UNITED STATES OF AMERICA

 COMMODITY FUTURES TRADING COMMISSION

 OPEN MEETING ON THE SEVEN SERIES OF

 PROPOSED RULEMAKINGS UNDER THE DODD-FRANK ACT

 Washington, D.C.

 Thursday, December 9, 2010
 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 Presentations:

 9 Governance Requirements for Derivatives Clearing

 Organizations, Designated Contract Markets and

 10 Swap Execution Facilities and Additional

 Requirements Regarding the Mitigation of Conflicts

 11 of Interest

 12 ANANDA RADHAKRISHNAN

 13 NANCY SCHNABEL

 14 End-User Exception to Mandatory Clearing of Swaps

 15 DAN BERKOVITZ

 16 GEORGE WILDER

 17 Business Conduct Standards with Counterparties

 PHYLLIS CELA

 18

 VINCE MCGONAGLE

 19

 PETER SANCHEZ

 20

 ANANDA RADHAKRISHNAN

 21

 22
 3

 1 PARTICIPANTS (CONT'D):

 2 Issuance of Interim Final Rule for Reporting

 Certain Post-Enactment Swap Transactions

 3

 SUSAN NATHAN

 4

 RICK SHILTS

 5

 DAN BERKOVITZ

 6

 7 * * * * *

 8

 9

 10

 11

 12

 13

 14

 15

 16

 17

 18

 19

 20

 21

 22
 4

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

 2 (9:00 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 proposed

 7 rulemakings under the Dodd-Frank Wall Street

 8 Reform and Consumer Protection Act. Today we will

 9 be considering end user exception to mandatory

 10 clearing of swaps, business conduct standards with

 11 counterparties, governance requirements for

 12 derivatives clearing organizations, designated

 13 contract markets and swap execution facilities.

 14 In addition to those proposed rulemakings, the

 15 Commission will consider an interim final rule for

 16 reporting certain post-Dodd-Frank enactment swap

 17 transactions. The public might note that we had

 18 calendared for today discussions of swap execution

 19 facilities. I've also always said to the press

 20 that we're human so that as Chair I've decided

 21 this morning that we're going to take that one up

 22 next week. I think we'll have some good further
 5

 1 discussion among the Commission and staff on that

 2 one. This probably is not going to be the last

 3 time that we recalendar something and need an

 4 extra week to get our work done.

 5 Before we hear from staff, I'd like to

 6 thank Commissions Mike Dunn, Jill Sommers, Bart

 7 Chilton and Scott O'Malia for all of their

 8 thoughtful work. I say this every week. As we

 9 get into the holiday period it is remarkable how

 10 much they are doing and their able legal

 11 assistants are doing to help us through all of

 12 this. I'd also like to welcome members of the

 13 public, market participants and members of the

 14 media today as well as to welcome those listening

 15 on the webcast.

 16 This is our seventh public meeting to

 17 consider Dodd-Frank rulemakings. We will have

 18 another meeting on the 16th and we're planning two

 19 additional meetings on Dodd-Frank rulemakings in

 20 January and we'll continue to announce our

 21 proposed rulemakings and which topics we're taking

 22 up 1 week in advance, and this is 1 week in
 6

 1 advance so I'm going to do this. I think we're

 2 also going to put it on our website. But next

 3 week as I say, we're looking to take up swap

 4 execution facilities as I just mentioned. We're

 5 also going to hear in I think it's our third round

 6 about clearinghouse rules. These will be the

 7 risk- management rules on clearinghouses. At what

 8 I'll call our third round we will conduct

 9 discussions on internal business conduct with

 10 regard to confirmations, portfolio compression and

 11 portfolio reconciliation and also on position

 12 limits. And I wanted to make a few comments if I

 13 might on position limits. What I've asked staff

 14 to do is to pull together two components, it might

 15 be in one vote but I think it will probably two

 16 rulemakings, one on spot month and one on what we

 17 call other months or all months combined. We've

 18 had a long tradition at this agency or setting

 19 position limits. We have spot month limits right

 20 now on pretty much if I'm not mistaken all of the

 21 physical commodities and some financial

 22 commodities, we've put out proposals this past
 7

 1 January on energy products and we think that we

 2 can move more expeditiously with regard to the

 3 spot month period and it would be my hope that we

 4 could vote on something and then finalize

 5 something on the spot month area within the next

 6 few months. With regard to all months combined

 7 and other months as that is to data intensive,

 8 that too hopefully can be completed expeditiously

 9 but there is the challenge of doing it and the

 10 data that's so necessary for it so that I've asked

 11 staff to make a presentation and try to bring both

 12 rules up next week. I think that's what we're

 13 calendaring for next week. As of right now,

 14 Commissioner Chilton's staff has been very

 15 involved and I think very forthright publicly

 16 about our need to move forward on position limits.

 17 I share that view. Congress did set different

 18 dates for us on that, 180 and 270 days rather than

 19 360 days so that we're trying to work with that

 20 and we'll take more of that up and I'm sure our

 21 other Commissioners will have views on that and

 22 maybe share that even today at the end of our
 8

 1 presentations.

 2 I want to thank staff for working on all

 3 the draft rulemakings. I thank them for their

 4 thoughtful recommendations. We look forward to

 5 receiving public comments on all that we're

 6 putting out today. There will be fact sheets and

 7 Q and A's put on our website. Before I turn to

 8 the presenters, I turn to fellow Commissioners.

 9 Commissioner Dunn?

 10 COMMISSIONER DUNN: Thank you, Mister

 11 Chairman. You'll recognize that we all are

 12 talking funny. I don't know if that's because

 13 we've had so much discussion or if the Chairman is

 14 sharing a cold with all of us, but it isn't

 15 indicative of the hard work that staff has put in

 16 putting all of this together, but more

 17 importantly, the Commissioners working together to

 18 try to find some solutions to things.

 19 CHAIRMAN GENSLER: We have been in close

 20 quarters.

 21 COMMISSIONER DUNN: He's been in my face

 22 a lot. I want to thank you all for joining us
 9

 1 today in this important meeting regarding the

 2 implementation of the Dodd- Frank Act. The

 3 business conduct standards for swap dealers and

 4 major swap participants is of particular interest

 5 to me because I believe that strong standards for

 6 swap dealers and major swap participants are

 7 necessary to prevent another financial crisis. By

 8 implementing strong business conduct standards,

 9 the Commission can establish meaningful protection

 10 for counterparties and hopefully prevent the types

 11 of behavior that necessitated the passage of Dodd-

 12 Frank. To me, Mister Chairman, this is the heart

 13 of what we're supposed to be doing.

 14 An inherent conflict of interest exists

 15 when a swap dealer acts as both an adviser and a

 16 counterparty to his customers. The business

 17 conduct standard proposed today provides

 18 meaningful protection to counterparties and I

 19 support them, but I believe more can be done. I

 20 am particularly interested in public comment on

 21 this rulemaking, specifically, whether the

 22 proposed rules go far enough in protecting
 10

 1 counterparties.

 2 Dodd-Frank requires the Commission to

 3 consider whether to expect small banks, savings

 4 associations, farm credit institutions and credit

 5 unions from the definition of financial entities

 6 in its clearing requirements. I welcome public

 7 comment on whether any of these groups should be

 8 expect and if so why. Specifically with regard to

 9 farm credit institutions I would like to know if

 10 the $10 billion cap on total assets meets

 11 congressional intent. I am concerned, Mister

 12 Chairman, that a decade ago Congress told the CFTC

 13 not to look at swaps and over the counter. In

 14 that period that industry has developed and it's

 15 quite different from the futures industry. I am

 16 concerned that as we who know and understand the

 17 futures industry and our staff has been working on

 18 that and fully appreciate differences that have

 19 developed. I hope that we're not trying to take

 20 what has worked well in the futures industry and

 21 say that has to be in the swap industry without

 22 taking into account how the swap industry has
 11

 1 developed. When we get to that point I look

 2 forward to comments from the public on what we're

 3 doing if we are in fact going to achieve the

 4 purpose of Dodd-Frank and are we going about it

 5 right. I've said before that I think it's

 6 important that we get these rules out in time

 7 because Congress has mandated it, but it's not an

 8 easy task and what we get out, it's imperative

 9 that we get it right so that the public has got to

 10 give us comments in regard to these proposed rules

 11 so that we get that final rule right. But I think

 12 also inherent in that, Mister Chairman and my

 13 colleagues is a duty for us to follow-up to ensure

 14 the efficacy of those regulations that we pass,

 15 and I've said before that I think in 12 or 18

 16 months we need to review what we've done and what

 17 that impact has been. Again I want to thank staff

 18 for the great work that they've done on getting

 19 things together. I get changes in the middle of

 20 the night from staff so that I know somebody is up

 21 there working and I appreciate it.

 22 CHAIRMAN GENSLER: Thank you,
 12

 1 Commissioner Dunn. Commissioner Sommers?

 2 COMMISSIONER SOMMERS: Thank you, Mister

 3 Chairman. I too want to say thank you to all the

 4 rulemaking teams this morning for all the hard

 5 work and the rules that we have in front of us or

 6 thought we were going to have in front of this

 7 morning. A lot of these rules are complicated and

 8 we really do appreciate all the time that all the

 9 teams put in to making these rules be in a place

 10 for proposal stage where we feel comfortable

 11 getting public comment. So thank you all for all

 12 your hard work.

 13 Last week I expressed concern about a

 14 number of the Commission's proposals that I felt

 15 were too broad or overreaching what I felt the

 16 statute directed us to do. This week my concerns

 17 go the other way. Even though we're not

 18 considering the SEF proposal, one of my concerns

 19 this week is that we were defining SEF too

 20 narrowly. It's also a concern that I have

 21 regarding the end user exemption proposal because

 22 I believe the statute directed us to consider
 13

 1 whether we should be exempting some of these small

 2 institutions. And although we asked questions

 3 with regard to that subject, we don't propose a

 4 framework for how we would go about exempting

 5 these small institutions so that in that area I

 6 believe we have read the statute too narrowly.

 7 My opening statement today is almost

 8 solely with regard to the definition of SEF so

 9 that I will forego subjecting you to my concerns

 10 about the SEF definition until next week, but just

 11 say that I hope in the 7 days that we have to

 12 reconsider this rule that we will address some of

 13 the concerns about looking at that definition too

 14 narrowly. I will follow-up by saying on the end

 15 user exemption that I think that we need to

 16 consider whether or not the $10 billion limit is

 17 appropriate and if there are other criteria that

 18 these institutions may have that would make them

 19 qualify for this exemption. I think that this is

 20 something that we really do need to look at. I

 21 would have preferred a framework be proposed in

 22 what we're doing today but since we did not do
 14

 1 that I would suggest that the public and all of

 2 those who are concerned about this really do give

 3 us suspect comment about how we could consider

 4 putting that kind of framework in a final rule.

 5 Again thank you to the teams today and I look

 6 forward to hearing about these proposals.

 7 CHAIRMAN GENSLER: Thank you,

 8 Commissioner Sommers. I look forward to that

 9 also. I think I know much of what's in your

 10 written statement, but we have 7 days and it might

 11 change by next week.

 12 COMMISSIONER SOMMERS: Many of these

 13 things you have heard before.

 14 CHAIRMAN GENSLER: Yes, I'm sure. On

 15 the end user side, I thank you that for once you

 16 want us to be more prescriptive.

 17 COMMISSIONER SOMMERS: I suppose there

 18 is another way of looking at that, maybe follow

 19 what the statute says.

 20 CHAIRMAN GENSLER: Commissioner Chilton?

 21 COMMISSIONER CHILTON: I'd like to if

 22 it's okay with the Chair defer to Commissioner
 15

 1 O'Malia first and then go.

 2 CHAIRMAN GENSLER: Absolutely.

 3 Commissioner O'Malia?

 4 COMMISSIONER O'MALIA: Happy day. How

 5 often have I complained that I always have to go

 6 after Mr. Chilton, and now I get to go before him?

 7 The holidays are upon us and as many of

 8 you know, I have three daughters which therefore

 9 means I have three wish lists. My youngest

 10 daughter Macie spent the weekend scouring the

 11 catalogues in search of the perfect gift to top

 12 her list. Do you know what she came up with? A

 13 towel warming rack. She had no idea why she

 14 wanted it, but it was in the catalogue and thus

 15 had an equal opportunity as many of the other

 16 items to make the list. I didn't think much of

 17 the towel rack until I read the proposal relating

 18 to the swap execution facility, namely, the part

 19 that aims to further define what a SEF is and I

 20 thought to myself that this SEF rule is very

 21 similar to the towel rack episode, no reason, just

 22 because. I'm not buying a 7-year- old a towel
 16

 1 warming rack and I'm not supporting the proposed

 2 rulemaking on SEFs as it was drafted today.

 3 Unlike Commissioner Sommers, I am going to expound

 4 a little bit on the SEF even though we haven't.

 5 This is an important issue and I think we're going

 6 to have a good robust debate about it and I'm just

 7 going to share my views on where this thing is

 8 going and my views on it.

 9 CHAIRMAN GENSLER: Absolutely.

 10 COMMISSIONER O'MALIA: We obviously had

 11 a lot of time and options before interpreting the

 12 statutory language with the goal of providing

 13 greater pretrade transparency and the Commission

 14 chose a limited two-tier approach that relies on a

 15 narrow reading of the statute and a broad reading

 16 of an aspiration that if adopted will actually

 17 diminish the overarching goal of promoting the

 18 trading of swaps on SEFs. The rulemaking mandates

 19 that SEFs either take the form of a central limit

 20 order book for any product that trades for more

 21 than 10 times a day or transparent requests for a

 22 quote or RFQ approach. The so-called transparent
 17

 1 RFQ approach will require all bids and offers to

 2 be firm and provide a first-in-bid, first-in-fill

 3 approach and that's it. Staff has interpreted a

 4 minimal statutory requirement that in a manner

 5 that entirely strips away the unique

 6 characteristics of swaps that has been bandied

 7 about by the Commission for the last 20 years and

 8 requires swaps to trade like futures in my

 9 opinion. Looking over the history of the

 10 Commission's treatment of swaps, it remains

 11 abundantly clear that while swaps contain some

 12 features similar to those of futures, they remain

 13 sufficiently different in their purpose, function

 14 and design. To limit swap trading to a central

 15 limit order book exchange might be unnecessary to

 16 mitigate systemic risk, protect the public

 17 interest and in fact may inappropriately burden

 18 commerce. That is, if swaps possess the same

 19 characteristics as futures, then Congress would

 20 not have needed to create a SEF definition to

 21 accommodate them. End users and buy-side

 22 participants are understandably wary about being
 18

 1 forced into unfamiliar and inhospitable

 2 environments where high-frequency traders can

 3 undermine their ability to trade sizable positions

 4 and nascent illiquid markets threaten to divulge

 5 the positions through bidding alone. Like a

 6 7-year-old wanting a towel warming rack, it just

 7 can't the right, but at least buying a towel rack

 8 helps commerce. I can't say that for this

 9 proposal.

