EL ROL DEL ESTADO: PROPUESTAS DE POLÍTICA:

Stuart Wexler I. Pre-trade Price Transparency

o SEF Definition: “The term ‘swap execution facility’ means a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce….” See CEA Section 1a(50).

o “Rule of Construction – The goal of this section is to promote the trading of swaps on swap execution facilities and promote pre-trade price

transparency in the swaps market.” See CEA Section 5h(e).

1. What is a Rule of Construction and how does it relate to other provisions that might be in conflict?

2. Similar language not contained in statutory language regarding securities-based swaps.

o How does the CFTC’s interpretation of the rule of construction animate the proposed SEF rule? See 17 CFR Part 37, “Core Principles and Other Requirements for Swap Execution Facilities,” January 7, 2011 (“CFTC Proposed SEF Rules”).

o Comparison to SEC Rules (See 17 CFR Parts 240, 242 and 249, “Registration and Regulation of Security-Based Swap Execution Facilities,” February 2, 2011) (“SEC Proposed SB SEF Rules”)

1. “Commenters should be mindful that in proposing its interpretation of the definition of SB SEF, the [SEC] is trying to balance

the…stated goal of encouraging SB swap trading to move onto regulated markets with the goal of promoting greater transparency in the trading of SB swaps.” SEC Proposed SB SEF Rules, at p. 23.

2. Requests for quote – five (CFTC) vs. one (SEC) o Implications for voice vs. electronic broking;

o Comparison to price transparency under TRACE

1. Post-trade reporting relationship to pre-trade transparency;

2. TRACE studies on bid-offer spread compression post-introduction. II. Block Trade Size

o Relevance for reporting vs. relevance for permitted execution modalities; o Comparison to futures;

o Comparison to other markets; o Authority to determine. III. Impartial Access

o SEC vs. CFTC approach

1. CFTC – Access for all who meet objective criteria;

2. SEC – Discrimination among categories of participants permitted, provided administered neutrally.

o Permitted objective criteria. IV. Compliance Program

 Dodd-Frank requirements:

o SEF must designate a Chief Compliance Officer (CCO);

o CCO shall:

 Report directly to the board or senior officer of the SEF;  Review SEF’s compliance with applicable requirements;  Work with the Board or comparable body to resolve

conflicts of interest;

 Administer policies and procedures;

 Ensure compliance with the CEA and associated regulations;

 Establish procedures for remediation of noncompliance issues identified by the CCO;

 Establish and follow appropriate procedures for the

handling, management response, remediation, retesting and closing of non-compliance issues;

 Annually prepare a report:

 Describing SEF’s compliance with applicable requirements;

 Describing each of the SEF’s policies and procedures;

 Accompanied by a required financial report;  Accompanied by a certification, under penalty of

perjury, that the compliance report is accurate and complete.

o Comparison of SEF Compliance Program to other Dodd Frank compliance programs;

 DCMs;  FCMs;  SDRs.

o Comparison to broker-dealer regulatory programs;

 “Firms must have established procedures and a system for applying them which would be “reasonably expected to prevent and detect, insofar as practicable, any violation by a person under their supervision.”

“To avoid liability for a violation, supervisor must have

“reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and systems without reasonable cause believe that such procedures and systems were not being complied with.” Securities Exchange Act of 1934, 15 U.S.C. ss78a-78jj.

 “Senior management has the ultimate responsibility for the establishment and maintenance of a firm’s overall compliance efforts; business line supervisors have the responsibility to oversee business operations and the authority to control employee activity to achieve compliance with applicable policies and laws. The role of the Compliance Department is to advise businesses on how to comply with applicable laws and regulations, and to monitor business activity and employee conduct to identify violations (or potential violations) of rules, regulations, policies, procedures and industry standards. Even with the evolving, and in many cases increased, emphasis being imposed on the Compliance Department function, there is a huge difference between the role of the

Compliance Department and its personnel, and the overall broad firm responsibility “to comply” with applicable rules and

regulations. The Compliance Department plays an integral support function for firm compliance programs, but only senior

management and business line supervisors ultimately are responsible for ensuring firm compliance with laws and regulations.” “SIA White Paper on The Role of Compliance,” (November 2005):

