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SPEECHES & TESTIMONY

  • Remarks of Chairman J. Christopher Giancarlo before the Market Risk Advisory Committee Meeting

    January 31, 2018

    Thank you, Commissioner (Rostin) Behnam.

    Good morning, everyone. A warm welcome to all of the Market Risk Advisory Committee (MRAC) Committee members, presenters and participants, both here and on the telephone. It is good to have you all with us.

    This is the first time my new fellow Commissioners and I are appearing together in an official capacity at the agency. It is very good to be with Commissioners (Brian) Quintenz and (Rostin) Behnam. Hopefully, the three of us will have additional company this year.

    Today, we’ll continue the CFTC’s history of thoughtful and thought-provoking advisory Committee hearings under the new Commission.

    We had hoped to kick off that continuation last week with a Technology Advisory Committee (TAC) Committee hearing. It is unfortunate that the meeting had to be rescheduled. Commissioner Quintenz, Daniel Gorfine, and the TAC members have done a lot of preparation. Nevertheless, it will be a great program when it takes place in the next few weeks. Don’t miss it.

    Our other advisory Committees: the Agriculture Advisory Committee (Ag), the Energy and Environmental Markets Advisory Committee (EEMAC) and the Global Markets Advisory Committee (GMAC) will also have scheduled meetings in the months to come.

    But today, we kick off the year with MRAC. As you know, this committee was very active and effective under former Commissioner (Sharon) Bowen. No doubt, such quality work will continue under Commissioner Behnam, Designated Federal Officer Alicia Lewis, and the Committee members.

    Today MRAC will discuss the product self-certification process under Part 40 of the Commission’s regulations. It looks like a great agenda.

    Two weeks ago I had the honor to speak at the annual conference of the ABA Section on Derivatives and Futures Law. I discussed derivatives on virtual currencies and the appropriateness of requirements under CFTC regulations for the review of such products. As you are all aware, Designated Contract Markets (DCMs) must comply on an ongoing basis with 23 core principles, and Core Principle 3 requires that contracts must not be readily susceptible to manipulation.

    I spoke about the “Review and Compliance Checklist” that the CFTC staff deploys to ensure:

    • that self-certified virtual currency futures products and their cash-settlement processes are not readily susceptible to manipulation, and
    • that virtual currency derivatives products are sufficiently margined.

    I also said that I was neither an apologist nor an opponent of the current process of self-certification. Rather, I - alongside my fellow commissioners – have inherited the process. And we are not the first Commission to have a conversation about the right balance of interests for the self-certification process, as that conversation predates virtual currencies.1

    I also said that it is quite clear that Congress and prior Commissions designed the product self-certification framework to give the DCMs, in their role as self-regulatory organizations, the ability to design and certify new products. Congress deliberately framed the self-certification process so that development of derivatives products would not be hampered by cautious regulators wary of the political risks of approving new products. I went on to say that the CFTC’s current product self-certification framework is consistent with public policy that encourages market-driven innovation that has made America’s listed futures markets the envy of the world.

    A week after the ABA conference, I met in Washington with a senior European markets regulator to discuss a range of topics. Unprompted, he brought up the CFTC’s self-certification process and said that it was the reason why almost all new financial products originated out of the United States.2 It stuck me that sometimes it helps to be reminded of our advantages by those that don’t enjoy them.

    That is not to say that existing processes should not be analyzed and, where appropriate, improved. At the ABA conference, I noted criticism from some market participants that the CFTC did not hold public hearings prior to self-certification of Bitcoin futures.  I pointed out that, unlike provisions in the Commodity Exchange Act (CEA) and Commission regulations for rule self-certifications that provide for a public comment period,3 there is no avenue for public input into CFTC staff review of product self-certifications in the CEA or Commission regulations.4 It is hard to believe that Congress was not deliberate in making that distinction.

    In fact, it is DCMs and Designated Clearing Organizations (DCOs) - and not CFTC staff - that must solicit and address stakeholder concerns in new product self-certifications. Interested parties, especially clearing members, should indeed have an opportunity to raise appropriate concerns for consideration by regulated platforms proposing virtual currency derivatives and DCOs considering clearing new virtual currency products.

    That is why I have asked CFTC staff to add an additional element to its Review and Compliance Checklist for virtual currency product self-certifications. That is requiring DCMs and Swaps Execution Facilities (SEFs) to disclose to CFTC staff what steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and Future Commission Merchants (FCMs). Further, I have asked staff to take a close look at DCO governance around the clearing of new virtual currency products and formulate recommendations for possible further action. There may well be other improvements to consider.

    In closing, I believe the issues raised by self-certification of virtual currency futures are: (a) the degree of responsibility of DCMs under the CEA and Commission regulations to ensure that virtual currency derivatives are not readily susceptible to manipulation given the nascent state of this emerging asset class and (b) the degree of responsibility of a DCOs under the CEA and Commission regulations to ensure that virtual currency derivatives are sufficiently margined.

    I look forward to your discussion of these important issues. It is timely. We see what is on the horizon. We must be prepared and responsible. The present is prelude to the future. As we confront the challenges ahead, we will look to the thoughtful discussions of advisory committees like yours.

    And, again, Commissioner Behnam, thank you for organizing this meeting. Thank you all for attending.

    ####

    1 See 71 Fed. Reg. 1953, 1956 (Jan. 12, 2006) (discussing the need to balance the flexibility Congress gave DCMs in being able to self-certify new products quickly against the obligations of the DCM and the Commission to assure themselves that the certification is accurate, and noting that it is not the intention of the Commission or its staff to inject a chilling effect into the self-certification process).

    2 Prior to the changes made in the Commodity Futures Modernization Act of 2000 (CFMA) and the Commission’s subsequent addition of Part 40, exchanges submitted products to the CFTC for approval. From 1922 until the CFMA was signed into law, 793 products were approved. Since then, exchanges have self-certified12,016 products. For financial instrument products specifically, the numbers are 494 products approved and 1,938 self-certified. See http://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm

    3 See Section 5c(c)(3)(C) of the CEA, 7 U.S.C. 7a-2(c)(3)(C), and 17 C.F.R. 40.6(c)(2).

    4 See Section 5c(c)(1) of the CEA, 7 U.S.C. 7a-2(c)(1), and 17 C.F.R 40.2.

    Last Updated: January 31, 2018