 10 I want to be clear. I am in favor of

 11 increasing pretrade transparency as the Chairman

 12 is so passionate for and bring more transparency

 13 and bringing more swaps to swap execution

 14 facilities and relying less on block trades. To

 15 achieve this we must permit a broad arrange of

 16 venues to inspire market innovation, competition

 17 and improve transparent market pricing. Congress'

 18 open-ended language is clearly intended to permit

 19 flexibility across all trading venues. I ask that

 20 we interpret the statute broadly to permit the

 21 various RFQ and transparent voice broker systems

 22 already serving the industry to continue to
 19

 1 operate with at most minor alterations. This I

 2 believe I will allow market participants to

 3 ultimately determine what levels of pretrade

 4 transparency and liquidity they require to manage

 5 risk. I checked back with Macie this morning

 6 about her list. She admitted that it was a little

 7 long, she's being reasonable and she is cutting

 8 out the towel rack. I hope we can get comments

 9 and input necessary to cut out list as well.

 10 Mister Chairman, I shared with you an

 11 amendment that I thought was appropriate to

 12 broaden the definition of SEFs. I appreciate your

 13 willingness to pull the proposal and reconsider

 14 and possibly give this amendment some

 15 consideration. I've talked with my colleagues

 16 about it. I think it's a great opportunity to

 17 expand the definition to give ourselves some

 18 optionality in what SEFs are going to be allowed

 19 and I appreciate your willingness to work with me

 20 on it and I hope that we can come to an acceptable

 21 solution because I think we all agree that the

 22 goal of this objective is pretrade transparency
 20

 1 and flexibility for trading in the SEF

 2 environment.

 3 From my experience working in the

 4 Senate, I do know how it feels to be in the host

 5 seat and I would like to thank Reva although her

 6 rulemaking got pulled and her team for their

 7 efforts. They've worked long and hard. And I

 8 would also like to thank the other teams headed by

 9 Phyllis Cela, Nancy Schnabel, George Wilder and

 10 Susan Nathan. I appreciate their unwavering

 11 commitment to responding to my questions, comments

 12 and criticisms with thoughtful consideration.

 13 Similar to my colleagues, I commend the

 14 end user exemption team for drafting what overall

 15 is a very thoughtful and well-written proposal.

 16 However, I'm concerned as to why we are failing to

 17 fully address the issue of excluding small banks,

 18 farm credit institutions and credit unions from

 19 the definition of financial entity. This is

 20 unreasonable. Section 2(h)(7)(C)(ii) directs the

 21 Commission with their ever-important word shall to

 22 consider whether to exempt these entities, and as
 21

 1 pointed out by House Agriculture Committee

 2 Chairman Collin Peterson, "The regulators will

 3 have maximum flexibility when evaluating the risk

 4 portfolios of these institutions for consideration

 5 of an exemption." All we're going to do today

 6 after almost 5 months with this language is punt

 7 it. While I can appreciate staff's decision to

 8 pose a series of questions aimed at further

 9 informing their consideration of the appropriate

 10 criteria for such an exemption, we are too far

 11 into these rulemakings to start from square one.

 12 As we move forward on the rulemaking I encourage

 13 staff to keep in mind that many of the affected

 14 institutions pay a critical role in economic

 15 development of small communities and rural areas.

 16 It is my hope that a final rule will ultimately

 17 permit the bulk of these institutions to avail

 18 themselves of an end user exemption. As for the

 19 proposal for business conduct standards for swap

 20 dealers and major swap participants in their

 21 dealings with counterparties and especially

 22 counterparties who are special entities, I believe
 22

 1 staff has demonstrated an extraordinary ability to

 2 effectuate the statutory mandates through

 3 consideration of congressional intent and in the

 4 manner in which market participants actually

 5 conduct their business. This proposal is

 6 especially timely as the Bank of America has just

 7 agreed to pay more than $137 million in

 8 restitution to federal and state agencies for

 9 their participation in a conspiracy to rig bids in

 10 the municipal bond derivatives market. However,

 11 the rule strives to ensure that counterparties

 12 dealing with sophisticated swap dealers and major

 13 swap participants are fully informed and of course

 14 have recourse if they are not prior to entering

 15 into these complex instruments I support. I will

 16 say I am not entirely sold on the broader proposal

 17 to apply execution standards for all Commission

 18 registrants transacting swap available for trading

 19 on DCMs and SEFs. These standards are designed to

 20 ensure fair dealing and further protections

 21 against fraud and abusive practices and these are

 22 good things. However, the proposal in part
 23

 1 requires an execution ultimately to be in terms of

 2 a "reasonable relationship" to the "best terms

 3 available" for such a swap on a DCM or SEF. While

 4 it is better to require absolute best execution,

 5 the requirements of this proposal are somewhat

 6 vague and may ultimately become another rule in

 7 the book only relied on in the most egregious

 8 circumstances. I am keeping my mind open,

 9 however, and look forward to reviewing the

 10 comments from a diverse population of Commission

 11 registrants who may ultimately be affected by this

 12 proposal.

 13 In closing I'd like to thank dedicated

 14 staff who have worked night and day to preserve

 15 and make these changes in these rulemakings, and

 16 by all means do not interpret my views to mean you

 17 should never request a towel warming rack.

 18 However, in making your wish list please consider

 19 whether these items you choose are reasonable for

 20 the markets. Thank you.

 21 CHAIRMAN GENSLER: Before I turn to

 22 Commissioner Chilton, I want to mention that I
 24

 1 know we're spending a lot of time together and

 2 maybe there was an illusion that I was like your

 3 daughter Macie or something, but I'm going to take

 4 that as the glass is half-full because I know you

 5 love your daughter Macie.

 6 COMMISSIONER O'MALIA: I love all three

 7 of my daughters.

 8 CHAIRMAN GENSLER: If the Chairman is in

 9 any way being alluded to in having a wish list at

 10 least you're saying it in the context of your

 11 daughter Macie so that I'm feeling good about

 12 that.

 13 COMMISSIONER O'MALIA: You should.

 14 Thank you.

 15 CHAIRMAN GENSLER: Thank you. We do

 16 work well together even if we have a little bit

 17 different view on what the statute says about

 18 transparency and pretrade transparency. I'm going

 19 to save my thoughts on swap execution facilities

 20 until next week because I think that all of us are

 21 really working with this statute. It's a very

 22 detailed statute about swap execution facilities
 25

 1 and what it means to be made available for

 2 trading. In the proposal today because Commission

 3 O'Malia didn't mention it, when he mentioned these

 4 two tiers, there is a third tier in the proposal

 5 that anything that's a block trade, anything

 6 that's an end user out of those commercial end

 7 users, anything that's not made available for

 8 trading, would have been pretty much whatever the

 9 market wanted to use such as voice or limited

 10 requests for votes and things like that so that I

 11 as augmenting what you were saying. But I look

 12 forward to working with everybody throughout the

 13 next 7 days on it. Commissioner Chilton?

 14 COMMISSIONER CHILTON: Thank you, Mister

 15 Chairman. For a couple of years I've been

 16 supporting position limits. We had the authority

 17 to impose those prior to Dodd-Frank but weren't

 18 able to get the support to do it and now we have

 19 the law, and we just had these new speculative

 20 data that I talked about yesterday in New York

 21 where we've seen more positions coming into

 22 markets than ever before and there is certainly
 26

 1 disagreement about the impact of speculators on

 2 prices, but any impact isn't acceptable. We've

 3 just seen gas prices raise 10 cents and crude is

 4 around $90 and raised $7 in 2 weeks. I read a

 5 quote in a local paper that said there's no reason

 6 that it's delinked from supply and demand. I'm

 7 not saying that it's speculators, but our job is

 8 to try and do what we can and now we have the law

 9 on our side on position limits and I'm pleased

 10 with that. All of us have seen it, and this is

 11 public information, large concentrations, we've

 12 seen more than 20 percent in the crude market at

 13 times, more than 20 percent concentration by

 14 single trader in gas, roughly 40 percent by an

 15 individual silver trader and these are issues that

 16 demand us to deal with. I had a proposal that I

 17 was going offer today as my colleagues know

 18 because I emailed them very late at night, but I

 19 really appreciate the Chairman's commitment to

 20 taking this up next week and looking at this in a

 21 slightly different way perhaps on the things that

 22 we can do expeditiously with regard to the spot
 27

 1 months swaps and then as soon as possible on the

 2 other months and on the aggregate months. It's an

 3 important proposal and I want to get it right. I

 4 appreciate some of the concerns that my colleagues

 5 have and quite frankly I have too about making a

 6 fulsome decision on what the levels are. A bad

 7 rule is not good. We want to have a good rule.

 8 So I appreciate the Chairman's commitment and I

 9 look forward to next week.

 10 I did want to say just a brief thing on

 11 the SEFs. I was prepared to support the rule that

 12 we are considering. I did add some questions. I

 13 think Commissioner Dunn may have added some

 14 questions too. I want to make sure that we take

 15 into account both of the things that are in the

 16 law. One is promoting transparency as the

 17 Chairman has eloquently spoken about and I support

 18 it, but transparency isn't absolute and the other

 19 test, and it's not a secondary test, it's not a

 20 lesser test, but the other test in the law is to

 21 promote SEFs so I want to make sure that our

 22 proposal does that. I think the proposal as we
 28

 1 had it, the questions allowed us any flexibility

 2 that based on the comments that new could change

 3 it, but I look forward to taking it up next week

 4 and I think Reva and everybody else for their work

 5 on that and all the other rules today. Thanks

 6 very much again for your commitment, Mister

 7 Chairman.

 8 CHAIRMAN GENSLER: Thank you to all my

 9 Commissioners and again for their commitment to

 10 getting this very important project for the market

 11 done and done well and done right. With that I'm

 12 going to hand it over to Ananda Radhakrishnan and

 13 Nancy Schnabel. Nancy, it's good to see you back

 14 here again. They're going to present an

 15 additional rule on governance and mostly it's

 16 regard to reporting on governance and there are

 17 some fitness standards provisions as well. Nancy

 18 and Ananda?

 19 MS. SCHNABEL: Commissioners, Chairman,

 20 today staff is presenting the second rulemaking on

 21 governance and conflicts of interest which I

 22 really hope is not like a towel warming rack.
 29

 1 Before I start discussing the rulemaking, I wanted

 2 to thank you and the Commissioners and staff for

 3 very constructive comments. I would also like to

 4 thank my team members for working very hard on

 5 this rulemaking.

 6 Back to the second rulemaking. The

 7 second rulemaking further the conflicts of

 8 interest core principles that each DCO, DCM and

 9 SEF have. Additionally, the second rulemaking

 10 implements core principles with respect to

 11 governance fitness standards as you said and the

 12 composition of governing boards for DCOs and DCMs,

 13 and also diversity with respect to publicly listed

 14 DCMs. On October 1, the Commission approved a

 15 proposal proposing certain structural governance

 16 requirements and certain limitations on ownership

 17 of voting equity and exercise of voting rights.

 18 These proposals were meant to implement Section

 19 726 of the Dodd-Frank Act which requires the

 20 Commission to promulgate certain rules to mitigate

 21 conflicts of interest. Staff believes that the

 22 notice of proposed rulemaking today will
 30

 1 complement any final rule that the Commission

 2 contemplates adopting with respect to Section 726

 3 of the Dodd-Frank Act.

 4 First with respect to the conflicts of

 5 interest core principles, these core principles

 6 require a DCO, DCM or SEF to establish and enforce

 7 rules to minimize conflicts of interest and to

 8 establish a process for resolving conflicts of

 9 interest. To further implement such core

 10 principles, staff is proposing requirements on

 11 reporting, maintenance of a regulatory program,

 12 transparency and limitations on use of nonpublic

 13 information. With respect to reporting, staff is

 14 proposing to mandate that each DCO file a report

 15 with the Commission whenever its board of

 16 directors rejects a recommendation or supersedes

 17 an action of its risk-management committee or

 18 whenever its risk- management committee rejects a

 19 recommendation or supersedes an action of its

 20 risk-management subcommittee. And also staff is

 21 recommending that each DCM or SEF file a report

 22 with the Commission whenever its board of
 31

 1 directors rejects a recommendation or supersedes

 2 an action of its regulatory oversight committee or

 3 its membership or participation committee.

 4 Further under reporting staff is proposing that

 5 each DCM, DCO or SEF provide certain reporting on

 6 the composition of its board of directors within

 7 30 days after the election of its board of

 8 directors, and also staff is proposing to require

 9 that the regulatory oversight committee of each

 10 DCM or SEF prepare an annual report assessing the

 11 various components of the DCM or SEF regulatory

 12 program and such a requirement generally parallels

 13 current acceptable practices under DCM Core

 14 Principle 15.

 15 Moving on to the regulatory program

 16 staff is proposing to require that as part of its

 17 regulatory program each DCO, DCM or SEF establish,

 18 maintain and enforce written procedures to

 19 identify on an ongoing basis existing and

 20 potential conflicts of interest and to make fair

 21 and nonbiased decisions in the event of such a

 22 conflict of interest. With respect to
 32

 1 transparency, staff is proposing to establish

 2 minimum standards for transparency of the

 3 governance arrangements of relevant DCOs, DCMs and

 4 SEFs, and transparency would be transparent to the

 5 public as well as to the Commission; that the

 6 minimum standards require each DCO, DCM or SEF to

 7 make available certain information to the public

 8 and relevant authorities with respect to

 9 governance such as charters, nominations process

 10 descriptions, identities of public directors, et

 11 cetera, and also ensure that the information that

 12 they make available is current, accurate, clear

 13 and readily accessible; finally, to disclose

 14 summaries of significant decisions. Significant

 15 decisions involve those areas in which conflicts

 16 of interest may be most manifest. With respect to

 17 a DCO or a SEF, significant decisions will relate

 18 to access, membership and disciplinary procedures.