 Legal or compliance officers “do not become ‘supervisors’ for

purposes of Sections 15(b)(4)(E) . . . solely because they occupy those positions…[D]etermining if a particular person is a ‘supervisor’ depends on whether, under the facts and circumstances of a

particular case, that person has a requisite degree of responsibility, ability or authority to affect the conduct of the employee whose

behavior is at issue.” In re Gutfreund. 51 S.E.C. 93, Release No. 31554, Release No. 34-31554 (Dec. 3, 1992).

o Problematic aspects

 “Ensuring” compliance and the risk of personal liability;

“While the CEA does not explicitly use the word ``enforce,'' the Commission believes that the use of this word in Sec. 39.10(c)(1) is appropriate to capture the meaning of Section 5b(i)(2)(C), i.e., that CCOs must have the authority to fulfill their statutory and regulatory obligations. Moreover, it is consistent with the statutory directive for the CCO to ensure compliance with the CEA. These considerations are particularly important given that the CCO of a DCO has unique responsibilities in connection with the DCO's critical role in providing financial integrity to derivatives markets. In particular, a CCO must have the ability to effectively address rules and practices that could compromise compliance with fair and open access requirements (Core Principle C), risk management requirements (Core Principle D), and financial resource

requirements (Core Principle B).

The Commission, however, recognizes that the term ``enforce'' could imply that the DCO's CCO must have direct supervisory authority over employees not otherwise in his or her direct chain of command, or that the CCO has independent authority to discipline employees or terminate employment to facilitate compliance with the CEA and the Commission's regulations. To avoid confusion, the Commission herein clarifies that the term ``enforce,'' as used in Sec. 39.10(c)(1), is not intended to include the authority to

supervise employees not in the CCO's direct chain of command, or the authority to terminate employment or discipline employees for conduct that results in noncompliance. The Commission notes that a DCO is not precluded from conferring such authority on its CCO; however, such action would be at the DCO's discretion and is not required by Sec. 39.10(c)(1).”……

“CME described as ``impracticable'' the proposed standard that a CCO must ''ensure'' a DCO's compliance and suggested that an appropriate and ``achievable'' standard would be to require a CCO to put in place measures ``reasonably designed to ensure

compliance'' with the CEA and Commission regulations. The Commission is revising Sec. 39.10(c)(2)(iv) in response to CME's comment. Although Section 5b(i)(2)(E) of the CEA requires a CCO to ``ensure'' compliance, the Commission agrees that a CCO cannot fully guarantee compliance because, as a practical matter,

he or she will have to rely to some extent on information provided by other DCO employees or representatives of the DCO's service providers. Accordingly, Sec. 39.10(c)(2)(iv) is being modified to include as a duty of the CCO, ``[t]aking reasonable steps to ensure compliance with the Act and Commission regulations * * * '' (added text in italics). The Commission believes that this revision addresses CME's concern while retaining the emphasis on the CCO's actions rather than focusing on the nature of measures put in place by the CCO.”

CFTC Final Rule on Derivatives Clearing Organization General Provisions and Core Principles, 76 FR 216 (November 8, 2011) (“CFTC DCO Rules”).

 Separation from legal

1. “Section 37.1501(b)(2) also requires that a CCO not serve as general counsel of a SEF. This prohibition reflects the Commission’s belief that granting these dual roles to a single individual is incompatible with effective regulation and self-regulation.”

FN. “As conceived by the Commission, SEF CCOs have overall responsibility for SEF’s compliance programs. CCOs must be neutral fact-finders, and must be able to act in the interest of effective compliance regardless of the persons, entities, or conduct that may be the subject of investigation. In contrast, an entity’s general counsel serves as the legal counsel and defender of a company and seeks to avoid or negate related legal risks. A second basis for the separation of the general counsel and CCO roles is the [CFTC’s] determination that an individual acting as CCO should not be in a position to assert attorney-client privilege against the [CFTC]. If a SEF’s CCO were also its general counsel, much of the information about its

compliance program could potentially be protected from third-party review, including the Commission’s, under the shroud of attorney-client privilege. While there may be circumstances where the attorney-client privilege could be asserted by a SEF, the Commission believes that such circumstances do not include the areas of responsibility assigned to CCOs by the CEA or Commission regulations.” CFTC Proposed SEF Rules, pp. 73-74, FN 103.

