Remarks of Commissioner Dawn D. Stump Before the National Cattlemen’s Beef Association Live Cattle Marketing Committee meeting at the 2019 Cattle Industry Convention

February 1, 2019

I want to thank my long-time friend Colin Woodall for the invitation to speak with NCBA’s Live Cattle Marketing Committee.  Having only recently been confirmed to my position at the Commodity Futures Trading Commission, I am extremely pleased that my first industry conference is before all of you, friends in the cattle sector.  Since I am now a Commissioner, I must also tell you that the views I express today are my own and do not represent those of the CFTC or my fellow Commissioners.  I grew up in the agricultural industry during the farm crisis of the 1980s. My hometown of Olton, Texas is almost exclusively dependent upon crop production, cattle feeding, and more recently dairy operations. I have seen first-hand the tremendous risks involved in these lines of business and know you all need access to a variety of effective risk management and price discovery tools, including the futures markets.

In 1974 the CFTC was created as an independent agency.  Prior to that time its predecessor, the Commodity Exchange Authority, was housed at the United States Department of Agriculture.  Since that time, the markets we regulate have grown to include those utilized by manufacturers managing risks associated with currency price fluctuations, utilities facing energy production disruptions, pensions hedging against retirement savings loss, and even banks who need to guard against interest rate fluctuations. While our mission has broadened over the years, one of my priorities at the agency is to ensure that we remain focused on our legacy mission in the agricultural markets. 

Speaking of legacies, and since its Super Bowl weekend, can we talk for a moment about my team, the Dallas Cowboys?  Growing up in Texas in the 1970s I recall taking great pride in our two Super Bowl wins and then while I was in college the team won three more championships.  Yes, I know the 49ers also have 5 Vince Lombardi trophies, as have the Patriots who are vying for their sixth on Sunday, and Pittsburgh outranks all with the most NFL titles.  So what makes these teams great?  I believe there are three critical factors: 1) the players take pride in their shared objective and actually set aside personal differences and work towards a common mission, 2) the game is instructed by remarkable coaches – some seasoned and some new, and 3) many, beyond those on the field, take pride in and monitor the teams’ performance thereby demanding well-functioning operations.

I would suggest that any successful marketplace also requires these components and I think you all are to be commended for recent efforts to bring various players in the cattle market together in the spirit of working towards preserving and updating risk management tools.  By taking a leadership role in engaging the market makers, the brokers, and the exchange, NCBA is a thought leader.  I am certain this was not easy, but I believe your team spirit and your concrete deliverables will yield a better outcome. Your industry has the benefits of great leaders in their fields being willing to tackle these challenges – some bring vast experience and others are innovators for the 21^st Century and it is wise to embrace both.  Like your business operations that have benefitted from technological advancements, the futures markets have undergone a tremendous transformation in recent years – from open outcry to electronic trading.  Transition is difficult but hopefully the coordination you all are engaged in will yield an optimal outcome – something akin to having the experience of Bill Belichick and the enthusiasm of Sean McVay on the same team.  We need your veterans and your innovators to help us ensure the markets, albeit different from those of the past, are serving their intended purpose.  And finally, thank you for your efforts to ensure that those outside of this meeting are well served.  Like the fans of football, there are many depending on you, the players and coaches, succeeding in maintaining the integrity of the live cattle and feeder cattle futures markets.

We at the CFTC must lend support to your efforts by employing robust procedures for deterring market manipulation, acting on violations, and reporting back to stakeholders. We conduct examinations of the exchanges and clearinghouses, monitor ongoing market intelligence, conduct surveillance for market abuse, and have an extremely strong enforcement program.  I suppose in my football example we would be the field officials, though I am not sure I should compare myself to an NFL referee in our host city of New Orleans.

Giancarlo: Bipartisanship, Goodwill and Common Sense Guided CFTC Through Government Shutdown

January 28, 2019

Washington, DC - U.S. Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo issued the following statement regarding the CFTC’s return to operations:

“Following the Friday evening announcement of the continuing resolution to reopen the government, the CFTC resumed operations.  Today, we enthusiastically welcomed back hundreds of employees to our offices in Washington, Kansas City, Chicago and New York.  We are grateful for the professional manner in which they handled the uncertainty of the shutdown.

“While the lapse in appropriations meant that much of the CFTC's work was required by law to cease, the CFTC continued to perform essential market-critical functions throughout the shutdown.  The agency was well prepared, utilizing its Lapse in Appropriations action plan adopted a year ago.  A small team of agency staff continued to monitor derivatives markets and ensured that essential enforcement activities were carried out. Personnel performing these excepted functions remained in communication throughout with key market participants and self-regulatory organizations. They deserve our thanks and gratitude.

“The particular nature and length of this shutdown required the CFTC to address many challenging and unprecedented issues.  This included assessing which agency activities became increasingly essential over time and recalling furloughed staff to perform these functions. Much of the analysis and response was handled by CFTC Chief of Staff Mike Gill, General Counsel Dan Davis and Executive Director Tony Thompson. They addressed complex questions in an intelligent and balanced fashion.

“Undoubtedly, the situation was a source of uncertainty, anxiety and even hardship for many CFTC employees and their families. The entire Commission and its senior staff were concerned throughout for their colleagues’ welfare. The situation was a reminder of the outstanding talent and capability of the CFTC’s workforce as well as their public service, for which we are grateful.

“Yet, what made the CFTC’s handling of the shutdown most effective was the goodwill and cooperation brought to bear by all five of its Commissioners.  Over five weeks, the Commissioners gathered together to hear reports from senior agency personnel about underlying market activity and discuss the handling of essential agency functions. I am indebted to Commissioners Brian Quintenz, Rostin Behnam, Dawn Stump and Dan Berkovitz for their engagement and support that enabled the CFTC to operate with bipartisan common sense during the past thirty-five days.

“In the days to come, we will update the public and market participants of the status of resumption of various agency activities, including publication of market data.  Today, I simply want to express gratitude for the grace and goodwill of our entire staff.  Welcome back!”

Keynote Address of Chairman J. Christopher Giancarlo Before the ABA Business Law Section, Derivatives & Futures Law Committee Winter Meeting

January 25, 2019

Introduction

Thank you for the opportunity to speak to you.

I am sorry that I am not with you in person.  I had every intention to join you today, as did agency staff who were invited to speak on panels.  I know there are so many fine colleagues and truly distinguished members of the derivatives bar gathered together. I hope that you all enjoy this year’s program.

Let me note that ABA has kindly agreed to post the full text of these remarks online with the other Conference materials.  Of course, they will also be posted on the CFTC’s website in due course.

Agency Shutdown

As you know, the CFTC is in shutdown mode along with much of the Federal Government.  That means that all agency work that is not essential to preservation of life and property has ceased.  It means a pause in the agency’s policy agenda, including work on SEF reform, Project KISS, position limits, swap dealer de minimis, CFTC/SEC rule harmonization, LabCFTC initiatives, increasing regulatory deference for overseas jurisdictions and participation in international work streams and standard setting activities.  It means suspension of ongoing agency examinations of clearinghouses and exchanges.  It means a halt to routine enforcement actions.

