Remarks of Commissioner Brian D. Quintenz Commodity Futures Trading Commission at the ICDA 39th Annual European Summit (Bürgenstock)

September 18, 2018

Introduction

Thank you for that kind introduction.  Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the Commission.

It is truly an honor to be giving this evening’s keynote at the Bürgenstock conference.  This event has a long and distinguished history – starting in 1980 and originating in Switzerland before moving this year to Frankfurt.  This is my first time in Frankfurt – a city that has been reborn and rejuvenated through focused effort and attention to detail.  As I enjoyed some of the city today, I was struck by old and new coming together, by how the modern can take on historic character.

In many ways, Frankfurt is the physical representation of our global financial market and its own recent history.  The trust and confidence in the markets – shattered and laid bare following the financial crisis – has been largely re-established – reborn and rejuvenated – through the significant attention and focused effort of the international regulatory community. 

I’d like to reflect today on the financial crisis.  I’ve heard some label the crisis as a failure of capitalism.  I disagree with that.  For capitalism to function properly, transparency is required.  Transparency provides the marketplace with the information necessary for the appropriate assessment of risk, from calculating cost of capital to evaluating risk-adjusted returns, which allows for the efficient allocation of resources.  Capitalism without transparency is like democracy without accountability.

In many ways, for me, that was the major lesson of the crisis – our financial markets lacked crucial forms of transparency that prevented capitalism from functioning properly, that prevented the market from supplying the appropriate level of accountability to assess risk and allocate capital.  Ultimately, that lack of transparency fueled a panic which turned a severe recession into an almost catastrophic crisis.

In my view, the reason a normal, cyclical recession turns into a full-blown financial crisis is an ensuing market panic, which causes liquidity and lending to freeze.  Panics are usually fueled by an opacity of information – a lack of transparency into the true risk in the system.  In 2007-2008, that opacity was very present in the over-the-counter (OTC) derivatives markets:  in firms’ exposures to the housing markets, their exposures to each other, and the true risk from those exposures – liquidity risk as opposed to capital insufficiency.  Nowhere was this confluence of opacity more present than with AIG. 

On September 16, 2008, exactly ten years ago this past Sunday, the Federal Reserve Bank of New York provided an emergency $85 billion loan to keep AIG, a global company with about $1 trillion in assets prior to the financial crisis, from a liquidity insolvency.  When all was said and done, AIG lost $99 billion in 2008 and received over $180 billion in taxpayer funds to prevent its default.[1]   

AIG found itself in such dire financial straits through the activities of one division within the company, AIG Financial Products.  That division wrote credit default swaps (CDS) on over $500 billion of assets, including $78 billion on collateralized debt obligations relating to residential mortgages of which $63 billion had exposure to subprime mortgages.[2]  When AIG established this directional CDS position, it did not post any initial margin with its counterparties or otherwise set aside capital for future potential losses.  Instead, under the terms of these bilateral contracts, AIG was only required to post margin in the event the market value of the underlying mortgage-backed securities dropped, or if AIG itself suffered a credit downgrade.[3]  In fact, for an insurance company, AIG’s collateral situation was somewhat unique.  Many of AIG’s competitors, including monoline financial guarantors, were not required to post any collateral until actual losses occurred.[4]

In July 2007, after the credit ratings agencies downgraded their ratings of mortgage-backed securities, AIG received its first collateral call from Goldman Sachs.[5]  Surprisingly, up until these collateral calls, top AIG executives – including the CEO and Chief Risk Officer – were unaware of the collateral provisions in AIG’s CDS agreements that required AIG to post collateral if the market value of the underlying securities dropped.[6]  It soon became apparent that the Office of Thrift Supervision, which supervised AIG on a consolidated basis, also was not aware of the collateral provisions in these contracts.[7]

From July 2007 onward, AIG disputed its requirements to post collateral with counterparties, arguing that AIG’s models showed no long-term losses on the underlying mortgage-backed securities.  Counterparties countered that the contracts required AIG to post collateral if market value fell, regardless of the fact the losses were so far unrealized.  And yet, even while these potentially crippling collateral disputes were ongoing, AIG’s CEO, Martin Sullivan, who would eventually step down as the company’s billion dollar losses mounted, continued to focus publicly on only the temporary capital effect of unrealized losses and the low probability of realized losses, describing the CDS contracts as so “carefully underwritten and structured … [that] we believe the probability that [the business] will sustain an economic loss is close to zero,”[8] and stating in a November 2007 presentation that the underlying CDOs “would have to take losses that erode all of the tranches below the ‘Super Senior’ level before AIGFP would be at risk.”[9]  

