Remarks of Chairman J. Christopher Giancarlo at FIA Expo Chicago, Illinois
“A Week in the Life of the CFTC”
October 17, 2018
Thank you. I especially want to thank the organizing committee, Walt Lukken, and the rest of the speakers. Thank you for the invitation to speak here. This expo is advertised as the “hub” of the derivatives and swaps universe. Indeed, it is, and I am pleased to have this time with you.
Recent Developments at the CFTC
It may have been a quiet week in Lake Wobegon, but the first week in October was a rather busy time at the CFTC. I would like to tell you about a week in the life of the agency.
On Wednesday and Thursday, October 3-4, the CFTC hosted its first ever financial technology conference, Fintech Forward. LabCFTC and the CFTC’s Office of Customer Education and Outreach (OCEO) worked together to bring innovators, regulators, market participants, thought-leaders, and the general public together to examine the wide range of fintech developments impacting markets, including crypto assets, machine learning, cloud technologies, regtech, and other emerging financial technologies.
The collaboration underscores the Commission’s multi-pronged approach to keeping pace with a rapidly changing market and ensuring market integrity. In its first year, LabCFTC has actively and effectively executed on its mission of facilitating market-enhancing innovation and helping to inform policy, and the Office of Customer Education and Outreach continues to pursue opportunities to educate customers in our markets across all asset classes.
In fact, LabCFTC is here in Chicago at FIA Expo holding office hours with financial technology innovators. Next week, the Lab will conduct lab hours in Austin, Texas. Sign-ups are underway.
Fintech Forward 2018 focused on key tech-driven developments in the financial markets. Conference participants considered the impact of new technologies on markets and customers, and what regulators must do to remain forward-looking, mitigate risks, educate customers and market participants, and identify emerging opportunities, risks, and challenges. It was a fine event that we hope to reprise next year.
Perhaps an even more significant event was the meeting of the Technology Advisory Committee on Friday, October 5. That is because the TAC Committee met in front of a full Commission. The last time that happened was on April 30, 2013 – five and a half years ago. In fact, that was the last time any advisory committee took place before a full CFTC Commission. Thus, it was very satisfying to have our new and full Commission together ten days ago.
You know, there is logic to having a five-member Commission. And, it is right that all CFTC Commissionerships be filled, as they are now. In fact, we may well have on board the most experienced and knowledgeable group of Commissioners in the history of the CFTC. You will hear from most of us here at Expo. I thank Senator Roberts, Senator Stabenow, and the Senate Ag Committee for their work in the current Congress to confirm all five members of this Commission.
One of the capabilities of a full Commission is to sponsor and activate all of the CFTC’s advisory Committees. I thank Commissioner Stump for agreeing to sponsor the Global Markets Advisory Committee. In that role, Dawn is representing the CFTC this week at the IOSCO meeting in Madrid. It has been too long since the last meeting of GMAC, but it is now in good hands and will soon be off to a good restart.
I also thank Commissioner Berkovitz for taking over sponsorship of the Energy and Environmental Markets Committee. Dan is busy finalizing the EEMAC membership for an upcoming meeting. We look forward to that.
I will be taking on sponsorship of the Agriculture Advisory Committee and will be reaching out soon to members. The Ag Advisory Committee met last year in Kansas City under Commissioner Behnam’s interim sponsorship, for which we are grateful. I look forward to sponsoring another Ag Advisory Committee meeting in Kansas in conjunction with the CFTC’s 2nd Ag Commodity Futures Conference in early April 2019.
I also want to thank Commissioner Behnam for standing up the Market Risk Advisory Committee with energy and determination.
The MRAC’s formation of a sub-committee to address emerging issues related to the movement away from LIBOR to SOFR was just unanimously approved by the Commission. The MRAC’s work in this area will complement and further the work of the Alternative Reference Rate Committee. Commissioner Behnam has taken a thoughtful approach to this important task.[i] I support this coordinating effort and the fine work that will surely result.
That brings me back to the TAC Committee meeting. I thank Commissioner Quintenz, Daniel Gorfine, and all the distinguished TAC members for preparing a thorough and diverse program.