Fortunately, the agency is able to continue to perform essential market-critical functions.  That means that a small team of CFTC staff continue to monitor derivatives markets, ensure essential enforcement activities are carried out, and evaluate market activity across futures and swaps to identify potential impact on the clearing system.  Personnel performing these excepted functions remain in communication with key market participants and self-regulatory organizations, which continue their own market and risk surveillance activities.  You might say that the CFTC is in “silent running” mode in which many activities are suspended, while the agency engages in informed but passive monitoring of market developments.

During this time, most CFTC employees have been furloughed.  Undoubtedly, the situation is a source of uncertainty, anxiety and even hardship for many of our team and their families.  Along with my fellow Commissioners, I am most sympathetic to their personal situations and concerned for their welfare.  Let us hope that the shutdown will be resolved as soon as possible for their sakes and the sake of the overall mission of the agency.

Meanwhile, CFTC Commissioners are exempt from furlough, though our paychecks are suspended along with the agency payroll.  In that respect, we share in understanding some of the pain of many of our agency colleagues.  Still, my fellow Commissioners and I remain engaged on important policy issues.  I believe you may be hearing from several of us during your conference.

I want to take this opportunity to discuss with you two current policy initiatives.  First, the cross-border application of CFTC swaps regulations and, second, our recently proposed revisions to the existing SEF rules.

Cross-Border Deference

Four months ago, I released a White Paper on cross-border swaps regulation[1] that proposed updating the agency’s current cross-border application of its swaps regime with a rule based framework based on regulatory deference to third country regulatory jurisdictions that have adopted the G-20 swaps reforms.

I want to lay out for you the context for the White Paper before discussing next steps in cross-border policy development.

As you know, in the late 20^th Century, regional and national markets for financial products expanded into global markets.  The era produced a new term, “globalization,” denoting increasing interdependence of economic and cultural activities.  Many observe that the era of “globalization” led to rising employment and standards of living for over a generation.

During that period of time, swaps grew in importance and maturity.  Trading of swaps was (and remains) conducted exclusively by institutional counterparties in the world’s major financial centers.  While local financial regulation applied to these professional markets, the primary trading and contractual protocol for swaps came from the private sector, the International Swaps and Derivatives Association (ISDA).  The ISDA protocol provided a singular global standard that facilitated active trading across borders.  Deep pools of swaps trading liquidity emerged in major regional centers based around key global currencies.  Access to those regional liquidity pools was quite open and uniform based on adherence to the universal ISDA protocol.

Then came the financial crisis of 2008.  In response, the G-20 decided a year later in Pittsburgh to implement a series of reforms to global swaps markets.  Those reforms were drawn from emerging industry best practices and included increased swaps central clearing, trade reporting and trade execution on regulated platforms along with swap dealer registration and increased capital and margin.  These G-20 reforms would be implemented appropriately at the G-20 nation state level in a fashion that was “consistent,” though not identical.

The United States moved first to enact the Pittsburgh accords in the Dodd-Frank Act in 2010, and the CFTC moved commendably to implement most of the swaps reforms by the end of 2014.

Five years later, most of the CFTC’s reforms appear to be working well, especially the implementation of the swaps clearing mandate.  Other CFTC reforms, in my opinion, are less than optimal, namely the swaps trading mandate and its application outside of the United States.

As you know, I remain a critic of the mismatch between the CFTC’s swaps trading regulatory framework and the distinct liquidity and trading dynamics of the global swaps markets.[2]  This mismatch – and the application of this framework worldwide – has caused numerous harms, foremost of which is reluctance of global market participants to transact with entities subject to CFTC swaps regulation.

Traditionally, users of swaps products chose to do business with global financial institutions based on factors such as quality and breadth of service, product expertise, financial resources and professional relationship.  Under the CFTC’s current framework, those criteria are secondary to the question of the institution’s regulatory profile.  Non-U.S. market participants avoid financial firms bearing the scarlet letters of “U.S. person” in certain swaps products to steer clear of the CFTC’s problematic regulations.  As a result, non-U.S. market participants’ efforts to escape the CFTC’s flawed swaps trading rules have fragmented global swaps trading and driven global capital into separate liquidity pools based on nothing more commercially important than entity identity.

Since the start of the CFTC’s SEF regime in October 2013 and accelerating with mandatory SEF trading in February 2014, global swaps markets have divided into separate trading and liquidity pools:  those in which U.S. persons participate and those in which U.S. persons are shunned.  Liquidity has been fractured between an on-SEF, U.S. person market on one side and an off-SEF, non-U.S. person market on the other.[3]

Such fragmentation exacerbates the already inherent challenge in swaps trading – adequate liquidity – and increases market fragility as a result.  Fragmentation leads to smaller, disconnected liquidity pools and less efficient and more volatile pricing.  Divided markets are more brittle, with shallower liquidity, posing a risk of failure in times of economic stress or crisis.  Fragmentation increases firms’ operational risks as they structure themselves to avoid the rules of one jurisdiction and be subject to the rules of another while managing multiple liquidity pools in different jurisdictions (e.g., through different affiliates).  As structural complexity increases, operational efficiency is reduced.

Fragmentation of global financial markets may be likened to habitat fragmentation in the natural world, in which large, continuous biological habitats are divided into a greater number of smaller eco-systems, isolated from each other by a matrix of dissimilar habitats, leading inexorably to broad ecosystem decay.[4]

In a similar way, trading market fragmentation, whether caused by entity based regulation or the implementation of other post crisis reforms, may harm market liquidity and market safety and soundness, increasing the systemic risk that G-20 market reform was predicated on reducing.  Amidst the current tide of de-globalization and slowing world economic growth, market regulators should not ignore the potential systemic risk inherent in market fragmentation.

That is why we worked so hard in 2017 to reduce market fragmentation by achieving a landmark comparability determination with the European Commission.  It is also why our recent White Paper proposes replacing the CFTC’s current “entity based” approach to cross-border application of its swaps regime with a “territorial” framework based on regulatory deference to third country regulatory jurisdictions that have adopted the G-20 swaps reforms.  It advocates moving away from numerous separate “entity” based liquidity pools in each of the world’s major trading jurisdictions.  Instead, it encourages the development of unified “territorial”- based trading liquidity pools under the jurisdiction of the competent local regulator that applies the G20 swaps reforms.  The White Paper contends that the antidote to global trading market fragmentation is a broad regulatory program of deference to third country regulatory jurisdictions to achieve in each global trading center “one market, one regulator, one set of equivalent swaps reforms.”

Of course, the White Paper did not purport to specifically address every cross-border issue, but to lay out a high-level framework for approaching the matter.  It sought to offer enough detail to give readers a good sense of direction, yet acknowledges that details and substance must be worked out properly through the agency rulemaking process.

