NDFs

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Panel I: CFTC Clearing for Non-Deliverable Forwards (NDF)

The first panel will discuss whether mandatory clearing should be required of NDF swaps contracts. Each panelist will present and then there will be opportunity for broader discussion and questions. Representatives from the CFTC, the Bank of England, and the European Securities and Markets Authority will also be joined by a subcommittee of experts on the foreign exchange markets who, although not presenting at the meeting, will participate in the broader discussion following the presentations.

Panelists:

Brian O’Keefe, Deputy Director, Division of Clearing and Risk, U.S. Commodity Futures Trading Commission

David Bailey, Director, Financial Market Infrastructure, Bank of England

Rodrigo Buenaventura, European Securities and Markets Authority

GMAC Subcommittee on Foreign Exchange Markets

Key Issues

Is the NDF class set forth herein sufficiently defined? Should the proposed class include additional positive specifications or any negative specifications? Are there other terms that market participants often include in NDFs?

Should the Commission limit its determination to the most liquid NDF currency pairs, i.e. Brazilian Real / USD, Chinese Yuan / USD, Indian Rupee/ USD, Korean Won/USD, Russian Ruble / USD, and Taiwan Dollar / USD, and exclude the other six proposed currency pairs?

What types of packaged transactions would involve an NDF that the Commission has proposed to be included in the clearing requirement?

Do market participants have specific concerns about the potential application of a trade execution requirement in light of the way NDFs are currently being executed?

Do market participants have specific concerns about the potential application of the Commission’s reporting rules in light of the way NDFs are currently being executed?

Do market participants have specific concerns regarding the costs of clearing and/or the availability of connectivity to clearing?

Are there currently any specific issues that exist with regard to the reporting of NDF transactions under the Commission’s reporting rules?

Are there other issues of which the Commission should be aware?

words that may have been spoken

We're thinking about creating a clearing requirement in this new class. What are the issues with the implementation of interest rates or CDS? How do we avoid some of those issues as we think about this proposal putting together? We very much look forward to your feedback.

Just a very brief presentation to just run through sort of, sort of what we're thinking about and why we're thinking about it at this point. Forward contracts, unlike sell fx forwards, the parties don't actually exchange or deliver the two currencies. These are cash-settled contracts, usually in US dollars, by comparing the exchange rate established at the day of the contract, with the spot date at the fixing date, and generally in US dollars. This is used to hedge or speculate risk, usually on currencies that have restrictions that do not allow off-shore delivery ... unlike the FX swaps or forwards that were subject to the treasury exemption, NDFs remain part of our swap definition.

The chairman touched upon how our analysis worked. The five factors that we need to look at when we're considering a consideration for mandatory clearing, trading liquidity make sure there is adeuqate ... rule frameworkcapaccity, operational expertise to clear these products, what the effects on mitigation of systemic risk, the effect on competition to the extent that we subject them to the mandatory clearing requirement, or the insolvency aspects for a clearing member.

So to give you an idea, our CFTC regulations require that DCOs that want to clear new swaps, to file a 39.5B filing with us indicating the swaps they would like to clear, and they discuss those 5 factors. This chart I am presenting here is hsowing clearinghouses that have presented these filings to us and the various currency pairs they have provided information on. The X's are the ones where we see the clearing activity, with regards to the ones that are not highlightened in yellow, the operational framework is there, they are just not clearing these swaps there at this point.

How the proposal as we're thinking about it now would be sort of similar to the prior clearing requirements but it's good to think about the interest rate clearing requirement. Essentially the proposed class would have 12 reference currencies and those 12 represent the ones that have been submitted to us, the settlement currency would be US dollars, and the tenor would be 2 years to 3 days, that would represent what was proposed to us. I think there are issues, we are doing our analysis with liquidity around that, but that was what has been submitted to us, and that's the basis for the proposal to get some feedback on that.

To the extent that these are standaridzed contracts, those would be subject to the clearing requirements, to the extent tha tyou have a situation where a non-standard term is included in the contract and it could not be cleared for that reason, well you would have the... so the swap has to be accepted for clearing at the clearinghouse, it should eliminate any non-standard terms that the clearinghouse can't handle.