I want to briefly comment on one topic raised at the TAC Committee. That is the report of the TAC’s Automated and Modern Trading Markets Subcommittee and its discussion around an IOSCO Consultation Report on “Mechanisms Used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading.”[ii] I query to what extent the recommendations contained in the IOSCO report may address some of the concerns underlying the CFTC’s 2016 proposed Regulation AT.[iii]
As you know, Regulation AT was an initiative of my predecessor, Chairman Massad. My position was and continues to be that, while there were some good things in the proposal, there were other things that were unacceptable and perhaps unconstitutional, including that proprietary source code used in trading algorithms be accessible without a subpoena at any time to the CFTC and the Justice Department.
At heart, Reg AT is a registration scheme that would put hundreds if not thousands of automated traders under CFTC oversight, a role for which our agency has inadequate resources and capabilities. While I share genuine concerns about the inevitability of some future market disruption exacerbated by automated trading algorithms, there is nothing in Reg AT’s proposed imposition of burdensome fees and registration requirements that will prevent such an event. The blunt act of registering automated traders does not begin to address the complex public policy considerations that arise from the digital revolution in modern markets. Worse is that it would give a false sense of security that the CFTC had regulatorily foreclosed such market disruption, which is impossible. That is why I voted against Reg AT. I do not intend to advance it in its current iteration.
Nevertheless, I remain quite open to thoughtful consideration by my fellow Commissioners, market participants, and the public about whether there are elements in Reg AT that could serve as the basis for a new and more effective rule. Our new Market Intelligence Branch and Office of Chief Economist can help with market analysis. In February, the UK FCA and the Prudential Regulatory Authority published papers outlining their respective regulatory governance and compliance expectations in respect of algorithmic trading. These are worth careful study. The IOSCO recommendations discussed by the TAC Subcommittee also appear helpful. I commend the TAC Committee for its work to review the impact of automated trading on markets. I look forward to well-informed and balanced policy recommendations that the Commission can consider for appropriate action.
Record Setting Enforcement
Let me now pivot to another issue that was addressed the same first week in October: enforcement. We reported on the agency’s enforcement efforts for the fiscal year that ran from October 2017 through September 2018 – the first fiscal year under my administration.
In short, it was one of the most vigorous periods of enforcement activity in the history of the agency. We reported:
- More enforcement actions than ever;
- More penalties resulting from those actions than five out of eight years of the prior administration;
- More large cases than ever before;
- More cases for manipulative conduct and spoofing;
- More whistleblower awards than in the entire history of the program;
- More partnering, including with federal and state law enforcement, other market and prudential regulators and self-regulatory organizations; and
- More accountability, with 70% of cases involving charges against individuals from the front office to the C-Suite.
Why such an emphasis on enforcement?
Because it is the duty of government generally and the particular mission of the CFTC to enforce market regulation and prosecute bad actors. We fulfill that mission so that America’s financial markets are places for good people to fulfill their dreams and grow the economy.
During an administration pledged to broad-based prosperity, the CFTC’s robust enforcement program is important to the health and safety of U.S. financial markets. When conducted in a disciplined fashion, assertive regulatory enforcement is fully compatible with vibrant economic growth.
Before I entered government service, I spent a decade and a half working on Wall Street. My commitment to robust regulatory enforcement derives from that experience. I have enormous respect for the good men and women of America’s financial service industry who conduct themselves each and every day with integrity and honesty. They are the ones who are betrayed by the very few who engage in wrongful behavior. They are the ones who count on the CFTC to police U.S. commodity and financial markets that remain the envy of the world.
A New Approach to Cross-Border Regulation
Let me comment on one other event from the first week in October. That was the release of a White Paper on cross-border regulation.[iv] As you may know, the White Paper provides thoughts on how the CFTC should revise its current ad-hoc cross-border regime into a holistic risk-based framework that furthers the cause of swaps market reform. I want to focus the balance of my remarks this morning on one of the foundational elements of the White Paper: regulatory deference.
In September, I embarked on an extensive trip to Europe and Asia where I gave a preview of the White Paper through a series of speeches laying out my ideas for improving the CFTC’s cross-border application of swaps regulation. The speeches contained both a mea culpa and an apologia. The mea culpa acknowledged that in the past the CFTC has been accused of an over-expansive assertion of jurisdiction in applying Title VII of the Dodd-Frank Act outside the United States. That expansive assertion is responsible, at least in part, for fragmenting global markets into a complex series of ever more shallow pools of trading liquidity.
