UNITED STATES OF AMERICA 

 COMMODITY FUTURES TRADING COMMISSION 

 OPEN MEETING ON THE THIRTEENTH SERIES OF 

 PROPOSED RULEMAKINGS UNDER THE DODD-FRANK ACT 

 Washington, D.C. 

 Tuesday, April 12, 2011 
 2 

 1 PARTICIPANTS: 

 2 Commission Members: 

 3 GARY GENSLER, Chairman 

 4 BART CHILTON, Commissioner 

 5 MICHAEL V. DUNN, Commissioner 

 6 JILL SOMMERS, Commissioner 

 7 SCOTT D. O'MALIA, Commissioner 

 8 Division of Clearing and Intermediary 

 8 Oversight: 

 9 

 9 

 10 JOHN LAWTON 

 11 TOM SMITH 

 12 ANANDA RADHAKRISHNAN 

 13 THELMA DIAZ 

 14 

 15 * * * * * 

 16 

 17 

 18 

 19 

 20 

 21 

 22 
 3 

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

 2 (9:30 a.m.) 

 3 CHAIRMAN GENSLER: Good morning. This 

 4 meeting with come to order. This is a public 

 5 meeting of the Commodity Futures Trading 

 6 Commission to consider issuance of proposed rules 

 7 under Dodd-Frank Act for the Margin Requirements 

 8 for Uncleared Swaps for Swap Dealers and Major 

 9 Swap Participants. 

 10 I just want to check whether our 

 11 technology is working before I move on. 

 12 Commissioner Dunn was going to be joining us, I 

 13 think, from Chicago, Commissioner Chilton. So I 

 14 just wanted to just before I go any further to see 

 15 if we've everybody signed in. 

 16 COMMISSIONER CHILTON: I'm here. 

 17 COMMISSIONER DUNN: Mr. Chairman, this 

 18 is Commissioner Dunn. I am here in Chicago. 

 19 CHAIRMAN GENSLER: Terrific. Good to 

 20 see you, Mike, and I think I heard Bart as well. 

 21 Is that right? 

 22 COMMISSIONER CHILTON: Yes, sir, Mr. 
 4 

 1 Chairman. 

 2 CHAIRMAN GENSLER: Great. The 

 3 Commission will consider the proposed rulemaking 

 4 related to conforming amendments to current CFTC 

 5 regulation that was advised on today's meeting 

 6 agenda, but we're going to take that up at a later 

 7 meeting. 

 8 And before we hear from staff, I'd like 

 9 to thank Commissioners Dunn, Sommers, Chilton, and 

 10 O'Malia for all their thoughtful work on 

 11 implementing Dodd-Frank Act. I'd like to welcome 

 12 the public as we normally do, and market 

 13 participants, and members of the media to today's 

 14 meeting, as well as welcome those listening to the 

 15 live webcast. 

 16 We look forward to receiving your public 

 17 comments on this proposed rule that we're 

 18 considering today. The rule, as well as a fact 

 19 sheet and questions and answers document, will be 

 20 posted on the website. I think this is our 13th 

 21 meeting, but sometimes Commissioner Sommers 

 22 corrects my number. But I think we're 13. 
 5 

 1 The proposed rule that we're considering 

 2 today, normally the proposed rules stay open for 

 3 60 days, but as we're taking up the capital rule, 

 4 and, as one of my fellow commissioners said, it's 

 5 a little like peanut and butter, the two go 

 6 together. I think we're going to make sure this 

 7 proposal stays open until at least the last day 

 8 that the capital rule is open, whenever we take 

 9 that up. 

 10 The rulemaking team will present today's 

 11 work, and I very much appreciate all of their hard 

 12 work with their commissioners and fellow 

 13 regulators. They'll present this rule. And, at 

 14 the same time today, I believe that the credential 

 15 regulators are what many in the public might call 

 16 the bank regulators, are also taking up a similar, 

 17 though not identical, and we'll get into that a 

 18 little bit in this hearing, rule as well. 

 19 I will be supporting the proposed rule, 

 20 which addresses Margin Requirements for Uncleared 

 21 Swaps entered into non-bank swap dealers, because 

 22 the prudential regulators have the banks, and 
 6 

 1 non-bank major swap participants. These will be 

 2 for trades between the swap dealer, or major swap 

 3 participant, and the rules would require paying 

 4 and collecting initial and variation margin that's 

 5 between the dealers and the dealers. 

 6 The rules for trades between the dealers 

 7 and financial entities would require collecting, 

 8 but not paying, initial and variation margin. And 

 9 on an issue that I think I've spoken on and this 

 10 Commission has signed on as to various testimonies 

 11 I've put forward, the proposed rule would not 

 12 require margin to be paid or collected on 

 13 transactions involving non-financial end-users 

 14 hedging or mitigating commercial risk. 

 15 Congress had recognized the different 

 16 levels of risk posed by transactions between 

 17 financial entities and swap dealers, but reflected 

 18 that non-financial end-users would have an 

 19 exception from clearing. These transactions 

 20 involving non-financial entities don't pose the 

 21 same risk to the financial system as those solely 

 22 between financial entities. And I think the risk 
 7 

 1 of a crisis in the future spreading through the 

 2 financial system is greater the more 

 3 interconnected financial entities are as 

 4 contrasted with non-financial entities. So the 

 5 CFTC staff is about to propose something that 

 6 moves that issue, I think, to the side, and that's 

 7 part of why I support this. 

 8 In terms of the financial entities, it 

 9 also allows that there might be some thresholds 

 10 for the collection of margin if they're regulated 

 11 financial entities, like insurance companies or 

 12 banks, and so forth. 

 13 I just want to mention one thing that is 

 14 not on margin. Before today's meeting, the 

 15 Commission separately voted to proposed rules 

 16 establishing swapped data, record keeping, and 

 17 reporting requirements for swaps entered into 

 18 prior to enactment of the Dodd-Frank Act. I think 

 19 we had calendered it for our last meeting. 

 20 Because of some technical things in the document 

 21 itself, we decided not to actually vote at the 

 22 meeting, and we have taken that up in what's 
 8 

 1 called seriatim. That proposed rule provides 

 2 clarity concerning what records must be kept and 

 3 what data must be reported to swap data 

 4 repositories with respect to the historical swaps. 

 5 And that has been sent to the Federal Register, 

 6 and will be posted to our website with the talking 

 7 points and Q&A as well. 

 8 Before we hear from staff, I'll turn to 

 9 my fellow commissioners, I think recognizing 

 10 Commissioner Dunn from Chicago. 

 11 COMMISSIONER DUNN: Thank you, Mr. 

 12 Chairman, and thank the staff for the hard work 

 13 that they've done in preparing this particular 

 14 rule. 

 15 I am here in Chicago, and this morning I 

 16 had a little overview of how we're modifying our 

 17 current stand program, be able to, or at least get 

 18 a different platform, so we can implement this 

 19 type of a program. I want to thank everyone for 

 20 the hard work that they have in putting this in. 

 21 During the financial crisis, derivatives 

 22 clearing organizations that have mandatory 
 9 

 1 clearing and margin requirement met all their 

 2 financial obligations without the infusion of any 

 3 capital from the Federal government. This was not 

 4 the case in the world of uncleared swaps. Today's 

 5 staff presents us with a proposed rule laying out 

 6 the margin requirements for uncleared swaps. 

 7 When reviewing this proposed rule on 

 8 margins, it's important to remember that AIG wrote 

 9 approximately $1.8 trillion worth of credit 

 10 default swaps. AIG did not post initial margin or 

 11 pay variations on many of these transactions 

 12 because of their AAA credit rating. Once the 

 13 subprime crisis hit, AIG was subject to large 

 14 margin calls that it could not pay. On the brink 

 15 of bankruptcy, that had the very possibility of 

 16 causing a global financial meltdown. The U.S. 

 17 government poured billions of dollars into AIG, 

 18 the majority of which went to pay through 

 19 counterparties on AIG derivatives deal. 

 20 If AIG had been required to post initial 

 21 margins or pay variations, in all likelihood they 

 22 never would've been able to enter into $1.8 
 10 

 1 trillion worth of swaps. 

 2 The story of DCOs who met all their 

 3 financial obligations and AIG, who needed a 

 4 massive government bailout to survive, illustrates 

 5 the importance of margins in the cleared and 

 6 uncleared world. In my opinion, companies like 

 7 AIG simply cannot be allowed to amass swaps 

 8 positions so large that without paying the 

 9 necessary levels of initial and variation margin. 

 10 Without margin requirements, positions of such 

 11 magnitude will again threaten to destabilize the 

 12 entire financial system. 

 13 I would like once again to thank the 

 14 staff of CFTC for all their hard work in regard to 

 15 these very important proposed rules. Their 

 16 dedication to the important work during this 

 17 difficult time is what government services is all 

 18 about. 

 19 I know there is a lot of concerns about 

 20 end-users on margins; I look forward to get the 

 21 public comments on this. I will keep an open mind 

 22 on it. Once again, it is up to the industry and 
 11 

 1 the public to direct the way the Commission will 

 2 go on this particular rule. Thank you. 

 3 CHAIRMAN GENSLER: Thank you, 

 4 Commissioner Dunn. Commissioner Sommers? 

 5 MR. SMITH: Thank you, Mr. Chairman. 

 6 Today we are considering one of the centerpieces 

 7 of the new regulatory structure under the 

 8 Dodd-Frank Act. The Act requires that the CFTC, 

 9 the SEC, and prudential banking regulators 

 10 establish comparable, initial, and variation 

 11 margin requirements for uncleared swaps to the 

 12 maximum extent practicable. 

