The Commodity Futures Trading Commission (Commission or CFTC) and the Office of Financial Research (OFR) have today entered into a Memorandum of Understanding (MOU) whereby the Commission will share information and data reported on Form CPO-PQR with OFR. Form CPO-PQR is filed by certain Commodity Pool Operators registered with the Commission and contains sensitive data not intended for public disclosure, but rather required for the purpose of regulatory oversight by the National Futures Association and the Commission. Because OFR conducts financial stability-related research, and often publishes reports, briefs, working papers and other types of work product, the MOU provides that OFR may make “Form CPO-PQR Work Product”, OFR or Financial Stability Oversight Council (FSOC) work product that includes or is derived from Form CPO-PQR, available to the public after aggregating, anonymizing, or masking the data.  A previously executed MOU among FSOC members does not include this type of provision for the publication of work product, and as such this is a new question for the Commission to consider.

As a practical matter, I have concerns with the precedent of this MOU as it relates to broad disclosure of entire data sets without a more granular rationale. As a matter of data protection, I expect information obtained by the Commission to have a proven use case.Therefore, I expect any other agency seeking the information we are entrusted to protect to offer a precise utility as justification for the requested data. More specifically, I question what particular functionality Form CPO-PQR is expected to offer OFR. Here, the vast scope of OFR’s jurisdiction should not override the need for specific objectives to be conveyed.

With proper protections, I am supportive of sharing information within the U.S. government to ensure coordinated regulatory policies and oversight, as such authority is specifically provided for in Section 8(e) of the Commodity Exchange Act (CEA). Section 8(e) provides that the Commission may furnish information to another agency of the U.S. Government acting within the scope of its jurisdiction. Yet, Section 8(e) further states that any such information shall not be disclosed by such agency “except in any action or proceeding…to which it, the Commission, or the United States is a party.” Therefore, while I support well-defined intragovernmental information sharing, I am reluctant to endorse another agency publicly disclosing such information. The public disclosure of general statistical information is governed by a separate section of the CEA, Section 8(a), which limits the authority to “publish” such general statistical information to the Commission. If Congress had intended to permit such publication of data to be extended via intragovernmental sharing arrangements, it would have specifically provided for such in Section 8(e) of the CEA where these arrangements are authorized.

In the case of this particular MOU, it is suggested that the Commission is in fact exercising its authority to “publish” the data by way of consent. I am concerned that it is the Commission that is considered to have published the data, but OFR that has developed the work product. Congress recognized that the unique expertise of the Commission makes it the agency to determine appropriate publication of such data, yet under this MOU once Commission staff has consented to answering the narrow question of whether OFR has sufficiently aggregated, anonymized, or otherwise masked Form CPO-PQR information, it is considered “published” by the Commission and OFR is free to disclose what Congress intended to restrict as a responsibility of the Commission.

As officers of the United States Government, we all recognize the obligation to remain vigilant in safeguarding the data we collect, especially sensitive, proprietary and personally identifiable information, such as that contained in Form CPO-PQR. As the markets we oversee are of importance to the financial stability of the nation, and the Chairperson of the CFTC is a member of the FSOC, we have a need to coordinate and share specific information with OFR. However, we can only do so pursuant to Section 8 of the CEA, and here I believe Congress has left very little room for interpretation as to the methods by which such data may be disclosed publicly and by whom. Our adherence to these requirements has never been more critical than in the current environment where data is increasingly important to the market and regulators, and most especially in light of the CFTC’s role within the FSOC. 

Data is essential to our work here at the Commodity Futures Trading Commission, and as such I am pleased that we are devoting attention to improving and refining the information the agency requires.  At our most recent meeting, the Commission finalized significant improvements to our swap data reporting rules.  Today we continue to make progress regarding our data collection efforts and are moving in the right direction when it comes to CFTC Form CPO-PQR.  I wish to thank the Division of Swap Dealer and Intermediary Oversight, Office of the Chief Economist, and Office of the General Counsel for their efforts in advancing this final rule before us.

When the Commission proposed these refinements in April of this year we took into consideration how various streams of information received here at the CFTC, including those that are more timely, standardized, and reliable, may be leveraged across divisions to develop a holistic oversight program.  We also explained that the CFTC’s ability to make full use of the information through Form CPO-PQR had not met the Commission’s initial expectations.  Consistent with the proposal and supported by public comment, the Commission will cease to require the submission of most of Schedule B and all of Schedule C of this form.  These Schedules included the calculation and submission of both very detailed pool-specific information and aggregate information for all pools operated by certain Commodity Pool Operators (CPOs).  While the information in these Schedules is complex and challenging to report, the Commission has not been able to utilize this granular data to identify trends or develop other analyses across CPOs or pools.  In balancing our responsibility to be data driven while also prioritizing protecting the requisite data, we should strive to only collect information that we know has a demonstrable use-case.  We must remain vigilant in safeguarding the data we collect, especially sensitive proprietary and personally identifiable information, such as that contained in Form CPO-PQR.  The Data Protection Initiative[1] that I initiated within the CFTC helps us better ascertain our regulatory data needs and assure robust internal protection measures.  It makes sense for the Commission to refine the form based on the scope of our data intake needs, experience and past utilization of this information, and considering the sensitivity of said data.

