March 30, 2017
Prepared for Delivery
Good morning, thank you for that kind introduction. I want to thank David Hirschmann, the US Chamber and the CCMC for inviting me to speak this morning. It is an honor to be with you.
I am an avid supporter of the Center for Capital Markets Competitiveness. The CCMC is one of the few places in Washington that understands the reality that American capital markets are vital US national interests. The CCMC knows that our markets fight a battle every day, in every trade and in every regulation against determined foreign competitors.
We owe our thanks to the CCMC for its valiant defense of free and competitive markets, which - along with the rule of law, voluntary exchange, free enterprise and limited government - provide the underpinnings for broad and sustained prosperity. Thank you again for your warm welcome today.
I will begin this morning with an important announcement:
Assistant US Attorney, James McDonald, of the Southern District of New York, has agreed to become the next Director of Enforcement of the CFTC.
Jamie McDonald has an extraordinary background: undergraduate at Harvard, law school at UVA and law clerk to the Chief Justice at the US Supreme Court. He is an accomplished Federal prosecutor and skilled agent of American law enforcement.
The appointment of Jamie McDonald as CFTC Director of Enforcement is a signal that market enforcement will remain aggressive and assertive under the Trump Administration.
It is a sign to those who may seek to cheat or manipulate U.S. markets that there will be no pause, no let up and no relaxation in the CFTC’s mission to uncover and punish wrongdoing.
But today’s summit is an opportunity for broader reflection. So, let me begin.
We are nearly a decade removed from the financial crisis. Much of the regulatory work in the aftermath of recession and market meltdown has been to implement Congress’ crisis response – the Dodd-Frank Act. Therefore the regulatory approach, both at the CFTC and across the federal government, was in a sense backward looking.
And yet, it has taken too long for many American entrepreneurs to emerge from the recession and borrow, invest and hire again. So much policymaking, rulemaking, and thought have been directed at building a regulatory superstructure ostensibly to prevent another 2008-style crisis that we’ve lost sight of the challenges just ahead of us to formulate the right regulatory response.
There is no denying that the US economy has not rebounded satisfactorily from the financial crisis. Too many Americans have been left out of a tepid recovery that has mainly benefitted those in a few large cities on the East and West coasts.
In the past thirty months as a Commissioner, I have had the good fortune of travelling to almost a dozen and a half states. I have met with producers of a whole range of Ag and energy products and users of our futures and swaps markets. I have also met with workers at grain elevators, cooperatives, factories, exchanges and futures commission merchants who serve American producers.
I have come away from many of these meetings with the sense that everyday Americans are convinced that Washington politicians and bureaucrats have gotten in their way of earning a living. They want the burdens removed so that they can build their dreams again.
That is why November’s election was so significant: Americans voted for a change in the direction of the country, a change back toward economic growth and broad based prosperity
And American derivatives markets regulated by the CFTC have a role to play to renew economic growth.
As the CCMC knows, derivative markets provide the means by which risks of variable production costs, such as the price of raw materials, energy, foreign currency and interest rates, can be transferred from those who cannot afford them to those that can. They play an essential role in pricing risk and transferring it in efficient ways.
Derivatives enable banks to increase business lending and economic investment. They serve the needs of society to help moderate price, supply and other commercial risks to free up capital for economic growth, job creation and prosperity.
Yet today, America’s derivatives markets are struggling, in some cases, under the weight of flawed and excessive regulation. Our markets today are more fragmented, more concentrated, less liquid and less supportive of economic growth and renewal than in the past. The overly prescriptive regulation of American derivative markets is part and parcel of the over-regulation of the US economy that thwarts revival of American prosperity.
The American people have entrusted the Trump Administration to turn the tide of over-regulation. Accordingly, financial market regulators, like the CFTC, must pursue their missions to foster open, transparent, competitive and financially sound markets in ways that best foster American economic growth and prosperity.
The time has come for our financial markets – and the efforts of those who regulate them – to be put more fully into the service of American economic recovery.