One of the striking facts that we need to address is that 99% of that is uncleared transactions. One of the five factors is that we are comfortable with the capacity for the clearinghouse's ability to take on those additional volumes. The next set of slides talk about LCH.. can yo ugo back one? LCH has filed some supplement data about the number of transactions they were clearing. Their original filing was done some time ago. The number of new trades that they have cleared through the beginning of this year.. Gavin can talk about the volumes that LHC has seen recently. The FCISEF tracker.. FIA SEF Tracker. 61% increase in the clearing of NDFs, we are seeing growht inregard to the activity of the SEFs.

These last two slides here... commission regulations 50.25 sets forth an implementation schedule. The rule itself is that the implementation schedule is discretionary to the extent that we are considering a new asset class, I think staff would very much support using the implementation schedule that we have. If people don't recall how that works is, category 1 entities would need to begin clearing within 90 days, that's active funds, major swap participants... the active funds are more than 200 swap trades per month. Category 1 entities are all other financial participants, all other entities...

The first clearing mandate that we should.. was the one on interest rate derivatives that was sent to the commission on the first of October. The second clearing mandate was the one on CDSes, and that is ongoing and we expect to deliver that around the end of November. The third clearing mandate is this one that we are discussing today on NDFs.

This starts with the notification of the authorization of a ... and that's an article five notification. I think that is similar to the submissions that you can recive from the clearinghouses under the CEA. I am not going to comment on the process of.. whether or not they should be subject to compulsory clearing. This is an analysis of the derivative class.

We are consulting on 11 currencies. They are all against the US dollar which is 94% of the NDF market. The maturaties that we are proposing are subject to the clearing obligation of between 3 days and 2 years. In terms of the criteria of the product, we need to assess three elements. Standardization, availability of pricing, and liquidity. When it comes standardization, what we found is that the level of standardization of NDFs is high comparable to credit or interest rates. This is because of industry initiative, not regulation. The percentage of transactions eligible for electronic processing is close to 100%, near 94% or 95%. In terms of liquidity, we have volumes between 5 and 17 billion per currency per day exchanged. Probably the peculiarity of this market is that the clear volumes are low compared to the traded volumes. They go between 0.5% and 4% of the traded volume for the LHC in Europe, for clearing of these products. That's what we are watching more closely. (LHC is a CCP, central clearing party?). There are 23 members, two offer clearing at this stage. This is something we are watching closely.

There are some peculiarities in the NDFs, which is that the maturities are below 3 months, 90% is below 3 months, 10% is with maturities less than 7 days. 30% is below 30 days. ... Just to conclude, we think that the main three factors that are required to be assessed by ISMA, is that in terms of standardization, liquidity and availability of pricing, we are assessing the number of CCPs that are authorized, we expect to have more CCPs authorized in the european union by the time the date arrives, hopefully... more internationally.. CCPs that would add to the robustness of the network. We are eager to see the results and the comments that is running for five weeks and to check whether or not the ISRA approach is the right one or not, with the CFTC at staff level as well for commitments with mutual, that we have to put in place every time a clearing obligation is proposed. Thank you very much.

David? (Bank of England)

Thank you very much for inviting me to participate in today's discussion. This is not the first time that I have spoken to the committee. I have valued the open and frank dialog that we have had at previous meetings. I hope today's discussion will be of similar nature.

We have seen the european perspective, a very thorough consideration of the process that is required for determining whether a clearing mandate is required to reduce system risk per the G20 goals. I have learned from past experience of speaking after Rodrigo is that he steals the important points. I thought it would be interesting to offer a slightly different perspective, the perspective of the supervisor of the lcearing houses, of clearing the products of which a mandate is being considered. From that perspective..

