Remarks of CFTC Commissioner Rostin Behnam at the Bipartisan Policy Center, Reference Rate Reform: Impact on the Economy and Consumers

October 11, 2018

Introduction

Thank you for the kind introduction. I want to thank the International Swaps and Derivatives Association (ISDA), and the Bipartisan Policy Center for hosting this important event and giving me an opportunity to participate and share my views.  As long as I have worked in Washington, I have relied on BPC’s consensus driven, bipartisan solutions, which in many respects can themselves be considered benchmarks, for policymakers. Before I begin my remarks, please allow me to remind you that the views I express today are my own and do not represent the views of the Commodity Futures Trading Commission (the CFTC or Commission) or my fellow Commissioners.

This morning’s discussion has highlighted that reference rates, despite being little known outside of discrete financial circles, are a crucial component of the global economic ecosystem, woven into countless products that touch the lives of nearly every American consumer.  From the terms of the most basic home mortgage, to student loan agreements, auto financing contracts, and credit card purchases, reference rates are pervasive throughout our real economy. Given the everyday consumer use of these financial products, the past findings of benchmark fraud and manipulation have real word impacts on consumers. Reference rate reform requires an all hands on deck approach to ensure American consumers do not feel the weight of misaligned or manipulated reference rates.  To me, reference rate reform can be summed up in one word:  “trust.”

In the coming years, market participants, regulators, and end-users must leverage all available resources to find consensus driven solutions that will restore transparency, credibility, and above all else accuracy – in a word, trust – to ensure reference rates properly reflect fair and equitable borrowing costs.  With this in mind, I cannot think of a better venue to trust than BPC to host today’s discussion.

The CFTC has been working diligently as a member of the Official Sector Steering Group, the coordinating body set up by the Financial Stability Board in 2013 to drive the reform effort.[1]  To that end, I want to recognize the tremendous work of the Alternative Reference Rates Committee (AARC), and also the work done by the Federal Reserve, U.S. Treasury Department, the UK’s Financial Conduct Authority, the Bank of England, the European Central Bank, and other key stakeholders across the globe.[2] 

The timeline of events since the financial crisis is a powerful story of recognition and reform as well as collaboration and innovation in the benchmark space.  Given the Financial Conduct Authority’s decision to no longer compel banks to submit to LIBOR at the end of 2021, we only have a few years to reach consensus and lay the foundations for the next generation reference rates.[3] 

CFTC’s Role: Past, Present & Future

Since allegations of benchmark manipulation first surfaced nearly a decade ago, the CFTC has been at the forefront of the global effort to eliminate fraud and manipulation within the rate setting process.  Since June 2012, the CFTC has levied sanctions of more than $3.3 billion for LIBOR-related misconduct. These important enforcement actions, initiated by prior CFTC leadership and continued under current leadership, have not only addressed the bad actions of numerous individuals, but also a failure of financial institutions to police employees.

Personally, I have recently provided a forum for additional discussion of LIBOR through the CFTC’s Market Risk Advisory Committee (MRAC), which I sponsor.

At the CFTC, each Commissioner sponsors an Advisory Committee to provide input and make recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. The MRAC advises the Commission on matters relating to evolving market structures and the movement of risk across clearinghouses, exchanges, intermediaries, market makers and end users.  The Committee examines systemic issues that threaten the stability of derivatives and other financial markets, and makes recommendations to the Commission on how to improve market structure and mitigate risk.  MRAC members include representatives from clearinghouses, exchanges, intermediaries, academia, and end-users.  

In July, I convened the MRAC to focus on benchmark reform in an effort to unpack the myriad impending issues specifically related to the derivatives market.[4]  As a starting point, members of the ARRC and key market participants first discussed the role of interest rate benchmarks in the economy, the impetus for LIBOR reform, and the current status of global reform initiatives.  The discussion focused on the efforts of the Financial Stability Board (FSB) and the ARRC, as well as public and private sector coordination efforts in other jurisdictions.  A second panel of speakers addressed the development of the Secured Overnight Financing Rate (SOFR), and SOFR derivatives, and efforts to improve LIBOR. 

A final panel discussed the effect of LIBOR reform on the derivatives markets.  The discussion focused on LIBOR reform’s impact on legacy derivatives contracts, the development of fallback language, and key risk management and governance considerations for market participants.  End user and dealer representatives discussed the risks their firms and clients face with respect to LIBOR Reform and how they or their clients are preparing to mitigate those risks.

Just last week, the Commission approved my effort to establish the Interest Rate Benchmark Reform Subcommittee to provide reports and recommendations to the MRAC regarding ongoing efforts to transition U.S. dollar derivatives and related contracts to SOFR, and the impact of such transition on the derivatives markets.[5]

I am excited to lead this important next step by convening market experts from all disciplines to assist the MRAC, and ultimately the Commission, to find regulatory solutions within the jurisdiction of the CFTC that will ensure a smooth transition to an alternative risk-free reference rate.  Topics and issues this subcommittee may consider include the treatment, under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act,[6] of existing derivatives contracts that are amended to include new fallback provisions or otherwise reference RFRs such as SOFR and new derivatives contracts that reference RFRs. The subcommittee also may consider the impact of the transition on liquidity in derivatives and related markets.  I am currently seeking nominations for membership on the subcommittee to ensure that it benefits from the expertise of a diverse and skilled body of individuals.

My goal is to use the subcommittee to complement the work of the AARC by shedding more light on the potential challenges heading toward 2021, identifying the risks for financial markets and individual American consumers, and above all else providing solutions within the derivatives space. My expectation is that the subcommittee’s work – and that of the Commission itself – will recognize the critical importance of benchmarks while demanding integrity and reliability. 