What he did not describe, however, was AIG’s precarious liquidity position should margin calls be triggered by either mounting mark-to-market losses or a downgrade of the firm’s credit rating. This potential liquidity drain was further exacerbated by AIG’s securities lending activity, which invested a substantial portion of its cash collateral in illiquid mortgage-backed securities that became trapped in the credit freeze.[10]  Shockingly, despite that existential liquidity risk, AIG stated flatly in February 2008 that, “AIGFP…has the ability and intent to hold its positions until contract maturity or call by the counterparty.”[11]

By June 2008, AIG had posted $13.2 billion of collateral with counterparties, causing a severe liquidity strain on the company.[12]  Then, on Monday, September 15, all three ratings agencies downgraded AIG, triggering an additional $13 billion in cash collateral calls.[13]  AIG was unable to meet these collateral calls, amassing a $12.4 billion unfunded exposure to its counterparties, and prompting the Federal Reserve to offer assistance.[14] 

Of course, hindsight is 20/20, and AIG’s assessment of the value and liquidity risk of its CDS contracts proved to be terribly wrong.  Yet, the market’s view into AIG’s financial problems was hindered by the opaque nature of the OTC derivatives markets.  Traded off-exchange, with no regulatory documentation or reporting requirements, it was often difficult to ascertain market participants’ OTC exposures to one another, making it impossible to distinguish between creditworthy firms and firms that had taken on excessive risk.[15]  In addition, without any public reporting requirements, the marketplace had limited price discovery visibility, and existing OTC positions became increasingly difficult to value. 

The more firms doubted the third-party exposures (and therefore the creditworthiness) of their trading partners, the less willing they were to trade, the more likely they were to issue large margin calls on unfunded positions, and the more exacerbated each firm’s own liquidity and credit position became.[16]  Even when counterparty relationships were known, valuation disputes were common given the lack of price transparency and resolution mechanisms were often inadequate to facilitate timely reconciliation.[17] 

Introducing Transparency into the Derivatives Markets

Our financial system today bears little resemblance to its state ten years ago, in large part due to the commitment of G-20 members to enact meaningful reforms to repair the global financial market and support future financial stability and prosperity.[18]  As the story of AIG reveals, firms grappled with three main types of opacity during the financial crisis: firms’ exposures to underlying assets, firms’ exposures to each other, and firms’ liquidity needs regarding those exposures.  Each of these forms of opacity has been addressed by the post-crisis reforms of data reporting, clearing, and margin.  I think it is helpful to take each reform in turn to see how it sheds light on counterparty and position exposures, as well liquidity issues.

Data

As I have said previously, I believe increasing transparency in the OTC derivatives market is the most important of the post-crisis reforms.  Transparency promotes market integrity by facilitating efficient price valuations and the identification of trading relationships, both critical pieces of information that were absent in 2008. 

Today, the CFTC can see an individual firm’s swap transactions with various counterparties and answer the basic questions of who, what, when, and where with respect to the swap markets.  This data is also disseminated anonymously to the public in real-time in order to provide post-trade transparency to the markets.  The United States is not alone in making significant strides toward transparency.  All 24 member jurisdictions of the Financial Stability Board (FSB) have fully implemented, or are in the process of implementing, trade reporting requirements.[19] 

Despite these significant improvements, we unfortunately have a long way to go and wasted a lot of precious time.  One of the primary objectives of the G-20 Pittsburgh summit was to ensure that regulators could readily analyze swap data to identify and measure risk exposures in the market, in particular counterparty credit risk.  We are still in the process of achieving that goal.  This past spring, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-IOSCO) harmonization group, co-chaired by the CFTC, published detailed technical specification guidance on critical data elements (CDEs).[20]  

For the first time, harmonized guidance exists specifying the margin and collateral information critical to performing meaningful risk analysis.  The CFTC is currently working on implementing the CDEs.  Once these fields are adopted across jurisdictions, global aggregation and measurement of risk, including counterparty credit risk, increasingly becomes a reality.  It will finally be feasible for regulators to determine the aggregate swaps exposure between two counterparties or a single firm’s aggregate exposure to a particular product or market.