 19 With respect to a DCO, significant decisions will

 20 relate to open access, membership and the finding

 21 of products acceptable or nonacceptable for

 22 clearing, and staff wants to make very clear that
 33

 1 they do not recommend and they do not require that

 2 DCOs, DCMs or SEFs make public any nonpublic

 3 information as that is defined within this

 4 rulemaking.

 5 We move to limitations on use of

 6 nonpublic information so that each DCO, DCM or SEF

 7 staff is recommending to establish and maintain

 8 written policies and procedures on safeguarding

 9 nonpublic information. These procedures and

 10 policies must at a minimum preclude each

 11 registered entities' members, directors, certain

 12 officers and certain affiliates and also members

 13 of the disciplinary committee and disciplinary

 14 panel if there are not also members of the board

 15 of directors to not disclose any nonpublic

 16 information absent prior written consent.

 17 Finally, staff believes that these written

 18 policies and procedures are important because they

 19 would prohibit those in positions of power at a

 20 DCO, DCM or SEF from leveraging such power to

 21 benefit themselves or to the detriment of their

 22 competitors.
 34

 1 Second, in addition to implementing the

 2 conflicts of interest core principles, the

 3 rulemaking today implements certain core

 4 principles with respect to DCO or DCM governance

 5 fitness standards and composition of boards of

 6 directors or other governing bodies and the DCM

 7 core principle on diversity of certain boards of

 8 directors. With respect to governance fitness

 9 staff is proposing to require each DCO or DCM to

 10 specify and enforce fitness standards for its

 11 members, directors, members of any disciplinary

 12 panel or disciplinary committee, persons with

 13 direct access with certain affiliates and these

 14 proposals generally codify that acceptable

 15 practices under current DCM Core Principle 14 and

 16 extends such practices to DCOs. And with respect

 17 to composition of boards of directors or other

 18 governing bodies, staff is proposing to require

 19 each DCM to design and institute a process for

 20 considering the range of opinions that market

 21 participants hold with respect to functioning of

 22 an existing market as well as new rules or rule
 35

 1 amendments. For DCOs staff is proposing two

 2 alternatives, alternatives that the Commission

 3 will adopt in its entirety rather than an

 4 alternative that a DCO can choose in and of

 5 itself. The first alterative is that the DCO

 6 would be deemed in compliance with the core

 7 principle on composition of the board of directors

 8 or other governing bodies if it has 10-percent

 9 customer representation on its risk-management

 10 committee which is what staff had recommended on

 11 October 1, 2010. The second alternative is they

 12 would be deemed in compliance if they had

 13 10-percent customer representation on their board

 14 of directors. We are seeking public comment on

 15 this proposal because this proposal would keep the

 16 question open with respect to customer

 17 representation until after the 180-day

 18 implementation period for the first rulemaking.

 19 CHAIRMAN GENSLER: Is there a motion on

 20 the staff recommendation?

 21 COMMISSIONER DUNN: Move to adopt the

 22 recommendation.
 36

 1 COMMISSIONER SOMMERS: Second.

 2 CHAIRMAN GENSLER: I support the

 3 proposed rulemaking. I will have one question on

 4 the last thing that you said. I think it builds

 5 upon a proposal that's out there and we're looking

 6 to try to finalizing that 180- day period of time.

 7 And importantly, it builds on reporting to

 8 regulators and a little of reporting to the public

 9 related to fitness standards. I had a question on

 10 the last point you just went through, Nancy,

 11 keeping the comment period past the 180 days.

 12 Could you walk through that again?

 13 MS. SCHNABEL: We're definitely going to

 14 adopt rules to implement Section 726 or I guess we

 15 hope to adopt rules.

 16 CHAIRMAN GENSLER: You mean staff would

 17 be recommending.

 18 MS. SCHNABEL: Exactly. What's what I

 19 meant. Those rules will have certain board

 20 compositions or staff will recommend perhaps that

 21 those rules will address board composition or

 22 other governing body composition. But with
 37

 1 respect to customer representation because we have

 2 received opposing comments, we're seeking more

 3 public input on this one specific issue and we

 4 intend to implement customer representation

 5 requirements if you all agree with the final

 6 rulemaking on the second rulemaking, so the final

 7 second governance rulemaking.

 8 CHAIRMAN GENSLER: So that you're saying

 9 public please keep telling us about the customer

 10 representation piece, that the piece is in essence

 11 being cabined off a little bit?

 12 MS. SCHNABEL: That's right.

 13 CHAIRMAN GENSLER: I think I now

 14 understand it. Commissioner Dunn?

 15 COMMISSIONER DUNN: I'm in agreement

 16 with this proposed regulation. I think staff has

 17 done a very good job on it. But I want to

 18 follow-up, and I know there is news out about

 19 appropriations and what we might be getting in

 20 that area and I thank you, Mister Chairman, for

 21 going to the Hill yesterday or was it the day

 22 before?
 38

 1 CHAIRMAN GENSLER: I seemed to be there

 2 many days. I can't remember all of them. I do

 3 thank the House of Representatives and what

 4 they've done, but we're not there yet,

 5 Commissioner Dunn.

 6 COMMISSIONER DUNN: But it does bring me

 7 down to the fact that what we're asking is for

 8 DCOs to write a report on what they're doing on

 9 conflicts of interest concerns and I would like to

 10 know how the division is going to review that and

 11 what types of actions are going to be taken when

 12 we get these types of decisions.

 13 MR. RADHAKRISHNAN: If all goes well and

 14 the Commission does get the appropriation that it

 15 seeks and if the hiring process goes as smoothly

 16 as we hope it does and we would be in a position

 17 to hire sufficient staff to look at these reports,

 18 and if we find that there are certain things

 19 wanting we'll of course go back to the DCOs to

 20 find out why it is they weren't able to comply

 21 fully with the aspects of the law. So I guess the

 22 answer is if we do get staff that we had asked for
 39

 1 then we'd be in a much better position to review

 2 these reports.

 3 COMMISSIONER DUNN: Do you have a

 4 timeline in mind in which the division would

 5 review these reports as they've come in?

 6 MR. RADHAKRISHNAN: The report is

 7 supposed to be annual?

 8 MS. SCHNABEL: This one is whenever

 9 there is a conflict.

 10 MR. RADHAKRISHNAN: Whenever there's a

 11 conflict. I can't predict when we'll get these

 12 reports because it's event specific if I'm not

 13 mistaken. But if you're asking how long it is we

 14 will take, it depends on the length of the report.

 15 Hopefully we can review reports I'd say within a

 16 week, but again it depends on what it is we get.

 17 COMMISSIONER DUNN: It's too late. You

 18 said 1 week.

 19 MR. RADHAKRISHNAN: I beg your pardon?

 20 COMMISSIONER DUNN: I said it's too

 21 late. You said 1 week. I think it's very

 22 frustrating for somebody who says that they think
 40

 1 there has been an injustice and they go through

 2 the internal process and then they look at us as

 3 the court of last review on this and I think we

 4 owe it to them to try to get out and say we're

 5 going to respond in such a such a time and I think

 6 with a week you're shooting from the hip, but I do

 7 want to make sure that we have a mechanism set up

 8 within the division to review those in a timely

 9 manner.

 10 MR. RADHAKRISHNAN: You're right. I'm

 11 shooting from the hip because I don't know what

 12 I'm going to get so that that is the issue.

 13 CHAIRMAN GENSLER: You're estimating?

 14 MR. RADHAKRISHNAN: I am estimating.

 15 I'm always conservative because I don't like to

 16 overpromise things to the Commission.

 17 CHAIRMAN GENSLER: Commissioner Sommers?

 18 COMMISSIONER SOMMERS: Thank you, Mister

 19 Chairman. Nancy, I have a couple of questions

 20 with regard to our coordination with other

 21 regulators not just domestically but

 22 internationally. In the preamble you talk about
 41

 1 certain elements that we have included from both

 2 the European Commission proposal and CPSS-IOSCO

 3 and if you could walk us through that.

 4 MS. SCHNABEL: With respect to the

 5 European Commission proposal, we took various

 6 elements. One element would be the reporting

 7 requirement that we just discussed which is

 8 whenever there is an overrule by the board of the

 9 risk-management committee then the CCP which is

 10 the terminology that they use for DCOs under the

 11 European Commission proposal would have to file a

 12 report so that that is definitely one place. With

 13 respect to CPSS-IOSCO, there are two different

 14 CPSS-IOSCO principles. There are the ones that

 15 are currently in effect and then there are the

 16 ones that will hopefully become in effect next

 17 year. The ones that are currently in effect with

 18 respect to governance arrangements not require, I

 19 would say suggest or recommend, greater

 20 transparency and also clear organizational

 21 structure so that we took some of those proposals

 22 from CPSS-IOSCO with respect to transparency to
 42

 1 both the public and to the Commission.

 2 COMMISSIONER SOMMERS: I want to clarify

 3 because I think I heard this when we were talking

 4 with the European Commission with regard to their

 5 proposals on this that conflicts of interest may

 6 be one area where we are not fully on the same

 7 page.

 8 MS. SCHNABEL: That's correct.

 9 COMMISSIONER SOMMERS: What about the

 10 SEC? Have they already proposed their entire

 11 conflicts-of-interest rules?

 12 MS. SCHNABEL: They've proposed some of

 13 their conflicts-of-interest rules. I think that

 14 they have some requirements that may be coming up

 15 in their entity rulemaking such as the SEC

 16 rulemaking or their swap-based SEF rulemaking so

 17 that they're nearly done but not completely done.

 18 COMMISSIONER SOMMERS: Are we consistent

 19 with what the SEC is doing?

 20 MS. SCHNABEL: We are mainly consistent.

 21 There will be differences here and there, but we

 22 are consistent.
 43

 1 COMMISSIONER SOMMERS: Can you highlight

 2 any of the differences that you think are

 3 meaningful?

 4 MS. SCHNABEL: I don't necessarily want

 5 to speak on behalf of the SEC and I'm not sure

 6 what part of our discussion is necessarily public.

 7 For instance, with this rulemaking some of the

 8 provisions here the SEC does not have similar core

 9 principles so that whether or not they're going to

 10 implement some other provisions this rulemaking in

 11 its entirety is unclear. But I really can't speak

 12 for them so that I think that those might be the

 13 areas where there would be some discrepancy.

 14 COMMISSIONER SOMMERS: Thank you.

 15 CHAIRMAN GENSLER: Thank you,

 16 Commissioner Sommers. Commissioner Chilton?

 17 COMMISSIONER CHILTON: I don't have any

 18 questions. Thank you, Mister Chairman.

 19 CHAIRMAN GENSLER: Commissioner O'Malia?

 20 COMMISSIONER O'MALIA: It's a beautiful

 21 day. Nancy, I just have one question. The

 22 proposal requires that summaries of significant
 44

 1 decisions implicating the public interest, things

 2 like membership access and discipline which would

 3 include a rationale for the decisions and the

 4 process for reaching these decisions would be made

 5 available to the public. How are we going to

 6 protect appropriate business confidential or other

 7 items that should be held privately?

 8 MS. SCHNABEL: I thought I took those

 9 two provisions out of the proposal because of

 10 questions that were raised with respect to

 11 protection of nonpublic information, but if

 12 somehow they were not taken out I will now take

 13 them out. We've inserted a provision that states

 14 that the requirement does not extend to nonpublic

 15 information that a DCO, DCM or SEF has.

 16 CHAIRMAN GENSLER: I'd help out there to

 17 ask by unanimous consent if they're not out yet

 18 that they be taken out. Are there any objections?

 19 I'm not hearing any objection by U.C. just to make

 20 sure that you have the authority to take them out

 21 in case you hadn't.

 22 COMMISSIONER O'MALIA: Thank you, Mister
 45

 1 Chairman, and thank you, Nancy, for your

 2 sensitivity to these issues.

 3 CHAIRMAN GENSLER: Not hearing any

 4 further questions, I want to call the roll on the

 5 staff recommendation as possibly amended by the

 6 U.C., but you may have already done that. Dave

 7 Stawik?

 8 MR. STAWIK: Commissioner O'Malia?

 9 COMMISSIONER O'MALIA: Aye.

 10 MR. STAWIK: Commissioner O'Malia, aye.

 11 Commissioner Chilton?

 12 COMMISSIONER CHILTON: Aye.

 13 MR. STAWIK: Commissioner Chilton, aye.

 14 Commissioner Sommers?

 15 COMMISSIONER SOMMERS: Aye.

 16 MR. STAWIK: Commissioner Sommers, aye.

 17 Commissioner Dunn?

 18 COMMISSIONER DUNN: Aye.

 19 MR. STAWIK: Commissioner Dunn, aye.

 20 Mister Chairman?

 21 CHAIRMAN GENSLER: Aye.

 22 MR. STAWIK: Mister Chairman, on this
 46

 1 question the ayes are five and nays are zero.

 2 CHAIRMAN GENSLER: Thank you. Thank you

 3 again Nancy and Ananda for your excellent work and

 4 we'll see you back in January when you're

 5 proposing something on the first final rule. Now

 6 we're moving on to the end user proposed rule and

 7 George Wilder from the Office of General Counsel.

 8 I don't know if somebody is coming up to the desk

 9 with you. Dan Berkovitz as well maybe. They will

 10 present rules related to end user exemption for

 11 mandatory clearing of swaps. As they're getting

 12 situated, Congress said that nonfinancial end

 13 users hedging or mitigating commercial risk would

 14 have a choice in that they get to decide whether

 15 to use a clearinghouse, and what we're hearing

 16 from staff on today is that proposal as well as

 17 Congress says we shall consider exemptions for

 18 smaller financial institutions of those less than

 19 $10 billion, farm credit institutions, credit

 20 unions and insured depository institutions with a

 21 list of questions to help us do that. George and

 22 Dan.
 47

 1 MR. WILDER: Let me begin by thanking

 2 each of you and your staffs, each of my teammates

 3 and each of our SEC staff colleagues. Everybody

 4 has been very helpful and I am very grateful.

