Remarks of CFTC Chairman Heath P. Tarbert to the 36th Annual FIA Expo 2020
November 10, 2020
Remarks as delivered
Good morning everyone.
First, I want to thank you, Walt, and I want to thank FIA for inviting me back to this really important gathering of derivatives industry participants. I hope that everyone is staying safe and I hope that we can all be together soon. When we were here at the 2019 FIA Expo – that feels like five years ago, doesn’t it – I laid out a mission and vision for the CFTC. Our mission is to promote the integrity, resilience, and vibrancy of U.S. derivatives markets through sound regulation. Our vision is to be the global standard for sound derivatives regulation.
Back in 2019 – in a large room with other people, with many of you – I laid out a plan for what the agency would do in the coming year. I spent the first 100 days of my term talking to external stakeholders, getting to know the agency, and laying out my plan. That plan set out five goals of my administration and laid out specific action items to fulfill each of those goals. Well, as the great military strategist Helmuth von Moltke said, “no plan survives contact with the enemy.” Or, perhaps better, as Mike Tyson said, “Everybody has got a plan until they get punched in the mouth.” And boy, 2020 sure punched us and the entire world right in the mouth. 2020 was a huge test of resiliency of our markets, of our market participants, and of our agency. And I’m so proud to say that all three showed how tough they are.
So what have we been up to in 2020? Well, I showed everybody last year what the plan was, but a plan is only a piece of paper unless it’s executed. Like Thomas Edison said, “vision without execution is hallucination.” Now this industry has seen big talk before, and what we needed to prove that we could walk the walk, and to go back to the roots – and the hoofs – of the futures industry, we needed to show that we weren’t all sizzle and no steak. So you saw that plan – and were asking me last year, and are asking me –“Where’s the beef?”
Well, since last Expo, the agency had 19 open meetings – that’s more open meetings than the prior seven years combined before me getting to the agency. And 11 of those meetings were after the Covid pandemic started, and we just didn’t have these meetings so we can talk about weather. The agency approved 30 final rules and proposed more that I hope will finalize by the end of this year, and 22 of those final rules were done during Covid. This includes finishing all the major Dodd-Frank rulemakings. We may revisit and recalibrate some of these final rules, but from here on, we’re moving from building the system to improving the system, and there were other things that we accomplished as well that I’ll talk about a little later.
When I was laying out my plan for the agency, I focused on five key goals that have since been adopted by the Commission: first, was to strengthen the resiliency and integrity of our derivatives markets while fostering their vibrancy; second, was to regulate the derivatives markets to promote the interests of all Americans; third, to encourage innovation and enhance the experience for market participants like so many of you, at home and abroad; fourth, was to be tough on those who break the rules; and finally, we wanted to focus on our unique mission and improve our operational effectiveness as an agency. The amazing thing is that this agency has advanced each of these goals during the past year. In short, we’ve gone from goals to action.
Our markets are incredibly important to the American and the world economy. They have to function well in good times and be able to withstand the bad times as well. The vital role of the CFTC is to ensure those markets are both vibrant but also resilient, but global oversight – and cooperation of regulators – since the 2008 Financial Crisis still lacked a clear framework when I took the helm at the agency.
When I started at the CFTC, The US and European regulators were grappling with the fallout from Brexit. In particular, the EU wanted to make sure it had enough oversight of clearing once London left the EU, but American clearinghouses stood to be collateral damage from that fight. We needed to find a way for both sides of the Atlantic to oversee clearinghouses that are relevant to them without creating unwieldy overlapping oversight. Well, I’m pleased to say that our negotiations bore fruit – both on the specific issue of clearinghouses, and well as creating the most productive working relationship ever between the CFTC and the EU. So what are the concrete results? Well, here’s a place with a lot of steak to go with the sizzle. The EU revamped Emir 2.2 and did not designate any US clearinghouse as tier 2, so our clearinghouses – including the CME – remain under the sole oversight of the CFTC. At the same time, we’ve revamped our rules to provide alternative compliance for certain non-US clearinghouses. This allows Derivatives Clearing Organizations incorporated outside the US that don’t pose a substantial risk to our country to meet their regulatory obligations through compliance with their home country’s rules. We’re avoiding duplicative supervision of clearinghouses which can exacerbate problems in the event of defaults, but at the end of the day, we’ve amicably worked out a solid solution. We’ve enshrined that through sound regulations and memorialized plans for enhanced cooperation through an MOU with ESMA to share information on our clearinghouses. At the end of this process, I think we’ve ushered in a new era of productive transatlantic cooperation, but our work on clearinghouses isn’t the only thing we’ve done to strengthen the resiliency of our markets.
