 exclusion from the swap definition. Under the 

 22 Commodity Exchange Act, forward contracts are 
 38 

 1 excluded from futures regulation. The Dodd-Frank 

 2 Act excluded from the swap definition "any sale of 

 3 a non-financial commodity or security for deferred 

 4 shipment or delivery so long as the transaction is 

 5 intended to be physically settled." 

 6 Although the wording of this forward 

 7 exclusion is slightly different than the forward 

 8 exclusion applicable to futures, there is 

 9 legislative history to the Dodd-Frank Act 

 10 indicating that Congress intended that the 

 11 Commissions interpret the two exclusions 

 12 consistently. To implement this congressional 

 13 intent the proposal provides guidance that the 

 14 forward contract exclusion from the swap 

 15 definition with respect to non-financial 

 16 commodities should be interpreted in a manner 

 17 consistent with the CFTC's historical 

 18 interpretation of the forward contract exclusion 

 19 from futures. 

 20 It further clarifies the book-out 

 21 transactions and non-financial commodities that 

 22 meet the requirements specified in the 
 39 

 1 Commission's Brent Interpretation and that are 

 2 effectuated through a subsequent separately 

 3 negotiated agreement should qualify for the 

 4 forward exclusion from swaps in futures. 

 5 Commenters also requested clarification 

 6 regarding the CFTC's 1993 order exempting energy 

 7 contracts from regulation under the CEA, the 

 8 Energy Exemption, after enactment of the 

 9 Dodd-Frank Act. The Energy Exemption basically 

 10 extended the Brent Interpretation and its guidance 

 11 regarding book-outs to energy commodities other 

 12 than oil. Because the proposal extends the Brent 

 13 Interpretation to all the non-financial 

 14 commodities, the proposal would withdraw the 

 15 Energy Exemption as no longer necessary. 

 16 So that wraps up the types of 

 17 transactions the proposal clarifies are not swaps 

 18 or security-based swaps. While, as I mentioned at 

 19 the outset, the definitions of "swap" and 

 20 "security-based swap" are comprehensive, the 

 21 proposal does clarify that a few types of 

 22 transactions in particular are swaps or 
 40 

 1 security-based swaps. For example, foreign 

 2 exchange forwards and swaps are defined as swaps 

 3 subject to the Treasury Secretary's determination 

 4 to exempt them from the swap definition. Even if 

 5 the Treasury Secretary determines to exempt them, 

 6 however, the statute provides that certain 

 7 provisions of the CEA apply to FX forwards and 

 8 swaps and the proposed regulations reflect this. 

 9 The proposal also clarifies that certain 

 10 FX products do not fall within the definitions of 

 11 FX swaps and forwards, and so they are not subject 

 12 to the Treasury's determination to exempt. These 

 13 products include foreign currency options, 

 14 non-deliverable forwards involving foreign 

 15 exchange currency swaps, and cross-currency swaps. 

 16 Outside of the FX suite of products the 

 17 proposal also would clarify that forward rate 

 18 agreements, notwithstanding their forward label, 

 19 are swaps. Proposed guidance would further 

 20 clarify that options and swaps and forward swaps 

 21 are swaps. 

 22 The proposal then turns to the 
 41 

 1 relationship between swaps and security-based 

 2 swaps, how we distinguish the two. The proposal 

 3 specifies a couple of principles about how 

 4 agreements, contracts, or transactions that are 

 5 subject to Title VII of the Dodd-Frank Act -- 

 6 which are referred to in the release as Title VII 

 7 instruments -- are to be classified as swaps, 

 8 security-based swaps, or mixed swaps. That 

 9 classification of a Title VII instrument is to be 

 10 made at the time it is entered into and that 

 11 classification is retained throughout the tenure 

 12 of the instrument unless the instrument is 

 13 materially amended or modified. 

 14 This simple guidance, we believe, is 

 15 meant to ensure that market participants are not 

 16 unnecessarily burdened in determining the 

 17 classification of their Title VII instruments. 

 18 The proposal goes on to clarify whether Title VII 

 19 instruments are swaps, security-based swaps, or 

 20 mixed swaps in certain areas. So, for example, 

 21 clarification is provided regarding whether Title 

 22 VII instruments based on interest rates, monetary 
 42 

 1 rates, and yields are swaps or security-based 

 2 swaps. 

 3 In brief, Title VII instruments based on 

 4 interest rates and other monetary rates, including 

 5 inner-bank offer rates, money market rates, 

 6 government target rates, and so forth, are swaps. 

 7 Title VII instruments based on yields, where yield 

 8 is used as a proxy for price or value of a 

 9 security, loan, or certain security indexes, are 

 10 security- based swaps except in the case of U.S. 

 11 Treasuries and certain other exempted securities 

 12 which the Dodd-Frank provides are swaps. 

 13 In addition, guidance is provided in 

 14 several other areas, including total return swaps 

 15 and Title VII instruments based on futures 

 16 contracts. In a few areas it really sets out 

 17 alternative approaches and requests comment. 

 18 The proposal then turns to the use of 

 19 the term "narrow-based security index" in the 

 20 security-based swap definition. In general, with 

 21 respect to Title VII instruments on security 

 22 indexes, the CFTC has jurisdiction over such 
 43 

 1 instruments on broad-based security indexes while 

 2 the SEC has jurisdiction over Title VII 

 3 instruments on narrow-based security indexes. 

 4 The proposal clarifies that the existing 

 5 criteria for determining whether a security index 

 6 is narrow-based and the past guidance of the 

 7 Commissions regarding those criteria in the 

 8 context of security futures applies to Title VII 

 9 instruments. Credit default swaps are also 

 10 subject to this same jurisdictional division. CDS 

 11 on broad-based security indexes are regulated by 

 12 the CFTC while CDS on narrow-based security 

 13 indexes, as well as CDS on single names or loans, 

 14 are regulated by the SEC. 

 15 The proposal provides new criteria 

 16 tailored to CDS for determining whether CDS is 

 17 based on an index that is a narrow-based security 

 18 index. In addition, it provides guidance 

 19 regarding the term "index" and provides proposed 

 20 rules governing tolerance and grace periods for 

 21 the Title VII instruments on security indexes 

 22 traded on trading platforms. 
 44 

 1 So that's the end of swap and 

 2 security-based swap. Turning to mixed swaps, 

 3 which are both swaps and security-based swaps, the 

 4 proposal expresses the expectation that this will 

 5 be a narrow category. It addresses regulatory 

 6 treatment of bilateral, uncleared mixed swaps 

 7 where one counterparty is a dual registrant with 

 8 CFTC and the SEC. It also establishes a process 

 9 for requesting a joint order from the Commissions 

 10 to determine the appropriate regulatory treatment 

 11 of mixed swaps that do not fall into that 

 12 category. 

 13 With regard to security-based swap 

 14 agreements, or SBSA, the Dodd-Frank Act provides 

 15 the SEC with anti-fraud authority over and access 

 16 to information from certain CFTC regulated 

 17 entities regarding SBSAs, which are a type of 

 18 swap-related securities over which the CFTC has 

 19 full regulatory authority under the statute. The 

 20 proposal provides guidance on SBSAs and clarifies 

 21 that there would not be an additional books and 

 22 records requirements regarding SBSAs other than 
 45 

 1 those that have been proposed by the CFTC for 

 2 swaps. 

 3 The proposal also includes a process for 

 4 members of the public to request a joint 

 5 interpretation from the Commissions regarding 

 6 whether a Title VII instrument is a swap, 

 7 security-based swap, or mixed swap. Finally, it 

 8 includes proposed anti-evasion rules and guidance 

 9 for the CFTC. 

 10 These are the highlights of the 

 11 proposal. Because of time constraints, I've 

 12 necessarily skipped over many details, but if the 

 13 Commission votes today to publish this proposal in 

 14 the Federal Register, the public will be able to 

 15 review it in its entirety and provide comments. 

 16 Again, we would welcome comments on all aspects of 

 17 the proposal. 

 18 Thank you for your attention and I and 

 19 the team would welcome any questions you may have. 

 20 CHAIRMAN GENSLER: Thank you so much, 

 21 Julian and the team. With that I would entertain 

 22 a motion to accept the staff recommendation on 
 46 

 1 this Joint Rule on Product Definition. 

 2 COMMISSIONER SOMMERS: So moved. 

 3 COMMISSIONER O'MALIA: Second. 

 4 CHAIRMAN GENSLER: With that, I guess 

 5 I'm just going to ask a few questions. I do 

 6 support this rule. I think it's -- as Julian 

 7 said, the Dodd-Frank Act is very specific with 

 8 regard to the definition of swap and 

 9 securities-based swap, but the CFTC was directed, 

 10 along with the SEC, to give further definition. 

 11 And we worked closely with the SEC, in 

 12 consultation with the Federal Reserve, on the 

 13 proposed rule to define these terms. 

 14 And we were greatly benefited by the 

 15 public comment. I think it was somewhere in the 

 16 order of 80+ specific comments to the ANPR. But 

 17 even with regard to many other meetings and many 

 18 other commenters, I think that number probably is 

 19 a low count, the 80. And the statute is clear: 

 20 Interest rate swaps, currency swaps, commodity 

 21 swaps, equity swaps, CDS are swaps, and I think 

 22 the rule is consistent with that. 
 47 

 1 And I think where there was ambiguity, 

 2 we've addressed that. Insurance offered by a 

 3 regulated insurance company is not a swap. 

 4 Commercial transactions, what the public normally 

 5 thinks of as commercial transactions or consumer 

 6 transactions, are not swaps. 

 7 And in a very important area for this 

 8 agency is the question of forwards -- forwards in 

 9 the commodity space. And specifically, Congress 

 10 addressed this and said that any sale of a 

 11 non-financial commodity or security for deferred 

 12 shipment or delivery, so long as the transaction 

 13 is intended to be physically settled, that's not a 

 14 swap. We've had something similar -- not 

 15 identical words, but very similar -- in the 

 16 Commodities and Exchange Act since the 1930s, that 

 17 forwards were not futures. And I'm glad to see 

 18 that I think this rule supports that, but we're 

 19 going to look for it in public comment on this as 

 20 well. 

 21 But, Julian, I do have one question in 

 22 that area because it's come up in so many meetings 
 48 

 1 with farm co-ops and energy companies and so 

 2 forth. If somebody has an embedded option in a 

 3 forward, where did we come out on that? 

 4 MR. HAMMAR: Basically, we followed the 

 5 Commission's decision -- recent decision in In re 

 6 Wright and which also followed the OGC 

 7 interpretation from 1985, which basically says 

 8 that if the option is related to price, then we 

 9 won't consider that to be a swap. But if the 

 10 optionality is to delivery, then that's something 

 11 we have to take a look at. 

 12 CHAIRMAN GENSLER: Did we ask further 

 13 questions on that regard, to get public comment, 

 14 particularly in the electricity area? I think I 

 15 seem to have had a recent meeting with a bunch of 

 16 very thoughtful people from electricity companies 

 17 that had some questions on this and wanted to be 

 18 able to comment. So I just want to make sure we 

 19 did include some questions. 

 20 MR. HAMMAR: Yes, we did. 

 21 CHAIRMAN GENSLER: Good. I think 

 22 further, consistent with Dodd-Frank, the proposal 
 49 

 1 clarifies that these issues as to where the line 

 2 is between the SEC and the CFTC, and it took us a 

 3 few extra months, but I think this was time well 

 4 spent because I think it will provide the public 

 5 greater certainty as to the jurisdictional lines 

 6 without creating gaps in the regulatory oversight. 

 7 But I just had a couple questions there and credit 

 8 default swaps. 

 9 So if a credit default swap is on a 

 10 single name or on a narrow group of names it would 

 11 be regulated by the SEC, is that correct? 

 12 MR. HAMMAR: That's correct. 

 13 CHAIRMAN GENSLER: And I thought that 

 14 one provision that's in here that you might 

 15 explain a little bit is what if it was on a broad 

 16 group, maybe even it's 50 or 100 names, but one of 

 17 the counterparties has an opportunity to change 

 18 those names or actually direct what the names are 

 19 after the fact. 

 20 MR. HAMMAR: Well, in that situation, if 

 21 a party does have discretion, then it would be a 

 22 security-based swap or it could be a mixed swap. 
 50 

 1 If the parties do not have that discretion, it's 

 2 set right from the start, then it would be a 

 3 broad-based index and subject to CFTC (inaudible). 

 4 CHAIRMAN GENSLER: Right. So if 

 5 discretion's retained, it's over a security-based 

 6 swap and at the SEC, but if it's what's the 

 7 classic broad-based indices, whether it's sort of 

 8 iTraxx or CDS in this marketplace. Those would be 

 9 considered swaps as I understand it, generally 

 10 speaking. 

 11 And then could you comment on the 

 12 anti-evasion provision a little further as to what 

 13 we did there? 

 14 MR. HAMMAR: Well, essentially what we 

 15 did was our proposed rule further defines as a 

 16 swap a transaction that has been intentionally 

 17 entered into to evade Dodd- Frank Act 

 18 requirements. We are comfortable. Our general 

 19 counsel's comfortable that we have the authority 

 20 to do this. And we think that it makes, you know, 

 21 it makes sense. 

 22 What it would do is we would treat the 
 51 

 1 transaction as a swap and we have intent built 

 2 into it, so that, you know, people will -- you 

 3 know, it will have to be shown that somebody 

 4 intentionally structured it to evade, you know, 

 5 not -- and if they have a valid business purpose 

 6 or something like that, you know, then they have a 

 7 valid defense. So we think it is cabined in 

 8 enough so that, you know, the market won't be, you 

 9 know, chilled. 

 10 CHAIRMAN GENSLER: So what you're -- 

 11 Dan? 

 12 MR. BERKOVITZ: That's correct. We've 

 13 examined the precedent for anti-evasion language 

 14 in other statutes and case law and interpretation, 

 15 and generally agencies are given a wide range in 

 16 applying anti-evasion. We have narrowly crafted 

 17 it, as Julian mentioned, so that it has to be 

 18 structured willfully to evade the definitional 

 19 requirements in order for the instrument to be 

 20 captured within under this provision. And one of 

 21 the factors is whether it's a legitimate business 

 22 purpose for structuring the transaction in that 
 52 

 1 particular manner. But we're comfortable with the 

 2 proposal. 

 3 CHAIRMAN GENSLER: Thank you. 

 4 Commissioner Dunn? 

 5 COMMISSIONER DUNN: Thank you, Mr. 

 6 Chairman. I commend the staff for the tough work 

 7 on putting this interp out. I note that the ANPR 

 8 went out back in August of 2010, with closing in 

 9 September of 2010. And staffs between the CFTC 

 10 and SEC worked jointly on putting these proposals 

 11 together. And as staffs often do, they do have 

 12 different interpretations of who's in charge of 

 13 what. And Mr. Chairman, I commend you and 

 14 Chairwoman Schapiro for the direction given the 

 15 staffs and getting us to where we are. 

 16 Julian, could you elaborate on what are 

 17 the major areas of difference between what the SEC 

 18 is proposing today and what we have here in the 

 19 CFTC proposal? 

 20 MR. HAMMAR: Yes, Commissioner. We have 

 21 -- I guess there are four areas where we have 

 22 differences with the SEC. The first is 
 53 

 1 anti-evasion, although that is because our statute 

 2 requires us to further define swap and 

 3 security-based swap to prevent evasion whereas the 

 4 SEC has discretionary authority to do so under the 

 5 statute. And so they are requesting comment on 

 6 the issue. 

 7 So the remaining three are the ones that 

 8 staff had differences on and those are insurance 

 9 on swaps, whether they should be regulated swaps 

 10 or security-based swaps; swaps linked to futures 

 11 on the 21 foreign sovereign debt securities that 

 12 SEC has exempted for purposes of futures trading; 

 13 and the last one is with respect to index CDS, 

 14 whether if the index is provided by a third party 

 15 index provider and it's listed for trading on a 

 16 DCM, SEF, or registered FBOT, whether that should 

 17 be under the CFTC's jurisdiction and satisfy 

 18 what's called the public information test prong of 

 19 the index CDS test. 

 20 But, you know, overall, you know, in my 

 21 judgment, I mean, this is an over 300-page 

 22 document. The staffs did reach agreement on a lot 
 54 

 1 of topics and on a comprehensive rule-making 

 2 covering various topics. So I -- you know, we do 

 3 have these areas, but, you know, we expressed our 

 4 different views. And we're requesting comment to, 

 5 hopefully, better inform you and they to inform 

 6 the SEC on the appropriate treatment of these 

 7 products. 

 8 COMMISSIONER DUNN: I note that there is 

 9 a provision that a person can ask for a joint 

 10 interpretation when they seem to be at loggerheads 

 11 and that there is a period of time that the two 

 12 commissions are required to answer that request 

 13 for a joint interpretation. Could you amplify on 

 14 that a bit? 

 15 MR. HAMMAR: Sure. Yes, under the 

 16 process the two commissions would have 120 days in 

 17 order to make a determination, you know. Based on 

 18 our past experience and, you know, some of these 

 19 new products with the SEC, you know, lots of times 

 20 these things have gone on, you know, for years 

 21 sometimes. And so we thought that, you know, it 

 22 would be good to have a process where people can 
 55 

 1 come in, request an interpretation about the 

 2 status of their instrument, and within a set 

 3 timeframe. And moreover, if we can't do it in the 

 4 120-day period of time, we will publicly state our 

 5 reasons why we can't so that there is 

 6 accountability as well. So we think that that is 

 7 a very good proposal. 

 8 COMMISSIONER DUNN: Thank you, Julian. 

 9 Mr. Chairman, I know other commissioners have 

 10 questions, so I'll yield back to you. 

 11 CHAIRMAN GENSLER: Thank you, 

 12 Commissioner Dunn. Commissioner Sommers? 

 13 COMMISSIONER SOMMERS: Thank you, Mr. 

 14 Chairman. I have a couple of different questions, 

 15 first of all, on the issue that I raised in my 

 16 opening statement on the multilateral development 

 17 institutions. 

 18 And I have a question with regard, I 

 19 guess, first of all, to say thank you for the 

 20 discussion and questions that you had drafted that 

 21 were in the earlier draft, but to ask whether or 

 22 not you believe that there are any specific 
 56 

 1 concerns that you have with asking these 

 2 questions. I intend on putting them in a dissent 

 3 and ask you if you have any concerns with asking 

 4 questions with regard to their concerns. 

 5 MR. ARBIT: Commissioner, we have 

 6 included those questions in the draft for sort of 

 7 discussion purposes, and they certainly serve that 

 8 purpose. As staff thought about the issues some 

 9 more which had come up kind of late in our process 

 10 our concern about it was that it was focusing, as 

 11 you say, on a very legitimate question, but in the 

 12 wrong place. This is a product definition 

 13 rule-making whereas Julian was explaining we're 

 14 trying to provide guidance to the public what is a 

 15 swap, what isn't a swap, and how you distinguish 

 16 swaps from security-based swaps. I think 

 17 everybody agrees that these products by these 

 18 multilateral development institutions are swaps. 

 19 So staff was reluctant to ask questions about 

 20 whether there should be exclusions to the swap 

 21 definition based on the party that's entering into 

 22 the transaction. I think that's -- to use the 
 57 

 1 phrase -- the very slope that we prefer not to go 

 2 down. 

 3 We have met with some of these 

 4 organizations and what we have stressed to them is 

 5 that what staff believes would be more helpful 

 6 information, the questions would be more helpful 

 7 to us, is to talk about these entities and these 

 8 transactions in the context of the specific 

 9 requirements of Dodd-Frank: The clearing 

 10 requirement, capital margin requirements, 

 11 reporting requirements. And help us try to 

 12 understand where difficulties may exist and where 

 13 there may not be difficulties. If they're carved 

 14 out of the soft definition, they're out, the 

 15 counterparties are out, and that was the concern. 

 16 It may be that there are good and valid reasons 

 17 why certain requirements under Dodd- Frank should 

 18 not apply and those are questions that we would 

 19 much prefer to be discussing with these kinds of 

 20 organizations. 

 21 COMMISSIONER SOMMERS: I appreciate 

 22 that. I don't have a specific solution in mind 
 58 

 1 for how to take care or address their concerns. 

 2 But because we have not included any of these 

 3 questions in previous proposals, I'm just hoping 

 4 that by including some questions with regard to 

 5 it, we'll be able to get comment and then put it 

 6 in wherever staff agrees is an appropriate place. 

 7 An additional question I have on this 

 8 subject is with regard to their comment letter, 

 9 which is on behalf of a number of the multilateral 

 10 development institutions, and they reference 

 11 different privileges and immunities that are 

 12 conferred on them by a series of statutes dating 

 13 back to Bretton Woods. And I'm wondering whether 

 14 you have analyzed our regulation of the activities 

 15 of these entities and whether or not they would 

 16 conflict with any of these other statutes and the 

 17 immunities or privileges that have been granted to 

 18 them. 

 19 MR. ARBIT: We have read those letters 

 20 and we have considered the issue. I don't think 

 21 we've reached, from staff's point of view, a firm 

 22 judgment on it. Those certainly are important 
 59 

 1 questions that we do need to determine how, when 

 2 Congress layered on the Dodd-Frank, how that does 

 3 apply to preexisting statutory regimes. And so 

 4 there is the question of the authority and the 

 5 extent to which the Commission can reach some of 

 6 these activities. We welcome comment on that 

 7 question. 