Of course, in order for this global aggregation to occur, regulators must share access to the relevant swap data within their jurisdictions.  The CFTC recently finalized regulations establishing the process by which the CFTC will grant access to swap data to foreign and domestic authorities.[21]  I hope other jurisdictions will reciprocate so that jurisdictional boundaries do not impede our oversight over systemic risk, which flows across those very same boundaries.    

Clearing

Centralized clearing is foundational to post-crisis reforms.  Almost three quarters of FSB jurisdictions have implemented OTC clearing requirements for standardized derivatives; seven more are in the process of doing so.[22]  Clearing notional levels for interest rate and credit default swaps have increased significantly from their pre-crisis levels of 24% and 10%, respectively.[23]  By 2017, based on data collected by the CFTC on U.S. reporting entities, about 85% of all new interest rate and credit default swaps are being cleared.[24]  

Clearing addresses opacity on many fronts.  From a counterparty credit risk perspective, it takes bilateral risk that was once dispersed across many counterparties and consolidates it within one regulated central counterparty, where risk is centrally managed and margined.  It also provides transparency into a firm’s directional exposures, as well as its liquidity profile, through daily mark-to-market margining. 

Margin for Uncleared Derivatives

Since 2008, the Basel Committee on Banking Supervision (BCBS) jurisdictions with the most active derivatives markets have all implemented margin requirements for uncleared derivatives.[25] 

In 2017, the top 20 derivatives market participants collected $130.6 billion of initial margin from unaffiliated counterparties, an increase of nearly 22% from the prior year.[26]  When you add in variation margin, a total of $1 trillion was collected by these market participants for their uncleared derivatives transactions in 2017.  The aggregate amount of margin associated with uncleared derivatives will only increase in 2019 and 2020, as smaller, previously out-of-scope counterparties become subject to regulatory margin requirements.  

For both cleared and uncleared swaps, initial and variation margin requirements reduce the likelihood of losses in the event of a default.  As a result of margin requirements, positions are marked-to-market daily and collateral is available for potentially uncovered future exposures.  Margin requirements create certainty about the liquidity needs of a market participant’s positions.  Under today’s margin regime, AIG would not be allowed to establish such a large directional position without setting aside collateral reserves.  Additionally, unlike AIG’s confusion, firms now understand they must be able to fund their margin positions to respond to market developments, regardless of whether a particular position will ultimately result in a loss. 

As a complement to these new margin requirements, Basel’s liquidity coverage ratio (LCR) aims to ensure that large banking organizations have sufficient liquidity to absorb significant economic shocks.[27]  The LCR specifically requires firms to take into account additional liquidity needs that could arise due to losses from derivatives positions and the collateral supporting those positions.[28]  Taken together with margin, the LCR provides transparency into a firm’s liquidity needs and makes it more likely that a firm will have the liquidity necessary to withstand acute, short-term liquidity shocks.

Defeating Our Own Good work:  Capital and Cross-Border Disputes

Ten years later, much of the opacity that froze the OTC derivatives markets has been illuminated thanks to data reporting, clearing, and margin requirements.  Regulators and market participants have a clearer picture of a firm’s exposures, counterparties’ exposures, and related liquidity needs.  However, instead of promoting liquidity and effective risk mitigation, some post-crisis reforms inadvertently may be directly working against this progress:  in particular, capital requirements and cross border regulation.

Capital ensures that firms are able to continue to operate during times of economic and financial stress by providing an adequate cushion to protect them from losses.  Just as important, capital is designed to give the marketplace confidence that any given firm has a high probability of surviving the next crisis.  Therefore, crafting appropriate capital levels is linked to the state of market transparency.  As transparency increases, a static level of capital should generate more confidence in a firm’s solvency.  Said differently, a certain amount of capital may be very insufficient in a market with significant opacity but provide high confidence in a market with broad transparency.

Therefore, minimum capital standards for firms should not be established in a vacuum.  Instead, when evaluating capital requirements, regulators must consider the collective impact that post-crisis reforms – like reporting, clearing, and margin – have had on the derivatives markets and on the market’s ability to better estimate risk and allocate resources.  Regulators should take a holistic view of how these reforms are interrelated to ensure that their cumulative effect is the desired one. 

