I support the Commission’s enforcement against Sunoco LP for the spoofing of the crude oil, gasoline, and heating oil futures markets.  However, I oppose the CFTC’s determination that Sunoco’s conduct should not result in any disqualifications under the “bad actor” provisions of the securities laws.  The CFTC has neither the authority to make this determination, nor the tools to adequately protect investors in the securities markets.

The Securities and Exchange Commission (“SEC”) is responsible for determining who is subject to registration requirements for the offer and sale of securities, and what type of misconduct warrants any disqualifications in the securities markets.  Various SEC regulations, including Regulations A and D, exempt companies from the requirement to register securities offerings with the SEC.[1]  “Bad actors” found to have committed certain violations of the securities laws are automatically disqualified from claiming such exemptions absent a determination by the SEC to provide a waiver.  SEC regulations also provide for automatic disqualification for certain violations of the Commodity Exchange Act.  However, under those SEC regulations, the automatic disqualification does not apply if the CFTC “advises” the SEC that disqualification under Regulations A and D should not arise as a consequence of the CFTC’s order.

Congress, however, has not authorized the CFTC—the federal derivatives regulator—to determine whether companies should be required to register securities offerings with the SEC.  Nor did it authorize the SEC to delegate this responsibility to the CFTC.[2]

Furthermore, the CFTC does not have any history of regulating these markets, nor does it have the same ability as the SEC to protect investors.  For example, the CFTC does not have the same authority as the SEC to require “bad actors” to undertake remedial measures to ensure the integrity of their conduct in the securities markets.

Any advice that the CFTC offers about compliance with securities registration requirements is, as the term indicates, purely advisory and has no effect on a firm’s qualifications under the securities laws.  For this reason, although I disagree with the Commission’s proffering of this advice, its inclusion does not affect my overall support of this enforcement action.

I look forward to continuing to work with the SEC to imminently resolve this issue.

I thank the staff of the Division of Enforcement for their work in this case.

I commend the Division of Enforcement for their tireless efforts to ensure that market participants, especially exchanges and intermediaries, comply with the Commodity Exchange Act and CFTC Regulations and don’t skirt those rules to the disadvantage of U.S. customers and law-abiding market participants. As a derivatives market regulator that supports innovation and ingenuity, it is imperative that we actively police trading platform activity and remove the bad apples so that legitimate, law-abiding marketplaces can flourish. We will not stand for any participant brazenly flouting our rules. I look forward to the successful resolution of this matter and the beneficial impact it will have in this market by holding those who deliberately ignore the law accountable.

I support today’s Commission action ordering JPMorgan[1] to pay $920 million—the largest monetary settlement in this agency’s history—for manipulating the precious metals and U.S. Treasury futures markets.  However, I oppose the CFTC’s determination that JPMorgan’s conduct should not result in any disqualifications under the “bad actor” provisions of the securities laws, for the reasons outlined below.

For eight years, a group of traders at JPMorgan systematically “spoofed” precious metals and Treasury futures markets by entering hundreds of thousands of orders with the intent to cancel them before execution.  The Commission’s Order finds that JPMorgan manipulated these markets and failed to diligently supervise its traders.  The scope of misconduct and market harm described in the Order is unparalleled among prior spoofing cases brought by the Commission.  This enforcement action illustrates how vital it is for firms to maintain adequate surveillance systems and promptly investigate red flags.

These egregious violations warrant the historic level of monetary sanctions imposed by the CFTC.  However, it is the responsibility of the SEC, not the CFTC, to determine who is subject to registration requirements for the offer and sale of securities, and whether such misconduct warrants any disqualifications in the securities markets.

Various SEC regulations, including Regulations A and D, exempt companies from the requirement to register securities offerings with the SEC.[2]  “Bad actors” found to have committed certain violations of the securities laws are automatically disqualified from claiming such exemptions absent a determination by the SEC to provide a waiver.  SEC regulations also provide for automatic disqualification for certain violations of the Commodity Exchange Act (“CEA”).  However, under those SEC regulations, the automatic disqualification does not apply if the CFTC “advises” the SEC that disqualification under Regulations A and D should not arise as a consequence of the CFTC’s order.