 5 I will address three topics, credit

 6 risk, commercial risk and financial entities.

 7 These three topics are key to understanding our

 8 proposal. First is credit risk. As you know,

 9 credit risk is handled differently for cleared and

 10 noncleared swap so that for noncleared swaps, 10

 11 disclosures about meeting credit risk will be

 12 required. These are not burdensome disclosures

 13 under our proposal. We propose an easy-to-use

 14 system that uses a check-the-box approach that

 15 covers 10 items or boxes to check. These boxes

 16 ask whether a written credit support agreement is

 17 involved; whether pledged or segregate assets are

 18 involved; whether written third-party guarantee is

 19 involved; whether the end user will rely on its

 20 own resources; and whether other means of meeting

 21 credit risk are involved. There are also four

 22 identity questions, the identity of the electing
 48

 1 counterparty under the rule; whether a financial

 2 entity is involved; whether a captive finance

 3 affiliate is involved; and whether an SEC filer is

 4 involved and if so whether the board approval

 5 requirement has been met. There is also a tenth

 6 question, whether the swap is being used to hedge

 7 or mitigate commercial risk, and this leads me to

 8 my second topic. Not all swaps are eligible for

 9 the end user exception. Only swaps used to hedge

 10 or mitigate commercial risk qualify. How does an

 11 end user know whether its swaps qualify? We

 12 provide guidance in our proposal. There are three

 13 ways to qualify. If the swap is eligible for

 14 hedge accounting treatment, it qualifies; if the

 15 swap is eligible for a hedge exemption from

 16 position limits it qualifies; and if the swap

 17 reduces risk relating to the end users assets,

 18 liabilities or services it qualifies.

 19 In our proposal we also provide guidance

 20 about which swaps do not qualify. Swaps used for

 21 speculation, investing or trading do not qualify

 22 for this exception. Nor do swaps used to hedge
 49

 1 another swap unless that first swap itself is used

 2 as a hedge. This leads me to my third and final

 3 topic, financial entities. As a general rule,

 4 financial entities cannot use the end user

 5 exception, but the Dodd-Frank Act permits the CFTC

 6 to consider whether to allow small financial

 7 institutions to use the end user exception.

 8 Accordingly, we propose that the Commission invite

 9 comment on its options here and how it should

 10 proceed.

 11 Before closing, there is one more topic

 12 that I'd like to discuss. With what we propose

 13 here, our system uses reporting to SDRs as the end

 14 user's way to comply with the Dodd-Frank Act's

 15 requirement for notice regarding noncleared swaps

 16 so that the Commission's oversight and enforcement

 17 effort for end users will depend upon this SDR

 18 database. Thank you. That's all I have.

 19 CHAIRMAN GENSLER: Thank you, George.

 20 Do I hear a motion on the staff recommendation?

 21 COMMISSIONER DUNN: So moved.

 22 COMMISSIONER SOMMERS: Second.
 50

 1 CHAIRMAN GENSLER: I support this

 2 proposed rulemaking on the end user exception.

 3 Congress decided that nonfinancial entities

 4 mitigating or hedging commercial risk will have a

 5 choice whether to submit their transactions

 6 through a clearinghouse. If they want to they

 7 can, if they don't want to they're out. The

 8 reason I support the rule is in essence this

 9 proposal says that if a company, a nonfinancial

 10 company, is using a swap to hedge an asset, a

 11 liability and input a service that it currently

 12 has or uses or even if it just anticipates having

 13 the asset, the liability of the input of the

 14 service and it's hedging that, it would qualify

 15 for the end user exception. It also says very

 16 specifically that this could be a currency risk,

 17 an interest rate risk or a physical commodity risk

 18 and so forth. In addition, if that wasn't clear

 19 enough, if does say that if the swap meets

 20 generally accepted accounting principles as a

 21 hedge or is used as a bona fide hedging which is

 22 under the Commodities and Exchange Act another
 51

 1 concept of hedging, the transaction would qualify

 2 for the end user exception but it's not reliant on

 3 a generally accepted accounting principle or a

 4 bona fide hedger, it's much more expansive again

 5 hedging an asset, liability input or service

 6 current or anticipated. Thus I think that it

 7 complies with congressional intent in terms of the

 8 nonfinancial entities. George also went through

 9 as he said 10 questions on credit risk and we're

 10 only doing that because Congress mandated that

 11 there had to be notification. Many people don't

 12 focus on that so that we've tried to make that a

 13 check-the-box approach to make it very

 14 straightforward for end users and that those could

 15 be just sent off to the swap data repository as I

 16 understand it.

 17 I think these are very good. We do have

 18 in this proposal also something with regard to

 19 financial entities because Congress said we shall

 20 consider for those insured depository

 21 institutions, farm credit institutions and credit

 22 unions that are less than $10 billion exceptions
 52

 1 from the generalized rule that financials come in

 2 and I know that some of my fellow Commissioners

 3 had hoped that we would be very explicit and have

 4 a proposal on that today, and if anybody is at

 5 fault it's probably me where today I think we'll

 6 be up to 36 rules. I suggested some time ago a

 7 little bit more process to ask the public for some

 8 help on this very important thing. I think

 9 Congress was specific where they said we shall

 10 consider it and we have a series of questions to

 11 help us do that but it would be full anticipation

 12 that sometime over the next I guess we have about

 13 7 months to go here that we would be learning from

 14 the public and taking that up as well. With that

 15 I don't have any questions. Commissioner Dunn?

 16 COMMISSIONER DUNN: Thank you, Mister

 17 Chairman. This has been probably one issue in

 18 Dodd-Frank that we've heard more from folks lining

 19 up to be exempted as an end user. We've had a lot

 20 of them in our offices, we've received a lot of

 21 information from them but not it really counts.

 22 So for those folks who are concerned about the end
 53

 1 user exception, now is the time to get comments

 2 in. What happens in the next 30 days on this is

 3 extremely important.

 4 I'd like to recognize George for the

 5 important work that he did on the Hill in getting

 6 this legislation out and I'm going to quote from

 7 the Congressional Record of June 30, 2010, House

 8 5246 page, and it's Mr. Holden from Pennsylvania

 9 who engaged with a colloquy with Chairman Peterson

 10 from the Agricultural Committee, and you'll

 11 indulge me, Mister Chairman, I'd like to read that

 12 colloquy and what led up to it. Mr. Holden says,

 13 Over 20 years ago the Agricultural Committee put

 14 in place a revised legislation and regulatory

 15 regime for the Farm Credit System that has

 16 successfully stood the test of time in ensuring

 17 that these institutions operate safe and sound.

 18 I'm very proud of that because I worked for

 19 Chairman Leahy on that particular legislation, Bob

 20 Cashdollar and my staff was my counterparty for

 21 Mr. Jones over on the House side and it did work

 22 well and I'm glad Mr. Holden recognized that. The
 54

 1 farm credit institutions are regulated and

 2 examined by a fully empowered independent

 3 regulatory agency, the Farm Credit Administration,

 4 which has the authority to shut down and liquidate

 5 a system or institution that is not financially

 6 viable. In addition, the Farm Credit System is

 7 the only GSE that has a self- funded insurance

 8 program in place that was established to not only

 9 protect investors and farm credit debt securities

 10 against loss of principal and interest but also to

 11 protect taxpayers. These are just a few of the

 12 reasons why the Agricultural Committee insisted

 13 that the institution of the Farm Credit System not

 14 be subject to a number of provisions of this

 15 legislation. They were not the cause of the

 16 problem, did not utilize TARP funds and did not

 17 engage in abusive subprime lending. We have

 18 believed that this legislation should not do

 19 anything to disrupt this record of success.

 20 Mister Speaker, I would now like to enter into a

 21 colloquy with the Chairman of the Agriculture

 22 Committee. The conference report includes
 55

 1 comprise language that requires the Commodity

 2 Futures Trading Commission to consider exempting

 3 small banks, farm credit systems and credit unions

 4 from provisions requiring that all swaps be

 5 cleared. We understand that community banks, farm

 6 credit institutions and credit unions did not

 7 cause the financial crisis institution that

 8 precipitated this legislation. While the

 9 legislation places a special emphasis on

 10 institutions with less than $10 billion in assets,

 11 my reading of the language is that they should not

 12 in any way be viewed by the Commodity Futures

 13 Trading Commission as a limit on the size of the

 14 institution that should be considered for an

 15 exemption. Mister Chairman, would you concur with

 16 that? Mr. Peterson, yes, I full agree that the

 17 language says that institutions to be considered

 18 for exemption shall be included and include those

 19 with $10 billion or less in assets. It is not a

 20 firm standard. Some firms with larger assets

 21 could qualify while some with smaller assets may

 22 not. Regulators will have maximum flexibility
 56

 1 when looking at the risk portfolios of these

 2 institutions for consideration of an exemption.

 3 We all know that legislative history and

 4 colloquy are not part of the statute per se, but

 5 we're driven by that because that's the intent of

 6 the Congress and that's what we ought to be

 7 looking at here. As I read that, that tells me

 8 that Congress thought that for small banks, for

 9 credit unions and farm credit institutions that

 10 $10 billion is not an absolute threshold and it

 11 confers upon us as regulators when making those

 12 decisions to talk to the NCUA for credit unions,

 13 to talk to the Farm Credit Administration for the

 14 farm credit systems, to find out exactly what is

 15 at stake and what risk these institutions have as

 16 we make these considerations. I would like to ask

 17 if that's the intent of what we have in this

 18 regulation and how we're going to be doing that.

 19 MR. WILDER: Thank you, Commissioner.

 20 Yes, it is. We have been in contact with the Farm

 21 Credit Administration, we've been in contact with

 22 the NCUA and other regulators around town so that
 57

 1 you're absolutely right that that's what Congress

 2 had in mind and we're hoping to hear what industry

 3 has to say and help us through this because there

 4 are some issues as you know among the different

 5 categories of financial institutions that are

 6 going to be challenging. That's why we've taken a

 7 cautious approach here and are looking forward to

 8 hearing more.

 9 CHAIRMAN GENSLER: Thank you,

 10 Commissioner Dunn. I fully hope and even expect

 11 that we will hear from the public and I think it

 12 will help inform this Commission so that, yes, it

 13 may be a cautious view but I think it will be very

 14 helpful to hear from the public on this set of

 15 questions. Commissioner Sommers?

 16 COMMISSIONER SOMMERS: Thank you, Mister

 17 Chairman. I want to follow-up with some specific

 18 questions on this same area and clarify that in

 19 the statute although there is this $10 billion or

 20 less, that the statute says including institutions

 21 that are $10 billion or less. In the colloquy Mr.

 22 Holden points out that he though that that gave us
 58

 1 the flexibility to include institutions that were

 2 above $10 billion. Where do you believe or what

 3 criteria should be in a risk profile that we look

 4 at to decide whether or not an institution that

 5 has more than $10 billion that would qualify and

 6 an institution that has less would not?

 7 MR. WILDER: There is probably going to

 8 have to be some consideration of credit risk, risk

 9 to capital, a percentage of capital perhaps that

 10 is related to the exposure that the institution

 11 has to its swaps. Some of these institutions are

 12 large asset-wise but they're really not that big

 13 in terms of their swap activity so that it means

 14 that the asset test may not be the best way to go.

 15 We also have to be somewhat concerned I think

 16 about having some measure of parity amongst the

 17 four categories of institutions that are covered

 18 by this rule. Congress did say it not once, not

 19 twice but three times that they were suggesting

 20 the asset-based test for each category so that

 21 there may be a message there. But you're right on

 22 target that Congress recognized this problem and
 59

 1 they've directed us to solve it and there are

 2 solutions there. We just need to be able to build

 3 a record to support what we do.

 4 COMMISSIONER SOMMERS: What do you think

 5 are the challenges in us figuring out what the

 6 solutions are?

 7 MR. WILDER: I think that we need to

 8 recognize that the four categories compete with

 9 each other particularly say for ag lending so that

 10 we need to be careful about not being perceived as

 11 tipping a balance for those markets. We need to

 12 take into consideration antitrust concerns here on

 13 the Commodity Exchange Act. That's not an

 14 insurmountable problem. I think that actually

 15 there is probably a good solution to this but it's

 16 going to require us to build a record, an

 17 administrative record, that will support what we

 18 do.

 19 COMMISSIONER SOMMERS: Because all we do

 20 in this proposal is ask questions and we don't set

 21 up a proposed framework for how we would have a

 22 solution to this, does that preclude us from being
 60

 1 able to include a framework for exemptions in a

 2 final rule because this seems to be more like an

 3 ANPR to me on this particular issue, so then are

 4 we going to have to go out with another proposal

 5 with regard to this?

 6 MR. WILDER: That's a good observation

 7 and you're right, there is a problem if the

 8 Commission feels that it wants to go to a final

 9 rule that it won't be able to do that at this

 10 point. But there are options. The Commission has

 11 options here. There is the possibility of issuing

 12 an order and there are several ways the Commission

 13 could issue an order here. The Commission may

 14 very well issue an order without taking further

 15 comments in the Federal Register. That's a

 16 possibility. It's not like we're foreclosing.

 17 You're not foreclosing yourself by just asking for

 18 comments at this point. There's flexibility.

 19 COMMISSIONER SOMMERS: I would say that

 20 I think this is a good rule and I think you've

 21 done a great job except for these provisions and I

 22 fear that by delaying getting comment on a
 61

 1 particular solution for this delaying going final

 2 with a process for exemption may have a lot of

 3 untended consequences and may actually go against

 4 congressional intent. Thanks, George.

 5 MR. WILDER: Thank you.

 6 CHAIRMAN GENSLER: Commissioner Chilton?

 7 COMMISSIONER CHILTON: I just have a

 8 quick comment. George, I think you and your team

 9 have done a really good job and I thank you. I've

 10 talked a little bit about this before generically

 11 when I've said that a lot of people who have come

 12 in and have met with us want the line for

 13 regulation to begin right after them. In this

 14 case if they want to be included the line is long

 15 and in some cases it's sort of laughable who's

 16 requested this. I don't want to make light of it

 17 saying it's laughable, but we've had hedge funds

 18 in here that have said their end users -- I even

 19 had somebody suggest that in ETFs since they are

 20 the natural counterparty to some of the end users

 21 needed to be included in this. So some of these

 22 requests while you want to take them seriously
 62

 1 quite frankly don't pass the smirk test. I think

 2 that you've done a really good job here to strike

 3 a reasonable balance. I'm not suggesting that it

 4 can't be improved, that we won't get some

 5 additional comments that will be helpful, but I

 6 thank you and your team for your good work.