 8 I would also say in a related vein, 

 9 because you had -- Commissioner, you referenced 

 10 the multilateral development institutions, but 

 11 there's, you know, various other sorts of 

 12 international organizations as well. And the 

 13 question of the extra territorial reach of Title 

 14 VII is also a question that just permeates all of 

 15 the efforts that the Commission is undertaking. 

 16 We got some very thoughtful comment letters in 

 17 response to various proposed rule- makings and the 

 18 Commissioner's extra territorial application of 

 19 Title VII, and those are issues that the staff is 

 20 working on as people start looking to develop 

 21 final rules on the specific requirements. 

 22 COMMISSIONER SOMMERS: Thank you. I 
 60 

 1 think for the record I'd also like to note that in 

 2 the EU draft, EMIR considers the status of these 

 3 entities and suggests that their regulation will 

 4 not apply to them. So in order to be consistent 

 5 with our international counterparts, I think that 

 6 this is something that we should consider. 

 7 On a couple of other issues where we 

 8 have inconsistencies and in reference to 

 9 Commissioner Dunn's question with regard to where 

 10 there are differences, I'm wondering on both of 

 11 the issues of the insurance wraps and the futures 

 12 on sovereign debt, I'm wondering what your 

 13 concerns would be with taking the SEC's approach 

 14 on either one of those issues, and specifically on 

 15 the insurance wraps. Would those policies go 

 16 unregulated if we were to adopt the SEC's 

 17 approach? 

 18 MR. HAMMAR: Well, I guess, in the case 

 19 of insurance on swaps that would really be up to 

 20 the state regulators how they would want to 

 21 address that if, you know, we didn't deal with it. 

 22 And I guess, you know, we were concerned with 
 61 

 1 respect to the mono lines, that this was an issue. 

 2 And, you know, we are -- you know, we haven't sort 

 3 of definitively stated that insurance on a swap is 

 4 a swap. We are requesting comment on it, though, 

 5 because of the economic similarities that we think 

 6 that could be drawn between the two. And, you 

 7 know, I guess, you know, we haven't really made up 

 8 our minds on that issue yet. So I think it's just 

 9 a matter of we'd like to get comment from the 

 10 public and, you know, see what they come back 

 11 with. 

 12 On foreign sovereign debt, I guess the 

 13 issue there really is that, you know, futures on 

 14 the foreign sovereign debt are traded on our 

 15 regulated markets, designated contract markets. I 

 16 think the CME just announced that they're going to 

 17 do yield spreads on the foreign sovereigns, 

 18 futures on them. And, you know, the issue is 

 19 really, you know, a guiding principle of Dodd- 

 20 Frank was whatever we had regulation over in 

 21 futures, we would have regulation over swaps in 

 22 order to prevent, you know, things like gaming and 
 62 

 1 arbitrage and, you know, that our regulatory 

 2 regime would apply. The SEC, though, has a 

 3 concern on their side because security-based swaps 

 4 and foreign sovereigns, the instruments 

 5 themselves, are subject to them as security-based 

 6 swaps. And so they see swaps on futures as a way 

 7 to game or get out of the SEC's regulatory regime. 

 8 I don't know what the resolution will be 

 9 and we're hoping to get some, you know, good 

 10 comments from the public how to deal with it, but 

 11 that's the approach we've taken. 

 12 COMMISSIONER SOMMERS: Thank you. I 

 13 appreciate that. I just want to say specifically 

 14 to this team I know that you've had lots of long 

 15 months and long hours putting all of this 

 16 together, and we realize that a lot of your 

 17 disagreements have ended in positive resolution, 

 18 so appreciate all of your hard work. 

 19 CHAIRMAN GENSLER: I would echo that and 

 20 extend that to the SEC, who's meeting today, too, 

 21 because there were a remarkable number of places 

 22 that the two staffs and the two commissions could 
 63 

 1 find disagreement and there were hundreds of 

 2 places where we found resolution and agreement. 

 3 And if there's two or three that we're asking the 

 4 public for further help on, it's really -- to 

 5 bring more into the discussion on these two or 

 6 three and, of course, bring the public into where 

 7 we've reached resolution as well. Because, you 

 8 know, final rules always change from the 

 9 proposals. 

 10 Commissioner Chilton? 

 11 COMMISSIONER CHILTON: Thank you, Mr. 

 12 Chairman. The one thing about following 

 13 Commissioner Sommers is a lot of times it hurts my 

 14 interest in something, so thank you for that, 

 15 Jill. 

 16 I'm curious, Mr. Berkovitz, if the 

 17 questions in Commissioner Sommers dissent get 

 18 comments, can we include those comments as part of 

 19 the decision-making process for the rule, the 

 20 final rule? And if the Commissioner, 

 21 theoretically, all thought that the comments said 

 22 something and that we wanted to make a change 
 64 

 1 reflective of the questions, is that something we 

 2 could incorporate in a final rule? 

 3 CHAIRMAN GENSLER: Dan, can you broaden 

 4 it to final rules? Because it might elicit 

 5 comments on other rules. 

 6 MR. BERKOVITZ: Yes, Commissioner 

 7 Chilton and Mr. Chairman, that if we did receive 

 8 comments on those questions, the Commission would 

 9 be able to consider them and evaluate them and 

 10 incorporate responses into the final rules. We 

 11 would be able to do that. 

 12 COMMISSIONER CHILTON: Okay. So we have 

 13 the latitude to alter the rule because of the 

 14 questions that are asked in a dissent? 

 15 MR. BERKOVITZ: If the comment is 

 16 submitted to the Commission it wouldn't 

 17 necessarily depend on how the comment or what 

 18 motivated the comment or what prompted the 

 19 commenter to submit that comment. As long as the 

 20 comment was relevant to the Commission's rule and 

 21 pertained to something in the Commission's rule, 

 22 the Commission could consider it in many instances 
 65 

 1 if it was a material comment that went to a 

 2 material comment that went to the substance of the 

 3 rule the Commission would be actually obligated to 

 4 consider it, so. 

 5 COMMISSIONER CHILTON: I'm sorry. Then 

 6 I'm just wondering, Dan, is it an easier mechanism 

 7 for the public to comment on a question that the 

 8 Commission would ask as part of the rule as 

 9 opposed to an individual commissioner -- in this 

 10 case Commissioner Sommers -- asking as part of her 

 11 dissent? I mean, would it be an easier logistical 

 12 mechanism for the staff to be looking at these 

 13 questions as part of the actual proposal as 

 14 opposed to as part of a commissioner's dissent? 

 15 MR. BERKOVITZ: In terms of the staff 

 16 reviewing the comments, it's been my experience 

 17 and my observation to date -- and we've gotten 

 18 many, many, many comments and the staff is working 

 19 very hard to summarize all of the comments. We 

 20 have a late comment policy where it's 

 21 discretionary to consider them and we have 

 22 considered them in a number of instances, and 
 66 

 1 staff has to date been able to incorporate all of 

 2 those to the same extent. So to date we've been 

 3 able to accommodate all the comments regardless 

 4 of, as I said, what might have motivated the 

 5 commenter. I hope I'm answering the question. I 

 6 might have missed it. 

 7 CHAIRMAN GENSLER: There's a mechanical 

 8 thing on a joint rule, if I might, Commissioner 

 9 Chilton, that this is a joint rule with the SEC 

 10 that they're voting on at the same time. So that 

 11 also is sort of a unique circumstance on this 

 12 right here. 

 13 COMMISSIONER CHILTON: So, Mr. Chairman, 

 14 so are you suggesting that if we added questions 

 15 in our proposal that that might cause some 

 16 idiosyncratic issues with the SEC's proposal? 

 17 CHAIRMAN GENSLER: Well, actually I 

 18 don't think we can just as a matter of -- like 

 19 their vote -- I don't know if they voted on it 10 

 20 minutes ago or in half an hour from now. They're 

 21 meeting today and voting on a joint rule in the 

 22 same document. 
 67 

 1 COMMISSIONER CHILTON: Well, let me just 

 2 ask Mr. Berkovitz -- unless you know, Mr. Chairman 

 3 -- would questions somehow obfuscate the actual 

 4 thing that we're doing in the rule or do we have 

 5 to have it just letter for letter, you know, 

 6 dotted I for dotted I on the proposal? 

 7 MR. BERKOVITZ: Well, let me try to 

 8 answer that. I hope I'm answering the right 

 9 question. 

 10 Clearly, if the questions are within the 

 11 four corners of the Commission's proposal, the 

 12 proposal that the Commission has put forth -- and 

 13 the Commission in the this case, the joint 

 14 commissions -- if the questions are within that 

 15 document and the Commission considered a comment 

 16 that was resulting from those comments and then 

 17 the Commission in the final rule went a certain 

 18 direction because of those comments, the 

 19 Commission -- and it varied from the proposed rule 

 20 -- the Commission would have a very strong case 

 21 that what it was doing was a logical outgrowth and 

 22 the public was on notice that the Commission was 
 68 

 1 considering this alternative. 

 2 If it's just in the case of a 

 3 commissioner through a separate opinion or through 

 4 a public speech r something outside of the four 

 5 corners of that document that suggest to people 

 6 please submit your comments, we will consider 

 7 them, as I said, the staff is obligated to 

 8 consider the comment no matter how it's received 

 9 if it's on the rule. It might be more difficult 

 10 for the Commission to modify the final rule as a 

 11 logical outgrowth and that the public was on 

 12 sufficient notice if it came through one of those 

 13 different avenues rather than the four corners of 

 14 the text. But that might be a different -- where 

 15 it would make a difference. But, then again, it 

 16 would depend on the circumstances or particular 

 17 circumstances of the rule. 

 18 COMMISSIONER CHILTON: All right. Thank 

 19 you. Well, I commend Commissioner Sommers for 

 20 asking some questions and I hope we get comments 

 21 on them. 

 22 I just have one final thought and that 
 69 

 1 is that this group has done a really good job on 

 2 what I know is an arduous task. I remember right 

 3 when Commissioner Sommers and I started I had a 

 4 meeting with -- I won't say who, but one 

 5 individual who was concerned about an issue that 

 6 Commissioner Sommers had also raised a bunch of 

 7 times on portfolio margining. And this individual 

 8 said, well, that won't get resolved until 

 9 so-and-so at the SEC dies or retires. And that's 

 10 not the way that government should work. You 

 11 know, the staff could only do so much and then it 

 12 will come up to the commissioners. And I think 

 13 there's been some lack of leadership over the 

 14 years because the staff just comes to loggerheads. 

 15 And so this will require us on some of these 

 16 issues that haven't been resolved to actually make 

 17 a decision, and I look forward to doing so in a 

 18 deliberative process, but one that's also 

 19 expeditious and realizes the urgency of doing some 

 20 of these things. 

 21 Thank you, Mr. Chairman. 

 22 CHAIRMAN GENSLER: Thank you, 
 70 

 1 Commissioner Chilton. Commissioner O'Malia? 

 2 COMMISSIONER O'MALIA: Thank you. And 

 3 following Jill and then following Bart, I always 

 4 learn something and I think that discussion, 

 5 Commissioner Chilton, was very helpful and I 

 6 appreciate you asking those questions. 

 7 Julian, I would like to go back to the 

 8 insurance wrap issue. And if you could just 

 9 characterize the differences between the two 

 10 positions right now and just enlighten me to the 

 11 thinking behind why we came up with two different 

 12 proposals. 

 13 MR. HAMMAR: Yes. Well, Commissioner, 

 14 the SEC believes that insurance on a 

 15 security-based swap should not be considered a 

 16 security-based swap. And in the preamble, we ask 

 17 the -- we say that the insurance may have, you 

 18 know, characteristics that, you know, what we're 

 19 asking about is, you know -- what we're really 

 20 trying to do is just how we distinguish it or, you 

 21 know, are they the same? You know, what -- you 

 22 know, how do we deal with it? And so we're asking 
 71 

 1 comments about, you know -- because the thing is 

 2 if, you know, you're insuring a swap, you know, in 

 3 some sense you are, you know, taking on the 

 4 economic exposure of the counterparty to the swap. 

 5 And, you know, in the case of CDS in particular, 

 6 the distinction is quite blurry and so we are 

 7 requesting comment on it. 

 8 COMMISSIONER O'MALIA: Yes. Well, I 

 9 think it's a great question because I do agree 

 10 that it is a blurry area, I mean, especially with 

 11 some of the products that have come out related to 

 12 CDS. So I think I'm quite comfortable with that. 

 13 Let me ask you about the forward 

 14 exclusion. As I read it the forward exclusion 

 15 would consider to work the same way after this 

 16 rule is implemented as it works today. Is that 

 17 your -- is that the consensus of what your reading 

 18 is? 

 19 MR. HAMMAR: Yes. That's essentially 

 20 correct. We are extending it to all non-financial 

 21 commodities, though, which in the past was the 

 22 Brent oil and then Energy expanded it to certain 
 72 

 1 other energy commodities. And we are -- but the 

 2 basic gist of it, the book-out transactions would 

 3 be excluded if they're entered into by commercials 

 4 in reliance on the guidance and brand interp. 

 5 COMMISSIONER O'MALIA: Okay. I am a 

 6 little uncertain about a fix for floating interest 

 7 rate swap entered into in connection with a bond 

 8 offering made by a municipality or a loan given to 

 9 a corporation. So will we have jurisdiction over 

 10 the swap or does the SEC have jurisdiction over a 

 11 floating fix for -- 

 12 MR. HAMMAR: If it's an interest rate 

 13 swap we would have jurisdiction. 

 14 COMMISSIONER O'MALIA: Okay. The FTR 

 15 process, who will have to apply for an FTR 

 16 exemption under the provision we've provided, 

 17 under 722? 

 18 MR. HAMMAR: That's right. Yes, we 

 19 aren't actually addressing that issue in this. We 

 20 are saying that people will have to go through the 

 21 Section 722 process to list an exemption. 

 22 COMMISSIONER O'MALIA: Okay. If we 
 73 

 1 exempt the FTR from regulation under this separate 

 2 process could you -- and maybe this is outside 

 3 your reach here, but will the RTO or ISO that that 

 4 FTR trades on also be exempt from regulation? Are 

 5 we regulating the product or the entity? 

 6 MR. ARON: Well, actually I think that's 

 7 part of a separate team going to brief you. Is it 

 8 tomorrow? So that's what that other team is 

 9 considering right now. You know, they're coming 

 10 in actually Friday again and speaking to, you 

 11 know, Bob Wasserman and the rest of our team about 

 12 that, so, you know, it's going towards an order on 

 13 that, but to be determined by the Commission, of 

 14 course. 

 15 COMMISSIONER O'MALIA: Great, thank you. 

 16 Again, let me offer my -- you know, there's no way 

 17 I'm going to go through all 300 pages and 

 18 questions and ask you every question I have on 

 19 this one, but I do think time is overdue for this 

 20 rule-making. It is essential going forward, so 

 21 I'm pleased to get comment on it. It is 

 22 complicated, it is extensive, and I know the 
 74 

 1 public will need plenty of time to take a look and 

 2 digest all of this. So I'm happy to put it out 

 3 and support this to get the comment on it and look 

 4 forward to all the input coming back. So thank 

 5 you very much for all your hard work. 

 6 CHAIRMAN GENSLER: I do have one 

 7 question, Dan, if I -- because I thought 

 8 Commissioner O'Malia was talking about this issue 

 9 of electricity contracts traded on regional 

 10 transmission organizations and ISOs as well. And 

 11 it might be helpful for the public just if you 

 12 want to give a little briefing. I know it's 

 13 unusual, but just take two minutes and say, where 

 14 does his stand. I know some of the -- you've had 

 15 not just you, but the clearing folks and other 

 16 folks have had extensive meetings with these 

 17 organizations and they do plan to put an order and 

 18 -- put a request in front of us. But could you 

 19 give us a little bit more? 

 20 MR. BERKOVITZ: Yes, Mr. Chairman, and I 

 21 think this is consistent with the approach Terry 

 22 was mentioning earlier in connection with how to 
 75 

 1 treat the consequences of something being a swap 

 2 or not. These instruments are instruments that 

 3 are used by regional transmission organizations 

 4 and participants in the electricity market to 

 5 provide some type of financial protection, 

 6 financial certainty for -- in the transmission of 

 7 electricity. The question that the agency has 

 8 been asked is, are these swaps? And if they're 

 9 swaps, how would they be regulated? These 

 10 instruments are used in regional transmission 

 11 organizations which are basically regulated by 

 12 FERC, so there's the question of whether it's CFTC 

 13 or FERC regulation. 

 14 Congress provided in Dodd-Frank a 

 15 specific provision that if the Commission finds 

 16 it's in the public interest to exempt these from 

 17 regulation, that these instruments that are within 

 18 FERC's jurisdiction, that it shall do so. So we 

 19 have received many requests are these swaps, and 

 20 the agency -- the staff's response is we will 

 21 treat these through the process that Congress set 

 22 out in Section 4(c) to consider whether they 
 76 

 1 should be exempted. So the regional -- we've been 

 2 on occasion discussions with the regional 

 3 transmission organizations and these participants 

 4 in the electricity market to determine what would 

 5 be the appropriate terms and conditions of any 

 6 exemptive order that the Commission would consider 

 7 so that we could make such a public interest 

 8 finding and not regulate these instruments. 

 9 We've been in discussions with the 

 10 regional transmission organizations. We have had 

 11 a very productive interchange of -- exchange of 

 12 information, the types of information that we 

 13 would need to make such a finding that it would be 

 14 in the public interest for an exemption to be 

 15 issued; the types of information that we would 

 16 need them -- to be submitted from them. And that 

 17 process, that dialogue is going back and forth 

 18 with the ultimate goal that they would be able to 

 19 submit a document to us that we could consider. 

 20 CHAIRMAN GENSLER: I thank you. I don't 

 21 know if any of them are listening, but I look 

 22 forward -- I personally look forward to their 
 77 

 1 submission. I think that would be very 

 2 constructive and consistent with congressional 

 3 intent, so that'd be good. 

 4 And I also want to thank all my fellow 

 5 commissioners, particularly on this rule. I know 

 6 that you've been patient. There's been the staff 

 7 negotiations. There's even been the chairman 

 8 negotiations. But I really -- and I thank you for 

 9 highlighting the need for this one to be done and 

 10 so a personal thanks to all of you that gave me 

 11 your support and the staff support to end up with 

 12 what I think is nearly total agreement with the 

 13 SEC. There are these two or three items, but -- 

 14 and I look forward to the public. 

 15 But with that, Mr. Stawick, would you 

 16 care to call the roll? 

 17 MR. STAWICK: 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. 
 78 

 1 Commissioner Sommers? 

 2 COMMISSIONER SOMMERS: No. 

 3 MR. STAWICK: Commissioner Sommers, no. 

 4 Commissioner Dunn? 

 5 COMMISSIONER DUNN: Aye. 

 6 MR. STAWICK: Commissioner Dunn, aye. 

 7 Mr. Chairman? 

 8 CHAIRMAN GENSLER: Aye. 

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

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

 11 nays are one. 

 12 CHAIRMAN GENSLER: The vote being in the 

 13 affirmative I look forward to hearing from the SEC 

 14 if their vote's affirmative, and then I guess 

 15 we'll jointly send it to the Federal Register. 

 16 But I thank you so much. 

 17 And whoever is up next, is it capital or 

 18 segregation? Who is it? Segregation, Mr. 

 19 Wasserman and team. 

 20 I also want to thank -- I see Dave 

 21 Johnson came back for a cameo. Dave Johnson's one 

 22 of our excellent staff who now works for Senator 
 79 

 1 Pat Roberts and it's just always good to see 

 2 alumni here. 

 3 The next group of presenters will 

 4 include Bob Wasserman, John Lawton, Nancy 

 5 Schnabel, Laura Astrada -- all from the 

 6 Commission's Division of Clearing and Intermediary 

 7 Oversight -- as well as Martin White from the 

 8 Office of the General Counsel. They'll present 

 9 the staff report on the proposed rule concerning 

 10 protection of cleared swaps, of customer contracts 

 11 and collateral. There's also certain conforming 

 12 amendments to the commodity broker bankruptcy 

 13 provision. We benefited by significant public 

 14 input through Advance Notice of Proposed 

 15 Rule-Making and many other meetings. So I turn it 

 16 over to the team. 

 17 MR. WASSERMAN: Thank you, Mr. Chairman. 

 18 I'm Bob Wasserman, lead for the Segregation 

 19 Bankruptcy Team. And I'd first like to express my 

 20 deep appreciation to my deputy, Nancy Liao 

 21 Schnabel, and the other members of the team; 

 22 Martin White of the Office of General Counsel; my 
 80 

 1 DCIO colleagues Laura Astrada, Jon DeBord, and 

 2 Jennifer Bauer; and from the Office of Chief 

 3 Economist David Reiffen and Todd Prono. This work 

 4 simply could not have happened without their 

 5 assistance. 

 6 As the Chairman mentioned, last November 

 7 the Commission published an advanced notice 

 8 proposed rule- making seeking to obtain comment 

 9 about the issues of segregation and bankruptcy 

 10 and, in particular, cost issues relating to four 

 11 models: A model for complete physical 

 12 segregation; a model for complete legal 

 13 segregation that had been referred to as legal 

 14 segregation with commingling; a model for legal 

 15 segregation with recourse that had been referred 

 16 to as moving customers to the back of the 

 17 waterfall; and the futures model which had been 

 18 referred to as the baseline model. 