With respect to capital requirements, I worry that the accepted mantra has become the higher and more restrictive the capital standard, the better.  Respectfully, I disagree.  Capital requirements need to be appropriate and commensurate to a firm’s risk.  In the case of derivatives, I believe that our current capital models do not adequately take into account margin’s mitigation of counterparty credit risk, and in some cases, like the leverage ratio, work against the benefit of these important reforms. The leverage ratio penalizes the increased liquidity which firms now hold as a result of important initiatives like the LCR mentioned above because it treats safe assets the same as risky assets.  The leverage ratio also penalizes the beneficial regime of posting initial margin against swap exposures, treating the initial margin which banks hold on behalf of clients as a leverageable asset of the firm, instead of recognizing it as the risk-reducing property of customers.

Secondly, the risk of fractured liquidity pools is growing due to cross-border regulatory disputes over the extraterritorial application of jurisdictions’ rules. The full promise of the 2009 G-20 reforms cannot be realized by a single nation acting alone, but it can be actively defeated if each jurisdiction imposes its rulesets on others.

While we are here at the 10^th anniversary of the financial crisis, it was four years ago at this very conference, that then CFTC Commissioner, now CFTC Chairman, Christopher Giancarlo, articulated his concept of a cross-border regime based on deference to home country regulators, rather than regulatory overreach.[29]  More recently, he has put forth a blueprint for how nations, through deference, can support a global, liquid, transparent swaps market that fully lives up to the G-20 reforms.  I fully support his vision and look forward to learning more of the details in the weeks to come.

Conclusion

We have made remarkable progress in our efforts to rebuild our markets since the financial crisis.  I hope we continue to build on that progress by thoughtfully assessing how all the interrelated pieces of the derivatives markets fit together, so that the vitality, resiliency, and health of our economies continues to grow.

Remarks of Commissioner Rostin Behnam at the Michigan Agri-Business Association 2018 Outlook Conference, Mackinac Island, Michigan

Markets and Issues: Lessons Learned and a Path Forward

September 15, 2018

Introduction (and a Bit of History)

Good morning.  It is great to be here with all of you, and a pleasure to kick off this important conference on beautiful Mackinac Island.  Before I begin my remarks, I want to thank our host, the Michigan Agri-Business Association, for the kind invitation to speak with you. Before getting into some of the more recent work of and developments at the Commodity Futures Trading Commission (“CFTC”), I’d like to tell you a little about my personal history and connection with Michigan and the agricultural markets.

In addition to spending many summers in northern Michigan with family and friends, I have also spent many days travelling across the state serving the people of Michigan as counsel to Senator Debbie Stabenow.  From Detroit, Saginaw, and Lansing, to Holland, Traverse City, Marquette, and even Isle Royale, I have had the privilege of spending many hours meeting, and more importantly learning from Michigan producers who care deeply about agriculture and this state’s precious natural resources.  It is with these great memories that I am so honored to be back in Michigan with you this morning.

It’s especially auspicious that I am here on Mackinac Island to talk a bit about the futures markets.  The Island’s strategic location between the Lower and Upper Peninsulas made it a center of commerce for the Great Lakes fur trade as far back as the 17^th century.  Even prior to that, before the Europeans arrived, the Odawa tribe inhabited the Island.  “Odawa” means “traders” or “to trade” in Algonquin.  So, it’s perhaps fitting that I’m standing here before you today in my current role.

Prior to becoming a CFTC Commissioner, I spent more than six years as counsel to Senator Stabenow on the Senate Agriculture, Nutrition, & Forestry Committee.  As a new Committee staffer in 2011, I focused primarily on CFTC issues.  Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (the “Dodd-Frank Act”),[1] the CFTC was at the epicenter of the policy response to the 2008 financial crisis.  A crisis that, many argue, ignited when Lehman Brothers filed for the largest bankruptcy in U.S. history.  This occurred ten years ago to the day, on September 15, 2008.  The Dodd Frank Act brought the CFTC to the forefront of the effort to bring greater certainty and transparency to the derivatives markets, where risk had built up to unfathomable levels and individual financial institutions had grown to such size and complexity as to be systemically important to the U.S. economy and beyond.  As a former Managing Director at Lehman Brothers has remarked, “If the Dodd-Frank Act’s first objective was to limit risk before an institution collapses, the second objective was to limit destruction after a systemically important financial institution has failed or is in danger of failing.”[2]

While the nation’s economy slowly recovered from the devastating loss of millions of jobs and homes, and trillions of dollars of retirement savings, CFTC staff was building a new regulatory framework under Title VII of the Dodd Frank Act for the previously unregulated swaps market.  Ensuring the CFTC got its new rules right was a monumental task for the relatively small agency.  But, without hesitation, I can confidently say, ten years since the crisis, the CFTC, our nation’s derivatives markets, and most importantly, the American public, are in a much better position.