2. “The Commission has considered prohibiting a CCO from working in the DCO's legal department or serving as general counsel, consistent with the Commission's approach to the CCO of an SDR….However, in response to public comments and in light of the fact that all currently registered DCOs have some form of compliance program already in place, with one or more staff members assigned to carry out compliance officer functions, the Commission has determined that the potential costs of hiring additional staff to satisfy such requirement could result in imposing an unnecessary burden on DCOs, particularly smaller ones. The Commission recognizes,

however, that a conflict of interest could compromise a CCO's ability to effectively fulfill his or her responsibilities as a CCO. The Commission therefore expects that as soon as any conflict of interest becomes apparent, a DCO would immediately implement a back-up plan for reassignment or other measures to address the conflict and ensure that the CCO's duties can be performed without compromise.” CFTC DCO Rules, at 69341. 3. “The role of the chief compliance (and ethics) officer is currently a hot, if confused topic. What does she do — ensure good process or enforce strict compliance? To whom does she report — GC/ CFO or to CEO/board? What is her role in shaping the company’s voluntary adoption of ethical standards — beyond what the law requires?

This issue has been thrust into high relief by regulators and enforcers who, in light of various scandals, want a more independent compliance function in corporations…Let me offer a somewhat contrarian, more nuanced view about the critical importance of a chief compliance officer, but in a right-sized role… It is ludicrous to suggest, as some do, that the GC only worries about what is “legal” and the chief compliance officer worries about what is “right.” The “what-is-right” set of issues is at the center of the role of the modern, broad-gauged general counsel as wise counselor and leader….

Compliance IS a core GC job. At the dead center of the GC…job is responsibility for adherence to the formal and ethical rules binding the company. They must be partners to the CEO, but first and foremost they must be guardians of the company on the three essentials of compliance: prevent, detect, and respond…

The main objection to the position I am advocating is expressed in one phrase: lack of independence. At headquarters, the GC and CFO will be compromised by their relationship to the CEO, and their fear of losing unvested options or restricted stock units or deferred compensation. Down in the organization, division lawyers or finance people will be afraid to speak candidly to their business leaders and afraid to report up to the company GC or CFO….

The short response to this objection is one word: culture. In a good company — a company with a high-performance, high-integrity culture — the CEO leads personally and directly on integrity and, with the board‘s explicit support, makes clear that she wants the GC and CFO to be rigorous and candid on issues of legal, financial, and ethical rules. Creation of such a culture turns on top leadership, not on the chief compliance officer…

In a bad company, with a poor culture, a distant board and an indifferent CEO (or worse), independent voices — whether from a chief compliance officer or the GC/CFO — will be muffled and discouraged. Neither a general counsel nor an independent chief compliance officer can change a bad environment, which deeply affects how people feel, think, and act. If tone at the top is rot at the top, then little can be done without the CEO or board being removed. Indeed, the misguided (in my view) enforcement thrust for a CCO wholly independent of the GC and CFO has

stemmed from major scandals caused by senior

leadership’s unlawful, unethical, or negligent behavior and by board indifference or negligence. If the GCs (or CFOs) were complicit or negligent, enforcers should press for their replacement, not for supplanting them.”

From “Don’t Divorce the GC and Compliance Officer,” Benjamin W. Heineman, former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government, Harvard Law School Program on Corporate Governance and Program on the Legal Profession, December 26, 2010.