At the same time, the apologia recognized the fact that the CFTC’s cross-border overreach may have been understandable back in 2013, when no other G20 jurisdiction had yet to fully implement the G20 swaps reforms. To ostensibly protect U.S. markets, the CFTC sought to impose U.S. law abroad regardless of whether activity had a “direct and significant” impact on the United States.
However, all of this is water under the bridge. Times have changed. Markets have changed. A new approach to cross-border regulation is necessary.
The White Paper does not purport to address every cross-border issue, but to lay out a high-level framework for approaching the matter. It seeks to offer enough detail to give readers a good sense of direction, yet acknowledges that details and substance must be worked out through the rulemaking process. The purpose of the White Paper, therefore, is to serve as a concept release to generate more focused discussion of these important issues.
Since returning from Europe and Asia, I have begun discussing the recommendations contained in the White Paper with many market participants and fellow regulators both domestically and abroad. Further, I have directed the staff to begin the rulemaking process with the aim to publish certain proposed and final regulations through the APA process with appropriate public notice and comment in the first half of next year.
So, what do we mean by “deference?” It is a word that is frequently thrown about in regulatory circles. Yet, it is a mistake to dismiss it as a slogan. It is a regulatory approach that can be applied to concrete regulatory challenges – regulation of swaps trading venues, regulation of central clearinghouses (CCPs), and regulation of swap dealers. It is the basis for any realistic chance to preserve functioning global markets.
During my travels in Europe and Asia, I called for policymakers and regulators to join me in adopting a deferential approach to the cross-border application of swaps reform regulation. I said we have a rare and precious opportunity to trust one another; an opportunity to put into place contemporaneously laws, rules, and regulations that enshrine regulatory and supervisory deference in how we treat third-country firms and transactions. This approach can help to end the imposition of unnecessarily duplicative, overlapping, and costly burdensome regulatory requirements and thereby alleviate the market fragmentation that plagues the swaps markets today.
The majority of regulators with whom I spoke welcomed the return to deference. It was discussed favorably at last week’s G-20 meeting in Bali. Many are expressing enthusiasm for regulatory coordination and want to seize the opportunity to put in place relevant laws, standards, and policies that reflect a path of deference.
I am committed to establishing a CFTC cross-border framework that is risk-based and offers deference to comparable non-U.S. regulations. It is my sincere hope that the regulators of the world’s largest swaps markets will choose to join me on this path forward. I believe this is the right path whether or not any other jurisdiction moves toward this approach.
2017 Proposed Amendments to EMIR
As many of you know, the current EU legislative proposals on third-country CCP supervision appear to be headed in the opposite direction of what I am proposing. It is a flashback to the CFTC’s 2013 guidance. The proposed amendments to EMIR will expand the regulatory and supervisory authority of ESMA over both EU and third-country CCPs (including ongoing surveillance and on-site inspections), and to provide the European Central Bank (ECB) and other EU central banks with new oversight authority over both EU and third-country CCPs.
Under ESMA’s new authority, the proposal would designate each recognized third-country CCP as either Tier 1 or Tier 2 depending on how systemically important the CCP’s clearing activities are to the European markets. Tier 1 CCPs would be considered “non-systemic” and would be subject to essentially the current existing equivalence determination and recognition regime. Tier 2 CCPs would be considered “systemic” and would be subject to additional EU regulatory and supervisory requirements (i.e., must be fully consistent with all provisions of EMIR).
And of course, as you know, a number of EMIR requirements will dramatically increase the costs to clear at U.S. CCPs that are operating in the EU and are inconsistent with U.S. law. This is because EMIR is applied to all of the clearing operations of the non-EU CCP – even clearing activity that happens outside of the EU –irrespective of the domestic law that the non-EU CCP is subject to in its home jurisdiction. This is very different than the CFTC approach.