There are a number of clear-cut outstanding issues related to the treatment of legacy derivatives that can benefit from in depth discussions within the MRAC, including margin requirements, mandatory clearing, trade execution, and reporting.  Further, it is critical that the CFTC, through the MRAC, establish a robust record in order to resolve and defend any regulatory changes that potentially lie ahead.

Closing

In the past decade, American consumers have overcome significant economic challenges as a result of the financial crisis.  On the heels of the crisis, as consumers struggled with these challenges, benchmark fraud and manipulation further eroded trust between consumers and the financial industry.  I am determined to work, within the context of reference rate reform, to help rebuild trust by shedding light on the importance of reference rates to consumers, and facilitating an inclusive, bipartisan conversation to resolve issues related to derivatives markets.  In that light, I am certain the CFTC and more specifically the Market Risk Advisory Committee can play an important supporting role of all the work that has been done dating back more than five years, but also in the few years ahead.           

Statement of CFTC Chairman J. Christopher Giancarlo on Proposed Amendments to Registration and Compliance Requirements for Commodity Pool Operators and Commodity Trading Advisors

October 9, 2018

In response to the Request for Information issued as part of Project KISS, the Commission received a number of letters from members of the asset management industry suggesting areas of potential rulemaking that, in their view, would make the Commission’s regulations more efficient and less burdensome.  I believe that today’s notice of proposed rulemaking furthers both of those interests. 

This proposal would incorporate relief from registration and compliance obligations for commodity pool operators (CPOs) and commodity trading advisors (CTAs) consistent with relief currently provided by staff letters and advisories.  By integrating this relief now into the Commission’s regulations, the Commission is eliminating the need to search for a staff advisory that is over 20 years old and is providing legal certainty to entities currently relying upon the staff relief.  This will make regulatory obligations clearer and thereby facilitate compliance.  

Specifically, today’s notice of proposed rulemaking would reduce burdens for CPOs that operate pools in multiple jurisdictions by permitting them to register with respect to the pools that solicit or accept U.S. domiciled participants.  It would maintain an exemption with respect to those offshore activities whose only nexus to the U.S. is that the CPO also manages some U.S. derived assets.  It would also shore up our consumer protection provisions by prohibiting statutorily disqualified persons from operating exempt pools and soliciting and accepting funds, thereby giving such pool participants more confidence in their pool’s operator.  It would ensure that the Commission’s regulations treat similarly situated entities in a commensurate manner by excluding the investment advisers of business development companies under terms identical to those under which the investment advisers of registered investment companies are already excluded.  It would also eliminate the burden of filing data collection forms for persons with no meaningful, reportable information.  Finally, it would provide appropriate relief to the operators and advisors of asset management vehicles whose clients are limited to a single family, consistent with the terms of a comparable regulation adopted by the SEC, furthering our efforts at harmonizing with our fellow regulators in how we treat market participants in this space.

In short, this proposal appropriately tailors regulation and codifies decades-old no action relief in line with the goals of the CFTC’s Project KISS. I expect this proposal to be the first in a series of staff recommendations to streamline and simplify regulation of commodity pool operators and commodity trading advisors.

Opening Statement of Commissioner Brian D. Quintenz before the CFTC Technology Advisory Committee

October 5, 2018

Good morning and welcome to our second meeting of the reinvigorated Technology Advisory Committee (TAC or Committee).  Before we begin, I would like to thank all of the Committee members for so generously giving their time to participate today.  The CFTC is lucky to have such a robust and esteemed group advising us, but the flip side of that coin is that such an esteemed group is undoubtedly one with many demands on their time, so I appreciate you all making this Committee’s work a priority.

At the conclusion of the February TAC meeting, the Committee voted to establish four subcommittees on crypto-assets, DLT, cybersecurity, and the automated algorithmic trading environment.  Those subcommittees have been formed, populated, and meeting, and I would like to extend a warm welcome to all of the members of our subcommittees present today and thank those who aren’t here for their work.  I look forward to your presentations regarding potential work streams to be advanced over the next year.  I would also like to thank Dan Gorfine, the Acting Chair of the Committee and the Director of LabCFTC, as well as Jorge Herrada, for their tireless efforts to make this meeting a success.

As many of you know, this meeting follows a fascinating and incredibly successful two day fintech conference, called FinTech Forward, hosted by the CFTC.  I am pleased this meeting builds on that exchange of information and dialogue.

We have an ambitious agenda for today.  We will hear presentations from three of the TAC subcommittees outlining their progress to-date, as well as their plans for the future.  We also have the pleasure of hearing from experts regarding the potential uses of RegTech solutions to facilitate compliance.

Virtual Currencies Subcommittee Presentation & Digital Asset Security Discussion
First, the Virtual Currencies subcommittee will present on the evolving cryptocurrency landscape, including questions surrounding the appropriate regulatory framework for various crypto-assets and trading platforms.  Issues revolving around cryptocurrency volatility, custody, cybersecurity, taxonomy, and trading practices are all ripe for further discussion.  The presentation should spur further discussion about how the CFTC, other regulators, spot platforms, and market participants can all contribute to enhancing this market’s credibility and safety.

Automated and Modern Trading Markets Subcommittee Presentation
Next, the Automated and Modern Trading Markets subcommittee will discuss its planned work over the next year to assess the true risks of the modern trading environment.  At the last TAC meeting, I highlighted my hope that the TAC could assist the Commission in understanding whether exchanges and market participants are following best practices with respect to automated and algorithmic trading.  To the extent market participants are not currently incentivized to follow best practices, or to the extent best practices are failing to adequately address certain risks posed by automated trading, the TAC can advise on whether regulation can play a constructive role in alleviating those risks.