Our focus is predominately on the capacity of the CCP to manage the volumes, which is a question of operational capacity, to recognize the defaults of clearing members should they occur. This is something that we consider when authorizing a CCP to clear a product. A clearing mandate would require a refresh of this. The bulk of the market is uncleared in NDFs, and may cause a significant change in how a market works from a clearing mandate implementation perspective. We think about the size and scale of positions in the market that may need to be closed out in the case of a membe rdefault, we look at profile positions, net wide positions, we think aobut liquidity available within the market which might be needed if a position needs to be closed at. We look at average daily volumes, number of active dealers, psoition concentrations, and the potential loss if a position is liquidated or wound down. The costs might be incurred by transaction costs or market moves.

When looking at the NDF market, as Rodrigo already mentioned, in the European case, we are thinking about 11 currency pairs as opposed to the 12 for the CFTC. The data available for NDFs is not as available as extensively as other asset classes, like CDSes. Looking at this, we have relied primarily on trade repositories from a European perspective. Our analysis has indicated what? As a broad point from our perspective, the market ... clearing mandates across all of the 11 currency pairs that Rodrigo mentioned, they become less strong as the maturities extend. So while 11 currency pairs have liquidity and volume, it drops off in all pairs as you move out on maturity terms. Some currency pairs, like dollar vs colombian peso, the drop off on liquidity is significant at shorter maturities. Just to give some examples, I am very much generalizing.

Most of the currency pairs we are discussing see several thousand trades per day with maturities up to 3 months. When you get up to greater than a year, you see less than 100 trades per day taking place. In some currencies the average daily volume can be measured in single digits. They are more concentrated in shorter maturities. The longer maturities have multiples of longer spreads than the shorter maturities. So if you are considering a clearing mandate, you need to consider that they might make the task of a clearinghouse closing out positions that are longer-term more complicated. The outstanding positions are typically smaller, which might make it easier. Market participants might choose to clear longer maturities from the positions that they might want to benefit from netting in the clearing house.

I am not drawing conclusions about what the clearing mandate should look like. We want to look at... To that end, I support the thoughtful approach. That's what I wanted to highlight to the committee and I look forward to questions.

I think we can start opening up questions to the rest of the membership here today.

It might be worth, although it's addressed in some ways for a clearing mandate, if any of the participants might be willing to speak to the general benefits of imposing a mandate, apart from the technicalities of whether it would fit within the statute, it might be benefit to review for the public. Why would a clearing mandate be considered in the first place? What is it about clearing that's a positive as far as the public is concerned or the financial markets are concerned? How does a mandate fit into that for a NDF?

LHC Clear Net... it would seem rather odd if I didn't take that question as a clearinghouse. Thank you to my fellow subcommittee members for avoiding it. In the summer of 2008, the clearinghouse was approached by a group of membrs for looking at a clearing service for the FX forwards product. We looked at this in 2003, and at time the focus of the FX markets were less on the mitigation of counterparty risk and more on the mitigation of settlement risk, and thus the settlement service CLS was born around that time and the clearinghouse stopped its analysis of FX clearing. After we looked at it in 2008, that's why the clearinghouse hired me, I was working at Citigroup in the currency markets. In September 2008... so the market asked us to look at clearing FX, because they wanted counterparty credit risk mitigation, and they wanted us to look at the largest markets first, the $2 trillion FX forwards and swaps.

With the act in 2009 of August, we moved our attention from swaps and forwards, as markets believe, to options. So we built an FX options service. Throughout 2009 and 2010 and up to the beginning of 2011 when the truly systemic importance of the FX asset class became clear to all. It is used for payments. It is the liquidity of all the markets. For the product that.. for the rest of the products that have a transfer of notional, which included options, it was decided that it warranted much more robust analysis. So the members asked us to look at NDFs, which they thought would fall within the mandate.

So there is a section of counterparty credit risk mitigation.. we built a service for NDFs. That perception has changed. The clearinghouse provides security removing that counterparty risk, it offers some operational efficiencies, and certainly the benefits of netting as opposed to bilateral netting, the other benefits is that the impact of capital will have on many market participants. Margins is to be posted on uncleared derivatives. That's adding not only to clearing NDFs, which has been seen in the press, both in the clearing houses and ... that has added to the development of other FX clearing products. The clearinghouse will be more advantageous after the 2015 rules will pass. So to summarize.. the market wanted counterparty credit risk mitigation, that's the one that we can do right now, with cash settled NDFs, and with capital something in 2015, we are working with the.. to manage inter-day liquidity risk. In time for that deadline in some 14 months time.