In my talks with European authorities, I have asked them to reconsider such an expansive approach. I have repeatedly given the example of letters of credit as one matter of contention. Under the CFTC DCO regime, letters of credit are accepted for initial margin for futures contracts. This type of financing has been used for generations in American agriculture. However, letters of credit are not a permitted form of initial margin payment under EMIR. Prohibiting the use of letters of credit would cause American FCMs to have to post tens of billions of Dollars in additional clearinghouse margin. It would be devastating to the FCM industry and to American agriculture.[v]
There are other substantive differences that are equally problematic. For example, EMIR would dictate matters of board composition and corporate governance for U.S. clearinghouses, including those designated as SIDCOs, overriding existing legal obligations under U.S. securities and state corporations law. Such overseas interference with sovereign U.S. federal and state law is unprecedented and wholly unacceptable.
The proposed amendments to EMIR, when understood alongside comments from some European officials, raise serious doubts about the European commitment to a policy of deference. In contrast to the CFTC’s approach to the regulation and supervision of cross-border CCPs to limit CFTC oversight to primarily U.S. business activity, the EU’s approach is to apply EU law to a third-country CCP’s entire clearing business, even business activity of long-standing commercial practice, comprehensively regulated under established U.S. law.
Make no mistake: the CFTC cannot and will not allow its regulated markets and market participants to become subject to conflicting or overly burdensome regulation from abroad. No sovereign regulator would agree to it, let alone a regulator overseeing the world’s largest derivatives markets. The CFTC will not allow U.S. market participants to be put in the completely untenable position of having to choose between violating domestic laws and regulations or violating foreign laws and regulations. It is completely irresponsible for European regulators to seek to put U.S. market participants in this position.
If a satisfactory resolution of this situation cannot be found, the CFTC will have no choice but to consider a range of readily available steps to protect U.S. markets and market participants. Be assured that the CFTC has a range of options, short of further legislative action, that it can execute unilaterally in response to an extraterritorial overreach by a non-U.S. authority. They include revisiting the CFTC’s Part 30 regime to withdraw existing exemptions in particular overseas jurisdictions. They also include delaying or withholding CFTC staff relief for non-U.S. entities from such jurisdictions. Other effective options are available in conjunction with fellow U.S. regulatory agencies.
These are blunt and strong tools. We are fully aware of the devastating impact they would have on market access and trading liquidity provision on national markets in which they would be applied. None of these options represent a course of action that I wish to pursue.
I much prefer the approach of regulatory deference that I have spent the past six weeks traveling the globe to promote. In fact, I am ready to jump on even more planes, trains, and automobiles bound for any European capitol to work out a sensible approach. I do not want to reach a point where we give up on deference and start restricting market access and critical provision of trading liquidity on both sides of the Atlantic.
So, let me end on a positive note. I am cheered by the warm reception my White Paper has received in so many international quarters. Most people understand what it was intended to do. I hold my hand out to colleagues in Europe and across the globe. I am hopeful that we can work together to reduce global market fragmentation and build upon regulatory deference as the basis for well-ordered and robust world markets that support global economic growth and prosperity. We must. There is no other sensible choice.
So, in conclusion, it has indeed been a busy week at the CFTC – a full and engaged Commission, a fintech conference, a new look at automated trading in today’s digital markets, addressing the move away from LIBOR, record regulatory enforcement, and new thinking on the crucial role of regulatory deference in the cross-border implementation of swaps reform, just to name a few topics.
Some say there is a lot of noise coming out of Washington of late. It is an election season after all. Whatever the season, the CFTC is busy, has its head down, and is getting on with the job it has to do – the CFTC, where the enforcement is strong, the Commissioners are good looking, and the staff are all well above average.
[i] See Remarks of CFTC Commissioner Rostin Behnam at the Bipartisan Policy Center, Reference Rate Reform: Impact on the Economy and Consumers (Oct. 11, 2018), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam9.
[ii] See IOSCO, Consultation Report, Mechanisms Used by Trading Venues to Manage Extreme Volatility and Preserve Orderly Trading (Mar. 2018), available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD594.pdf.
[iii] See Regulation Automated Trading, 81 FR 85334 (Nov. 25, 2016), available at: https://www.govinfo.gov/content/pkg/FR-2016-11-25/pdf/2016-27250.pdf.
[iv] See CFTC Chairman J. Christopher Giancarlo, Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation (Oct. 1, 2018), available at: https://www.cftc.gov/sites/default/files/2018-10/Whitepaper_CBSR100118_0.pdf.
[v] The CFTC has requested from European authorities a way to reconcile this particular conflict of laws without adequate satisfaction.