 19 The Commission asked members of the 

 20 public to detail the costs they would incur and 

 21 the benefits they would enjoy under those 

 22 potential models. We received more than 30 very, 
 81 

 1 very thoughtful comments from swaps customers, 

 2 investment managers, futures commission merchants, 

 3 and derivatives clearing organizations. These 

 4 comments included a variety of keen observations: 

 5 That swaps are significantly different from 

 6 futures; that swaps customers were accustomed to 

 7 bearing the cost and enjoying the benefits of 

 8 individual collateral protection; that the futures 

 9 model includes implicit costs to customers; and 

 10 that the moral hazard issue applies both to 

 11 derivatives clearing organizations' incentive to 

 12 risk manage its FCM members as much as to a 

 13 customer's incentive to risk manage its FCM. 

 14 In the comments derivatives clearing 

 15 organizations and firms expressed great concerns 

 16 about the costs and about the very real transfer 

 17 of wealth they would bear if customer collateral 

 18 were protected individually. With mandatory 

 19 clearing of swaps baseline amounts of all cleared 

 20 swaps, customer collateral margin that is, and 

 21 clearing guarantee funds. Amounts required 

 22 completely independent of this rule-making will be 
 82 

 1 many times larger than the corresponding amounts 

 2 for futures today. Under the assumptions in those 

 3 comments, one or both of these amounts would 

 4 increase significantly depending on the model for 

 5 customer collateral protection adopted by the 

 6 Commission. 

 7 ISDA noted the critical importance of 

 8 the ability to support positions of non-defaulting 

 9 swaps customers in the event of an FCM insolvency 

 10 rather than liquidating those positions en masse. 

 11 And the DCO observed that an FCM default could be 

 12 perceived by a gradual decline during which 

 13 customers transferred positions and collateral to 

 14 other FCMs, thereby rendering reliance on the 

 15 collateral of those customers for use in a default 

 16 scenario, potentially imprudent, and calling into 

 17 question some of the cost estimates discussed 

 18 previously. 

 19 As part of this process, we've also 

 20 consulted with fellow financial regulators, both 

 21 domestically and outside the U.S. In light of 

 22 these comments, and in particular the fact that 
 83 

 1 (inaudible) side commenters indicated that they're 

 2 accustomed to bearing the cost of individual 

 3 collateral protection and the importance of 

 4 portability, the Notice of Proposed Rule-Making 

 5 before you proposes the complete legal segregation 

 6 model. Staff believes that this model strikes the 

 7 best balance between achieving the goals of 

 8 customer collateral protection and fostering 

 9 portability at the least cost. 

 10 The cost, however, does remain a 

 11 continuing concern. And as a number of 

 12 commissioners have alluded to earlier, the NPRM 

 13 asked for comment on a very broad and deep variety 

 14 of questions concerning alternative models, 

 15 including legal segregation with recourse, the 

 16 futures model, and various optional models. 

 17 The discussions of optionality note the 

 18 limitations of the bankruptcy code, in particular 

 19 the requirement for ratable distribution. We look 

 20 forward to comments on these issues to help us 

 21 decide how to proceed. 

 22 I should note that this Notice of 
 84 

 1 Proposed Rule- Making has a fairly wide scope of 

 2 areas for natural outgrowth. 

 3 I'd like to spend just a few moments 

 4 discussing some of the specifics in the proposed 

 5 regulations. I should note that regulations in 

 6 proposed Part 22 apply only to cleared swaps 

 7 contracts and collateral. They do not affect 

 8 futures or futures customer collateral. 

 9 Sections 22.1 through 22.10 in the 

 10 proposal set forth the basic architecture for 

 11 segregation cleared swaps customer collateral and 

 12 mostly parallel or in a number of cases 

 13 incorporated by reference Regulations 1.20 to 1.30 

 14 and 1.49, which are the corresponding regulations 

 15 for futures. The definitions in Section 22.1 

 16 embody a recognition that 4(d) orders that the 

 17 Commission has issued previously which permit 

 18 commingling in a futures account of foreign 

 19 futures or swaps transactions now under Dodd-Frank 

 20 may also be issued pursuant to 4(d)(f) of the 

 21 Commodities Exchange Act to permit commingling in 

 22 the swaps account of exchange-traded futures or 
 85 

 1 foreign futures transactions. 

 2 To have cleared swaps accounts treated 

 3 in accordance with U.S. bankruptcy law, Regulation 

 4 22.8 in the proposal requires that the situs of 

 5 the account relationship between FCMs and their 

 6 cleared swaps customers and between DCOs and their 

 7 FCM members be located in the U.S. That speaks to 

 8 the account relationship. The location of the 

 9 actual collateral is regulated in 22.9 and 

 10 incorporates the existing Regulation 1.49 as it 

 11 applies to futures or, indeed, 1.49 as it may be 

 12 changed in the future. 

 13 Proposed Regulations 22.11 through 22.16 

 14 implement the complete legal segregation model, 

 15 establishing a structure by which risk information 

 16 is passed upstream daily. Swaps may be cleared 

 17 through a multi-tier system with certain FCMs 

 18 clearing swaps directly and other FCMs clearing 

 19 swaps for customers through one or more 

 20 intermediate FCMs. 

 21 22.11 requires clearing member FCMs to 

 22 daily provide their DCOs information identifying 
 86 

 1 the portfolio cleared for each swaps customer. 

 2 22.12 requires DCOs to calculate daily 

 3 the amount of collateral required for each 

 4 customer. A DCO, however, will not be required to 

 5 monitor whether a cleared swaps customer has, in 

 6 fact, posted sufficient collateral. If not, the 

 7 FCM essentially will have made a loan outside of 

 8 the relationship with the DCO. 

 9 Proposed Regulation 22.13 sets forth two 

 10 tools that DCOs may use to manage the risks they 

 11 incur. A DCO may increase the collateral required 

 12 of particular cleared swaps customers or may 

 13 require FCM members to post additional collateral 

 14 out of their own funds. And I should note that 

 15 these tools are neither mandatory nor exclusive. 

 16 Proposed Regulation 22.14 requires an 

 17 FCM that fails to meet a margin call to provide 

 18 such information and collateral from 

 19 non-defaulting swaps customers as it has. 

 20 And 22.15 requires a DCO to treat the 

 21 collateral of each cleared swaps customer as 

 22 belonging to that customer. I should note that 
 87 

 1 what is protected is the value of the collateral, 

 2 not any specific item. I should also note that 

 3 the proposed rule-making discusses the changes to 

 4 22.15 that would be made in the event the 

 5 Commission were to choose to adopt the segregation 

 6 -- excuse me, the legal segregation with recourse 

 7 model. And I should also note that if the 

 8 Commission were to choose to adopt the futures 

 9 model, essentially a number of these provisions 

 10 would not need to be adopted. So, in other words, 

 11 they would not be replaced, but rather some would 

 12 be pulled back. 

 13 I'm going to take just a few moments to 

 14 talk about the cost of supervision and oversight, 

 15 another issue that was of concern that was 

 16 mentioned previously. Day-to- day implementation 

 17 of these proposed rules is sufficiently similar to 

 18 the existing futures rules that for any model that 

 19 the Commission may adopt on final rule-making we 

 20 do not expect a significant difference in 

 21 monitoring, methodology, or cost over the present, 

 22 either with respect to DSRO supervision if they're 
 88 

 1 member FCMs or with respect to CFTC staff 

 2 supervision of DCOs. 

 3 Now, again, I'm speaking solely with 

 4 respect to this rule. Obviously there are a lot 

 5 of complications introduced by Dodd-Frank in terms 

 6 of clearing swaps, and I'm not speaking of 

 7 additional costs there, just with respect to this 

 8 rule. And I should also note that because of the 

 9 changes in risks, DCOs may well change the 

 10 intensity of their supervision of their members' 

 11 risk management of customers. 

 12 The amendments to Part 190, the 

 13 Commission's FCM bankruptcy regulations, are 

 14 technical and conforming. For example, references 

 15 to DCMs are amended to include parallel references 

 16 to swaps execution facilities. Some amendments do 

 17 apply to exchange-traded futures, but only with 

 18 respect to an FCM and bankruptcy. 

 19 And I should note proposed amendments to 

 20 Rule 190.06 clarify that nothing constrains the 

 21 contractual right of a clearing organization to 

 22 liquidate open commodity contracts and, in order 
 89 

 1 to promote portability, prohibits the trustee from 

 2 avoiding certain pre-partition transfers made by a 

 3 clearing organization on behalf of customers. 

 4 Partial transfers which are provided for in the 

 5 current rule are still permitted because a 

 6 transfer of all contracts and all accounts may be 

 7 impractical. 

 8 I thank you for your attention and would 

 9 be happy to answer your questions. 

 10 CHAIRMAN GENSLER: Thank you. I'll 

 11 entertain a motion to support the staff 

 12 recommendation on segregation of cleared swaps. 

 13 COMMISSIONER SOMMERS: So moved. 

 14 COMMISSIONER O'MALIA: Second. 

 15 CHAIRMAN GENSLER: I thank you. I will 

 16 support the rule on protection of cleared swaps, 

 17 but I do have a few questions and I have a 

 18 statement that will go, you know, into the record. 

 19 But, Bob, as I understand it, we put out 

 20 four options in this ANPR earlier. Is that 

 21 correct? 

 22 MR. WASSERMAN: Yes. 
 90 

 1 CHAIRMAN GENSLER: And where this comes 

 2 out is though it has rule text and there's a 

 3 preferred path called legal segregation with 

 4 operational commingling -- first, did I get the 

 5 title right? 

 6 MR. WASSERMAN: I think at this point 

 7 we've decided to call it complete legal 

 8 segregation to distinguish it from -- 

 9 CHAIRMAN GENSLER: All right. Maybe if 

 10 I call it complete legal segregation it comes out 

 11 with that, though is it correct the funds could be 

 12 operationally commingled? 

 13 MR. WASSERMAN: Yes, indeed, under all 

 14 of the models that we're continuing on, they -- 

 15 CHAIRMAN GENSLER: Okay. So, but as the 

 16 rule text comes out with that, as I understand it, 

 17 there's a series of well-written questions and 

 18 options that retains this Commission's flexibility 

 19 that in the final rule we might go with one of the 

 20 other options that (inaudible) in this document. 

 21 Is that correct? 

 22 MR. WASSERMAN: Correct. 
 91 

 1 CHAIRMAN GENSLER: And, Mr. Berkovitz, 

 2 is that correct? I just want to get the general 

 3 counsel on the record. You can come back to the 

 4 table and I'll ask it. He's got that BlackBerry 

 5 all the time. 

 6 The question is though we've in the rule 

 7 text on this proposed one path and that path is 

 8 this legal segregation with what I'll call 

 9 operational commingling, there are these other 

 10 paths that are pretty fully described in the 

 11 preamble. Does that retain our flexibility? You 

 12 know, when the commenters come in it's, you know, 

 13 four to six months from now, we have some 

 14 flexibility here in the final rule. 

 15 MR. BERKOVITZ: Yes, Mr. Chairman. 

 16 We've looked at this and we believe that there's 

 17 adequate notice to the public that the Commission 

 18 is considering these alternatives and we're 

 19 providing -- seeking comment. And we believe it 

 20 satisfies the APA requirement for adequate notice 

 21 and opportunity for comment on the proposed action 

 22 and the alternatives in the document. 
 92 

 1 CHAIRMAN GENSLER: I ask that because I 

 2 think it's very important for this Commission to 

 3 retain that flexibility, but also for the public 

 4 to understand that we have that flexibility. So 

 5 what Bob described on optionality, that the 

 6 clearinghouses would have optionality, we could 

 7 put that into the final rule text, correct, if we 

 8 -- you know, subject to public comment, et cetera? 

 9 MR. BERKOVITZ: Yes, Mr. Chairman. 

 10 CHAIRMAN GENSLER: And so the people 

 11 should take as seriously the preamble as they're 

 12 taking the rule text, that there are a number of 

 13 paths, the optionality's an important one, we can 

 14 put that in the final rule. 

 15 MR. BERKOVITZ: We would consider it if 

 16 it were to be adopted, presumably. Obviously we'd 

 17 look at the final document, but sufficient 

 18 flexibility, that would be a logical outgrowth of 

 19 what's being considered and there's adequate 

 20 notice and opportunity for public comment. 

 21 CHAIRMAN GENSLER: Right. And in the 

 22 same way I want to make sure -- because there's a 
 93 

 1 lot of people that will comment on this. I gather 

 2 -- I mean, from the commenters, the 32 comments 

 3 that came in the ANPR, that a number of firms on 

 4 what's usually called the "buy side" -- asset 

 5 managers, hedge funds, money managers, mutual 

 6 funds -- were concerned and wanted to have such 

 7 legal segregation. Is that correct? 

 8 MR. WASSERMAN: Yes. 

 9 CHAIRMAN GENSLER: Yes. But the 

 10 clearinghouses' letters, as I read them, raised 

 11 significant concerns about costs. Is that 

 12 correct? 

 13 MR. WASSERMAN: Most of them did. There 

 14 was at least one exception. 

 15 CHAIRMAN GENSLER: Right. So I suspect 

 16 the comments will come in on both sides of this 

 17 debate and that we still have the flexibility that 

 18 -- to the final rule to possibly do exactly what 

 19 we did here or move slightly away from it. Is 

 20 that correct? 

 21 MR. WASSERMAN: Yes, and thus I think 

 22 those on each side of the debate should have great 
 94 

 1 incentive to explain which models they like and 

 2 which models they don't like and why. 

 3 CHAIRMAN GENSLER: Yes. I mean, I will 

 4 say I support this because I think that the swaps 

 5 marketplace will be moving to clearing, that this 

 6 is consistent with congressional intent, that one 

 7 customer's funds or collateral are not used to 

 8 secure another customer's funds. And I think 

 9 Congress was specific about that. But we do have 

 10 the futures model that has allowed for some of 

 11 that for decades. So I very much look forward to 

 12 the public's comments. And I, too, am going to 

 13 keep an open mind on this, but -- because I think 

 14 that we've made a proposal here, but we've clearly 

 15 indicated to the public there's a very close 

 16 second or third that might get -- you know, 

 17 depending upon public comment, still is keeping an 

 18 open mind towards. 

 19 Commissioner Dunn? 

 20 COMMISSIONER DUNN: My thanks to Mr. 

 21 Wasserman and his team. They did the ANPR. They 

 22 did the roundtable. And they've come up with this 
 95 

 1 proposed rule and this has been one that has 

 2 really taken a lot of time and effort, and I 

 3 appreciate what they have done in this arena. 

 4 Bob, I'd like to know in your opinion 

 5 which one of the proposals offers the best 

 6 protection to customers from other customers' 

 7 risk? And which proposal offers the best 

 8 portability for the customer? 

 9 MR. WASSERMAN: And I think that the 

 10 model that the proposal has, namely the legal 

 11 segregation with commingling or complete legal 

 12 segregation -- however we refer to it -- provides 

 13 the best protection for the customers in that 

 14 under that model the fellow customer collateral, 

 15 that is to say the collateral of the non- 

 16 defaulting customers, is protected from the start. 

 17 And because that money is essentially set aside 

 18 and cannot be accessed by the clearinghouse 

 19 because of the default of another customer, that 

 20 collateral then is available to support a transfer 

 21 to healthy FCM. I mean, healthy FCM is not, in 

 22 most cases, going to be eager to take a transfer 
 96 

 1 unless the positions are supported by collateral. 

 2 And so having that collateral available from the 

 3 beginning is, I think, most conducive to 

 4 portability. 

 5 COMMISSIONER DUNN: Is it contemplated 

 6 that there will be some type of risk assessment 

 7 made to allow the customers to know exactly what 

 8 they're at risk with the other entities involved? 

 9 MR. WASSERMAN: I'm not sure I 

 10 understand. 

 11 COMMISSIONER DUNN: Will the customer 

 12 know what's in the portfolio of the FCM they're 

 13 using? And is there some type of assessment that 

 14 will allow them to understand the risk that they 

 15 have in the lane that they take for this clearing? 

 16 MR. WASSERMAN: And so under the 

 17 complete legal segregation essentially their risks 

 18 would be separate from those of fellow customers 

 19 and so they would not be exposed to those risks. 

 20 Under a number of other options they would be 

 21 exposed to those risks. There are in the Notice 

 22 of Proposed Rule-Making some questions as to how 
 97 

 1 one might usefully advice customers of the risks. 

 2 One of the issues is there's some limitations as 

 3 to how far you can go on that. And so while there 

 4 might -- it seems to me -- and I should note that 

 5 we should, to a certain extent, wait from the 

 6 comments, but, on the one hand, you might 

 7 profitably give out certain information about an 

 8 FCM's policies in general. On the other hand, 

 9 it's unlikely that customers would feel 

 10 comfortable with FCMs sharing information with 

 11 other customers about their specific risks. So I 

 12 think there's some possibilities there, but also 

 13 some limitations. 

 14 COMMISSIONER DUNN: Then would it be 

 15 incumbent upon the CCP or for the Commission to do 

 16 some type of audit and financial review to 

 17 determine that risk? 

 18 MR. WASSERMAN: CCPs already, under the 

 19 present futures system, do that to a certain 

 20 extent. And we've seen some very excellent risk 

 21 management review programs and DSRO supervision 

 22 where -- unlike a customer where, of course, the 
 98 

 1 customer coming in does not have that kind of 

 2 relationship with the FCM to ask about fellow 

 3 customers; there are certain privacy issues. The 

 4 DCOs and the DSROs already are supervising their 

 5 members. And so when they ask questions, they 

 6 want to know what are you doing both as your 

 7 general policies and what are you doing with 

 8 respect to specific customers. The DSRO 

 9 essentially by rule has the power to essentially 

 10 demand that information and to obtain it. 

 11 And so I think what we will see is that 

 12 the DCOs will build upon the excellent programs 

 13 they already have. I think there may be some 

 14 sharpening of incentives to the extent that they 

 15 have some closer financial exposure, but I rather 

 16 expect that they'd be building on a base that's 

 17 already there, namely their existing risk 

 18 supervision programs. 

 19 CHAIRMAN GENSLER: Can I help out a 

 20 little? Isn't the answer just straightforward? 

 21 We as an agency can see into an FCM's risk, but a 

 22 customer can't. 
 99 

 1 MR. WASSERMAN: Yes. 

 2 CHAIRMAN GENSLER: All right. I think 

 3 that might be responsive. 

 4 MR. WASSERMAN: And the DC -- 

 5 CHAIRMAN GENSLER: That's great. That's 

 6 it, isn't it? 

 7 MR. WASSERMAN: Yes. 

 8 CHAIRMAN GENSLER: It's just the 

 9 customer can't. I mean, you can answer other 

 10 questions, but isn't that what he's asked? 

 11 MR. WASSERMAN: Yes. We and the DCOs 

 12 can do that; the customers cannot. 

 13 COMMISSIONER DUNN: Thank you, Mr. 

 14 Chairman, because it then builds upon my next 

 15 question. And when you were saying that as far as 

 16 CFTC goes it's not going to require any additional 

 17 staff, but won't we have to be able to perform 

 18 some type of audit and financial review to make 

 19 that determination? 

 20 MR. WASSERMAN: Again, this is something 

 21 that we already supervise in terms of the risk 

 22 management that DCOs do with respect to their 
 100 

 1 members. And so I think there may be some 

 2 expansion of intensity, but it's essentially the 

 3 same sort of program that we're already doing. 

 4 And I think I'd add that we do 

 5 anticipate we would need additional staff for 

 6 overseeing DCOs that will get new products, new 

 7 members, and so forth. There'll be potentially 

 8 new FCMs. So in all those ways I think swaps 

 9 coming in will ultimately require more staff 

 10 probably in both the audit and review side and the 

 11 risk surveillance side. I think Bob's point is 

 12 simply it's not so much the specific terms of this 

 13 proposal as the general increase in number of 

 14 registered entities, increase in volume, increase 

 15 in number of products that they carry. 

 16 COMMISSIONER DUNN: What do we 

 17 anticipate, increase in FCMs from what we 

 18 currently have? 

 19 MR. LAWTON: I'm not sure that we've 

 20 come up with a number on that. I think that 

 21 really remains to be seen. 

 22 CHAIRMAN GENSLER: Yes. I think, 
 101 

 1 Commissioner Dunn, earlier last summer -- and I 

 2 think this has probably been modified -- last 

 3 summer we were at about 125 FCMs and staff had 

 4 said that preliminarily it might grow to as many 

 5 as 200. And I think that was part of some of our 

 6 budget work in the fall. But I think it would be 

 7 good if DCIO sort of now, you know, updates that, 

 8 particularly as we start to, you know, be more 

 9 engaged with Congress in our 2012 and even start 

 10 on 2013 budget submissions for OMB. 

 11 COMMISSIONER DUNN: Thank you, Mr. 

 12 Chairman. I thought the figure was 250. It may 

 13 have been in the 200 range. Thank you. 

 14 CHAIRMAN GENSLER: Commissioner Sommers? 

 15 COMMISSIONER SOMMERS: Thank you, Mr. 

 16 Chairman. To the team, this has been certainly no 

 17 easy task. I mean, I think that there are 

 18 legitimate concerns on both sides of this issue 

 19 with market participants in the swaps market that 

 20 want to preserve the framework they're used to 

 21 operating under and market participants in the 

 22 futures side who want to preserve their futures 
 102 

 1 model of doing business. And I certainly 

 2 appreciate everything you've done to kind of 

 3 balance the different interests that have been 

 4 involved in this rule-making. 

 5 From the beginning, I, because of those 

 6 two separate and distinct interests, had hoped 

 7 that we could preserve some type of optionality 

 8 because I didn't think that this Commission should 

 9 be in the business of picking winners and losers. 