It is clear that the White Paper did not get everything right.  Its approach to ANE transactions,[5] for example, may need further thought and refinement.  Yet, that was exactly the purpose of the White Paper - to serve as a conceptual framework to generate more focused discussion so that resulting rule proposals would be closer to the mark when brought before the Commission and the public.

Still, I believe that the White Paper got the big things right.  Since its release, I have had extensive conversations with other regulators and most major participants in swaps markets here and abroad.  These conversations have confirmed to me that the CFTC’s current cross-border approach of applying its regulations to each and every overseas swap transaction by a U.S. Person whether or not such activity actually has a “direct and significant” impact on the United States is a flawed and over-expansive assertion of its Dodd-Frank Title VII jurisdiction.  For an agency with perennially restrained funding, the overreach of CFTC jurisdiction is untenable.  Worse, the impact of this overreach has contributed to fragmenting global markets into a complex series of ever more shallow pools of trading liquidity that, in a market crisis, may present significant global systemic risk.

Therefore, I believe the CFTC must move forward to replace its over expansive assertion of regulatory jurisdiction with an approach based on regulatory deference to third country regulatory jurisdictions that have adopted the G-20 swaps reforms.

That is why, once the government shutdown ends, I intend to direct CFTC staff to prepare as soon as possible to put through the Administrative Procedure Act process various new cross-border rule proposals.  They will address a range of cross-border issues in swaps reform – from the registration and regulation of swaps dealers and major swaps participants to the registration of non-U.S. swaps CCPs and swaps trading venues.  The intention is to replace the cross-border guidance issued by the CFTC in 2013 and the cross-border rules proposed in 2016, as well as address certain positions taken in CFTC staff advisories and no action letters.

The CFTC must adopt a new cross-border framework that is risk-based and offers deference to comparable non-U.S. regulations.  It is my sincere hope that my fellow Commissioners and regulators of the world’s swaps markets will support us on this path.  I know it is the right direction forward.

SEF Reform

Let me now turn to SEF reform.

As you know, last November the CFTC adopted a proposed rule on Amendments to Regulations on Swap Execution Facilities and the Trade Execution Requirement (Amendments) and a Request for Comment (RFC) regarding the Practice of “Post-Trade Name Give-Up.”[6]

Earlier this month, I conducted a series of meetings in New York City to discuss the proposed Amendments and the RFC.  These meetings were originally set up to be led by the SEF rule writing team.  Due to the government shutdown the team could not attend.  I faced a choice of cancelling the meetings or going solo.  I decided to go forward.

Over the course of a week, I met with a dozen and a half major participants in global swaps markets, including all of the leading SEF platforms, major bank and non-bank swaps dealers and market makers, and major asset managers and other buy-side institutions.  Everyone I met with expressed a desire to engage on the SEF proposal in good faith and in a positive spirt.  All expressed appreciation for undertaking to revise the current framework.  Almost all agreed that the current framework is flawed, clunky and would benefit from substantial revision.  Many agreed that the current framework, as it is built upon various no action relief, staff guidance and temporary regulatory forbearance, is unsustainable as a long term proposition.

There was also broad acceptance of the benefit of making SEF execution methods more flexible and SEFs themselves more attractive and less restrictive for swaps market participants.  There was strong interest in replacing existing no-action relief and staff guidance with final rule making and easing the most burdensome and unworkable aspects of SEF compliance.  There was clear support for broker proficiency exams.  And, there was considerable interest in bringing more cleared swaps products into scope, if done gradually with broad market consensus.

That does not mean the proposed Amendments were without constructive criticism.  Almost all expressed concern with the process and timing of bringing new products into scope.  Many were also concerned with the proposed restrictions on off-SEF, pre-trade communications.  And there was broad concern with how the proposal dovetails with reforming our current cross-border rule implementation.  Some raised concerns that the proposal overly simplified revisions to the standards for “impartial access.”  And a number of firms discussed various technical standards and provisions like error trade policy and financial resources.

Let me address a few of these concerns now.

In making the “made available to trade (MATT)” trading mandate co-incident with the swap clearing mandate, the intention was to increase the amount of swaps products traded on SEFs.  Concerns were expressed that the proposal may inadvertently have created the opportunity for a single SEF to force market-wide SEF execution by quickly listing cleared swaps products.  This was not the proposal’s intention.  I believe that bringing swaps subject to the clearing mandate into scope of the trading mandate should be done properly and, perhaps, in stages with a relative degree of consensus of buy-side, sell-side and major SEF market participants.  I would be interested to consider comment letters that suggest minimum conditions (such as listing on multiple SEFs) with adequate time for SEF connectivity and onboarding before any new mandatorily cleared swaps become mandatorily SEF traded.[7]

I also heard concern with the proposed restrictions on off-SEF, pre-trade communications.  Our goal here was to address the separation of liquidity formation and price discovery from trade execution on existing SEF platforms that took place upon the implementation of the current rules.  The proposal utilizes a carrot and stick approach by, on one hand making the SEF environment more salutary to all such activities and, on the other, prohibiting off platform pre-trade communications for purposes of SEF liquidity formation and price discovery.

It may be that in attempting to bring pre-trade communications onto registered SEFs, the proposal may threaten to disintermediate essential client relationships and communications between buy-side and sell-side market participants in current non-MATT products.  This was not intended and is certainly worth further consideration.  I would be interested to consider comment letters that address whether the objective of encouraging the full process of liquidity formation, price discovery and trade execution to take place on SEF platforms is sufficiently furthered by the proposal’s efforts to make the SEF environment more salutary to all such activities without needing to prohibit off platform pre-trade communications.

Also, let me address concerns with the proposal’s revisions to the standards for “impartial access.”  Several firms with whom I met suggested that permissible SEF membership criteria should relate to a member’s actual market activity in particular swaps asset classes and not its broader commercial activities, such as banking services or direct clearing membership.  I would be interested to consider public comments whether the revisions to “impartial access” would benefit from minimum standards for SEF membership criteria that are consistent with a SEF’s right to establish such criteria under Dodd-Frank.

These three issues – the process and timing of bringing new products into scope, the proposed restrictions on off-SEF, pre-trade communications and revisions to the standards for “impartial access,” along with the broad concern with how the proposal dovetails with reforming our current cross-border rule implementation (that I touched upon earlier in my remarks) – were the concerns most consistently raised in my recent meetings.  They are all valid concerns that will receive thoughtful attention and consideration by CFTC staff.

One final point on the proposal:  It only applies to CFTC regulated SEFs.  It does not extend CFTC jurisdiction offshore to European MTFs or OTFs.  Our proposal is deferential to the MIFID-II regulatory regime for swap execution activities in the EU.  It is consistent with the goal I have expressed[8] of ending the current bifurcation of the global swaps markets into separate U.S. person and non-U.S. person marketplaces by exempting non-U.S. trading venues in regulatory jurisdictions that have adopted comparable G20 swaps reforms from having to register with the CFTC as swap execution facilities.  Therefore, I do not expect our SEF proposal to have any impact on SEF-registration exemptions for EU trading venues consistent with the 2017 agreement reached with the European Commission on trading venue equivalence.

