Keynote Address of Commissioner Dawn D. Stump at FIA Expo, Chicago, Illinois
Family Feud, Jeopardy, and Let’s Make a Deal
November 03, 2021
Before beginning, I note that the views I express today are my own and not necessarily those of the Commission I am proud to serve upon nor my fellow Commissioners.
I am very happy to be here with you all in Chicago. Due to the pandemic, it has been a while since I have had the opportunity to speak in person. I am a little out of practice, so I am going to need a little help from the audience today. I hope we can also have a bit of fun by starting with a friendly game of “Family Feud.”
Two of the conference attendees have agreed to be our first contestants.
Top three answers are on the board.
In 2021, what topic is a CFTC Commissioner most often asked to address when invited to speak?
- Crypto/Digital Assets
- Climate Change/Carbon Markets
I asked this question because it really demonstrates where the public’s interest is focused. Interestingly, these topics are well beyond the traditional mandate of the Commodity Futures Trading Commission (CFTC). Sure, we have CFTC-regulated products that are based upon the demand for crypto, emission reductions, and impact investment, but those products comprise a small portion of the markets we oversee. Nonetheless, it seems to be where at least some of you – and many of your clients – are focused, so I thought I would spend a bit of time talking about each today.
Crypto and Digital Assets
I’ll begin with digital assets. Before regulators go about engaging in a jurisdictional power-grab, I think market participants need us to provide clearer descriptions of our current authorities. Only from that point can we determine whether gaps exist.
On a frequent basis, I am reminded that the public is confused by the application of each federal and state regulator’s current regulatory and enforcement regime. Until we remedy that confusion, we cannot have an honest conversation about whether any agency needs new authorities. And only then can informed stakeholders contribute to designing a workable regulatory structure.
One clear example of where regulators owe the marketplace clarity is with respect to the persistent tendency to draw a distinction between commodities and securities. Oftentimes, this confusion seems to stem from well-intentioned product developers seeking to determine if they need to face the CFTC or the Securities and Exchange Commission (SEC) in achieving proper U.S. regulatory compliance, and in doing so they ask the wrong question: “Is my product a security or is it a commodity?”. I am alarmed that those who are genuinely seeking to enter a regulatory environment with these new products have been led to believe that this is the fundamental question they must answer.
As most everyone here knows, the CFTC does not regulate commodities. So, any pronouncement that an asset is a commodity should not be interpreted as a roadmap to the CFTC for regulatory oversight. Unfortunately, far too many of those seeking to genuinely innovate in this space, and those looking to participate in this space, have been misinformed as to this point. I am trying my best to level-set and correct the proliferation of this misinformation. I want to be very clear that the CFTC regulates derivatives – we are specifically charged by Congress to regulate futures and swaps1 – many of which have commodities as their underlying assets, but we do not regulate the underlying commodities themselves.
For example, natural gas is a commodity, and the CFTC regulates futures contracts and swaps on natural gas. But the CFTC does not regulate the transmission and sale of natural gas for resale in interstate commerce. Rather, that is left to the Federal Energy Regulatory Commission.
While the SEC does regulate securities (and I will leave it to them to hash out what qualifies as a security), the CFTC regulates derivatives, not commodities. That said, the derivatives we regulate include some derivatives on securities.2
Complicated? Unfortunately, yes. But it is how our system is designed today, with multiple regulators involved in the oversight of assets depending on the nature and function of the specific product.
Separately, and perhaps the root of some of the confusion as to the CFTC’s role in the digital asset space, is the more expansive enforcement authority we have to deter fraud and manipulation in the cash markets (notably, this anti-fraud/anti-manipulation authority extends beyond the derivatives markets we regulate and into the cash markets).3 Congress provided the CFTC with this expanded enforcement authority because such fraudulent or manipulative activity in the cash markets may have an impact on the derivatives markets we are tasked to oversee. Given the confusion that exists, I believe we must consistently clarify that this broader enforcement authority does not suggest that we are conducting day-to-day regulatory oversight in these cash or spot crypto markets. Failing to be clear on this point gives the public a false sense of security and leaves those seeking a regulatory home perplexed.
We need to minimize the confusion and stop allowing silly distinctions between commodities and securities to drive the discussion. Only then can we have an honest conversation about next steps.