We are fortunate that the International Organization of Securities Commissions (IOSCO) recently published eight recommendations to assist trading venues and regulatory authorities in implementing practices to manage extreme volatility and preserve orderly trading.  With those overarching principles in mind, Bryan Durkin from the CME Group will present how CME has implemented trading and volatility controls that complement, and in some cases exceed, the recommendations put forth by IOSCO.  I hope this presentation facilitates a broader discussion regarding whether U.S. exchanges’ trading controls meet the principles outlined by IOSCO, as well as what risks may exist beyond those controls’ impact.

RegTech and Robo-Rulebooks
The Committee will also hear from a panel about the feasibility of regulators issuing machine-readable and executable regulatory rulebooks to facilitate market participants’ RegTech compliance solutions.  Although the financial markets are now largely digitized, the regulatory landscape has remained largely inaccessible from a digital perspective for a number of reasons:  antiquated data formats, like PDFs, or the common practice of embedding regulatory requirements and relief in no-action letters, guidance, or preamble language, rather than rule text.  I look forward to hearing from presenters about whether regulators have the tools to make their regulatory frameworks more digitally accessible.  My hope is that conversations such as this one raise awareness and motivate agencies to make the conscious effort to publish their regulatory requirements to machine-readable formats.

Distributed Ledger Technology and Market Infrastructure Subcommittee Presentation
Finally, the TAC will hear a presentation from the Distributed Ledger Technology (DLT) and Market Infrastructure subcommittee regarding DLT’s potential for trade reporting.  DLT’s potential to transform how firms handle execution, processing, reporting and recordkeeping of derivatives transactions is already being developed and tested.  However, like most opportunities, using DLT for regulatory purposes also presents challenges.  For example, in order to fully realize the efficiencies of DLT, regulators and market participants must move together to adopt interoperable technologies.  A precondition for such widespread adoption involves individual firms deciding for themselves that there is a business case for DLT and choosing to invest in DLT infrastructure, rather than their existing back office processes.  I look forward to hearing about these and other large questions raised by using DLT for trade reporting.

Taking a second to look ahead, we hope to schedule our next full meeting of the TAC in January 2019.  At that time, we anticipate each subcommittee will present either additional analysis or some concrete recommendations regarding its particular subject matter area for the TAC’s consideration.

With that, I would now like to recognize Chairman Giancarlo and my fellow Commissioners to make their opening remarks.

Remarks of Chairman J. Christopher Giancarlo at Economic Club of Minnesota, Minneapolis, Minnesota

“Regulatory Enforcement & Healthy Markets: Perfect Together!”

October 2, 2018

Introduction

Good afternoon.  Thank you for the leadership of the Economic Club and for the invitation to speak here.  It is an honor.  The Economic Club, in conjunction with the great economics department at the University of Minnesota, has made Minneapolis a center of economic thought.  Through economists like Walter Heller, and titanic figures like Bill Frenzel and Mark Olson, Americans listen carefully to the voices that come out of Minneapolis.  You provide an important platform for sharing ideas and informing the community.  I would particularly like to thank Chairman Mark Kennedy, President Stephen Sanger, and Executive Director Kristin Robbins for making this possible.  I also want to recognize my friend, Neel Kashkari.

Today I would like to talk about enforcement of regulations in financial and commodities markets.  At the CFTC, regulatory enforcement is a priority and a bipartisan one.  As I have made clear many times, there will be no pause, no let up, and no relaxation in the CFTC’s efforts to enforce the law and punish wrongdoing.[1]  We must keep the markets safe and fair for consumers.  I am grateful for the commitment of my fellow Commissioners who bring a high degree of intelligence and range of perspectives to bear on enforcement matters.  They ask the right questions and seek the right answers to find the right balance in the cause of rule enforcement.

At the CFTC, our mission is to foster open, transparent, competitive, and financially sound markets.  We also want our markets to be deep, liquid and vibrant attracting the world’s capital essential to the current resumption of strong economic growth.

Today, I want to talk about why a vigorous enforcement program is essential to fulfilling that mission and why a strong—and disciplined—enforcement program is compatible with strong economic growth and American prosperity.  Indeed, those who have studied the issue have concluded that strong enforcement is necessary for strong markets.[2]

The connection between enforcement and economic growth makes sense.  For the economy to grow, businesses and individuals need to know they’re competing on a level playing field.  They know—and we know—that’s essential for them to thrive.  Unlawful activity puts honest businesses at a disadvantage.  It impedes free and fair competition.  It dampens economic growth.  And it undermines our democratic values, public accountability, and the rule of law.  That’s why we’re committed to ensuring all companies and individuals in our markets play by the rules.

I want to talk today about some of the developments in our enforcement program, and some of the ways we’ve worked to grow the program over the past year.  I was confirmed as Chairman in August 2017.  And our Fiscal Year—which ran from October 2017 through September 2018—just ended.  So in offering these thoughts I’ll focus principally on the activities of the Fiscal Year that just closed.

Overview

I’ll start with an overview.  Now, I want to make clear that a strong enforcement program is about more than just numbers.  You can’t get a complete picture of an enforcement program through quantitative metrics alone.  You also don’t want Federal agencies to be motivated to hit certain headline numbers when enforcing the law.  That is not sound public policy.

But some have asserted that regulatory agencies under this administration have gone soft on regulatory enforcement.  Those critics have primarily used numbers to make their case.[3]  So, I’ll spend a few minutes talking about the quantitative measures of the past year—my first year since Senate confirmation—to show that, even on its own terms, this criticism is unfounded.  In fact, by any measure, enforcement during this past year has been among the most vigorous in the history of the CFTC.

So, let’s do the numbers:[4]

More enforcement actions.  During the last Fiscal Year, the CFTC filed 83 enforcement actions.  That’s among the highest number of actions in the Commission’s history, and an approximately 25% increase from each of the last three years of the prior administration.  A 25% increase.