Earlier this week, you may have read a story in the Wall Street Journal asserting that I would “walk away” from the SEF proposal.[9]  That assertion is simply wrong.  As with any agency rule proposal, we wish to thoroughly understand its possible impact on markets and market participants and will take that into consideration in the process.  Any thought of re-proposing the rule is premature before public comments have been received and fully considered and discussions take place with my fellow Commissioners.

Our goal is not to get the SEF rule done at any cost or any timetable, but to get it done right.  For that we need well-considered public comment.  Staff has received a few requests to extend the comment period.  With the shutdown, staff has been unable to engage in face to face meetings with market participants and commentators that customarily take place during comment periods.  For these reasons, I intend to seek an extension of the comment period for both the SEF proposal and the name give up RFC until March 15.

Finally, let me ask the question that may be on some minds.

With billions already having been spent to come into compliance with the existing SEF regime and with everybody used to it and with so much other work to do, “Why do this?  Why change the current SEF rules?”

Let me tell you why.  It is about risk and opportunity.

First, the current SEF rule framework bears risk for market participants.  It only works because it relies on a series of no action letters, staff interpretations and temporary regulatory forbearance.  Most of those no action letters are time limited and will expire in the future.  Staff in this, or a future administration, may well change the various interpretations, guidance and compliance expectations that underpin the billions of Dollars that have been spent.  In short, the existing framework is too subjective and an unstable foundation for the long term value proposition of the US swaps market.

Second, the current restrictions on methods of execution may turn out to be, by themselves, a source of trading risk during a liquidity crisis.  Moreover, as I explained earlier, non-U.S. market participants continue to avoid U.S. Person financial firms to steer clear of the CFTC’s problematic regulations in certain swaps products.  This has contributed to global market fragmentation and systemic risk that post-crisis regulatory reform was meant to ameliorate.

On the other hand, improving the SEF rules presents opportunity - opportunity for service innovation by existing and new market entrants that has waned under the current framework.  Industry research estimates this proposal will accelerate market innovation leading to an increase of as much as 20% in average daily notional volume on SEFs.[10]  We estimate dozens of new SEF registrants.  Here is the opportunity to create a regulatory framework that, instead of stifling it, actually fosters innovation, entrepreneurship and increased market vibrancy.

Improving the SEF rules also increases the chance that the SEC will draw on the new framework in whole or in part for their Security-based SEF regime.  That presents the opportunity for a comprehensive and unified U.S. regulatory regime for all swaps products, reducing operational and compliance cost and risk.

Perhaps most importantly, improving the CFTC’s SEF rules to make them more compatible with the inherent trading dynamics and episodic liquidity of swaps trading will enhance U.S. markets as mechanisms for price discovery and risk mitigation.  It will increase their global competitiveness, making them more attractive to global capital and risk transfer.

If I have been consistent in anything in my almost five years at the CFTC, it is in voicing the value proposition of derivatives trading markets as foundational to U.S. economic growth and broad-based American prosperity.  Simply put, improving the CFTC’s SEF rules is about strengthening a key pillar of the US economy.

I have often said that we should seek neither the most restrictive regulatory framework, nor the most lenient.  We should seek the best framework.  That is what we are trying to do with the SEF proposal:  create a better, more flexible and more durable regulatory framework for swaps execution that will support vibrant markets and broad based American prosperity for a generation or more.

And the time to do so is now.  An old English proverb teach us to:  “Make hay while the sun shines.”  The time to shore up our swaps regulatory foundation is now, while markets are robust, not later when they may be under stress.

We can do it if we work together.  With the experience and intelligence of the ABA Derivatives Law Bar, we can improve these rules.  Let’s make the U.S. swaps trading regulatory regime the best that there is.  Like our derivatives markets, let’s make our regulation the envy of the world.

Conclusion

In closing, let me again say how sorry I am that I cannot be with you at the conference.  Enjoy the excellent program.

Thank you.

Remarks of Commissioner Dan M. Berkovitz at the Commodity Markets Council State of the Industry 2019

Competition, Concentration, and Cartels in the Swaps Market

January 27, 2019

Good afternoon.  Thank you Kevin, Jim, and the Commodity Markets Council for inviting me here to speak with you.

I’m going to talk today about free, fair, and competitive markets.  These concepts are the foundation of our economic system.  In the same year the American colonies declared their independence, Adam Smith observed in The Wealth of Nations, “In general, if any branch of trade, or any division of labor, be advantageous to the public, the freer and more general the competition, it will always be the more so.”[1]  Just as our principles of political liberty have endured, the principles of economic liberty have endured as well.  More recently, the U.S. Supreme Court declared, “The heart of our national economic policy long has been faith in the value of competition.”[2]

Free market principles are a cornerstone of the derivatives markets.  One of the longstanding purposes of the Commodity Exchange Act is to “promote . . . fair competition.”[3]  In the Dodd-Frank Act, Congress applied the principles of open markets and fair competition to swaps trading.  The Act requires swap execution facilities, or “SEFs,” to provide all market participants with impartial access to the market and enable them to trade with many other market participants.[4]

In any market, rules are necessary to prevent fraud and manipulation.  Rules that preserve competition, open markets, and level playing fields also are necessary because in any market the largest participants have a tendency to try to tilt the playing field in their favor.  Here is Adam Smith again, regarding the tendency of dealers in an industry to try to limit competition:

The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.  To widen the market and to narrow the competition, is always the interest of the dealers.[5]

Today, the swap market is concentrated in a few large bank dealers.  A review of data from the swap data repositories shows that the largest five dealing institutions are party to about 70% of all reported swap transactions and 80% of the notional amount traded.  Our futures commission merchant data shows that five bank FCMs provide clearing for about 80% of cleared swaps.  These high levels of concentration show that the largest dealers possess considerable market power.  These high levels of concentration also present potential systemic risks, since the failure of one of these firms in a highly interconnected market could have significant impacts on the other firms in the market.

Just as in any other market, we need rules in the swap markets to ensure market integrity and promote fair and open competition.

In November 2018, the CFTC voted in favor of a Proposal that would overhaul the CFTC’s swap trading rules.[6]  I voted against the Proposal.[7]  In my view, this Proposal conflicts with the principles of free and open competition that are embodied in the Commodity Exchange Act and the Dodd-Frank Act.

The Proposal would allow SEFs to create exclusive markets for swap dealers.[8]  What I call the Proposal’s “exclusionary access” provision would perpetuate and strengthen the current two-tier market structure for cleared swaps.  In one tier end-users and proprietary traders buy from or sell swaps to dealers.  In the other tier, dealers trade with each other exclusively and lay off the risks from their swaps at prices that only dealers can access.

