Remarks of CFTC Chairman Heath P. Tarbert to the 35th Annual FIA Expo 2019
October 30, 2019
(Chairman Tarbert’s remarks begin at 1:08:19)
Remarks as Prepared for Delivery
Well, good morning everyone. It is great to be here at FIA, the leading association for the futures industry—not only in the United States, but around the world. It’s also terrific to be here in Chicago. As Walt said, this city has so much history and has made the United States a leader in this field and has helped underpin our system of free enterprise for the last century and a half. So it’s wonderful to be here because I think one of the key messages I want to convey is that I care as much about these markets as all of you do. And so it’s a great honor to stand here before you as the fourteenth Chairman of the CFTC, with that charge to keep.
I finished my first 100 days a few days ago, so I will just give you an overview of what I have done, and ultimately, what I hope to do, not only in the near term, but also in the farther term as well. So I’m going to cover today what we have done, and that includes picking the right team of executive leadership that I want to introduce to all of you. Some of them are here today. I also want to talk about our new mission, vision, and values. That is very important for setting the right tone as the CFTC goes into close to fifty years of being a leader in derivatives regulation. Most importantly, I want to give you an idea of where we are going. I am going to outline five strategic goals that the CFTC has come up with in the past 100 days and then an action plan for what I would like to pursue as Chairman. And then finally, some tangible next steps that you will see in relatively short order coming out of the agency.
One of the things they say in Washington is that “personnel is policy.” So even before I set foot at the CFTC, I started thinking about the leadership team. I can’t do the job alone. I have an absolutely phenomenal Commission. Some of our Commissioners are here today. I think Commissioner Behnam, Commissioner Quintenz, if you could stand up. I just want to say I have an outstanding set of colleagues. And so while they are absolutely critical to setting the agenda, I also rely on our executive team, which runs the agency day-to-day. I will just run down who they are: Jaime Klima, Dan Davis, Dorothy DeWitt, Clark Hutchison—some of them sat in this very room in years past—Jamie McDonald, Summer Mersinger, Suyash Paliwal, Michael Short, Josh Sterling, Sarah Summerville, Tony Thompson, and Bruce Tuckman. These truly are in my opinion, a best-in-class team who care about these markets as much as I do. And I looked for people who would be good leaders, who have natural ability, but who are also very thoughtful. I also looked for people who truly understand the industry. I don’t think you can be a responsible regulator if you don’t understand the industry. So I looked for people with those qualities. You will also notice that is—if not the most diverse—one of the most diverse leadership teams in CFTC history. It’s really important to me that our leadership reflects the diversity of those in our markets—all of you. And I know FIA shares that view based on what Walt just said.
When I came to the CFTC, I came from Treasury and I had a pretty deep background in financial regulation more generally. But it was much more in the banking and securities side. I am always reminded by Benjamin Franklin’s saying that “the doorstep to the temple of wisdom is knowledge of our own ignorance.” So for the first thirty days, I said, “I’m not going to make key decisions that I don’t have to make. I’m just going to try to listen and understand.” And so I had over 26 meetings with virtually all of the 700 employees at the CFTC to get a sense of what they were working on, what they cared about, and where we can take the agency. What became very clear to me is I would go into a room of 30 to 40 people in Chicago, New York, Washington, Kansas City, and I would say “alright could anyone tell me the mission of the CFTC?” Not a single hand would go up. And that wasn’t really talking about them as much as talking about our mission. It was very clear it was sort of copied out of some statutory language. It wasn’t inspirational. And so one of the things that we did early on, was to ask the entire agency to propose a mission, vision, and set of core values. We then took all of the submissions, we selected what we thought were the best and then we voted on them. So I’m pleased to announce that the CFTC—a few hundred of our employees as well as those in our leadership—voted on the following mission statement, which is the new mission of the CFTC: To promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. And you’ll hear me talk about integrity, resilience, and vibrancy—very important traits. And so this is the new mission statement of the CFTC.
The other thing the CFTC did not have in our 45-year history was a vision statement. And so we also created a new vision statement, which is: To be the global standard for sound derivatives regulation. And again, you see sound regulation in both of those statements, and it’s really key to us get it right. Sound regulation is doing the right things, using the right tools, at the right time, for the right reasons. And it’s really important that we consider that.