Meanwhile, a regime already exists for regulating futures and swaps on digital assets, and we at the CFTC have for some time been applying our regime in this space, much as we do for other futures and swaps based on vastly different assets, ranging from crude oil futures to credit default swaps. My opinion is that we should stick to what we do best in regulating the infrastructure that supports futures and swaps markets. Whether based upon corn, crypto, or credit defaults, the derivatives markets we regulate function very differently from those markets that facilitate exchange of the underlying assets. Before expanding the CFTC’s authority into the cash markets, careful consideration should be given to whether the market infrastructure we oversee today can logically benefit the cash markets, which have historically been beyond our expertise.
Climate Change and Carbon Markets
Turning now to our second most requested speaking topic – climate and carbon markets. Anyone who reads a paper or watches the news is familiar with the various concerns and opinions pertaining to the impact of climate change on the global economy. Like many things we as a nation grapple with, this one is multi-faceted to the point that sometimes the basics get lost in the mix. If we are to have an honest conversation about a path forward, we must consider the entire picture, which is well beyond just the environmental goals, but also involves strong impact investor sentiments as well as everyday consumer needs. Balancing these interests is no small task, and we should do so very thoughtfully.
Let’s start with investors. It is undeniable that many are seeking to invest in a way that drives transition to reduced carbon emissions. And as a result, those that supply our nation with food and energy are themselves exploring how to expedite transition by committing resources to the next generation of technology. I support market-driven outcomes such as this, as preferred to government mandates. That said, I am not naïve to the fact that others of my colleagues in various agencies may prefer the government to play a more prominent role in driving these developments.
Regardless of what or who creates the momentum and my own personal views on the preferred impetus, as a nation, we would be well served to contemplate the new transitional and physical risks that are being introduced – the potential for stranded assets, changes in asset prices, credit risks, supply disruptions, and so forth. Investors should work with those that provide our economy with essential goods and services to determine how best to balance carbon reduction efforts against these new risks during the transition they seek. It would be unfortunate for the government to be the source of such new risks.
It’s a balancing act, and while institutions finance new technologies to advance carbon emission reduction, those that continue to support existing infrastructure in the meantime should not be penalized. Abandoning established food and energy supply methods during a time when many are trying to transition cannot be the price we pay to advance alternative production methods. Otherwise, it is the U.S. consumers who will ultimately suffer.
Additionally, the best solutions likely benefit from drawing upon the experience of those who today supply our country with such goods and services. Their experience with the infrastructure and markets, as well as the influence of investor pressure they are already responding to, cannot be dismissed if we are genuinely interested in adapting without the unnecessary disruptions other countries have experienced. As such, I was pleased to see that a recent report from the Financial Stability Oversight Council (FSOC) recommended the formation of a Climate-related Financial Risk Advisory Committee to help the FSOC gather information and analysis on climate-related financial risks.4 I hope such a committee will have balanced representation to include current energy and agricultural producers who are on the front lines of taking on new risks to balance the demands of environmental improvements, impact investors, and consumers.
Perhaps that is where the CFTC can be of most help in lending our expertise in facilitating risk management tools. Whether these new risks are driven by government mandates or consumer and investment demand, derivatives will be used to manage such. We will regulate the resulting risk management tools just as we do with respect to risk arising from all other asset classes. In fact, we already are doing so, as today we oversee approximately 175 exchange-listed climate-related derivatives products.
“ESG” – Environmental, Social, Governance Factors
The discussion of climate change naturally leads to a broader conversation on ESG. Difficult questions remain in how to value a company’s ESG standing – opinions vary widely, and reliable data is often hard to come by.
Diversity in the context of ESG is perhaps an example of the valuation confusion that exists. Some suggest it belongs in the “S” category (social) for the greater good and fairness it represents, but how does one measure goodness and fairness? Others believe diversity is a component of the “G” category (governance) – a simple metric in the tally of individuals represented. In the context of governance, I have repeatedly stated my belief that encouraging a diverse set of views yields alternative ways of considering challenges and broadens the options for solving problems. And I believe that is a benefit to any decision-making body – public company, government agency, or otherwise. But numbers alone will not achieve this objective; inclusion is critical – more on the importance of inclusion later.
When I set aside my personal views and focus on my job of regulating the derivatives markets developing in response to demand for ESG investing, I am reminded that difficult questions remain, even as demand persists. And the way in which these underlying standards develop will impact the ability to realize well-functioning derivatives markets in this area. I appreciate that so many of you are working on this task. As new markets and products develop in our space, we need much input.
As I would now like to shift my remarks to other matters that may be of interest, I would like to ask our “Family Feud” contestants back to the stage for round 2.