Without access to the highly liquid dealer-only market, non-dealers cannot price swaps to end-users as efficiently as the dealers.  As a practical matter, under this structure only dealers can economically and efficiently offer cleared swaps to end-users.

The Proposal also would repeal the method-of-execution rules that require request-for-quote, known as “RFQ,” and order book trading systems for liquid swaps that are made available to trade on a SEF.[9]  The Proposal provides no evidence to support its claim that allowing “flexible methods of execution” will benefit end users.  The Proposal fails to identify any trading method that can or will provide lower costs to end users than the RFQ method.  I will say more about this later.

In the absence of any constraints, the dealers undoubtedly will push trading with non-dealers to less transparent single-dealer platforms and platforms that only allow one-to-one trading where there is no direct, real-time price competition with other dealers.  Today, everyone can trade commodities, stocks, and futures with a wide variety of other participants on open, all-to-all platforms where competitive prices from multiple prospective buyers and sellers are posted. If the Proposal is enacted, it’s highly unlikely that end-users like you will be able to trade swaps directly with each other or with non-dealer proprietary traders.  It is nearly certain that you will only execute cleared swaps with large swap dealers.

In tandem, the exclusionary access provision and the repeal of the competitive trading requirements would wither the already limited competition that currently exists in the swaps market.  In essence, the Proposal would create a swap-dealing cartel for the big banks.

The Proposal envisions a world of maximum flexibility for the dealers in how to trade and with whom to trade.  This would return us to the swaps world as it existed prior to the financial crisis and the Dodd-Frank Act.  That experience did not turn out well.  There is ample evidence that the pro-competitive rules put in place by the CFTC after the financial crisis have led to lower prices for end-users compared to the unregulated swap markets that previously existed.

We should be looking for ways to build on our progress, not tear it down.  We should increase participation in our swaps markets, not limit it.  I will set forth for you a little later an alternative path forward that would increase participation in the swaps markets, promote competition, and reduce concentration.  My approach would offer end-users and proprietary traders more choice of counterparties and better liquidity and would not require a total overhaul of the SEF rules as the Proposal does.  Ultimately, these changes would lead to better prices, smaller spreads, and healthier markets.

Market Competition

Now, more on competition.  The preamble to the Proposal posits what seems to be an upside-down rationale for codifying the dealer-only markets: that we need to protect the dealers from competition.  We are told that the protection of dealer-only markets will be beneficial for the end-users.

Here is the Commission majority’s rationale for protecting dealer-only markets:

The dealer-to-dealer market may provide benefits to the swaps markets, in particular to non-dealer clients, by allowing dealers who provide liquidity to offload risk from clients. . . .  SEFs that serve the wholesale, dealer-to-dealer market have stated that using eligibility or participation criteria to maintain a dealer-to-dealer market is beneficial . . . .[10]

When I first read this, I recognized the arguments but could not immediately place them.  But then I realized that these arguments allowing restrictions on competition reminded me of arguments that were made a long time ago by the proponents of the Standard Oil Trust to justify restraints on competition in the oil industry.  If you will indulge me, I would like to make a short detour into the history of the early years of the oil markets to illustrate how and why the principle of free and open competition has prevailed in this country.[11]

Most of you know how our modern futures markets originated in the mid-1800s on the Chicago Board of Trade with the trading of contracts for the future delivery of grains.  At about the same time, exchanges in Pennsylvania and New York were established and began trading oil futures.  But unlike the CBOT, which has operated continuously since it opened, the oil exchanges were dead within twenty years.  What happened to them?  The short answer is that the Standard Oil Company and other large oil producers killed them.

In 1859, the drilling of the first oil well by “Colonel” Edwin Drake near Titusville, Pennsylvania, triggered the first oil boom.  Initially, oil was priced at each of the wells, but soon producers and buyers met regularly at fixed locations.  These meeting places quickly evolved into actual exchanges for oil.  The Titusville Oil Exchange opened in 1871 and the National Petroleum Exchange in New York was founded in 1882.  Both exchanges offered spot and futures contracts. [12]

But John D. Rockefeller was watching.  In the eyes of Rockefeller, unrestrained competition had led to over-developed production and refining industries, depressed profits, and wasted resources.[13]  To stabilize oil production and prices so that he could make steady profits, Rockefeller consolidated the refining industry into the Standard Oil Trust.  To control the transportation of oil, he collaborated with the railroads and built his own pipelines.[14]   Rockefeller believed he was creating a revolutionary new economic order, one where cooperation and collaboration replaced competition.  “The day of combination is here to stay,” Rockefeller declared.  “Individualism has gone, never to return.”[15]

Rockefeller and his colleagues also believed that speculation on the exchanges was a source of instability.   Oil had become “’the favorite speculative commodity of the time.’”[16]  Banding together to form the “Producers’ Protective Association,” Standard Oil and the large Pennsylvania oil producers refused to buy or sell on the exchanges.  Without the liquidity from Standard Oil and the large producers, the exchanges collapsed into oblivion.  Futures markets for crude oil and refined products would not reappear for nearly a hundred years.

Rockefeller and his supporters believed that the order and stability brought to the industry by the Standard Oil Trust, including the suppression of speculation, was beneficial for the consumers as well as the producers.[17]  But the views espoused by Rockefeller and others—that limits on competition are preferable to free and open competition—were rejected.  In 1890, Congress passed the Sherman Antitrust Act to prohibit restraints on free trade.[18]  Shortly after the turn of the century President Theodore Roosevelt successfully brought suit under the Sherman Act to break up the Standard Oil Trust.[19]

The Supreme Court has explained the fundamental purpose of the antitrust laws is “preserving free and unfettered competition”:

[The Sherman Antitrust Act] rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.[20]

These principles are very much alive today.  In addition to examining the historical record, the value of competition can be seen in modern examples.  You may have heard of the book Freakonomics.[21]  The book presents a good case study of how the introduction of direct price competition between dealers in a dealer-to-consumer market—in particular, the RFQ process—saved consumers billions of dollars.[22]  The book tells of how in the late 1990s, the price of term life insurance fell dramatically across the Unites States. During that same period, the prices of other types of insurance—health, car, and homeowners’ insurance—kept rising. Why did the price of term life insurance drop while the prices of other insurance rose?  In the spring of 1996, a new website called QuoteSmith.com and several other websites began posting the prices of term life insurance offered by different insurance companies.  This enabled customers to compare prices on one screen.  According to Freakonomics, this new price competition and transparency saved American consumers about $1 billion a year in insurance premiums.  Today, you can use this website or various others like it to obtain quotes for all types of insurance.

Customers for other dealer-provided products also have benefitted from the RFQ process.  You can find the lowest-priced home mortgages by visiting a website that provides quotes upon request from various lenders.  If you’ve ever searched for airline, hotel, or rental cars on a website like Kayak or Expedia, you’ve used an RFQ system for your travel.  These everyday examples demonstrate why we should keep RFQ as one of the required methods of execution in the swaps markets.