I support these efforts to better tailor Form CPO-PQR, but I wish we had also adopted a similar approach for the Schedule of Investments.  The Schedule of Investments required in today’s Form CPO-PQR is considerably more detailed than the former version as it was updated by the National Futures Association in 2010.  I could perhaps support such additional information intake if it has proven to be of essential use to our regulatory responsibilities, but I do not feel that a tangible use-case has been demonstrated for all of the additional line items required by the current Schedule of Investments.  In response to questions accompanying the proposed version of this rule, the Commission received multiple recommendations that it revert to the 2010 NFA version, but we are unfortunately not adopting that course.  The Commission has not accomplished very much with the information in the Schedule of Investments and, at the same time, the NFA, who regularly utilizes this information, commented that the increased granularity of the current version has not improved their analysis.  In parallel, the CFTC receives substantial data on its jurisdictional markets through frequent and detailed reporting of transactions and positions in both swaps and futures markets that it can instead leverage.  A data collection should be based upon a prerequisite and actionable use-case and not aspirational concepts.  The continued collection of the Schedule of Investments as-is represents a dislocation between data wants and needs.

It is unfortunate that the principles applied to rationalizing this reporting and the changes we are acting on today do not carry all the way through the final product.  Though disappointed that we are not implementing all of the changes I desired, I am somewhat encouraged by the commitment in the final rule to reconsider today’s policy determination.  In the final rule, the Commission instructs staff to evaluate the ongoing utility of the Schedule of Investments within 18-24 months after the compliance date.  As part of this review, staff will consider improvements in other robust data sources at the CFTC’s disposal and development of applications that facilitate oversight of CPOs, and provide recommendations or a proposed rulemaking.

We must also acknowledge that many market participants within our regulatory purview also operate in areas overseen by the SEC.  There has been some confusion surrounding the intended utility of various reports and forms that investment advisers supply to each regulator.  For example, in addition to CFTC Form CPO-PQR, Form PF was the data collection mechanism designed to carry out the Congressional intent under the Dodd-Frank Act to procure information from private funds for systemic risk oversight.  It is important that the CFTC will continue to engage with the SEC on potential modifications to the original Form PF, but so long as each form remains the two should be distinguished in purpose and tailored to the specific function.  I wish to take this opportunity to commend my colleague, Commissioner Quintenz, on his continued leadership in advancing this conversation and the joint work with the SEC on Form PF.

Today’s final rule simplifies reporting requirements, reduces reporting burdens, and more closely aligns data collection with use-cases.  I plan to vote to approve the improvements we have made here, but we can no longer hold market participants hostage to supplying data we are not utilizing.  I hope to revisit the Schedule of Investments in a timely manner, maybe even sooner than the period of review in the rule.  I again wish to thank the Staff for their hard work to date and eagerly anticipate their future efforts with Form CPO-PQR.

I respectfully concur with the Commodity Futures Trading Commission’s (the Commission or CFTC) issuance of today’s final rule (the Final Rule) amending Regulation 4.27 and Form CPO-PQR.  As a whole, the Final Rule provides a thoughtfully balanced and complete evaluation of the issues identified in the notice of proposed rulemaking[1] and the responsive comments.  Perhaps, just as importantly, the Final Rule clearly acknowledges that it is the first of several steps in the Commission’s ongoing assessment of Form CPO-PQR not only for its utility as a regulatory tool, but as a yardstick to measure improvements to the Commission’s data integration and analytical capabilities.  The Final Rule makes smart, targeted corrections without forgoing the possibility of future adjustments should the Commission later determine that additional data would support evolving regulatory initiatives or Financial Stability Oversight Counsel (FSOC) requirements to fulfill statutorily mandated duties and initiatives aimed at identifying and monitoring risks to financial stability.[2]

In determining to reduce the frequency and scope of commodity pool operator (CPO) data reporting and collection, the Commission is pivoting away from what was an ambitious vision for ongoing oversight, monitoring, and trend analysis inspired by the events and fallout of the 2008 financial crisis.[3]  To be sure, keeping pace with regulatory change and shifting priorities while exercising appropriate discipline in collecting, handling, and managing data is an endless endeavor.  Nevertheless, I am pleased with today’s outcome, and I am confident that as we continue moving forward, the tremendous abilities of the dedicated staff whose direct insight and experience informed our decisions will ensure we continue to act decisively in furthering our goals and supporting our mission critical duties.

The CFTC shares aspects of its regulatory initiatives, risk surveillance, and monitoring duties with respect to CPO and commodity pools with the Securities and Exchange Commission (SEC), the National Futures Association (NFA), and the FSOC.  The Final Rule in its detailed preamble identifies areas of overlap in which commenters suggested that the Commission ought to retreat from its proposed baseline for data collection in Revised Form CPO-PQR.  I am pleased that the Commission reasonably considered such comments and provides well-reasoned responses based on analysis of facts and data incorporated directly into the record.  While the Commission and its staff must always be prudent and judicious in our allocation of data, resources, authority, and deference in working amicably towards common goals, we should exercise great care so as to avoid sacrificing primacy and independence when acting directly in support of Congressional mandates and statutory directives.