More penalties.  Not surprisingly, the penalties resulting from those cases also reflect our commitment to combatting wrongdoing in our markets.  The total amount of civil monetary penalties imposed by the Agency during the last Fiscal Year was approximately $900 million.  That total is higher than five of the eight years from 2009 to 2016.  And of those $900 million, we collected about $800 million—or just under 90 percent.  That would have ranked second highest during that same eight year period from 2009 to 2016.  The second highest.

More large-scale matters.  When it comes to numbers, total penalty amounts can serve as imprecise measures of success, because a small number of filings with relatively high penalties can account for a large percentage of the overall amount.  So, could it be that this year’s enforcement program has been driven by a single (or just a few) large cases?  In a word, no:  This year’s enforcement effort reflects the broadest range of significant actions in the history of the Commission.  During the last Fiscal Year, we brought more large-scale matters, against those whose actions threaten the basic integrity of the market, than in any previous year in Commission history.  From 2009 to 2016, the CFTC imposed monetary judgments of more than $10 million in an average of three cases per year.  This past year, we imposed such monetary judgments in ten cases.[5]  That’s more than three times the previous average.

Similarly, we have brought more manipulative conduct and spoofing cases than ever before.  From 2009 to 2016, the Commission, on average, brought five such cases per year.  This year, we filed more than 25—more than five times the previous annual average.  More than five times the previous average.

More Accountability.  But how do you know who we’re charging?  Are we going after the small fish while letting the big ones off the hook?  Not a chance.  We filed more charges against financial institutions than in all but one of the 8 years from 2009 to 2016.  We have prioritized individual accountability, with approximately 70% of our cases involving charges against individuals.  And these include significant numbers of individuals at financial institutions, as well as individual traders at proprietary trading firms and managed funds.  We’ve brought these cases without fear or favor.  We’ve given no one a pass.

More partnering with criminal law enforcement.  We’ve also filed far more actions in parallel with our criminal law enforcement partners than in any previous year.  We filed 14 such parallel actions this Fiscal Year—more than any other year from 2009 to 2016.  This means that wrongdoers in our markets now face the prospect not just of substantial fines, but also, in appropriate cases, the threat of criminal prosecution.

More whistleblower awards.  On top of all this, we’ve developed our whistleblower program in unprecedented ways.  We strengthened the protections we provide to whistleblowers that come forward.  We granted more whistleblower awards this past Fiscal Year than in the entire history of the program.  And we issued the largest whistleblower awards in the history of the Agency.  All of this has been designed to ensure more whistleblowers come forward to tell the Agency about any misconduct occurring in our markets.  It seems to be working, as we’ve received more whistleblower tips and complaints this past year than in any previous year.

Record Numbers.  So, those are the numbers.  By any measure, they are impressive.  They demonstrate that the CFTC remains undaunted and effective in pursuit of its enforcement mission.

But as I’ve said, numbers tell only a small part of the story.  In our view, a robust enforcement program should cover the waterfront.  It should detect the most pernicious and harmful wrongdoing.  It should make clear that nobody—no matter how big or well connected—is above the law.  It should charge not only the entities responsible for wrongdoing, but also the individuals who carried out the illegal action.  And when criminal prosecution and the prospect of imprisonment are warranted, an effective enforcement program should work alongside its criminal law partners to ensure that justice is achieved.  Those are some of the principles we have strived to achieve as part of our enforcement program, and what I’ll turn to now.

Manipulative Conduct Cases

Just a moment ago, I highlighted cases involving manipulative conduct or disruptive trade practices like spoofing as particularly noteworthy.  Why is that the case?

One primary function of our markets is to facilitate the price discovery process.  And one of our principal responsibilities as regulator of these markets is to ensure that the price discovery process is sound.  That means identifying, investigating, and aggressively prosecuting those who seek to interfere with this price discovery process.  Our experience and market intelligence teaches that manipulative trading practices undermine price discovery, drive liquidity from the markets, and put honest brokers at a disadvantage.

These cases are complex, and they are difficult.  They require us to stay one step ahead of the most sophisticated wrongdoers in our markets.  As one court put it, “[t]he methods and techniques of manipulation are limited only by the ingenuity of man.”[6]  That is why I have directed CFTC Staff to redouble our efforts to meet the challenges posed by those who might use their ingenuity to undermine the integrity of our markets.  And they have delivered.

That’s reflected not just in the numbers—not just in the fact that we filed five times more cases involving this type of misconduct than the previous annual average.  It’s also reflected in the cases themselves.

We continued to file significant cases involving benchmark manipulation.[7]  We filed cases involving traditional forms of manipulative conduct like efforts to corner the market.[8]  We charged new forms of manipulative conduct—like those that abuse technology or seek to manipulate the structure of the electronic order book.[9]  And we’ve charged particularly complex and novel patterns of manipulation—including those that cross-markets, cross-exchanges, and even cross international borders.[10]

We’ve done all this, it bears mentioning, without missing a beat in other areas of our program.  At the same time we’ve focused on the integrity of the price discovery process, we’ve also continued our commitment to protect customers and root out retail fraud in our markets.  More than thirty of our cases this Fiscal Year involve retail fraud.  That is in line with the annual average in the past decade at the Agency.  These filings range from fraud in the markets for retail forex, precious metals, and virtual currencies among others.  Some of these cases—including a series of recent binary options fraud filings—set new precedents within the CFTC for how to aggressively identify and prosecute this type of retail fraud.[11]  And we have not been shy to take these cases to trial, winning significant trial victories in this area over the past year—including a precedent setting victory in a trial involving Bitcoin fraud.[12]

Coordination with Criminal Authorities and Other Regulators

Coordination with Criminal Authorities

I have given some metrics for the significant ramp up in CFTC coordination with our law enforcement partners and self-regulatory organizations.  In particular, we’ve increased our efforts to work with the Department of Justice (DOJ), as reflected by the significantly increased number of parallel filings this past Fiscal Year.