We finalized rules on swap dealer capital requirements so our dealers who have been provisionally registered for over seven years can finally drop that provisional tag, and we finalized a rule – not guidance – on the treatment of cross-border swaps, a rule that clears up much of the confusion generated by the early flurry of Dodd-Frank rulemakings and that properly focuses the CFTC’s jurisdiction on risks that can wash back onto American shores. Finally, we revamped our swaps reporting rules to harmonize them with other regulators to make sure the agency can fully quantify and analyze risk in the cleared and uncleared swaps markets. We’ve also done a lot to promote the interests of all Americans.
Most Americans have never heard of the CFTC, but our agency – and the actions we’ve taken over the past year – has had a big impact on pocketbook issues for most American families like the price of food at the store, gas at the pump, and interest rates on people’s home mortgages, and where we’ve come through for everyday Americans with both our position limits rule and our work on the Libor transition. Well, if our work on cross-border clearing was a steak, position limits was a brisket. It’s huge. It’s a tough cut of meat if you don’t do it right, and it takes a hell of a long time to get done, but you know what, once it’s done, there’s enough for everybody.
Our position limits rule is a workable solution to what has been a long drawn-out drama. Our proposal earlier this year was the agency’s 5th attempt at a position limits rule since 2010. Only one of those rules was ever adopted as final – and it was later vacated by the District Court. Every nominee for Chairman or Commissioner has pledged to the Senate that they would get position limits done, but until last month – no one could. We put together a framework that I think will stand the test of time. It achieves our goals of limiting the role that speculative positions can play in our markets while acknowledging different ways that cash market participants use futures markets for hedging. The rule leverages the good work of our exchanges and what they are already doing to set and monitor position limits. Our goal was to make the rule as easy as possible to comply with by clearly enumerating as many hedging transactions as were warranted and creating a streamlined, exchange-centric review for non-enumerated hedges. Now my hope is that – after some work and compliance systems are in place – this rule will not be a huge burden on compliance departments that the prior proposals certainly would have been, and once this rule is in effect, I think we’ll have given the markets good protections against excessive levels of speculation, which some people believe cause big swings in commodity prices over the years.
Another example of our rules helping everyday Americans is our work on LIBOR transition. This is a key interest rate has been used to set interest rates on mortgages, commercial loans, and many other individual and corporate debts, and as we found out over the past decade, it’s a rate that can be gamed. The CFTC took a leading role in identifying the problems with LIBOR, and we’ve helped with the transition away from that rate. While the CFTC didn’t select SOFR as the replacement rate, we’ve done a lot to encourage and facilitate its replacement. We’ve offered targeted no action relief to help move existing LIBOR-based swaps to SOFR into other risk-free rates. We’ve also worked with our clearinghouses as they switch from using LIBOR to SOFR to discount cash flows. The concerted efforts of industry and regulators through the ARRC will help ensure a smooth transition covering thousands of counterparties and trillions in notional swaps. The ARRC process has been a model of public-private partnership aimed at achieving a goal that –let’s face it – neither side would have been able to achieve alone, and while our attention has been focused on making sure the existing markets continue to function well, we also need to keep an eye on what’s to come.
Our markets are constantly evolving to address the needs of market participants and so many of the things that are integral to our markets today. Think about it, electronic trading, interest rate markets, energy derivatives, all of those things were once considered new and disruptive. Well, the CFTC is an agency that embraces change. Congress in fact put in our implementing statute that the agency should “foster responsible innovation.” As far as I can tell, the CFTC is the only agency with the word “innovation” in our statute. So what have we done to foster responsible innovation? The first is engagement, and when I talk about engagement, I’ve got to talk about the role of LabCFTC.