I appreciate the Commission and its staff’s ongoing engagement with the SEC and FSOC, as well as with NFA, throughout the drafting of the NPRM and the Final Rule, and I am encouraged that discussions are ongoing.  As we move forward, it is my intention to ensure that the Commission provides staff the support and resources necessary to effectuate its current plans for Form CPO-PQR data and make future amendments and adjustments, as appropriate.

I support today’s final rule that would simplify and streamline the reporting obligations of commodity pool operators (CPOs) on Form CPO-PQR.  The Commission first adopted Form CPO-PQR in 2012 and closely modeled the form on Form PF.  The Commission adopted the Form of its own volition; unlike Form PF, which is specifically mandated by the Dodd-Frank Act, there is no similar statutory directive requiring the adoption of Form CPO-PQR.[1]  In my opinion, since its adoption, the detailed information requested on Form CPO-PQR has not significantly enhanced the Commission’s oversight over CPOs and has never been fully utilized by staff.  I have long questioned the Commission’s need to know the litany of data requested on the Form.

In my view, many of the questions on the existing form are more academic than pragmatic in nature – information that may be nice for the Commission to have, but data that is certainly not necessary for the Commission to effectively oversee commodity pools and the derivatives markets.  This is why I am very pleased that the final rule eliminates the most burdensome sections on the current form—Schedules B and C, which together contain roughly 72 distinct questions, if one includes all the separately identifiable subparts.  Many of these questions are challenging for CPOs to calculate precisely and require numerous underlying assumptions that vary from firm to firm, making it difficult, if not impossible, for the Commission to perform an apples-to-apples comparison across the commodity pool industry.

While today’s final rule represents a marked improvement over the current CPO reporting regime, more work remains to be done.  Importantly, the proposal requested comment about reverting back to the former Schedule of Investments originally adopted by the National Futures Association (NFA) in 2010 for its NFA Form PQR (2010 Schedule of Investments).  In 2012, the Schedule of Investments adopted by the Commission went further than the 2010 Schedule of Investments, by lowering the itemized reporting thresholds and adding significantly more granular subcategories of investments.  For example, the Commission sought information regarding the tranches of various types of securitizations and the types of bonds held by the pool.  Historically, the information on the Schedule of Investments has mostly been used by the NFA for their CPO examination program.  However, in its comment letter to the Commission, the NFA noted that it “does not have a need for the more granular information currently in the Schedule” and that it “fully supports [aligning the current schedule with the 2010 Schedule of Investments] because [NFA] believe[s] a more streamlined schedule will significantly alleviate filing burdens on CPOs without negatively impacting the usefulness of the information that is collected.”[2]

I am disappointed that this final rule does not amend the form to adopt the 2010 Schedule of Investments, but I am encouraged that the preamble instructs DSIO staff to evaluate the ongoing utility of the current Schedule of Investments, including comparing it to the 2010 Schedule of Investments, within 18-24 months following the compliance date.  As part of this review, staff is instructed to consider whether or not, in light of its utility, the Commission should revert back to the 2010 Schedule of Investments.  After completing this review, in whole or in stages, staff will develop recommendations, provide relief, or propose a rulemaking for the Commission’s further consideration to effectuate staff’s findings.  This review will allow staff to carefully consider which questions on the Schedule of Investments are necessary to effectively oversee CPOs and to propose eliminating any fields which are being received through other data channels or have no regulatory use case to the Commission’s oversight function.  I think this review is long overdue and is especially timely given the developments in other data streams, like part 45 swap data, that DSIO is actively working to combine with clearinghouse data to provide a complete picture of a CPO’s derivatives activity.  I believe that DSIO’s ability to monitor, in real time, a fund’s derivatives positions will be absolutely vital to the oversight and regulation of commodity pools in the future.

In closing, I deeply appreciate DSIO staff’s efforts to address my concerns on this point in the weeks leading up to today’s vote.  Thank you all very much for your engagement and dedication.

[1] See section 404 of the Dodd-Frank Act.

[2] NFA Comment Letter (June 20, 2020), https://comments.cftc.gov/Handlers/PdfHandler.ashx?id=29369.

I support the Memorandum of Understanding (MOU) with the Office of Financial Research (OFR) to share data collected by the Commission on Form CPO-PQR.

Following the 2008-09 financial crisis, Congress created the Financial Stability Oversight Council (FSOC) and tasked it with collecting information from member agencies, including the CFTC, to monitor the financial markets to identify potential threats to the financial stability of the United States.[1]  To carry out this responsibility, FSOC is authorized to request information on nonbank financial companies from member agencies and receives data and analysis from OFR.[2]  Having one central repository aggregate data across bank and nonbank entities can be a powerful tool in identifying and managing risks to the financial system.  At the same time, the sharing of this information across agencies must be subject to strict requirements to protect the confidential nature of this data.

For many years, OFR has been receiving from the Securities and Exchange Commission (SEC) information on Form PF submitted by Commodity Pool Operators (CPOs) that are dually-registered with the SEC as broker-dealers, as well as from other SEC-registered investment advisers.  OFR recently requested similar information from the CFTC for CPOs not dually registered with the SEC.  The information on the Commission’s revised Form CPO-PQR that will be shared with OFR under this MOU is less detailed than what is currently reported on Form PF.  OFR states that it intends to use this Form CPO-PQR information “in connection with the functions and activities of OFR and [FSOC] under the Dodd-Frank Act.”[3]  Any publication by OFR of Form CPO-PQR data as part of that function must be anonymized and cannot be released without the Commission’s consent.