 10 There are people who have frameworks already set 

 11 up to provide complete legal segregation. And if 

 12 that's the course we go, they will be a winner in 

 13 this. There are people who have, you know, of 

 14 course, the futures model set up. And if we go a 

 15 different direction, they will be losers. So I 

 16 was hoping throughout this whole rule-making that 

 17 we would be able to preserve some type of 

 18 flexibility and optionality, so I appreciate all 

 19 the work you've done to include that in this 

 20 proposal. 

 21 The question I have with regard to that 

 22 is the questions that we ask in the proposal about 
 103 

 1 the optionality, I know that you have specific 

 2 concerns about the bankruptcy code. And in one of 

 3 the documents we received it says that because the 

 4 bankruptcy code requires customer property to be 

 5 distributed ratably we cannot give customers the 

 6 option to choose. So if you can just quickly walk 

 7 through what type of optionality, I think there 

 8 are two different types of optionality we have 

 9 suggested, and what is in the proposal for 

 10 optionality. 

 11 MR. WASSERMAN: So as you quite 

 12 correctly noted, the concern is the requirement of 

 13 the bankruptcy code that customer property be 

 14 distributed ratably. And as the NPRM notes, we 

 15 have to this point looked at things by account 

 16 class with different types of products. So, for 

 17 instance, there is an account class for U.S. 

 18 exchange-traded futures, there's an account class 

 19 for foreign futures. We have built just about a 

 20 year ago an account class for OTC swaps, and 

 21 that's going to be essentially conformed in this 

 22 proposed rule-making regardless of which option 
 104 

 1 the Commission were ultimately to choose. 

 2 But we've not said, for instance, that 

 3 there be an account class each customer his own 

 4 account class, and it seems to me that that goes a 

 5 bit beyond what Congress let us do in the 

 6 bankruptcy code and in Section 20 of the CEA. But 

 7 there is mention of one possible approach that one 

 8 could take, which is if a particular FCM, that 

 9 legal entity, dealt with DCOs that followed a 

 10 particular model and only DCOs that followed that 

 11 particular model, then a ratable distribution 

 12 would follow that model. 

 13 And so, theoretically, and essentially 

 14 the NPRM mentions this is a possibility and seeks 

 15 comment on it, one could limit by the legal entity 

 16 -- now, of course, you could have multiple legal 

 17 entities that are affiliates and one is the legal 

 18 entity that deals with DCOs who adopt legal 

 19 segregation with commingling, another deals with 

 20 DCOs that adopt the legal segregation with 

 21 recourse or the futures model, and that is a 

 22 potential way to deal with it. There are, to be 
 105 

 1 sure, concerns in terms of competition and in 

 2 terms of market structure, but, you know, 

 3 ultimately that's for the commenters and we look 

 4 forward to hearing what folks say about the 

 5 practicality of that. 

 6 Fairly late in the process we had a 

 7 commenter mention possibilities, concepts of how 

 8 one might do this by taking funds out of customer 

 9 property and essentially leaving it to the DCO. 

 10 We asked some questions about that. I think we -- 

 11 that concept very much needs further development 

 12 and it would be helpful to get comment that 

 13 provides that further development. On the other 

 14 hand, I think given that this is mentioned in the 

 15 Notice of Proposed Rule-Making it would likely 

 16 behoove all interested commenters to give their 

 17 views on that. I hope that's been responsive. 

 18 COMMISSIONER SOMMERS: Absolutely. 

 19 Thank you, Bob. 

 20 And I think that what I would encourage 

 21 is all the interested parties to specifically 

 22 comment on the costs associated with some of these 
 106 

 1 different options and whether or not it satisfies, 

 2 you know, the intent that we're meaning to bring 

 3 to this proposal. 

 4 And again, I wanted to say thank you to 

 5 this whole team. You've done a lot of thinking 

 6 outside the box to try to figure out what we can 

 7 do to solve some of these very complicated issues. 

 8 Thank you. 

 9 CHAIRMAN GENSLER: Thank you, 

 10 Commissioner Sommers. Commissioner Chilton? 

 11 COMMISSIONER CHILTON: Just real 

 12 quickly, Mr. Chairman. I agree on knowing what 

 13 the costs are. And as Commissioner Dunn, you 

 14 know, asks all the time it's also interesting to 

 15 know what it's going to cost the agency and we 

 16 need to know what we think it's going to cost 

 17 consumers. I am interested in what Mr. Wasserman 

 18 was talking about there at the end about another 

 19 idea related to taking it out of customers' 

 20 property, so I look forward to comments. 

 21 I do think this is a good example of us 

 22 further fine-tuning where we might be headed. 
 107 

 1 I've been really impressed with the comments we 

 2 received and visited a bunch of folks around the 

 3 country on this issue, and it's been very helpful. 

 4 And this is what the rule-making process is about 

 5 because we're further defining things and I think 

 6 we're going to end up at a good place. But these 

 7 comments have been absolutely critical to us 

 8 moving forward in the process. 

 9 I just want to comment the team, commend 

 10 Bob. And I don't have any questions. Good job. 

 11 CHAIRMAN GENSLER: Thank you, 

 12 Commissioner Chilton. Commissioner O'Malia? 

 13 COMMISSIONER O'MALIA: Thank you, Mr. 

 14 Chairman. I think I'd like to follow up on 

 15 Commissioner Dunn's questioning about 

 16 understanding kind of what FCMs -- what their 

 17 exposures are and what customers can expect. 

 18 Obviously in the futures space we have well-known 

 19 FCMs. We've got a track record, et cetera. We've 

 20 got a very good track record in omnibus clearing. 

 21 And the FCMs and DCOs work really well together. 

 22 Obviously we're creating a new -- a 
 108 

 1 swaps world is a brand new world and I think 

 2 customers ought to be a little more informed than 

 3 the basics of what we've provided in the futures 

 4 space. We have on our monthly report that is a 

 5 quantitative analysis of seg funds and Part 30 

 6 funds and it's Excel spreadsheets saying how much 

 7 is in each account, but it doesn't give you any 

 8 qualitative analysis of the risks or the 

 9 counterparties or anything like that. And I am 

 10 sensitive to disclosing counterparty risk or, you 

 11 know, other customer risk in a fund, but I think 

 12 in the swaps world where we know so little about 

 13 it and understanding your relationships, we ought 

 14 to do a better job to educate customers about who 

 15 they're sharing with. 

 16 Obviously the team has come up with -- a 

 17 solution to that is don't expose yourself to any 

 18 other customers, which is one option, but I think 

 19 we need to understand what the costs of that are 

 20 and we have not heard a unanimous cry for total 

 21 segregation, this legal segregation and we have 

 22 some people asking for this omnibus model. So I 
 109 

 1 think marrying better information with the 

 2 possibility of having an omnibus model will 

 3 certainly give customers better information. 

 4 You have put some questions in here. I 

 5 think we can do a better job of really roughing 

 6 those out. And I will expect, hopefully, in a 

 7 final rule that we have a better idea of what 

 8 questions we want to ask and what we can ask of 

 9 the FCM and disclose to customers. It won't 

 10 disclose positions, but, at the same time, give 

 11 them more information going forward. 

 12 Let me get on to some of the questions 

 13 that I have here. Can you -- the cost-benefit 

 14 analysis in the back of this, you use words like 

 15 "tend" and "likely" and it's a little fuzzy. I'd 

 16 like to go back a step. What kind of cost did 

 17 commenters to the ANPR anticipate with a company 

 18 complete legal segregation model? Because I 

 19 didn't see that -- I don't think I saw the 

 20 specific numbers that were referenced in our 

 21 cost-benefit analysis that were raised in those 

 22 questions. Were they in there? 
 110 

 1 MR. WASSERMAN: I think they were, but, 

 2 in any event, yes, I'm pretty sure they were 

 3 discussed, certainly discussed in the discussion 

 4 of the comments. And I should note -- 

 5 COMMISSIONER O'MALIA: Well, maybe you 

 6 could share -- and just summarize those for me, if 

 7 you will. 

 8 MR. WASSERMAN: And so there were really 

 9 two types of costs. One cost is operational 

 10 costs, essentially doing things under the model 

 11 that one is not doing today that costs staff time, 

 12 computer programming, that sort of thing. And the 

 13 comments indicated that those costs would actually 

 14 be fairly modest, something on the order of per 

 15 FCM at one-time cost increase of about 800,000 to 

 16 $1 million and a recurring annual cost with a 

 17 median estimate of about $700,000. And similar 

 18 costs in terms of DCOs. 

 19 There were conflicting discussions with 

 20 respect to what I would call risk costs. That is 

 21 to say by essentially removing fellow customer 

 22 collateral from the equation essentially you're 
 111 

 1 going to be subjecting the DCOs and the other 

 2 clearing members to increased costs. And there 

 3 are two ways they can approach that. One is to 

 4 increase the amount of margin. Each entity -- you 

 5 know, each customer provides with respect to each 

 6 position. Another approach is through the 

 7 guarantee fund. And one could essentially 

 8 increase the amount in the guarantee fund to meet 

 9 a potential default or one could do a combination 

 10 of the two. 

 11 And so what some folks said is, well, 

 12 look, first off I should note that the numbers are 

 13 large because the baseline is large. And so, for 

 14 instance, ISDA was talking about something on the 

 15 order of a baseline collateral requirement of some 

 16 $500 billion. And they were talking about an 

 17 increase of some 70 percent of that in the event 

 18 one goes to individual customer protection. If 

 19 the DCOs were to take that approach by 

 20 essentially, say, going from a 99th percentile 

 21 margin to a 99.9 percentile margin. 

 22 An alternative approach is through the 
 112 

 1 guarantee fund, and we had baseline estimates for 

 2 the guarantee funds without this rule of some $128 

 3 billion. And this is essentially because more 

 4 swaps is more business, more risks, and, 

 5 therefore, that baseline would increase with that. 

 6 And we've seen estimates of increases in that of 

 7 some 50 billion to $128 billion, essentially a 

 8 doubling. 

 9 On the other hand, we had -- as I 

 10 mentioned, one commenter said, wait a minute, how 

 11 -- the change here is not so great because the 

 12 change is based on an assumption that you're 

 13 saying that fellow customer collateral will be 

 14 there in the event of a default. And there are 

 15 some kinds of defaults, a very sudden default, 

 16 where that likely would be the case. But what 

 17 we've seen also are some other kinds of defaults 

 18 -- Lehman immediately comes to mind -- where 

 19 essentially the FCM was on a downward slope for a 

 20 couple of days before its insolvency. During that 

 21 time customers are free to, and indeed in many 

 22 cases maybe have fiduciary obligations to, take 
 113 

 1 their money and move it to another FCM. They have 

 2 every right to do that. And if they do, that 

 3 money is not going to be there. So if you set up 

 4 a default resource scenario that assumes that 

 5 money is going to be there and it isn't, then you 

 6 could have a bit of a problem when a default might 

 7 actually come. And so that suggestion is, well, 

 8 maybe that's not prudent. In which event if you 

 9 don't rely on that, it's not a cost. 

 10 COMMISSIONER O'MALIA: Does this 

 11 proposed rule- making lean towards using a 

 12 guarantee fund approach, which poses some risk as 

 13 you've just identified, or leaning towards more 

 14 margin? Do you have a personal preference? 

 15 MR. WASSERMAN: I don't have a 

 16 preference as to margin versus guarantee fund, and 

 17 the document does not express preference either 

 18 way. That would be in the good judgment of the 

 19 DCOs based on how they would deal with the rules 

 20 as they are ultimately adopted. 

 21 COMMISSIONER O'MALIA: Okay. Have you 

 22 -- has this team or the Office of Chief Economist 
 114 

 1 done an economic cost-benefit analysis on the 

 2 numbers identified in the -- on the comments in 

 3 the ANPR? 

 4 MR. WASSERMAN: Yes. And the 

 5 cost-benefit analysis in the document is, in large 

 6 part, based on the comments. I should note one of 

 7 the things that they pointed out is that to the 

 8 extent that customers are free to leave before a 

 9 default, that also affects the benefits because 

 10 essentially some customers, in other words, might 

 11 be able to save themselves depending upon how the 

 12 default scenario plays out. 

 13 COMMISSIONER O'MALIA: I'm still a 

 14 little confused because in the cost-benefit 

 15 analysis in the back it talked about these 

 16 different scenarios, but it said -- you know, it 

 17 didn't give hard dollar numbers and it had softer 

 18 words like "tend" and "likely," and it didn't give 

 19 me a real good sense of hard economic analysis 

 20 based on these costs. 

 21 CHAIRMAN GENSLER: Nancy, do you want to 

 22 just take it? Because I see you have the papers 
 115 

 1 there. 

 2 MS. SCHNABEL: Well, there are numbers. 

 3 It's on page 107 and 109, and those numbers are 

 4 the same as those up front in the preamble where 

 5 we talked about commenters giving the risk costs 

 6 and the operational estimates. So there are 

 7 numbers. And if there are any other economic 

 8 analysis that you, I guess, Commissioner O'Malia, 

 9 wanted to know about, you know, please ask us 

 10 about it. 

 11 COMMISSIONER O'MALIA: Yes, I was 

 12 looking on page 111, 114, and some of these -- 

 13 I'll get back with you on that. I just need to 

 14 talk with you a little bit more about how rigorous 

 15 this analysis has been and if we have a good grasp 

 16 on the likely outcomes of either one of these 

 17 scenarios. 

 18 Let me just -- I do want to thank the 

 19 teams for the flexibility. This is a tough 

 20 question. We're trying to understand the 

 21 implications of any decision we make. I differ 

 22 slightly with the Chairman on the certainty of 
 116 

 1 Congress on this matter and the legal requirement, 

 2 but it is what it is. And I'm comfortable because 

 3 I think we do have options to consider going 

 4 forward and if Congress wants to reflect on this 

 5 further, I think that would certainly be helpful. 

 6 But it would -- at least we're not foreclosing 

 7 some options here and I'm willing to support this 

 8 going forward. I do want to have a little more 

 9 discussion about some qualitative customer 

 10 information that we can talk about in the swaps 

 11 space going forward and maybe improve upon that 

 12 and be less asking questions and be a little more 

 13 forceful in what it is that would inform customers 

 14 going forward about fellow customer risk. 

 15 Let me close there and let them vote. 

 16 CHAIRMAN GENSLER: Thank you, 

 17 Commissioner O'Malia. Mr. Stawick? 

 18 MR. STAWICK: Commissioner O'Malia? 

 19 COMMISSIONER O'MALIA: Aye. 

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

 21 Commissioner Chilton? 

 22 COMMISSIONER CHILTON: Aye. 
 117 

 1 MR. STAWICK: Commissioner Chilton, aye. 

 2 Commissioner Sommers? 

 3 COMMISSIONER SOMMERS: No. 

 4 MR. STAWICK: Commissioner Sommers, no. 

 5 Commissioner Dunn? 

 6 COMMISSIONER DUNN: Aye. 

 7 MR. STAWICK: Commissioner Dunn, aye. 

 8 Mr. Chairman? 

 9 CHAIRMAN GENSLER: Aye. 

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

 11 Chairman, on this question the yeas are four, the 

 12 nays are one. 

 13 CHAIRMAN GENSLER: I thank you. I thank 

 14 the team. Now that it is actually passed and 

 15 we'll be sending it to the Federal Register, I 

 16 guess I get a chance to do something I'm allowed 

 17 to do, is to direct the staff to do something and 

 18 I'll do it publicly. 

 19 I think within this 60-day comment 

 20 period I'd like to direct you to have a staff 

 21 roundtable. I think that this would be a good 

 22 thing in the middle, maybe like a month into the 
 118 

 1 roundtable, to let people sort of digesting this, 

 2 but, hopefully, not at the end of the 60 days. So 

 3 that people can really -- their comments can be 

 4 reactive also to the staff roundtable. And I 

 5 would suggest get those who support, those from 

 6 the buy side and elsewhere that support, those who 

 7 have reservations, try to explore these cost 

 8 issues further and, you know, fill this room if 

 9 you need to because it's a really important issue. 

 10 But I guess I get under this -- I checked, they 

 11 said I could direct you to do this. But if you 

 12 could do that in the middle of the 60-day period I 

 13 think it'd be very helpful. 

 14 MR. WASSERMAN: We'll make it so. 

 15 CHAIRMAN GENSLER: Thank you. With 

 16 that, I think we'll move to the capital rule. 

 17 Tom Smith, Thelma Diaz, John Lawton, 

 18 it's the capital rule, the other half of peanut 

 19 butter and jelly because you were here as well on 

 20 the margin rule. I thank you for all of your 

 21 diligent work and I hand the floor to you. 

 22 MR. SMITH: Thank you very much. And 
 119 

 1 first I'd like to acknowledge the other members of 

 2 our team who are not sitting with us: Jennifer 

 3 Bauer and Todd Prono, Beverly -- 

 4 CHAIRMAN GENSLER: You might come a 

 5 little closer to the mic or move the mic. 

 6 MR. SMITH: Yes, and John Paul 

 7 Rothenberg. Staff requests Commission approval to 

 8 publish in the Federal Register two documents. 

 9 CHAIRMAN GENSLER: Why don't you just 

 10 pull it closer? 

 11 MR. SMITH: Is that good enough? There 

 12 we go. The first is the Notice of Proposed 

 13 Rule-Making titled "Capital Requirements of Swap 

 14 Dealers and Major Swap Participants." The second 

 15 is a notice of the extension of the comment period 

 16 for the Notice of Proposed Rule-Making titled 

 17 "Margin Requirements for Uncleared Swaps for Swap 

 18 Dealers and Major Swaps Participants," which was 

 19 approved by the Commission for publication on 

 20 April 12, 2011. The extension of the comment 

 21 period for the margin rules would be published on 

 22 the same day as the proposed capital rules to 
 120 

 1 ensure that the comment periods for both rules run 

 2 concurrently for a full 60-day period. 

 3 The proposed capital rule would 

 4 implement provisions within Section 731 of the 

 5 Dodd-Frank Act that direct the Commission to adopt 

 6 regulations in closing capital requirements and 

 7 financial condition reporting requirements on swap 

 8 dealers and major swap participants. The 

 9 Dodd-Frank Act applies a bifurcated approach that 

 10 requires each swap dealer and MSP for which there 

 11 is a prudential regulator to meet the capital 

 12 requirements established by the applicable 

 13 prudential regulator. And each swap dealer and 

 14 MSP for which there is a no prudential regulator, 

 15 including non-bank subsidiaries of bank holding 

 16 companies, to meet capital requirements adopted by 

 17 the Commission. 

 18 In addition, the SEC is directed to 

 19 adopt capital requirements for security-based swap 

 20 dealers and major security-based swap participants 

 21 that are not subject to prudential regulation. 

 22 The Dodd-Frank Act also requires a minimum level 
 121 

 1 of coordination and consultation with respect to 

 2 capital. The regulatory agencies are required to 

 3 consult at least annually and the capital 

 4 regulations are, to the maximum extent practical, 

 5 required to be comparable. 

 6 Consistent with this provision the 

 7 Commission has had several meetings with the 

 8 prudential regulators and the SEC, and has 

 9 provided the prudential regulators and the SEC 

 10 with an opportunity to review and comment upon the 

 11 proposed regulations. In developing the NPR 

 12 Commission staff also considered the many 

 13 pre-comment period letters that have been 

 14 submitted, the issues raised in meetings with 

 15 outside parties -- all of which are listed on the 

 16 CFTC website -- and the information obtained 

 17 during a public roundtable that was jointly hosted 

 18 by the CFTC and SEC and attended by 

 19 representatives of each of the prudential 

 20 regulators. 

 21 The proposed regulations, to a great 

 22 extent, draw upon existing Commission and bank 
 122 

 1 capital requirements. The proposed capital 

 2 regulations are risk-sensitive, meaning that a 

 3 swap dealer or MSP's capital requirement would 

 4 increase or decrease corresponding with the level 

 5 of market and credit risk associated with its 

 6 swaps transactions. The regulations also would 

 7 establish a minimum level of $20 million of 

 8 regulatory capital that each swap dealer or MSP 

 9 would be required to maintain. This minimum 

 10 capital requirement is consistent with recent 

 11 amendments to the Commodity Exchange Act, where a 

 12 20 million minimum capital requirement was imposed 

 13 on futures commission merchants that engaged in 

 14 OTC transactions in foreign currency. The minimum 

 15 capital requirement is intended to ensure that 

 16 swap dealers and MSPs maintain a minimum level of 

 17 financial resources to meet its financial 

 18 obligation, including obligations to end users. 

 19 The proposed regulations effectively 

 20 impose -- excuse me, the proposed regulations 

 21 effectively impose capital requirements on swap 

 22 dealers and MSPs based on one of three categories. 
 123 

 1 First, a swap dealer or MSP that is also 

 2 registered as a futures commission merchant would 

 3 be required to comply with existing CFTC FCM 

 4 capital requirements. The minimum regulatory 

 5 requirement would increase from 1 million of 

 6 adjusted net capital to 20 million. An SD or MSP 

 7 also would require to compute its risk-based 

 8 capital requirement based upon 8 percent of the 

 9 risk margin associated with cleared futures and 

 10 cleared swap positions carried by the FCM in 

 11 customer and non- customer accounts. The 

 12 risk-based capital requirement is currently part 

 13 of the capital rule. 

