November 17, 2010

Via Electronic Mail: dcodcmsefGovernance@cftc.gov

David A. Stawick
Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington DC 20581

Re: Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and
Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest

Dear Mr. Stawick:

Managed Funds Association (“MFA”)1 appreciates the opportunity to provide comments to the
Commodity Futures Trading Commission (the “Commission”) on its proposed rule related to
“Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap
Execution Facilities Regarding the Mitigation of Conflicts of Interest” (the “Proposed Rule”).2

MFA supports the Commission’s efforts to ensure that key instruments for market reform –
designated clearing organizations (“DCOs”), designated contracts markets (“DCMs”) and swap execution
facilities (“SEFs”) – are governed in a manner that prevents conflicts of interest from undermining the
Commission’s mission “to reduce risk, increase transparency and promote market integrity within the
financial system”.3 We very much appreciate the Commission’s detailed appraisal of market concerns
reflected in the Proposed Rule Release and believe that the Proposed Rule is a critical step towards
mitigating conflicts of interest at DCOs, DCMs and SEFs while preserving their competitiveness and
ability to provide the best possible services to the markets. As set out below, however, we believe that to
enhance the efficacy of the Proposed Rule and to strike the optimal balance between safe risk
management and comparative efficiency, the Proposed Rule should incorporate certain additional criteria.

In this spirit, we offer comments that we believe would strengthen the Proposed Rule and help
the Commission to achieve the goals set forth in the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”).

1
MFA is the voice of the global alternative investment industry. Its members are professionals in hedge
funds, funds of funds and managed futures funds, as well as industry service providers. Established in 1991, MFA is
the primary source of information for policy makers and the media and the leading advocate for sound business
practices and industry growth. MFA members include the vast majority of the largest hedge fund groups in the
world who manage a substantial portion of the approximately $1.5 trillion invested in absolute return strategies.
MFA is headquartered in Washington, D.C., with an office in New York.
2
75 Fed. Reg. 63732 (Oct. 18, 2010) (the “Proposed Rule Release”)
3
Id. at 63732.
Mr. Stawick
November 17, 2010
Page 2 of 6

I. Conflicts and Concerns

We believe that in the Proposed Rule Release, the Commission correctly identified certain key
potential conflicts of interest that a DCO, DCM or SEF may confront as well as the effects on such DCO,
DCM or SEF’s operations. However, below are additional conflicts and concerns that we believe are also
essential for the Commission to take into account prior to adopting a final rule.4

Incentives to Restrict Expansion or Efficiency of Swaps Clearing. The Proposed Rule Release
recognizes that enumerated entities5 have “economic incentives to minimize the number of swap contracts
subject to mandatory clearing and trading.”6 Such economic incentives could manifest themselves not
only in a more limited product expansion for cleared swaps, but also in the costs associated with clearing
swaps relative to bilateral settlement.

From the customers’ perspective, if the cost of clearing swaps that are not subject to mandatory
clearing but which may be clearable is materially higher than transacting bilaterally, economic
considerations or fiduciary obligations may prohibit such customers from clearing such clearable swaps,
and this in turn will delay the expansion of clearing to the full eligible product set. DCO governance
determines or influences the key costs of clearing – including the margin requirements of the DCO and
the capital and other requirements for direct clearing membership that in turn both affect clearing member
costs and enable or limit clearing membership access. Given that DCO governance is integral to fostering
competition and determining the costs charged to customers by DCOs and indirectly the further charges
by clearing members to their customers for cleared products, we request that as the Commission considers
this Proposed Rule, it seek to impose governance requirements that will encourage fair pricing of products
that are not subject to mandatory clearing but which may be clearable, as well products that are required
to be cleared.

Additional Decisions that Impact Clearing and Execution Expansion and Efficiency. Attached as
Annex 1 is a partial list of material features of swaps clearing and execution that are subject to decision
by the Boards and committees of DCOs, DCMs and SEFs. The outcomes of those decisions could have a
significant impact on clearing, execution, transparency and competition, as well as on cost and liquidity of
cleared swaps. Because of the potential materiality of these decisions, we believe that balanced
governance is essential to ensuring that these decisions are not the product of imbalanced representation
on Boards and committees of DCOs, DCMs and SEFs.