Without disagreeing, based on the presentations, there's still remains some small share of the market othat is cleared.. why is this the case? As an ex-banker, I'm familiar with seeking efficiency and I think that until a mandate is passed, the reason one clears early in this instance is to prove the operational readiness. So our members have done that to some degree, not all 20, but about 10 of them. A number of them have prepared that operational pipes for their clients. Beyond the 20 members we have, we have a further 4 that are ready in all aspects, because they are waiting for the mandate. So until the mandate comes and until they see that they need to clear, there is no impotence for them to clear. The cpaital or commercial impotence doesn't arrive for another 14 months. It will be by December of next year that the FX NDFs move into the CCPs.

To your question of why hasn't the market started to clear faster, I think there's a different dynamic that we need to be aware of in NDFs that did not present itself in rates or credit implementation of central clearing. You'll find that over the past 5 years, considerable effort has been put into execution, both here and in Europe. Small amounts are being cleared, but it's also related that it's ... 2.5% based on most data points. There's a reason why. Inside the NDF market, and when we look at our client business as an industry, a different phenomenon persists than what happens in rates or credit. Roughly 70% of underlying client flow happens in terms of price creation happens outside of the 2 jurisdictions that we're referring here today, both the US and European markets. In the NDF market, you have a handful of currency pairs, predominately China, India and Korea where the price creation is made from importers/exporters, or individual sinvesting into those currencies respectively. Price creation is made there. And by starting a clearing mandate here, we need to be cogniziant for US investors, to access that liquidity pool so that they can access that Asia liquidity pool in some meaningful way, from the numbers that we see here, and this is from industry, the US represents abut 10% of client flow in India. So we have some apprehensions, and there's a number of clients here, and they want to make sure that the liquidity they are seeing now in th eglobal market, that they are accessing that liquidity once we move into a cleared world. I don't suggest we debate whether we debate whether or not a clearing mandate is needed, but rather that US investors are able to access that liquidity from day one. That can happen from day one for finding a clearing mandate that is in lign with other jurisdictions, or that the currency pairs that we are discussing are globally consistent.

I think one thing to add to the discussion is... deciding to clear has to be driven by something. It can be driven by regulatory mandate ,customer demand, it can be demand by commercial realities of capital costs or risk management concerns, and in the case of the FX, it's probably also contributes to the lack of significant adoption on a voluntary basis the fact that the clearing offerings that are available are only servicing a portion of the risk pool as opposed to a broader set of the risk pool. So it can actually be risk increaisng or margin or capital increasing to split up a portfolio and only clear part of it, I think that is probably also contributing to the lack of voluntary adoption ahead of any mandate. So is the solution or answer, just to marry up the implementation schedules assuming both jurisdictions want to go forward with a clearing mandate. Um, I think there's certainly are benefits to having the major jurisdictions move in closer time alignment than has been the case so far, but I think probably more important than creating a lock step on the timing of a clearing mandate would probably not be imposing a trading mandate in one jurisddiction, because that seems t obe the piece of the US mandate that has had the most impact on the market's ability to access liquidity in all of the ways that they normally could.

It is something that should be considered when you think about the implementation timelines for the CFTC and what our colleagues in Europe in way of their consultation.. we are not too far way from each other for at least the beginnings of that. If ew could find a way to do that would be prudent. Further to that...

It would be extremely important that the US entities are able ot access from a price taking perspective, as much liquidity as possible. I have one comment to add on just the liquidity function. While there can be concerns that the liquidity might be bifurcated, the commission should also consider the fact that.. the potential benefits. When the markets become cleared, there may be additional market makers who are currently finding it difficult to participate in the market, who would be able to participate if clearing did take place. One of the ... the NDF market is exporting liquidity from other primary markets, and I would note that several of the primary markets that may be inaccessible to foreign participants are themselves are cleared. If you look at the underlying price function for dollar brazil, a lot of that is taking place on the BM&F. The ruble, where you had .. is a very successful vertically integrated clearing and execution system. So while we're talking about an export function that makes these markets accessible, some of the underlying markets driving them are themselves cleared.