This MOU builds upon an earlier arrangement between all FSOC member agencies regarding the sharing of non-public information (2011 FSOC MOU).[4]  Any information shared by OFR with other FSOC member agencies, including the information shared under the MOU approved today, will be subject to the confidentiality provisions in the 2011 FOSC MOU.

I would like to thank the Chairman and the staff in the Division of Swap Dealer and Intermediary Oversight for addressing my comments to this MOU, which allows me to vote in favor of it today.

I am voting for the final rule to amend Regulation 4.27 and Form CPO-PQR (Final Rule).  This Final Rule makes adjustments to the reporting requirements for Commodity Pool Operators (CPOs) and their pools based on lessons learned over several years since the requirements were first adopted.

Eight years ago, the Commission began collecting information from CPOs on Form CPO-PQR.  During that period, the Commission has come to learn that certain information in Form CPO-PQR has not materially improved the Commission’s understanding of CPOs’ participation in commodity interest markets, or its ability to assess the risks their pools may pose.  The Final Rule eliminates information that has not proven to be of value to the Commission.

Several commenters suggested that the Commission collect less information on the Pool Schedule of Investments (PSOI) about CPO investments in various asset classes.  I support the Commission’s decision in the Final Rule to continue to collect position data about pool investments.  To evaluate the risks posed by CPOs and the pools they operate, it is necessary to understand the total portfolio of each pool and its trading strategy.  Recent market volatility—including historic price movements in crude oil—underscores the importance of the CFTC’s ability to understand the nature of the participants in our markets and the scope of their activities in order to conduct timely oversight and spot emerging trends or risks.

Since joining the Commission I have supported and encouraged efforts to improve our data and analytical capabilities, and believe they should be expanded in the coming years.  Commission staff currently is taking steps to better synthesize swap data for large account controllers and develop a more holistic surveillance program.  Once these analytical tools have been further developed, staff will then be in a position to advise the Commission regarding whether any changes to the PSOI are appropriate.

To ensure that the Commission has a complete picture of pool activity across all derivatives markets, it should continue working to integrate swaps data with futures data.  Some commenters have suggested that one way to do this would be to require all reporting CPOs and their pools—not just those that trade swaps—to obtain LEIs and submit them on Form CPO-PQR.  I encourage the Commission and staff to continue to explore this approach, among others, so that the CFTC is able to aggregate all derivatives transactions by pools under common control.

I would like to thank the Division of Swap Dealer and Intermediary Oversight for their efforts in finalizing this rule in a form that I can support.

When the Commission considered the proposed rule to amend the compliance requirements for commodity pool operators (CPOs) on Form CPO-PQR,[1]  I observed that the esteemed 19th century mathematician Charles Babbage had asked “if you put into the machine the wrong figures, will the right answers come out?”[2]  Baggage foresaw what would evolve in the 20^th century as the “garbage-in, garbage-out” predicament—that is, the concept that flawed, or nonsense, input data produces nonsense output or “garbage.” 

Since becoming Chairman, I have prioritized improving the CFTC’s approach to collecting data.  As a federal agency, we must be selective about the data we collect, and then make sure we are actually making good use of the data for its intended purpose.[3]  For example, we recently adopted three final rules to revise CFTC regulations for swap data reporting, dissemination, and public reporting requirements for market participants.[4]  One purpose of those amendments was to simplify the swap data reporting process to ensure that market participants are not burdened with unclear or duplicative reporting obligations that do little to reduce market risk or facilitate price discovery.[5]

Today we are engaged in a similar exercise.  The amendments to the compliance requirements for CPOs on Form CPO-PQR that we are considering reflect the CFTC’s reassessment of the scope of the form and how it aligns with our current regulatory priorities.  By refining our approach to data collection, the final rule—in conjunction with our current market surveillance efforts—will enhance the CFTC’s ability to gain more timely insight into the activities of CPOs and their operated pools.  At the same time, the final rule will reduce reporting burdens for market participants.

Background on Form CPO-PQR

Form CPO-PQR requests information regarding the operations of a CPO, and each pool that it operates, in varying degrees of frequency and complexity, depending upon the assets under management of both the CPO and the operated pool(s).  When it adopted Form CPO-PQR in 2012, the Commission determined that form data would be used for several broad purposes, including:

• increasing the CFTC’s understanding of our registrant population;
• assessing the market risk associated with pooled investment vehicles under our jurisdiction; and
• monitoring for systemic risk.[6]

For the majority of pool-specific questions on Form CPO-PQR, the Commission believed the incoming data would assist the CFTC in monitoring commodity pools to identify trends over time.  For example, the CFTC would get information regarding a pool’s exposure to asset classes, the composition and liquidity of a pool’s portfolio, and a pool’s susceptibility to failure in times of stress.[7]

Shortcomings of Form CPO-PQR

Seven years of experience with Form CPO-PQR, however, have not borne out that vision.  To begin with, in an effort to take into account the different ways CPOs maintain information, the Commission has allowed CPOs flexibility in how they calculate and present certain of the data elements.  As a result, it has been challenging, to say the least, for the CFTC to identify trends across CPOs or pools using Form CPO-PQR data.  In addition, taking into account the volume and complexity of the data it was requesting, the Commission decided not to require the data to be provided in real-time, but instead mandated only post hoc quarterly or annual filings.

