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SPEECHES & TESTIMONY

  • Remarks of Chairman J. Christopher Giancarlo at the Singapore FinTech Festival

    November 15, 2017

    Introduction

    Good morning ladies and gentlemen. Thank you for your kind welcome.

    I want to thank Tim Adams for his kind introduction. I am looking forward to sitting down with him and taking your questions after I give these remarks.

    It is hard to think of a more timely subject than the one that underpins the Singapore FinTech Festival.

    Technology-driven innovation is rapidly changing our world, transforming our markets, and in many respects bringing all of us around the globe closer together.

    I am grateful to have the opportunity to kick off the Conference track on “RegTech” that is a critical subset of FinTech.

    I want to share some of the CFTC’s thinking on how to facilitate market-enhancing innovation and become a more digital, effective, and efficient regulator ourselves.

    For the marketplace and its regulators to benefit from emerging technologies and innovations, however, it will be incumbent on policymakers, regulators, and industry to be open-minded about, and receptive to, applications that foster those market-enhancing advances, while also ensuring market integrity.

    The CFTC has made it a priority to encourage such advances and looks forward to working with all of you in advancing this policy objective.

    21st Century Digital Transformation

    I have frequently spoken over the past year about the ongoing transformation of the world’s trading markets from analog to digital, from human to algorithmic trading and from stand-alone centers to seamless trading webs.1 I have described how market regulation by the CFTC, particularly, and other agencies, generally, has not kept pace with this transformation – at least not so far. And I have noted that such deficiencies run the risk of curtailing the agency’s effectiveness in overseeing the safety and soundness of contemporary markets.

    So much of our world today – from information to music to manufacturing to transportation to commerce2 and, now farming, has undergone a digital transformation.3 And, it should be no surprise to anyone in this audience that our capital, commodity and futures markets are going through the same digital transformation. The electronification of markets over the past 30 to 40 years and the advent of exponential growth in digital technologies have altered trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer.

    Automated trading now constitutes up to 70 percent of regulated futures markets.4 Similarly, automated trading now makes up approximately 80 percent of cash equities markets and 70 percent of foreign exchange spot markets.5 It will continue to dominate trading with new and innovative developments far into the future.6

    These and other emerging technologies and innovations present novel regulatory opportunities, challenges, and risks. They include “big data” capability to enable more sophisticated data analysis and interpretation,7 artificial intelligence to guide highly dynamic trade execution,8 “smart” contracts that value themselves and calculate payments in real-time,9 behavioral biometrics that can detect and combat online fraud,10 blockchain and distributed ledger technologies,11 and, as I will discuss in more detail today, RegTech – or those technologies that can enhance or improve regulatory oversight and industry compliance activities.

    Becoming a 21st Century Regulator: CFTC’s Launch of “LabCFTC”

    In May of this year, our agency was pleased to announce the launch of the LabCFTC initiative.12 In creating LabCFTC, we outlined an agenda designed to ensure that the CFTC would have the ability to keep pace with technological innovation in support of America’s vital national interest in maintaining the world’s deepest and most durable, competitive, and vibrant capital and risk transfer markets in the algorithmic, digital world of the 21st century.

    LabCFTC is the focal point of the CFTC’s efforts to facilitate market-enhancing FinTech innovation and fair competition for the benefit of the American public.13 We have housed this initiative within the CFTC’s Office of the General Counsel. It allows LabCFTC to leverage the expertise of the CFTC’s legal team to manage the interface between technological innovation, regulatory modernization, and existing rules and regulations.

    Indeed, LabCFTC is designed to make the CFTC more accessible to FinTech innovators. It serves as a platform to inform the Commission's understanding of emerging technologies and how they square with current rules.

    Additionally, LabCFTC is an information source for the Commission and the CFTC staff on technology-driven innovation that may influence policy development. LabCFTC will enable the CFTC to identify regulatory opportunities, challenges, and risks as FinTech applications develop and mature.

    LabCFTC will accomplish its mission in three ways: (1) engagement with innovators, whether they are a startup or an established entity; (2) consideration of new technologies, including RegTech, which have the potential to allow the Commission carry out its mission more effectively and efficiently; and (3) collaboration with external organizations, including domestic and international regulators, focused on sharing information and best practices related to FinTech innovation.