 7 MR. WILDER: Thank you.

 8 CHAIRMAN GENSLER: Thank you,

 9 Commissioner Chilton. Commissioner O'Malia?

 10 COMMISSIONER O'MALIA: George, let me

 11 add to the chorus. This is a great rule except

 12 for one item.

 13 MR. WILDER: One little thing.

 14 COMMISSIONER O'MALIA: Yes.

 15 Unfortunately with regard to the farm credit

 16 system I think we've missed it by a country mile.

 17 MR. WILDER: You're right.

 18 COMMISSIONER O'MALIA: I think every

 19 Commissioner has mentioned it, the $10 billion.

 20 Commissioner Dunn obviously raised it and

 21 Commission Sommers as well. Last night at 7

 22 o'clock which may be late for dinner when you sent
 63

 1 around a new question on this issue, it really

 2 isn't late in terms of rulemaking. This is early

 3 for a 7 o'clock change. But I think in the

 4 question though you left out three important

 5 words. It says in Section 2(h)(7)(ii), Congress

 6 directed the Commission to consider exempting

 7 depository institutions, farm credit institutions

 8 and credit unions with total assets less than $10

 9 billion. But when you go to the Act it says

 10 including such entities. That makes a big

 11 difference obviously in who we're considering in

 12 this question or who should respond in the nature

 13 of the question. Can we put in including such

 14 entities back into the question so that it's more

 15 consistent with the statute?

 16 MR. WILDER: We are asking this question

 17 whether there are measures other than $10 billion

 18 in assets so that we're not only asking here in

 19 terms of perhaps going above $10 billion, but

 20 we're also asking are there different tests that

 21 we could use so that I think this question is

 22 consistent with what Congress intended.
 64

 1 COMMISSIONER O'MALIA: Why don't we put

 2 their words back in our question?

 3 MR. WILDER: I'd be happy to do that.

 4 CHAIRMAN GENSLER: What are the words?

 5 COMMISSIONER O'MALIA: Including such

 6 entities, straight from the statute.

 7 CHAIRMAN GENSLER: Including such

 8 entities. Will we get closer to your country mile

 9 then, Commissioner O'Malia?

 10 COMMISSIONER O'MALIA: We're within a

 11 country mile then.

 12 CHAIRMAN GENSLER: What is the wording?

 13 COMMISSIONER O'MALIA: Including such

 14 entities.

 15 CHAIRMAN GENSLER: I'm asking for

 16 unanimous consent to include those three words in

 17 the question that came around at 7 o'clock last

 18 night. Was it three words?

 19 COMMISSIONER O'MALIA: Yes.

 20 CHAIRMAN GENSLER: Not hearing any

 21 objections, we've included those three words.

 22 COMMISSIONER O'MALIA: Thank you.
 65

 1 Obviously my colleagues have covered the ground on

 2 this one and I appreciate the great rulemaking.

 3 I'm not proposing it, but what do you think about

 4 maybe a staff roundtable on this issue since we're

 5 starting from scratch would be a good idea?

 6 MR. WILDER: You're asking me?

 7 COMMISSIONER O'MALIA: I was just kind

 8 of putting it out there.

 9 MR. WILDER: Sure. That's a

 10 possibility.

 11 CHAIRMAN GENSLER: At the end of the day

 12 there are going to be rules that come out on this

 13 small bank, small farm credit, small credit union

 14 provision. I don't think we should necessarily

 15 delay. I think actually we are building a

 16 constructive administrative record. I think as

 17 the Commission we owe that to the rulemaking

 18 process. And as Commissioner Chilton has said,

 19 there has been a long list of people who have come

 20 in and said we're really not what Congress

 21 intended when they wrote that and then you can

 22 fill in swap execution facility, swap dealer,
 66

 1 major swap participant, almost anything in there.

 2 And you can look on our website because we

 3 publicly posted the 500 meetings, but it's a good

 4 assumption that a large percentage of those are

 5 coming in to say we're not what Congress intended

 6 so that this area where Congress actually said we

 7 shall consider exempting these financial

 8 institutions from an otherwise financial

 9 institution definition, and I will own up and I am

 10 proud of this decision to build an administrative

 11 record. This may be a bit more cautious than

 12 Commissioner Sommers would want, but I think it is

 13 something that's incumbent upon this Commission to

 14 do well and do something that's sustainable in the

 15 courts after we do it.

 16 MR. BERKOVITZ: Mister Chairman, if I

 17 could add a clarification. The language in the

 18 proposal was a slight paraphrasing of the

 19 statutory language, but if you put in institutions

 20 including, we also had taken out the description

 21 of the banks as small banks and small institutions

 22 so that we may want to parallel the exact phrasing
 67

 1 in the statute.

 2 CHAIRMAN GENSLER: Is that all right

 3 with you, Commissioner O'Malia? So that we'll

 4 consider that a technical cleanup.

 5 MR. BERKOVITZ: Correct.

 6 CHAIRMAN GENSLER: Thanks. If there are

 7 no further questions, Dave Stawik, please call the

 8 roll.

 9 MR. STAWIK: Commissioner O'Malia?

 10 COMMISSIONER O'MALIA: No.

 11 MR. STAWIK: Commissioner O'Malia, no.

 12 Commissioner Chilton?

 13 COMMISSIONER CHILTON: Aye.

 14 MR. STAWIK: Commissioner Chilton, aye.

 15 Commissioner Sommers?

 16 COMMISSIONER SOMMERS: No.

 17 MR. STAWIK: Commissioner Sommers, no.

 18 Commissioner Dunn?

 19 COMMISSIONER DUNN: Aye.

 20 MR. STAWIK: Commissioner Dunn, aye.

 21 Mister Chairman?

 22 CHAIRMAN GENSLER: Aye.
 68

 1 MR. STAWIK: Mister Chairman, aye.

 2 Mister Chairman, on this question the ayes are

 3 three and the nays are two.

 4 CHAIRMAN GENSLER: Thank you, George and

 5 thank you, Dan. We'll see you back. Now we're

 6 moving to the notice of proposed rule making and

 7 staff's presentation on business conduct standards

 8 for counterparties or what we have sometimes

 9 called on our website and elsewhere external

 10 business conduct standards which are very

 11 important to protect the public. I'm filling a

 12 little time here for the public as people are

 13 coming in. The Congress clearly gave the SEC and

 14 the CFTC authority to set business conduct

 15 standards to protect against fraud, manipulation

 16 and other potential abuses, to promote market

 17 integrity and importantly promote a system of

 18 sales practices to protect counterparties. We're

 19 going to hear from Phyllis Cela who is the team

 20 lead and is also our Deputy Director of the

 21 Division of Enforcement, Vince McGonagle who is

 22 our Acting Head of Enforcement, Peter Sanchez who
 69

 1 is ever present on the team and then Ananda

 2 Radhakrishnan who heads up our Division of

 3 Clearing and Intermediary Oversight is also back

 4 for yet another cameo. Phyllis?

 5 MS. CELA: Thank you very much. Good

 6 morning, Mister Chairman and Commissioners.

 7 Before presenting an overview of the proposed

 8 rules, I really would like to thank the Commission

 9 and its staff for your support and guidance during

 10 the rulemaking process, and in particular Tim

 11 Karpoff for his wise counsel. I also would like

 12 to thank my team.

 13 CHAIRMAN GENSLER: Here's Tim. Do you

 14 want to tell him in person again?

 15 MS. CELA: Your wise counsel. You

 16 missed it. I want to thank my team, Pete Sanchez,

 17 Katie Driscoll, Ted Neller, Barry McCardy, Michael

 18 Salinski, Russ Petalia, Vivette Jane, John Doland,

 19 Todd Pronost and Stephanie Horn. We have worked

 20 closely with our counterparts at the SEC and I

 21 would like to acknowledge Lordes Gonzalez, the

 22 team leader there and her team.
 70

 1 In the course of preparing the proposed

 2 rules we received very helpful advice from

 3 numerous stakeholders through letters and

 4 consultations and also from staff and fellow

 5 regulators at the OCC, Fed, the Department of

 6 Labor, the European Commission and the U.K. FSA.

 7 This has been truly a collaborative effort which

 8 has resulted in the recommendations that we are

 9 making today.

 10 Section 731 of the Dodd-Frank Act adds

 11 Section 4(s)(H) to the Commodity Exchange Act and

 12 requires the Commission to promulgate rules to

 13 establish business conduct standards for swap

 14 dealers and major swap participants dealing with

 15 counterparties generally. In addition, Dodd-Frank

 16 empowers the Commission to promulgate rules to

 17 implement specific protections for special

 18 entities like state and municipal governments.

 19 The proposed rules will principally apply to swap

 20 dealers and major swap participants when they know

 21 their counterparty before entering into a swap.

 22 Often there will be uncleared bilateral swaps.
 71

 1 The disclosure and due diligence requirements will

 2 not apply to swaps initiated on a designated

 3 contract market or swap execution facility where

 4 the swap dealer or major swap participant does not

 5 know the identity of the counterparty prior to

 6 execution. In addition, where both counterparties

 7 or swap dealers, major swap participants,

 8 security-based swap dealers or major

 9 security-based swap participants, the disclosure

 10 and due diligence obligations will not apply.

 11 Generally speaking there are three

 12 groups of proposed rules, the general provisions,

 13 the duties that relate to dealings with all types

 14 of counterparties, and conduct rules that apply to

 15 dealings with special entities. The general

 16 provisions include requirements to have policies

 17 and procedures, diligence supervision and record

 18 retention related to the business conduct

 19 standards. They also address acceptable means of

 20 complying with the new requirements. The general

 21 provisions contain prohibitions against fraud,

 22 manipulation and abusive practices. The antifraud
 72

 1 provision incorporates the statutory text from new

 2 Section 4(s)(H)(iv) which applies to swap dealers

 3 and major swap participants and prohibits

 4 fraudulent, deceptive and manipulative practices.

 5 These proposed rules also prohibit disclosure of

 6 material, confidential counterparty information

 7 and trading ahead and front running of

 8 counterparty swap transactions. Coupled with the

 9 proposed internal business conduct rules requiring

 10 codes of ethics and information barriers, these

 11 rules are intended to protect counterparties from

 12 abuse by swap dealers and major swap participants

 13 including undermining the interests of

 14 counterparties by misappropriating their trading

 15 opportunities.

 16 The second group contains disclosure and

 17 due diligence requirements for dealings with

 18 counterparties generally. It begins with the duty

 19 to verify that the counterparty is an eligible

 20 contract participant and to determine whether a

 21 counterparty is a special entity. It continues

 22 with the duty to disclose the material risks and
 73

 1 characteristics of the swap and the material

 2 incentives and conflicts of interest of the

 3 participant dealer or major swap participant in

 4 connection with the swap. As part of the duty to

 5 disclose material risks, SDs and MSPs would be

 6 required to provide a scenario analysis for all

 7 high-risk, complex bilateral swaps. For bilateral

 8 swaps that are not available for trading on a swap

 9 execution facility or a designated contract

 10 market, counterparties would be able to opt in to

 11 require a scenario analysis from the SD or MSP.

 12 For uncleared swaps, there is the duty

 13 to disclose the daily mark which is defined as the

 14 mid-market value of the swap, and the duty to

 15 notify a counterparty of the right to clear, that

 16 is, a swap that is exempt from mandatory clearing,

 17 and to select the DCO. Under the proposed rules,

 18 SDs and MSPs would also have a duty of fair

 19 dealing and good faith and would be required to

 20 communicate in a fair and balanced manner. In

 21 this regard there is also an institutional

 22 suitability obligation when swap dealers or major
 74

 1 swap participants make recommendations to

 2 counterparties.

 3 The third group of rules applies to

 4 dealings with special entities. The statute

 5 requires that swap dealers that act as advisers to

 6 special entities must act in the best interests of

 7 the special entity and make reasonable efforts to

 8 obtain information necessary to ensure that their

 9 recommendations are in the special entity's best

 10 interests. The proposed rules adopt the statutory

 11 text and clarify that acts as an adviser to a

 12 special entity includes recommending a swap. The

 13 legislative history of Sections 4(s)(H)(iv) and

 14 (v) indicates that swap dealers should be able to

 15 continue to recommend a swap to a special entity

 16 and then enter into the same swap as a

 17 counterparty. For the statute and proposed rule

 18 to operate this way, the best interest duty would

 19 have to be interpreted to allow principal

 20 transactions between an adviser and its

 21 counterparty. Looking to case law, the best

 22 interest standard would require the adviser to put
 75

 1 the client's interests first by acting in good

 2 faith and making full and fair disclosure of all

 3 material facts and conflicts of interest and

 4 employing reasonable care that any recommendation

 5 is designed to further the purposes of the special

 6 entity. It would not bar principal transactions

 7 per se where the conflicts are properly disclosed

 8 and the counterparty consents.

 9 When acting as a counterparty to a

 10 special entity, swap dealers and major swap

 11 participants will have the duty to ensure that the

 12 special entity has a representative either

 13 in-house or external who is independent of the

 14 swap dealer or major swap participant and who

 15 satisfied certain other criteria including that

 16 the representative acts in the best interests of

 17 the special entity. When dealing with ERISA plans

 18 there will be an additional duty to verify that

 19 the plan has a representative that is an ERISA

 20 fiduciary, and when dealing with a municipal

 21 entity that there will be an additional duty to

 22 verify that the municipality has a representative
 76

 1 that is subject to restrictions on certain

 2 political contributions or pay-to-play

 3 restrictions. Swap dealers and major participants

 4 also would be subject to pay-to-play restrictions

 5 when dealing with municipal entities. This rule

 6 is similar to existing rules for investment

 7 advisers and municipal securities dealers.

 8 Finally, the proposed rules would

 9 require registered Commission intermediaries that

 10 handle customer orders for swaps that are

 11 available for trading on a swap execution facility

 12 or designated contract market to execute such

 13 orders on terms that are reasonably related to the

 14 best terms available. Thank you and I look

 15 forward to your comments and questions.