Just to supplement some of the points that have been made. The very short dates.. is one of the reasons why you haven't seen the same alignments that you would see in rates or credit. Particularly where you bear in mind that where you have entities trading an options product and then hedging some delta NDF, the inefficiency of some of that in clearing, is potentially unattractive and the capital efficiency derived from the position nonetheless being cleared has not been comparable to the one that you have seen as an incentive for rates and credits. That is going to change over the next year and 18 months, where we move into an environment of .. mandatory non-cleared margins. I do think it's an observation to one of the factors that sits behind the relatively low level of clearing that we see today. I think that the NDF market could be used as a hedge with respect to alternative products that people are trading, this is going to be more important in the context of monetary execution, or obligations around the CEF?SEF? ultimately i terms of where we land with clearing.

We're here to facilitate competition and innovation. We have an opportunity now to implement a mandate in parallel. I think this would facilitate one that would avoid splitting liquidity in the product. I think it would facilitate competition that would lead to the benefit of the development of the market and the development of liquidity that we see as key to success.

Are there any views about whether the NDF class has been sufficiently defined as laid out by Rodrigo or Brian? Have the right pairs been chosen? In terms of the creidt and interest rate asset classes, one could say that to ease into the obligations to start with a smaller group of currencies, that's one way to approach any mandate. One of the benefits of clearing FX is the portfolio correlation, the benefits that are achieved of multiple currencies into the same risk management framework. The user of the market has the margins they post reduced with the increase number o currencies because of the correlation between them in a portfolio, and a risk management perspective, the clearing house is better able to manage its risk, so the concentrations in one are offset by another. So on a purely risk management and efficiency of margin, I would suggest that both the proposal that's here today and ESRA, the 11 or maybe 12 currencies.

One of the things that we'd like to comment on is that we've gone through a process where the clearing houses themselves have selected which ones that they believe should be eligible and have authorizations for them. And it's seems arbitrary to bifurcate that list to us. One of the things that could be examined is the very small differences between let's say the sixth currency on the list and the seventh or eighth currency on the list, they are very very similar in terms of liquidity characteristics. The nature of this market is such that the liquidity in each of thse currencies is subject to change over time depending on what the market conditions are. We think that picking a much narrower subset of the currencies.. it might be tough for that to be an objective determination especially in light of a moving liquidity target.

I would further both comments. I have a slightly different reasoning. Getting back to the size of this market. It's 2.5% of global FX volumes. Limiting the scope from day 1 given the centralizing of risk into a handful of CCPs, and the fact that the underlying products themselves in emerging markets, open to higher volatility, and an element that we should touch on today, which is how we deal with disruption events in these markets, would mean that if you start with a smaller number of currencies, we're isolating our risk even further. You can make a statement there that if we don't have core-size to this market in a relative sense, then you're really starting with the classic swapping counterparty risk mitigation for liquidity risk. Again if the conversation is how we do implement, as opposed to should we, I would encourage more initially to ensure that this is stable.

Adam you talked about the advantages of having mandates that essentially kick in concurrently. What happens if that doesn't occur? What happens if the European mandate doesn't happen? Particularly thikning about, let me ask you that first. Conjecture, but I think, I think the driver is the driver between competing CCPs in different venues, and when they are both competing in the same pool of trades for transactions, I think it's beneficial. I think it provides more impetus to find the best solution.. The competitive incentitive is there even for the one not subject to the market.. is there a market fracturing risk? I don't think so. Even if we're later for whtever reason? Possibly in theory, but I don't think so. Say we go forward, on the same time table, or no long behind them, but recognizing that then, under our trading mandate, therecould be a matt determination, European trading mandates don't kick in for a while, what happens? It potentially creates a little bit of a liquidity risk, a little bit of a fragmentation,if everyone proceeds in parallel, the CFTC would have a mandate in place, much quicker. Does it create a risk that business moves to where there isn't a trading mandate? We both have clearing mandates, oh trading mandate... I think it's a possibility and it should be avoided.