 14 Second, a non-bank swap dealer or MSP 

 15 that also is part of a bank holding company would 

 16 be required to meet the capital requirements 

 17 established by the Federal Reserve Bank as if the 

 18 SD or MSP was a banking entity. The proposal 

 19 would also establish a minimum regulatory capital 

 20 requirement of $20 million of tier one capital as 

 21 defined by banking regulations. All other swap 

 22 dealers and MSPs, i.e., those that are not FCMs or 
 124 

 1 banks, would be required to maintain regulatory 

 2 capital as measured by tangible net equity. The 

 3 proposal would establish a minimum amount of 

 4 tangible equity that was equal to or greater than 

 5 $20 million plus an additional market risk charge 

 6 and credit risk charge for the uncleared swap 

 7 positions. Tangible net equity is defined as net 

 8 equity as computed under generally accepted 

 9 accounting principles less intangible assets. 

 10 SDs and MSPs that use capital models 

 11 reviewed by prudential regulators or the SEC could 

 12 request Commission approval to use the same models 

 13 for computing market risk and credit risk and 

 14 capital charges. The proposal further provides 

 15 that the Commission may approve capital models for 

 16 SDs and MSPs, but do not have models reviewed by 

 17 the SEC or prudential regulators if adequate 

 18 resources become available for the Commission to 

 19 conduct appropriate reviews and continuing 

 20 assessments of such models. 

 21 Pending the implementation of such a 

 22 program, the proposal provides that swap dealers 
 125 

 1 and MSPs that are FCMs would continue to apply 

 2 existing market risk and credit risk requirements 

 3 set forth in Regulation 1.17. Other swap dealers 

 4 and MSPs would use Basel-based, standardized, or 

 5 grid approach to compute market risk and credit 

 6 risk capital charges. 

 7 The proposed financial condition 

 8 reporting requirements for swap dealers and MSPs 

 9 are comparable to existing FCM financial condition 

 10 reporting requirements. SDs and MSPs will be 

 11 required to maintain current ledgers or similar 

 12 records which support each transaction affecting 

 13 their assets, liabilities, income, and expenses 

 14 and capital accounts. SDs and MSPs also will be 

 15 required to file monthly unaudited financial 

 16 reports with the Commission. Each swap dealer and 

 17 MSP also will be required to file an annual 

 18 audited financial statement with the Commission. 

 19 The audited and unaudited financial statements 

 20 must be prepared using the English language and 

 21 presented in accordance with generally accepted 

 22 accounting principles as established in the United 
 126 

 1 States. 

 2 The Notice of Proposed Rule-Making also 

 3 includes proposed amendments to CFTC financial 

 4 form 1FR FCM consisting of a new segregation 

 5 scheduled for swaps customers' funds. The 

 6 proposed schedule is consistent in design and 

 7 format with the existing segregation schedules for 

 8 Section 4d customer funds and for Part 36 

 9 (inaudible) funds. The proposed amendments would 

 10 also revise the provisions governing the required 

 11 audit scope of the independent public accountant's 

 12 annual FCM audit to include the new segregation 

 13 schedule for swaps customers. 

 14 The proposal also establishes notice 

 15 filing requirements for swap dealers and MSPs that 

 16 are comparable to the existing notice filing 

 17 requirements for FCMs. Such notice provisions 

 18 include SDs or MSPs being undercapitalized or 

 19 failing to maintain current books and records. 

 20 The effective oversight of the 

 21 implementation and ongoing compliance with the 

 22 proposed new capital and financial condition 
 127 

 1 reporting requirements would require significant 

 2 additional resources, including additional 

 3 staffing resources. In particular, if implemented 

 4 the proposal might require Commission staff to 

 5 conduct financial oversight and financial 

 6 examination of new registrants and potentially 

 7 review and assess capital models. The Commission 

 8 requested an additional 60 FTEs for the Division 

 9 of Clearing and Intermediary Oversight in the FY 

 10 2012 budget, which represents an approximately 50 

 11 percent increase over current levels. If 

 12 received, these additional resources would enhance 

 13 the division's ability to perform oversight of SD 

 14 and MSP registrants. 

 15 That completes the overview of the 

 16 proposed NPR and we're pleased to take any 

 17 questions. 

 18 CHAIRMAN GENSLER: Thank you, Tom and 

 19 team. With that, I'll entertain a motion to 

 20 support the staff recommendation on capital. 

 21 COMMISSIONER SOMMERS: To accept? 

 22 CHAIRMAN GENSLER: Or to accept. To 
 128 

 1 accept. 

 2 COMMISSIONER SOMMERS: So moved. 

 3 SPEAKER: Second. 

 4 CHAIRMAN GENSLER: Thank you. Tom, I 

 5 have a number of questions. What I want to focus 

 6 on is how this is divided up, so I'll start with 

 7 the traditional group. 

 8 Futures commission merchants who happen 

 9 to decide they want to be a swap dealer, their 

 10 capital regime, is it correct -- would, in 

 11 essence, with some small adjustments, but would, 

 12 in essence, be what they currently have? Is that 

 13 correct? 

 14 MR. SMITH: That's correct. 

 15 CHAIRMAN GENSLER: And as I understand 

 16 it that's a model that means it has to be very 

 17 liquid and the capital is computed in a way that 

 18 provides for the liquidity of the futures 

 19 commission merchant as a member of a 

 20 clearinghouse? 

 21 MR. SMITH: That is correct. 

 22 CHAIRMAN GENSLER: And so we sort of 
 129 

 1 maintain that. 

 2 MR. SMITH: We maintain that, yes. 

 3 CHAIRMAN GENSLER: Well, and then the 

 4 next piece is what if it's a swap deal that's not 

 5 a futures commission merchant? What we did there 

 6 was we sort of put it in two different categories? 

 7 MR. SMITH: That's correct, depending on 

 8 whether it was part of a bank holding company or 

 9 any other type of swap dealer. 

 10 CHAIRMAN GENSLER: So I'm just sharing a 

 11 little bit of how we got here maybe with the 

 12 public, but, I mean, they all blur together the 

 13 numerous meetings I've been in. But as I 

 14 understand it, swap dealers who were not futures 

 15 commission merchants, but would be part of a bank, 

 16 a number of them came in and said we're concerned 

 17 that you might end up with capital rules that says 

 18 it's the higher of the CFTC's capital rules or the 

 19 Federal Reserve capital rules. I mean, that was 

 20 one of their key, you know, questions. 

 21 MR. SMITH: That's correct, and they 

 22 were pointing out that this swap business is done 
 130 

 1 in the bank today in many instances it would 

 2 possibly be pushed out under Section 716 of 

 3 Dodd-Frank into a subsidiary. 

 4 CHAIRMAN GENSLER: Right, which is 

 5 sometimes known as the Blanche Lincoln Push-Out 

 6 Provision. 

 7 MR. SMITH: That's right, yes. 

 8 CHAIRMAN GENSLER: So where we ended up 

 9 is, in essence, that if it's part of a bank 

 10 holding company or if it's part of a systemically 

 11 -- institution -- I can't remember what SIFI 

 12 stands for, systemically -- 

 13 MR. SMITH: Systemically important 

 14 financial institution. 

 15 CHAIRMAN GENSLER: It's the capital 

 16 rules as set by the prudential regulators. 

 17 MR. SMITH: That's correct. 

 18 CHAIRMAN GENSLER: But we get to see it. 

 19 We get to see all the modeling. We get to see the 

 20 monthly reports. 

 21 MR. SMITH: Yes, they are, in effect, 

 22 our registrant. And it is our capital rule on 
 131 

 1 financial reporting that they're meeting. 

 2 CHAIRMAN GENSLER: Technically it's our 

 3 capital rule, but it piggybacks off the bank 

 4 capital. 

 5 MR. SMITH: Yes, our rule defers to -- 

 6 that's right. For the purposes of computing it 

 7 you refer to the Federal Reserve Board's rules. 

 8 CHAIRMAN GENSLER: I checked that box. 

 9 I like those two. 

 10 Then the other category is the challenge 

 11 of what if you're a non-bank, non-futures 

 12 commission swap dealer and that's where we get 

 13 into firms that have come in -- not a lot of 

 14 firms, but somewhere, you know, 10 or 15 of them 

 15 over these months have come in and said, well, if 

 16 we are a swap dealer we can't imagine using bank 

 17 capital rules. That's the large focus of the 

 18 meetings when they've come in and met at least 

 19 with me. 

 20 MR. SMITH: That's right and the reason 

 21 being primarily is that they never were 

 22 financially oriented institutions. They don't 
 132 

 1 have a balance sheet structure that would be 

 2 consistent with certainly an FCM or even a bank. 

 3 CHAIRMAN GENSLER: So where we ended up 

 4 is they can use tangible net worth. It means they 

 5 can count their factory, they can count their oil 

 6 in the ground if they're in the oil business, 

 7 their customer receivables, et cetera. 

 8 MR. SMITH: Correct. 

 9 CHAIRMAN GENSLER: So would they 

 10 possibly end up with -- I mean it is possible 

 11 there'd be some regulatory arbitrage that they 

 12 might have lower capital standards than the bank 

 13 capital standards would have been? 

 14 MR. SMITH: I believe so, yes. That'll 

 15 be a lower standard. 

 16 CHAIRMAN GENSLER: I'm sorry, so that 

 17 would be a lower standard -- 

 18 MR. SMITH: The capital on that equity 

 19 would be a lower standard or an easier standard to 

 20 meet. Because we're recognizing -- our proposed 

 21 rules would recognize significantly more types of 

 22 or classes of assets. 
 133 

 1 CHAIRMAN GENSLER: Right. And one of 

 2 the issues also is -- and this is a challenge of 

 3 any regulatory agency setting capital standards, 

 4 but capital standards help protect the public 

 5 against a default. Is that right? 

 6 MR. SMITH: That's one of the things 

 7 they do, yes. 

 8 CHAIRMAN GENSLER: What else do they do? 

 9 MR. SMITH: If it's an FCM it allows -- 

 10 I guess it all can generate from that because it 

 11 allows the ability to wind down operations to 

 12 transfer to customer funds to another 

 13 organization. 

 14 CHAIRMAN GENSLER: Right, right. 

 15 MR. SMITH: In the context of a swap 

 16 deal where you don't have customers it's more 

 17 counterparty relationships. 

 18 CHAIRMAN GENSLER: Right. Are you aware 

 19 of any capital standard for insurance companies 

 20 which are called reserves, but capital standards 

 21 or reserve requirements for insurance companies or 

 22 securities firms or banks where capital is only 
 134 

 1 computed on some of your transactions, but not 

 2 computed if your counterparty or your insurance 

 3 client or your securities client is, you know, 

 4 smaller or something like that? 

 5 MR. SMITH: No, I'm not. 

 6 CHAIRMAN GENSLER: So an insurance 

 7 company, for instance, regulated by a state 

 8 insurance company would have to have reserves or 

 9 capital even for their transactions with 

 10 homeowners insuring their houses or, you know, 

 11 auto insurance for somebody who has auto 

 12 insurance. Isn't that right? 

 13 MR. SMITH: I believe so, yes. 

 14 CHAIRMAN GENSLER: So I think I support 

 15 this rule. I think it's going to get a lot of 

 16 public comment, as it should. I think it's very 

 17 balanced that we protect futures commission 

 18 merchants and the liquidity and that that's at the 

 19 core of lowering risk to clearinghouses. If 

 20 somebody's not a futures commission merchant and 

 21 it's part of a bank holding company or a 

 22 systemically important financial institution we 
 135 

 1 pick up the calculations from the bank regulators 

 2 so that we don't have sort of a higher than and 

 3 sort of have regulatory arbitrage. And then if 

 4 it's not part of a bank holding company, not a 

 5 systemically important financial institution, of 

 6 course not a futures commission merchant, it's 

 7 this tangible net worth approach there may be some 

 8 regulatory arbitrage. It will be a lower capital 

 9 standard for those non-bank sort of commercial 

 10 dealers. 

 11 MR. SMITH: That's correct. And we've 

 12 included a question that asks for comment on some 

 13 financial entities that may fall into that third 

 14 category. 

 15 CHAIRMAN GENSLER: Would that be like 

 16 financial entities like if a high-frequency trader 

 17 might want to do this? 

 18 MR. SMITH: Yes, or a hedge fund or 

 19 something that may -- if it gets caught up in the 

 20 swap dealer definition, if it's required to 

 21 register as a swap dealer and is a swap dealer. 

 22 CHAIRMAN GENSLER: Right. And I'm very 
 136 

 1 sensitive, end users, commercial end users should 

 2 comment on this, whether a dealer or just end 

 3 users should comment on this, I'm very interested 

 4 in their thoughts. Because capital does get 

 5 priced into transactions. I mean, there's not a 

 6 doubt. You know, capital is part of how insurance 

 7 companies price their insurance product, how banks 

 8 price their loans. But ultimately I support this 

 9 because capital is a critical feature of 

 10 supporting the market so that we know that end 

 11 users, when they enter into a transaction, there's 

 12 something standing behind the dealer when the 

 13 dealer enters into the transaction. 

 14 Commissioner Dunn? 

 15 COMMISSIONER DUNN: Thank you, Mr. 

 16 Chairman. If I can follow up a bit on your 

 17 questioning here. For those SDs and MSPs that are 

 18 not SIFI or FCM or part of a bank holding company 

 19 and you're going to base that capital rule on the 

 20 tangible net equity, how is that going to be 

 21 determined? How will the CFTC staff go about 

 22 certifying what that tangible net equity is for 
 137 

 1 that entity? 

 2 MR. SMITH: There'll be reporting 

 3 obligations imposed on the swap dealers so we will 

 4 see monthly and annual certified financial 

 5 statements. The monthly will be unaudited. 

 6 Depending on the resources that we have as well, 

 7 as we do with FCMs today within the Division of 

 8 Clearing and Intermediary Oversight, we have a 

 9 program where we may conduct a direct examination 

 10 of an FCM. That may extend also to a swap dealer 

 11 or to an MSP. There will be some additional 

 12 challenges dealing with these specific type of 

 13 entities. Some of them may be very large energy 

 14 or agricultural corporations or private companies. 

 15 And that will be something that will present 

 16 issues for staff that we'll have to address. 

 17 We'll have to certainly get up to speed a bit more 

 18 on how they operate, but I think we'll need to see 

 19 the landscape of who does register first to 

 20 identify that. 

 21 COMMISSIONER DUNN: I like the concept 

 22 of opening up the margin requirement being done 
 138 

 1 concurrent so folks can look at both that and the 

 2 capital requirements in there. But I do think 

 3 this is going to be a considerable challenge to 

 4 the CFTC staff. For those that are operating 

 5 under their prudential regulator do you 

 6 contemplate that we're going to need some 

 7 memorandums of understanding so that we are privy 

 8 to all the information that we're going to need? 

 9 MR. SMITH: We certainly need to have an 

 10 open dialogue with the Fed and other prudential 

 11 regulators and with the Securities and Exchange 

 12 Commission. Whether we need -- I'm not sure of 

 13 the mechanism in that. That's something that I'm 

 14 going to take back. I know you raised this with 

 15 me the other day, Commissioner, and I'm going to 

 16 look into that with our Office of General Counsel 

 17 as to what is the best mechanism to have a formal 

 18 arrangement in place or however we need to do 

 19 that. But I don't have an answer whether it needs 

 20 to be an MOU or some other mechanism just to 

 21 ensure that we can share information with each 

 22 other about these entities and their models. 
 139 

 1 COMMISSIONER DUNN: Do you in general 

 2 have an idea how the application of the capital 

 3 requirements will affect the swap pricing in this 

 4 new regulatory regime? 

 5 MR. SMITH: Well, capital is certainly a 

 6 cost for the swap dealer and for the MSP. And 

 7 like all costs it has to be absorbed by some 

 8 party, be it the swap dealer, the MSP itself, be 

 9 it counterparties, or somehow it has to be taken 

 10 care of. Whether it will result in direct cost 

 11 dollar-for-dollar being passed on to end users or 

 12 to the counterparties, I'm certainly -- I don't 

 13 know the answer to that, but it is a cost. Some 

 14 of these entities are not currently subject to 

 15 capital requirements potentially, so they'll come 

 16 in and this will be an additional cost for them. 

 17 But I sort of look at it in the context of general 

 18 costs that are being absorbed by these 

 19 organizations. And yes, they will have to be 

 20 either internalized or passed on in some manner. 

 21 COMMISSIONER DUNN: When we look at this 

 22 cost- benefit analysis and what we have for the 
 140 

 1 final rule we will also consider the cost for the 

 2 Commission for implementation. But on a broader 

 3 scale, will you be looking at, without having that 

 4 capital -- that liquid capital available, what it 

 5 might cost the general public and taxpayers, per 

 6 se? 

 7 MR. SMITH: Yes, certainly. 

 8 COMMISSIONER DUNN: Thank you. 

 9 CHAIRMAN GENSLER: I just want to ask 

 10 one question in the middle. The tangible net 

 11 worth approach, doesn't it allow -- I mean, if 

 12 somebody's not a bank, that if its factories or 

 13 receivables that they could be using the factory 

 14 for other reasons. They might even have the 

 15 factory securing other loans and so forth. Is 

 16 that not right? 

 17 MR. SMITH: That's correct. 

 18 CHAIRMAN GENSLER: Yes, so it's a very 

 19 flexible approach. 

 20 MR. SMITH: Yes. 

 21 CHAIRMAN GENSLER: And if I have a 

 22 worry, I have a worry it's too flexible, but I 
 141 

 1 think that it's balanced. I think it addresses a 

 2 lot of pre-proposal comments. 

 3 Commissioner Sommers? 

 4 COMMISSIONER DUNN: The Chairman is 

 5 suggesting that perhaps we do a (inaudible) of 

 6 lien. 

 7 CHAIRMAN GENSLER: I was just noting 

 8 that we haven't. I mean, one of the questions 

 9 that I got back in August and September was, are 

 10 the CFTC going to make us segregate this capital? 

 11 And it's clear we didn't make anybody segregate on 

 12 the last category. 

 13 COMMISSIONER DUNN: No. 

 14 CHAIRMAN GENSLER: Yes. Commissioner 

 15 Sommers? 

 16 COMMISSIONER SOMMERS: Thank you, Mr. 

 17 Chairman. I think with this proposal it's the 

 18 same as the other two proposals that we've had 

 19 before us today. The team has gone through a 

 20 tremendous amount of work and effort to coordinate 

 21 and collaborate with other regulators, and I just 

 22 want to say how much we appreciate your time into 
 142 

 1 this proposal. 

 2 My concerns with regard to margin are 

 3 relatively the same -- I'm sorry, with capital are 

 4 relatively the same as they were with margin. 

 5 It's with regard to the review of models, the 

 6 internal models, and the decision that has been 

 7 made with regard to our limited resources that 

 8 with absent a prior approval of internal models we 

 9 may have to have some of these entities follow the 

 10 Basel standardized approach or I think what you 

 11 called the grid approach yesterday. And I just 

 12 want to note that I don't think this is optimal 

 13 for these people. And if you can tell us who you 

 14 think may be caught in this area where they 

 15 wouldn't have internal models that had already 

 16 been approved. 

 17 MR. SMITH: The main group will be the 

 18 entities that are able to use the tangible net 

 19 equity approach. Most likely they're not going to 

 20 be a bank and they're not going to be an FCM. So 

 21 those are entities that will be subject to this 

 22 requirement to compute their market risk and 
 143 

 1 credit risk using the Basel standardized approach. 

 2 There could also be some FCMs that don't meet the 

 3 level set by the Securities and Exchange 

 4 Commission to use the alternative net capital 

 5 approach, which is a models-based approach as 

 6 well. 

 7 COMMISSIONER SOMMERS: Thank you. And I 

 8 think my other concern, as I said before, on the 

 9 margin rule is that as we continue to collaborate 

 10 with international regulators, I think on these 

 11 couple of rules in particular it's very important 

 12 that we're as consistent as possible because, as 

 13 we all know, capital is a place where if there is 

 14 any inconsistency it creates a huge opportunity 

 15 for regulatory arbitrage. So hopefully, as we're 

 16 all looking forward to applying the Basel 

 17 standards that we will all continue to be on the 

 18 same page. Thank you. 

 19 MR. SMITH: You're welcome. 

 20 CHAIRMAN GENSLER: Thank you, 

 21 Commissioner Sommers. Commissioner Chilton? 

 22 COMMISSIONER CHILTON: Thanks, Mr. 
 144 

 1 Chairman. I don't have any questions. I want to 

 2 commend the team, Tom and everybody, for a good 

 3 job. I look forward to getting the comments and I 

 4 think it's a good rule. Thank you. 

 5 CHAIRMAN GENSLER: Thank you, 

 6 Commissioner Chilton. Commissioner O'Malia? 

 7 COMMISSIONER O'MALIA: Thank you, Mr. 

 8 Chairman. Thanks to the team, great hard work on 

 9 this. I know you guys have labored just to 

 10 explain it to us, so that's been no easy task. 

 11 Let me ask you some questions. 

 12 Will end users have to post initial and 

 13 variation margin to dealers? That's a 

 14 margin-related question. We think we understand 

 15 what that one could be. 

 16 MR. SMITH: And I believe it's pursuant 

 17 to the credit support agreement that they enter 

 18 into. 

 19 COMMISSIONER O'MALIA: Yes, agreed. If 

 20 an end user does not post initial and variation 

 21 margin to swap dealer on a swap it enters into 

 22 with a dealer, then will that swap dealer have to 
 145 

 1 take a risk-based capital charge for that swap? 

 2 MR. SMITH: Yes, if they don't have 

 3 collateral. Yes. 

 4 COMMISSIONER O'MALIA: If the end user 

 5 posts initial and variation margin to a swap 

 6 dealer will the dealer have to take a risk-based 

 7 capital charge for that swap if they post margin? 