 16 CHAIRMAN GENSLER: The Chair will

 17 entertain a motion on the staff recommendation on

 18 external business conduct standards.

 19 COMMISSIONER DUNN: So moved.

 20 COMMISSIONER SOMMERS: Second.

 21 CHAIRMAN GENSLER: Thank you so much,

 22 Phyllis and everybody on the team. I know there
 77

 1 has been a lot of work that's gone in over the

 2 last number of months and a lot of consultation

 3 and I'm glad that you listed it. We shared as I

 4 understand it drafts of this as it was coming

 5 through with the SEC and the federal banking

 6 regulators. Is that correct?

 7 MS. CELA: All of them, yes.

 8 CHAIRMAN GENSLER: You incorporated as

 9 best you could their comments?

 10 MS. CELA: We did. It was very helpful

 11 and we did.

 12 CHAIRMAN GENSLER: Also my thanks to

 13 fellow regulators across this town, and you said

 14 internationally, that you got comments from London

 15 and Brussels.

 16 MS. CELA: Absolutely. We sent term

 17 sheets abroad and had very detailed exchanges.

 18 CHAIRMAN GENSLER: I support the

 19 proposed rulemaking to establish business conduct

 20 standards for swap dealers and major swap

 21 participants in their dealings with

 22 counterparties. I think this is one of the
 78

 1 critical features of what Congress did in the

 2 statute, that there would be the promotion of the

 3 integrity of the markets in this way. Today's

 4 proposal implements those authorities that

 5 Congress asked us to do, to enforce robust sales

 6 practices in the swap markets and the rules will

 7 level the playing field and bring I think some

 8 needed transparency. There is even one

 9 transparency piece here, it's like the towel rack,

 10 but Congress did this one, which in the form of a

 11 question but I want to make sure I understand it,

 12 that if you're in a bilateral relationship because

 13 it's a customized swap or you're en end user that

 14 happens to decide not to use a clearinghouse, you

 15 can get a daily mid- market mark to market on

 16 valuation. Is that correct?

 17 MS. CELA: That is correct.

 18 CHAIRMAN GENSLER: That I think is a

 19 very positive thing to end users that Congress did

 20 and that we're incorporating in this rule that

 21 every day you get a chance to have that valuation

 22 directly and it's supposed to be mid-market. I
 79

 1 think it will strengthen the confidence in the

 2 markets. The proposed rules also prohibit fraud

 3 and certain other abusive practices. It would

 4 implement requirements for swap dealers to deal

 5 fairly with customers providing balanced

 6 communications and disclose conflicts of interest

 7 and material incentives before entering into the

 8 swaps. And the rule also would implement the

 9 Dodd-Frank heightened duties on the dealers when

 10 they deal with certain entities, what are called

 11 special entities. Am I correct that that's

 12 largely municipalities and pension plans?

 13 MS. CELA: And endowments.

 14 CHAIRMAN GENSLER: And endowments.

 15 Thank you. With regard to these entities, the

 16 municipalities, pension plans and endowments, the

 17 proposed rules include higher standards than

 18 Congress wanted and as Phyllis said also it has a

 19 restriction on certain political contributions to

 20 municipal officers by the dealers, similar to the

 21 pay-to- play restrictions that the SEC has and

 22 you've tailored off of those restrictions. Is
 80

 1 that right?

 2 MS. CELA: We did. We copied.

 3 CHAIRMAN GENSLER: Plagiarism was

 4 allowed for now. It might not be plagiarized once

 5 the public comments and we may decide to change

 6 it.

 7 MS. CELA: That's always possible.

 8 CHAIRMAN GENSLER: The proposed rule is

 9 intended to ensure that swaps customers get fair

 10 treatment in the execution of their transactions

 11 and would require dealers to disclose what access

 12 they have to swap execution facilities so that as

 13 I understand it whether it's an end user like the

 14 commercial end users we talked about or

 15 financials, that the dealer would have to tell

 16 them there are these things called trading

 17 platforms and SEFs and so forth. Is that correct?

 18 MS. CELA: That's correct. It's a

 19 two-piece disclosure so that you disclose where

 20 the swap is trading and which markets you have

 21 access to as a dealer.

 22 CHAIRMAN GENSLER: So that if it's a
 81

 1 commercial end user that has a choice whether to

 2 use a swap execution facility, they keep that

 3 choice but they at least get some disclosure. Is

 4 that correct?

 5 MS. CELA: That is correct.

 6 CHAIRMAN GENSLER: Then the rules

 7 prohibit the dealers from defrauding a customer by

 8 executing a transaction on terms that have no

 9 reasonable relationship to the market. This may

 10 be something that's very important to hear from

 11 the public on, it may be something that doesn't

 12 happen often, but at least as I understand it

 13 includes that as well.

 14 MR. CELA: It does. It's grounded in

 15 concepts of fair dealing and antifraud and it

 16 derives from the principal agent relationship in

 17 the case law and has been articulated as a

 18 reasonable relationship test.

 19 CHAIRMAN GENSLER: I also think the

 20 proposal asked a series of very important

 21 questions. I commend Commissioner Dunn who worked

 22 on a lot of these in terms of the counterparty
 82

 1 relationship and the adviser relationship and how

 2 the two square in this bilateral world. Is that

 3 right?

 4 MS. CELA: That is correct. It is a

 5 complicated situation that Congress has addressed

 6 in a way through a disclosure regime. That

 7 disclosure regime actually derives from case law

 8 beginning with the Supreme Court case in the

 9 capital gains are in the mid-1960s which talks

 10 about when you have an adviser relationship with a

 11 client, disclosure and consent to disclosure is

 12 very material and particular disclosures is the

 13 way to put sunshine on the situation and try to

 14 mitigate the situation.

 15 CHAIRMAN GENSLER: Can you, Phyllis,

 16 tell us how this proposal defines adviser?

 17 MS. CELA: Adviser here would have its

 18 meaning as adviser under the CTA definition, but

 19 what we've done here is to particularly say that

 20 when you make a recommendation as you would if you

 21 were a commodity trading adviser, if you make a

 22 particularized recommendation to a special entity
 83

 1 that would put you in the adviser box and obligate

 2 you to operate on a best interest standard of

 3 care.

 4 CHAIRMAN GENSLER: So that if you make

 5 as you call it a particularized recommendation as

 6 opposed to a general the markets are going up.

 7 It's not like that.

 8 MS. CELA: There is a carve-out. We

 9 thought it was important not to interfere where

 10 interference was unhelpful and not necessary. We

 11 were told that when there is general market

 12 information provided to a counterparty, that

 13 should certainly not be considered advising, or

 14 when a counterparty comes to receive terms on a

 15 request basis for a transaction from a swap

 16 dealer, whatever terms that the swap dealer would

 17 provide shouldn't be considered to be advice to

 18 that counterparty.

 19 CHAIRMAN GENSLER: But where they're

 20 actually structuring a deal and so many of these

 21 dealers have structuring desks and they're working

 22 to structure something over days or maybe weeks,
 84

 1 then that would be particular advice?

 2 MS. CELA: That would certainly seem to

 3 be particular advice. This isn't the first time

 4 that the law has considered what constitutes

 5 making a recommendation. Our own CTA case law,

 6 the CTS decision one and of course on the

 7 investment adviser side on for the SEC as well as

 8 under FINRA case law, there is a fairly

 9 substantial body of law to provide guidance on

 10 what does constitute a recommendation in the

 11 circumstance. The circumstance that you just

 12 described seems to me to be one that would fall

 13 cleanly within.

 14 CHAIRMAN GENSLER: I thank you again and

 15 I very much look forward to the public's comments

 16 in this area. It's a very important area.

 17 Commissioner Dunn?

 18 COMMISSIONER DUNN: Thank you, Mister

 19 Chairman, and I thank staff for indulging me and I

 20 thank my fellow Commissioners. I know I've been

 21 the lefty here on this one. But in my mind I

 22 think this falls within a fiduciary responsibility
 85

 1 and at one point that was in the proposed statute.

 2 It wasn't in the final statute although in reading

 3 it I think Congress gives us the authority to

 4 require that if possible, but that may be just one

 5 of five opinions here.

 6 Having said all that, I feel that there

 7 is an inherent conflict of interest from somebody

 8 who is both an adviser and a counterpartner and it

 9 goes against logic to say, no, there's not. Are

 10 you satisfied that what we're doing here will

 11 mitigate that conflicts of interest?

 12 MS. CELA: Yes. I feel like what the

 13 proposed rule does and what Dodd-Frank does is

 14 acknowledge the conflict. It doesn't ignore the

 15 conflict or hide it or somehow put it under the

 16 rug. It says there is an issue here that needs to

 17 be addressed and the way the Congress addresses it

 18 is to impose this higher duty of care, this best

 19 interest standard for the adviser in dealing with

 20 certainly the special entity. What helps in this

 21 regard I believe is in order to enter into a

 22 transaction with a counterparty, that special
 86

 1 entity counterparty will have to have its own

 2 independent representative and it too will have to

 3 operate in the best interests of that special

 4 entity. So I think it is certainly possible for

 5 the special entity to be looking to its own

 6 independent representative for reliance purposes

 7 and to evaluate the recommendation that's coming

 8 from the swap dealer who would be acting both as

 9 the adviser and the counterparty. With that

 10 additional protection in that circumstance,

 11 Commissioner, I appreciate very much your concern.

 12 We have it as well. Particularly as an

 13 enforcement person I worry about things like that.

 14 I think we've gone a fair distance to mitigating

 15 as you say. You can't eliminate the conflict.

 16 You can shed light on it and bring it to the open

 17 and the parties can make judgments.

 18 COMMISSIONER DUNN: You indicated and

 19 the Chairman just elaborated on the fact that

 20 we're looking at the current body of law as we go

 21 through here and that suggests to me that this is

 22 not static, that it's dynamic and that as case law
 87

 1 changes, this may change as well. My question to

 2 you as an enforcer, how do we enforce this and how

 3 do we push the boundaries of case law as we're

 4 going through this to come down on the side of the

 5 individuals?

 6 MS. CELA: I think we were given some

 7 tools we didn't have before. We certainly have a

 8 lot of tools. We had no tools before with respect

 9 to this particular relationship between a swap

 10 dealer and the counterparty. It was on the bus.

 11 What Congress did was impose very particular due

 12 diligence requirements around certification of the

 13 appropriateness of counterparty in the first

 14 instance and then a very robust disclosure regime.

 15 What we've done here is really incorporating the

 16 very robust language from the statute so that from

 17 an enforcement standpoint it's the tripwire to

 18 fraud. If you haven't made the disclosures the

 19 risk is with respect to fraud, but making the

 20 disclosures or failing to make the disclosures

 21 themselves would be effective enforcement so that

 22 in that context robust compliance and an audit
 88

 1 program would be very helpful in ensuring that the

 2 business is going on in a way that would mitigate

 3 those conflicts that you're concerned about and we

 4 are too.

 5 COMMISSIONER DUNN: Is the division

 6 contemplating developing that type of audit group

 7 to go out and look at this?

 8 MS. CELA: That's why I invited Mr.

 9 Radhakrishnan to the table today.

 10 MR. RADHAKRISHNAN: In fact, depending

 11 on how the Commission structures the agency, staff

 12 is contemplating structuring an audit group to

 13 look at swap dealers. Of course, everything is a

 14 function of resources so if we get what we ask for

 15 and we get it in time, then we can do it. Notice

 16 I said get it in time as well because getting

 17 money 2 to 3 years from now is going to help us.

 18 COMMISSIONER DUNN: Is the entity that

 19 the dealers register with going to have a duty

 20 here as well?

 21 MR. RADHAKRISHNAN: Commissioner, as the

 22 Commission asked the question in the registration
 89

 1 rulemaking, the issue is always should we do it or

 2 should the NFA do it because I think in that

 3 rulemaking the Commission proposed that all swap

 4 dealers and MSPs have to register with the NFA. I

 5 don't know the answer to that. The answer would

 6 be a balance between us. I don't speak for the

 7 NFA, but I'm not sure that they will members and

 8 not look at them. But as to whether we do it I

 9 think is a function of resources and also of

 10 course what the Commission decides we should do.

 11 COMMISSIONER DUNN: I would hate to

 12 think that the public thinks we're doing a

 13 regulation out here with no follow-up or with no

 14 police on the job.

 15 MR. RADHAKRISHNAN: I agree with you.

 16 And I'm just guessing in that if the Commission

 17 doesn't get the resources I suspect that the NFA

 18 will do it, but I hope that we get the resources

 19 just so that the Commission's staff and the

 20 Commission itself gets a familiarity with how we

 21 implement these regulations.

 22 COMMISSIONER DUNN: Phyllis, you had
 90

 1 indicated that you had talked with other agencies.

 2 How do our rules here compare with what the SEC

 3 does? Is there a difference and why?

 4 MS. CELA: Let me say that my

 5 counterpart team at the SEC got a reprieve. They

 6 were supposed to be considered yesterday but won't

 7 be heard until next week.

 8 CHAIRMAN GENSLER: A little like the SEF

 9 team. We're not the only ones who are human.

 10 MS. CELA: I really can't tell you what

 11 will come of it. What I can say is that in the

 12 course of staff consultation and give and take,

 13 the rules are very close. There are some things

 14 that they are taking up in different work streams.

 15 There are some things that they already have in

 16 some ways that we don't have. An execution

 17 standard is something a little bit like that.

 18 Their antifraud rules may or may not be included

 19 for example in this rulemaking, more likely if at

 20 all in a subsequent rulemaking. But I would say

 21 that with respect to the disclosures, we are

 22 virtually the same and the due diligence
 91

 1 requirements and our treatment of special entities

 2 is very, very close or at least to be recommended

 3 to be very close. What makes it through on both

 4 sides is of course up to you.