 13 The importance of achieving consistency 

 14 is a theme that runs throughout the Act, and is 

 15 something that I believe is critical, not only 

 16 with respect to the rules being promulgated by our 

 17 fellow domestic regulators, but internationally as 

 18 well. We should not be creating opportunities for 

 19 regulatory arbitrage. And I want to say that I 

 20 appreciate all the work of the staff, what you've 

 21 done to attempt to help create this consistency. 

 22 I am mindful that substantive 
 12 

 1 differences exist between the approach to Margin 

 2 for Uncleared Swaps that we are considering today 

 3 and the approach being considered by the EU as 

 4 part of the European market infrastructure 

 5 regulation, or EMIR, could have far-reaching 

 6 effects. 

 7 My understanding is that EMIR currently 

 8 does not contemplate a two-way exchange of initial 

 9 margin. While I'm supportive of today's proposal 

 10 on Margin Requirements for Uncleared Swaps for 

 11 Swap Dealers and Major Swap Participants, I 

 12 believe that we must continue to work to harmonize 

 13 our rules internationally. 

 14 Likewise, although the Margin Proposal 

 15 before us today is broadly consistent with the 

 16 proposal being considered by prudential 

 17 regulators, there are some important differences, 

 18 particularly with respect to commercial end-users. 

 19 I believe that the CFTC staff recommendation is 

 20 consistent with congressional intent that 

 21 commercial end-users be given the flexibility to 

 22 continue to do business as they have before. 
 13 

 1 However, I think that all regulators must be 

 2 mindful of the potential negative economic 

 3 consequences as we continue to overlook the 

 4 increased costs that these regulations may be 

 5 imposing on hedgers and risk management tools. 

 6 I want to thank the team for all their 

 7 work and hard efforts to coordinate with others on 

 8 this proposal, and I look forward to the public 

 9 comments on this particular issue and on other 

 10 aspects of this proposal. 

 11 CHAIRMAN GENSLER: Thank you, 

 12 Commissioner Sommers. 

 13 Commissioner Chilton. 

 14 COMMISSIONER CHILTON: Thanks, Mr. 

 15 Chairman. Just quickly, thank you to the staff. 

 16 I think this is one of those rules where we had 

 17 the possibility of sort of overreaching, and I 

 18 think the staff got it right. We'll see in the 

 19 comments. But it had the potential to go too far, 

 20 and I think they struck a really good balance, and 

 21 I thank them for that work. 

 22 I also agree with probably all of you, 
 14 

 1 but what Commissioner Sommers was saying about the 

 2 harmonization. This is going to be increasingly 

 3 important as we get into the final rulemaking 

 4 phase. And, Mr. Chairman, you've done a great job 

 5 when you were over there three weeks in moving the 

 6 ball forward. It's a tough balancing act. 

 7 Everybody has their own sovereign issues. They've 

 8 got multiple sovereignty issues in the EU. But I 

 9 think we'll get through it, and I think if we 

 10 continue to work like we have been, that we'll 

 11 have more efficient, effective markets overall, 

 12 and this is a good step with regard to margins for 

 13 uncleared swaps. Thank you. 

 14 CHAIRMAN GENSLER: Thank you, 

 15 Commissioner Chilton. 

 16 Commission O'Malia. 

 17 COMMISSIONER O'MALIA: Good morning. 

 18 Thank you, Mr. Chairman. Let me thank the team, 

 19 which has spent many long hours developing the 

 20 Margin Rule Proposal today before us. You've done 

 21 a good job of developing a proposal that I believe 

 22 is more consistent with the Act, and I appreciate 
 15 

 1 that. 

 2 Today we're voting on a similar, but not 

 3 identical, rules as the prudential regulators. 

 4 Despite endless attempts to conform the rules, 

 5 treatment of end- users couldn't be further apart. 

 6 The rules proposed by the prudential regulators 

 7 will require that end-users pay initial margin and 

 8 variation margin to banks. The Commission rules 

 9 require transaction between swap dealers and 

 10 end-users to simply include a credit support 

 11 agreement. Unfortunately, this is not the only 

 12 inconsistency. 

 13 Another concern I have is that we are 

 14 moving forward on a margin rule without defining 

 15 the new capital requirements. Throughout this 

 16 entire rulemaking process, participants have 

 17 complained they can't see the entire picture. 

 18 Today's rulemaking is no different. End-users 

 19 will need to wait a couple more weeks before they 

 20 see the entirety of the new capital end margin 

 21 regime. I am pleased, however, that the comment 

 22 period for each rule will run simultaneously. I 
 16 

 1 appreciate that, Mr. Chairman. 

 2 I believe the commercial end-users and 

 3 many of the financial end-users will be 

 4 dissatisfied with the lack of harmonization among 

 5 the different regulatory bodies. And I will vote 

 6 against today's Margin Proposal for the following 

 7 reasons: 

 8 First, the proposed rule states that the 

 9 policy behind the Commission's margining regime is 

 10 to, quote, "create the proper incentives for 

 11 moving more transactions into central clearing." 

 12 This line of thinking is representative of the 

 13 Commission's failure to accept Congress' view that 

 14 uncleared swaps must be treated differently than 

 15 cleared swaps. 

 16 According to the Dodd-Lincoln letter, 

 17 quote, "Congress clearly stated in this bill that 

 18 the margin and capital requirements are not to be 

 19 imposed on end-users, nor can the regulators 

 20 require clearing for end-user trades," end quote. 

 21 The prudential regulators have decided to 

 22 disregard the policy behind the end-user 
 17 

 1 exemption, the intent Congress expressed in the 

 2 Dodd-Lincoln letter, and, more recently, the 

 3 bipartisan letter from Chairman Stabenow, Chairman 

 4 Johnson, Chairman Baucus, Chairman Lucas received 

 5 on April 6th regarding the treatment of end-users. 

 6 I believe the major concern of the 

 7 Congress is a concern I share, that we are 

 8 imposing increased costs on non-systemically 

 9 relevant commercial firms who will now be faced 

 10 with the decision of hedging risk or investing in 

 11 their business. 

 12 Second, I'm also struck by the fact that 

 13 prudential regulators are hiding behind the safety 

 14 and soundness language in the Act to draft rules 

 15 that prohibit bank swap dealers from posting 

 16 margin to their counterparties. To be clear, this 

 17 is a one-way posting of margin. Banks will not 

 18 post margin to end-users, financial or commercial. 

 19 What does this mean in reality? First, it 

 20 decreases the incentive for counterparties to 

 21 conduct a credit analysis on the banks because the 

 22 rules are implicitly signaling to the market that 
 18 

 1 regulated banks are too big to fail. Second, it 

 2 institutionalizes purchasing and negotiating power 

 3 on one side of the commercial transaction. 

 4 Finally, it will now be much more expensive for 

 5 end-users to hedge their commercial risk using 

 6 uncleared customized swaps. 

 7 Finally, today's rulemaking leaves open 

 8 the possibility that end-users will be assessed 

 9 margin. The Commission's own proposal states that 

 10 each swap dealer may accept margin in a manner 

 11 agreed to by the parties in a credit support 

 12 arrangement, although no margin obligations are 

 13 technically required to be imposed on 

 14 non-financial entities, but this may be cold 

 15 comfort to end-users. But I look forward to their 

 16 input. 

 17 It also does nothing to prevent indirect 

 18 price increases from swaps for end-users due to 

 19 capital charges, but that we will deal with in the 

 20 next rule. 

 21 I will say this: Many of my concerns 

 22 regarding the margin and capital rules hinge on 
 19 

 1 the definition of swap dealer. I have read many 

 2 of the comments, and I see a reoccurring theme. 

 3 The definition is too broad, and the exception is 

 4 too narrow. As a result, it is clear that our 

 5 proposal captures legitimate end-users as swap 

 6 dealers, and it appears to miss the mark of the 

 7 rule. 

 8 I'm also frustrated that today's 

 9 proposal has paid very little attention to swap 

 10 dealer banks that are captured by the Section 16 

 11 push out rule, which will be regulated by the CFTC 

 12 within the next two years. While I find no 

 13 justification for the lopsided treatment of end- 

 14 users throughout the bank regulator margin 

 15 proposal, I certainly would have preferred that 

 16 they not require end- users to post margin, to 

 17 push out swap dealers during the 24-month 

 18 transition period. 

 19 This rule is also the poster child for a 

 20 failed cost benefit analysis. I'm trying to 

 21 understand what the costs associated with the 

 22 segregation of collateral at a custodian bank 
 20 

 1 because it certainly won't be free. What are the 

 2 costs associated with posting margin, and what 

 3 benefits do we gain from allowing margin 

 4 requirements to be imposed on commercial end-users 

 5 that pose little, if any, systemic risk to the 

 6 financial system? 

 7 In short, we did not conduct a robust 

 8 cost benefit analysis, which is consistent with 

 9 the President's own executive order. 

 10 Before I close, I would like to make a 

 11 comment regarding the rulemaking schedule going 

 12 forward. Mr. Chairman, I know that you've 

 13 discussed and have proposed a roundtable on the 

 14 rulemakings, which I support and appreciate your 

 15 initiative. And at the end of the roundtable, I 

 16 suggest that the Commission release a 

 17 comprehensive schedule, the sequencing of the 

 18 final rulemaking, and a proposed implementation 

 19 plan in the Federal Register, and allow the public 

 20 60 days to comment before we finalize the rules 

 21 going forward. This level of transparency will 

 22 give the market a clear picture of what is coming 
 21 

 1 and the certainty it needs to make critical 

 2 investment decisions to be in compliance with the 

 3 rules upon implementation. 