Dodd-Frank Act implementation was not my only priority in 2011.  The 2014 Farm Bill began taking shape, providing me the opportunity to take on additional policy work, specifically learning about agricultural biotechnology and crop protection.  This included working on several titles of the 2014 Farm Bill, and other key pieces of legislation more narrowly focused on biotechnology and crop protection.

Much like the CFTC, my not-to-distant history is rooted in the agricultural markets.  Although I am thrilled and honored to serve in my current capacity, there are few days that go by when I do not think about my old Senate colleagues and the honor it was to serve Michigan while learning so much about agriculture.  But, luckily agriculture is never too far away from my mind in my new job. 

Congress created the CFTC, an independent Federal agency, in 1975.  The CFTC, formerly a part of the United States Department of Agriculture, regulates derivatives transactions, which include futures, options, and now swaps.  Derivatives are financial products, or contracts, whose value is derived from the price of an underlying commodity, which can be anything from a bushel of wheat to a barrel of oil.  Derivatives are widely used by many participants in our economy, including financial institutions, manufacturers, and energy companies.

But, more importantly, our nation’s farmers and ranchers critically rely on the derivatives markets to discover prices and manage their price risk, which can make or break an entire growing season.  It is no coincidence that derivatives are so important to agricultural producers; they helped create the markets.  Dating back to the mid-1800’s, U.S. futures markets have helped alleviate a few of the many challenges agricultural producers face on a day-to-day basis.  Congress enacted legislation in the early 1900’s creating the CFTC’s predecessor agency within the Department of Agriculture.  More than 100 years later, there has been explosive growth in the market place.  The range of contracts offered and traded have expanded from core agricultural commodities, to more complex financial instruments intended to help hedge interest rate and currency risk, to name a few.

As the derivatives markets have grown and evolved, so has the CFTC.  But, the agency’s focus and commitment to the agricultural community is steadfast.  With the benefits of knowing agricultural policy and appreciating the many challenges producers face, from weather and pests, to trade and immigration, I am committed to proposing ideas, examining issues, and supporting policy and solutions that will serve and promote derivatives markets that are fair, efficient, and accessible.  With this commitment in mind, I would like to share some recent developments at the CFTC and also a few areas of policy and events that you can expect in the future.

Nine Months into 2018 (A Little More Recent History)

Although much remains on the CFTC agenda for 2018, this year will certainly be remembered by, at least in part, a first of its kind event held in April known in the Twittersphere as “AgCon 2018.”  The CFTC and Kansas State University’s Center for Risk Management Education and Research jointly hosted a conference, “Protecting America’s Agricultural Markets: An Agricultural Commodity Futures Conference.”[3]  Although I know Michigan State itself could be a formidable host for such a conference, Kansas State did a wonderful job hosting this important event.  Over two days, the CFTC, members of the Kansas State University community, and more than 300 market participants from across the country discussed a range of critical topics affecting agriculture commodity futures, including the role of speculators in futures markets, high frequency trading, contract design, and advancements in financial technology.  These were critical discussions that have provided the CFTC with important input, and certainly set the tone for improved policy in the future. 