II. Recommendations

In consideration of the above, we offer specific recommendations that we believe would

4
Id. at 63737, where the Commission asks for input on other conflicts of interest that may exist and the
effects of such conflicts.
5
Id. at 63732, which defines “enumerated entities” to include: (i) Bank holding companies with over
$50,000,000,000 in total consolidated assets; (ii) a nonbank financial company supervised by the Board of
Governors of the Federal Reserve System; (iii) an affiliate of (i) or (ii); (iv) a swap dealer; (v) a major swap
participant; or (vi) an associated person of (iv) or (v).
6
Id. at 63734.
Mr. Stawick
November 17, 2010
Page 3 of 6

A. Structural Governance Recommendations

Composition of DCO, DCM and SEF Boards and Committees. We agree with the Commission
that there needs to be fair representation in governance of DCOs, DCMs and SEFs to maintain
impartiality.7 We believe that the Proposed Rule makes progress towards fulfilling this goal by requiring
that public directors have representation on each DCO, DCM and SEF’s Board and committees and by
requiring that customers have representation on each DCO’s risk management committee, which we
strongly support. We believe, however, that to completely effectuate fair representation and balanced
governance, no group should constitute a controlling majority. In particular, we believe that it is critical
that the Commission impose requirements that affirmatively limit the representation of clearing members
on Boards and committees to a percentage that is less than what would constitute control under the
corporate constitutive documents applicable for the relevant Board or committee.

Moreover, we respectfully request that the Commission eliminate the restriction in the Proposed
Rule that would prevent employees or officers of a DCO from being members of such DCO’s risk
management committee or similar governance bodies. The interests of a DCO’s employees and officers
are aligned with such DCO’s interests because such employees and officers would be motivated: (i) to
expand the scope of DCO products and services, (ii) offer optimal capital, margin and cost management,
and (iii) maintain DCO risk management boundaries that prevent losses to the DCO, its members and the
markets.

Establishing that clearing members cannot independently control risk management committees or
similar governance bodies, and that decisions are taken by a plurality of public directors, customers, DCO
officers and employees, as well as clearing members, will help ensure that key decisions result from
objective, risk-based criteria intended to the enhance the DCO’s business and its ongoing safety and
soundness.

Expressly Impose Fiduciary Obligation on Board Members. While we think it is implicit that all
members of the Board of a DCO, DCM or SEF have a fiduciary duty to such registered entity,8 we
believe that the Commission should make this an express obligation. Such a fiduciary duty would
reinforce the alignment of interests between the Board members and the registered entity that would help
to mitigate the conflicts of interest at issue in the Proposed Rule Release.

Availability of DCO, DCM and SEF Corporate Documents. As mentioned in the Proposed Rule
Release, one of the goals of the Dodd-Frank Act was to increase transparency.9 As a result, we
recommend that the Commission require DCOs, DCMs and SEFs to provide to the Commission detailed
minutes of all Board, committee and subcommittee meetings, subject to the Commission providing
appropriate protections to avoid public disclosure and preserve the confidentiality of sensitive commercial
information. We believe this mandated transparency is essential for the Commission to have the
information necessary to properly oversee these registered entities.

7
Id. at 63740.
8
Securities and Exchange Commission Release No. 34- 63107; File No. S7-27-10 “Ownership Limitations
and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution
Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC”
(October 26, 2010) (the “SEC Proposed Rule”), at 24, acknowledging the existence of such fiduciary duty.
9
Proposed Rule Release at 63742.
Mr. Stawick
November 17, 2010
Page 4 of 6

In addition, we believe that the Commission’s final rule should compel DCOs, DCMs and SEFs
to make publicly available all Board and committee charters, procedural rules and similar documents as
well as the identities of Board and committee members. Publication will permit monitoring of conflicts
of interest. Also, since clearing will affect many market participants that will not have direct participation
on the Boards or committees of DCOs, DCMs or SEFs, we believe that they have a strong interest in
having this information be widely accessible.

Anti-Avoidance. We note that while currently the risk management committees are the key
governance bodies at a number of DCOs, DCMs and SEFs, such entities may also vest the authority of
such risk management committees in one or more other committees or subcommittees (for example, SEF
participation committees). We would ask that the Commission draft the final rule so that it is both
flexible and comprehensive enough to ensure that it effectively mitigates conflicts of interest as intended
by the Commission and described herein, regardless of the actual Board, committee and/or subcommittee
structure established at each DCO, DCM or SEF. Similarly, several DCOs have advisory committees
comprised of customer representatives. While these committees have been a useful source of advice and
expertise to the DCOs, they typically do not have any decisional authority and should not be used as a
substitute for the 10% customer representation and other conflict mitigation requirements set out in the
Proposed Rule or described herein. Finally, in this context we support the provisions of the Proposed
Rule that require reporting to the Commission in any instance where a governance entity (e.g., Board or
risk management committee) is obliged to overrule the recommendation of a subcommittee or other
recommending body.10

B. Ownership Recommendations

DCO Ownership Restrictions. We support the Commission’s proposed “First Alternative” for
limiting ownership of voting equity and the exercise of voting rights at DCOs. We believe that the First
Alternative, which has both a single-member limit and an aggregate limit, is consistent with the
Commission’s goal of “introducing a perspective independent of competitive, commercial, or industry
considerations to the deliberations of governing bodies”11 and ensuring that clearing members do not have
sole control of DCOs or an overriding profit sharing motivation to support one DCO at the expense of
another. However, unlike the First Alternative, the Commission’s proposed “Second Alternative” does
not include an aggregate limit on ownership or voting control. Without an aggregate limit, we think the
Second Alternative does not adequately address the control and profit sharing concerns that are
motivating the Proposed Rule. Therefore, we recommend that the Commission either eliminate the
proposed Second Alternative or revise it so that it also includes an aggregate limit.