 8 MR. SMITH: If the margin covers the 

 9 extent of the exposure, no. If the margin is not 

 10 sufficient, yes. 

 11 COMMISSIONER O'MALIA: And what is that 

 12 exposure? 

 13 MR. SMITH: The current exposure and the 

 14 -- 

 15 COMMISSIONER O'MALIA: The risk -- 

 16 MR. SMITH: -- potential future 

 17 exposure. 

 18 COMMISSIONER O'MALIA: The risk-based 

 19 capital charge? 

 20 MR. SMITH: Yes. 

 21 COMMISSIONER O'MALIA: Okay. So it's 

 22 the Commission's policy to make -- so they're 
 146 

 1 either going to have to pay a capital charge or 

 2 going to have to pay margin. 

 3 MR. SMITH: If there is no margin 

 4 collected or posted by any end user -- and we'll 

 5 say if you want to limit it to commercial end user 

 6 -- a commercial end user with a dealer, they will 

 7 have a charge in their credit risk charge. Yes, 

 8 they will. 

 9 COMMISSIONER O'MALIA: Okay. I think 

 10 that's what I stated. All right, thank you. 

 11 So how does that comply with the 

 12 Lincoln-Dodd letter? Congress clearly stated in 

 13 this bill that the margin capital requirements are 

 14 not to be imposed on end users nor can regulators 

 15 require clearing for end users. How are you 

 16 taking that into consideration in this rule? 

 17 MR. SMITH: I think one of the things 

 18 that we're doing is looking at it from the full 

 19 perspective of what are these swap dealers allowed 

 20 to count as their capital. And this rule looks at 

 21 those swap dealers that are dealing with the 

 22 commercial end users except that they're a 
 147 

 1 financial company in a very broad way and allowing 

 2 them to use a significant amount of their assets 

 3 to meet that capital requirement. So it's sort of 

 4 a, you know, a balancing of capital and the margin 

 5 requirements. 

 6 COMMISSIONER O'MALIA: I appreciate the 

 7 flexibility you've created with this tangible 

 8 equity. However, to your point -- to the question 

 9 you answered previously was if they don't post 

 10 margin, they're going to post a capital charge, 

 11 right? 

 12 MR. SMITH: They're going to incur 

 13 capital charges because we're required to impose 

 14 capital requirements on swap dealers and users. 

 15 COMMISSIONER O'MALIA: This is getting 

 16 circular, but how did you account -- no, we won't 

 17 go there. Back to the Dodd-Lincoln letter. 

 18 All right, moving on to credit rating 

 19 issues. How do you treat the creditworthiness of 

 20 counterparties when you apply a credit risk factor 

 21 charge? If you could explain what that rule 

 22 provides for. 
 148 

 1 MR. SMITH: Yes. In computing the 

 2 extent of the credit risk exposure, first you look 

 3 at what is your current exposure to a 

 4 counterparty, which is market-to- market of the 

 5 positions, and you also look at potential future 

 6 exposure. At that point, under the Basel 

 7 standardized approach you assign a factor to that, 

 8 which would be either 20 percent, 50 percent, or 

 9 150 percent depending upon the credit rating of 

 10 that counterparty. 

 11 What we had proposed in this rule is to 

 12 just use a 50 percent standard and not -- or we 

 13 have a provision in there that would allow the 

 14 swap dealer to internally develop what those 

 15 credit ratings are and they would seek Commission 

 16 approval or review of those rating approach, and 

 17 then the resultant number would be 4 percent. So 

 18 whatever it comes out to at 4 percent is the 

 19 credit risk charge. 

 20 COMMISSIONER O'MALIA: Now I'm confused. 

 21 Four percent or 50 percent? 

 22 MR. SMITH: Well, it's 8 percent, so 
 149 

 1 it's 50 percent. You look at what your current 

 2 exposure is and your potential future exposure, 

 3 add those together, apply this charge which is 50 

 4 percent, and you -- 

 5 COMMISSIONER O'MALIA: So it's a 50 

 6 percent haircut? 

 7 MR. SMITH: No, it's not a 50 percent 

 8 haircut. There's one more step to the equation. 

 9 COMMISSIONER O'MALIA: Okay. 

 10 MR. SMITH: Then the haircut is 8 

 11 percent of that. So it effectively comes down 50 

 12 percent of 8 percent is a 4 percent charge on your 

 13 current and potential future exposures, the 

 14 aggregate of those. So that would be what a swap 

 15 dealer would have to have a capital reserve for 

 16 from a credit risk. 

 17 COMMISSIONER O'MALIA: My question was 

 18 the credit risk factor charge, what are we 

 19 assessing? Because I understand there's the Basel 

 20 standard and there's this 50 percent standard for 

 21 how you compute this. And I know we had been 

 22 discussing back and forth whether we were going to 
 150 

 1 apply the straight 50 percent haircut for the 

 2 initial evaluation as opposed to the Basel that 

 3 uses credit ratings to some extent. 

 4 MR. SMITH: Right. That's right. 

 5 COMMISSIONER O'MALIA: So let me just 

 6 deal with that part of it -- 

 7 MR. SMITH: Okay. 

 8 COMMISSIONER O'MALIA: -- before we more 

 9 on to this 4 or 8 percent. 

 10 MR. SMITH: Okay, yes. 

 11 COMMISSIONER O'MALIA: So in the rule 

 12 it's 50 percent straight. 

 13 MR. SMITH: Correct. 

 14 COMMISSIONER O'MALIA: Regardless of 

 15 your credit quality. 

 16 MR. SMITH: Unless you generate that 

 17 internally within the -- 

 18 COMMISSIONER O'MALIA: The swap dealer? 

 19 MR. SMITH: Yes. 

 20 COMMISSIONER O'MALIA: Okay. In the 

 21 Basel standard, which is what we've used 

 22 throughout this rule up until this point, is 20 
 151 

 1 percent for investment grade, so it's a 20 percent 

 2 haircut, 50 percent for junk, and 150 percent for 

 3 distressed. 

 4 MR. SMITH: For anything else. 

 5 COMMISSIONER O'MALIA: For anything 

 6 else, right. 

 7 MR. SMITH: Yes. 

 8 COMMISSIONER O'MALIA: Okay. Now, I 

 9 know we've discussed about changing whether we 

 10 were going to use credit rating agencies for 

 11 company credit quality. I know the statute says 

 12 not for securities, but it doesn't say that we 

 13 can't use it for companies. 

 14 MR. SMITH: No, right now it's stayed at 

 15 50 percent. 

 16 COMMISSIONER O'MALIA: Right. And we 

 17 just ignore the other. Now, what if a company -- 

 18 what if a swap dealer comes up with a model that 

 19 says, you know, we're actually using credit rating 

 20 agencies to evaluate the quality of our 

 21 counterparty and are basing our standard on that? 

 22 Will we accept it or not? 
 152 

 1 MR. SMITH: We'd have to look at what 

 2 the whole program is. I don't know at this point 

 3 in time if it would be part of it. 

 4 COMMISSIONER O'MALIA: Okay. Well, I 

 5 have a serious concern about treating everybody 

 6 the same with this 50 percent rule. And I know 

 7 you're probably trying to avoid using credit 

 8 rating agencies, but -- 

 9 MR. SMITH: Yes. 

 10 COMMISSIONER O'MALIA: -- that's what 

 11 Basel allows for and we use Basel throughout this 

 12 entire rule other than this factor here. So I'm a 

 13 little confused with that. 

 14 Let me go on to collateral. There's 

 15 some language about it's in the swap dealers 

 16 physical possession or control. Does that mean an 

 17 oilfield if you post that as collateral? Do you 

 18 physically have to -- is it take title to it or -- 

 19 MR. SMITH: I think to qualify as 

 20 collateral it would have to have some kind of -- 

 21 you wouldn't want the collateral being used in 

 22 multiple instances or for multiple obligations. 
 153 

 1 So, generally speaking, there is either a lien or 

 2 there is some kind of mechanism to ensure that 

 3 that collateral is unencumbered. 

 4 COMMISSIONER O'MALIA: But is "physical" 

 5 the right word for that? 

 6 MR. SMITH: It can be and I think we use 

 7 that in the FCM concept where they often post 

 8 Treasuries and other things with an FCM, so it's 

 9 borrowing from that concept. It doesn't have to 

 10 be in the possession, but it needs to be in the 

 11 possession or control or have some kind of lien. 

 12 COMMISSIONER O'MALIA: There's a new 

 13 provision that came in late, this conforming -- on 

 14 page 63, conforming amendments to delegated 

 15 authority provisions. This seems to be an 

 16 amendment to our margin rule in some respects. 

 17 Not in some respects, you know, with regard to the 

 18 margin rule, I think it is an amendment to our 

 19 margin rule. Is that correct? Page 64 and 65. 

 20 MR. SMITH: I think -- yes, what those 

 21 are, are there's existing delegations in 

 22 Regulation 140.91. What we were proposing in this 
 154 

 1 rule was to -- where certain authorities are 

 2 delegated to the Commission by the rules, the -- 

 3 or under the authority of the Commission they have 

 4 delegated certain responsibilities to the director 

 5 of the Division of Clearing and Intermediary 

 6 Oversight, so we're picking those up. The ones 

 7 for the margin were in the proposed margin rules 

 8 with respect to what the rules were and what the 

 9 Commission's authorities were. The provisions to 

 10 incorporate the delegation to the Division of 

 11 Clearing and Intermediary Oversight Director was 

 12 not included in that rule, so we picked them up 

 13 here. 

 14 We're not changing the rules that were 

 15 put out for a proposal by the Commission with 

 16 respect to margin. It's the delegation of certain 

 17 authorities to the division director. 

 18 COMMISSIONER O'MALIA: Okay. In this, 

 19 on the margin rule, we had an extensive discussion 

 20 of modeling margin with Ananda. He was at the 

 21 table. And it was Ananda's belief that we just 

 22 had to accept these models and we weren't -- you 
 155 

 1 know, especially for the 716 push-outs. You know, 

 2 I know -- and you said they didn't have the 

 3 resources to evaluate the models. Now, I read 

 4 this and it says -- it contemplates DCIO being 

 5 able to basically consider what's acceptable 

 6 margin and what's not and make changes to 

 7 individual assets or collateral. If we don't have 

 8 the capability to approve the models, how are we 

 9 going to evaluate everybody's individual 

 10 collateral and assets that they're posting? How 

 11 do we get into that? How are we going to have the 

 12 resources to do that? 

 13 MR. LAWTON: I think the concept was 

 14 that you might have a case where something becomes 

 15 a distressed asset and we've become aware of 

 16 something that was fine, was posted as collateral. 

 17 And because if something happens to the issuer, we 

 18 become aware of it, we might go into the 

 19 registered entities or registrants and say we 

 20 don't think that this is acceptable now. It was; 

 21 it fit before, but in the news somebody -- it 

 22 becomes a distressed asset and people across the 
 156 

 1 markets are haircutting these things dramatically. 

 2 COMMISSIONER O'MALIA: So we would say 

 3 they can't haircut them as drastically? 

 4 MR. LAWTON: No, if somebody was not -- 

 5 for example, if somebody was giving a full value 

 6 to something that we believe should now be 

 7 haircut. 

 8 COMMISSIONER O'MALIA: Is this kind of a 

 9 one-way street that if they're only over-valuing 

 10 them? What if they're undervaluing them? 

 11 MR. LAWTON: Yes, I don't think that we 

 12 would contemplate if somebody was -- I'm sorry, 

 13 maybe I misunderstand the question. 

 14 COMMISSIONER O'MALIA: Well, this whole 

 15 rule seems to say that, you know, we can replace a 

 16 -- we can require an entity to replace a margin 

 17 asset posted with the CSE -- which is a swap 

 18 dealer or a major swap participant -- with a 

 19 different margin asset. It says we can require a 

 20 CSE to modify the margin haircut, and I'm just 

 21 trying to -- I mean, what is our role here? How 

 22 much interference are we going to have in this? 
 157 

 1 Are we going to -- and how often are we going to 

 2 look at this and what are the criteria? I mean, 

 3 I've got a lot of questions about this one and I'm 

 4 trying to understand. Would it be both ways? If 

 5 it's too low we would say, you know, the 

 6 calculation's high; or if it's too high, say it's 

 7 too low. 

 8 MR. LAWTON: Again, I think that we're 

 9 thinking it's in the direction where something is 

 10 now, we believe, overvalued and, therefore, 

 11 putting the entity at risk because they're 

 12 accepting something or valuing something in a way 

 13 that is not appropriate anymore. And again, I 

 14 think the notion for delegated authority is this 

 15 could be in a distressed market situation, perhaps 

 16 not only is the collateral in a distressed 

 17 situation, but perhaps the individual dealer is in 

 18 a distressed situation. And so we want to be able 

 19 to act quickly. 

 20 COMMISSIONER O'MALIA: Well, since we've 

 21 authorized this vast authority without much 

 22 limitation can I talk you into maybe creating some 
 158 

 1 thresholds or some flexibility on end user capital 

 2 requirements? Maybe substituting our decision for 

 3 what a bank may assess a small end user. Would 

 4 you be interested in that? 

 5 The silence is deafening. I think 

 6 there's a typo in this, on page 65, the second 

 7 line. "The Commission is proposing to delegate 

 8 authority with respect to," blah, blah, blah, 

 9 "which would authorize a Commission." Don't you 

 10 mean the Commission is not delegating, the 

 11 Commission is delegating DCIO. Line 2, page 65. 

 12 Is that a typo? 

 13 CHAIRMAN GENSLER: Unanimous consent to 

 14 fix the type? No objection, it's fixed. Good 

 15 catch. 

 16 COMMISSIONER O'MALIA: I read this 

 17 stuff. I have no further questions. Thank you. 

 18 CHAIRMAN GENSLER: I thought I'd reply 

 19 to a question you gave the staff. How I comport 

 20 with the Dodd- Frank letter -- not the 

 21 Lincoln-Dodd letter is this rule does not impose a 

 22 charge on the end users. I do appreciate that end 
 159 

 1 users doing swaps with a bank where the federal 

 2 prudential regulators are setting capital or 

 3 dealing with a non-bank where the SEC or we're 

 4 doing capital, that capital is priced into the 

 5 swap. But there's no capital being assessed or 

 6 imposed directly on the end user; it's part of 

 7 that business. So as it relates to the letter 

 8 itself I think -- and I know we have a difference 

 9 here, but, I mean, I think that it does comply 

 10 with that letter. 

 11 We're not doing margin. That's the rule 

 12 we did two weeks ago. Congress said they're not 

 13 having clearing. That's all right, too. And on 

 14 capital, I think the capital that the dealer has 

 15 to have we've taken a very balanced -- my word 

 16 might even be light -- approach, but they're not 

 17 systemically relevant because they're not SIFIs 

 18 and they're not part of bank holding companies. 

 19 So I think this tangible net equity approach where 

 20 they can using the factory for other reasons -- 

 21 and the handful of people that have been in have 

 22 said if we don't have to segregate it and we can 
 160 

 1 use tangible net equity so we can use the factory 

 2 for other purposes, we think that that might work. 

 3 Might. They'll see the proposal and then they're 

 4 comment. 

 5 COMMISSIONER O'MALIA: Thank you for 

 6 clarifying that. 

 7 CHAIRMAN GENSLER: Mr. Stawick? 

 8 MR. STAWICK: Commissioner O'Malia? 

 9 COMMISSIONER O'MALIA: No. 

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

 11 Commissioner Chilton? 

 12 COMMISSIONER CHILTON: Aye. 

 13 MR. STAWICK: Commissioner Chilton, aye. 

 14 Commissioner Sommers? 

 15 COMMISSIONER SOMMERS: Aye. 

 16 MR. STAWICK: Commissioner Sommers, aye. 

 17 Commissioner Dunn? 

 18 COMMISSIONER DUNN: Aye. 

 19 MR. STAWICK: Commissioner Dunn, aye. 

 20 Mr. Chairman? 

 21 CHAIRMAN GENSLER: Aye. 

 22 MR. STAWICK: Mr. Chairman, aye. Mr. 
 161 

 1 Chairman, the yeas are four, the nays are one. 

 2 CHAIRMAN GENSLER: I thank you and we'll 

 3 accept that vote and, along with the others, be 

 4 forwarding it to the Federal Register. 

 5 Let me just see whether I'm supposed to 

 6 now or -- there was this vote on extending the 

 7 other comment period. Am I going to do that now? 

 8 COMMISSIONER O'MALIA: Just read. 

 9 CHAIRMAN GENSLER: All right. I'm 

 10 supposed to just read. As we noted two weeks ago, 

 11 when the Commission proposed the margin rule, it's 

 12 our intention to ensure that the comment periods 

 13 for proposed margin and capital rules end on the 

 14 same date. To that end, consistent with the draft 

 15 Federal Register release that the Office of 

 16 General Counsel circulated, do I hear a motion to 

 17 extend the comment period for the proposed margin 

 18 rule to end the same day as the comment period for 

 19 the proposed capital rule that we just considered? 

 20 COMMISSIONER O'MALIA: Mr. Chairman, I 

 21 have an amendment I'd like to offer to this, if I 

 22 may. I have an amendment and if it's appropriate 
 162 

 1 now, then I'd like to do it now if we need -- 

 2 CHAIRMAN GENSLER: This is not the 

 3 30-day piece. 

 4 COMMISSIONER O'MALIA: Okay. 

 5 CHAIRMAN GENSLER: This is just to make 

 6 margin and capital coterminous. 

 7 COMMISSIONER O'MALIA: No complaints. 

 8 CHAIRMAN GENSLER: Okay. Do I hear a 

 9 motion? 

 10 COMMISSIONER SOMMERS: So moved. 

 11 COMMISSIONER O'MALIA: Second. 

 12 CHAIRMAN GENSLER: If there's no 

 13 discussion, Mr. Stawick could you call the roll? 

 14 MR. STAWICK: Commissioner O'Malia? 

 15 COMMISSIONER O'MALIA: Aye. 

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

 17 Commissioner Chilton? 

 18 COMMISSIONER CHILTON: Aye. 

 19 MR. STAWICK: Commissioner Chilton, aye. 

 20 Commissioner Sommers? 

 21 COMMISSIONER SOMMERS: Aye. 

 22 MR. STAWICK: Commissioner Sommers, aye. 
 163 

 1 Commissioner Dunn? 

 2 COMMISSIONER DUNN: Aye. 

 3 MR. STAWICK: Commissioner Dunn, aye. 

 4 Mr. Chairman? 

 5 CHAIRMAN GENSLER: Aye. 

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

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

 8 nays are zero. 

 9 CHAIRMAN GENSLER: Okay, thank you. We 

 10 will have a separate vote after the fourth one on 

 11 this whole 30-day concept. 

 12 Thank you so much, Thelma and Tom. 

 13 John, you get to stay at the table, I think, 

 14 right? Changing seats. 

 15 I did notice a bunch of other alums 

 16 here, you know, Jim Newsome, Brad Berry. I mean, 

 17 I noted David and there are so many people here, 

 18 so I didn't want to leave you out. And there's 

 19 probably Graham -- I mean, there's too many. 

 20 There's a lot of -- Dan Waldman comes back every 

 21 time. Alison, there's Alison Lurton. There are 

 22 probably people I'm just not seeing. My eyes are 
 164 

 1 blurry. 

 2 John Lawton, Peter Kals from the 

 3 Division of Clearing and Intermediary Oversight, 

 4 there's Nadia, the Division of Market Oversight, 

 5 David back at the table again from the General 

 6 Counsel will present the staff report proposed 

 7 rules concerning amendments to adapt certain CFTC 

 8 regulations to Dodd-Frank. I don't know who I'm 

 9 turning to, but the team. 

 10 MR. LAWTON: Good afternoon. The 

 11 Commission has before it amendments to numerous 

 12 regulations across its Rule Book to bring them 

 13 into conformance with the requirements of the 

 14 Dodd-Frank Act. In some cases the changes are 

 15 purely administerial. For example, deleting 

 16 references to derivative transaction execution 

 17 facilities is a category of trading platform that 

 18 was eliminated by Dodd-Frank. In other cases the 

 19 changes, while technical, did require the exercise 

 20 of a judgment in drafting. For example, modifying 

 21 various definitions to accommodate swaps in the 

 22 Rule Book. Finally, in several instances the 
 165 

 1 changes are substantive in nature. For example, 

 2 modifying certain recordkeeping requirements and 

 3 aligning them across futures and swaps. 

 4 With regard to the cost to the staff, 

 5 staff believes that implementation of these 

 6 particular rules would actually not require 

 7 additional resources. Staff believes, in fact, 

 8 that by clarifying and harmonizing various rules 

 9 across the Rule Book that should facilitate 

 10 oversight of the markets and reduce the need for 

 11 interpretative guidance going forward. 

 12 To provide a bit more detail I'm going 

 13 to turn it over to my colleagues. First Peter 

 14 Kals of DCIO, then Nadia Zakir of DMO, and then 

 15 finally Dave Aron of OGC. 

 16 MR. KALS: The Dodd-Frank Act amended 

 17 the Commodity Exchange Act's definitions of 

 18 "futures commission merchant" and "introducing 

 19 broker" to permit them to trade swaps for 

 20 customers. Accordingly, the proposed rule-making 

 21 amends regulations applicable to FCMs and IBs so 

 22 that they cover swaps analogously to futures. 
 166 

 1 Definitions. Staff has proposed 

 2 revising the definitions of "customer," "customer 

 3 funds," and "commodity interest" so that customers 

 4 of FCMs and IBs include swap customers and so that 

 5 the transactions they handle include swaps 

 6 transactions in addition to futures transactions. 