We also chose four key values. And I think all of you will like these values, and keep in mind these were chosen by people at the CFTC, your day-to-day regulators in many cases. The first core value is Commitment—bringing our best to work every day and holding ourselves to the highest professional standard, just as many of you do. Second, was Forward-thinking. Really important for this industry in particular. It’s constantly changing. And so we need to challenge ourselves to stay ahead of the curve, and that is necessarily going to mean an important, constructive relationship with all of you. Next, Teamwork. The CFTC is really a community. It’s a place where people value each other. There are many CFTC alums in the audience today, and you know that it’s a special place, and I want to reinforce that. So we value our diverse skillsets and backgrounds to achieve our mission. And that’s so important simply because many of the issues that Walt outlined in his introduction don’t fall within any single division of the CFTC. It requires the entire organization to work together on cross-cutting issues. So emphasizing teamwork is critical. And then finally, and again, the agency’s employees chose this, so it is very important, this came from inside the agency, but is arguably going to be the most important of these values for all of you out there: Clarity—providing transparency to market participants about our rules and processes.
So now that we have come up with our mission, vision, and core values, we were then able to construct five strategic goals. So I’ll spend the rest of the time talking a little bit about those goals and tangible things that you can expect from the agency over the next short-term period.
So what are the strategic goals? Well, the very first one is taken directly from our mission statement. That’s to strengthen the resilience and integrity of our derivatives markets while fostering their vibrancy. And the formulation of this goal I think is really important because it is subtle, but it’s critical. And that’s the idea that resilience and integrity are of critical importance, but sometimes there can be a trade-off with vibrancy. So we want to make sure we balance that. Making sure our markets are strong, they have integrity, but not over-regulating in such a manner that they no longer are innovative.
Second, is to regulate our derivatives markets to promote the interests of all Americans. I think Walt said it best, and this is something that I’ve been focused on: most Americans have no idea how important the derivatives markets are to their daily lives. From the price of gasoline that people pay at the pump to the price of the food on the kitchen table, derivatives markets are the underpinning of our free enterprise system, not only in this country, but around the world.
Third—and this is one I think everyone in this room will appreciate—is to encourage market innovation and enhance the regulatory experience for market participants at home and abroad. It’s really important to me that this market—while being well regulated, while being soundly regulated—continues to thrive and that this industry continues to grow. And so we want to make sure that the regulatory experience for all of you is one that is enhanced.
Number four is to be tough on those who break the rules. I know everyone in this room, members of FIA, care about these markets, you care about the integrity of these markets, but there are bad actors out there. And to ensure we have confidence in our markets, we’re committed to weeding out those bad actors and being tough.
And then finally, this is sort of internal, but it’s so important that the agency, which has gone through a tremendous amount of change in the last ten years: to focus on our unique mission and improves our operational effectiveness. Because while these are primarily internal, they will have external ramifications as over the years you interact with our agency.
So how will we implement this? Well, goal number one: to strengthen the resilience and integrity of our markets while fostering their vibrancy. First big bucket of things is CCP supervision. And in this room, everyone knows the importance of clearinghouses and central counterparties. They really are at the center of our system and the Dodd-Frank Act made them all the more important, where we are centralizing risk in our clearinghouses. One of my key goals is to enhance and build out our Division of Clearing and Risk. So we have the people and personnel we need to continue to keep pace with the industry on issues like cybersecurity, margin, and capital, which we will talk about in a little bit. Also, we will be introducing in short order in the next couple of months our final rules to Part 39, our core principles for derivative clearing organizations. It’s also critically important that the CFTC remains the primary regulator and supervisor of our clearinghouses.
And this goes to the second key area which is international cooperation. Everything Walt said is absolutely on point. Regulators think about jurisdiction and borders, but markets do not. Markets are fluid. And international cooperation is more important now than it has ever been. EMIR 2.2 poses a potential challenge to that. We have been in a very good dialogue with the European Commission and with ESMA. We want to get to a place where we have regulatory cooperation that retains the authority of the CFTC and America to regulate and supervise our own clearinghouses. So we are committed to that result. And part of international cooperation, as Walt said, is about deference. But let me be very clear on this, deference is a two-way street. So we will grant deference if deference is granted in return. And so we are committed to doing that. One of the areas that we’re going to introduce in the next few months is our cross-border swaps proposal. And the cross-border swaps proposal basically addresses the situation where you have a foreign counterparty and a foreign counterparty, so non-US persons. At what point does that become a direct and significant issue for the United States? Does it have a direct and significant impact? A lot of foreign regulators around the world have told us there was a potential overreach back in the day. So we are considering that point, and are also considering the point about risk to the United States. So you will see, I think, a proposal in short order that focuses on capturing risk to the U.S. and to U.S. taxpayers. In my view, something that is arranged, negotiated, and executed in the United States, but ultimately not booked in the United States—booked abroad—does not pose a direct and significant risk, such that we would need them to register them as a swap dealer. I want to be very clear, we will apply our fraud and manipulation standards for U.S. activity. But as far as requiring the registration, I am focused on eventual risk that could come back to the United States and would hit American taxpayers potentially.
