SPEECHES & TESTIMONY

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

October 3, 2019

Good morning and welcome to our fourth meeting of the Technology Advisory Committee (TAC or Committee). Before we begin, I would like extend a warm welcome to Chairman Tarbert.  This is Chairman Tarbert’s first TAC meeting at the Commission and I hope he finds them as informative and engaging as I have. I would also like to take a moment to recognize Meghan Tente, the Committee’s new Designated Federal Officer. Thank you, Meghan, for seamlessly assuming the leadership role for the Committee and for working so diligently to ensure today goes off without a hitch.

As always, I would also like to express my deep gratitude to all of the Committee members for so generously giving their time to participate today.  As I have noted before, the agency is fortunate to have such a talented and esteemed group advising us, but the flip side of that coin is you all undoubtedly have many demands on your time, so I appreciate you making this Committee’s work a priority.

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.

Virtual Currencies Subcommittee Presentation

Our Virtual Currency subcommittee will hear a presentation from Gary DeWaal, Special Counsel at Katten, and Lee Schneider, General Counsel of Block.one, on the key characteristics and legal treatment of stablecoins.  Although the definition of a “stablecoin” is evolving, they are commonly thought of as a class of virtual currencies that seek to offer price stability, frequently by being “backed” by assets on reserve, like fiat currency(ies) or physical commodities (e.g., gold).  Because they strive for price stability, stablecoins have the potential, through tokenization, to function as viable, liquid mediums of exchange and to be powerful enablers of smart contracts.  Depending upon their mechanics and structure, a particular stablecoin may qualify as a commodity, security, derivative, or some other regulatory category.  Given the nascency of this class of digital assets, I think it is important to approach any stablecoin as we have other products that have similar characteristics, mechanics and structure.  I look forward to hearing from Mr. DeWaal and Mr. Schneider on the defining characteristics of stablecoins and their potential regulatory implications.

Next, the subcommittee will hear from Chris Brummer, Professor and Director of the Institute of International Economic Law at Georgetown University Law Center, and Tom Chippas, Chief Executive Officer of ErisX, to discuss some of the unique challenges associated with crypto-custody.  The protection of private keys by crypto-trading platforms, trust companies, and clearinghouses is an evolving landscape of best practices which has quickly become very robust.

Distributed Ledger Technology and Market Infrastructure Subcommittee Presentation

The Distributed Ledger Technology (DLT) subcommittee will then present on some of the potential real world applications of DLT, including with respect to custody and collateral management.  DLT also holds great promise to safeguard individuals’ privacy, promote data integrity, and ensure confidentiality.  As the technology matures, I also think it will be interesting to explore whether there is a role for DLT to play with respect to firms demonstrating their compliance with CFTC record retention requirements. Specifically, one day the agency may be able to verify over the blockchain, through something like a zero-knowledge proof, that certain records exist within a firm and are being maintained appropriately.  Such a process could significantly enhance customer protection and promote regulatory compliance, while not requiring enormous regulatory resources or exposing sensitive data to cyber risk through electronic transfers.

Automated and Modern Trading Markets Subcommittee Presentation

The Automated and Modern Trading Markets subcommittee will continue its examination of the true risks inherent in the modern trading environment and whether, and how, those risks are currently being mitigated.  In my view, many of the risks posed by automated and algorithmic trading are already being addressed through market incentives, including exchanges’ and firms’ own self-interest to limit a significant operational risk to their businesses.  But to the extent gaps may exist, it has been my hope that the work of this subcommittee can illuminate them and begin a conversation about how those risks can be best alleviated.

Prior TAC meeting presentations and discussions have already added significant clarity to that landscape.  To refresh everyone’s recollections, in prior TAC meetings, Bryan Durkin of the CME Group has presented how CME has implemented trading and volatility controls that complement, and in some cases exceed, eight recommendations published by the International Organization of Securities Commissions (IOSCO) regarding practices to manage volatility and preserve orderly trading.

More recently, the CFTC’s Market Intelligence Branch presented its own research report entitled, Impact of Automated Orders in Futures Markets, that analyzed manual and automated trading’s impact on the commodity futures markets.[1]  The report contained several significant findings, including that the increase in automated order activity seen across all commodity futures markets has not correlated to increases in end-of-day price volatility and, in some cases, showed that the volatility declined as automation increased.

Building upon that work, today we will hear from Alicia Crighton, Managing Director at Goldman Sachs, who will discuss FIA’s best practices for exchange and firm risk controls. FIA has played a critical role in advancing risk management and trading controls through development of its best practices and its subsequent industry surveys regarding their adoption.

Ms. Crighton will discuss current pre- and post-trade risk controls being implemented by exchanges and firms today.  Taking into account the dynamic, ever evolving nature of these controls, she will also give us a preview of some of the next generation controls and best practices currently being developed by exchanges and firms to further refine and improve electronic trading systems and protect the integrity of our markets.

Next, and directly supplementing the prior TAC meeting’s presentation by CME, Mayur Kapani, Chief Technology Officer for the Intercontinental Exchange (ICE), will present on the risk controls ICE currently implements across all of its exchanges.  Mr. Kapani will also walk us through a real life example illustrating how these risk controls worked during the recent volatility spike in Brent crude.

Both of today’s presentations demonstrate how trading and risk management controls continue to evolve with the trading technology itself.  Controls are constantly being updated and improved to respond to market developments.  Given how quickly advancements in risk controls are occurring, I would also be curious to hear from the subcommittee and the full TAC if it would be informative to have an updated industry survey to determine what best practices look like in 2019 and how widely they have been adopted.

It is my view that these continuous enhancements are made possible because exchanges and firms have the flexibility and incentives to mitigate evolving risks through an ever-higher set of standards, rather than through prescriptive regulatory requirements which can quickly become obsolete, redundant, or create unintended consequences, and even new risks.

Cybersecurity Subcommittee Presentation

Finally, the Cybersecurity subcommittee will present on the Financial Services Sector Coordinating Council’s (FSSCC) Cybersecurity Profile, building upon the overview provided at our last meeting.  Following the presentation, the subcommittee would like to discuss with the full Committee whether the TAC should vote to recommend that the Commission issue a statement of support for the FSSCC Cybersecurity Profile at the next TAC meeting.  I am interested to hear feedback from the full Committee regarding this possibility.

We will also hear from Jason Harrell, Executive Director and Head of Business and Government Cybersecurity Partnerships at DTCC, regarding vendor risk management.  Mr. Harrell will discuss some of the challenges of effective vendor risk management and some potential alternative approaches that may address those challenges.

Conclusion

Before I conclude my remarks, I would also like to recognize Jorge Herrada, John Coughlan, Scott Sloan, and Phil Raimondi for their tireless efforts to make this meeting a success.

With that, I would now like to recognize Chairman Tarbert and my fellow Commissioners to make their opening remarks.

 

[1] Impact of Automated Orders in Futures Markets, DMO (March 2019) https://www.cftc.gov/sites/default/files/2019-03/automatedordersreport032719.pdf.