As the CFTC staff has reviewed the data over the years, it has become apparent that the disparate, infrequent, and delayed nature of CPO reporting has made it difficult to assess the impact of CPOs and their operated pools on markets.  This is largely because conditions and relative CPO risk profiles may have changed, potentially significantly, by the time Form CPO-PQR is filed with the CFTC. 

Sound Regulation Means Collecting Only Information We Intend to Use

What we need is not over-regulation or even de-regulation, but rather sound regulation.  In the midst of the coronavirus pandemic, when we are facing the greatest economic challenge since the 2008 financial crisis, and possibly since the Great Depression, the fact that we are asking market participants to put significant time and effort into providing us data that is difficult to integrate with the CFTC’s other more timely and standardized data streams is not sound regulation.  Frankly, it is wasteful and an example of ineffective government.

My colleague Commissioner Dan Berkovitz made the following observation in connection with a different rulemaking: “In addition to obtaining accurate data, the Commission must also develop the tools and resources to analyze that data.”[8]  He is spot on.  But I believe the converse is also true.  We should not collect data we cannot use effectively.  In the case of Form CPO-PQR, this means not requiring market participants to provide information that the CFTC has neither the resources nor the ability to analyze with our other data streams.  Our credibility as a regulator is strengthened when we honestly admit that our regulations ask for data that we both have not used effectively and have no intention of using going forward.  That is what we are doing today.

Alternative, and Sometimes Better, Sources of Data Are Available to the Commission

Form CPO-PQR is not our only source of data regarding commodity pools.  The CFTC has devoted substantial resources to developing other data streams and regulatory initiatives designed to enhance our ability to surveil financial markets for risk posed by all manner of market participants, including CPOs and their operated pools. 

These alternative data streams, which include extensive information related to trading, reporting, and clearing of swaps, are in some cases more useful or robust than information from Form CPO-PQR.  Importantly, most of the transaction and position information the CFTC uses for our surveillance activities is available on a more timely and frequent basis than the data received on the current iteration of Form CPO-PQR.  Furthermore, CFTC programs to conduct surveillance of exchanges, clearinghouses, and futures commission merchants already include CPOs and do not rely on the information contained in Schedules B and C of Form CPO-PQR.

Taken together, the CFTC’s other existing data efforts have enhanced our ability to surveil financial markets, including with respect to the activities of CPOs and the pools they operate.  In general, the CFTC’s alternate data streams provide a more prompt, standardized, and reliable view into relevant market activity than that provided under Form CPO-PQR.  As revised, data from Form CPO-PQR will more easily be integrated with these existing and more developed data streams.  This will enable the CFTC to oversee and assess the impact of CPOs and their operated pools in a way that is both more effective for us and less burdensome for those we regulate.

In keeping with these principles—particularly the principle that we should not collect data we cannot use effectively—I note that as part of this rulemaking the Commission is instructing the staff to evaluate the ongoing utility of the Pool Schedule of Investments information in revised Form CPO-PQR.  This will include comparing it to the 2010 Schedule of Investments.  The review will be completed within 18-24 months following the date upon which persons are required to comply with the final rule and may result in further recommended actions.  During the review period, the staff also may identify and extend targeted relief for data fields that the CFTC receives from other sources.

Legal Entity Identifiers Are Something We Need

The final rule does more than simply eliminate certain data collections.  It also requires the collection of an additional piece of key information: legal entity identifiers (LEIs) for CPOs and their operated pools.  LEIs are critical to understanding the activities and interconnectedness within financial markets.  Although LEIs have been around since 2012 and authorities in over 40 jurisdictions have mandated the use of LEI codes to identify legal entities involved in a financial transaction,[9] this is a new requirement for Form CPO-PQR.  The lack of LEI information for CPOs and their operated pools has made it challenging to align the data collected on Form CPO-PQR with the data received from exchanges, clearinghouses, swap data repositories, and futures commission merchants.  As a result, we cannot always get a full picture of what is happening in the markets we regulate.  Adding an LEI requirement for CPOs and their operated pools will help give us a complete perspective.

In addition, the final rule better aligns Form CPO-PQR with Form PQR of the NFA, which all CPOs must file quarterly and which the NFA may revise to include questions regarding LEIs.  Under these circumstances, we could permit a CPO to file NFA Form PQR in lieu of our Form CPO-PQR as revised.  In doing so, we would offer CPOs greater filing efficiencies without compromising our ability to obtain relevant data.

Form CPO-PQR, As Revised, Has Other Regulatory Benefits

The Dodd-Frank Act established the Office of Financial Research (OFR) nearly a decade ago to look across our financial system for risks and potential vulnerabilities.[10]  It was contemplated that, for the OFR to do its work, it would have access to data from other U.S. financial regulators.  Yet to date, the CFTC has shared none of the Form CPO-PQR data with the OFR, largely because of the shortcomings outlined above.