In addition, we concur that “circumstances may exist where neither alternative may be
appropriate”,12 and therefore, we do not object to the Proposed Rule’s waiver procedure. In practice, we
believe that the Commission should grant waivers sparingly and only after a full assessment of the
potential impact of the related conflicts of interest on the DCO, the clearing regime and the financial
markets.

DCM and SEF Ownership Restrictions. We support the need to encourage establishment of
DCMs and SEFs so that the enhanced clearing regime is effective; and we believe that competition
between DCMs and SEFs is critical for development or a sound market. As a result, we are concerned
10
Id. at 63741.
11
Id. at 63742.
12
Id. at 63743.
Mr. Stawick
November 17, 2010
Page 5 of 6

that ownership and/or control of a DCM or SEF by a group of clearing members could result in a
concentration of liquidity on one platform, to the detriment of healthy competition. Therefore, we request
that the Commission consider whether ownership restrictions could be appropriate in certain instances.
Regardless of whether the Commission imposes ownership restrictions on DCMs and SEFs, we believe
that the structural governance requirements recommended above are essential to prevent founding owners
from, inter alia, establishing anti-competitive incentives for market participants to direct liquidity to a
single venue or preclude access to competing providers of liquidity.

III. Consistency of Commission and SEC Rules

We recognize that, unlike in other areas of Title VII, the Dodd-Frank Act does not require the
Commission jointly to adopt rules with the Securities and Exchange Commission (“SEC”) with respect to
requirements for DCOs, DCMs and SEFs.13 However, we believe that many of the key clearing entities
will be subject to regulation by both the Commission and the SEC. In addition, we believe that the
language in Sections 726 and 765 of the Dodd-Frank Act is nearly identical because Congress intended
for the related rulemakings to be as symmetrical as possible. Therefore, we strongly recommend that the
Commission coordinate and reconcile the Proposed Rule with the SEC Proposed Rule to ensure, to the
extent possible, consistency of treatment for clearing and execution of swaps and security-based swaps.

****************************

MFA appreciates the opportunity to comment on the Commission’s Proposed Rule. If the
Commission or its staff has questions, please do not hesitate to call Carlotta King or the undersigned at
(202) 367-1140.

Respectfully submitted,

/s/ Stuart J. Kaswell

Stuart J. Kaswell
Executive Vice President, Managing Director & General
Counsel

CC: The Hon. Gary Gensler, CFTC Chairman

13
The SEC’s Proposed Rule refers to these entities as security-based swap clearing agencies, security-based
swap execution facilities and national securities exchanges.
Mr. Stawick
November 17, 2010
Page 6 of 6

Annex 1 – Additional DCO, DCM and SEF Governance Decisions that Impact Clearing and
Execution Expansion and Efficiency

• Contract Structure – Is the relationship to the clearing member one of principle-to-principle versus
agency? What is the comparative cost or documentation burden of one or the other? Does the
contract or the relationship to the clearing member permit close-out or transfer or netting of a position
freely, or is there a requirement to seek the clearing member’s consent or pay an unwind fee? Does
the contract or associated trade flow require the use of third party services? If so do these services
require additional fees?

• Portability – Are positions held through one clearing member freely portable, absent the default of the
original clearing member, to another clearing member? Is partial portability of a portfolio permitted,
or must it be the complete portfolio?

• Straight-Through-Processing – Is a trade once executed immediately accepted or rejected for clearing,

• Four-Way Execution – Can trades executed between a customer and an executing broker that is not a
direct clearing member be accepted for clearing? Immediately, or with delay?

• Anonymity – If a trade is executed with a broker that is not a direct clearing member, does the
executing broker’s identity remain anonymous to the customer’s clearing member?

• Transparency – Are end-of-day settlement prices published? Is there a charge to view them when
published? Are intra-day execution prices available?

• Suitability for Electronic Trading – Is the design of the cleared instrument or its trade processing
flows suitable for electronic trading? Are there barriers to electronic trading?

• Execution Format – On a DCM or SEF, what is the price discovery format? Are binding prices
displayed? Who is permitted to transact with whom? Are there restrictions on customers’ access to
liquidity providers’ quotes? Are interactions anonymous or disclosed?