To the individual market participant, competition may be difficult.  It is unpredictable.  It is stressful.  But time and again we have seen that open and competitive markets produce the best overall results for the economy and society.  Competition not only leads to better prices, it drives competitors to become more efficient, and to innovate.  Other countries have tried different economic systems, but none have come close to producing the prosperity, well-being, and wealth that our free-market system has generated.

Empirical Evidence

In analyzing the Proposal, we do not need to rely solely on economic theory.  There is plenty of data and economic evidence showing that the Commission’s current SEF rules have led to more competition, greater liquidity, more electronic trading, better price transparency, and lower prices for swaps that are traded on regulated platforms.

In my written and verbal statements dissenting from the Proposal, I described in detail several studies by the Bank of England, economic academics, and the CFTC’s own economists that documented the benefits of the current regulations.  In brief, the conclusions of these studies demonstrate the positive market impacts of the current swap trading rules.  I encourage anyone interested to review those studies for more details.

Bank of England Staff Working Paper (2018).  The Bank of England staff concluded that the CFTC’s trade execution mandate, including the RFQ requirement, has led to a “sharp increase in competition between swap dealers” in dealer-to-customer transactions for interest rate swaps subject to the mandate.  They concluded that this competition had led to “a substantial reduction in execution costs,” amounting “to daily savings in execution costs of as much as $3 million [to] $6 million for end-users of USD swaps.”[23]

CFTC economists’ study (2018).  In a 2018 study, four CFTC economists concluded:  “Judged from our evidence, [the] SEF-traded index CDS market seems to be working well after Dodd-Frank—dealers’ response rates are high, the vast majority of customer orders result in trades, and customers’ transaction costs are low.”  With respect to the most liquid CDS index swaps, the CFTC economists found that “the average transaction cost is statistically and economically close to zero.”[24]

“Market Structure and Transaction Costs of Index CDSs” (2017).  This 2017 academic study found that the prices customers obtained in the dealer-to-customer market through the RFQ system often were better than the prices that were available on the interdealer Order Book.  In addition, the study found that “the current market structure delivers very low transaction costs. .  . .”[25]

Proposals to Increase Competition

Rather than completely rewrite the SEF regulatory structure, I favor a targeted, data-based approach to improve the swaps markets.  We need the banks and other swap dealers to continue to provide liquidity to the swaps markets.  The rules should continue to enable them to do so.  However, a highly concentrated dealer oligopoly is not a prerequisite for sufficient liquidity.  We should seek ways to bring in more sources of liquidity and competition.  Robust competition leads to healthier markets and improves the overall welfare of all market participants.

I recently voted to make permanent the $8 billion de minimis threshold for swap dealer registration.  As most of you know, small dealers provide many of the essential swap services for firms in the physical commodity business.  One of the main reasons I supported keeping the threshold at the current level was to allow firms with limited dealing activity to compete with the larger dealers for swap dealing services to end-users.  This competition has resulted in more choices and better swap services for firms in the physical commodity business.

I support a number of additional measures to improve competition in the swap markets.  I also invite suggestions as to how best to increase competition and liquidity, particularly for the most actively traded swaps. 

Some examples of improvements I support include:

Expand Floor Trader registration.  The purpose of the floor trader provision in the swap dealer definition is to permit non-dealer traders who trade large amounts of swaps on SEFs or designated contract markets for their own accounts to register as floor traders rather than swap dealers.  Many of these proprietary traders act as market makers in futures, equities, and FX markets and have expressed interest in doing so for liquid swaps.

In practice, however, the floor trader rule has proven to be overly restrictive.  Many proprietary trading firms are unwilling to register as floor traders.  They have stayed out of the swap markets to avoid triggering either type of registration.  The Commission should amend the floor trader provision to remove the overly restrictive conditions.  This would permit a wider range of proprietary traders to both register and provide additional liquidity to the swaps market and compete with the handful of large bank dealers that currently dominate this space.

Revise bank capital requirements impacting FCMs.  The bank capital requirements agreed to by the Basel Committee on Banking Supervision and imposed by the U.S. prudential regulators on bank FCMs include a provision called the “supplemental leverage ratio,”or “SLR.”  The SLR requires banks to hold an amount of highly liquid capital determined by the total assets held by the bank.  The greater the amount of assets, the greater the amount of capital that must be held.  The current SLR regulations require customer funds held by a bank FCM as margin to be treated as assets to be included in the SLR calculation.  The SLR capital requirements therefore increase the cost of clearing and work at cross-purposes with the provisions of the Dodd-Frank Act that encourage the use of clearing. 

The Commission should work with the prudential regulators to ensure that bank capital requirements are adequate from a risk perspective, but also do not unduly restrict the availability of clearing services by bank FCMs.

Abolish Name Give-Up.  The Commission should prohibit the practice of name give-up for most cleared swaps.  Under this practice, on many platforms that provide anonymous trading, the identity of a counterparty is provided to the dealer after the completion of a trade.  Name give-up is a major deterrent to non-dealers seeking to participate on dealer-only platforms as it provides the dealers with valuable information about a counterparty’s positions.  Name give-up is a relic of the pre-Dodd Frank era when most swaps were not cleared and the identity of the counterparty was necessary to manage credit risks.  It should be eliminated for anonymous trades so that non-dealers can provide additional liquidity without having their trading strategies exposed.

Enable average pricing.  The Commission should work with market participants and facilities to enable buy-side firms to obtain average pricing for buy-side swap trades.  Although average pricing is available for futures, it currently is not available for swaps, which limits the direct participation of buy-side asset managers on SEFs.

Conclusion

I am open to appropriate amendments that improve the swap markets.  I could support flexible methods of execution for less-liquid classes of swaps brought onto the SEFs.  But we should not lower current standards for highly liquid swaps or relax the impartial access requirements in order to bring less-liquid swaps into SEF trading.  In my view, we can both provide flexibility in the method of execution for the less liquid swaps while still requiring competitive methods of execution for the most liquid classes of cleared swaps.  It should not be an all-or-nothing approach.

I have focused here today on the issues of impartial access and competition. I look forward to reading the comments on all aspects of the Proposal.

I will conclude by recalling that at the dawn of the industrial age, the great industrialists claimed that dealer cartels and restraints on the forces of free market competition would enable them to both earn predictable profits and provide great benefits to the general public.  For well over a century, we have consistently rejected this approach, as expressed through our antitrust laws and economic policies, and instead favored a free market approach of economic liberty, freedom to trade, and competition.  Congress affirmed this fundamental economic policy for derivative markets in both the Commodity Exchange Act and the Dodd-Frank Act.  Rather than follow the exclusionary, anti-competition path that the Proposal sets forth, we can take an alternative path that will move us towards more competition, more freedom to trade, and better pricing for end users.  I hope that you will join me on this path.