Two weeks ago in a speech to the Futures Industry Association1, I said that the CFTC must reinterpret its regulatory mission consistent with the goals of the Trump Administration through a new three-part agenda:
In my remarks, I laid out a number of agency initiatives in advancing this new agenda that I want to talk to you about today. Namely:
1. Reducing regulatory burdens
2. Fixing flawed swaps trading rules
3. Working more effectively with overseas regulators
4. Right-sizing our regulatory footprint
1. Reduce Regulatory Burdens
Let’s start with regulatory burdens.
On February 24, 2017, President Trump issued an executive order furthering his regulatory reform agenda to stimulate economic revival. To achieve it, our first step is to reduce excessive regulatory burdens.
The President’s executive order directs federal agencies to designate a Regulatory Reform Officer and establish a Regulatory Reform Task Force. Accordingly, I recently announced the launch of a new agency initiative.
The initiative is Project KISS. It stands for “Keep It Simple Stupid”. It is an agency-wide review of CFTC rules, regulations and practices to make them simpler, less burdensome and less costly.
I have designated my chief of staff, Mike Gill, as Regulatory Reform Officer. He is leading Project KISS and directing our task force inside the CFTC. Pursuant to the president’s order, we will review ALL CFTC rules in our quest to reduce regulatory burdens and costs for participants in the markets we oversee.
In addition, Project KISS will soon issue a call for recommendations from the public to make our existing regulations simpler, less burdensome and less costly. We look forward to receiving sensible recommendations that we can look to implement.
Now, I want to be clear. Project KISS is NOT about identifying rules for repeal or even rewrite. What it IS about is taking our existing rules as they are and applying them in ways that are simpler, less burdensome and less of a drag on the economy.
2. Fix Flawed Swaps Rules
Another step in reducing regulatory burdens while encouraging healthy markets is fixing the CFTC flawed swaps trading rules.
Two years ago, I published a white paper that analyzed flaws in the CFTC’s implementation of its swaps trading regulatory framework under Title VII of Dodd-Frank. It explained the fundamental mismatch between the CFTC’s swaps trading framework and the distinct liquidity, trading and market structure characteristics of the global swaps market. It argued that the CFTC’s current approach is highly over-engineered, disproportionately modeled on the US futures market and biased against both human discretion and technological innovation.
As predicted, the CFTC’s flawed swaps trading implementation has caused numerous harms, foremost of which is driving global market participants away from transacting with entities subject to CFTC swaps regulation. It has fragmented global markets into a series of distinct liquidity pools that are less resilient to market shocks and less supportive of global economic growth. It has unnecessarily impeded banks’ financial risk hedging activities necessary for healthy extension of credit to the private sector.
The CFTC must move forward with a better regulatory framework for swaps trading. It must allow market participants to choose the manner of trade execution best suited to their swaps trading and liquidity needs and not have it chosen for them by the federal government. Our regulatory framework must help to attract, rather than repel, global capital to US trading markets. It must better align regulatory oversight with inherent swaps market dynamics. Most importantly, it must facilitate risk transfer in support of increased commercial lending and American economic revival.
3. Work More Effectively with Regulatory Counterparts
That leads to the next opportunity to spur US growth and job creation: projecting American leadership here and abroad to make US markets more attractive to global capital. It starts with working more effectively with our international regulatory counterparts.
As you know, the US played a leading role in formulating the reforms to the global swaps markets adopted at the 2009 G-20 Leaders’ Summit in Pittsburgh. Congress adopted most of these reforms in Title VII of the Dodd-Frank Act. The CFTC has been in the forefront, both domestically and internationally, in implementing the swaps reforms.
I am not aware of any significant proposal in the current Congress or from the Administration to repeal Title VII outright, nor do I advocate it. Thus, I expect that the CFTC will continue to serve as the lead overseer of US implementation of the swaps market reforms set out in Pittsburgh.
Similarly, I expect that the CFTC will fully embrace the Trump Administration’s executive order to advance American interests in international financial regulatory negotiations and meetings. This means the CFTC must be an active participant in international bodies to pursue policies that are most beneficial for American markets.
We must use our strong influence in global standard-setting bodies to ensure that capital rules set by international bodies do not hinder strong economic growth.
I believe that the amount of capital that financial institutions are compelled by regulators to take out of trading markets should be calibrated to the amount of capital needed to be kept in markets to support increased commercial lending and the overall health and durability of US financial markets.
