Remarks of Commissioner Rostin Behnam at the FIA Boca 2018 International Futures Industry 43rd Annual Conference, Boca Raton, Florida
Accountability & Moving Forward
March 15, 2018
Good afternoon and thank you for the kind introduction. I’m thrilled to be the crowd warmer for the Washington Outlook panel. Joking aside, the crowd warmer’s job is to get the audience in the mood for the main act -- to make you all feel integral to what’s about to occur on stage and to elicit and encourage you to react. Your engagement and reactions are critically important, especially now as we have all been promised deliverables in terms of Project KISS1, Reg. Reform 2.0,2 and CFTC and SEC harmonization,3 and we are increasingly expectant of proposals for resolving outstanding regulatory issues such as the de Minimis exception, position limits, and Regulation Automated Trading (Reg AT).
As we continue to evaluate our regulatory landscape and make critical determinations as to which parts to revisit, which to complete, and how we can guide legislation and develop regulations to address technological developments in our markets in a thoughtful, collaborative manner, we must: (1) hold one another accountable; (2) adhere to regulatory process; (3) be wary of false progress; and (4) demand genuine dialogue.
In the aftermath of the bitcoin self-certification discussions of 2017, I expressed my concerns that the Commission’s accountability (and responsibility) is greatly impacted by adherence to the regulatory processes established by the Commodity Exchange Act (CEA), Commission regulations, and the Administrative Procedure Act.4 Process establishes the guideposts in the narrative of how we carry out our mission so that in the future, when we encounter new issues and challenges, we have markers we can point to. Rejection of process in favor of ad hoc decision making may make for good memes, but it leaves our record vulnerable to revision, future regulatory uncertainty, and unintended consequences. Though I’ve heard echoes that process is sometimes wielded to stifle progress,5 I prefer to consider former longtime Chicago journalist Sydney J. Harris’s point of view that, “The greatest enemy of progress is not stagnation, but false progress.”
As we move forward into Q2 of 2018, we need to make sure we don’t slip into a repeat of 2017. To be blunt, there were a lot of soundbites. To date, Project KISS has produced a “tiered list of significant efforts” and an interim final rule that replaces “the complex and confusing lettering for defined terms” in Commission Regulation 1.3 with an alphabetized list.6, 7 While I approved the publication of the interim final rule in the Federal Register,8 I did so only after pointing out a couple things. First, I’m not sure that 21st century regulators or our market participants are truly confused by the standard numbering system for rules in the Code of Federal Regulations (or that they turn away from their computers to flip through the hard copy volume of the CFR to find terms).9Second, the release should at least acknowledge and solicit comments regarding the costs and burdens associated with administering the removal of the level 1 paragraph designations from such things as relationship documentation and internal compliance systems. And third, whether substantive and more mission critical work was sacrificed to put out this rule.10
Let me just pause to say that I do appreciate the willingness of staff to incorporate my suggested edits and thank them for their time.
Not Going Back
By now you’ve heard from the Chairman, Commissioner Quintenz, and a host of others about how the issues shaping the 2018 agenda present opportunities to reach workable solutions within the tenets of our regulations and the Dodd-Frank Act, while strengthening our position as a premier 21st century regulator. I believe any changes must be narrowly targeted and surgical to ensure core reforms are kept whole and intact.
To be clear, while I strongly oppose any wholesale roll backs of Dodd-Frank initiatives, I believe a principles-based approach to implementation can be suitable in certain instances. A principles-based approach provides greater flexibility and focuses on thoughtful consideration, evaluation, and adoption of policies, procedures, and practices as opposed to checking the box on a predetermined, one-size-fits-all outcome. It allows for greater calibration and consideration of each entity’s unique risk profile within the rule set while reducing our own regulatory footprint. However, the best principles-based rules in the world will not succeed absent: (1) clear guidance from regulators; (2) adequate means to measure and ensure compliance; and (3) willingness to enforce compliance and punish those who fail to ensure compliance with the rules. In short, it requires accountability.
Keep on Truckin’
We are all encouraged to stay focused on our priorities, and those include some legislative proposals, opportunities for regulatory reform and completion of the Dodd-Frank agenda, and some forward thinking progress towards bringing innovative technologies and changes to our markets into the regulatory fold. For me, it also includes overseeing the CFTC’s Market Risk Advisory Committee (MRAC).
Since the beginning of the New Year, the Trump administration and Congress has shifted some attention towards Dodd-Frank reforms. The Senate just passed the first Dodd-Frank legislative package since President Obama signed the bill in 2010, and sent the package to the House of Representatives. The House Financial Services Committee recently held an oversight hearing focused on nearly a dozen derivatives bills. Senior level administration officials have also recently discussed changes to capital requirements and potentially revisiting the Volcker Rule in 2018. As I have said many times in the past, and earlier in these remarks, targeted, surgical regulatory changes are warranted to address unintended consequences; but, I caution against any efforts, small or large, to undermine core principles and policy established in Dodd-Frank. Bear Stearns failed nearly 10 years to the day. Seems like a long time ago; but we must not displace history as we continually seek to cement and develop sound, transparent, and robust regulatory policy.