As I’ve made clear, a robust combination of criminal and regulatory enforcement in our markets is not only appropriate,[13] but also critical to deterring violators, punishing misconduct, and preserving market integrity and protecting customers.  As part of our goal to deter wrongdoers, we recognize there is no greater deterrent than the prospect of criminal prosecution—and the reality of time in jail.

Perhaps the most notable reflection of our commitment on this score was the announcement of the parallel actions involving spoofing and manipulative conduct we filed together with the Department of Justice in January 2018.  A senior member of the Justice Department stated that these filings constituted “the largest futures market criminal enforcement action in Department history.”[14]  The largest.

These filings were equally significant for the CFTC.  We filed cases charging three financial institutions and six individuals with spoofing and manipulative conduct.[15]  One of the resolutions with a financial institution marked the largest civil monetary penalty ever imposed by the Commission for spoofing-related misconduct.[16]  The largest.

But the Commission has taken a number of other actions in parallel with our criminal counterparts as well.  These included cases ranging from retail fraud[17] to virtual currency fraud,[18] to cases where the defendant sought to obstruct our investigation,[19] to name a few.

We are grateful to the Department of Justice for their continued coordination in these matters.  And we expect this to be an area of continued growth for our enforcement program.

Coordination with Other Regulators and Self-Regulatory Organizations

Beyond our coordination with DOJ, we’ve also focused on increasing coordination with other government agencies and self-regulatory organizations.  We can most effectively protect our markets when working closely with these regulatory partners.  That’s particularly true as our markets evolve and become more interconnected.  Bad actors don’t conform their misconduct to the technical boundaries of different regulatory jurisdictions.  So regulators must work together to ensure the entire scope of the misconduct is identified, investigated, and prosecuted—particularly when the wrongdoing stretches across different regulatory jurisdictions.

We’ve done that this past Fiscal Year.  Our increased coordination with the SEC is particularly noteworthy.  To give you one example, in a series of cases filed in Federal District Court in Florida last week, we took action, in parallel with the SEC, in charging a massive national and international binary options fraud ring, where the alleged fraud spanned across both CFTC and SEC jurisdictions and harmed approximately 75,000 victims.[20]

To offer another example:  Together with parallel actions of the SEC, DOJ, and the Federal Bureau of Investigation (FBI), we filed an action against a trading platform and its CEO for unlawfully offering products margined in Bitcoin without the required anti-money laundering protections in place.  We brought the action charging the portion of the activity involving derivatives, the SEC charged the portion relating to equities, and DOJ and the FBI secured an order seizing the platform’s website and shutting it down.[21]

I want to thank SEC Chairman Clayton and the SEC’s enforcement team for their continued commitment to working together to police and protect our respective markets.

We’ve also coordinated our enforcement activities with self-regulatory organizations like the NFA and the exchanges.  In a series of cases involving on-exchange trading misconduct, we brought actions in parallel with exchanges like the CME and NADEX. [22]  We’ve done the same with the National Futures Association (NFA): we’ve filed a number of actions in parallel with the NFA,[23] but we’ve also called upon NFA to collect restitution, assist in identifying victims, and serve as a post-judgment monitor.[24]

All of this reflects the view that as regulators, we are better together than we are on our own.  This point—that we’re better together—is uncontroversial.  But it’s a lot easier to say than it is to achieve.  It requires a daily commitment from all involved to work together, to accommodate one another, and—from time to time—to give each other the benefit of the doubt.  I have made it clear this is what I expect our Staff to do.  Leaders of the other agencies and organizations have made it clear that’s what they expect as well.  And it’s what the American people expect.  I am grateful to the Staff of the CFTC and of our sister agencies and organizations for following through on this commitment.

Individual Accountability

Another priority for our enforcement program has been to enhance individual accountability.  It’s becoming widely recognized across the enforcement community that one of the most effective ways to combat corporate misconduct is by seeking accountability from individuals who committed the wrongful acts.  Individual accountability ensures that the person committing the illegal act is held responsible and punished; it deters others, fearful of facing individual punishment, from breaking the law in the future; it incentivizes companies to develop cultures of compliance and to report to regulators when they find bad actors in their entity; and it promotes the public’s confidence that we are achieving justice.

This past year, we made great strides in achieving this goal of individual accountability.  During the last Fiscal Year, approximately 70% of the Commission’s actions involved charges against one or more individuals.  These charges—particularly when coupled with our increased coordination with the criminal authorities—should send a significant deterrent message to those in our markets who might otherwise be tempted to engage in wrongdoing.

Part of our effort to increase individual accountability has involved the continued development of our cooperation and self-reporting program.[25]  This cooperation program was started by my predecessor, Chairman Massad.  It had my support then and I embrace it today.  This program—which grants substantial benefits to those who come forward, take responsibility for their own wrongdoing, and assist in the Commission’s investigations—has allowed us to bring cases and charge individuals that we would not otherwise have been able to charge.

The end goal here extends well beyond the number of cases filed.  We intend for our enhanced emphasis on individual accountability, cooperation, and self-reporting to have a far broader social impact.  That is, to foster a culture of compliance in our markets.  I can imagine a CEO standing in front of the company’s new hires on their first day on the job.  I can imagine the CEO telling the new staff about the various trainings to come as part of the onboarding process—compliance, ethics, human resources and the like.  And I imagine—this is our goal with the cooperation and self-reporting program—the CEO telling the new staff that, notwithstanding these various internal company regimes, if they break the law, their problems won’t stop with the compliance, ethics, or human resources department.  Their problems will come from the CFTC, DOJ, and the FBI.  Because the CEO is committed to identifying any misconduct, and reporting it out to the relevant authorities.  That sort of commitment is what we’re seeking to foster.[26]  And that sort of commitment, we believe, is what creates the culture of compliance we want in all of our market participants.