This SEC-created process has complicated the CFTC’s ability to settle its own enforcement cases without resource-intensive litigation.  Respondents in CFTC cases subject to automatic disqualification under the SEC’s regulations often do not agree to settle their CFTC cases unless and until either the SEC grants a waiver of the disqualification, or the CFTC “advises” the SEC that the disqualification shall not apply.  In a number of instances, such as this one today, rather than indefinitely delay enforcement of the CEA in anticipation of a potential waiver by the SEC, CFTC enforcement staff will notify SEC staff of the request to waive the bad actor provisions.  Where SEC staff does not object or raise concerns, the Commission will then “advise” the SEC that the disqualification shall not apply.  Essentially, the SEC advises the CFTC on whether the CFTC should advise the SEC that the SEC’s regulation shall not apply.  This circular consultation obscures public transparency and accountability and wastes scarce CFTC resources.

More fundamentally, the CFTC’s advice on the application of the SEC’s regulations has no legal effect.  Congress has not authorized the CFTC—the federal derivatives regulator—to determine whether companies should be required to register securities offerings with the SEC.  Nor did it authorize the SEC to delegate this responsibility to the CFTC.[3]

Accordingly, any advice the CFTC offers about compliance with securities registration requirements is, as the term indicates, purely advisory and has no effect on JPMorgan’s qualifications under the securities laws.  For this reason, although I disagree with the proffering of this advice, its inclusion does not affect my overall support of this enforcement action.

As I have said before, the CFTC and the SEC should develop a process in which the SEC exclusively will consider and decide whether a company subject to a CFTC enforcement order should be exempt from registration under the securities laws, within a timeframe that does not unreasonably delay the CFTC’s issuance of the order.  I urge my colleagues at the SEC to continue to work with us to speedily resolve this issue.

I thank the staff of the Division of Enforcement for their dedication and hard work in this case.

We concur with the Commission’s decision to accept the Offer of Settlement from JPMorgan Chase Bank, N.A.; J.P. Morgan Securities LLC; and JPMorgan Chase & Co. (the “Respondents”).  We concur with the Commission’s findings that the Respondents engaged in unlawful spoofing, manipulation, and attempted manipulation in precious metals and treasuries markets, and that Respondent J.P. Morgan Securities LLC further breached its duty of diligent supervision, all in violation of the Commodity Exchange Act (“CEA”) and the Commission’s regulations.

The Respondents’ violations detailed in the Commission’s Order were vast, and are fully deserving of the substantial sanctions imposed by the Order.  We commend the Division of Enforcement, working cooperatively with the Department of Justice and the Securities and Exchange Commission (“SEC”), for their perseverance in bringing Respondents’ misconduct to light.  Today’s Order will go far towards achieving the Commission’s objectives of deterring similar misconduct by others, instilling a culture of compliance among those who participate in our markets, and protecting the integrity of the marketplace.

Unfortunately, though, the Order also presents a troubling – and wholly collateral – issue.  Pursuant to rules adopted by the SEC, the findings of our Order will result in the disqualification of Respondents from certain exemptions relating to the registration of securities offerings under Regulations A and D of the SEC’s regulations (a “Reg A/D disqualification”).[1]  However, the SEC’s regulations also provide that such disqualification “shall not apply” if the CFTC “advises in writing” that disqualification “should not arise as a consequence of such order.”[2]  The Order issued today includes this advice.

Although they may have been well-intentioned, these SEC rules (which were not mandated by statute) have put the CFTC in a difficult position in cases such as this one.  As often happens, the Respondents will not agree to settle the CFTC’s enforcement action absent a waiver of the resulting Reg A/D disqualification.  SEC rules provide that the SEC may waive the disqualification upon a showing of good cause,[3] but waiting for such an SEC waiver intolerably subjects the CFTC’s enforcement program to the vagaries of when the SEC makes time to consider the Respondents’ request.  In order to efficiently perform our responsibility to enforce the CEA and the Commission’s regulations, therefore, we decide whether to advise, as set forth in the SEC’s rules, that the Reg A/D disqualification provisions of the securities laws should not apply – a decision that is more appropriately one for securities regulators to make.