 7 Recordkeeping. We've proposed revising 

 8 fundamental recordkeeping rules so that FCMs and 

 9 IBs keep records of swaps transactions similarly 

 10 to how they presently maintain records of futures 

 11 transactions. For example, we've proposed 

 12 amending Regulation 1.31 so that swap records must 

 13 be maintained not only for five years, which is 

 14 the current retention period for futures records, 

 15 but also for the life of the swap because swaps 

 16 tend to have longer terms than futures. This 

 17 would require FCMs and IBs to maintain swap 

 18 records for the same amount of time as the 

 19 Commission recently proposed for swap dealers and 

 20 major swap participants. 

 21 Bunched orders. Under current 

 22 Regulation 1.35 FCMs and IBs must keep records 
 167 

 1 identifying each customer whose order is submitted 

 2 to a designated contract market. However, if an 

 3 FCM or IB receives several orders for the same 

 4 contract -- a bunched order -- from an eligible 

 5 account manager, such as a commodity trading 

 6 advisor, the FCM or IB need not include in its 

 7 trading records the identity of each customer. In 

 8 order for the FCM or IB to avail itself of this 

 9 exception the eligible account manager's 

 10 post-trade allocation scheme must be fair so that 

 11 the manager doesn't give preferential treatment to 

 12 certain customers if the FCM or IB can't fill all 

 13 of the bunched orders at the best available market 

 14 price. 

 15 Staff has proposed amending the bunched 

 16 orders provision so that swap orders can be 

 17 bunched analogously to futures orders and can be 

 18 submitted to a swap execution facility in addition 

 19 to a DCM. Staff has proposed provisions specific 

 20 to bunched orders for swaps executed bilaterally. 

 21 Whereas eligible account managers must allocate 

 22 bunched orders that have been cleared as soon as 
 168 

 1 necessary to ensure that clearing records identify 

 2 each customer, which would have to happen sometime 

 3 before the end of the day on which the order is 

 4 executed, bunched orders executed bilaterally must 

 5 be allocated to individual customers by the end of 

 6 the day on which the order was executed. The 

 7 preamble of the proposed rule seeks comment 

 8 whether it be possible for market participants to 

 9 bunch swap orders as proposed. 

 10 Finally, in amending the bunched orders 

 11 provisions in Regulation 1.35 staff has proposed 

 12 adding FCMs and IBs to the list of eligible 

 13 account managers. We understand that these 

 14 brokers have the ability to bunch orders and, 

 15 therefore, they should be permitted to do so 

 16 provided they comply with all of the existing 

 17 rules as well as other regulations that prohibit 

 18 these brokers from trading ahead of their 

 19 customers. As a result, FCMs and IBs would not be 

 20 able to bunch customer orders with their own 

 21 proprietary orders. 

 22 MS. ZAKIR: Good morning, Mr. Chairman 
 169 

 1 and Commissioners. In addition to establishing a 

 2 comprehensive regulatory framework for swaps and 

 3 security-based swaps, Title VII of the Dodd-Frank 

 4 Act also created a new type of regulated 

 5 marketplace and registered entity called the swap 

 6 execution facility, or SEF. The Dodd-Frank Act 

 7 established a new regulatory framework for SEFs 

 8 similar in many respects to the regulatory 

 9 framework for designated contract markets. In 

 10 particular, the regulatory framework for SEFs 

 11 under the Dodd-Frank Act includes a number of 

 12 self-regulatory responsibilities that are similar 

 13 to the self-regulatory obligations of DCMs. 

 14 Accordingly, the amendments to the Commission's 

 15 regulations proposed today would add SEFs to 

 16 certain regulations that currently applied to 

 17 designated contract markets. 

 18 As an initial matter, staff is proposing 

 19 to amend the definition of "self-regulatory 

 20 organization" in Regulation 1.3(ee) to include 

 21 SEFs. The addition of swap execution facilities 

 22 to the self-regulatory organization definition 
 170 

 1 would, for example, require SEFs to comply with 

 2 Regulation 1.59 which requires self-regulatory 

 3 organizations to submit rules to the Commission 

 4 that prohibits certain conduct by their employees. 

 5 Staff also is proposing several new and 

 6 revised definitions under Part 1 for terms that 

 7 are newly defined or have revised definitions 

 8 under the Dodd-Frank Act. Such terms include 

 9 "swap execution facility," "swap data repository," 

 10 "floor broker," and "floor trader," to name a few. 

 11 Staff is proposing also to amend 

 12 Regulation 1.35 to add SEF participants who have 

 13 trading privileges to the list of persons that 

 14 must comply with the basic recordkeeping functions 

 15 that are currently applicable to members of 

 16 designated contract markets, FCMs, intermediary 

 17 brokers, and retail foreign exchange dealers. 

 18 The proposed revisions to Regulation 

 19 1.39 would extend the requirements applicable to 

 20 the simultaneous execution of buy and sell orders 

 21 of different principals to staff participants with 

 22 trading privileges. 
 171 

 1 Staff also is proposing to extend 

 2 Regulation 1.67, which currently applies designed 

 3 contract markets to SEFs, thereby requiring a SEF 

 4 to notify an FCM or other registrant upon learning 

 5 that a member of such facility or market violated 

 6 a rule resulting in financial harm to a customer 

 7 and requiring the FCM or registrant to then notify 

 8 the customer. 

 9 Staff is further proposing to revise 

 10 Part 7 which currently sets forth contract market 

 11 rules altered or supplemented by the Commission 

 12 pursuant to Section 8(a)(7) of the Commodity 

 13 Exchange Act. Staff proposes to revise parts of 

 14 and to include the rules of any registered entity, 

 15 including SEFs, that the Commission may alter or 

 16 supplement in the future. 

 17 In order to implement the grandfathering 

 18 and phase-out of exempt markets under the 

 19 Dodd-Frank Act staff also is proposing an 

 20 amendment to Part 36 governing exempt markets. 

 21 The revisions eliminate cross references to 

 22 sections of the Commodity Exchange Act that are 
 172 

 1 eliminated by the Dodd-Frank Act. While 

 2 eliminating the cross references, the proposed 

 3 revisions incorporate the relevant substantive 

 4 provisions of the Commodity Exchange Act 

 5 applicable to exempt markets that will continue to 

 6 operate during the pendency of the grandfathering 

 7 period as permitted by the Dodd-Frank Act. 

 8 Finally, staff is proposing revisions to 

 9 Part 140 and 145 pertaining to governing 

 10 organizations, functions, and Commission 

 11 procedures, and Commission records and 

 12 information. The proposed revisions largely add 

 13 SEFs and swap data repositories to the provisions 

 14 that are currently applicable to other registered 

 15 entities, including, for example, the Commission's 

 16 delegation of authority to divisions within the 

 17 Commission to publish in the Federal Register and 

 18 to disclose confidential information. 

 19 This concludes my presentation and I 

 20 look forward to answering your questions. Thank 

 21 you. 

 22 MR. ARON: I just have a few preliminary 
 173 

 1 remarks. I just want to say it's great to be back 

 2 here. It's even more fun the second time around 

 3 at the agency. And Peter stole one or two of my 

 4 bullets, so my presentation will be even shorter 

 5 than it otherwise was. 

 6 And lastly, I didn't actually draft the 

 7 proposed changes to 1.31 and 1.35, so my able 

 8 enforcement colleagues may jump in in response to 

 9 some questions that I anticipate on possibly the 

 10 oral recordkeeping rule and otherwise. 

 11 So 1.31 is the Commission's general 

 12 recordkeeping rule, 1.35 is its transaction 

 13 recordkeeping rule. Our general approach and what 

 14 we're recommending today was to conform to the 

 15 December 9th swap dealer and MSP recordkeeping 

 16 rule -- which I note was a five-nothing vote -- to 

 17 conform in some respects to international 

 18 standards. 

 19 The overview of the 1.31 changes are 

 20 first that all persons who are subject to our 

 21 recordkeeping rules would be required to keep 

 22 those records in original format for paper or 
 174 

 1 native file format for electronic records. And 

 2 I'll come back to what "native file format" means 

 3 in a minute. And I understand that enforcement 

 4 already expresses a preference for those formats 

 5 in their record production requests currently, so 

 6 it won't be a complete surprise or change. 

 7 Production of records must be in a form 

 8 for proposing -- or recommending the proposed -- 

 9 that they be in a form specified by the 

 10 Commission. And Federal Rules of Civil Procedure 

 11 already require that with respect to federal 

 12 proceedings currently. 

 13 Next, we would propose that record 

 14 keepers maintain records of swaps and related 

 15 sport and forward trades until, as Peter 

 16 mentioned, expiration, termination, or transfer 

 17 plus five years, for the reasons Peter mentioned. 

 18 And lastly, the record keepers would be 

 19 required to permit inspection not only by us and 

 20 DOJ, but also the applicable bank regulators; and 

 21 for security-based swap agreements, only the SEC. 

 22 So native file format briefly is the 
 175 

 1 format in which the electronic file was originally 

 2 created. And this is important because saving a 

 3 file in that format ensures it will store all the 

 4 data that were created with the program. Other 

 5 formats may be compatible, but they might not save 

 6 all the information. So if you save a Word 

 7 document as a plain text file, it removes the 

 8 formatting. We don't want changes like that. 

 9 So moving to 1.35, the recordkeeping 

 10 obligations would extend to -- I think Peter 

 11 mentioned this as well -- swaps executed by FCMs, 

 12 IBs, and SEF members on SEFs. The rule applies 

 13 now to non-swaps and only on DCMs. 

 14 Next, the oral recordkeeping proposal. 

 15 It would expressly require FCMs, retail forex 

 16 dealers, IBs, and DCM, SEF members to keep records 

 17 of all oral and written communications that lead 

 18 to commodity interest or cash commodity trades: 

 19 Commodity interests, you know, swaps, futures, 

 20 futures options, commodity options. And the 

 21 rationale behind our recommendation is that where 

 22 oral communications are used to form trades, the 
 176 

 1 Commission has historically had a more difficult 

 2 time enforcing the Commodity Exchange Act in our 

 3 regs, and particularly where we must establish a 

 4 threshold knowledge or intent level of 

 5 sustain-and-action. And as a consequence 

 6 enforcement success is often directly correlated 

 7 to the existence of a high-quality voice 

 8 recording, so we're trying to increase the 

 9 efficiency and get better results. 

 10 So that's kind of a quick and dirty and, 

 11 you know, ready for some questions. 

 12 CHAIRMAN GENSLER: With that, the Chair 

 13 will entertain a motion to accept the staff 

 14 recommendation to issue the rule concerning 

 15 amendments to various regulations. 

 16 COMMISSIONER SOMMERS: So moved. 

 17 COMMISSIONER O'MALIA: Second. 

 18 CHAIRMAN GENSLER: I have just a couple 

 19 questions. I support this, but I particularly 

 20 want to ask a question about bunched orders and 

 21 then maybe on this recordkeeping. 

 22 And again, I'm relating this because so 
 177 

 1 many meetings that I've been in, asset managers, 

 2 particularly asset managers who use subaccounts -- 

 3 a subaccount might mean that they're managing for 

 4 many different pension funds' money -- have raised 

 5 the bunched order flexibility that they have in 

 6 the futures world and have asked that they have a 

 7 similar flexibility in the swaps world if they're 

 8 traded on a swap execution facility or brought to 

 9 a clearinghouse. So my question, Peter and John 

 10 and the team, is do you think this addresses -- 

 11 and I know, John, you've been in some of these 

 12 meetings -- does this address the issue that many 

 13 of these asset managers have raised? 

 14 MR. LAWTON: Yes, we believe that it 

 15 does. We've talked to a number of people and I 

 16 think the people are certainly interested in 

 17 reviewing this and seeing whether they believe it 

 18 can work for them. And I think it ties to the 

 19 Part 39 straight through processing rule that the 

 20 Commission proposed recently that the asset 

 21 managers had a concern about that rule because 

 22 they don't necessarily know at the time a trade is 
 178 

 1 executed who is the ultimate beneficial owner of 

 2 all the pieces of the trade. And we believe that 

 3 that issue was raised in the futures world in the 

 4 past and that the bunched orders rule seems to 

 5 address it. And we're trying to establish and 

 6 analogous procedure for swaps. 

 7 CHAIRMAN GENSLER: So, I mean, we could 

 8 get in a debate whether this is a conforming rule 

 9 or not a conforming rule. It's not ministerial, 

 10 as you said, but it is, in essence, taking is it 

 11 1.35 as it applies to futures and allowing 

 12 basically the flexibility that these pension funds 

 13 and asset managers could use a similar approach to 

 14 swaps? 

 15 MR. LAWTON: Right. And I think that 

 16 one issue that people will discuss is what should 

 17 be the deadline for getting your allocation done. 

 18 And I think we'll get some comment on that because 

 19 it may be that different asset managers have 

 20 different capabilities as to how quickly they can 

 21 do it. 

 22 CHAIRMAN GENSLER: Right. So I think 
 179 

 1 this helps lower risk to the market as it brings 

 2 things into clearing and swap execution 

 3 facilities, but actually addresses a legitimate 

 4 concern that asset managers had without clarifying 

 5 it. Because if the Commission didn't clarify it 

 6 they do our bunched order rules for futures apply 

 7 to swaps, and this is what this proposal's saying. 

 8 MR. LAWTON: Essentially, yes. 

 9 CHAIRMAN GENSLER: Yes. And then when 

 10 recordkeeping and reporting, I guess David and 

 11 maybe -- I see Vince there as well from the 

 12 Division of Enforcement, you said that this is, 

 13 again, you know, whether it's -- it's not 

 14 ministerial whether it's conforming, but, in any 

 15 event, this is consistent with what we did in a 

 16 rule in the fall, a proposed rule in the fall, for 

 17 swap dealers' recordkeeping, is that correct? 

 18 MR. ARON: That is actually, isn't it? 

 19 The oral -- 

 20 CHAIRMAN GENSLER: Vince, come up to the 

 21 table if you want. 

 22 MR. LAWTON: Right. There was one of 
 180 

 1 the business conduct rules for swap dealers had a 

 2 similar provision and so that was just proposed. 

 3 It's out there as a proposal for swap dealers and 

 4 MSPs, so this would apply a similar requirement to 

 5 FCMs and IBs. 

 6 CHAIRMAN GENSLER: Is that right? 

 7 MR. McGONAGLE: Yes, that's right. And 

 8 so it captures language that says each transaction 

 9 record shall be maintained as a separate file 

 10 identifiable by transaction and counterparty as 

 11 well as the length of time, say, in particular for 

 12 audio which is a new proposal for 1.35, that it be 

 13 for five years. And so currently, this proposal 

 14 tracks the prior language that was used for the 

 15 swaps rule. 

 16 CHAIRMAN GENSLER: And it's still -- you 

 17 know, it was out for comment, but if we do vote in 

 18 a few minutes to extend everybody 30 days, that 

 19 would be extended as well, so it'd be helpful. 

 20 Do you know what the international 

 21 regulators do, the FSA, for instance? What do 

 22 they do in this area? 
 181 

 1 MR. McGONAGLE: So with respect to audio 

 2 recordings, there's been conversation in the 

 3 regulatory community, even internally within CFTC, 

 4 for several years about whether the recordkeeping 

 5 obligations should extend to audio. And 

 6 commencing in 2008, the UK FSA commenced a 

 7 comprehensive market study with respect to audio 

 8 requirements and imposed a rule that had a 

 9 retention requirement of six months. It was 

 10 basically focused on communications, say, at 

 11 certain dealers, that those communications be 

 12 maintained for a period of six months, and 

 13 entertained a number of comments from various 

 14 industry sources in determining whether to roll 

 15 out that rule. It had a very long tail with 

 16 respect to the implementation in the proposal, was 

 17 out there for several months. And then when the 

 18 proposal was picked up, implementation period 

 19 extended thereafter for several months. 

 20 But the FSA takeaway was that in large 

 21 part for their community audio was already being 

 22 captured. And so to the extent that for the large 
 182 

 1 firms they were already doing it, FSA didn't see 

 2 that there was large additional costs imposed. 

 3 That's not to say, however, that those 

 4 commenters who submitted to UK FSA agreed. I 

 5 mean, they took the position that there would be 

 6 costs associated with respect to audio 

 7 requirements. The UK FSA ultimately disagreed in 

 8 terms of whether the costs should outweigh the 

 9 benefit and ultimately promulgating the rule. And 

 10 the UK FSA is also coming out with a new proposal 

 11 which will be effective in the fall with respect 

 12 to cell phone communications and the data capture 

 13 for those conversations. 

 14 CHAIRMAN GENSLER: And is it correct, I 

 15 gather, for the Division of Enforcement you're 

 16 recommending this for at least two reasons. One, 

 17 it makes futures commission merchants have to be 

 18 consistent with swap dealers? Is that -- 

 19 MR. McGONAGLE: That's correct, Mr. 

 20 Chairman. 

 21 CHAIRMAN GENSLER: And then the second 

 22 reason is you think it'll be -- facilitate this 
 183 

 1 agency's transparency and ability to police the 

 2 markets? 

 3 MR. McGONAGLE: So the benefits that we 

 4 see are for market protection, deterrence. The 

 5 communications? We're neutral as to the 

 6 communications, so they may be inculpatory or 

 7 exculpatory. But the fact of the matter is, is 

 8 that people communicate about their transactions 

 9 through writing and orally. We have a very good 

 10 program in place for the capture of written 

 11 records, written communications, and this would 

 12 capture oral communications that relate to the 

 13 transactions that we're most interested in. 

 14 CHAIRMAN GENSLER: Okay, thanks. 

 15 Commissioner Dunn? 

 16 COMMISSIONER DUNN: Let me follow upon 

 17 that because, correct if -- the proposed rule 

 18 regarding oral communications requires that a 

 19 registrant would actually record all oral 

 20 communications that could lead to an executed 

 21 transaction. Is that correct? 

 22 MR. McGONAGLE: Yes. Commissioner, the 
 184 

 1 operative language is: All oral and written 

 2 communications provided or received concerning 

 3 quotes, solicitations, bids, offers, instructions, 

 4 trading, and prices that lead to the execution of 

 5 transactions and the commodity interest or cash 

 6 commodity whether communicated by telephone, 

 7 voicemail, facsimile, instant messaging, chat 

 8 rooms, electronic mail, mobile device, or other 

 9 digital or electronic media. 

 10 COMMISSIONER DUNN: Well, on the oral 

 11 side, I wonder when does the tape have to go on? 

 12 I'm in Chicago, so naturally I'm going to give a 

 13 little push for the Bulls since they won last 

 14 night. Say you've called up your friend and you 

 15 started talking about the Bulls game last night 

 16 and that evolved into something that potentially 

 17 leads to a transaction. At what point do they 

 18 have to turn on the tape or is it supposed to be 

 19 on all the time? 

 20 MR. McGONAGLE: So my first answer is 

 21 the conservative one, which is basically, you 

 22 know, I'm interested in comments -- we'll be 
 185 

 1 interested in comments concerning how people are 

 2 already taping in the community. My expectation 

 3 is that the tape's going to be running. And in a 

 4 number of cases where we've obtained audio 

 5 recordings it's because people are speaking on a 

 6 taped line. And so they're having a conversation 

 7 at a desk where they're most likely to be 

 8 conducting business that's relevant to our 

 9 jurisdiction. So I think it's a situation where 

 10 they would not be able to toggle on and off during 

 11 their communication, that it would capture for the 

 12 entirety of the day those individuals that are 

 13 engaged in transactions that would be subject. 

 14 So, you know, we do pick up 

 15 conversations and this has happened in the past 

 16 where people will say whatever they say on the 

 17 phone, some of which won't be susceptible or, you 

 18 know, privacy issues or talking about their 

 19 day-to-day life, and intermixed with that will be 

 20 transactions or communications about transactions. 

 21 So that's a long way of saying that I don't know 

 22 that finding a bright line will be easy to do. It 
 186 

 1 would be easier, I think, if you had a taped line 

 2 and people conducting business just conducted 

 3 their business on that taped line. 

 4 MR. ARON: If I could just add a little 

 5 something. In connection with the FSA study they 

 6 found that 80 percent of the covered phone lines 

 7 were already being recorded and it's not that 

 8 unusual on Wall Street for traders to be recorded. 

 9 You often hear the beep in the background when 

 10 you're talking to a trader. So we'll find out in 

 11 response, you know, to what the commenters say if 

 12 maybe it's changed. But if it's not, it shouldn't 

 13 be all that unusual. 

 14 COMMISSIONER DUNN: All right. Thank 

 15 you. 

 16 CHAIRMAN GENSLER: Thank you, 

 17 Commissioner Dunn. Commissioner Sommers? 

 18 COMMISSIONER SOMMERS: Thank you, Mr. 

 19 Chairman. I don't have any questions, but just 

 20 want to state two objections to these conforming 

 21 amendments. 

 22 The first being that I think it's 
 187 

 1 premature to have conforming amendments to conform 

 2 to proposals that we haven't finalized yet. And 

 3 the second one is the inclusion of issues that I 

 4 believe are important issues, but substantive 

 5 issues being put into a proposal that is supposed 

 6 to be conforming. 

 7 I don't have any questions. Thank you. 

 8 CHAIRMAN GENSLER: Thank you, 

 9 Commissioner Sommers. Commissioner Chilton? 

 10 COMMISSIONER CHILTON: I have no 

 11 questions. Support it. Thank you. 