This is the point, ladies and gentlemen.  The purpose of regulatory enforcement is a reasoned and disciplined one: to foster a culture of compliance in US financial markets. A culture of ethical behavior that underpins open, competitive, and vibrant market activity essential to strong economic growth and American prosperity.

Whistleblower Office

Finally, we have emphasized the integral role our Whistleblower Program plays in our enforcement effort and for the Agency more broadly.  Demonstrating our commitment to protecting whistleblowers, the Commission finalized Rules prohibiting employers from retaliating against whistleblowers and from taking steps to impede would-be whistleblowers from coming forward.[27]

A goal in strengthening the whistleblower protections was, of course, to ensure that whistleblowers would not be penalized for their decisions to come forward to report wrongdoing.  But the programmatic goal was broader:  To offer whistleblowers additional incentives to report wrongdoing to the Commission, thus increasing both the quantity and quality of information available to us about misconduct in our markets.

In the same vein, the Commission also highlighted the incentives for whistleblowers to come forward through the awards it issued this past year.  Coming into this Fiscal Year, the Commission had issued a total of four whistleblower awards.  This past year, the Commission issued five such awards—more than the cumulative total previously issued.  The five awards from last Fiscal Year total more than $75 million.  This includes the CFTC’s largest ever award of approximately $30 million.

Our goal to incentivize more whistleblowers to come forward appears to be working.  Whistleblowers submitted more tips and complaints to the CFTC than in any previous year.  I expect this area to continue to grow as well.

Conclusion

Before I entered government service, I spent a decade and a half working on Wall Street.  My commitment to robust regulatory enforcement derives from that experience.  I have enormous respect for the good men and women of America’s financial service industry who conduct themselves each and every day with integrity and honesty.  They are the ones who are betrayed by the very few who engage in wrongful behavior.

It is the duty of government generally and the particular mission of the CFTC to fairly enforce market regulation and prosecute bad actors.  We must fulfill that mission so that America’s financial markets are places for good people to fulfill their dreams, grow the economy and increase prosperity.

I have been critical of past policy choices that seemed blind to adverse implications for economic growth and vitality.  As someone who serves during an administration pledged to broad based prosperity, I believe the CFTC’s commitment to robust enforcement plays an important role in the health and safety of US financial markets.  I am certain that, when conducted in a disciplined fashion, active enforcement is compatible with vibrant economic growth.

In my home state of New Jersey, we have a slogan: New Jersey & you – perfect together.  As the Chairman of the CFTC, I have a similar saying: “Regulatory enforcement & healthy markets: perfect together!”

I began by talking about some of the great voices out of Minnesota.  One of them was Walter Heller, a giant in the field and head of the Council of Economic Advisors under Presidents Kennedy and Johnson.  He put the Economics Department on the map at University of Minnesota and was well known to many of the founders of the Economics Club.  Perhaps the most famous remark by Dr. Heller was that in economics we should focus on the “practicalities.”  Principle may guide us, but we must not forget the practicalities.

I believe enforcement is a way that principles are practicalities.  By enforcing our principles we make the practicalities of commerce work in ways that benefit all Americans.

Thank you.

Remarks of Daniel Gorfine Regarding DLT and the Next Generation of Computing Infrastructure, Finovate, NYC

September 27, 2018

Good morning and thank you for the opportunity to kick off Day 4 at Finovate.  I am Chief Innovation Officer and Director of LabCFTC at the U.S. Commodity Futures Trading Commission (CFTC).  My remarks presented here reflect my own views and do not necessarily reflect the opinions or views of the Chairman, Commissioners, or the Commission.

Today, I am going to spend the first portion of my remarks talking a bit about how it is that someone from the CFTC – an Agency long associated with agricultural products like wheat, corn, and oil – is standing here before you to talk about things like fintech, DLT, and Crypto.  The second portion of my talk will go into more detail as to how innovation – and in particular DLT – impacts the CFTC and our markets.  And then I will conclude with a few additional thoughts regarding possible future states impacted by this technological innovation and questions and challenges that will likely emerge.

From Farms to Fintech

Stepping back, the mission of the CFTC is to foster open, transparent, competitive, and financially sound markets.[1]  The agency oversees markets vital to supporting the transfer of risk between market participants and by extension to the stability and reliability of real-world economic activity, ranging from the production and provision of gasoline for our cars, to the availability of credit for our purchases, and the offering of produce in our grocery stores.[2]

So as I posed a moment ago how do we now find ourselves here making the jump from traditional commodities and risk transfer to fintech topics like DLT and bitcoin?

The answer is that our financial markets are fast-evolving due to technology-driven innovation and this has changed the way market participants interact and engage in economic activity.   longer do market participants rely on face to face interactions and telephones.  Instead, markets have become increasingly electronic, digital, and interconnected.  This new world in turn creates new market and regulatory opportunities, challenges, and risks.

I would argue that much of this dynamic and what makes “this time different” – at least from a regulatory perspective – derives from three identifiable threads around fintech innovation.

The first centers on speed, both in terms of innovation and subsequent adoption.  The speed phenomenon is the result of the profound impact that increased computing power and lower computing costs have had in the development of new business models and products.  Additionally, the internet and mobile technologies have rapidly sped the adoption of these new models and products.  This means that markets and regulators are faced with a constant barrage of innovations and not much time to grasp their implications before inter-connected computers and devices permit their ready adoption.