V. Jurisdictional Reach o Extraterritoriality:

“(i) APPLICABILITY.—The provisions of this Title relating to swaps that were enacted by the Wall Street Transparency and Accountability Act of 2010 (including any rule prescribed or regulation promulgated under that Act), shall not apply to activities outside the United States unless those activities—

(1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or

(2) contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of this Title that was enacted by the Wall Street Transparency and Accountability Act of 2010.” Section 2(i) of the CEA.

o Swaps subject to mandatory clearing, but traded outside the U.S. by two non-U.S. parties?

o Non-U.S. swaps traded between a U.S. bank and a non-U.S. firm on a European platform?

o Enforcement mechanism? VI. Organizational Challenges

o Transforming an arms-length customer relationship into a self-regulatory “membership” environment;

o How many SEFs should I have?

o What is my SEF and what are its assets – People? Technology? Rulebook? o Training brokers – handling change, complex decision making in real

Paul M. Architzel is a partner in the Securities Department, Chair of the Derivatives and Futures Practice Group and a member of the Broker-Dealer Compliance and Regulation Group. Mr. Architzel advises firm clients on compliance with the recent regulatory reform mandates of the swaps and derivatives markets.

Mr. Architzel’s practice focuses on all areas of futures regulation, including the regulation of commodity pools and commodity trading advisors, and the regulation of futures exchanges, derivatives clearing organizations and futures commission merchants. He is an expert on issues involving the listed derivatives markets, the clearing and trading of OTC derivatives, end-user market participation and cross-border access issues. He also handles complex matters that involve the overlapping jurisdiction of securities and futures regulations, as well as compliance issues facing hedge funds and commodity pools. Mr. Architzel has practiced actively before the Commodity Futures Trading Commission (CFTC) as well as the Securities and Exchange Commission (SEC), and is a frequent speaker at futures and derivatives industry conferences. Before entering private practice, Mr. Architzel served as Chief Counsel of the Division of Economic Analysis, now the Division of Market Oversight, at the CFTC for more than 20 years, and was the chief architect of the Core Principle framework for futures market regulation codified by the Commodity Futures Modernization Act of 2000 (CFMA). He also wrote the CFTC’s rules for regulated and exempt markets. Mr. Architzel also spent several years as the in- house chief US regulatory counsel for Eurex Frankfurt AG, a global derivatives/futures exchange and clearinghouse. Mr. Architzel is an adjunct professor of law in the Securities and Financial Regulation LLM program at Georgetown University Law Center where he teaches Futures Regulation and the Commodity Exchange Act.

Chris Bowen

Managing Director, Chief Regulatory Counsel

Chris Bowen has served as Managing Director, Chief Regulatory Counsel of CME Group since September 2009. He is responsible for overseeing CME Group’s domestic and international regulatory activities, including the development of new regulatory initiatives to support CME Clearing Europe. Prior to assuming his current role with the company, Bowen served as General Counsel and Chief Administrative Officer of NYMEX.

During his 15-year NYMEX tenure, Bowen held a number of key positions including Senior Vice President and General Counsel and Associate General Counsel. He was instrumental in transitioning NYMEX to a public company and in building the NYMEX regulatory practice, as well as developing key strategic business partnerships including the Dubai Mercantile Exchange. He also held legal and regulatory roles with Morgan Stanley & Co. and the CFTC Division of Trading and Markets.

Bowen holds a bachelor’s degree in political science from Columbia University and a J.D. from the University of Maryland School of Law. He is a member of the Committee on Futures Regulation of the New York City Bar Association.

Ronald S. Oppenheimer

Senior Vice President and General Counsel Vitol Inc.

As General Counsel, Ron is responsible for the oversight of all legal and regulatory affairs for Vitol Inc.’s business.

Prior to joining Vitol Inc., Ron served as First Vice President and General Counsel for Merrill Lynch Global Commodities and before that, as General Counsel for several other divisions of Merrill Lynch, including Global Equity Financing and Services, Direct Markets, and Futures and Options. His professional experience also includes serving as Executive Vice President and General Counsel of the New York Mercantile Exchange, as an associate at Skadden, Arps, Slate, Meagher and Flom, and as a senior trial attorney for the Commodity Futures Trading Commission.

Ron is a member of the Board of Directors of the National Futures Association and a member of the Business Conduct Committee of the Intercontinental Exchange. He has