This is not a new issue; we have wrestled with this conundrum several times since we joined the Commission in September 2017 and September 2018.  Indeed, this is not the first time that CFTC Commissioners publicly have raised concerns regarding this issue.[4]  We are aware that CFTC and SEC representatives have been seeking a resolution that would permit the CFTC to effectively enforce the CEA and CFTC regulations while allowing the SEC to more appropriately determine whether a Reg A/D disqualification resulting from a CFTC enforcement action should be waived.  We appreciate these efforts and the progress that we understand has been made to date.  But the fact that this case has arisen and yet this issue still has not been resolved prompts us to write together to emphasize the urgency of finding a remedy from the SEC to avoid further hindering the CFTC’s enforcement program and consuming valuable time of our Commission.

The CFTC and SEC have an admirable record of cooperative enforcement efforts that – as reflected in the resolution of our respective charges against the Respondents in this case – have served the public interest well.  But the public interest is not being well served by the current circumstances regarding Reg A/D disqualifications created by the SEC’s rules.  Resolving this issue must be a top priority.

I am pleased to support the FSOC’s activities-based review of secondary mortgage market activities, and in particular the activities of Fannie Mae and Freddie Mac (collectively, “the GSEs”) as the dominant private secondary market providers of liquidity.  When the GSEs collapsed in the summer of 2009, the American people were left holding the bag.  Furthermore, the subsequent Dodd-Frank Act scarcely mentioned the GSEs—let alone made any attempt to reform them.  Additional legislative attempts were made by both sides of the aisle, but all have failed.  That leaves it to us, the FSOC, to address the potential systemic risk posed by the GSEs.

The good news is that for the first time, the FSOC is formally acknowledging that any distress that affects the secondary market activities of the GSEs could pose a risk to the financial stability of the United States if not properly mitigated.  Our review is a necessary and important step in protecting American taxpayers against future bailouts and reforming our housing finance system.  I also want to commend the FHFA for its efforts to develop a robust regulatory framework tailored to the systemic risk posed by the GSEs.  We must continue to monitor the GSEs’ activities and the FHFA’s implementation of the framework, which—so long as it continues to embody strong capital requirements—should lessen the need for the FSOC to consider taking more formal action.

Remarks as Prepared for Delivery
September 23, 2020

Good evening everyone. It is an honor to be addressing all of you. Unfortunately due to COVID, I have to do so via video conference from Washington and not with you in beautiful Guildhall. Still, I take heart that this great tradition continues. Winston Churchill once said “The maxim of the British people is ‘Business as usual.’”  So, even as I take heart, I am in no way surprised. 

Overview 

Tonight I am going to talk about Britain, and I am going to talk about America. More specifically, I am going to speak about the Special Relationship between us. For me, that special relationship is not simply the kind of history you find in a textbook. For me, that special relationship is personal—in fact it has been a defining feature of my own education and career. The same is true for tens of thousands of Americans and Brits today as it has been in decades past.  

The special relationship is built on many bonds, and commonly takes on political and military tones. But the economic dimension of our special relationship is just as important. Among its pillars is what I will call the special regulatory relationship—something rarely talked about but of critical importance—most especially so for the City of London.   

Importance of the City of London 

Once again, I truly wish I could address you in person because London is one of my favorite places in the world. I have been fortunate to spend quite a bit of time in London. Your ancient metropolis has long fascinated me. And specifically, the City proper—with its history and traditions that are without equal anywhere in the world. As I am sure all of you know, the City of London has existed for many hundreds of years. Its special status was first documented in Magna Carta more than 800 years ago.  

But apart from the City’s grand history and traditions, your “square mile” is literally the richest in the world. In fact, London often finds itself switching spots regularly with New York as the world’s No. 1 financial center. And there is little question that London is the most important overseas financial center for the US economy.   

When it comes to derivatives—particularly swaps—London continues to wear the crown. The Square Mile contains the largest global largest FX and Cross Currency Swap Markets in the world. It encompasses entities such as the London Bullion Markets Association which sets standards for the Gold Swaps and the COMEX Gold Futures markets that have been used for decades by investors and hedgers.   