More personally, I am happy to announce today that an official notice has been published in the federal register inviting individual nominations to the MRAC. The federal register notice breaks ground for renewing the committee’s charter, reconstituting its membership, and setting an agenda for 2018. Having already met once this year, regarding bitcoin and the self-certification process, the MRAC is ripe for many more important, cutting edge discussions about market risk that even go beyond our discussions of systemic, market-wide risks.
I believe it’s time for the CFTC to follow the lead of our fellow regulators in the prudential space and focus on operational risk—the risk that remains after determining financing and systemic risk, and includes risks resulting from breakdowns in internal procedures, personnel, and systems. It includes fintech risks such as service disruptions, data compromise, and cybersecurity. It also includes risks from outsourcing and use of third-party products and vendors. And, it includes fraud and other personnel misconduct.
I’d like to conclude these remarks with my thoughts regarding the government outlook on fintech issues in 2018 and beyond. fintech certainly took center stage in 2017. Whether the meteoric rise of bitcoin, or the equally swift development of distributed ledger technology, the general public and policy makers have taken notice across the globe. I hope that the U.S. will take a leading role in paving the way for a well-defined, fair, and balanced regulatory regime.
In my view, the best and most efficient manner to achieve this important, and much needed goal involves the Financial Stability Oversight Council (FSOC). I applaud Secretary Mnuchin for his comments and commitment to establishing an FSOC interagency group of regulators to review the impact of cryptocurrencies.11 But, given the pace of development in coins, payments systems, and distributed ledger technology, I believe more deliberate, swift, and comprehensive action is needed; and the authority granted to the FSOC in Dodd-Frank is the perfect means to execute the following: (i) convening member bodies; (ii) foster extensive discussions regarding, among other things, oversight responsibility, jurisdiction, and general policy approach of each regulatory body; (iii) engaging stakeholders, market participants, public interest groups, and foreign regulators; and (iv) delivering a detailed roadmap of policy findings and possibly legislative proposals to the Congress.
FSOC is perfectly suited to address the promise and risks posed by fintech. Regulators must take a leading role in this journey to ensure market participants do not too quickly develop systems and rules that may carelessly run afoul of core policy: safety and soundness; transparency; and prohibiting fraud and manipulation.
I look forward to any contribution I can make in these critically important discussions.
Thank you for your time, and with that I will now step aside for the main act.
1 See, e.g., Michael Gill, Remarks of CFTC Chief of Staff Michael Gill at the National Press Club, CFTC Kiss Policy Forum, Washington, D.C., http://www.cftc.gov/PressRoom/SpeechesTestimony/opagill2.
2 J. Christopher Giancarlo, Remarks of Chairman J. Christopher Giancarlo before Derivcon 2018, New York City, New York (Feb. 1, 2018), http://www.cftc.gov/PressRoom/PressReleases/opagiancarlo35.
3 CFTC (@CFTC), @CFTC & @SEC_News teams are hard at work on Title VII harmonization, Twitter (Feb. 27, 2018, 4:53 PM), https://twitter.com/CFTC/status/968605066889515009; Chris Giancarlo (@giancarloCFTC), Twitter (Feb. 27, 2018, 9:18 PM)
4 Rostin Behnam, Opening Statement of Commissioner Rostin Behnam before the Market Risk Advisory Committee (Jan. 31, 2018), http://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement013118.
6 J. Christopher Giancarlo, Written Testimony of Chairman J. Christopher Giancarlo before the U.S. House Committee on Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies, Washington, D.C. (Mar. 7, 2018), http://www.cftc.gov/PressRoom/PressReleases/opagiancarlo39#PrRoWMBL.
7 Definitions, 83 Fed. Reg. 7979 (Feb. 23, 2018).
8 An interim final rule is effective immediately upon publication in the Federal Register. An agency may solicit comments on an interim final rule after it becomes effective, and may replace or change the interim final rule as a result of public comment. See Office of the Federal Register, A Guide to the Rulemaking Process, available at https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf .
9 See 1 CFR § 21.11.
10 Definitions, 83 Fed. Reg. at 7980.
11 The Economic Club of Washington, D.C., U.S. Treasury Secretary Steven T. Mnuchin discusses tax reform, the national debt and debt limits, and cryptocurrencies (Jan. 12, 2018).https://economicclub.org/sites/default/files/transcripts/Steven_Mnuchin_Edited_Transcript.pdf
Last Updated: March 19, 2018