Top three answers are on the board.
As many of you know, former Commissioner Dan Berkovitz and I have had a close working relationship that pre-dates our time at the CFTC. And as such, we often compared notes on various matters. During the first half of 2021, what topic most often dominated my conversations with former Commissioner Berkovitz? (And as a reminder, the topic of positions limits is “so 2020,” and, therefore, a reasonable guess for prior years, but not in 2021.)
- Event Contracts
- Retail Interest in Derivatives Markets
- Interesting Podcasts or Non-Fiction Books
As to this last topic, anyone who knows Dan appreciates that he is an avid inquirer. Very rarely did we end a conversation without my adding another non-fiction book or podcast to my library list. Perhaps someday he will publish his favorites – too many for me to recount here, so I had better focus my remarks on the many days that Dan and I read our favorite “book” together, the Commodity Exchange Act (CEA). And I am not joking, we often read excerpts from the CEA as we contemplated new questions about novel contracts or the application of the statute in the context of increased retail participation or disintermediation. In fact, he returned my call one day last spring as I was walking to pick up my daughter from school – I told him I might need to call him back because I didn’t have the CEA in front of me, and he kindly asked which section I wanted to discuss and then proceeded to read it to me such that I could point out my specific query within Section 5c(c)(5)(C) of the CEA – true story.
For those who may not have memorized the CEA, Section 5c(c)(5)(C) deals with a special consideration for CFTC review of event contracts.5 Congress has generally limited the CFTC’s ability to disapprove new contracts unless it finds they are violating the CEA or CFTC regulations. These limitations date back to the Commodity Futures Modernization Act of 2000,6 but were left in place by Congress when it enacted the Dodd-Frank Act a decade later.7
Also in the Dodd-Frank Act, Congress addressed the trading of a narrow set of event contracts by granting the CFTC a bit more discretion to determine that certain of these contracts MAY be contrary to the public interest if they involve specifically enumerated activities including: (1) activity that is unlawful under any Federal or State law; (2) terrorism; (3) assassination; (4) war; (5) gaming; or (6) other similar activity determined by the CFTC, by rule or regulation, to be contrary to the public interest.8
So, what does all of this mean? While the CEA provides a fairly wide allowance for contracts to be traded on events that could happen in the future by demonstrating compliance with the statutory core principles and CFTC regulations, there is additional legal analysis that the CFTC must undertake for event contracts. With regard to event contracts, we must answer two additional questions:
- First, we must determine if the contracts involve any of the enumerated activity – gaming, terrorism, assassination, war, unlawful activity.
- If the answer is yes, then we must answer whether such contracts are contrary to the public interest. If yes again, then the contract cannot be listed.9
Otherwise, if the answer to either of these questions is “no,” then we are tasked to honor the process established by Congress of reliance on a demonstration of compliance with the core principles and CFTC regulations as the standard for new contract listings.
How a person (including any Commissioner or CFTC staff member) feels about these contracts is a subjective determination. My job is to objectively apply the statutory criteria for listing event contracts. We will then regulate and oversee the listing entities as we do all of our registrants.
Beyond event contracts, the interest from retail market participants in many other products the CFTC regulates is another topic worth exploring. I would like to discuss three recent developments with respect to retail participation generally that I find to be very interesting:
- First, access – initial demand for many new asset classes is increasingly derived from retail participants. Take, for example, crypto derivatives.
- Second, product development – we have seen the introduction of smaller-sized “micro” futures on such things as crude oil, as futures exchanges attempt to attract retail traders to their platforms.
- Third, infrastructure – last year, the CFTC granted designated contract market (DCM) designations to several new futures exchanges whose business models focus on retail traders.
I think all of these things demonstrate how the CFTC’s principles-based approach to compliance with our requirements enables us to be a bit more nimble than other regulators in permitting innovation and evolution to occur. I trust that when conducting rule enforcement reviews, our market oversight staff will pay close attention to the new retail-focused DCMs in order to make sure these exchanges fulfill their legal obligations – just as we do for any market infrastructure provider.
At the same time, I am hopeful the CFTC will undertake new initiatives to help assure that retail traders are properly informed about how the futures markets operate and the degree of risk that such trading inherently entails.
And I would be remiss if I did not add that we are continually carrying out our market surveillance and investigative functions to assure that the futures markets trade in an orderly manner and to guard against manipulation, disruptive trading, and other types of abuse which harm the futures markets and those who trade on them – both institutional and retail traders alike.