 4 I think everyone appreciates that we 

 5 will not be able to implement all the rules in 

 6 time to comply with the statutory deadlines. I 

 7 think we ought to put an end to the artificial and 

 8 arbitrary deadlines and work to implement a 

 9 completely transparent final rulemaking and 

 10 implementation process going forward. 

 11 In closing, I will not support today's 

 12 rule, and I would strongly encourage the public to 

 13 identify the cost burdens associated with the 

 14 rulemaking in the comment letters they submit to 

 15 the Commission and to the prudential regulators. 

 16 Thank you. 

 17 CHAIRMAN GENSLER: Thank you, 

 18 Commissioner O'Malia. 

 19 I think now I turn it over to Ananda 

 20 Radhakrishnan, John Lawton, Thelma Diaz, and Tom 

 21 Smith to present today's staff recommendation. 

 22 MR. LAWTON: Good morning. The proposed 
 22 

 1 rules before the Commission address Margin 

 2 Requirements For Uncleared Swaps entered into by 

 3 Swap Dealers And Major Swap Participants. They 

 4 would implement Section 431(e) of the Commodity 

 5 Exchange Act -- I'm sorry, 4s(e) of the Commodity 

 6 Exchange Act, which was added by Section 431 of 

 7 the Dodd- Frank Act. 

 8 The rules would apply to swap dealers 

 9 and major swap participants not subject to 

 10 regulation by either the Federal Reserve Board, 

 11 the Office of the Comptroller of Currency, the 

 12 Federal Deposit Insurance Corporation, the Farm 

 13 Credit Administration, or the Federal Housing 

 14 Finance Agency. Collectively, those entities are 

 15 referred to as the prudential regulators. 

 16 In developing these rules, Commission 

 17 staff has consulted with the prudential 

 18 regulators, as well as with the staff of the 

 19 Securities and Exchange Commission. 

 20 As required by Section 4s, the CFTC 

 21 staff and staff of the prudential regulators have 

 22 attempted to make their respective proposals 
 23 

 1 comparable to the maximum extent practicable. We 

 2 understand that the prudential regulators will 

 3 also be voting on proposed rules today. 

 4 I'm going to address five topics this 

 5 morning in presenting this proposal: What 

 6 products would be covered by the rule, what market 

 7 participants would be covered by the rule, how 

 8 margin would be calculated, what forms of margin 

 9 would be acceptable, and the location of margin, 

 10 where it would be held. 

 11 First, with regard to the products 

 12 covered, the proposed rules would apply to swaps 

 13 entered into after the effective date of the rule. 

 14 The rules would not apply retroactively. 

 15 With regard to the market participants, 

 16 the proposal would apply to swap dealers and major 

 17 swap participants not subject to oversight by the 

 18 prudential regulators. As I'll discuss in more 

 19 detail in a moment, the rules would not require 

 20 commercial end-users to post margin. 

 21 Consistent with the risk-based mandate 

 22 set forth in Section 4s, the margin treatment 
 24 

 1 under the proposal would vary by counterparty. 

 2 The way we thought about it is there are sort of 

 3 three tiers of trades: Trades between swap 

 4 dealers or MSPs and other swap dealers or MSPs, 

 5 trades between swap dealers or MSPs and financial 

 6 end-users, and trades between swap dealers or MSPs 

 7 and non-financial end- users. 

 8 The definition of financial end-user for 

 9 this purpose is based on the definition in Section 

 10 2(h)(7) of the Act, which addresses the exemption 

 11 for mandatory clearing. The definition of 

 12 non-financial end-user is basically anyone who is 

 13 not a swap dealer, an MSP, or a financial 

 14 end-user. 

 15 Okay. So moving to the first year, 

 16 which would be trades, swap dealer to swap dealer. 

 17 In those cases, a swap dealer MSP, subject to the 

 18 Commission, would be required to collect both 

 19 initial margin and variation from its 

 20 counterparties that were also a swap dealer MSP. 

 21 They would be required to collect the entire 

 22 amount calculated; that is to say, there would be 
 25 

 1 no thresholds allowed. We understand that the 

 2 prudential regulators proposal is the same in this 

 3 regard. 

 4 The effect is to require two-way initial 

 5 margin and two-way variation margin from swap 

 6 dealer to swap dealer, swap dealer to MSP; that 

 7 is, that each swap dealer MSP will be subject to 

 8 either the CFTC rules or to the prudential 

 9 regulators rules, and it will be required to 

 10 collect under the rules to which it is subject. 

 11 So, if one is subject to the CFTC and one is 

 12 subject to a prudential regulator, the CFTC swap 

 13 dealer will collect pursuant to the CFTC rule, and 

 14 the prudential regulator's swap dealer will 

 15 collect pursuant to the prudential regulator rule. 

 16 Moving now to the second tier, or 

 17 trades, between swap dealers, MSPs, and financial 

 18 entities, the rules would require the swap dealer 

 19 MSP to collect initial margin and variation margin 

 20 from its counterparties. Thresholds would be 

 21 permitted for some, but not all, financial 

 22 entities. 
 26 

 1 The standard for qualifying for a 

 2 threshold would have three elements: The 

 3 financial entity must be subject to capital 

 4 requirements by a bank or an insurance regulator, 

 5 the financial entity must have a swap portfolio 

 6 below a specified size, which is basically keyed 

 7 off of the definition of major swap participants, 

 8 essentially about half, and the financial entity 

 9 must use swaps predominantly to hedge. 

 10 A key difference between the 

 11 requirements under this tier and the first tier is 

 12 that for swap dealer financial entities, there 

 13 would be one-way margin; that is, the swap dealer 

 14 MSP would be required to collect, but would not be 

 15 required to pay. 

 16 Staff at the prudential regulators have 

 17 expressed the view that the reason for this is 

 18 that it may create risk to the safety and 

 19 soundness of the regulated entity, that is, the 

 20 swap dealer MSP, such as a bank, if it was giving 

 21 margin to an unregulated entity, such as a hedge 

 22 fund. 
 27 

 1 Again, consistent with the directive in 

 2 Section 4s that the rules of the Commission and 

 3 the prudential regulators be comparable to the 

 4 maximum extent practicable, staff is proposing 

 5 that this provision also be in the CFTC proposal. 

 6 Staff of the Commission and staff of the 

 7 prudential regulators are each going to recommend, 

 8 however, that the Federal Register release ask 

 9 questions about this one-way margin and whether 

 10 there's a rationale for that compared to the 

 11 rationale for two-way margin. 

 12 Moving now to the third tier, which is 

 13 swap dealer MSP to non-financial entity, the 

 14 proposal would not require that swap dealers or 

 15 MSPs collect initial margin or variation margin 

 16 from non-financial entities. This is consistent 

 17 with congressional intent as expressed in various 

 18 letters by the chairman of the applicable Senate 

 19 and House committees. It's also consistent with 

 20 the lesser risk that such parties generally 

 21 propose to their counterparties and to the 

 22 financial system generally. Non- financial 
 28 

 1 entities generally use swaps to hedge and do not 

 2 have the same degree of interconnectedness with 

 3 the markets as swap dealers or major swap 

 4 participants would. 

 5 The proposal would require that swap 

 6 dealers and MSPs enter into credit support 

 7 arrangements with their counterparties. 

 8 Therefore, a non-financial entity would only be 

 9 required to post margin to the extent that the 

 10 parties bilaterally agree in their credit support 

 11 arrangements independently entered into that that 

 12 would be done. 

 13 Turning now to the topic of margin 

 14 calculation, the proposal would allow initial 

 15 margin to be calculated pursuant to our model, or, 

 16 if no qualifying model were available, pursuant to 

 17 an alternative method that essentially ties the 

 18 Margin for Uncleared Swaps to the margin for 

 19 similar cleared swaps. 

 20 Any model that would be used would be 

 21 subject to a number of standards. For example, a 

 22 model would be required to cover 99 percent of 
 29 

 1 price changes over a 10-day liquidation period. 

 2 By way of comparison, the clearing rules earlier 

 3 proposed by the Commission for cleared swaps 

 4 executed on a swap execution facility would 

 5 require the margin to cover 99 percent of price 

 6 changes over a five-day liquidation period. The 

 7 different liquidation time horizons reflect the 

 8 greater standardization and the greater market 

 9 liquidity that can be expected for cleared 

 10 products compared to uncleared products. 

 11 If no model were available for a 

 12 particular product or group of products, the 

 13 proposed alternative proposal would require the 

 14 participants to identify a comparable cleared 

 15 product. The parties would then apply a 

 16 multiplier to the margin level required by the DCO 

 17 for the cleared product to reflect the greater 

 18 risk of the uncleared product. This is a point of 

 19 difference. The proposed alternative model being 

 20 proposed by the prudential regulators would be 

 21 based on notional value of the uncleared swap. 

 22 Again, both the prudential regulator staff and the 
 30 

 1 CFTC staff are recommending that there be 

 2 questions asked about the pluses and minuses of 

 3 the different proposed alternative models. 

 4 The fourth of the five topics that I 

 5 wanted to touch on today is forms of margin that 

 6 would be acceptable. For trades in the first two 

 7 tiers, that is, swap dealer to swap dealer or swap 

 8 dealer to financial entity, the proposal would 

 9 specify specific acceptable forms of margin. 

 10 Essentially, they would fall within the category 

 11 of cash, treasuries, and various GSE type 

 12 products. 

 13 For trades involving non-financial 

 14 entities, the rules would not specify forms of 

 15 margin. Again, this would be specified in the 

 16 credit support arrangements agreed to bilaterally 

 17 between the parties. 