LabCFTC’s role is twofold: first, to engage proactively with the innovator community. Second, to keep CFTC staff apprised of trends and developments in innovation. At LabCFTC’s office hours, innovators can talk to staff about developments in the industry. This lets innovators – many of whom don’t have traditional financial services backgrounds, let alone regulatory backgrounds – think about how their innovation fits within the CFTC’s regulations, and the Lab has continued these outreach efforts even during Covid. The Lab has also been instrumental in keeping CFTC staff up to date on fintech developments. In fact, since Covid started, the Lab has given over 60 training sessions internally here at the CFTC, and that’s one of the main ways that I myself have been able to keep up on developments in fintech. The importance of this engagement is one of the reasons why I elevated LabCFTC to report directly to the Chairman, and to be at the same level as our other main divisions at the agency. And this engagement isn’t just limited to industry.
In the past year, we’ve joined the Global Financial Innovation Network, which is a group of over 60 central banks, regulators, and organizations from around the world, creating a framework for cooperation on financial innovation. We also recently signed a statement of intent with the South African Reserve Bank to promote financial innovation. I recognized the difficulty faced by many market operators about where the CFTC’s jurisdiction stops and the SEC’s jurisdiction begins, so I made it a point during my tenure for the two agencies to work hand-in-hand to resolve these issues. The two agencies have worked behind the scenes on the dividing line between CFTC and SEC jurisdiction over digital assets, and last year, based on conversations between the two agencies, I stated my position that Ether was a commodity under CFTC jurisdiction, which provided much greater certainty to the fintech community. And just last month, the two agencies –for the first time in 45 years of our shared existence– held a joint open meeting to vote on something, in this case, margin on securities futures, an issue that has hampered the development of that market here in the US despite the fact that it thrives overseas. The dividing line between the agencies may be murky to the market, which has the unfortunate consequence of creating uncertainty for financial innovations, but I believe the cooperative relationship between the agencies, between the two commissions, and in particular the way in which Chairman Clayton and I have fostered it through committed dialogue, will help bring clarity to our markets.
The second thing we’ve done, apart from engagement, is to provide actual guidance. We’ve taken all the information we’ve gotten from conversations from this industry and questions about how new fintech innovation fits within our regulations, and we’ve used that to provide solid guidance to the marketplace. So in March of this year, we published a binding Commission interpretation on the actual delivery of digital assets for leveraged products, which was the culmination of two years of work and countless comments from – and conversations with – the digital asset community.
The CFTC also just published a few weeks ago some very helpful guidance on how FCMs should account for physically delivered virtual currency futures. This guidance will let the industry understand how the agency views some of the most important issues around accounting and financial reporting of virtual currencies. There are still plenty of issues we are working through with the fintech community, and I hope we are going to continue to provide more guidance on how these products fit within our regulations, and this engagement and guidance isn’t just empty talk. We’re seeing a real payoff in our markets as they diversify with new products as well as new contract markets.
During my tenure, we’ve designated two new contract markets, we’ve amended the orders of three clearinghouses to handle additional products, and we have other new markets right now in discussion with our Commission for future designations. We’ve also seen an explosion of new products offered on our exchanges. Of course, digital assets are a big focus of innovation right now, and we’ve seen physically-delivered Bitcoin futures offered for the first time, and in just the past few months, we’ve seen Ether futures listed on a DCM for the first time. This is less than a year after I stated my position that Ether is a commodity under CFTC jurisdiction. But it’s not just digital assets. Our exchanges have listed over 1,000 new products, new contracts since last July, ranging from new contracts on pork cuts that can provide better risk management compared to live hogs, to futures on water prices in California, to new stock index volatility futures. At the end of the day, our markets are not only resilient, they’re also innovative.
Well so far, I’ve talked a lot about making the system more resilient, making it work for the American people, and fostering innovation. But it’s not all sunshine and roses out there. Sometimes, there are cattle rustlers, and that’s where enforcement plays its role. 2020 was a banner year for our Enforcement division, and all of you who abide by the rules should take comfort in that. Our markets depend on rules, and when somebody breaks those rules, they can undermine the confidence in our markets, so we’ve got to make sure that non-compliance isn’t a competitive edge. So we want to do two things.