These products are increasingly important in the diversifications of portfolios. It is no wonder that the City draws the best and brightest from all over the world. As a result the City has been, and remains, at the very forefront of finance. And the City’s success continues to ensure Britain’s economy—even in challenging times—remains among the largest in the world. 

My Special Relationship with Britain 

But as I alluded to a moment ago, my admiration for the City does not come from all the impressive statistics. Early on in my career I had the benefit of living in Britain and witnessed firsthand what it is about the UK, for its part, that makes the relationship so special. When businesses go global, London is often the location of their first overseas office. In fact, that’s how my relationship with the City began. 

More than 20 years ago, my first paid law job was not in Washington or New York or even anywhere in America. It was in the London office of Sullivan & Cromwell—which was tucked away in Ironmonger Lane. Given I was but a clueless 23-year old summer associate, the firm had the foresight to assign me a mentoring partner. If you can believe it, that mentoring partner was none other than Jay Clayton, now Chairman of the US Securities and Exchange Commission. The two of us have weekly one-on-one calls to coordinate our agencies, so I still get the benefit of his mentorship!  

I returned to the US to finish my final year of law school, but each day that went by I yearned to return to Britain. I was lucky enough to be admitted by the Faculty of Law at Oxford University on a US-UK Thouron Fellowship, which was created to deepen the bonds of friendship between our two countries. During my time in Britain as a student, I earned my doctorate in comparative law, having written my thesis on a subject near and dear to many of you:  the City Code on Takeovers and Mergers.   

I returned to the United States and began my law career in earnest, working in private practice and serving in various positons within the US Government. But Britain’s influence continued to shape me in subtle ways. When I passed the bar, my firm granted each newly admitted lawyer up to $250 to purchase a single piece of wall art for his or her office.  My choice was large copy of Arthur Pan’s 1942 iconic portrait of Winston Churchill—cigar in hand and purpose in his eyes. That framed print has traveled with me to every job since. I am pleased to say it sits in the CFTC Chairman’s office and continues to inspire not just me but our agency’s employees and guests.   

Before reentering government for a second time in 2017, I had officially become an English Solicitor and was a partner within the global financial services practice of Allen & Overy, one of the UK’s Magic Circle Firms headquartered at 1 Bishop’s Square—literally on top of the ancient walls of the City itself.   

In fact, I have spent so much time here, my family and colleagues are often mildly frustrated with my use of British lingo. My PA has noted that I don’t call people, rather I “phone” them; my advisers continue to delete the word “whilst” from my speeches and articles; and my children give me funny looks when I ask them to get in a “queue” rather than line up. But perhaps I just feel more at home over there with all of you—lots more interesting conversation to say the least.

Maybe Oscar Wilde put it best when he said that “We [Brits] have really everything in common with America nowadays except, of course, language.” Well, language aside, I’d like to think I have a special relationship with Britain—and the City in particular. So I hope that after I conclude my remarks the feeling will be mutual.  

The Special Relationship  

So now on to more serious topics: as you are all well aware there has long been a special relationship between Britain and America. This has been acknowledged by leaders of both our great countries many times throughout history. I find one interaction particularly poignant. Celebrating the 200th anniversary of diplomatic relations between the US and the UK in 1985, Prime Minister Thatcher observed: 

“There is a union of mind and purpose between our peoples which is remarkable and which makes our relationship a truly remarkable one. It is special. It just is, and that's that.” 

President Reagan, in turn, acknowledged: 

“The United States and the United Kingdom are bound together by Inseparable ties of ancient history and present friendship ... There's been something very special about the friendships between the leaders of our two countries. And may I say to my friend the Prime Minister, I'd like to add two more names to this list of affection: Thatcher and Reagan.” 

Why the Special Relationship Exists 

So all agree this special relationship exists, but every now and again we should ask ourselves: why? Well of course there is the fact that Britain was the mother country of America. And aside from a few inter-family squabbles early on, we have been through thick and thin together. We have maintained political, military and economic ties throughout it all.  

We both have democratic forms of government in a world where democracy is being challenged on many fronts. We maintain strong military ties—having served side by side through two World Wars, Korea, Desert Storm, above the skies of Bosnia, and the War on Terror, to name a few.