 18 To the extent the parties require or 

 19 permit the use of non-traditional forms of 

 20 collateral, the proposal would require that they 

 21 periodically revalue them just to reflect the 

 22 potential change in the market value of a product. 
 31 

 1 For example, if someone were accepting natural gas 

 2 and storage as margin for an energy swap, the rule 

 3 would require that that asset be periodically 

 4 revalued. And the proposed Federal Register 

 5 release would ask questions as to how frequently 

 6 should that be done, and what's feasible, what's 

 7 appropriate for risk management purposes. 

 8 The final topic is the location of 

 9 collateral. Under the proposal, swap dealer to 

 10 swap dealer trades, collateral would have to be 

 11 held at an independent third party custodian. By 

 12 contrast, for trades between a swap dealer and a 

 13 financial end-user or a swap dealer and a non- 

 14 financial end-user, the proposal would simply 

 15 require that the swap dealer offer the 

 16 counterparty the opportunity to have the margin 

 17 held in segregation, and that would be at the 

 18 option of the counterparty. 

 19 Finally, the proposal, with regard to 

 20 custodians, would set some limits on how they 

 21 could invest funds that they're held and would 

 22 prohibit them from rehypothecating assets that 
 32 

 1 they hold in the custodial account. 

 2 Thank you, and we're ready to take any 

 3 questions anyone might have. 

 4 CHAIRMAN GENSLER: Thank you, John. 

 5 Thank the whole team. I think I'll entertain a 

 6 motion to accept the staff recommendation on 

 7 Margin for Uncleared Swaps for the swap dealers 

 8 and MSPs we regulate. 

 9 COMMISSIONER SOMMERS: So moved. 

 10 COMMISSIONER O'MALIA: Second. 

 11 CHAIRMAN GENSLER: Having been moved and 

 12 seconded, I guess it's now open to the floor for 

 13 questions. And I'll start with a few. 

 14 I am supporting today's rule, but I'd 

 15 like to tease out a little bit more where there 

 16 might be any differences between what we're doing 

 17 today and the prudential regulators. I applaud 

 18 the staff because I know it's been seven or eight 

 19 months of work to comply with the statute in all 

 20 of its respects, but importantly where it says 

 21 also to the maximum extent practicable to be 

 22 consistent. But there are some differences. So, 
 33 

 1 maybe John or Ananda, just if you could highlight 

 2 what you think the top two, three, or four, I 

 3 don't mean to limit it, but where are there some 

 4 differences, if you could? 

 5 MR. RADHAKRISHNAN: Thank you. First, 

 6 with respect to the requirement between a swap 

 7 dealer and an MSP and a non-financial end-user, 

 8 I'm looking at the draft that was provided by the 

 9 staff of the prudential regulators yesterday, and 

 10 it says, "Under the proposed rule, a covered swap 

 11 entity," i.e., swap dealer or MSP, "...would not 

 12 be required to collect initial or variation margin 

 13 from a financial end-user counterparty as long as 

 14 the covered swap entity's exposures to the non- 

 15 financial end-user were below the credit exposure 

 16 limits that the covered swap entity has 

 17 established under appropriate credit processes and 

 18 standards." So, this is a subtle difference, but 

 19 I'm not sure whether it is a difference because in 

 20 our proposal we are saying there has to be a 

 21 credit support agreement, and with respect to the 

 22 exchange of margin, it's all a function of the 
 34 

 1 credit support agreement. 

 2 CHAIRMAN GENSLER: But I gather, and I'm 

 3 looking at that page, too, because I read it late 

 4 last night, but they're saying the swap entity 

 5 would not be required to collect initial variation 

 6 margin. We say the same the thing, you would not. 

 7 They're, of course, regulating banks. They then 

 8 go on to say this idea of having a credit exposure 

 9 limit established under appropriate credit 

 10 processes and standards, so we don't have that 

 11 because we're not bank regulators. So, that's the 

 12 difference. We're not mandating there be 

 13 thresholds. 

 14 MR. RADHAKRISHNAN: Correct, we're not. 

 15 We're not. And the one difference is that if a 

 16 threshold is reached, and it doesn't seem to me 

 17 that the prudential regulators are insisting on 

 18 the threshold. But the one difference is if the 

 19 threshold is reached, then the types of collateral 

 20 that can be posted are limited to the types of 

 21 collateral, basically treasuries, cash, and GSEs, 

 22 whereas we are very clear that our proposal would 
 35 

 1 basically, parties agree, but you've got to allow 

 2 the use of non-cash collateral. 

 3 CHAIRMAN GENSLER: Right. So, if I 

 4 remember the statute, I don't remember the 

 5 section, but somewhere in 731, it says that 

 6 Congress mandated the use of non-cash collateral. 

 7 You're saying we allow that. 

 8 MR. RADHAKRISHNAN: That's correct. 

 9 CHAIRMAN GENSLER: One difference that I 

 10 noticed, and maybe it's a modest difference, but I 

 11 did notice that the discussion, and I don't know 

 12 if my fellow commissioners noticed this because it 

 13 was a document that we all maybe got late 

 14 yesterday, was reading through the prudential 

 15 regulator thing. I noticed that I understand the 

 16 prudential regulators have included a provision in 

 17 their proposal that would permit portfolio 

 18 margining of swaps executed prior to the effective 

 19 date. For the public, I think that the proposed 

 20 rule that we are proposing would only require 

 21 margining for post-effective date. So, first, is 

 22 that correct? 
 36 

 1 MR. RADHAKRISHNAN: That's correct. 

 2 CHAIRMAN GENSLER: And the Federal 

 3 Reserve and the bank regulators look like they're 

 4 doing the same thing. It's only post-effective 

 5 date margining. 

 6 MR. RADHAKRISHNAN: That's how I 

 7 understand it, yes. 

 8 CHAIRMAN GENSLER: But I noticed that 

 9 they have about a page and a half where they say 

 10 that if a bank wanted a portfolio margin, wanted 

 11 to use some of the pre- enactment or pre-effective 

 12 date swaps that might help lower margin, that at 

 13 least the regulators would consider that. 

 14 MR. LAWTON: Yeah, that's correct. The 

 15 way that they've phrased it is that you can't pick 

 16 and choose, that if you're going to include 

 17 pre-enactment swaps in the portfolio, you have to 

 18 put them all in or none of them. 

 19 CHAIRMAN GENSLER: So, I'm wondering, 

 20 and I'd have to unanimous consent, but I'm 

 21 wondering whether we should at least include 

 22 questions that would allow us the flexibility in 
 37 

 1 our final rule if the market thinks that's 

 2 important. We currently don't have any questions 

 3 on that, do we? 

 4 MR. LAWTON: Right. Our proposal is 

 5 silent on that. It doesn't prohibit such 

 6 pre-enactment swaps. It's silent. It doesn't 

 7 state explicitly that they may be included. 

 8 CHAIRMAN GENSLER: Well, I don't know if 

 9 other commissioners will have questions on that 

 10 topic, but whether I should ask it now or later, I 

 11 think I'd like to at least have the questions. 

 12 I'd like to retain the flexibility that in the 

 13 final rule, if the market thinks that's a good 

 14 idea, that we're consistent. So, I might ask that 

 15 at the end and let others ask about that. 

 16 Just a very small point. I noticed a 

 17 discussion, it was a number of places, but on page 

 18 20 particularly in our rule, that we talk about 

 19 marking the positions for variation and maybe 

 20 initial margining as well. And I thought it would 

 21 be appropriate to have just a cross- reference to 

 22 the statute wherein 4s(h), it says that there has 
 38 

 1 to be daily marks. So, it's a small technical 

 2 thing, but I'd ask unanimous consent to accept 

 3 just some cross- reference to the statute. 

 4 Not hearing objection, we can do that. 

 5 Commissioner Dunn? 

 6 COMMISSIONER DUNN: Thank you, Mr. 

 7 Chairman. Again, I want to express my 

 8 appreciation to the staff for their hard work on 

 9 this, and I know that doing all the harmonization 

 10 that needed to take place on this, they did a 

 11 great job on it. 

 12 But I would like to zero in on this 

 13 credit support arrangement that we're talking 

 14 about there. And for those end-users would able 

 15 to post that non-cash collateral. What is the 

 16 role of the CFTC in verifying that there is some 

 17 there within that arrangement? 

 18 MR. RADHAKRISHNAN: You mean in terms of 

 19 the valuation of it? 

 20 COMMISSIONER DUNN: That's correct, the 

 21 valuation. 

 22 MR. RADHAKRISHNAN: Well, first of all, 
 39 

 1 if we're going to examine the swap dealer, we'll 

 2 probably look at what the credit support 

 3 arrangement provides in terms of what you can 

 4 accept as collateral. And then we'll probably ask 

 5 for supporting documentation to show that 

 6 collateral has in fact been posted. And then with 

 7 respect to valuation, I think John mentioned, we 

 8 do require that there be a periodic valuation of 

 9 the collateral. 

 10 But the broader question is, let's say, 

 11 for example, the collateral provided is natural 

 12 gas leases or natural gas in storage. Then we 

 13 and/or the NFA will have to quickly get an 

 14 understanding of how natural gas is valued. 

 15 COMMISSIONER DUNN: Mr. Chairman, I note 

 16 that we did get a modest increase in the deal that 

 17 was worked out with Congress, and I think that 

 18 will be very, very helpful. But I would ask 

 19 Ananda, do we have the resources now to be able to 

 20 do that type of quick study that he was talking 

 21 about, and to understand those balance sheets, and 

 22 what the worth of these assets that are being 
 40 

 1 pledged are? 