While the advantage of the principles-based regulatory framework is that it is sufficiently flexible to allow the CFTC to adapt to changing market dynamics, there are aspects of our current regime that are a bit ill-fitting for some of the recent trends. For example, our clearing rules are designed around a structure where an intermediary stands between clients and clearinghouses as a guarantor, and where clients use leverage to increase their exposure. Perhaps this works well for some retail offerings, but many new retail-focused derivatives clearing organizations (DCOs) do not use an intermediary model.
To date, we have accommodated this model by imposing conditions such as requiring products to be fully collateralized. But I think anyone who assumed that was the end of the story might be a tad naïve. Certainly, we might expect future requests from these registrants to offer leveraged clearing. Yet, our DCO rules are written for a legacy structure of intermediaries operating in markets largely dominated by institutional clients. If the trend of growing retail interest persists, we will eventually have to address this very thoughtfully, with an eye towards maintaining the safety and soundness of the clearinghouses while at the same time encouraging retail access to the clearing infrastructure.
Before I close, I think we have time for one more friendly competition. This time the game is “Jeopardy,” and our contestants are all CFTC alumni.
And the categories are:
- CFTC C-Hair
- Women Before Me
Please remember to frame your response in the form of a question.
During the past 10 years, the CFTC has had six Chairmen (including Acting Chairmen). Among these men, only two – Heath Tarbert and Mark Wetjen – share a physical feature that distinguishes them from the others.
Answer: What is a full head of hair?
During the CFTC’s 47 years, on only one occasion have three female Commissioners served simultaneously. These women formed the majority of the Commission in 1994/95 – points will be awarded for each correct name.
Answers: Who is Barbara Holum?
Who is Mary Schapiro?
Who is Sheila Bair?
I look forward to the day – perhaps soon – when more female Commissioners serve simultaneously. But having men and women serve as Commissioners is just one example of the diversity of experiences and views that I believe benefits all decision-making bodies, including the CFTC. If all leaders in an organization have homogeneous experiences, opinions, and areas of expertise, that will limit ideas. Encouraging a diverse set of views yields alternative ways of considering challenges and broadens the options for solving problems.
But diversity is only part of the equation. Inclusion and retention are critical. An organization’s employees must feel comfortable sharing their unique opinions. It is unacceptable for any employees to feel they must pull back for fear of failure or to adapt to the majority or the status quo in a way that causes us to lose the benefit of diverse viewpoints. Furthermore, without proactive steps to retain employees, we again risk losing the benefit of diversity.
In closing, I want to thank everyone for playing along in my game-show themed talk, but I also want to assure you that there is no family feud or double jeopardy playing out at the CFTC. As you are well aware, we are a little light on Commissioners right now. As a result, matters requiring Commission-level approval can only proceed if the two of us agree. Some have suggested this affords me the opportunity to simply oppose the Acting Chairman’s agenda by canceling his vote with an opposing vote of my own. Anyone who knows me or Russ Behnam understands that is not how either of us chooses to do our work. I have known and worked with Acting Chair Behnam for a long time – even before we arrived at the CFTC. We are much more inclined to try our hand at “Let’s Make a Deal.” And even as the two of us are currently limited in our ability to communicate directly with one another about agency business, our teams have also worked together for several years, and they serve us well in finding common ground. Nevertheless, I will be true to my principles, and I know he will be, too. But we will not play games with your markets.
- 1See Section 2(a)(1)(A) of the Commodity Exchange Act (CEA), 7 U.S.C. § 2(a)(1)(A).
- 2This includes, for example, futures contracts on broad-based stock indexes.
- 3See CEA Sections 6(c)(1) and 9(a)(2), 7 U.S.C. §§ 9(1), 13(a)(2), respectively.
- 4See FSOC, Report on Climate-Related Financial Risk 2021, at 5, 119 (October 21, 2021) (Recommendation 1.2), available at FSOC Report on Climate-Related Financial Risk (treasury.gov).
- 5CEA Section 5c(c)(5)(C), 7 U.S.C. § 7a-2(c)(5)(C).
- 6Commodity Futures Modernization Act of 2000, Appendix E of Public Law 106–554, 114 Stat. 2763 (2000).
- 7Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) (Dodd-Frank Act).
- 8CEA Section 5c(c)(5)(C)(i), 7 U.S.C. § 7a-2(c)(5)(C)(i).
- 9CEA Section 5c(c)(5)(C)(ii), 7 U.S.C. § 7a-2(c)(5)(C)(ii).