We both have free-enterprise systems based upon the rule of law. And we believe in sound regulatory oversight of the free-enterprise system—which takes us to a subject less frequently acknowledged by commentators: the special regulatory relationship.   

The Special Regulatory Relationship

Yes, it is no stretch to say there is also a special regulatory relationship in financial services—alongside the larger special relationship that is tangible in its own right. This relationship recognizes the special place the City’s financial sector—encompassing both its private and public sector institutions—holds in the world. I want to outline the past, present, and future of this unique, but often overlooked, relationship.   

Past 

First, the special regulatory relationship has a strong and decades-long past. I will start where my own agency began—in the early 1970s. Even then our markets were international, though nowhere to the extent they are today. 

There has always been market risk in finance but during much of the post-war period, the Bretton Woods system ensured dependability in foreign exchange and interest rates. When the dollar-peg system went by the wayside, the real economies within America and Britain began to feel the sting of greater fluctuations in interest rates and foreign exchange. Combined with upheaval in the energy markets, these pressures fueled the explosive growth in the derivatives markets that were tracking financial risks alongside traditional commodity staples such as grains, sugar, and coffee.   

Since 1922, the CFTC had existed in various forms as an agency within the Department of Agriculture. But in 1974, Congress decided to spin out the CFTC as a fully independent agency. It was given a broader remit and charged to supervise the expanding US derivatives markets. That same year, the failure of Herstatt Bank sent shock waves through the international bank regulatory community.   

The silver lining was that the Bank of England and the Federal Reserve together—through the special regulatory relationship—recommended to other members of the then G-10 to address cross-border supervision. This joint British-American effort culminated in the Basel Committee on Banking Supervision—among the most influential international standard setters.  (And from 1974-1988 the BOE chaired it). So yes, we probably would not have The Basel Committee without the US-UK special regulatory relationship. 

But before I give the Fed all the credit for the US side of the relationship, you should know the CFTC has played an important part as well. In 1986, the CFTC and the SEC signed an MOU with the then Department of Trade and Industry, now succeeded by the FCA. In 1989, the CFTC issued among the first exemptions under Rule 30.10 (allowing British firms to serve as futures brokers for US customers on UK exchanges without having to register as brokers in the US). In 1991, we signed an MOU between the CFTC, SEC, the BOE, and what is now the FCA, the PRA on mutual assistance and the exchange of information.  

From the 1980s until the 2000s, the special regulatory relationship was strong. There were even Americans serving in high-profile regulatory positions in Britain and vice versa. Our special regulatory relationship was certainly put to the test during the global financial crisis. On the whole, however, our regulators worked constructively with one another. For example, one major concern related to collateral in USD posted at UK-based Central Counterparties. To address the concerns we created swap lines between the Fed and the BOE to ensure the BOE would have the means to provide liquidity in US dollars if needed. 

In the aftermath of the 2008 crisis, we found ourselves agreeing on much of what needed to be done—including much of what would become the global reforms the G20 adopted. The move to centralized clearing was a key component of those recommendations. As was the imposition of margin requirements to any uncleared swaps that remained. On the eve of Brexit, the relationship remained but the path forward was unclear.   

Present 

So enough history; let us move on to more recent events and how we have worked together following the UK’s decision to leave the European Union. If the past was marked by a gradual evolution from the 1970s onward, the last few years have been marked with rapid change. I see Brexit not so much as a challenge to Britain as an opportunity for our special regulatory relationship to grow stronger.  

Within a year of the Brexit vote we had an upset election in the US, and the new President nominated me to be Assistant Secretary of the Treasury for International Markets. At the US Treasury, Brexit was top of mind. I took heed of Churchill’s advice never to worry about action, but only inaction. (Taking action is hard enough, but try to do it in the government) Nevertheless, we focused on concrete actions. 

In 2017, I led a government-wide project to track all MOUs and financial regulatory relief that had been granted to the UK indirectly—as a result of its EU membership. A hard Brexit would mean the UK would fail to be covered by these instruments. So we catalogued nearly 60 agreements, MOUs, and other actions. We then worked across US regulators—banking—securities—insurance etc.—to repaper and re-execute them so they’d apply to Britain upon Brexit. 