The time has come to recalibrate bank capital requirements to better balance systemic risk concerns with healthy economic growth and American prosperity. In addition to the international arena, the CFTC will use its membership on the Financial Stability Oversight Council to advocate for this objective.
By seeking to work more effectively with our regulatory counterparts while looking out for American interests, we are dedicated to making sure American markets remain highly effective places to trade.
Our approach to regulation should never be based on a crude measure of the quantity of regulation, but the quality of regulation and oversight.
American capital and risk transfer markets should be neither the least nor the most prescriptively regulated – but the BEST regulated, balancing market oversight, health and vitality.
4. Normalizing the CFTC after Dodd-Frank
Now, let’s take a closer look at the agency itself.
For the past six years, the CFTC has operated at a breakneck pace driven by Dodd-Frank’s mandate for swift rule implementation on swaps. That mandate was the justification for a considerable amount of expediency in rule adoption and agency operation and process.
The era of Dodd-Frank implementation at the CFTC is now drawing to a close. It is time to resume normalized operations and practices. That means a return to greater care and precision in rule drafting, more thorough econometric analysis, less contracted time frames for public comment and a reduced docket of new rules and regulations to be absorbed by the marketplace. It also means that the CFTC will embrace President Trump’s directive that each federal agency minimize the costs borne by their regulation.
Normalizing operations at the CFTC also means resetting its focus on its core mission: fostering open, transparent, competitive and financially sound markets for the trading of derivatives. That means streamlining the fine work of our divisions that oversee markets, intermediaries and market participants.
It also means being realistic about our agency budget and Congressional appropriations. We must run a tighter ship operationally.
In January, I have launched a comprehensive budget and spending review as the first step prior to engaging with the White House and Congressional appropriators over future agency funding. Before we can ask the people’s representatives for more of our citizen’s hard-earned dollars, we must first know where we’re spending every nickel and dime and how we might manage to save a few.
I bring to the task experience as a former senior executive of a publicly-traded company. In business, everything we did – every expenditure and every investment -- had to contribute to shareholder value. The P&L was our scorecard and it didn’t lie. You were either adding value to the enterprise or you were looking for another line of work.
In government it is not so simple – there are no quarterly earnings statements. And, the shareholders only get to vote every four years, not every day through the purchase and sale of company shares.
Nevertheless, I intend to utilize managerial skill and business experience to bring best operational practices from the private sector to the CFTC. Our budget review has already identified several areas in which the agency can run more efficiently. We are looking for more.
Our message is a willingness to do more with what we have. The tighter we run the ship, the greater will be the trust placed in the CFTC by our Congressional overseers and US taxpayers, who are our ultimate shareholders.
Many Americans have done more with what they have these past eight years. So can regulators.
So, in summary, risk transfer markets regulated by the CFTC allow variable costs such as interest rates to be shifted from those who can’t afford to bear them to those who can. From the farmer in the Midwest to lenders on Main Street and, indeed, Wall Street, derivatives are essential to economic growth and investment.
Flourishing capital markets are the answer to US and global economic woes, not diminished trading and risk transfer. We must foster safe, sound and vibrant global markets for investment and risk management to stimulate greater job creation and broad-based prosperity.
The American people elected President Trump to turn the tide of over-regulation. Financial market regulators, like the CFTC, must pursue their missions in ways that best foster American economic renewal.
In that spirit, the CFTC must interpret its regulatory mission by pursuing a three-part agenda: contributing to American economic growth, enhancing US financial markets, and rationalizing our regulatory footprint.
In drawing to a close, I reflect on the fact that we Americans are and have always been an aspirational people. Whether our families arrived in this country seven generations ago, seven years ago or seven weeks ago -- and in whatever circumstances they may have come -- they came with hopes and dreams for a better life.
Today, whatever our political point of view, we Americans still seek a brighter and more prosperous future for our families and ourselves.
In January, we witnessed a new beginning for our country and a renewed promise for broad-based economic growth.
This is a time to redouble our efforts to rebuild American prosperity:
1 “CFTC: A New Direction Forward,” Remarks of Acting Chairman J. Christopher Giancarlo, at 42nd Annual International Futures Industry Conference, Boca Raton, FL, March 15, 2017, at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlos-2.
Last Updated: March 30, 2017