Once Form CPO-PQR is revised, it has the potential to be useful not only to the CFTC.  To this end, we have negotiated a memorandum of understanding (MOU) with the OFR, under which we will for the first time provide to the OFR the information we collect regarding CPOs.  Under the MOU, the OFR will receive the Form CPO-PQR Information consistent with the provisions of Section 8(e) of the CEA, which establishes important protections for CFTC data sharing.[11]

Conclusion

For these reasons, I am pleased to support the Commission’s final rule to amend the compliance requirements for CPOs on Form CPO-PQR.  As revised, Form CPO-PQR will focus on the collection of data elements that can be used with other CFTC data streams and regulatory initiatives to facilitate oversight of CPOs and their operated pools.  This will primarily reduce current data collection requirements, but also mandate disclosure of LEIs by CPOs and their operated pools.  Focusing on enhancing data collection by the agency is no doubt tedious.  Nonetheless, I am convinced it leads to smarter regulation that helps promote the integrity, resilience, and vibrancy of U.S. derivatives markets.

Chair Castor, Ranking Member Graves, and members of the committee, it is an honor to appear before you today to discuss creating a climate resilient America through strengthening the U.S. financial system and expanding economic opportunity.  Before I begin, please recognize that the views I express today are my own and do not represent the views of the CFTC, its staff, or my fellow Commissioners.

The critical work of this committee and the topic of today’s hearing could not be timelier.  As of Tuesday, wildfire activity continued in 10 western states where 70 large fires have burned more than 3.9 million acres,[1] and the Gulf Coast is still reeling from the damage of Hurricanes Laura and Sally.  Data from NASA satellites confirms that 2020 fire activity in California, Oregon, and Washington State has broken several records in both size and scope.[2] In particular, a review of the data collected since 1997 indicates that 2020 is the highest year of fire carbon emissions for California, and, notably, this figure only reflects activity through September 11^th.[3]

The impact of wildfires on air quality has led to the use of the word “airpocalypse” to describe the dangerously high particulate pollution in parts of the United States, a term that in the past has only applied to other countries.[4]  The impact of airpocalyptic conditions on human health and welfare is indisputable.  Even as this country continues to battle COVID-19 with its own litany of impacts on respiratory function, Oregon hospitals recently reported a 10% increase in emergency room visits for breathing problems related to air quality.[5]

These are all manifestations of the physical risks associated with changing climate and extreme weather events.  But how is an “airpocalypse,” or climate risk generally, understood and accounted for in the financial markets?  And, why is a financial regulator in the right position to move this conversation forward? Before I answer these questions, I’d like to provide a bit of background.

Background and Beginnings                                 

I serve as a Commissioner at the Commodity Futures Trading Commission, or the CFTC.  The CFTC is a bipartisan, five-member independent federal regulatory agency that serves as the primary U.S. derivatives market regulator.  Derivatives, which include futures, options, and swaps, are financial contracts that derive their value from an underlying asset, ranging from a variety of commodities including wheat, natural gas, gold, interest rates, and bitcoin.  Derivatives are critical risk management and price discovery tools that touch nearly every corner of our economy, from the price of bread to gas at the pump. 

The CFTC’s mission is to foster open, transparent, competitive and financially sound markets; prevent and deter price manipulation and other disruptions to market integrity; and to protect all market participants and the public from fraud, manipulation, and abusive practices.[6] When the CFTC was established as an independent agency in 1974, most futures trading took place in the agricultural sector.[7] Today, the portfolio of derivatives is much more diverse, with the vast majority of the contracts being financial in nature, including global currencies, interest rates, and financial indices.  Like the contracts themselves, the market participants also vary, including banks, institutional investors, manufacturers, farmers and ranchers, and energy companies.  

With a previous background as a congressional aide focused on both financial services policy and agricultural policy, including the 2014 Farm Bill,[8] the multitude of risks related to climate change faced by farmers, ranchers, and the entire value chain has been at the forefront of my thinking since joining the Commission in 2017.  Weather and climate present the greatest, consistent—yet uncertain— risks to the agricultural economy and rural communities.  More frequent and more severe extreme weather events, from flooding, hurricanes, and tornadoes, to wildfires have presented a growing set of longer term challenges that require a different way of assessing long-term risk management and the policies to support it. 

At the CFTC, when we think about financial market risk we are required to think about scenarios that are “extreme but plausible.”  What if there were years in which wildfires impaired the economy of the Western states, record flooding in the Midwest shocked the agricultural engine of the country, and Gulf Coast and East Coast Hurricanes destroyed coastal property?  And what if these events happened in quick succession, or, even worse, but still plausible, and this is key, what if they happened at the same time?  Beyond the implications for our lives, health, safety, and national security, would our economy and the financial markets that underpin it be able to withstand such withering and debilitating shock?  And, more to the point, what could or should policy makers do about it? 

Like many other agencies and departments, the CFTC has active and insightful Federal Advisory Committees, authorized under the Federal Advisory Committee Act,[9] which provide outside input and make recommendations to the Commission on regulatory and market issues.  Our advisory committees are comprised of industry participants, subject matter experts, and stakeholders in the markets we oversee.  I have proudly served as the sponsor of the Market Risk Advisory Committee (MRAC) since I arrived at the Commission.  During my tenure, the MRAC has convened to address a variety of matters, including the impending transition away from the London Interbank Offered Rate, more commonly known as Libor, market structure issues, and clearinghouse risk issues.   