First, we want to reward a culture of compliance for all those people out there, including many in this audience, who operate within the CFTC’s regulations, so that’s why we’ve issued additional guidance on self-reporting. The more companies have robust programs, the better that they can identify and remediate compliance problems. That improves the securities of our markets and our market participants, and it’s something that we should reward.
Second, we’ve gone after people who try to operate outside the CFTC’s regulations. Our statute and regulations are pretty clear about what has to be offered on a registered exchange, and so while we want to foster responsible innovation, we can’t abide by people who flout our rules. Just over a month ago, the Enforcement Division brought an enormous case with the Department of Justice against a huge, unregistered Bitcoin derivatives exchange. This case may turn out to be one of the biggest cases our agency has ever brought, against a company that has taken over a billion dollars in fees from customers, including many US customers, for unlicensed and heavily leveraged Bitcoin derivatives. Our registered exchanges comply with rules on customer protection and market integrity for the benefit of market and market participants. This platform didn’t comply with those rules and we can’t reward non-compliance. It’s bad for US customers, it’s bad for our firms that are complying, and it’s bad for the commodities markets as a whole. Similarly, we’re also acting aggressively against offshore funds that either fake registration with the NFA or otherwise hide behind invalid exemptions. You know, it’s really important. Many of you are NFA members, and it means something to be an NFA member, so we can’t have people effectively subverting that process.
Finally, last month we filed our largest ever joint case with state regulators. This case – called metals.com – involved fraudulent solicitation for precious metals derivatives that took in over $185 million from lots of retail victims, including the elderly, who are in some cases targeted because of their Christian and conservative beliefs. Well, we have covered a lot of ground in the past year, but there’s a lot more that we’ve been doing outside of rulemaking and enforcement. These have focused on our response to the Covid pandemic as well as how the agency operates.
To start, this agency, and the entire world felt the pain of the Covid pandemic. Back in March, when our major cities were locked down and social distancing prevented normal operations, we worked with our market participants, with the NFA, and our exchanges to provide temporary targeted relief. Our first priority was to make sure that our markets could operate virtually as the entire industry went remote. We then actively engaged with our fellow regulators globally to monitor volatility in the markets and to look for potential weaknesses that needed to be addressed.
We’ve been heavily involved in IOSCO committees that are tracking potential vulnerabilities, and my own service as Vice-Chair of the IOSCO Board has insured that the CFTC has a seat at the table in all relevant international fora. We have engaged with our clearinghouses and our largest dealers and participants to monitor margin levels, liquidity, and indicators of the health of our markets. When things went south, this whole industry and regulators globally pulled together, worked together, and made sure the system held together. All the while, our agency was facing many of the same problems that our participants were. Our employees moved to telework overnight. Our technology team went into overdrive to make sure systems could handle the change. But the agency focused on the challenges of Covid and became stronger in the process. We found ways to have remote open Commission meetings, and we instituted regular internal leadership calls so that everyone stayed apprised of the situation, and – as you can tell from all we’ve done in the past year – our productivity as an agency never went down. I am so incredibly proud of how this agency not only faced a crisis, but thrived in that crisis, and now that we’ve settled into the new normal, we’re revamping some of our aspects of our organization so that we can better serve our markets and the American people.
We recently announced a reorganization of the agency and some additions to our executive team. One of the most exciting changes is the creation of a new Division of Data. This division pulls together parts of the agency that take in and analyze all the market data that we rely on to do our jobs and many of you in the audience provide to us. This will allow the agency to better identify the data that we need and work better with you, our market participants and exchanges, to receive that data. We’re also reallocating some of our examiners from DSIO to DCR to better support our clearinghouse exams. We’re also moving our customer education team into DSIO, which will be rebranded as the Division of Market Participants. All these changes will help rationalize and streamline our agency’s operations and help us better fulfill our oversight roles.
So, how were we so successful in just 15 months? Well the answer is I’ve a lot of people to thank. After all, personnel is policy. Along with the dedicated career staff at our agency, we’ve attracted a diverse team of the best and brightest to help me lead this agency. So, what will we say were the keys of success? Looking back at my time thus far at the CFTC, there have been some overarching goals and some guiding principles.