Thank you. 

[1] Adam Smith, The Wealth of Nations, at Book II, Chapter II, ¶ 106 (E. Canaan ed., The Modern Library, 1937) 

[2] Standard Oil Co. v FTC, 340 U.S. 231, 248 (1951).

[3] 7 U.S.C. § 5.

[4] 7 U.S.C. §§ 7b-3(f)(2) (impartial access provision); 7 U.S.C. 1a(50) (“multiple to multiple” requirement).

[5] Smith, at Book I, Chapter XI, Conclusion of the Chapter, ¶ 10.

[6] Notice of proposed rulemaking, Swap Execution Facilities and Trade Execution Requirement (“Proposal”), 83 Fed. Reg. 61946 (Nov. 30, 2018).

[7] See Dissenting Statement of Commissioner Dan M. Berkovitz, 83 Fed. Reg. 61946, 62144.

[8] See Proposal, 83 Fed. Reg. at 61993-96.

[9] See id. at 61980-82.

[10] Id. at 61995. 

[11] For more detailed histories of these years, see Daniel Yergin, The Prize (Simon & Schuster, 1990), and Ron Chernow, Titan (Random House, 1988).

[12] Id. at 33-34 (“By the time the Titusville Oil Exchange operated in 1871, oil was already on its way to becoming a very big business, one that would transform the everyday lives of millions.”); Wikipedia, New-York Mining Stock and National Petroleum Exchange, https://en.wikipedia.org/wiki/New-York_Mining_Stock_and_National_Petroleum_Exchange (last visited Jan. 24, 2019).  Exchanges also sprouted in Oil City and Pittsburgh, Pennsylvania.  Yergin, supra note 11, at 33; Wikipedia, Pittsburgh Stock Exchange, https://en.wikipedia.org/wiki/Pittsburgh_Stock_Exchange (last visited Jan. 24, 2019).    

[13] Chernow, supra note 11, at 130. 

[14] Regarding the Standard Oil Trust, Rockefeller recounted, “It was forced upon us.  We had to do it in self-defense.  The oil business was in confusion and daily growing worse.  Someone had to make a stand.”  Id. at 148.

[15] Id.   

[16] Yergin, supra note 11, at 33-34, 789 (quoting Paul H. Giddens, The Birth of the Oil Industry, at 182-83 (Macmillan, 1938).  See also Testimony of Patrick C. Boyle (“Boyle Testimony”), Publisher and Editor, Oil City Derrick, Hearings Before the Industrial Commission, Trusts and Industrial Combinations, at 404ff (Sept. 7, 1899).  Boyle testified, “[t]he rapid fluctuations in oil in 1876 did a great deal to foster the exchange element and show people that it was possible to make money rapidly by these wide fluctuations; and the sudden advance of $3 a barrel in 1876 brought the public into speculation with the producers.”  Boyle Testimony at 451.

[17] For example, Mr. Boyle testified: 

Q.  Are we to understand then, that after this era of speculation and the shut down [of] the strong men in the oil region, the Rockefellers resolved to suppress all this speculation in oil and oil certificates . . . and bring oil up to a paying figure for producers as well as refiners, which system, as a matter of regulation, has existed until the present day, and that the benefit of the whole oil trade that has come to the consumer has come through the great organizations of oil men?  Are we to understand by your testimony that the stronger the producers and refiners have been and the more they have been united in finding a stable market, the more the consumer has gained?  

A.  I believe that is true. 

Id. 

[18] 15 U.S.C. §§ 1-7.  

[19] During the debate over the passage of the Sherman Act, Representative William Mason stated, “trusts have made products cheaper, have reduced prices; but if the price of oil, for instance, were reduced to one cent a barrel, it would not right the wrong done to people of this country by the trusts which have destroyed legitimate competition and driven honest men from legitimate business enterprise.”  Statement of Rep. William Mason, 51st Cong., 1st Sess., Congressional Record (June 20, 1890), House, at 4100. 

[20] Northern Pacific R. Co. v U.S., 356 U.S. 1, 4 (1958).

[21] Steven D. Levitt and Stephen J. Dubner, Freakonomics (Morrow, 2006).

[22] Id. at 59-60.

[23] Evangelos Benos, Richard Payne & Michalis Vasios, Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act, Bank of England Staff Working Paper No. 580, at 31 (May 2018). 

[24] Lynn Riggs (CFTC), Esen Onur (CFTC), David Reiffen (CFTC) & Haoxiang Zhu (MIT, NBER, and CFTC), Swap Trading after Dodd-Frank:  Evidence from Index CDS, at 43, 50 (Jan. 26, 2018).

Statement of CFTC Chairman J. Christopher Giancarlo on Agency Operations in the Event of a Lapse of Appropriations 

December 21, 2018

CFTC Chairman J. Christopher Giancarlo issued the following statement on agency operations in the event of a lapse of appropriations:

“In the event of a lapse of appropriations, the CFTC will be required to cease operations not excepted by the Anti-Deficiency Act. But regardless of any shutdown, the CFTC will ensure its market-critical functions continue to be carried out.  Among other things, during any shutdown a small team of CFTC employees will continue to monitor futures and swaps markets, ensure essential enforcement activities are carried out, and evaluate market activity across futures and swaps to identify any potential impact on the clearing system. Staff performing these excepted functions will be in communication with key market participants, which will continue their own market and risk surveillance activities.”

Statement of Commissioner Dan M. Berkovitz on the Proposed Revisions to the Volcker Rule Regulations

December 21, 2018

I am voting yes on proposed revisions to the Volcker Rule regulations (the Proposal) that would implement sections 203 and 204 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).  Today’s action would codify changes made by Congress regarding which banks are subject to the Volcker Rule. 

There have been assertions that EGRRCPA exempts from the Volcker Rule banks that have either: (i) $10 billion or less in total consolidated assets or (ii) trading assets and liabilities that are 5 percent or less of total consolidated assets.  There are some very large banks on a total consolidated assets basis that would meet the second prong and thereby be excluded from the Volcker requirements under this interpretation. 

In my view, such a reading of EGRRCPA conflicts with Congressional intent.  Congress did not intend to exempt very large banks from the Volcker Rule.  As stated in the summary of EGRRCPA, section 203 amends the law “to exempt from the ‘Volcker Rule’ banks with: (1) total assets valued at less than $10 billion, and (2) trading assets and liabilities comprising not more than 5% of total assets.”[1]  Accordingly, the Proposal codifies the intent of Congress, thereby resolving any perceived imprecision in the language of section 203 of EGRRCPA.[2]

Statement of CFTC Chairman J. Christopher Giancarlo on No-Action Relief for Clearing Members of Eurex Clearing AG to Deposit Customer-Owned Securities as Margin Collateral for Swap Transactions with Clearstream Banking AG

December 20, 2018

I am pleased that the CFTC staff has accommodated a request from Eurex Clearing AG, a derivatives clearing organization registered with the CFTC, for relief in connection with clearing swap transactions on behalf of U.S. customers.  The Commission is committed to seeing that the CFTC staff takes a considered, yet flexible approach to applying CFTC rules in the cross-border context, which includes providing relief to market participants from Europe and elsewhere in the world where the CFTC knows that there are strong regulatory and supervisory frameworks in place.  Granting Eurex this relief is consistent with this commitment.  Just as the CFTC staff provides regulatory relief to non-U.S. market participants to enable them to conduct their cross-border business, we expect regulators in other jurisdictions to take similar steps to provide U.S. market participants with the necessary legal and regulatory relief and certainty to conduct their business on a cross-border basis.  Such shared efforts are essential to address harmful market fragmentation and to foster efficient financial markets to support global economic growth.

