SPEECHES & TESTIMONY

Opening Statement of Commissioner Brian Quintenz before the CFTC Technology Advisory Committee

March 27, 2019

Good morning and welcome to our third meeting of the Technology Advisory Committee (TAC or Committee).  Before we begin, I would like to thank all of the Committee and subcommittee members for volunteering to participate and share their expertise with us.  In particular, I would like to take a moment to recognize the new TAC Chair, Richard Gorelick, for his willingness to lead and giving so generously of his time to advance this Committee’s important work.  Richard has a long and distinguished history as a participant in the derivatives market, has been an astute and consistent source of feedback to the CFTC across multiple advisory committees, as well as in two of this TAC’s subcommittees, has been a long-time member of FIA’s Principal Traders Group, and has testified before Congress on derivatives market structure.  Richard, thank you for continuing to provide us the benefit of your expertise and now, your leadership.

We have a packed agenda for today.  We have presentations from each of the TAC subcommittees highlighting relevant issues for the full Committee’s consideration, as well as several guest presenters.

Automated and Modern Trading Markets Subcommittee, including Special Presentation from the Division of Market Oversight

First, for our Automated and Modern Trading Markets Subcommittee, the CFTC’s own Elitza Voeva-Kolev, along with Mel Gunewardena, the CFTC’s new Chief Market Intelligence Officer, will present a new and fascinating report developed by the Market Intelligence Branch entitled, Impact of Automated Orders in Futures Markets.  The staff report analyzes manual and automated trading’s impact on the commodity futures markets.  Specifically, the report examines transaction data in 30 futures contracts for the period January 2013 through December 2018, and analyzes the correlation, if any, of increased automated trading with volatility.  The report contains several significant findings, including that the increase in automated order activity in all commodity futures markets has not correlated to increases in end-of-day price volatility.

The report will become a substantial anchor and reference point in the journey to achieve an objective, data-driven understanding of the impact that automated and algorithmic trading have on our markets.  I am extremely proud that this significant agency work product will be unveiled before our own TAC Committee, with external publication soon to follow.  This report is an excellent example of our staff using the data the Commission collects in order to examine and better understand how market structure, trading activity, and market fundamentals are evolving in our core markets.  I note this report complements an earlier MIB report issued this past June examining sharp price movements in the commodity futures markets.[1]

Further staff reports and data analysis, along with the expertise represented on this Committee, are critical to accurately and specifically identifying the true risks associated with automated and algorithmic trading, as well as how the development, adoption, and deployment of market-incentivized solutions are mitigating those risks.  I look forward to more thoughts on this topic in the future from this subcommittee.

Virtual Currencies Subcommittee Presentation, including Special Presentation from ABA

Our Virtual Currency Subcommittee will first hear a presentation from Peter Van Valkenburgh, Director of Research at Coin Center, on various consensus mechanisms used for virtual currencies.  Currently, both Bitcoin and Ether rely on a proof of work consensus mechanism to validate their respective ledgers.  However, the Ethereum Foundation has announced its plans to shift to a proof of stake consensus mechanism at some point in the future, in part to reduce energy consumption.  The transition from proof of work to proof of stake consensus mechanisms raises important questions for both market participants and regulators, including how the use of either mechanism affects the likelihood that a bad actor could manipulate or falsify the ledger.  These issues are also among the many topics on which the Commission recently sought comment in a Request for Information about the evolution of the cryptocurrency market and potential new virtual currency-based futures and derivatives products.[2]

Following Mr. Van Valkenburgh’s presentation, we will also hear from Kathryn Trkla and Charley Mills from the American Bar Association’s Jurisdiction Working Group of the Innovative and Digital Products and Processes Subcommittee.  That group has recently published a comprehensive overview of the current federal and state regulation of virtual currencies and digital assets, along with identifying key policy areas for additional consideration.[3]  I am excited to hear from these distinguished panelists on their work.

Cybersecurity Subcommittee Presentation

Next, our Cybersecurity Subcommittee will hear from Mr. Josh Magri, Senior Vice President and Counsel for Regulation & Developing Technology at the Bank Policy Institute.  Mr. Magri will provide an overview of the Financial Services Sector Coordinating Council (FSSCC) Cybersecurity Profile.  The Profile presents a possible common, standardized approach regulators could use when examining cybersecurity at firms.

We will also hear about how the transition to cloud-based infrastructure may pose unique cybersecurity concerns for firms, as firms work to adjust their current controls to a shared-responsibilities environment.

The Cybersecurity Subcommittee has also begun to review existing regulatory guidance on third party vendor risk management, with the goal of presenting possible recommendations to the full Committee about ways in which the CFTC could strengthen its existing guidance in this area.  We will hear from subcommittee members about their progress to date on this important initiative.

Distributed Ledger Technology and Market Infrastructure Subcommittee Presentation, including Special Presentation from ISDA

Finally, our Distributed Ledger Technology and Market Infrastructure Subcommittee will present on the current state of DLT, including challenges toward more widespread adoption and potential use cases.  The panel will also explore if there are specific areas where CFTC regulation may be inhibiting the adoption of DLT or additional areas where further guidance from the agency could support further development.

Lastly, we will hear from ISDA representatives about the recent release of the Common Domain Model (CDM) 2.0 for interest rate and credit derivatives.[4]  The further actualization of DLT in the derivatives space depends on the ability of market participants to digitize all aspects of their financial transactions.  Once the terms of a swap can be reduced to a completely digital, industry-accepted standard, then automatic trade reporting, centralized recordkeeping, and, ultimately, smart contracts become possible.  ISDA’s CDM 2.0 aims to create a standard digital representation for products and lifecycle events in the interest rate and credit derivatives markets, with the hopes of expanding to other asset classes later this year.  CDM 2.0 is now fully accessible to all market participants, which is an important step toward building broader consensus and supporting its further application in new projects.

Conclusion

Before I conclude my remarks, I would also like to thank Dan Gorfine, the Designated Federal Officer of the Committee and the Director of LabCFTC, as well as Jorge Herrada, John Coughlan, and Scott Sloan, for their tireless efforts to make this meeting a success.

With that, I would now like to recognize Chairman Giancarlo and then my fellow Commissioners for their opening remarks.

 

[1] Sharp Price Movements in Commodity Futures Markets, Market Intelligence Branch, DMO (June 29, 2018), https://www.cftc.gov/sites/default/files/2018-06/SharpPriceMovementsReport0618.pdf.

[2] Request for Input on Crypto-Asset Mechanics and Markets, Request for Input, 83 Fed. Reg. 64563 (Dec. 17, 2018), https://www.cftc.gov/sites/default/files/2018-12/2018-27167a.pdf.

[3] Digital and Digitized Assets: Federal and State Jurisdictional Issues, American Bar Association, Derivatives and Futures Law Committee, Innovative Digital Products and Processes Subcommittee Jurisdiction Working Group (March 2019), https://www.americanbar.org/content/dam/aba/administrative/business_law/buslaw/committees/CL620000pub/digital_assets.pdf.

[4] ISDA Publishes CDM 2.0 for Deployment and Opens Access to Entire Market, ISDA (March 20, 2019), https://www.isda.org/2019/03/20/isda-publishes-cdm-2-0-for-deployment-and-opens-access-to-entire-market/.