(from JP Morgan) From my perspective, the clearing mandate, while certainly ideal to the joined. I think while obviously the clearing mandate would be ideal in a similar timeframe, I think it would be less disruptive from that, if it wasn't exact timing. I think what is key is the question around the trading mandate. Nobody knows, and maybe they'reright, clearing mandates would bring in more market participants, that would be a medium to long term outcome. I think in the short term, you could have a bifurcation of liquidity which would be adverse to US based investors and I think that would be disruptive. We're not sure on the exact outcome, but a bifurcation in the beginning, that would be challenging to some market participants. This would be if there is both trading and clearing mandates over here, but only clearing in Europe.

The risk here is that.. a Matt determination.. a map determination.. the phasing approach to clearing, you could have the added complication that certain, but not others are required to clear, but that determination being made in that context of phasing. So certain market participants would be required to not just the CEF/SEF and clear, but also the situation where the US market is not uniformly applied because of the clearing side of the dimension.. so the fragmentation risk is a real one, and I think it's more to do with the introduction of the map determination of the back, more so than the clearing.

So there's a variety of things that we could do to respond to that concern, to the degree that the commission believes it is a concern worth responding to. One thing we could do is delay the clearing mandate. The other option would be to prevent a trading execution mandate from going into effect, or we could even revisit that policy of the commission. So those two very basic options... I am interested in the views of anyone who would think that those two options might be preferred.

so it is an interesting discussion. The mandatory trading issue. Capital becomes an interesting observation. In the United States, depending on how you mandate your clearing, in the energy industry what happened was that when Dodd-Frank came into effect, we converted all of our cleared products to futures. A lot of that was due to capital issues of our users. Moving mandatory trading and clearing in the US, it might moves to the futures market. NDFs ar e just cash-settled contracts, and we've been doing that for 30 years or more I guess. These are not new notions. I think the issues are that the new participants might move in a more mandated environment to a futures-type environment. I think depending on the holding period, 1, 2 or 5 day in the case of jurisdictions, they might have a driving function on whether or not these goes. You should do a wider breadth of product. The liquidity issues in other markets, we have seen a lot less liquid markets go towards mandated clearing and not have much of an issue, compared to the NDFs under discussion.

Just two quick points. Also a question on trading mandates versus clearing mandates... Perhaps the matt determinations that we already have in place are, where mandates are already in place, we do see from market participants, we have seen a fragmentation of liquidity between different markets. That's something to consider. The second point is that liquidity fragmentation from a systemic risk and market resiliency, it has deterimental consequences in times of consequences. In times of crises, liquidity fragmentation can ause major systemic risk.

I think you're asking the right questions. Given the way that the commission rules are structured, it's hard to talk about a clearing mandate without a simultaneous mat determination at least that's a feasibility and I think that the mandatory trading raises a lot more issues than the mandatory clearing. I think that moving NDFs into a mandatory clear, SEF trading environment, will have an effect on highlighting fissures and unresolved issues around some other commission rules particularly the cross-border guidance, given to how it is applied and functioned, there is a real possibility to fragmenting liquidity if there is a... given the existence structure of the NDF market, I think it would be even more susceptible to that kind of fragmentation.

One of the things I want to note in comment is that you have asked about the right NDFs, the right pairs, and there's a sub issue to that in that as the ESMA consultation paper that was released on October 1st, the reason why the OTC market is standardized, is because they adopted templates. But when you look at the rules of the relevant DCOs, and the SEFs that are currently trading NDFs, there hasn't been harmonization of their product definitions with the standards of each other. So you have disconnects between each DCO's definition and how they have incorporated the SEFs and the other standards, and unless all of those details are worked out, I think you have a real possibility of baseless risk, and counterparty disputes over what's actually being transacted and cleared.