    Since its launch a few months ago, LabCFTC has held over 100 meetings with market participants and FinTech innovators, ranging from established financial service firms to start-up companies. CFTC staff have held office hour sessions in New York, Chicago, and Washington D.C. and will be scheduling rolling sessions early next year in Silicon Valley, Austin, and Route 28 outside of Boston.

    LabCFTC also published its first FinTech primer in October on the topic of virtual currencies. The purpose of the primer is to: (1) provide a brief overview of virtual currencies; (2) explain the CFTC’s role in overseeing this space; and (3) educate the public on potential risks. LabCFTC will utilize this communication tool to educate the public, add clarity and provide a high-level roadmap regarding our current thinking.

    Developments in RegTech

    Let me now focus on the topic of today’s track discussion: “RegTech.”

    While definitions vary, some have suggested that RegTech is essentially the use of technology-driven innovation to increase “the effectiveness and the efficiency of [business] compliance” with an increasing number of rules and regulations.14

    Yet, I might extend that definition of RegTech further to also include the ability of a regulator to be more effective and efficient in overseeing its markets. The efficiency, cost-saving, and performance improvements that can be driven by technological-innovation should and can extend to all relevant market stakeholders.

    The underpinnings of RegTech – or the elements that make it possible today – largely center on four key factors:

    • First, one cannot underestimate the importance of exponentially increasing computing power over prior decades.
    • Second, these increasingly powerful computers have access to troves of data, which can be generated through digital networks and systems, as well as from “smart” physical objects that have been equipped with data-receiving sensors (i.e. the Internet of Things).
    • Third, data analytics software has the ability to make sense of this plethora of data and drive concrete suggestions, conclusions, or action items.
    • Fourth and finally, advances in machine learning – and a future state of Artificial Intelligence – can drive even more sophisticated analyses that go beyond the mere automation of functions.

    These factors fuel the growth of RegTech. RegTech can make regulatory compliance and oversight cheaper, easier, and more accurate – basic manual processes can be automated; trails of activity can be logged; audit functions can be executed faster and with more complete information; suspicious behavior or activity can be more readily flagged; and critical human capital resources can be dedicated to more productive tasks. All of these elements speak to the promise of RegTech innovation.

    Another dynamic worth acknowledging here involves the application of distributed ledger technologies and smart contracts in the context of RegTech. As to the former, shared ledger systems, which hold promise in increasing operational efficiencies, may also help facilitate real-time, standardized, and lower-cost regulatory reporting – something that could benefit both industry and the regulator. And related application of smart contracts (or self-executing agreements) could result in the potential decrease of execution risks, more efficient use of trade-related margin and collateral, and the incorporation of automated regulatory compliance provisions into the contract code.

    In thinking about RegTech, however, I think it is critical that we include cyber-security and data-security as part of the broader discussion. Indeed, the increasingly important role played by data and the movement of data on computer platforms means that the stakes around ensuring data integrity are even higher. This will be one of the primary risks we must solve for in a digital world. I suspect that even on this front, technology-driven innovation will provide us solutions – but at this stage, at least, technology only goes where we direct it!

    On the topic of directing technology, I would be remiss if I did not mention some work we will be doing through LabCFTC in order to stimulate innovative application of RegTech. We plan to issue a call for public feedback on a series of innovation prize competitions we intend to begin in 2018 under the Science Prize Competition Act. These competitions will afford us the ability to spur innovation that can solve public policy challenges and enhance our markets. Such competitions may involve, for example, novel ways to use or share data, make our rules machine readable (i.e., developing a “robo rulebook”), or build a more dynamic, digital, and “smart” notice-and-comment platform.

    Conclusion

    Let me conclude my formal remarks here before I sit down with Tim Adams and take questions about my vision for the CFTC and RegTech.

    RegTech poses significant opportunities for those involved in our financial markets, both participants and regulators. I suspect we are in the “early innings” of this space (to use an American baseball saying), but believe that it is imperative for all involved stakeholders to do their part in understanding emerging technologies and think creatively about incorporating such technologies.