 2 MR. RADHAKRISHNAN: I'll respond this 

 3 way. If all of the auditors in DCIO moved from 

 4 their current responsibilities, which are fairly 

 5 significant, and trained to understand the 

 6 valuation of non-traditional forms of collateral. 

 7 And the other issue is we don't know what it is. 

 8 I don't know about quick study, 

 9 Commissioner Dunn. We will study it, but it 

 10 presumes that staff may not be doing other 

 11 responsibilities. And the reason I answer that 

 12 that way is because it remains to be seen just how 

 13 many of these instances we are required to do and 

 14 what forms of collateral people will accept. 

 15 COMMISSIONER DUNN: Well, I've said 

 16 before, when it comes time for a final rule, I 

 17 really would like to see from the division 

 18 drafters how they're going to afford to implement 

 19 that rule. What are they not going to be doing 

 20 that we're presently doing, because I'm assuming 

 21 we're 100 percent fully employed, maybe 110 or 15 

 22 percent fully employed. So, some things that we 
 41 

 1 are currently doing we're not going to be doing. 

 2 I'd like to know what those are and how the 

 3 resources are going to be allocated to implement 

 4 these regulations. I just feel that if we say 

 5 we're going to do something, we'd better have the 

 6 wherewithal to be able to do that. 

 7 We did get a lot of input on end-user on 

 8 this, and, John, in your opinion, does this rule 

 9 satisfy the majority of those end-users that had 

 10 concerns on the pre- writing of this particular 

 11 proposal? 

 12 MR. LAWTON: I hope so, but I really 

 13 couldn't say. 

 14 MR. RADHAKRISHNAN: Well, we believe 

 15 that it does to the extent that we are not 

 16 mandating the collection of margin and pretty much 

 17 leaving it to the parties to decide. All we're 

 18 saying is you've got to have a credit support 

 19 agreement without saying what thresholds people 

 20 need to have. We're saying you've got to allow 

 21 the use of non-cash collateral. So, we believe 

 22 that we are being responsive to the concerns that 
 42 

 1 were addressed. 

 2 COMMISSIONER DUNN: Well, I'm sure we 

 3 will get further comments from folks. 

 4 Mr. Chairman, I have no further 

 5 questions, but again, I want to thank the staff 

 6 for a job well done. 

 7 CHAIRMAN GENSLER: Yeah. I thank you. 

 8 Mike, on this issue on non-cash collateral, I just 

 9 looked in the statute book where it is. And it's 

 10 explicit in 4s(e)(3)(C) that in prescribing margin 

 11 requirements of the subsection, etc., etc., the 

 12 Commission, with respect to swap dealers and MSPs 

 13 for which there is not a prudential regulator 

 14 shall permit the use of non-cash collaterals the 

 15 regulator commissioner determines to be 

 16 consistent. Of course, it's got to be consistent 

 17 with preserving financial integrity in markets, 

 18 preserving the stability of the U.S. financial 

 19 system. So, I'm pleased to see that staff has 

 20 included something because Congress directed us to 

 21 include something. But we'll get comments. 

 22 MR. RADHAKRISHNAN: That's correct, sir. 
 43 

 1 Page 28, there is a statement that says, "As was 

 2 the case for initial margin, this is in accordance 

 3 with the statement in Section 4s(3)(C) that the 

 4 Commission permit the use of non- cash 

 5 collateral." 

 6 CHAIRMAN GENSLER: But we've only 

 7 allowed it for the non-financial end-users. 

 8 MR. RADHAKRISHNAN: Correct. 

 9 CHAIRMAN GENSLER: I would, hopefully 

 10 Commissioner Sommers will give forbearance, there 

 11 was something Commissioner O'Malia said in his 

 12 opening that I will maybe turn you to. On the 

 13 bottom of page 8 and the top of page 9, there are 

 14 sentences that if I turn you to, and I'm not even 

 15 going to ask unanimous consent, we might strike. 

 16 But it's the last word on page 8, "and", and then 

 17 the top of page 9, "create the proper incentives 

 18 for moving more transactions in the central 

 19 clearing." And I find myself in agreement with 

 20 Commissioner O'Malia. I don't think the statement 

 21 is necessary for the rest of it; it's just a 

 22 preamble statement. But is that necessary? 
 44 

 1 MR. RADHAKRISHNAN: Staff of CFTC does 

 2 not believe so, but this is language we obtained 

 3 from the prudential regulators. I just want you 

 4 to know that. 

 5 CHAIRMAN GENSLER: Oh, okay. But it's 

 6 our preamble. 

 7 MR. RADHAKRISHNAN: Yes, so we can take 

 8 it out. 

 9 CHAIRMAN GENSLER: So I'm asking 

 10 unanimous consent, even though I don't think it'll 

 11 change Commissioner O'Malia's vote on the overall 

 12 rule -- I always like to find ways that we can 

 13 narrow differences -- that we could strike those 

 14 eight or 10 words. 

 15 Not hearing objection, they'll be 

 16 struck. Commissioner Sommers? Sorry. 

 17 COMMISSIONER SOMMERS: Thank you, Mr. 

 18 Chairman. I have a couple of different areas that 

 19 I just want to clarify for those who are 

 20 interested in what we're doing in this proposal. 

 21 The first area is where in the proposal, 

 22 we require that the CSEs calculate hypothetical, 
 45 

 1 initial, and variation margin each day for the 

 2 non-financial entities because we believe that it 

 3 would likely be necessary in helping them compute 

 4 their capital requirements. 

 5 So, my question, because we're not doing 

 6 capital today, and because we're not laying these 

 7 out side by side, to just ask if this consistent 

 8 with the way current capital requirements are 

 9 calculated, and if this is something that you 

 10 think is necessary to be in here because of the 

 11 way the capital rule will be proposed. 

 12 MR. SMITH: Yes, it is consistent with 

 13 the way capital is computed today for futures 

 14 commission merchants or for broker-dealers. What 

 15 this is basically saying is we need to mark the 

 16 position to market and recognize any gains or 

 17 losses, and also to see if you have any receivable 

 18 or liability, which is included in the entity's 

 19 capital. The question then becomes, how do we 

 20 treat it for regulatory purposes? Do we allow 

 21 that receivable to qualify as regulatory capital 

 22 or not? So, this is the first that was just had 
 46 

 1 the calculation. 

 2 COMMISSIONER SOMMERS: And those 

 3 decisions will be made in our capital proposal? 

 4 MR. SMITH: That's correct. 

 5 COMMISSIONER SOMMERS: Okay. Thank you. 

 6 Then on the use of proprietary modeling. So we 

 7 say in the proposal that we will not allow the use 

 8 of proprietary models unless those models have 

 9 been approved by prudential regulators. And then 

 10 I think, you may want to explain this because I'm 

 11 not going to do a very good job of explaining it. 

 12 There is an alternative methodology for 

 13 calculating the margin. 

 14 Do you contemplate that we may be in a 

 15 place where having the methodologies blessed so 

 16 that we can approve those if we don't have the 

 17 resources to do such a thing, could be delegated 

 18 to a third party? 

 19 We talk about independent third party 

 20 verification, but having some entity, and perhaps 

 21 even internationally, that would say that certain 

 22 valuation methodologies have been tested and that 
 47 

 1 all regulators could be able to look to that type 

 2 of entity, if that's something we could 

 3 contemplate delegating. 

 4 MR. RADHAKRISHNAN: I think we could in 

 5 theory, Commissioner. I think if a movement 

 6 developed suddenly internationally for an 

 7 independent entity to develop modeling techniques 

 8 for margin, and it's got to be specific to margin, 

 9 and if it meets certain minimum standards that the 

 10 regulators all can agree on, then it may not hurt 

 11 the Commission to think along those lines. If you 

 12 think about margining models in the cleared space, 

 13 the SPAN, which is pretty much used quite 

 14 significantly and throughout the world. There is 

 15 also to a lesser extent TIMS, developed by the 

 16 OCC. And then they're SPANs. The historical 

 17 development of SPAN in this agency, staff was 

 18 involved in looking at it, and now it's gotten a 

 19 worldwide acceptance. 

 20 So, if you do find such a movement and 

 21 if the international regulators do agree on it, 

 22 then I don't see why we can't consider it. 
 48 

 1 COMMISSIONER SOMMERS: I have concerns 

 2 in this particular area for us to be creating 

 3 policy saying that in this proposal what we say is 

 4 that CSEs, subject to Commission regulations, may 

 5 not have proprietary models. Given our current 

 6 budget constraints, the Commission does not have 

 7 the resources to review numerous models 

 8 individually, and that we're proposing to permit 

 9 the use of non-proprietary models. My concern is 

 10 that we may be putting our registrants at a 

 11 competitive disadvantage. So, I guess, I would 

 12 say that I would like to see comments specifically 

 13 addressed to this area, and what comments may be 

 14 helpful for this Commission, and how we can move 

 15 forward in helping us review these type of models. 

 16 CHAIRMAN GENSLER: Commissioner Sommers, 

 17 may I ask, do you think that it would help to ask 

 18 a specific question, again, to retain flexibility 

 19 that we ask a specific question that's in the 

 20 document that Commissioner Sommers is asking about 

 21 this reliance on some internationally, because I 

 22 would support it if we need it. 
 49 

 1 COMMISSIONER SOMMERS: I don't know if 

 2 we would be prohibited from using a delegated 

 3 source, even if we don't include it, right? 

 4 MR. RADHAKRISHNAN: I don't think so, 

 5 but if you'd like to ask the question, we can 

 6 certainly ask it. If I understand you correctly, 

 7 Commissioner Sommers, if there were to develop an 

 8 international standard, could the Commission in 

 9 its rules rely on that. That's the question, 

 10 right? 