More personally, I used AgCon as an opportunity to convene the CFTC’s Agricultural Advisory Committee.  As the sponsor of the Agricultural Advisory Committee, I have the unique opportunity to hold public meetings with a broad cross-section of representatives of the agricultural community in an effort to discuss current issues, and reconsider rules that may be creating unnecessary and costly regulatory burdens.  Given the breadth of topics discussed at AgCon, I decided to pivot from the typical market structure topics and focus on issues truly unique to production agriculture:  (i) the intersection of crop insurance and the futures markets; (ii) credit’s role in risk management and the Farm Credit System; and (iii) block trading in agricultural futures products.[4]

Given the critical importance of crop insurance as a risk management tool for growers and the ongoing 2018 Farm Bill discussions, I thought it timely to discuss the relationship between the futures markets and crop insurance, in an effort to identify and progress towards resolving issues that may exist between the two.  With a distinguished panel of speakers, including the Department of Agriculture, the Advisory Committee and the Commission were able to learn and better understand the importance of a functioning futures market to the crop insurance program.  As the best aggregator of information and prices, and the best venue for identifying forward looking prices, the futures market serves as a critical tool for reference prices and insurance coverage determinations.  These relationships further emphasize the importance of well-functioning futures markets and put the onus on the CFTC and market participants to ensure issues like convergence of cash and futures prices are addressed in policy and practice.

The second topic explored the relationship between the Farm Credit System and risk management.  Established a little over a century ago, the Farm Credit System is comprised of a network of borrower-owned lending institutions that provide hundreds of billions of dollars in loans, leases, and related services to farmers, ranchers, rural homeowners, agribusinesses, and others.  The Farm Credit System operates in a mutually beneficial relationship with its borrowers and beneficiaries, and, simply put, I believe a borrower’s ability and willingness to hedge risks using the futures market creates a more stable lending environment.  Given record low commodity prices, significant trade challenges, and labor concerns, among other issues, accessible and favorable credit becomes even more vital today than in other years.  Speakers from the Farm Credit Administration shared key issues that lenders focus on when entering into a relationship, and how a producer can best position his or herself to access credit.  Among many lessons, my key takeaway was continued education about the futures market in promoting better access to credit.

Finally, the advisory committee discussed block trades.  Block trades are privately negotiated transactions that are permitted to be executed apart from an exchange’s central limit order book.  The central limit order book, or CLOB, is the most conventional, transparent and efficient mechanism to match buyers and sellers -- essentially a two column ledger anonymously showing all buy and sell orders, and matching the highest bid with the lowest offer. Block trading has proved to be a useful tool for institutional market participants who need to execute large transactions (or combinations of transactions) or “blocks” with one party at a fair and reasonable price relative to the price listed on the CLOB.

In January, 2018, the Chicago Mercantile Exchange (“CME”) launched block trading for the full suite of agricultural futures and options on futures products.  Prior to that time, the CME had allowed block trades for only eleven products in the agricultural asset class.  Shortly thereafter, market participants expressed concerns regarding liquidity, price transparency, and trade reporting in the contracts that had block trades.

The Agricultural Advisory Committee served as the perfect venue, three months following the initial listing of the CME agricultural block trades, to have a discussion and examine what was working and what was not working.  I am pleased to say that following the Advisory Committee meeting, working in cooperation with CFTC staff and the CME, many issues have been addressed and resolved.  In July, the CFTC issued a report by the staff of the Market Intelligence Branch in the Division of Market Oversight (“DMO”) entitled “Agricultural Block Trade Analysis.”[5]   Based on analysis of all grain, oilseed, and livestock transactions from January 8 through March 31, 2018, CFTC staff’s key findings included that:  (1) block trades in the agricultural space comprise a very small portion of overall volume, but are somewhat more significant on specific dates and for certain contract months; (2) block trades are primarily occurring in nearby months; and (3) prices of blocks appear to be priced within the CME rule for “fair and reasonable prices.  DMO staff is continuing to monitor block trades and the CFTC remains vigilant to ensure that block trades are not interfering with end-users’ ability to manage risk and discover prices in a fair and efficient manner.

Looking Ahead

The CFTC has a lot to look forward to in the coming months and years.  In the past two weeks, the CFTC has welcomed two new Commissioners, giving the agency a full panel of five Commissioners.  With a full Commission, I am confident that the Chairman will move forward more aggressively with his agenda.  I am hopeful that the Commission will—at the very least—prioritize completion of the long overdue position limits rule, mandated by the Dodd-Frank Act.  This rule will no doubt play a critical role in ensuring our markets are transparent, safe, and free from fraud and manipulation.

I’d also like to see the Commission revive its commitment to address technological developments in our markets that pose operational risks.  In this age of technology driven financial markets, the question of a flash crash or automated trading system failure is not a question of if, but simply when.  I anticipate that the Market Risk Advisory Committee or MRAC, the other CFTC advisory committee I sponsor, will spend some time in the fall focusing on operational risk—the risks resulting from breakdowns in internal procedures, personnel, and systems.  It includes fintech risks such as service disruptions, data compromise, and cybersecurity.  It also includes risks from outsourcing and use of third-party products and vendors.  And, it includes fraud and other personnel misconduct.