 5 COMMISSIONER DUNN: To echo the

 6 Chairman, I think this is one of the key

 7 components of Dodd-Frank to ensure that we don't

 8 have a financial meltdown in the future and that

 9 people aren't taken advantage of. This is a point

 10 in time where we need to have in my opinion very,

 11 very strong conduct standards, we need to have

 12 standards that are fair to everyone, but they also

 13 have to be workable for the industry out there so

 14 that I am really am looking forward to see the

 15 types of comments that we get on this particular

 16 concept of standards. I also note that some of

 17 the things that you took in here are based on best

 18 practices within the industry and that connotes to

 19 me that that also is a dynamic thing that may

 20 transpire in the future and so this is something

 21 that I think staff and the Commission ought to

 22 look at based on what happened in case law, what
 92

 1 happens in industry standards and best practices

 2 out there, that we on an ongoing basis review this

 3 so that we can be in front and not behind.

 4 CHAIRMAN GENSLER: Thank you,

 5 Commissioner Dunn. Before I turn to Commissioner

 6 Sommers, on the resource question and this might

 7 be for Dan Berkovitz or Phyllis, I can't find the

 8 provision, is it not also the case that if a swap

 9 dealer is regulated as a bank or regulated by

 10 others, it could be a registered broker dealer,

 11 that the Federal Reserve and the bank regulators

 12 or the SEC also can examine this and the

 13 relationship as to show they can refer cases if

 14 there is an issue? Do I have that correct?

 15 MS. CELA: The short answer is they are

 16 frontline regulators for the same entities and can

 17 look at practices by those entities.

 18 CHAIRMAN GENSLER: If for some reason we

 19 don't get the resources as Ananda said, there are

 20 still the bank regulators or somebody else who can

 21 examine this and be as you call it the frontline

 22 regulators statutorily and they might have to
 93

 1 refer a case?

 2 MR. BERKOVITZ: Correct. They could

 3 refer the case to us. We still be the primary

 4 enforcement authority, but they could refer it to

 5 us and provide us with information certainly.

 6 CHAIRMAN GENSLER: It's another avenue.

 7 I'm thinking about this resource issue.

 8 MS. CELA: What I wanted to say is

 9 keeping that in mind, we made the books and

 10 records that would be kept with respect to

 11 compliance with these rules available to

 12 appropriate prudential regulators so that there

 13 should be no artificial barrier to their access to

 14 the information.

 15 CHAIRMAN GENSLER: Thank you. I'm

 16 sorry. Commissioner Sommers?

 17 COMMISSIONER SOMMERS: Thank you, Mister

 18 Chairman. I want to commend Phyllis and Peter and

 19 your whole team. I think that this really has

 20 turned out to be a reasonable rule and based on a

 21 lot of what Commissioner Dunn said, best practices

 22 that are in the industry and I appreciate your
 94

 1 tolerance for numerous comments from myself and

 2 from my office and the challenges that you had

 3 because a lot of the rule was not very flexible so

 4 you were working with what you had with words on

 5 the paper. I want to make a comment on one of my

 6 concerns in the rule that started as best

 7 execution and has ended up as an execution

 8 standard that ensures that the swap is executed on

 9 terms that have a reasonable relationship to the

 10 best terms available. I would suggest that there

 11 seems to be or my fear is that there seems to be

 12 this impression that counterparties have no idea

 13 what the fair price in the market is. If there

 14 are dealers out there who are executing swaps that

 15 have no relationship to a reasonable price in the

 16 market, that their customers are not going to be

 17 their customers for very long so I think that this

 18 provision may be a solution to a problem that

 19 doesn't exist. I would ask like Commissioner Dunn

 20 that I think this is one provision in this rule

 21 that I would specifically ask for comment on

 22 whether it's necessary and whether or not we are
 95

 1 overreaching in this area. Thank you.

 2 CHAIRMAN GENSLER: Thank you,

 3 Commissioner Sommers. Commissioner Chilton?

 4 COMMISSIONER CHILTON: Thank you, Mister

 5 Chairman. I wanted to thank Phyllis for the

 6 proposal with regard to alerting the best

 7 execution rule to ensure that there are reasonable

 8 executions. I thank you for that. I see that

 9 Mark Young is here and he brought in a group of

 10 pension funds a while back probably not with all

 11 of us but I found it very helpful to listen to

 12 them. I know that they had some concerns and that

 13 you had subsequently had some conversations with

 14 the Department of Labor. Could you share a little

 15 bit of those conversations with us to sort of

 16 elucidate folks?

 17 MS. CELA: I need to be careful. We had

 18 informal staff consultations so that the same way

 19 that if one of them had called me, nothing that I

 20 would say could bind Labor or you or anything

 21 else. We wanted to take up with them to get a

 22 better understanding of what the regulatory scheme
 96

 1 was. We were quite concerned based on what was

 2 being said to us that there was a concern about

 3 potential inconsistency with ERISA law or some

 4 duplication in Dodd- Frank with respect to what

 5 ERISA requires. Ultimately we had shared with

 6 Department of Labor staff the draft.

 7 COMMISSIONER CHILTON: Phyllis quickly,

 8 the pension funds that ERISA requires this whole

 9 litany of things that they're already required to

 10 do, therefore maybe we didn't need to have a

 11 litany of things ourselves. Maybe it was

 12 duplicative perhaps so that was the issue.

 13 MS. CELA: That was the issue, and so

 14 having gotten the very informal advice from the

 15 Department of Labor we felt that it was important

 16 that we go forward in the way that the Commission

 17 would interpret the provision to say that ERISA

 18 plans would be treated like other special entities

 19 but there were some changes to the specific

 20 statutory criteria to take account of concerns

 21 about particular compliance that they would have

 22 and we asked questions. We think it requires a
 97

 1 fuller record for us to make a judgment one way or

 2 another, and as I say on a very informal basis we

 3 were told that there were no concerns by staff

 4 about the approach that we were recommending to

 5 our Commission.

 6 COMMISSIONER CHILTON: So that we are

 7 welcoming comments on this and we know Mr. Young

 8 is a prolific writer of letters and that others

 9 will write to us too.

 10 MS. CELA: That's right. We expect to

 11 be pen pals.

 12 COMMISSIONER CHILTON: Thank you.

 13 CHAIRMAN GENSLER: Such a shout out.

 14 Commissioner O'Malia?

 15 COMMISSIONER O'MALIA: Who is Mark

 16 Young?

 17 CHAIRMAN GENSLER: I don't know. Do you

 18 want him to stand up?

 19 COMMISSIONER O'MALIA: No. Phyllis, my

 20 compliments, Peter and the whole team. For

 21 everybody watching, this is the rule for the

 22 little guy and maybe they haven't paid attention
 98

 1 and gone through end user priorities and there are

 2 different provisions in the statute for the little

 3 guy, but this is something they need to look at

 4 and it's in Section 731(h), Business Conduct

 5 Standards. It's a balancing act and Commissioner

 6 Dunn's points are well taken that it has to be a

 7 workable rule, but this does provide a new

 8 authority protections for the little guy and it's

 9 an important rule.

 10 I have a couple of questions. Part

 11 23.431 requires disclosure of material information

 12 including material incentives and conflicts of

 13 interest that a swap Dodd-Frank or an MSP may have

 14 in connection with a particular swap including

 15 incentives from any source other than a

 16 counterparty. My question is what kinds of

 17 incentives does staff think ought to be disclosed

 18 under this provision and would that include

 19 clearing incentives?

 20 MS. CELA: I think as a general matter

 21 it's understood that when swap dealers enter into

 22 transactions they're earning a profit so that
 99

 1 that's not particularly helpful as a disclosure,

 2 but what would be more interesting I think is if

 3 the swap dealer is receiving some kind of

 4 compensation from a third party unknown to the

 5 counterparty. That might make a difference in the

 6 nature of the transaction that will take place so

 7 that we specifically indicate in there any

 8 compensation that's received from a third party

 9 would be the type we'd be thinking of in

 10 particular.

 11 COMMISSIONER O'MALIA: Do you think this

 12 is a type of thing that will affect counterparty

 13 decision making?

 14 MS. CELA: I hope so. I hope it's

 15 meaningful and I hope people where that would be

 16 meaningful disclosure to them, for whatever reason

 17 they would act on it.

 18 COMMISSIONER O'MALIA: Will you

 19 elaborate on the differences between the proposed

 20 suitability requirements for swap dealers and MSPs

 21 and the NFA's know-your-customer duties?

 22 MS. CELA: That's a very good question,
 100

 1 Commissioner, and it's a very close issue. Know

 2 your customer is the standard and actually I saw

 3 Dan Roth before so that if I get it wrong I'm sure

 4 he'll speak up.

 5 CHAIRMAN GENSLER: For the public, Dan

 6 Roth is not Mark Young.

 7 MS. CELA: No.

 8 CHAIRMAN GENSLER: He runs the NFA which

 9 is the self-regulatory organization in the futures

 10 area.

 11 MS. CELA: Right. Know your customer is

 12 a concept that comes out of the SRO world and is

 13 intended to take a look at if I understand it

 14 correctly the qualifications of a customer to

 15 trade generally. The futures market has looked at

 16 risk disclosure and has looked at qualification of

 17 customers in a fairly generic way because of the

 18 nature of our products. Our products have been

 19 generic and they've been traded on exchange in a

 20 customized fashion and so that know your customer

 21 has worked in that environment and I know that NFA

 22 has worked very hard to make sure that it's a
 101

 1 robust screening or evaluation standard. But when

 2 you get into the kinds of products that are

 3 possible in the swaps world that do have

 4 differences in risk-reward profiles, then it feels

 5 like a more transaction-based rule that could have

 6 some application and may be effective in providing

 7 some additional due diligence so that what a

 8 suitability rule would do is look at

 9 recommendations to counterparties and on a

 10 transaction basis you're looking at a type of swap

 11 or a particular swap and you'd have to assess

 12 suitable in that way, a small difference but a

 13 difference nevertheless from know your customer.

 14 COMMISSIONER O'MALIA: With regard to

 15 the execution standard there's been discussed how

 16 will this requirement affect futures trading in

 17 contracts that trade side-by-side on NYMEX and

 18 Globex and the floor? How might that impact a

 19 best execution or trying to achieve that?

 20 MS. CELA: We are viewing this to come

 21 out a fair-dealing antifraud world of analysis so

 22 that it would seem to use that we would be looking
 102

 1 at conduct that is really over the course of a

 2 relationship. If a swap dealer were routinely

 3 sending orders for a customer to a market that had

 4 consistently worse execution standards than

 5 another, I think we would have to ask the

 6 question, we would be right to ask the question,

 7 about whether that was done in a reasonable

 8 relationship to the market and therefore whether

 9 or not it was fair and reasonable and was the swap

 10 dealer acting in good faith. The two markets that

 11 you identified, it is market neutral in the sense

 12 that wherever you can trade, you then have to

 13 evaluate the terms and then send the trades

 14 through or execute in a way that would be

 15 reasonable related to the best terms available.

 16 COMMISSIONER O'MALIA: Bank of America

 17 recently paid more than $137 million in

 18 restitution to federal and state agencies for its

 19 participation in a conspiracy to rig bids in the

 20 muni bond market. Based on your knowledge of this

 21 matter, how would the proposal with regard to

 22 execution standards have protected the affected
 103

 1 federal and state agencies?

 2 MS. CELA: I'm not at all qualified to

 3 comment on the particular case, but if I

 4 understand the kind of situation that was

 5 addressed there and I think it's really important

 6 as you consider these rules today to make sure

 7 that we've done our job that we have addressed the

 8 potential dangers in this area. There are a few

 9 things and Congress did most of them, frankly.

 10 There is this independent representative

 11 requirement. The independent representative has

 12 to be acting itself in the best interests of the

 13 special entity. If it's true that the

 14 representative firms were not acting in the best

 15 interests, that they didn't have the

 16 sophistication, that they were not independent of

 17 the swap dealer which his the bottom- line

 18 requirement for the independent representative

 19 provision that we have, if there is a relationship

 20 between that bid rigger and the dealer then that

 21 would it would seem me to be squarely within the

 22 prohibitions that we have. We also have added we
 104

 1 think very appropriately the pay-to-play

 2 restrictions which would go a long way I think to

 3 cleaning up the situation that has the potential,

 4 not commenting on this case, for wrong.

 5 COMMISSIONER O'MALIA: One final

 6 question. Section 23.410 of the proposed rule

 7 among other things prohibits the employment of

 8 device, scheme or artifice to defraud any special

 9 entity. This language tracks with the language in

 10 the CEA's new antimanipulation provisions of

 11 Section 6(c). Would a violation of this

 12 business-conduct rule result in $140,000 penalty

 13 or a million-dollar penalty? And because you are

 14 a swap dealer, would you have to be fined once

 15 under the regulation and then again under the

 16 statute for the same violation just by virtue of

 17 our registration status?

 18 MS. CELA: I want to answer the second

 19 one and I'm going to give the first one to Vince.

 20 Are you ready, Vince?

 21 MR. MCGONAGLE: Sure.

 22 MS. CELA: With respect to
 105

 1 double-counting, I think the Commission has given

 2 pretty good guidance in case law that it has and

 3 certainly federal court judges have so that we're

 4 not inclined to be receiving double-counting

 5 penalties on the basis of the same exact statutory

 6 language in connection with the same conduct so

 7 that I think we're good there. On the other, I

 8 think this was a topic of discussion and question

 9 at the earlier disruptive-practices meeting and

 10 that's why it's Vince's question.

 11 MR. MCGONAGLE: I will give no clarity

 12 because in evaluating an enforcement action we're

 13 going to evaluate all potential violations of the

 14 Act so that to the extent that we're dealing with

 15 something that is disruptive, a disruptive trading

 16 practice that is also say manipulative that gets

 17 clearly into the larger calculus for a million

 18 dollars per penalty then that's going to be part

 19 of the discussion that we have as a recommendation

 20 to the Commission or as part of the settlement.

 21 The question about whether fraudulent activity

 22 itself or how the disruptive trading standards are
 106

 1 set up that they might be different because

 2 they're talking more about fraud I think is still

 3 a question that's a little left open for the

 4 comment period for that particular rule. But in

 5 practical experience I'll go back to the first

 6 sentence is which is we would be looking at all

 7 potential violations of the Act and so it's likely

 8 that there would be a range of sanctions that

 9 would be discussed so that it wouldn't be one

 10 clear claim versus another.

 11 COMMISSIONER O'MALIA: Thanks for that

 12 clarity. I think I knew that going into the

 13 question.

 14 MS. CELA: I'm sorry.

 15 CHAIRMAN GENSLER: Did you get

 16 transparency too? I thank everyone. If there are

 17 no further questions, Mr. Stawik, if you can call

 18 the roll.