 12 CHAIRMAN GENSLER: Thank you, 

 13 Commissioner Chilton. Commissioner O'Malia? 

 14 COMMISSIONER O'MALIA: On the recording 

 15 and the recordkeeping, the amendment would require 

 16 that recorded communications be identified by 

 17 counterparty and transaction. How does this 

 18 differ from current storage practices of 

 19 electronic communications? And the second part of 

 20 this, can this kind of tagging be accomplished 

 21 automatically, you know, without human 

 22 intervention, so, you know, we're not going to 
 188 

 1 have to sort this thing out? 

 2 MR. ARON: I'm not really sure about the 

 3 technology, but, I mean, obviously when you just 

 4 set your phone line to be recorded it will all be 

 5 there. And presumably, you know, just manually it 

 6 can be done by simply somebody stating at the 

 7 beginning of a conversation who they're talking 

 8 to, you know. I don't know if we thought about 

 9 that specifically, but just off the top of my 

 10 head. 

 11 COMMISSIONER O'MALIA: Well, this goes 

 12 to kind of the larger conforming to our other 

 13 major rule-makings about counterparty IDs and 

 14 legal entity identifiers. If we're going to try 

 15 to sort all these communications out by those 

 16 transactions we're going to have to have a way to 

 17 manage that without saying -- you know, speaking 

 18 into the phone line and then requiring us to sort 

 19 that out. That's not a winner for us. Does 

 20 anybody have any thoughts on that, how we're going 

 21 to sort that out or how they're going to sort that 

 22 out so we don't have to? 
 189 

 1 MR. McGONAGLE: Well, certainly the 

 2 industry that is using audio now, they're 

 3 capturing the information in a way that is 

 4 somewhat searchable because they want to go back 

 5 and confirm the nature of the transaction. So, 

 6 you know, from enforcement's perspective our 

 7 ability to do the audit trail without -- you know, 

 8 to focus on communications of interest and filter 

 9 out those communications that we're not interested 

 10 in, it is important. But I think here in 

 11 particular as it relates to audio how those 

 12 communications are tagged by transaction and 

 13 counterparty will be a key area for comment, so we 

 14 can see what people are able to do currently for 

 15 their audit trail as it relates to audio 

 16 communications because I think it's different for 

 17 the electronic -- you know, the e-mail and chat 

 18 rooms, things like that. 

 19 MR. KALS: Also, if I may add, some 

 20 market participants have already commented on some 

 21 of your questions with respect to the swap dealer 

 22 recordkeeping rule. And I know generally that 
 190 

 1 staff is considering those comments already. 

 2 COMMISSIONER O'MALIA: Can you 

 3 characterize those for me? 

 4 MR. KALS: I don't have specifics about 

 5 those. 

 6 COMMISSIONER O'MALIA: All right. Thank 

 7 you. 

 8 CHAIRMAN GENSLER: I do know, 

 9 Commissioner O'Malia, I asked just back here, 

 10 there's about 20 comments on that original rule, 

 11 but no summary of it. 

 12 COMMISSIONER DUNN: Mr. Chairman? 

 13 CHAIRMAN GENSLER: Yes. 

 14 COMMISSIONER DUNN: Mr. Chairman? 

 15 CHAIRMAN GENSLER: Yes. 

 16 COMMISSIONER DUNN: Just to follow up on 

 17 Commissioner Sommers' comments, will this comment 

 18 be held open until all other rules are completed? 

 19 CHAIRMAN GENSLER: Well, I think this 

 20 would be held open for, you know, the 60 days, but 

 21 it's my -- it's not my anticipation that any of us 

 22 are going to be thinking about this. It's going 
 191 

 1 to be an earlier rule we finalize. So just like 

 2 we have discretion to consider late comments as 

 3 late comments come on this, you know, we'd have 

 4 the discretion to take those comments in. 

 5 COMMISSIONER DUNN: Thank you for that 

 6 clarification. 

 7 CHAIRMAN GENSLER: Mr. Stawick? 

 8 MR. STAWICK: Commissioner O'Malia? 

 9 COMMISSIONER O'MALIA: Aye. 

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

 11 Commissioner Chilton? 

 12 COMMISSIONER CHILTON: Aye. 

 13 MR. STAWICK: Commissioner Chilton, aye. 

 14 Commissioner Sommers? 

 15 COMMISSIONER SOMMERS: No. 

 16 MR. STAWICK: Commissioner Sommers, no. 

 17 Commissioner Dunn? 

 18 COMMISSIONER DUNN: Aye. 

 19 MR. STAWICK: Commissioner Dunn, aye. 

 20 Mr. Chairman? 

 21 CHAIRMAN GENSLER: Aye. 

 22 MR. STAWICK: Mr. Chairman, aye. Mr. 
 192 

 1 Chairman, on this question the yeas are four, the 

 2 nays are one. 

 3 CHAIRMAN GENSLER: The ayes have it, so 

 4 the staff recommendation is accepted. I do ask at 

 5 this point for unanimous consent to allow staff to 

 6 make technical corrections to the documents voted 

 7 on today prior to sending them to the Federal 

 8 Register. 

 9 I guess not hearing any objections, the 

 10 technical corrections are done. 

 11 As I noted when we opened the meeting we 

 12 have now substantially completed the proposal 

 13 phase of our Dodd- Frank rule-making. We do have 

 14 the Volcker Rule. We're bound to find some other 

 15 things that we'll think are appropriate to 

 16 propose. Testing and supervision, we've had a lot 

 17 of discussions and I'm very much looking forward 

 18 to staff recommendations on that. 

 19 COMMISSIONER O'MALIA: What about 

 20 portfolio margining? 

 21 CHAIRMAN GENSLER: I'm with you on that 

 22 one. Commissioner O'Malia and I have been like -- 
 193 

 1 COMMISSIONER O'MALIA: Let's write one. 

 2 CHAIRMAN GENSLER: Yes. Terrific. We 

 3 need to work on that one, so I agree with 

 4 Commissioner O'Malia on that. 

 5 But to continue to give potential market 

 6 participants the opportunity to evaluate the 

 7 entire mosaic of rule-makings the Commission will 

 8 vote to reopen and extend the comment period. I 

 9 know Commissioner O'Malia has an amendment to 

 10 what's been circulated here. But let me say I 

 11 think this time will allow the public to submit 

 12 any comments they might have after seeing the 

 13 whole mosaic. 

 14 And for the rules which the comment 

 15 period is closed, we've had the discretion. Those 

 16 late filers have been put up on our website and so 

 17 forth, but this is a more formal way to say, in 

 18 essence, take the month of May and have people 

 19 reflect and comment on these things. 

 20 But I think I need to have a motion on 

 21 extending the period for 30 days and then 

 22 Commissioner O'Malia can do the amendment. But do 
 194 

 1 I hear a motion first on the Federal Register 

 2 release that was distributed around to the 

 3 Commissioners' offices? 

 4 COMMISSIONER O'MALIA: So moved. 

 5 CHAIRMAN GENSLER: Maybe I'll second it. 

 6 And then I know that you had an amendment that you 

 7 wanted to make. 

 8 COMMISSIONER O'MALIA: Yes. Mr. 

 9 Chairman, I move to amend the proposed rule by 

 10 inserting language in the summary dates and 

 11 supplementary information sections. It would 

 12 request comment on the proposed sequencing of 

 13 considering final rules promulgated under 

 14 Dodd-Frank. I've circulated a draft that includes 

 15 that language. 

 16 Now, Mr. Chairman, we had talked earlier 

 17 on today about a more specific proposal. Now, 

 18 thanks to questioning by Commissioner Sommers and 

 19 Commissioner Chilton and General Counsel 

 20 Berkovitz' answers I have found a solution that 

 21 will not force everyone to take the proposal -- 

 22 the very specific rule-making proposal that I was 
 195 

 1 seeking comment on, but I can submit that as part 

 2 of or my comments as an amendment to the rule. So 

 3 I am only asking that the language simply says: 

 4 The Commission is also requesting comment on the 

 5 order on which it should consider the final 

 6 rule-making made under the Dodd-Frank Act. 

 7 Now, I will, in my concurring statement, 

 8 put forward a very specific list that wouldn't 

 9 have passed because under the short timeframe I 

 10 don't think I'd give it enough time for our 

 11 Commissioners to review that. So I will put 

 12 forward that. I will hope that the public will 

 13 comment on that proposal and make suggestions 

 14 based on that. And if it's completely wrong, I 

 15 won't be offended. But we would like to have the 

 16 public's input, the market's input as to what the 

 17 proposed sequencing going forward is while we have 

 18 this extra 30 days or so to develop this 

 19 rule-making. 

 20 This does not at all satisfy my other 

 21 concern that we ought to also put forward an 

 22 implementation schedule and put that so the public 
 196 

 1 can comment on that. I think making full 

 2 transparency of how we're going to implement these 

 3 and over what period of time will be essential to 

 4 developing budgets, developing priorities, and 

 5 hiring, et cetera. So I guess I'm scratching one 

 6 part of the itch, but I'll be back. 

 7 So I appreciate the Commission's 

 8 tolerance of my amendment at this late date. And 

 9 I appreciate the willingness of staff to kind of 

 10 work this out as well. 

 11 CHAIRMAN GENSLER: It'd be my honor to 

 12 second your amendment. 

 13 COMMISSIONER O'MALIA: Thank you. I 

 14 appreciate that. 

 15 CHAIRMAN GENSLER: The original proposal 

 16 being moved and seconded and the amendment moved 

 17 and seconded, are there questions for Commissioner 

 18 O'Malia on his amendment or any comments by 

 19 Commissioners? I want to talk about 

 20 implementation phasing, but it's not a question. 

 21 So I just want to see, Commissioner Chilton or 

 22 Commissioner Dunn, who are in Chicago? 
 197 

 1 COMMISSIONER CHILTON: Well, I have some 

 2 questions, Mr. Chairman, but perhaps I want to 

 3 hear your comments first. 

 4 CHAIRMAN GENSLER: Okay. All right. So 

 5 on implementation phasing, I think we've benefited 

 6 by that all of our rules have asked about 

 7 effective dates. And we've benefited that 

 8 Congress has actually given the SEC and CFTC some 

 9 flexibility on effective dates. The staff is 

 10 having a roundtable -- two days of roundtables 

 11 next week. It's anticipation that before the 

 12 roundtables they're going to put out a set of 

 13 concepts. Whether it'll be 10 or 12 or 14 

 14 concepts, it's still sort of in discussion with 

 15 the SEC. These will be at the staff level. They 

 16 don't implicate the five of us or their five 

 17 Commissioners. And I think it will be very 

 18 helpful to get the public comment on these dozen 

 19 or so concepts and get those questions out. We 

 20 have a public comment file that I think is open 

 21 till June 10th or something as well. 

 22 Implementation phasing is a very 
 198 

 1 important role that we play to help lower the 

 2 cost; to get the job done, as Congress has asked 

 3 us, but try to take that cumulative cost and, you 

 4 know, sort of phase it over time. When does a 

 5 clearinghouse sort of be open for business, have 

 6 its Rule Book in place? When does a SEF or a swap 

 7 data repository sort of be open for business and 

 8 have its Rule Books in place? That can be 

 9 different than, for instance, when the clearing 

 10 mandate actually takes place and so forth. 

 11 So I think that we'll get a tremendous 

 12 amount of public input through putting out these, 

 13 what I'll call concepts, getting the input next 

 14 week. No doubt the concept will change, we'll all 

 15 deliberate a bunch, and continue to get good 

 16 feedback from the public. 

 17 I think this specifically about how we 

 18 phase our final rule-making, it is helpful to hear 

 19 from the public, but a lot of that, I think, is 

 20 going to be when the staff can adequately 

 21 summarize the comments, when we have sufficient 

 22 time to deliberate, and, of course, when we 
 199 

 1 consult with other regulators. And I think that 

 2 there's some rules that, frankly, we'll be able to 

 3 move sooner because they're less controversial. 

 4 But we still might say the effective date is six 

 5 months or nine months later, or it might be an 

 6 effective date that's conditional upon another 

 7 rule being finalized. So I wouldn't want to be 

 8 constrained if we happen to have consensus and we 

 9 can move a final rule because that helps lower 

 10 market uncertainty, even if we delay the effective 

 11 date. And I look at the two can be detached. 

 12 But I turn it to Commissioner Chilton 

 13 because I thought you had something you wanted to 

 14 add and I didn't want to front-run what I thought 

 15 you wanted to add. 

 16 COMMISSIONER CHILTON: Well, no, 

 17 actually it was helpful hearing what you were 

 18 saying, Mr. Chairman. But I did have a question 

 19 then, in that same line, for Mr. Berkovitz. 

 20 Nothing in the original 30-day comment 

 21 period which enumerated several rules, there's 

 22 nothing in that language that would require us to 
 200 

 1 extend the comment period on rules that are not 

 2 enumerated. Is that correct? 

 3 MR. BERKOVITZ: That's correct, 

 4 Commissioner. Only the specific rules that are 

 5 enumerated in the Federal Register Notice would 

 6 the comment period be officially reopened or 

 7 extended. 

 8 COMMISSIONER CHILTON: Okay. And then 

 9 the second question, because I generally think 

 10 that this idea of sequencing that the Chairman 

 11 talked about in February and Commissioner O'Malia 

 12 is trying to move forward is a good thing in 

 13 concept, but I had significant problems with the 

 14 original amendment that Commissioner O'Malia had. 

 15 But the concept, I think, is a good one and I 

 16 don't want to, you know, mess that concept up. So 

 17 my question, Mr. Berkovitz, is what essentially 

 18 the Chairman, I think, was saying there, but just 

 19 to confirm, there is nothing in the language of 

 20 Commissioner O'Malia's that would restrict the 

 21 Commission from implementing or passing final 

 22 rules that are within the constructs of the Act. 
 201 

 1 Is that correct? 

 2 Let me say it again. Nothing within 

 3 Commissioner O'Malia's language would restrict the 

 4 Commission's ability to operate within the 

 5 constructs and timetables of the Act. That 

 6 doesn't mean we're going to meet all the 

 7 deadlines; we've talked about how we're not. But 

 8 I just want to ensure that just because we're 

 9 asking for the sequencing that, as the Chairman 

 10 suggests, if we have the wherewithal with a number 

 11 of votes to go forward on something, we're not 

 12 required to wait for these things. We can still 

 13 do what Congress told us to do. Is that correct? 

 14 CHAIRMAN GENSLER: Commissioner Chilton, 

 15 Mr. Berkovitz is just making sure. He had seen 

 16 the language, but with your question he just wants 

 17 to refresh his look. 

 18 COMMISSIONER CHILTON: That's fine with 

 19 me. I want to be sure. I want to be deliberate. 

 20 MR. BERKOVITZ: That's correct, 

 21 Commissioner. The amendment would not restrict 

 22 the Commission's discretion or ability in terms of 
 202 

 1 the sequence of the final rules. This notice 

 2 would not do that. 

 3 COMMISSIONER CHILTON: Okay. Well, I 

 4 think it's a helpful thing, Commissioner O'Malia, 

 5 in general, again, how you've amended your 

 6 amendment. I think it's helpful. 

 7 I don't have any other questions, Mr. 

 8 Chairman. 

 9 COMMISSIONER DUNN: Mr. Chairman? I've 

 10 got a question and it's a follow-up on 

 11 Commissioner Sommers' concern about legal 

 12 certainty in the swaps with the repeal of certain 

 13 provisions of the Commodity Futures Modernization 

 14 Act. Will we address that particular concern 

 15 before that? 

 16 CHAIRMAN GENSLER: Commissioner Dunn, 

 17 I'm going to hand it over to Dan Berkovitz, but it 

 18 is my hope that we would, that the five of us 

 19 through our staffs and through our good counsel of 

 20 our general counsel, but as well as the heads of 

 21 the Division of Market Oversight and heads of DCIO 

 22 have some recommendations. The issue before us, 
 203 

 1 Dan, if you can comment, is that under Dodd-Frank 

 2 on July 15th, I think it's exactly in 12 weeks and 

 3 1 day or so, but that there are certain 

 4 self-executing provisions of Dodd-Frank. And as 

 5 we move through our rule-writing in the summer and 

 6 what well will be into the fall to finalize rules, 

 7 how the market addresses that. 

 8 So it's my hope that we'd have 

 9 recommendations from staff and we would address 

 10 ourselves to it, but, Dan, do you want to take the 

 11 question? 

 12 MR. BERKOVITZ: Yes, that's correct, Mr. 

 13 Chairman. The staff and my office and general 

 14 counsel's office and then the divisions have been 

 15 working to look at the various requirements which 

 16 would come into effect and the provisions that in 

 17 existing law which would no longer be in effect as 

 18 of the effective date, and to prepare a briefing 

 19 for the Commission, and the options and our 

 20 authorities for addressing that. We'll be 

 21 prepared to brief the Commission on that shortly. 

 22 CHAIRMAN GENSLER: The emphasis was on 
 204 

 1 "shortly," right, Dan? 

 2 MR. BERKOVITZ: Very shortly, Mr. 

 3 Chairman, yes. 

 4 CHAIRMAN GENSLER: Not hearing any 

 5 further questions, Mr. Stawick, you'll have to 

 6 figure out how to call the roll or do I -- 

 7 MR. STAWICK: You may do it by voice 

 8 vote, Mr. Chairman. 

 9 CHAIRMAN GENSLER: Okay, I'm allowed to 

 10 do it by voice vote. All right. So do I do a 

 11 voice vote on the amendment first? 

 12 MR. STAWICK: Yes. 

 13 CHAIRMAN GENSLER: All right. So if I 

 14 could have all those in favor of Commissioner 

 15 O'Malia's amendment say aye. 

 16 GROUP: Aye. 

 17 CHAIRMAN GENSLER: Those opposed to 

 18 Commissioner O'Malia's amendment? 

 19 COMMISSIONER SOMMERS: No. 

 20 CHAIRMAN GENSLER: The ayes appear to 

 21 have it. And now I'll move to the amended motion 

 22 on the 30-day extension. All those who are in 
 205 

 1 favor say aye. 

 2 MR. STAWICK: This one, Mr. Chairman, 

 3 this is the actions under the previous unanimous 

 4 consent request. 

 5 CHAIRMAN GENSLER: Right. So, Mr. 

 6 Stawick, will you call the roll and the amended 

 7 motion? 

 8 MR. STAWICK: Commissioner O'Malia? 

 9 COMMISSIONER O'MALIA: Aye. 

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

 11 Commissioner Chilton? 

 12 COMMISSIONER CHILTON: Aye. 

 13 MR. STAWICK: Commissioner Chilton, aye. 

 14 Commissioner Sommers? 

 15 COMMISSIONER SOMMERS: No. 

 16 MR. STAWICK: Commissioner Sommers, no. 

 17 Commissioner Dunn? 

 18 COMMISSIONER DUNN: Aye. 

 19 MR. STAWICK: Commissioner Dunn, aye. 

 20 Mr. Chairman? 

 21 CHAIRMAN GENSLER: Aye. 

 22 MR. STAWICK: Mr. Chairman, aye. Mr. 
 206 

 1 Chairman, on this question the yeas are four, the 

 2 nays are one. 

 3 CHAIRMAN GENSLER: Thank you, Mr. 

 4 Stawick. The ayes having it. That, too, will be 

 5 sent to the Federal Register. And throughout the 

 6 summer and into the fall the Commission will hold 

 7 meetings like this one on some regular basis, but 

 8 we haven't set a schedule yet as we work through 

 9 some final rules. Right now we sort of have a bit 

 10 of a natural pause. 

 11 I think the next you'll have is some 

 12 staff roundtables, very important staff 

 13 roundtables next week on implementation phasing, 

 14 staff roundtables on segregation of cleared swaps, 

 15 maybe some others. But as we are able to move 

 16 towards some final rules in the next couple or 

 17 several months, we'll be doing as we always do, is 

 18 posting the public and putting out Federal 

 19 Register releases for meetings like this to do our 

 20 business in public and do final rules. 

 21 With that, if there's not further 

 22 Commission business I'd entertain a motion to 
 207 

 1 adjourn the meeting. 

 2 COMMISSIONER SOMMERS: So moved. 

 3 COMMISSIONER O'MALIA: Second. 

 4 CHAIRMAN GENSLER: All in favor? 

 5 GROUP: Aye. 

 6 CHAIRMAN GENSLER: All right. Any 

 7 opposed? It appears unanimous. I thank you all. 

 8 I thank all the staff. I thank the public for 

 9 being with us for these 14 meetings and being with 

 10 us on all their comments going forward. 

 11 (Whereupon, at 1:13 p.m., the 

 12 PROCEEDINGS were adjourned.) 

 13 * * * * * 

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 208 

 1 CERTIFICATE OF NOTARY PUBLIC 

 2 DISTRICT OF COLUMBIA 

 3 I, Stephen K. Garland, notary public in 

 4 and for the District of Columbia, do hereby certify 

 5 that the forgoing PROCEEDING was duly recorded and 

 6 thereafter reduced to print under my direction; 

 7 that the witnesses were sworn to tell the truth 

 8 under penalty of perjury; that said transcript is a 

 9 true record of the testimony given by witnesses; 

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

 11 employed by any of the parties to the action in 

 12 which this proceeding was called; and, furthermore, 

 13 that I am not a relative or employee of any 

 14 attorney or counsel employed by the parties hereto, 

 15 nor financially or otherwise interested in the 

 16 outcome of this action. 

 17 

 18 

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

 20 Notary Public, in and for the District of Columbia 

 21 My Commission Expires: May 31, 2014 

 22