Margin and capital, another huge area that you care a lot about. We are going to be continuing to look at margin models, to think about that to ensure there is enough margin in the system. That will also play a role in our swap dealer capital rule, which we will re-propose or re-open in short order. Also talking about capital, that many of you I think have brought to our attention over the years, are the Basel rules and their impact on our markets. We have started a constructive dialogue with our banking regulators to make sure that our risks are not mispriced and that we don’t take away these markets or undermine them through bank capital rules.
And then finally, market structure. Here we’re looking at things particularly in markets that let’s say, have not existed for a hundred years, like our swap execution facilities. We want to make sure these markets are liquid, vibrant, and resilient. And so for example, we will be putting out a proposal to restrict or eliminate the name-give-up practice to ensure that everyone has a fair shot. And now that we have centralized clearing, we don’t necessarily need to share this kind of critical information, which some people argue will reduce liquidity in the markets. And so everyone will have a chance to comment on that proposal in short order.
We’re also looking at some other changes: codifying some no action relief in the SEF space as well as in the SDR space, swap data reporting. It is really important we get those rules right—Part 43, Part 45, and Part 49—and that we have a semi-uniformed standard.
The second goal, as I mentioned, is to regulate our derivatives markets to promote the interests of all Americans. As Walt said, in many ways I feel like we are the most important financial regulator most Americans have never heard of. We need to make sure that Americans understand the importance of our markets, and there are specific ways we are going to do that. First and foremost, agriculture. Agriculture is the very cornerstone of the Commodity Exchange Act. If we don’t make these markets work for farmers and ranchers, then in my view, they’re not working. So you will see we are focused on agriculture and some things we can do there. In April 2020, we’re planning on having our very first meeting outside of Washington. One of the most important things that I think the Commission can do is to actually go out to the communities that are effected by our derivatives markets. So we will have our first open meeting out in the Mid-West at some point because I think the regulator that is the closest to the people, is the best form of regulation.
End users. These markets exist to ensure that end users can use them for risk management and price discovery. And all of you know that because either you are end users or many of your clients are end users. We will propose a position limits rule in the next few months that addresses the concerns of end users, that ensures that bona fide hedging is not restricted, and that risk management is there. But we will provide some prophylactic, clear, and usable rules so market participants such as yourself will know what the limits are.
Smaller financial institutions. It’s really important that we don’t treat Main Street institutions the same way we treat Wall Street institutions. And by Main Street institutions, I’m also talking about smaller FCMs. So there are some things we are thinking about doing in that space and would like an ongoing dialogue with FIA and others about that.
Customer protection. I know everyone in this room cares a great deal about customer protection, it’s one of the reasons my agency exists. Next week we are going to be proposing some changes to our Part 160 rules on protecting customer information that will enhance that. And early next year, I expect we will release a proposal that codifies thirty years of important bankruptcy standards in our Part 190 rules to ensure that customers are protected and we don’t have another MF Global.
And then finally, education. Again, making sure that all Americans understand the derivatives markets and the critical role that they play. And we would hope to partner with FIA, with NFA, and some of the other institutions on your great classes in that regard.
Goal 3: encourage innovation and enhance the regulatory experience for market participants at home and abroad. Well first and foremost, the CFTC has a long history of principles based regulation. And the CFTC, even unlike other financial regulators, and the futures markets in particular, not only survived the financial crisis, but thrived during it. And as a result, the Dodd-Frank Act codified much of what this industry has been doing for close to a hundred years. Maybe over a hundred years. Yet, the interesting thing was it didn’t actually codify the principles based approach that has led to the thriving of this industry and the sound regulation of this industry. So I would like to renew our principles-based tradition in areas where it makes sense. Last week I gave a speech at Harvard where I articulated some rules for principles and some principles for rules, as to when we would apply one or the other. So you will be seeing some principles-based approaches again, in the near term.
CFTC-SEC coordination. How many people in this room are also subject to some kind of regulation or reporting by the SEC? Can I see a show of hands? Okay, quite a bit, quite a bit. We want to make sure that we are not duplicating or overlapping regulations. We want to coordinate well with the SEC on a number of fronts. If the SEC is regulating something and has information, then we have to ask ourselves the question: do we really need to ask for similar information in a totally different reporting form? So we are focused on coordinating with the SEC. We are also focused on coordinating with them on issues regarding margin and cross-margining.
Eliminating red tape. That’s pretty clear. I think the issue there is we have some things that have lasted for decades. Do we really need to be doing them? Do the rules that we have represent any current regulatory purpose? If not, then maybe we should consider removing them.