The MRAC advises the Commission on matters relating to evolving market structures and movement of risk across the derivatives markets.  It examines systemic issues that threaten the stability of the derivatives and other financial markets.  The MRAC is therefore perfectly situated to explore the links between climate change and financial market risk, and what role policy makers should and could play to mitigate these more extreme, emerging risks, specifically with respect to financial market participants.

In June of 2019, the MRAC held a public meeting on the relationship between climate change and financial market risk.[10]  I left that informative day with three fears confirmed: 1) climate risk manifests in the financial markets in multiple and sometimes amplifying ways; 2) the U.S. financial regulators were far behind their global counterparts; and 3) much more work needed to be done to examine the potential risks that might demand a policy response.  It turns out that central banks and financial regulators across the world have been working on this issue for years, but in the U.S. we are only at the very nascent stages.  I’d like to recognize the leading work of the Bank of England in this space, and a number of excellent papers they have authored on this topic.[11]  Additionally, the Bank for International Settlements, the Network for Greening the Financial System, and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures have also done superb work in this space.[12]

To more fully focus on the issues and ensure we were able to gather the right mix of stakeholders, I immediately began the process of forming the Climate-Related Market Risk Subcommittee of the MRAC.  After unanimously confirming its formation and charge, and soliciting the public for membership nominations,[13] the CFTC unanimously confirmed its membership in November, 2019.[14] I charged the Subcommittee with exploring the relationship between climate risk and financial market risk, and asked that it produce a report with findings and recommendations to address the risk. 

The Subcommittee membership includes 34 professionals from banking, asset management, insurance, a credit rating company, agricultural and energy markets, data providers, environmental groups, and academia, singularly focused on climate change, adaptation, public policy, and finance.  Identifying a chairperson of the Subcommittee was a critical step, and I could not have been more fortunate with Dr. Bob Litterman’s willingness to serve as the Subcommittee chair. 

Dr. Litterman’s professional career has spanned more than four decades and across many disciplines, including economics, finance, and risk management.  Dr. Litterman spent 23 years at Goldman, Sachs & Co., where he served in research, risk management, and investments, including the head of the firm-wide risk function, and as the co-developer of the Black-Litterman Global Asset Allocation Model with Dr. Fischer Black.  After leaving Goldman, Bob became a founding partner at Kepos Capital, a New York City based macro investment firm, shifting much of his focus to addressing the risks of climate change.  Concerned with the inadequate manner in which society addressed climate risk, Bob, as an economist and risk manager, has strongly advocated for appropriate incentives to reduce carbon emissions, through a price on carbon.  This unique mixture of expertise in finance, risk management, economics, and climate change risk made Bob the perfect candidate to lead the effort, and we should all be grateful to him for his service.   

The Subcommittee represents a diverse and broad coalition of stakeholders that includes some of the sharpest minds on climate related financial market risk and also represents a novel, comprehensive, and inclusive public sector supported effort to study and address climate risk issues.  I am grateful to each of the members for their commitment to the effort, and their willingness to step up and tackle a difficult issue during an unprecedented time in our country’s history.

The Subcommittee held two in person meetings beginning 10 months ago before the COVID-19 pandemic, and then held monthly, then weekly, and then almost daily telephonic meetings as they conducted their work.  I received updates on their progress throughout the process.  When I asked for a consensus document, I knew that was a high bar to achieve. However, I was very pleased, when in early September, the Subcommittee voted unanimously, 34-0, to approve the 165 page report. 

In the months preceding the vote, there were many reasons to doubt the Subcommittee would meet its goal, specifically with the scope and charge of the Subcommittee.  Many outsiders thought arriving at consensus with members from such diverse parts of the economy and market was simply not feasible.  But, I was optimistic and determined given the seriousness of the issue and the need for action.  More importantly, as a result of the dedication, skill, and creativity of each of our members, adept leadership and diplomacy by the Chairman, the cogent writing of the work stream leads, and the grit, determination, and wisdom exhibited by our talented editorial team, the Subcommittee produced what I am very proud to present to you today.[15]

Before I turn to the report itself, I would like to take a moment to recognize and thank my Chief of Staff, Mr. David Gillers.  David joined my office in July, 2019, and in many respects has shepherded this initiative from his very first day at the CFTC.  David’s commitment and belief in the Subcommittee’s success has been steadfast, and his comprehensive understanding of the policy issues is a significant part of why we are here today.  I’d also like to recognize and thank John Dunfee, Laura Gardy, and Alicia Lewis for their tireless work and support.     

The Report

Managing Climate Risk in the U.S. Financial System (the “Report”) is a first-of-its kind document.  This is the first time an advisory coalition representing a broad swath of the U.S. economy has come together under the leadership of the federal government, presented a consensus view diagnosing climate-related financial market risk, and outlined a roadmap to directly tackle the problem.  Fortunately for us, the members were not bashful in what they have recommended. 

A few of the critical findings of the Report:

1. Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy. 
2. U.S. financial regulators must recognize this, and should move urgently and decisively to measure, understand, and address this risk.
3. The financial system can be a catalyst for investment that accelerates economic resilience and the transition to a net-zero emissions economy. 

The Report provides 53 policy recommendations, several of which I will highlight in a moment.  But before I do, I’d like to establish a few threshold matters that the Report makes clear.

