Over the last few years, derivatives markets have had to react quickly to new technologies, new government policies, and new economic realities.  Exchanges have added many new products for futures in traditional commodity types.  For example, in 2023, exchanges listed new metals contracts for lithium and molybdenum to meet growing demand in response to the historic investment in and demand for electric vehicles and batteries.  And we have also seen entirely new product types proliferate.  Exchanges have listed new contracts that reference novel commodities, such as digital assets and voluntary carbon market credits.

As sponsor of the CFTC’s Technology Advisory Committee, I feel comfortable saying that there is no shortage of participants with new ideas seeking access to our regulated markets.  Under the Commodity Exchange Act, the Commission’s role includes promoting responsible innovation, while protecting customers and promoting the market integrity and transparency that makes American capital markets the deepest and most liquid in the world.  New products may improve access to financial markets, reduce costs, and help manage novel risks.  But novel derivative contracts and the commodity they are based on may lack a meaningful history that shows that the contract is not readily susceptible to manipulation.  And for digital assets, showing that the contract is derivative of commodities rather than securities is important to prevent regulatory arbitrage.

Especially in novel cases, the Commission needs complete information so it can conduct oversight over new products on our markets.  The Commission needs to be able to understand if an exchange is fulfilling its core principles that govern its conduct, to determine whether the new product complies with the law, and to understand any increased risk the contract may pose to customers and financial stability.

Under the Commodity Exchange Act, most exchanges are permitted to self-certify that new products comply with the core principles, including that they are not readily susceptible to manipulation.  That means a potentially complex or novel product may enter the market even before the Commission’s staff have been able to understand fully whether it complies with the law, and the risks that it could pose.  To make this assessment quickly, our staff need complete information about both the characteristics of the product and of the market for the underlying commodity that determines its price.

I support this proposal because it recognizes and helps address a trend that Commission staff have experienced—submissions not including sufficient information for the staff to fulfill the Commission’s regulatory responsibility.  By requiring a “complete” explanation of a new product’s terms and conditions and providing context on what it means for an explanation to be “complete,” this proposal would enable the Commission to fulfill its oversight responsibility, including to determine the lawfulness of the product and to assess risk.

Under the proposed changes, the Commission’s ability to understand how the product’s terms and conditions comply with the law is increased.  This also allows the Commission to ensure that when exchanges do add new products, their decisions follow the core principles in the law, do not put market integrity at risk, and are supported by the twin pillars of customer protection and financial stability.

This proposal will help achieve the purposes of the Commission’s existing heightened review standard for digital assets.[1]  The heart of this heightened review is “extensive visibility and monitoring of markets and for virtual currency derivatives and underlying settlement reference rates.”[2]  Complete information at the self-certification phase will help staff better understand the risks posed by products that may not have the extensive history that allows manipulative trading patterns to be identified and that may reference digital assets traded on unregulated or unregistered spot exchanges.  “Complete” information will enable a more comprehensive Commission review of risks associated with these products and underlying commodities, and any changes necessary for market integrity or to protect customers and financial stability.

This proposal would also help the Commission extend heightened review to self-certified climate and environmental products listed on exchanges, a recommendation I first made in March at ISDA’s ESG Conference.[3]  The Commission has recognized the challenges that exist in the integrity of the spot market for carbon credits and launched an Environmental Fraud Task Force, which I advocated for, to combat fraud in this space that can impact derivatives carbon products.  Adopting a heightened review framework will allow the Commission to work closely with exchanges to ensure that they are fulfilling interest in these products in a responsible fashion.  That is aided by the Commission’s access to complete information about their terms and conditions and the underlying commodity at the initial self-certification.

Even where contracts address more traditional markets, the economic circumstances and customer needs are changing and the Commission needs complete information to keep pace.  Notably, the Commission needs complete information on new contracts on lithium, rare earth metals, and copper, products that are drawing increased interest due to growing investment in EV’s and batteries encouraged by the “triple whammy” of new laws—the Inflation Reduction Act (IRA), the Bipartisan Infrastructure Law (BIL) and the CHIPS and Science Act.  Users of these products may have sourcing and production location requirements for taking advantage of the IRA’s tax credits.  As I said before the Environmental and Energy Advisory Market Committee, the CFTC should work with exchanges on listing standards that address those needs.[4]  Complete information will be an important tool in that effort.

The addition of requiring “complete” information would also apply to new rules that are self-certified by an exchange or clearinghouse.  The emergence of novel products and technologies has also created interest in modifying long-standing rules about traditional market structure.  When the CFTC released its request for comment on “vertical integration,” on novel market structures, I said that this is an area that needs to be studied to determine any increased risk or unintended consequences.[5]  As I said in my statement, I am open to considering such changes to traditional market structures, but only if they do not result in increased risk to customers and financial stability.[6]  This is just as true for an existing exchange or clearinghouse seeking to change its business model as it is for a novel registrant coming before the CFTC for the first time.

The Commission has a brief window to delay implementation of self-certified rule changes that it can use when they present novel or complex issues.  Complete information will help us understand when to exercise that authority.

The power of markets is that, when they work well, they are an unmatched tool for innovation.  It is our responsibility as a regulator to keep updating our rules in ways that both promote responsible innovation and impose appropriate guardrails that promote market integrity and transparency.  I am thankful to the staff for their hard work on making an update in that spirit, and the Commission for considering this requirement.

Finally, I support the proposal because it includes changes designed to decrease systemic risk.  The Commission proposes to specify when systemically important clearing houses must notify the Commission when changing rules, procedures or operations.  The Commission’s experience has been that the current standard of notification, which is rules, procedures or operations “that materially affect the nature or level of risks presented” is too broad or vague to be meaningful.  I support the proposed notification to the Commission on material changes such as to the default management rule, programs related to risk analysis, recovery and wind down plans, revised margin methodology, cross-margining programs, or stress testing.  Each of these have the potential to be related to systemic risk.  The proposed changes enable the Commission to manage systemic risk, which is one of our key roles as a financial regulator.

I appreciate all of the work of the staff, and I look forward to public comment on the rule.