Additionally, I expect that the full Commission will vote on a final rule addressing the de minimis exception to the swap dealer definition before the end of this year.  Although I did not support the proposal[6] in June, I am looking forward to working with the Chairman and my fellow Commissioners to find consensus on a final rule that balances the need for a strong dealer regime, while ensuring our nation’s end-users, including the agricultural community, have fair and open access to the swaps market.

As we quickly march towards 2019, I suspect that the CFTC will return to Kansas next spring for a second commodity markets conference—I believe #AgCon2019 might already be out there.  I encourage all of you to engage with the CFTC, certainly my office included, to ensure that we are discussing the right issues affecting your businesses on a day to day basis.  I mentioned earlier in my remarks how happy I am to be back in Michigan.  To that end, I welcome future visits to see your operations first hand.

But Not Forgetting Our Recent Past

I would like to end my remarks on a slightly different note.  As I mentioned earlier, today is in fact the tenth anniversary of the Lehman Brothers bankruptcy.  Lehman Brothers was one of the world’s largest investment banks, with a history dating back to the mid-19th century; much like the futures markets themselves.  Lehman’s demise started a cascade of events that led to a prolonged financial crisis and ultimately the Great Recession.  Although those events took place many miles away from Mackinac Island, its repercussions were felt all across the rural economy and the globe.  Trust was broken.  The CFTC was certainly at the heart of the crisis in many ways.  Although different factors led to the crisis itself, the yet-to-be regulated over-the-counter swaps market played a significant role in exacerbating the litany of problems that seized financial markets.

Ten years past, we have all learned a lot about the stability of our financial system, the inter connectedness of very different parts of our economic ecosystem, and most importantly the resiliency of Americans.  Ten years past, the economy is strong and unemployment is at record lows.  Ten years past, the CFTC is a very different agency. The Dodd-Frank Act mandated a regulatory regime of the swaps market that has made it safer, more transparent, and arguably more efficient.  All positives for the swaps markets, and ultimately for all of us as beneficiaries of stable prices for goods.  There is always more work to be done, and the CFTC, myself included, work hard to ensure that we remain vigilant to the risks that infect our markets, and to identify danger before it’s too late.

As I enter my second year as Commissioner, I am cautious of the rhetoric and economic tailwinds that threaten to uproot the regulatory landscape that is only just beginning to show its strength.  I am cautious because I appreciate that this opportunity to second guess our progress to date is a luxury and that any choices we make may be colored by the recent tide of populist sentiments and information asymmetries.  I’m committed to continuing to defend the regulations that our predecessors—with the full input of the public—got right, to keep an open mind to making strategic edits when necessary, and to support and prioritize issues that have remained in the margins but which should be front and center on our agenda.  I am committed to demanding transparency and adherence to process.  And I am optimistic that our Commission is now fully staffed and has the experience, expertise, and hindsight to collaborate and engage towards decision making that will continue to move the CFTC and the markets it regulates forward.

Conclusion

I want to thank Michigan Agri-Business again for inviting me to speak.  Given the many challenges the agricultural economy is facing today, I hope my words today will bring some certainty that the CFTC is dedicated to serving Michigan and our nation’s farmers and ranchers.  I often give historical context to the CFTC to remind myself of its priorities.  The agency’s roots are in agriculture.  As Congress considers a five-year Farm Bill to provide the rural economy with the necessary risk management tools and investment it needs, please consider the CFTC in the same light.  Thank you.

Remarks by Chairman J. Christopher Giancarlo at the ISDA Industry and Regulators Forum, Singapore

September 12, 2018

Good morning.

Thank you for that kind welcome.  It is a pleasure to be back in Singapore and to be here at ISDA’s Industry and Regulators Forum.  I want to thank Scott O’ Malia and his team at ISDA for organizing this event.  I am looking forward to the fireside chat with my colleagues from Australia, Cathie Armour, and from Singapore, Lee Boon Ngiap, to discuss the next steps in the development and implementation of our global regulatory agenda.