 11 COMMISSIONER SOMMERS: Right. 

 12 MR. LAWTON: Just to add one point. The 

 13 proposal also talks about models developed by a 

 14 vendor, so I think that if there were some sort of 

 15 international model, somebody would have had to 

 16 have developed it, and somebody would have to be 

 17 making it available. So, I think to that extent, 

 18 it would be covered under the proposal if it's out 

 19 there. 

 20 COMMISSIONER SOMMERS: Thank you. The 

 21 next line of questioning is with regard to the 

 22 forms of margin or assets that can be posted. And 
 50 

 1 I was wondering if you could explain the 

 2 differences between what we will allow for swap 

 3 dealers, financial end-users, and non-financial 

 4 end-users, with regard to what forms of margin can 

 5 be posted, and the differences between what we 

 6 currently allow in the futures regime, because I 

 7 think there is quite a difference here for people 

 8 to be aware of. 

 9 MR. LAWTON: Yeah. I think that in the 

 10 proposal. It's fairly narrow. It's essentially 

 11 cash treasuries and certain other GSE-type 

 12 entities. In the futures world, it varies from 

 13 DCO to DCO, and it varies from product to product. 

 14 But certainly there's a wider number of things, I 

 15 mean, money market funds being an example that 

 16 comes to mind, or some DCOs permit equity 

 17 securities with a pretty big haircut, but they 

 18 permit equity securities for some products. 

 19 People permit, for example, gold. 

 20 I think the non-financial entities is 

 21 broader still when we start getting into things 

 22 like natural gas in the ground. I don't think you 
 51 

 1 see that at a clearing house. So on the 

 2 continuum, the most narrow is what's being 

 3 permitted for financial entities here. In the 

 4 middle would be what's permitted by clearing 

 5 houses. And then the broadest would be what's 

 6 being permitted for non-financial entities here. 

 7 COMMISSIONER SOMMERS: And then, with 

 8 regard to custodial arrangements, something you 

 9 said in your summary with regard to offering the 

 10 counterparty the option or requiring that the 

 11 custodial arrangements between swap dealers or 

 12 major swap participants be kept at an independent 

 13 body. But we're offering the counterparty the 

 14 option. And then there are limits to what they 

 15 can invest. And so, if you could explain the 

 16 differences between those custodial arrangements 

 17 and the limits between this and what we currently 

 18 see in the futures industry. 

 19 MR. LAWTON: With the future's industry, 

 20 basically there's not really limits on custodians 

 21 under our rules. The custodians would be banks, 

 22 and so they would be limited in what they can do. 
 52 

 1 The limit under our Rule, Section 4d that says a 

 2 custodian that receives segregated funds must 

 3 treat and deal with them as belonging to 

 4 customers, and they have to sign a custodial 

 5 arrangement under the Commission regulations. But 

 6 there's not really investment linked limitations 

 7 under CFTC rules for a custodian for 4d futures 

 8 segregated funds. So, that would be a distinction 

 9 between here and there. 

 10 COMMISSIONER SOMMERS: Sorry. With 

 11 regard to requiring that the swap dealers have a 

 12 custodial and independent custodian, is that 

 13 different from what normally exists now? 

 14 MR. RADHAKRISHNAN: That is different. 

 15 Right now, we don't have an independence 

 16 requirement. So, for example, an FCM that's 

 17 affiliated with a bank can custody its customer 

 18 funds. We monitor this because there is, of 

 19 course, the issue, which if is a bank goes bust, 

 20 then the FCM is going to go bust as well. But we 

 21 don't have any rules that say if you're an FCM, 

 22 you must keep your customer funds at a depository 
 53 

 1 that you're not affiliated with. 

 2 COMMISSIONER SOMMERS: What about for 

 3 the CSE that has a financial entity or a 

 4 non-financial entity as a counterparty? Did 

 5 limits to investments versus what we have under 

 6 1.25, is there a difference? Is there more 

 7 limitation there? 

 8 MR. LAWTON: Yeah. This is narrower 

 9 than 1.25. Again, an example would be money 

 10 market funds, that this, again, is the smaller 

 11 category. 

 12 COMMISSIONER SOMMERS: I guess I would 

 13 say with regard to this issue as well, I have 

 14 specific concerns with regard to this, so ask if 

 15 the public would like to specifically comment on 

 16 these areas. I think it would be very helpful for 

 17 us in knowing whether these type of more stringent 

 18 limitations are going to be anti-competitive or 

 19 add more costs to doing business. Thank you. 

 20 CHAIRMAN GENSLER: If I might, because I 

 21 think Commissioner Sommers asked a very good set 

 22 of questions, the whole line. But I'm just 
 54 

 1 curious, back to the, if I might. We're actually 

 2 deliberating. But in the futures model right now, 

 3 futures commission merchants have to segregate the 

 4 money, but it doesn't have to be with a separate 

 5 custodian. Is that what I understood? 

 6 MR. RADHAKRISHNAN: That's true. 

 7 CHAIRMAN GENSLER: That's similar to 

 8 what we're requiring here for swap dealers to 

 9 financial entity trades. In this rule, we're 

 10 saying you don't necessarily have to have a 

 11 separate custodian. Is that correct? 

 12 MR. LAWTON: That's correct. 

 13 CHAIRMAN GENSLER: So where we're more 

 14 restrictive, and that the prudential regulators 

 15 have, as I understand it, or similar, is it's the 

 16 dealer to dealer. Is that correct? 

 17 MR. RADHAKRISHNAN: That's correct. 

 18 CHAIRMAN GENSLER: Is there much dealer 

 19 to dealer FCM business in the futures world right 

 20 now? 

 21 MR. LAWTON: Well, everything would go 

 22 through the clearing house in the futures world, 
 55 

 1 so there really wouldn't be a bilateral trade. So 

 2 the FCM, it would be in their house account. 

 3 CHAIRMAN GENSLER: So, it would be in 

 4 their account. So, the analogy is mostly with the 

 5 financial entity counterparty. So, I do think it 

 6 would be very helpful to get public comment 

 7 because it's a little bit different, but may be 

 8 warranted. 

 9 MR. RADHAKRISHNAN: And I think also, if 

 10 you look at it from the banking perspective, I'm a 

 11 bank, I'm a dealer. If there wasn't an 

 12 independence requirement, you're basically 

 13 allowing me to keep my money with myself. So, I 

 14 think that's why the prudential regulators have 

 15 those independence requirements. 

 16 CHAIRMAN GENSLER: And to the extent 

 17 that our rules might be modestly different than 

 18 the prudential regulators, they're more flexible, 

 19 once a bank pushes out its business to the 

 20 non-bank affiliate, it would have our rules. Is 

 21 that correct? 

 22 MR. RADHAKRISHNAN: That's correct. 
 56 

 1 CHAIRMAN GENSLER: Commissioner Chilton? 

 2 COMMISSIONER CHILTON: Thanks, Mr. 

 3 Chairman. Two quick things. One, Mr. Chairman, 

 4 your idea on the portfolio margining idea, I 

 5 think, is a good one. If we can develop a 

 6 question to ensure that we have the latitude to do 

 7 something in the final rule, should we want to do 

 8 that, I think that's a good idea. 

 9 I wanted to raise an issue that 

 10 Commissioner O'Malia raised, but Commissioner 

 11 Sommers raised it several times, on the cost 

 12 benefit. And by and large, I think, I agree that 

 13 to the extent we can do more analysis on cost 

 14 benefit, it's a good thing. 

 15 On this one, I think we did a pretty 

 16 good job based upon what we know, and I'm not sure 

 17 that we can know a whole lot more. I mean, 

 18 essentially we've asked for comments, and 

 19 Commissioner O'Malia mentioned that. The rule 

 20 asked for comments on the cost benefit. But 

 21 overall, we say that this is going to be better 

 22 for markets and better for individuals, and that 
 57 

 1 it'll offset any costs. 

 2 But, Ananda, I'm curious. I mean, how 

 3 would you would even go about doing a cost benefit 

 4 because much of this is discretionary in how 

 5 individual parties would set it up. So, I'm 

 6 trying to get a handle on how you think you could 

 7 do something more than what we've done. 

 8 MR. RADHAKRISHNAN: Commissioner 

 9 Chilton, that's part of the issue, because in our 

 10 cost benefit analysis, we talk about opportunity 

 11 costs, because if you have to put up margin, the 

 12 cost is the cost of funding, the opportunity 

 13 costs. Because you've got to fund the margin, you 

 14 couldn't do something else with your money, so 

 15 what are the opportunity costs? 

 16 And, of course, the other issue has to 

 17 do with, we're hoping for comment on the totality 

 18 of the costs. We really don't have a good idea 

 19 what the totality of the costs will be. 

 20 COMMISSIONER CHILTON: My point was that 

 21 there is discretion in what individual parties 

 22 were coming up with. We are allowing collateral 
 58 

 1 to be used instead of posting margin, but we don't 

 2 say exactly what it will be. And so, there's a 

 3 big unknown out there. So, for us to try to make 

 4 some guess on what individual parties will come up 

 5 with on a bilateral agreement, what that would 

 6 cost, I don't know how we would do it. That's my 

 7 real question. 

 8 MR. RADHAKRISHNAN: Meaning how much 

 9 margin would actually be required? 

 10 COMMISSIONER CHILTON: Right. 

 11 MR. RADHAKRISHNAN: Yeah, that's right. 

 12 COMMISSIONER CHILTON: Anyway, I guess 

 13 my point is, I think we've done a pretty good job 

 14 on this one. While I agree in concept that the 

 15 more detail we can get on cost benefit analysis 

 16 the better, I think on this one, there are so many 

 17 unknowns that we've done a good job with the 

 18 information that we had. 