Transparency. Transparency is absolutely critical. We just amended, or are about to finalize Part 13, which imports the APA into our rulemaking process. We’re going to do more open meetings. As I said, I have a tremendous set of fellow Commissioners, and I think it’s important that the Commission meet publicly. And you’ll be seeing a lot more of that. We are not going to be doing a lot of rulemaking or other things by no action letters. We are actually going to go through the APA process where important and, we will restrict no action letters to those instances where we need a temporary fix or there’s something very specific that doesn’t lend itself to a general rule. It’s very important that our organization is transparent.
And then finally, 21st century commodities. Thinking about digital assets. Coming up with an approach that allows this country to lead—allows America to lead. Because if America doesn’t lead in this area, other countries will end up writing the rules. So it’s really important and part of the way we do this, in my opinion, is linked to that first topic I mentioned, a principles-based approach.
Be tough on those who break the rules. I don’t want to spend a lot of detail on this, but it’s really important, again, that these markets have integrity. You rely on them for integrity. You rely on the SROs as well as the CFTC to promote the integrity of these markets. That said, we’re going to be fair and consistent. It’s really important that we lay out what our expectations are. Self-reporting, cooperation, and remediation will be met with reduced fines. We will recognize that because it’s so important. My focus is not on punishing people as much as getting people to follow the rules. We will also increase our coordination with other regulatory authorities: the DOJ, the FBI, the SEC as well as with the exchanges, and NFA. And then finally we will focus our surveillance efforts. So, on those areas where we really do think there is a potential risk to market integrity, we will use quantitative methods and we’ll also target certain areas that I think are particularly important, like agriculture.
Finally, focusing on our unique mission and improving our operational effectiveness. I spoke earlier about mission, vision, and values. This is an organization that has gone through a lot of change and I think you guys have experienced that in dealing with this agency. Just to give you an objective number here: In 2007, the CFTC was rated by the Partnership for Public Service as one of the best places in government to work. By 2016, the CFTC was one of the worst three places to work in the government of agencies our size. We have a tremendous work force. If regulators feel good about what they do, they are committed, and they feel like they’ve got the resources they need, they will be better regulators for all of you. I care about the people in the agency, and I am focused on making it a better place.
Efficiency and cost effectiveness. Every private sector firm in here has to make tough decisions when it comes to money, budgets, and allocation. We should be doing the same in the government. In fact, I would argue it’s even more important that the government have the discipline because, ultimately, we are custodians of tax payer dollars.
Attracting and retaining diverse talent. I’ve already spoke about that. It’s not only for the executive team, it’s throughout the entire organization.
And then finally, data analysis and protection. We need to think about as an agency, how we get, how we use, and how we protect data. Under my watch, we’re not going to be taking any source code, unless there is a very specific reason for it and it’s subject to a subpoena. I can assure you of that. I’ve spent the last couple of years at Treasury trying to do what I could on the trade front and on the CFIUS front to protect American intellectual property and that’s something I will bring to this job.
So where do we go from here? Well, this is a quote I like by Thomas Edison, “vision without execution is hallucination.” In fact, I had this plaque made, I ordered it, and I showed it to the entire agency. And now it hangs on my wall in my conference room. We’re going to be focused now on getting things done. We have a mission, we have a vision, we have strategic goals, core values, but nothing’s going to get done unless we focus on results. “Never mistake activity for achievement,” said John Wooden of UCLA, and that’s something that is really important to us.
So what you can expect over the next short period, six months or so let’s say, all of these things: a framework of principle-based regulation, I already introduced that last week; CPO/CTA amendments to our Part 4—will be coming out pretty shortly; enforcement penalty guidance, again to ensure that there is fairness and consistency and market participants know; a swap dealer capital rule; cross-border rule for swap dealers, I mentioned earlier; the position limits rule that all of you I know are eagerly awaiting; name-give-up for SEFs; provisions to our bankruptcy rules; further SEF refinements—particularly I’m interested in not undoing ten years of industry practice, but if there are changes in the SEF world that enhance the liquidity and the resiliency of these markets, I’m certainly open to them if we can get a consensus on them; swap data reporting, that’s really important that we get that right, that we streamline that; revisions to Form PQR, that goes to SEC and CFTC; and finally, principles guidance for digital assets—so we can allow this industry to innovate and grow, but at the same time regulate responsibly. So that is what you can expect from the CFTC. I think if we do all of these things in the strategic plan—having listed out the core categories, I counted—there are about 195 tangible, focused actions that the agency can do over the next several years to achieve these. I think if we do this and we work constructively with all of you, we will work to ensure that our markets have integrity, have resilience, and have vibrancy. And I know it’s important to all of you, to your clients, to your companies, and to your livelihood. And I want you to know I am very much committed to that. Thank you very much.