The second is that innovation largely seeks to either disintermediate traditional gatekeepers or change the way they operate.  Current financial regulatory frameworks are centered on the intermediaries or gatekeepers that manage the access to our markets or financial services activity.  To the extent that innovators are seeking to disintermediate or substantially transform traditional models in order to increase efficiencies, regulators will need to proactively identify how rules and regulations conform or will need to change.

And the third is that new technologies and the Internet have reduced barriers to entering new businesses and driven convergence across historically distinct sectors of the economy.  More specifically, traditional financial institutions, telecom providers, technology companies, and startups are increasingly competing for the same set of users or customers with the same general set of financial services or activities.  This dynamic can drive rapid innovation and competition, which can benefit consumer and end-users, but put strain on regulatory frameworks that typically focus on the actor to be regulated rather than the activity.

Additionally, an important consequence of the increasing complexity of technology-driven business models is that it requires significantly more focus on technological literacy at all levels of leadership, including within business and government.  It is simply not enough to all agree to high level platitudes that items like cybersecurity are of great importance – instead it is imperative that we have deep understanding of the details of security protection in order to avoid bad outcomes.  Indeed, I would suggest that a key emerging risk in our markets is a potential lack of required literacy in the face of increasingly technology-driven business models and processes.

LabCFTC: Building a 21^st Century Regulator

Given these market dynamics, and related emerging regulatory challenges, we believe thoughtful 21st century regulatory approaches are needed.  This is why last summer, CFTC Chairman Chris Giancarlo announced with bipartisan Commission support the launch of LabCFTC.[3]

LabCFTC is the CFTC’s effort to help create a replicable model for regulatory engagement and modernization.  The mission of LabCFTC is to facilitate market-enhancing innovation, inform policy, and ensure we have the technological and regulatory tools and understanding to keep pace with changes to our markets.

The building blocks of the effort are engagement, testing and experimentation, education, and collaboration.  Through this approach, we can gain a better understanding of emerging risks, technologies, and trends, modernize our regulatory tools and operations, engage with innovators early in the development of new business models, and support better informed policymaking that facilitates market-enhancing innovation.

The effort seeks to involve both internal and external stakeholders through three primary work streams.

First, ‘Guide Point’ provides a dedicated point of contact for fintech innovators to engage with the CFTC, learn about the CFTC’s regulatory framework, and obtain feedback.  Such feedback and discourse may provide innovators with valuable information that can help them save time and resources, or allow for the identification of potential friction or uncertainty in existing rules.

Second, ‘CFTC 2.0’ fosters the testing, understanding, and potential adoption of new technologies that can improve markets or make the Commission a more effective and efficient regulator.  We recently crowdsourced ideas for future innovation competitions,[4] which may involve, for example, novel ways to visualize CFTC published data, developing market surveillance tools, making our rules more readily machine-readable, or building a more dynamic, digital, and “smart” notice-and-comment platform.

Finally, ‘DigitalReg’ is designed to support the Commission’s effort to build a 21st century regulator and regulatory approach. Internally, DigitalReg serves as a CFTC-wide resource to help inform the Commission and staff on fintech-related developments.  Externally, DigitalReg acts as a hub to help the Commission collaborate with other U.S. and international regulatory authorities in order to share best practices around fintech engagement.  We were accordingly pleased earlier this year to enter into a CFTC-first fintech cooperation arrangement with the UK’s Financial Conduct Authority (FCA),[5] and just a few weeks ago we entered a similar arrangement with the Monetary Authority of Singapore (MAS).[6]  Going forward, we are keen to continue ongoing constructive engagement with many other of our domestic and international regulatory peers.

DLT, Blockchain, and Digital Assets

Now shifting to the topics of primary focus today: DLT, blockchain, and digital assets[7] have been prominent areas of engagement and exploration for the CFTC over the past year.  When LabCFTC views the space, we are interested both in private or permissioned ledger networks (also sometimes considered “blockchain-inspired” technologies) that can be deployed by market participants to improve market infrastructure and in public blockchains that require use of a virtual currency to incentivize participation in maintaining the ledger system.

Developments across this spectrum have society re-thinking the nature of money, how people transact, and how we can more efficiently engage in regulatory, economic, and market activity.

On the private or permissioned side of the spectrum, new innovations hold promise in improving clearing and settlement processes,[8] decreasing execution risks, enhancing supply-chain management and transparency, powering smart contract systems, facilitating regulatory reporting and compliance, and even transforming information capture, delivery, and analytics capabilities.  Indeed, as we have seen firsthand through LabCFTC, there are many proof-of-concept and pilot projects underway across a range of potential applications.[9]

For example, with respect to capital markets infrastructure, DLT systems may replace outdated databases and reduce unnecessary and costly manual processes.  In the context of supply chains, we are seeing the ability to track food and agricultural products from farm to table, or the movement of commodities from inception to final delivery.  Smart contracts may further be able to incorporate compliance provisions into regulated economic transactions, and automate many types of economic activities.  And in the context of regulatory reporting, DLT platforms may also hold promise in permitting real-time and standardized reporting of trade data to the regulator without the need for current bespoke, batch-and-send systems.

In many respects, DLT-based or inspired systems may ultimately serve to upgrade our existing computing infrastructure in a range of sectors and applications.  I will have more to say on this later in my remarks.