We discussed the currency pairs and so what we would like to see is the more liquid currency pairs be in the first phase. Some of the currency pairs there are concerns about whether or not there will be sufficient liquidity. A clearing house could offer them on a voluntary basis. As Jason mentioned, from an infrastructure perspective, we have to be able to trade some of these currency pairs in the timezone in the region during which they are most liquid. We learned this with rates and credit in the initial phases. There was non-availability to trade and clear some of those contracts if you were in the non-US timezones. That was a concern for us. From a voluntary clearing perspective or trading perspective, the driver for NDFs has been for the mandate or the potential of the mandate. I recognize the benefits of clearing, but given the size of the market as well as the other mandates that you have, what our experience has been that allocation has been driven by when the potential mandate will take effect, versus any other benefit that people will see in the NDF market. When we think about SEF trading and clearing, I would like to think of it more as electronic trading. We would like to see the ability of the SEFs to alllw us to trade NDFs electronically around when the mandate comes into effect. Otherwise there is a completely different workflow. It helps.. the NDF was trading more electronically before the SEF mandate, so it allows us to go back to trading more electronically. We don't have to have a trading mandate, but some encouragement working towards electronic trading solutions.

Just an element of information to make things a bit more complicated, because I see the issue with timing and alignment of timing.. as somebody said before, there are some constraints on the regulatory regime. Our constraint is that ISMA has a limited time, which is 6 months, for determining the trading obligations after the adoption of the clearing obligations. So let's say we ... by the end of the year, and the commission adopts around March, then by September of next year we have to decide whether to propose or not a trading obligation on NDFs. If we decide to propose it, it would not be in effect nutil January 2018, which is the earliest date that it can take place. From a EU perspective, it would be the same date during which all counterparties would have to be clearing anyway. But that I guess adds to the complexity of the synchronization. So no case before 2017? For the trading obligation we will have to propose a trading obligation by let's say Fall of next year. The date of effectiveness of that obligation would be January 2017. Although we would recommend a year and half before.

The regulatory landscape issue.. if there is a clearing mandate in the US that requires US parties to clear transactions, and we have had some discussions about how fragmentation associated with that is a bad thing, so we have to acccess the liquidity in the market.. but if Europeans are not allowed to clear at third party CCPs, then that is a risk.

I found it interesting in the comments.. regarding the incentives. I tied that to David's comments around capital. But leading up to this day we had a number of different clients to provide us feedback. I think there's two main concerns. Yes one is liquidity. Clients tend to know that as far as executing with a US person, when you run your orderbook from an execution perspective, we have to run some of the orders into Asia hours and Europe hours, because that's where liquidity is most available. I would probably personally de-emphasize the importance of the execution mandate relative to getting core liquidity. The second one to David's comment, you are probably referring to beneficial capital from listed by way of margining, but I know a number of clients, and frank a number of providers here, it's not the jurisdiction of the CFTC directly, but the treatments of derivative exposure under ?? and the amount of capital that we have to hold is a concern for clients and it's a concern for providers. There are benefits or the .. there are no benefits to clearing and exposure bilaterla. This is the leverage calculation of exposure. You add the potential for US having a liquidity crunch, I hate to use that word, but lack of a better word. Yes there is a higher transaction cost that people can get comfortable with, but the reality is that the capital that you have to hold goes up over time, and th ebenefits of netting is falling apart. The size of this market is relatively small. As across the board going up, what the inevitable situation would be, as someone suggested, in some ways, you can make a case that some of these markets would become too expensive for some people to transact.

Phil? One of the things that, um, I think that people should consider is that the distance and time if we go all the way out to January 2017 between when there was a mandate for SEFs to register which happened last October and when people would be obligated to use the SEFs. If things play out ...

David Van Wagner, Chief Counsel, Division of Market Oversight, U.S. Commodity Futures Trading Commission.

Thomas Leahy, Associate Director, Division of Market Oversight, U.S. Commodity Futures Trading Commission.

Jerry Brito, Executive Director, Coin Center

Houman Shadab, Professor of Law, New York Law School

Tim Byun, Chief Compliance Officer, BitPay

Leonard Nuara, President and Co-Founder, TeraExchange