First, the Report establishes at the outset that it calls for policy and regulatory choices that are “flexible, open-ended, and adaptable to new information about climate change and its risks, based on close and iterative dialogue with the private sector.”[16]  In other words, there is much about climate risk that we are still learning, and policy makers must adapt to new information in real time.  This is by no means an argument to delay action; indeed, the case for urgent and immediate action is clear.  But, that action must be prudent and thoughtful, accompanied by continued evaluation and consultation.

Second, the Report recognizes that climate change already has placed disproportionate burdens on the low and moderate income households and historically marginalized communities.  This is why the framing of every one of the recommendations, and indeed, the entire Report, considers impacts on low-to-moderate income households and marginalized communities.  Any policy prescription must not exacerbate existing inequitable burdens of climate change.  This is absolutely critical in ensuring the actions the government takes do not make the problem worse.

Finally, COVID-19 hit the Subcommittee as it did every other corner of our country, but there are lessons learned from the pandemic that are applicable to the climate discussion. 

We should take note of the lessons learned from the Covid-19 pandemic: the importance of being decisive leaders, supporting and creating resilient stakeholders, of ensuring the availability of timely, consistent, and improved information, and of innovating to ensure our financial models build in risks and scenarios that are extreme but plausible in the near and longer term. 

If we start building better equipped financial systems now that both acknowledge and account for the inevitable impacts of climate change, we can be positioned to avoid the need for extreme shifts in balance sheet management and fiscal and monetary policy.

Recommendations:

The first recommendation of the Report is also the one that requires Congressional action:  The U.S. should establish a price on carbon.  The Report highlights that “[t]his is the single most important step to manage climate risk and drive appropriate allocation of capital.”[17]

As the Subcommittee’s chairman, Dr. Litterman has pointed out on several occasions, “financial markets do an amazing job of allocating capital in the direction of the incentives that they are given.”[18]  And that is why, when incentives are appropriate, they can help lead to innovation, improvements in health and safety, and quality of life the world has never seen.  But when the incentives are mis-aligned, as in the case of carbon emissions, there is a market failure, and the incentives go in the wrong direction, things begin to break down.  

A negative externality is a cost imposed on someone outside of a specific transaction.[19]  Carbon emissions are a perfect example of a negative externality.  Emissions impose significant costs on society in the form of current and future climate impacts, but the markets have not priced in this cost.  In other words, the costs of burning fossil fuels and “other emitting activities have been treated until now as if they were ‘free’.”[20]  When a negative externality is identified, “there is a role for the government to ensure those externalities are reflected in prices.”[21]  Without a cost in place, “financial markets lack the most efficient incentive mechanism to price climate risks.”[22]  Though a price on carbon is the single most consequential action policy makers could take to address climate risk, this recommendation serves as the context for the Report, rather than its focus. 

In the absence of a price on carbon, there is still an urgent role for regulators.  The Report points out that “financial regulators should actively promote, and in some cases require, better understanding, quantification, disclosure and management of climate-related risks by financial institutions…and other market participants.”[23]  Regulators today have the authority to implement these requirements.  The Report argues for critical action regarding disclosure, stress testing, scenario analysis, and governance. 

Another key recommendation of the Report is international collaboration and harmonization.  The U.S. is not alone in facing this challenge, nor are we alone in identifying policy solutions.  When it comes to pricing carbon, disclosures, stress testing, and scenario analysis, it’s critical that we approach this together with our international partners.  There are a host of international organizations active in this space.  However, as the Report points out, the U.S. “is a reluctant participant in these efforts, and in some cases, it is absent.”[24]  This seems illogical given the size of the U.S. capital markets, which are the largest in the world.  Indeed, “[t]he largest futures exchange in the world is based in the United States…. Four of the five largest asset managers are based in the United States, and the United States represents the largest insurance market globally by premium volume.  Without active leadership by U.S. regulators and financial institutions, the mission of prudent climate risk management will remain incomplete at best.”[25]

Perhaps my favorite chapter is the last, which focuses on opportunities in financing the net-zero transition.  Unlike many existing reports, the Report does not just focus on the downside risks.  It makes the case that structural changes and market innovations can expand capital flows to sustainable finance solutions.[26]  And in the process, create significant employment opportunities. By one estimate, the total worldwide investment needed in energy infrastructure to meet the Paris Agreement goal by 2050 (limiting warming to “well below” 2 degrees Celsius) is $110 trillion.  That’s roughly 2% of average global GDP per year.  That could translate to enormous economic opportunities, according to the Report.

I’ll end my remarks with an observation from the Report that captures the seriousness and urgency at hand:  “A world racked by frequent and devastating shocks from climate change cannot sustain the fundamental conditions supporting our financial system.”[27]

The good news, though, is that we have virtually all of the tools we need to start our work.  With the exception of a price on carbon, according to the Report, “existing legislation already provides U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now.”[28]  As this Committee’s Majority Staff Report[29] has called for the Report to be provided to various congressional committees, I strongly believe all congressional committees with relevant oversight jurisdiction should consider the policy recommendations.

As one observer noted, we missed the subprime mortgage crisis which led to the Great Recession; we missed the COVID-19 crisis which has led to catastrophic loss of human life and economic shock; let us not miss the climate crisis.

Thank you for your time. I am happy to take any questions.