    This conference to celebrate FinTech week here in Singapore only makes me more optimistic than ever that there is a wealth of new market-enhancing innovations waiting to be introduced. Through LabCFTC, the CFTC is ready.

    Thank you.

    1 See Address of J. Christopher Giancarlo to the New York FinTech Innovation Lab, “LabCFTC: Engaging Innovators in Digital Financial Markets,” May 17, 2017. http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-23 [hereinafter, “Giancarlo LabCFTC Speech”]; Address of J. Christopher Giancarlo to the American Enterprise Institute, “21st Century Markets Need 21st Century Regulation, Sept. 21, 2016. http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-17 [hereafter, “Giancarlo AEI Speech”].

    2 See generally Erik Brynjolfsson and Andrew McAfee, The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (W.W. Norton & Company 2014).

    3 See generally Martin Ford, Rise of the Robots: Technology and the Threat of a Jobless Future, 23-27 (Basic Books 2015).

    4 A recent internal report by the CFTC's Chief Economist looked at over 1.5 billion transactions across over 800 products on the Chicago Mercantile Exchange over a two-year period. It found that the percentage of automated trading in financial futures – such as those based on interest rates, currencies or equity indices – was 60 to 80 percent. But even among many physical commodities, there was a high degree of automated trading, such as 40 to 50 percent for many energy and metals products.

    5 McKinsey & Company and Greenwich Associates reprinted in Bank for International Settlements, Markets Committee, Electronic Trading in Fixed Income Markets, Jan. 2016, http://www.bis.org/publ/mktc07.pdf.

    6 Automated trading can enhance trading liquidity, increase market access and lower transaction costs while increasing trader productivity through greater transaction speed, precision and sophistication. At the same time, automated trading presents a host of new challenges, including increased spikes in market volatility from sheer speed of execution, flawed algorithms and position crowding and the risk of data misinterpretation by computerized analysis and mathematical models that increasingly replace human thought and deliberation. See generally, Giancarlo AEI Speech.

    7 Trevir Nath, How Big Data Has Changed Finance, Investopedia, Apr. 9, 2015, http://www.investopedia.com/articles/active-trading/040915/how-big-data-has-changed-finance.asp.

    8 Tom Upchurch, Technology: AI and the Spectre of Automation, Euromoney, Aug. 2016, http://www.euromoney.com/Article/3575461/Technology-AI-and-the-spectre-of-automation.html.

    9 Nigel Farmer, Making Contracts Smarter, TabbForum, May 3, 2016, http://tabbforum.com/opinions/making-contracts-smarter?print_preview=true&single=true&ticket=ST-14742885819637-OxE2RQ6CSK3LXd6HsvaWwJ8v3ewjlyh208guDvuC; Jay Cassano, What Are Smart Contracts? Cryptocurrency’s Killer App, Fast Company, Sept. 17, 2014, https://www.fastcompany.com/3035723/app-economy/smart-contracts-could-be-cryptocurrencys-killer-app.

    10 Anna Irrera, Experian enlists behavioral biometrics startup to combat fraudsters, Reuters, April 7, 2017, at: http://www.reuters.com/article/us-experian-fraud-idUSKBN1792XT

    11 Oscar Williams-Grut, WEF: Blockchain Will Become the ‘Beating Heart’ of Finance, Business Insider, Aug. 12, 2016, http://www.businessinsider.com/world-economic-forum-potential-of-blockchain-in-financial-services-2016-8; see generally, William Mougayar, The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology (Wiley 2016).

    12 Giancarlo LabCFTC Speech.

    13 See Address of Daniel Gorfine to the FIA Futures & Options Expo, “FinTech Innovation: Building a 21st Century Regulator,” Oct. 19, 2017. http://www.cftc.gov/PressRoom/SpeechesTestimony/opagorfine-1.

    14 See Tom Graham, RegTech: What is It and What are the Benefits?, Accenture Banking Blog, Feb. 22, 2017, http://bankingblog.accenture.com/regtech-what-is-it-what-are-benefits.

    Last Updated: November 15, 2017