In 2018, we moved from offense to defense:  setting up the US-UK Financial Regulatory Working Group.  I served as the first US Co-Chair. The purpose of the Working Group was to replicate the longstanding and successful forum the US and EU had for 15 years and continues to have today. All regulators meet with their counterparts twice annually to discuss over a two-day period subjects such as equivalence, cross-border topics, and issues of mutual concern. As we met first in London and then in Washington, it became clear that since the UK would import most of EU financial regulations on day 1, we would have to take a wait-and-see approach regarding attempts to harmonize our frameworks. However, there was one big area where Brussels had not issued any comprehensive directives: fintech.  

In 2019, we went one step further—establishing the Financial Innovation Partnership. The FIP, as we call it, is unique in that is not only involves regulators from both sides of the pond, but also the US Department of Commerce and UK Trade and Investment. We focus on reducing regulatory barriers to foster responsible cross-border innovation, while simultaneously involving our counterparts with expertise in trade promotion. As a result, start-ups and even mature fintech companies from the US and UK can engage with relevant government authorities from the other country as well as with each other.  

I left the Treasury in the summer of 2019 to take the helm of an agency that has been equally committed to strengthening the special regulatory relationship. For its part, the CFTC has been busy partnering on the LIBOR transition. In 2019 we, along with the BOE and FCA, as the “LIBOR Troika,” issued a joint statement regarding the transition. And we coordinate with all relevant UK regulators:  the BOE on CCPs, the PRA on Swap Dealers, and the FCA on exchanges and products. 

Because no single regulator can cover it all, I established at the CFTC the Chairman’s Award for Regulatory Excellence to recognize other people and institutions apart from the CFTC that are critical to our mission. And guess where the very first of these awards went? Not to anywhere in America but in fact across the Atlantic—to the UK FCA for its work on promoting innovation.  

Future 

Finally, onto the future of the special regulatory relationship. Because of the groundwork we have laid together in the distant and recent past, I believe the years ahead hold great promise for Britain and the Square Mile. We continue to be of the view that any major disruption in the international financial markets is a lose-lose proposition. So we are doing all we can to help ensure Brexit results in a smooth transition.  

In that vein, the CFTC is finalizing transitional relief to avoid disruption in the ability of UK entities, such as trading venues, to operate in the US. Additionally, last week our Commission adopted a final rule on alternative compliance for registered CCPs from outside the US. This rule recognizes that for all but the largest entities we can rely on the good sense, good supervision, and good cooperation of home regulators. We will also soon have the inaugural meeting of a US-UK working group on the resolution of systemically important CCPs, and the CFTC will be taking a leading hand in this effort. There is no other nation with whom we’re working so closely on this topic.  

Finally, in the near term we expect to enhance the relationship between the CFTC and the BOE. We seek to reinforce our longstanding relationship with respect to CCP supervision. We seek a relationship based on mutual trust, so we no longer have mutual uncertainty. We favor an arrangement involving deference to and reliance upon each other’s good judgement.  And we want to ensure cooperation in times of crisis and a clear process for resolving differences of opinion. 

Conclusion 

As I look to the future, I see the Special Regulatory Relationship having an impact far beyond Britain and America. I believe it can be a model for cooperative relationships between other jurisdictions. But I think its greatest promise is serving as a building block of global stability and growth. 

The international order of the last several hundred years has been guided by our two nations. During this time, civilization has advanced by leaps and bounds. So many marvels made possible—so many lives better lived—because of the markets we regulate and the shared values underpinning them.   

That same market dynamism is helping us tackle the promise—and peril—of today’s world.  It is helping fuel our collective response to the COVID-19 pandemic and other advances in medicine. It is reshaping international commerce and how we transact business with one another. It is being leveraged to constrain the global ambitions of bad actors. And so on.

Free markets and free people will always be the greatest force for human progress. That is why we must continue to commit—and recommit—to the overall US-UK Special Relationship. And to do our specific part, we must continue to enhance the special regulatory relationship. I am confident that if we do, this Square Mile will continue to play a leading role in the world’s economy.   

Once again, I am grateful for the honor of speaking to this evening. Thank you.