One of the primary objectives of my tenure has been to complete the Dodd-Frank rules. We’re 12 years since the Financial Crisis and 10 years since the Dodd-Frank Act. With the completion of swap dealer capital rules and position limits, we finalized all the major rules required by Dodd-Frank, and with the revisions of the swap data reporting rules, we fixed one of the most problematic rules from the initial flurry of the Dodd-Frank rules. Now as I said before, the Dodd-Frank rules aren’t necessarily set in stone. I’m saying that we finished building the regulatory framework that Dodd-Frank outlined, and with that objective accomplished, another is to help the agency and the industry write its future. The emphasis on promoting responsible innovation I believe is grounded in three things: number one, a focus on engagement with domestic and international regulators; number two, the renewed emphasis on principles-based regulation; and third, a recognition of the important role of self-regulatory organizations. I believe all of these three things are key to having this industry thrive in the future, and all of these point that the CFTC that will be able to adapt to changing markets and truly be the global standard when it comes to sound derivatives regulation.
So when I think about my time thus far at the CFTC, I want to thank my fellow Commissioners in particular. As a Commission, we’ve been focused on policy, not politics or personality. Washington may be divided, and in fact the nation may be divided, but the Commission’s tradition of collegiality and bipartisanship has never been broken. In fact, of the 30 final rules and the 21 proposed rules advanced by the Commission under my tenure thus far, 84% were on a bipartisan basis, and 80% were actually unanimously, so I’m proud to call Commissioners Quintenz, Behnam, Stump, and Berkovitz not just my colleagues but my friends. And in those few votes that weren’t bipartisan, my fellow Commissioners and I were able to still work together in a spirit of collegiality that is the hallmark of the CFTC. I also want to thank my personal office staff and our Executive Leadership Team. I assembled a team of A-players who got the job done. I’m proud to say that I also assembled one of the most diverse executive teams in the agency's history and I have begun many internal efforts to celebrate and promote diversity at every level.
We have also had incredible partners in Congress and in the Administration: the National Economic Council, Chairman Clayton, Secretary Mnuchin, and in Congress, we have had champions on both sides of the aisle. In the Senate Chairman Roberts and Ranking Member Stabenow, in the house Chairman Peterson, Ranking Member Conaway, and Congressman Scott. I’d like to thank the bipartisan support from the House Agriculture Committee’s leadership in particular in producing a CFTC reauthorization bill. Although that legislation hasn’t yet moved out of the house, I am hopeful that it sets a good foundation for congressional leadership looking forward. I’d also like to thank Senator Boozman & Representative Scott who both were incredibly helpful in showing a united front to our international colleagues as we addressed oversight regarding US clearinghouses. And for the first time in my tenure, I saw appropriators in Congress fully fund the agency, and that has allowed us to achieve many of the things we have talked about today.
Finally—and most importantly, I could not have done this without the support of my very patient wife and two young sons, age 6 and 9. Now finally, you might think that after a historic run like this, we'd be resting on our laurels. It's a reasonable assumption, but you'd be wrong. We're going to continue to advance policy where practical.
Next week, we’ll finalize two more rules: Swap Execution Facilities and Exempt DCO. In December, we’ll have our last meeting of 2020 to finalize the first overhaul of the CFTC’s bankruptcy rules in 37 years and our risk principles for electronic trading. Now these last two were proposed with bipartisan support, and I think their final adoption should be non-controversial and welcomed revisions to our existing regulations.
So, if I had to summarize the CFTC’s activity in five words it’d be this: promises made and promises kept. Or to follow the steak analogy from earlier: plenty of sizzle and a whole lot of steak. It’s an honor to serve as the 14th Chairman and CEO of the CFTC—and to once again address all of you. FIA is such an incredible partner, and I want to again thank Walt for your outstanding leadership and the invitation to speak today. Everyone please stay safe, and stay healthy. All the best. Thank you.
Read FIA’s MarketVoice Spotlight: CFTC's Tarbert: Global standards for crypto and CCPs are top industry priorities