 19 MR. RADHAKRISHNAN: Thank you. I just 

 20 want to mention, you were cutting in and out just 

 21 now when you were talking, so I just want to make 

 22 sure our telephone guys know that. I don't know 
 59 

 1 whether it's your distance to the telephone. 

 2 COMMISSIONER CHILTON: Two inches, so 

 3 I'll try to get closer. Thank you. 

 4 CHAIRMAN GENSLER: Thank you, 

 5 Commissioner Chilton. 

 6 Commissioner O'Malia? 

 7 COMMISSIONER O'MALIA: Thank you. Along 

 8 the lines that Commissioner Sommers mentioned, I 

 9 think the issue of this proprietary model, we 

 10 talked about it before. We found that, to my 

 11 frustration, we didn't have a jurisdictional hook 

 12 with some of these banks, and, more specifically, 

 13 these push out banks. We're in an intervening 

 14 time here. They've got two years to push these 

 15 things out, and then they will be under our 

 16 jurisdiction. And I'm trying to understand. This 

 17 doesn't really provide a transition plan. Are we 

 18 going to trust the modeling that the prudential 

 19 banks send them over with when they push them out? 

 20 They're going to have margining requirements under 

 21 prudential requirements, but when they get over 

 22 here, will we just lift those and return the 
 60 

 1 money? What's the plan with push outs? 

 2 MR. RADHAKRISHNAN: In the current rule 

 3 we're saying that if you want to use a proprietary 

 4 model that's been reviewed by the prudential 

 5 regulator, correct me if I'm wrong, though, it has 

 6 to be approved by the prudential regulator for use 

 7 by our registrant. 

 8 COMMISSIONER O'MALIA: By our 

 9 registrant? At that time it's their registrant. 

 10 MR. RADHAKRISHNAN: Correct, their 

 11 registrant. But also, our rule says, let's say we 

 12 have, I won't name an entity, but let's say you 

 13 have an entity right now. It's not part of a push 

 14 out. It's not part of a banking entity. So, it 

 15 may be affiliated with a banking entity. So we're 

 16 saying that the regulator has to approve it for 

 17 use by our entity. 

 18 So, I guess what we're saying is as long 

 19 as we don't get any information from the 

 20 prudential regulator that it stopped allowing 

 21 somebody to use the model, the presumption is that 

 22 the prudential regulator is still comfortable with 
 61 

 1 them using the model. 

 2 COMMISSIONER O'MALIA: Are you 

 3 comfortable using their model and the prudential 

 4 regulator signing off on it? 

 5 MR. RADHAKRISHNAN: Yes, right now I am 

 6 because they have the resources. They have the 

 7 experience doing this. I guess I have to be 

 8 comfortable because we don't have the resources. 

 9 I'll put it this way: I have no evidence for me 

 10 not to be comfortable. 

 11 COMMISSIONER O'MALIA: Okay. 

 12 MR. LAWTON: Just to add one point, and 

 13 I think when someone came over to us, we would 

 14 probably want them to do some back testing and 

 15 show us how it did perform. 

 16 COMMISSIONER O'MALIA: Since these 716 

 17 entities are coming our way anyway, is that 

 18 something that we can sit down with the 

 19 regulators, the prudential regulators, today and 

 20 have them walk through it and work with us on this 

 21 so we understand our modeling -- their modeling? 

 22 MR. RADHAKRISHNAN: OH, certainly, yeah. 
 62 

 1 We can send staff to understand how they -- 

 2 COMMISSIONER O'MALIA: I think we have 

 3 to have a higher level of certainty with these 

 4 models before we just endorsing them. 

 5 MR. RADHAKRISHNAN: So, right now, 

 6 there's no 716 entity right now, so right now it's 

 7 all the bank. So, if I understand you correctly, 

 8 let's say two years from now we found out that a 

 9 particular bank has to push out somebody. Then I 

 10 think I think at that time we'll find out what it 

 11 is they want to use. The first question is, 

 12 they'll have to demonstrate to us that they're 

 13 using a model that has been approved by the 

 14 prudential regulator for use by them. So, and I 

 15 guess at that time it's certainly appropriate for 

 16 us to have a conversation with the prudential 

 17 regulator, first, to make sure the entity is not 

 18 lying to us, and trying to get an understanding of 

 19 the model itself. 

 20 COMMISSIONER O'MALIA: Can I ask you 

 21 another question? 

 22 MR. RADHAKRISHNAN: Yes. 
 63 

 1 COMMISSIONER O'MALIA: Are the end-users 

 2 privy to the models used by swap dealers under our 

 3 jurisdiction or prudential regulators? 

 4 MR. RADHAKRISHNAN: I'm not sure. I 

 5 don't think they are. I'm not sure. 

 6 CHAIRMAN GENSLER: Can I just, because I 

 7 want to assure, because this is a very important 

 8 line. But on page 22 of the preamble, I thought 

 9 we retained the right that if something is part of 

 10 a bank holding company and has some model approved 

 11 by the prudential regulators, it's one of these 

 12 716 push outs, or it's already an affiliate. 

 13 Don't we retain under this proposal, it says under 

 14 23.155(b)4, we could approve or deny, and we could 

 15 set conditions or limitations? 

 16 MR. RADHAKRISHNAN: That's true. 

 17 CHAIRMAN GENSLER: I mean, again, I just 

 18 want to make sure because I agree with 

 19 Commissioner O'Malia that we don't want to just 

 20 give up our -- Congress has said we have to do 

 21 something for non-banks. If we inherit these 716 

 22 push outs, does this retain -- I mean, it's a 
 64 

 1 question for you, but it's also -- does this 

 2 retain our -- 

 3 COMMISSIONER O'MALIA: I think it does, 

 4 and that's my line of questioning. What are we 

 5 actually doing to be comfortable with this so we 

 6 can, A, represent this Commission and our 

 7 registrants in this negotiation with the 

 8 proprietary model? If we don't understand the 

 9 model and we can't explain it, how are we going to 

 10 police it? And I'm trying to understand the hook 

 11 we'll have immediately. There's no way we can get 

 12 to the prudentially regulated banks, but those 

 13 push outs are coming our way. 

 14 CHAIRMAN GENSLER: And some of them are 

 15 already there. Some of the banks already have 

 16 them outside of the bank. 

 17 COMMISSIONER O'MALIA: Correct. Are we 

 18 going to rely on them? What capabilities do we 

 19 have? And then, will end-users be on a level 

 20 footing with the banks in negotiating these 

 21 agreements? 

 22 CHAIRMAN GENSLER: Right. And I think 
 65 

 1 it's an excellent question, and I just want to 

 2 make sure retain that we can see the models. Is 

 3 that right, Ananda? 

 4 MR. RADHAKRISHNAN: Yes. 

 5 CHAIRMAN GENSLER: Completely. Like 

 6 it's no black box. 

 7 MR. RADHAKRISHNAN: No, the models have 

 8 to be filed. 

 9 CHAIRMAN GENSLER: And we could set 

 10 conditions or limitations if we're not satisfied. 

 11 MR. RADHAKRISHNAN: Right. Page 22, 

 12 there has to be a filing of the model and an 

 13 explanation of the manner in which the model meets 

 14 the requirements, the mechanics, the theoretical 

 15 basis, the empirical support, and independent body 

 16 validation. And we reserve the right to impose 

 17 conditions or deny the use of the model. 

 18 MR. LAWTON: And I would just add that 

 19 in the proposed rule, there's also a provision the 

 20 Commission may require that a covered swap entity 

 21 to provide further data or analysis concerning any 

 22 model at any time. 
 66 

 1 CHAIRMAN GENSLER: I think it might help 

 2 to add some questions on Commissioner O'Malia's 

 3 thought about transition. Like, what happens if 

 4 somebody were under the prudential regulator's 

 5 margin requirement and the business gets pushed 

 6 out? 

 7 COMMISSIONER O'MALIA: That's why I 

 8 opened this. This rule doesn't contemplate that. 

 9 No later than two years I think is what the Act 

 10 says that they have to come over to our 

 11 jurisdiction. But I think we need to prepare 

 12 ourselves for this and be clear about this thing. 

 13 You listed all the futures models, 

 14 margining models that are completely transparent. 

 15 We understand. I get they're complicated, and I 

 16 get that we don't have a lot of staff. But we 

 17 can't make excuses and just hope this goes away. 

 18 We got more money today, or we're in the process 

 19 of getting more money, and that's great news. And 

 20 this isn't always going to be the situation, but 

 21 we have to be able to stand up on our own. And if 

 22 we can leverage the resources of the prudential 
 67 

 1 regulators at this point to work with the models, 

 2 let's take advantage of that. 

 3 MR. RADHAKRISHNAN: If the Commission 

 4 can make sure that DCIO gets all money, we'll hire 

 5 all these people. 

 6 COMMISSIONER O'MALIA: Well, let me go 

 7 to a concern that Commissioner Dunn raised about 

 8 valuating these things. Don't allocate all your 

 9 staff to looking at oil and gas reserves. I mean, 

 10 the real bogey in this one is going to be 

 11 systemically risky entities, and that's not, quite 

 12 frankly, the oil and gas companies at this point. 

 13 It's really the clearing houses. 

 14 MR. RADHAKRISHNAN: Oh, absolutely. 

 15 COMMISSIONER O'MALIA: So don't put all 

 16 your auditors over there trying to learn what the 

 17 business of oil and gas engineering. 