To be clear, however, this area of innovation is quite distinct from the realm of public distributed ledgers and virtual currencies, and has its own unique set of challenges including around security, scalability, and broader adoption.[10]

On the public distributed ledger side of the spectrum, it may be helpful to level-set.  Virtual currencies are a digital representation of value and may function as a medium of exchange, a unit of account, and/or a store of value.  Virtual currencies generally run on a decentralized peer-to-peer network of computers, which rely on certain network participants to validate and log transactions on a permanent public distributed ledger visible to all.  The virtual currency serves as the required incentive for miners or validators.[11]

Proponents note that these virtual ecosystems unlock digital scarcity, enable the efficient transfer of ownership, and power the execution of relatively autonomous application platforms all without the need for a trusted, central party that was traditionally needed to verify that each party to a transaction has – and does – what it promises.[12]

In addition to providing new ways to transact over the internet, these advancements could allow for decentralized platforms or applications that provide consumers with desired goods and services absent a central gatekeeper.[13]  Additionally, decentralized systems could help counter rising concerns about the power wielded by centralized platforms that through their scale gain widespread access to -- and control over -- data and information.[14]  Some further note the potential inspiration that virtual currencies may provide Central Banks in the future creation of digital fiat currencies.[15]

Many, however, appropriately worry that virtual currencies and tokens are prone to fraud, manias, and bubbles driven by misunderstandings and myths regarding their scalability, utility, and intrinsic value.[16]  Indeed, over time bad actors have commonly invoked the concept of innovation in order to engage in fraudulent activities that target the general public.[17]  Additionally, as we are frequently reminded,[18] concerns regarding the use of cryptocurrencies to facilitate illegal activity are well-founded and require government efforts to ensure that Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements are effectively applied.

With recent hype around virtual coins and tokens there has also been a proliferation of so-called “Initial Coin Offerings” or ICOs, which frequently refers to the sale of virtual tokens to the public that are intended to raise capital for a venture and may bear the hallmarks of a securities offering.[19]  Our colleagues at the Securities and Exchange Commission (SEC) have been thoughtfully addressing related challenges,[20] and providing additional clarity to the marketplace.[21]  And from the CFTC’s perspective, given the potential to tokenize a broad range of economic assets, it is important to remind the public that digital assets can also be derivatives or commodities, depending on their terms and how they are structured.

Given the potential and challenges of this space, CFTC Chairman Giancarlo has made clear that the proper response by regulators and policymakers is not to dismiss the entire movement as misguided or foolish, but rather to take the time to learn, facilitate the promise, and guard against risks and bad actors.[22]

As part of this effort, LabCFTC published its first fintech primer on the topic of virtual currencies in October 2017.[23]  The goal of the primer was to help educate the public about potential use-cases of the technology, CFTC jurisdictional considerations, and relevant risks, including around investment speculation, cybersecurity, and platform operations.

After the self-certification and launch of bitcoin futures in December 2017, LabCFTC was then able to continue providing support to the Commission and operating divisions based on our engagement and study of DLT and virtual currencies.

The Next Generation of Computing Infrastructure

What strikes me about DLT and blockchain more broadly, however, is that it likely stands for the proposition that we are about to witness the upgrading of our technology infrastructure, or what is frequently referred to as back-office systems, to accommodate the next generation of computing and networks.  That’s a bold statement, but let me unpack it a bit.

Today, most back office computing systems – whether at a bank, a utility company, or a manufacturer – rely on largely bespoke databases that have been bubbled-gummed and scotch-taped over to work for their current business purpose.  These systems, however, do not agree on standardized data fields or formats, and nor do they communicate well with each other.  So, we end up with siloed and messy data, which does not lend itself to the potential of next generation data analytics and machine learning platforms.

At the most basic level, what Satoshi Nakomoto and Bitcoin have done is make thinking about back-office ledger and database systems the in-thing to do.  And the incredibly helpful byproduct of this development is that people are being forced to think about data standardization and platform interoperability.  If many adopters agree to particular data formats and standards, and use a common DLT-based or inspired system, then the data that is produced will be clean, accessible, and consumable.  This means data analytics and machine learning tools can use the data to yield high value-add predictions and insights.

In addition, economic transactions and activities will become more efficient and transparent given the ability to automate processes reliant on standardized data and shared transaction ledgers.  For example, one could imagine a future state where real-time weather data flows through thousands of interconnected systems, including smart insurance contracts, commodity pricing models, a power grid looking to calibrate anticipated energy demand, and even a digital speed limit on a highway that increases or decreases based on weather and road conditions.

My example above may have you thinking, well, this isn’t so revolutionary – after all, isn’t this the benefit that the Internet and mobile connectivity has always promised?  The answer is: Yes!

But, until people started thinking about adopting common systems and standards, the Internet could not guarantee complete and seamless inter-connectivity.  It is possible that now is the start of a process where DLT-based or inspired systems allow the Internet to fulfill more of its promise.  And this development will likely be coupled with continued advances in machine learning that will benefit from routine access to increasingly standardized and consumable data provided through DLT systems.

That said, there will be major barriers to overcome.  For starters, recent reports note delays and disillusionment with many current DLT pilot projects.[24]  And this is not entirely surprising – coming out of a clear hype cycle folks are now having to grapple with real and difficult questions.

How do we, for example, solve for the collective action problem in that DLT systems only yield real benefit when many market participants adopt a common systems and standards?  How do we avoid inadvertently stifling innovation by prematurely dictating those standards?  How do we justify the upfront investment cost to upgrade to new systems, especially when the current bespoke systems seem to work well enough?  How do we handle governance and liability issues with increasingly automated systems – who owns them and has ultimate responsibility if things go wrong?  How do we ensure that these new technologies are compliant with emerging privacy laws?  And how do we ensure the systems are safe and able to defend against malicious cyber-attacks?

These are just a few of the questions that need to be asked and answered.  And, I suppose all of you will be doing exactly that during the course of the day.  I, for one, look forward to learning more from all of you, and thank you again for allowing me to help kick start our day.