 19 MR. STAWIK: Commissioner O'Malia?

 20 COMMISSIONER O'MALIA: Aye.

 21 MR. STAWIK: Commissioner O'Malia, aye.

 22 Commissioner Chilton?
 107

 1 COMMISSIONER CHILTON: Aye.

 2 MR. STAWIK: Commissioner Chilton, aye.

 3 Commissioner Sommers?

 4 COMMISSIONER SOMMERS: Aye.

 5 MR. STAWIK: Commissioner Sommers, aye.

 6 Commissioner Dunn?

 7 COMMISSIONER DUNN: Aye.

 8 MR. STAWIK: Commissioner Dunn, aye.

 9 Mister Chairman?

 10 CHAIRMAN GENSLER: Aye.

 11 MR. STAWIK: Mister Chairman, aye.

 12 CHAIRMAN GENSLER: Phyllis, aye. You

 13 heard it. Even Mark Young whoever he is heard it.

 14 MR. STAWIK: On this question the ayes

 15 are five and nays are zero.

 16 CHAIRMAN GENSLER: I thank the team for

 17 its excellent work. There is much more to do, but

 18 enjoy your holiday. We have now another group

 19 coming up. The final presentation is the

 20 Commission's consideration of the issuance of an

 21 interim final rule with regard to reporting of

 22 swaps. I would have done a break here but I think
 108

 1 this one is a little quicker. As they come in and

 2 I fill some time, we have already issued an

 3 interim final rule with regard to swaps that were

 4 in existence when the President signed the bill

 5 which is called the date of enactment. In essence

 6 what that interim final rule said was save the

 7 information. This consideration here is a

 8 proposal on swaps entered into after the President

 9 signed the bill or the date of enactment but prior

 10 to the effect date that some of our data rules and

 11 other things would be effective at the earliest in

 12 the late summer of next year or maybe those

 13 effective dates will be even into months later.

 14 With that, Susan Nathan who is our lead of a

 15 number of our data teams, the swap data repository

 16 team you share, but a number of our data teams,

 17 Rick Shilts who heads our Division of Market

 18 Oversight and Dan Berkovitz who is our General

 19 Counsel. I turn it over to the team to present

 20 this interim final rule on in essence saving data.

 21 MS. NATHAN: Good morning, Mister

 22 Chairman, good morning Commissioners. There is no
 109

 1 team to thank on this particular rulemaking but I

 2 would like to express appreciation to Dan and his

 3 staff for their guidance in developing the rule.

 4 This morning staff is presenting for the

 5 Commission's consideration as the Chairman said an

 6 interim final rule under Part 44 of the

 7 Commission's regulations, it will be Part 44.03,

 8 to establish requirements related to the reporting

 9 of transition swaps to a registered SDR or to the

 10 Commission. Transition swaps are those swaps

 11 entered into on or before the date of enactment of

 12 the Dodd-Frank Act and prior to the effective date

 13 of permanent swap data reporting and rules that

 14 will shortly be promulgated by the Commission

 15 pursuant to new Section 2(h)(v) of the Act. That

 16 provision in turn was added by Section 723 of

 17 Dodd- Frank and requires that the Commission adopt

 18 rules for the reporting of data related to on the

 19 one hand preenactment swaps and on the other hand

 20 these transition swaps.

 21 As the Chairman mentioned, in September

 22 the Commission adopted an interim final rule, Rule
 110

 1 44.02, addressing the reporting timetable for

 2 preenactment swaps. The purpose of that rule was

 3 to clarify that reporting obligations would attach

 4 to those swaps and to ensure that counterparties

 5 would preserve relevant information pending the

 6 Commission's implementation of permanent data

 7 reporting rules under Section 2(h)(v). The

 8 interim final rule before the Commission today is

 9 similar in both substance and purpose. It directs

 10 that counterparties to transition swaps report

 11 data to a registered swap data repository or to

 12 the Commission within a specified time period or

 13 by the compliance date to be established by the

 14 permanent rules under 2(h)(v)(B). The rule

 15 further advises potential counterparties to

 16 preserve data related to transition swaps until

 17 reporting can be affected and specifically states

 18 that no counterparties will be required to create

 19 or otherwise adjust the data that they have in

 20 order to comply, it's whatever they have in the

 21 format that they have it.

 22 An interim final rulemaking is an
 111

 1 expedited process that permits an agency to adopt

 2 for good cause a rule that has not been subject to

 3 the Administrative Procedure Act's requirement

 4 that the public be given notice and an opportunity

 5 to comment on a proposed rule. In an IFR the

 6 agency publishes the rule as final but

 7 concurrently encourages public comment. To the

 8 extent appropriate, that comment will be addressed

 9 in the permanent rulemaking. Staff believes that

 10 an interim final rule is warranted here in order

 11 to timely clarify for counterparties the reporting

 12 obligations that will be imposed under 2(h)(v)(B)

 13 and thus to ensure that counterparties retain

 14 relevant data until these permanent recordkeeping

 15 and reporting rules are adopted. I welcome your

 16 questions.

 17 CHAIRMAN GENSLER: Do I hear a motion on

 18 the staff recommendation on this interim final

 19 rule?

 20 COMMISSIONER DUNN: So moved.

 21 COMMISSIONER SOMMERS: Second.

 22 CHAIRMAN GENSLER: Thank you. Susan, if
 112

 1 I might ask, I understand that this came up in

 2 reaction to questions from market participants as

 3 to we did an interim final rule for preenactment

 4 swaps and they were asking what do we do until you

 5 finalize it, and you might want to say why we are

 6 addressing this and how did the question come up.

 7 MS. NATHAN: That is the primary way in

 8 which the question came up and on the whole, once

 9 we realized that there might be some

 10 misunderstanding it seemed prudent to come out

 11 with this interim rule to clarify obligations and

 12 eliminate to the extent we can any confusion over

 13 who needs to report and what they need to do.

 14 CHAIRMAN GENSLER: Am I correct in

 15 understand that the main thing we're clarifying is

 16 what you need to do before the effective dates

 17 which could be up to a year from now? Is that the

 18 main question?

 19 MS. NATHAN: That is the main thrust of

 20 this rulemaking. Stripped of its title, what this

 21 is is a heads-up. If you believe that you are a

 22 counterparty to a transition swap, preserve
 113

 1 whatever data you currently keep in the course of

 2 normal business practice so that it's available

 3 for reporting as necessary under the permanent

 4 rules when they're adopted.

 5 CHAIRMAN GENSLER: I do support this.

 6 Why I really like it, but I'd like to know if I'm

 7 correct on this, is it's saying we're not going to

 8 be retroactive and say you have to create a

 9 different record than you currently have.

 10 MS. NATHAN: Precisely.

 11 CHAIRMAN GENSLER: So that until our

 12 data rules go effective, again this could be next

 13 fall or whenever, nobody needs to worry about

 14 going back and recreating records.

 15 MS. NATHAN: No, and the rule's text

 16 itself is very clear. It's what the counterparty

 17 has on the date of enactment.

 18 CHAIRMAN GENSLER: Or even after the

 19 date of enactment. Right?

 20 MS. NATHAN: Or even after, yes.

 21 CHAIRMAN GENSLER: So that if somebody

 22 enters into something today, December 9 or after
 114

 1 this gets into the Federal Register, it's whatever

 2 they are keeping now they keep and any regulatory

 3 obligations to have more data fields happens

 4 later.

 5 MS. NATHAN: That's correct.

 6 CHAIRMAN GENSLER: Thank you for

 7 clarifying that. I do support this. Commissioner

 8 Dunn?

 9 COMMISSIONER DUNN: Thank you, Mister

 10 Chairman, and I was going to note that in the

 11 preamble it says it does not require any

 12 counterparties to a transition swap transaction to

 13 create new records and permits records to be

 14 retained in their existing format. Are we

 15 prepared to ask for these and if so where would

 16 they go to and how would we store this data and

 17 what would be doing with it?

 18 MS. NATHAN: Are you asking whether

 19 there is an immediate reporting obligation imposed

 20 by this rule? No, there is not. The reporting

 21 obligations will be imposed under the permanent

 22 2(h)(v) rules.
 115

 1 COMMISSIONER DUNN: Thank you.

 2 CHAIRMAN GENSLER: Commissioner Sommers?

 3 COMMISSIONER SOMMERS: I don't have any

 4 questions. Thank you.

 5 CHAIRMAN GENSLER: Commissioner Chilton?

 6 COMMISSIONER CHILTON: I wasn't going to

 7 ask anything because I think you've done a really

 8 good job on this, Susan. But this talk of timing,

 9 I wanted to get a little bit of clarification.

 10 There were a couple of news articles recently. I

 11 think there was one yesterday and I don't want to

 12 ascribe exactly who it was because I'm not sure,

 13 but I believe there was somebody at Barclays who

 14 said it's going to take 3 years to implement this

 15 law. I don't see that happening. Congress gave

 16 us some discretion, Mr. Berkovitz, and the law,

 17 and I'm paraphrasing, says that the Commission

 18 once they promulgate a final rule shall implement

 19 it in not less than 60 days. What that means is

 20 that it could be more than 60 days but that it

 21 can't be less than 60 days unless otherwise

 22 prescribed in the Act. So unless there's a
 116

 1 different date, that minimum of 60 days before

 2 implementation, so theoretically it is open-ended.

 3 Theoretically at least you could wait 3 years.

 4 That's not wise and I don't think we'll end up

 5 there, but theoretically you could be there. I'm

 6 not going to get into a specific rule, but there

 7 are other places that have prescribed specific

 8 effective dates. There are just a handful. The

 9 Chairman said we've done 36 but there are going to

 10 be more than 40 of these and there's a handful of

 11 I think nine of them which had other times and on

 12 those the Commission doesn't have the sort of

 13 leeway that we have with regard to the section I

 14 tried to paraphrase there, the 60 days. Is that

 15 correct?

 16 MR. BERKOVITZ: Generally, yes,

 17 Commissioner, I think that's generally a correct

 18 observation. The provision you referred to says

 19 unless otherwise specified in the Act, the

 20 provisions of this Act shall be effective on the

 21 later of 360 days or 60 days after the

 22 promulgation of the final rule that is required.
 117

 1 COMMISSIONER CHILTON: I thought it was

 2 not less than 60 days.

 3 MR. BERKOVITZ: Right. Maybe I

 4 misspoke. Not less than 60 days after.

 5 COMMISSIONER CHILTON: Meaning it could

 6 be more unless it's otherwise prescribed.

 7 MR. BERKOVITZ: Correct.

 8 COMMISSIONER CHILTON: Thank you very

 9 much. I appreciate it.

 10 CHAIRMAN GENSLER: Thank you,

 11 Commissioner Chilton. Commissioner O'Malia?

 12 Nothing there? Mr. Stawik, do you want to call

 13 the roll?

 14 MR. STAWIK: Commissioner O'Malia?

 15 COMMISSIONER O'MALIA: Aye.

 16 MR. STAWIK: Commissioner O'Malia, aye.

 17 Commissioner Chilton?

 18 COMMISSIONER CHILTON: Aye.

 19 MR. STAWIK: Commissioner Chilton, aye.

 20 Commissioner Sommers?

 21 COMMISSIONER SOMMERS: Aye.

 22 MR. STAWIK: Commissioner Sommers, aye.
 118

 1 Commissioner Dunn?

 2 COMMISSIONER DUNN: Aye.

 3 MR. STAWIK: Commissioner Dunn, aye.

 4 Mister Chairman?

 5 CHAIRMAN GENSLER: Aye.

 6 MR. STAWIK: Mister Chairman, aye.

 7 Mister Chairman, on this vote the ayes are five

 8 and nays are zero.

 9 CHAIRMAN GENSLER: Thank you very much

 10 and thank you, Susan, Rick and Dan. At this point

 11 I'd like to ask for unanimous consent to allow

 12 staff to make technical corrections to the

 13 documents voted on today prior to send them to the

 14 Federal Register. Do I hear any objection? Not

 15 hearing objections, so moved. Our next meeting of

 16 this Commission is on December 16 where we will

 17 review the topics that I outlined earlier and I

 18 think we will also vote at that meeting on two

 19 more meetings in January. Of course we'll be

 20 posting the various topics 7 days in advance on

 21 each of those. I also want to remind the public

 22 and the press that we have a very important
 119

 1 roundtable tomorrow, December 10. I think the

 2 venue is over at the Securities and Exchange

 3 Commission if I'm not mistaken, but it's going to

 4 be with the Federal Reserve and the other bank

 5 regulators, the SEC and CFTC staff hearing from

 6 important topics on capital margins and we no

 7 doubt going to have more roundtables, Commissioner

 8 O'Malia. I think it is a good think to have

 9 roundtables. I don't know which topics we'll

 10 have. If there is no further Commission business,

 11 I'd like to hear a motion to adjourn the meeting.

 12 COMMISSIONER DUNN: So moved.

 13 COMMISSIONER SOMMERS: Second.

 14 CHAIRMAN GENSLER: We don't have to call

 15 the roll on this do we Mr. Stawik? All in favor?

 16 Aye.

 17 (Chorus of ayes.)

 18 CHAIRMAN GENSLER: Are there any

 19 opposed? No. Thank you.

 20 (Whereupon, at 12:00 p.m., the

 21 PROCEEDINGS were adjourned.)

 22 * * * * *
 120

 1 CERTIFICATE OF NOTARY PUBLIC

 2 DISTRICT OF COLUMBIA

 3 I, Christine Allen, notary public in and

 4 for the District of Columbia, do hereby certify

 5 that the forgoing PROCEEDING was duly recorded and

 6 thereafter reduced to print under my direction;

 7 that the witnesses were sworn to tell the truth

 8 under penalty of perjury; that said transcript is a

 9 true record of the testimony given by witnesses;

 10 that I am neither counsel for, related to, nor

 11 employed by any of the parties to the action in

 12 which this proceeding was called; and, furthermore,

 13 that I am not a relative or employee of any

 14 attorney or counsel employed by the parties hereto,

 15 nor financially or otherwise interested in the

 16 outcome of this action.

 17

 18

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

 20 Notary Public, in and for the District of Columbia

 21 My Commission Expires: January 14, 2013

 22