 18 I'm trying to understand, we have some 

 19 language, and I believe this came over from the 

 20 bank regulators. What authority do we have to 

 21 include foreign governments and sovereign wealth 

 22 funds? Section 23.150 of the proposed rule 
 68 

 1 expands the statutory definition to include, 

 2 quote, "Any government or any financial country, 

 3 or any political subdivision, agency, or 

 4 instrumentality thereof." What is our statutory 

 5 hook for expanding that definition? 

 6 MR. LAWTON: I think the concept is that 

 7 4s says that you have to have set margin 

 8 requirements that ensure the safety and soundness 

 9 of the swap dealer, major swap participant and are 

 10 appropriate to the risk posed. And so, I think 

 11 the idea was that such entities seem to pose risks 

 12 that are more along the lines of the risks posed 

 13 by a financial entity as compared to the risk 

 14 posed by a non- financial entity. 

 15 COMMISSIONER O'MALIA: I appreciate the 

 16 purity argument, but do you think you're going to 

 17 actually be able to regulate financial activities 

 18 of foreign governments? 

 19 MR. RADHAKRISHNAN: We can try. 

 20 CHAIRMAN GENSLER: It's just the margin 

 21 that the bank has to collect. 

 22 MR. RADHAKRISHNAN: That's right. So, 
 69 

 1 our hook is on to the -- 

 2 COMMISSIONER O'MALIA: And how are you 

 3 going to enforce that? 

 4 MR. RADHAKRISHNAN: We'll enforce it 

 5 against our registrants. 

 6 COMMISSIONER O'MALIA: And what happens 

 7 when they can't get it? 

 8 MR. RADHAKRISHNAN: Our registrants? 

 9 Then we'll refer it to enforcement for appropriate 

 10 action. 

 11 COMMISSIONER O'MALIA: Let me ask you, 

 12 on the issue of one-way margining, what impact 

 13 will that have in bankruptcy? If a bank fails, 

 14 and I am obviously reminded that there was Lehman 

 15 and Bear that failed that wasn't an end-user that 

 16 failed that brought the entire financial system. 

 17 But what happens in bankruptcy under that 

 18 scenario? 

 19 MR. LAWTON: Well, I think that means 

 20 the end- user is going to have to have a claim 

 21 against the bankrupt entity, whereas if they had 

 22 received the variation, they would have it. I 
 70 

 1 don't know whether there might be any kind of fall 

 2 back provisions in that. There probably wouldn't, 

 3 but I can't really speak to that. 

 4 COMMISSIONER O'MALIA: Buyer beware? 

 5 MR. RADHAKRISHNAN: Sort of, yeah. 

 6 COMMISSIONER O'MALIA: Do you think that 

 7 provides adequate coverage of our overall 

 8 financial system? 

 9 MR. RADHAKRISHNAN: I guess it's a 

 10 function of who we believe poses greater risk, 

 11 because if margin goes towards the banks, then the 

 12 thinking is, from our colleagues in the prudential 

 13 entities, they'll be more secure. And the chance 

 14 of them getting into trouble would be less. 

 15 COMMISSIONER O'MALIA: I don't have any 

 16 further questions. 

 17 CHAIRMAN GENSLER: I think that the last 

 18 question I have, and Commissioner Dunn focused on 

 19 it, is one that we'd be enormously grateful for 

 20 the public to comment on is whether two-way 

 21 margining is appropriate to protect, in essence, 

 22 the financial entities as well as the swap 
 71 

 1 dealers, and that is a really important one. We 

 2 included rule text in case. I mean, it's right 

 3 there. 

 4 I think I'm going to ask for two 

 5 unanimous consents. One unanimous consent is just 

 6 to have a question so that we would retain the 

 7 flexibility similar to what the prudential 

 8 regulators do to permit portfolio margining of 

 9 swaps, executed prior to the effective date, given 

 10 the possibility that that might be more flexible 

 11 in the end. 

 12 Not hearing objection, you'll find the 

 13 right language in which to do that. 

 14 MR. RADHAKRISHNAN: We'll find the 

 15 language, and we'll also make sure that they can't 

 16 pick and choose. 

 17 CHAIRMAN GENSLER: And the other one is, 

 18 I'm picking upon Commissioner O'Malia's question. 

 19 I think if I could ask unanimous consent that you 

 20 find the right words of the question on 716 

 21 push-outs, that what market participants think is 

 22 appropriate for any transition that might come as 
 72 

 1 somebody, in essence, moves from the prudential 

 2 regulators' margining standards to our margining 

 3 standards. Just anything that people on that 

 4 transition. 

 5 COMMISSIONER O'MALIA: Can we also ask 

 6 whether it's appropriate for the end-users to see 

 7 the valuation and collateral models? 

 8 CHAIRMAN GENSLER: As amended, a 

 9 unanimous consent on two issues. They might be in 

 10 different parts of the document, yeah. 

 11 COMMISSIONER O'MALIA: Thank you very 

 12 much. 

 13 CHAIRMAN GENSLER: Not hearing any 

 14 objections, I guess we're adding three or four 

 15 questions. 

 16 I think there are no further questions, 

 17 Mr. Stawick. 

 18 MR. STAWICK: Commissioner O'Malia? 

 19 COMMISSIONER O'MALIA: No. 

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

 21 Commissioner Chilton? 

 22 COMMISSIONER CHILTON: Aye. 
 73 

 1 MR. STAWICK: Commissioner Chilton, aye. 

 2 Commissioner Sommers? 

 3 COMMISSIONER SOMMERS: Aye. 

 4 MR. STAWICK: Commissioner Sommers, aye. 

 5 Commissioner Dunn? 

 6 COMMISSIONER DUNN: Aye. 

 7 MR. STAWICK: Commissioner Dunn, aye. 

 8 Mr. Chairman? 

 9 CHAIRMAN GENSLER: Aye. 

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

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

 12 nays are one. 

 13 CHAIRMAN GENSLER: I thank you, Mr. 

 14 Stawick. I thank the staff. The ayes having it, 

 15 a majority will be sending it along. 

 16 I'm supposed to ask unanimous consent to 

 17 allow staff to make technical corrections, I 

 18 guess, because we have four or five things they 

 19 have to get at. 

 20 Not hearing any objections to that, 

 21 you'll be able to make some corrections. 

 22 In terms of moving forward, as you all 
 74 

 1 know, we had identified 30 topic areas for 

 2 rulemakings. I think with today's, we're 28 and a 

 3 half topics or something because we have to do the 

 4 other side, the peanut butter that goes with the 

 5 jelly, so to speak, capital with margin. 

 6 We're also hopeful in the next several 

 7 weeks to move forward with the SEC on the joint 

 8 rule on product definitions, which then other than 

 9 a Volker rule, which is sort of on a different 

 10 time path because Congress put it on a different 

 11 time path, would really largely complete our 

 12 proposal phase. 

 13 It's this Chairman's hope that we do 

 14 that in the next few weeks. 

 15 MR. RADHAKRISHNAN: Actually, there's 

 16 two more, conforming part one. 

 17 CHAIRMAN GENSLER: There's two other 

 18 rules. I thank you, Ananda. There's conforming 

 19 part one, which we scheduled for today, but just 

 20 with some commissioner travels and so forth, we 

 21 decided we'll probably be taking up, and also, the 

 22 segregation of cleared swaps. We're working 
 75 

 1 further on testing and supervision. I don't know 

 2 that that will be in April. And that's a really 

 3 important rule. I know many commissioners are 

 4 weighing in with staff, and so I'm just being 

 5 realistic. That's probably a little bit more time 

 6 on the testing and supervision. But on the four 

 7 product definitions, capital, the conforming rule, 

 8 which was largely ready for today, and the cleared 

 9 swap segregation, it's the hope to do those in the 

 10 next several weeks. I know that you all, 

 11 Commissioner Sommers and Commissioner O'Malia, 

 12 much deserved family vacations, I guess next week. 

 13 I think we're trying to schedule 

 14 something for the week that you're coming back 

 15 because it would line up with the SEC on the same 

 16 day. The 27th we're thinking about possibly doing 

 17 it. But we're going to work with the SEC if we 

 18 can get a few more days maybe. 

 19 So with that, and if there's not any 

 20 other Commission business, I'll entertain a motion 

 21 to adjourn the meeting. 

 22 COMMISSIONER SOMMERS: So moved. 
 76 

 1 COMMISSIONER O'MALIA: Second. 

 2 CHAIRMAN GENSLER: All in favor? 

 3 COMMISSIONERS: Aye. 

 4 CHAIRMAN GENSLER: Thank you again to 

 5 the team. 

 6 (Whereupon, at 10:52 a.m., the 

 7 PROCEEDINGS were adjourned.) 

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 77 

 1 CERTIFICATE OF NOTARY PUBLIC 

 2 DISTRICT OF COLUMBIA 

 3 I, Stephen K. Garland, notary public in 

 4 and for the District of Columbia, do hereby certify 

 5 that the forgoing PROCEEDING was duly recorded and 

 6 thereafter reduced to print under my direction; 

 7 that the witnesses were sworn to tell the truth 

 8 under penalty of perjury; that said transcript is a 

 9 true record of the testimony given by witnesses; 

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

 11 employed by any of the parties to the action in 

 12 which this proceeding was called; and, furthermore, 

 13 that I am not a relative or employee of any 

 14 attorney or counsel employed by the parties hereto, 

 15 nor financially or otherwise interested in the 

 16 outcome of this action. 

 17 

 18 

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

 20 Notary Public, in and for the District of Columbia 

 21 My Commission Expires: May 31, 2014 

 22