Statement of Commissioner Brian D. Quintenz on Staff No-Action Relief for Eurex Clearing AG

December 20, 2018

Over two years ago, the European Commission (EC) and the CFTC agreed to a common approach to the regulation and supervision of cross-border CCPs (CCP Agreement).[1] The CCP Agreement was intensely negotiated for three years, and, in my opinion, the end result produced an agreement that promoted regulatory deference as well as prioritized supporting the vibrancy and liquidity of our global derivatives markets. Shortly after the announcement of the CCP Agreement in February 2016, the EC found the CFTC regime equivalent, the CFTC granted substituted compliance to dually-registered EU-domiciled CCPs, and the European Securities and Markets Authority (ESMA) made positive recognition decisions for several U.S. CCPs.

Unfortunately, in June 2017, the EC introduced legislation (known as EMIR 2.2), which has the effect of abandoning the CCP Agreement by requiring all CCPs, including those U.S. CCPs already recognized, to re-apply for recognition, and which refused to acknowledge the commitment made to the CFTC only a year before.

In response, this past March, I articulated my view that, since the EU’s proposal would renege on the CCP Agreement, the agreement’s current and future reliability was unclear. As a consequence, I declared I would neither support the CFTC granting additional equivalence determinations with the EU nor would I support any relief requested by EU authorities until the EU re-commits to honoring the agreement.[2] I felt this position was warranted in light of the EU’s violation of our trust and cooperation. I was not alone in calling for such consequences. Senators Pat Roberts (R-KS) and Debbie Stabenow (D-MI), Chairman and Ranking Member of the Senate Agriculture Committee, respectively, publicly recommended that if the EU moved away from the CCP Agreement the CFTC should reconsider existing accommodations it has granted to EU entities.[3]

Disappointingly, since that time, the EC has not provided any public or private assurances on the status of the CCP Agreement such that the treatment of U.S. CCPs will not materially change under EMIR 2.2 in the absence of significant developments in the U.S.-EU derivatives markets.  Furthermore, the EU legislative bodies have not taken any steps throughout the three-part legislative process to meaningfully limit the scope of the EC’s proposal. Therefore, in accordance with the declaration I made in March, I must object to today’s set of staff no-action letters for Eurex Clearing AG.

I would like to note, however, my objection does not apply to the manner in which the agency considered this request nor does it constitute opposition to Chairman Giancarlo’s position on the EU’s proposed legislation. In a recent appearance before the House of Representatives Committee on Agriculture, and then again at FIA Expo two months ago, the Chairman issued his own set of potential consequences should the EU decide to unilaterally impose additional substantial legal or supervisory obligations upon U.S. CCPs.[4] While Chairman Giancarlo and I potentially differ in our interpretations of the current status of the CCP Agreement and the associated impact it should have on requests for staff no-action relief, the Chairman’s stated feelings and proposed consequences on this matter are equally as strong, if not stronger, than my own.

In addition, I would like to recognize and commend the Chairman and the staff for conditioning today’s relief on the absence of any material increase in EU legal or supervisory obligations imposed on U.S. derivatives clearing organizations and further requiring agency staff to determine regularly whether any such increase has occurred. This condition is appropriate due to the uncertainty of the EU’s future cross-border supervisory framework.

Objecting to relief that provides U.S. firms more options in selecting risk management services and that promotes a vibrant global marketplace is not a position in which I ever expected to find myself as a CFTC Commissioner. It is my hope that the CFTC’s codification of principles articulated in Chairman Giancarlo’s recent Cross-Border White Paper,[5] as well as the further development, refinement, and application of EMIR 2.2, will yield appropriate, deferential cross-border regulatory frameworks, which minimize cross-border burdens, alleviate market fragmentation, and enhance regulatory cooperation.

[1]  Joint Statement from CFTC Chairman Timothy Massad and European Commissioner Jonathan Hill, CFTC and the European Commission: Common approach for transatlantic CCPs (February 10, 2016),
https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.

[2]   Keynote Address of Commissioner Brian Quintenz before FIA Annual Meeting, Boca Raton, Florida (March 14, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz9. 

[3]   Letter from Senators Roberts and Stabenow to CFTC Chairman J. Christopher Giancarlo, dated January 8, 2018,
https://www.agriculture.senate.gov/newsroom/rep/press/release/roberts-stabenow-support-cftcs-efforts-to-uphold-european-agreement.

[4]  House Committee on Agriculture, “Full Committee Hearing: Examining the Upcoming Agenda for the Commodity Futures Trading Commission” October 11, 2017, https://agriculture.house.gov/UploadedFiles/115-15_-_30977.pdf, pages 10-11, 22-23 and Remarks of CFTC Chairman J. Christopher Giancarlo at FIA Expo, Chicago, October 17, 2018, https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo58.  

[5]   Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-US Regulation, by CFTC Chairman J. Christopher Giancarlo, https://www.cftc.gov/About/Commissioners/JChristopherGiancarlo/index.htm.

Statement of Chairman J. Christopher Giancarlo on European Commission Decision on Clearinghouses

December 19, 2018

Washington, DC – U.S. Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo issued the following statement regarding the European Commission’s Decision on the temporary and conditional equivalence of the United Kingdom’s regulatory framework for central clearinghouses:

“The CFTC welcomes the European Commission’s adoption of an equivalence decision regarding the United Kingdom’s legal and supervisory arrangements for central clearinghouses (CCPs),” said Giancarlo.  “The CFTC also welcomes the additional statement by the European Securities and Markets Authority (ESMA) of its intention to complete the recognition of U.K. CCPs pursuant to the EC’s equivalence decision in a timely manner.  Together the equivalence decision of the EC and the final recognition decisions of ESMA will permit EU market participants to continue clearing through U.K. CCPs for 12 months as of March 30, 2019 in the case of a U.K. exit from the European Union without a transition period.

“The EC’s decision and ESMA’s announcement to complete the relevant recognition decisions represent concrete steps to protect global financial stability and mitigate market fragmentation by providing market participants with important legal and regulatory certainty to manage their operations after Brexit.  These steps are commendable, and their implementation merits strong support.”