Last November when I was in Singapore, in addition to speaking at this event, I also spoke at the Singapore Fintech Festival.  It was the first time the CFTC had participated in the Festival, and I was very pleased to have to be invited by Ravi Menon to attend.  Although this year I will not be able to attend, LabCFTC will be participating in the Festival.  Both MAS and the CFTC share a commitment to encouraging innovation and development in fintech, and I look forward to partnering with MAS on fintech initiatives in the future.

My speech at the fintech festival focused on the digital transformation of our lives, and I described the CFTC’s forward-looking agenda to address the impact of technological innovation and changing market dynamics.  I spoke about how the CFTC could facilitate market-enhancing innovation and become a more digital, effective, and efficient regulator.

My remarks today build on the theme of modernization of the CFTC’s mission, but in the area of how the agency applies its regulatory framework to activities outside of the United States, and how such modernization will benefit our close regulatory counterparts worldwide, particularly here in Asia.

Modernization of the CFTC’s Cross-Border Framework: Problems with the CFTC’s Current Cross-Border Framework

As I explained in London last week and Tokyo earlier this week, the CFTC was one of the first regulators to implement many of the G-20 swaps reforms first set out in Pittsburgh in 2009.  I, for one, am rightly proud of the CFTC’s leadership.  Yet, financial regulators around the world, including our colleagues at MAS and ASIC, also deserve recognition for the responsible progress they have made in recent years in implementing the Pittsburgh reforms.

Yet, going first always carries with it the risk of getting some elements wrong.  In the cross border extension of its rules, I think the CFTC did so by acting on a flawed premise – that every swap a U.S. person enters into, no matter where and how transacted, has a direct and significant impact on the U.S. economy and must be subject to CFTC swaps regulations.  This approach is increasingly inappropriate as other key swaps jurisdictions implement effective swaps reform.  Moreover, it causes a range of problems and unintended consequences, including the potentially dangerous fragmentation of global swaps markets.

I have spent the past five years observing how the CFTC’s approach to cross-border swaps regulation has impacted global markets – not just U.S. markets, but also markets in financial centers such as Singapore.  Since the start of the CFTC’s SEF regime in 2013 and accelerating with mandatory SEF trading in 2014, our global swaps markets have fractured into separate trading and liquidity pools between U.S. market participants on one side and non-U.S. market participants on the other.

Fragmented pools of trading liquidity are less resilient in the event of sudden market events, resulting in transaction volatility and higher pricing for end users.  Such fragmentation of global swaps markets is not prescribed by the G20 swaps reforms, nor is it justified as an unavoidable by-product of reform implementation.  In fact, market fragmentation is not only incompatible with global swap reform efforts, but detrimental to them.  The time has come to complete the important mission of global swaps reform in a manner that is harmonious and effective without fragmenting world markets.

Principles for Improving to the Cross-Border Approach

In constructing a more balanced and appropriate cross-border approach, I am drawing on the following set of principles.

First is the importance of distinguishing between swaps reforms that focus on market structure and trading practices and swaps reforms that focus on global systemic risk concerns.  For the former, we should show greater deference to non-U.S. regulatory authorities’ rules designed to address local market structure, customs, and trading practices.  Instead the CFTC’s focus should be with respect to cross-border activity that has direct systemic risk considerations for the U.S. markets.

When it comes to swaps reforms that do involve global systemic risk transfer, we must pursue multilateral coordination to achieve high levels of comparability on the basis of comity but not on the basis of what is identical.  The alternative is a world in which every regulator asserts global jurisdiction over swaps trading abroad by its home-domiciled institutions.  This leads to overlapping, duplicative and possibly conflicting regulations that stymie global economic recovery.

A next principle is that regulation of U.S. derivatives markets – the world’s largest – can and will only be done by U.S. regulatory authorities.  The CFTC will determine what is appropriate regulation of U.S. markets and market participants, just as other non-U.S. regulators should be expected to act as rule makers for their jurisdictions.  The CFTC has every right to expect that non-U.S. regulators will defer to the CFTC on oversight of the U.S. derivatives markets.

A further principle is the utilization of a flexible, outcomes-based approach to substituted compliance.  Where there is a sufficient level of regulation to justify a comparability assessment in the aggregate, we should streamline our substituted compliance determinations.  We should avoid including conditions or complexity when it is not needed.  Particularly for swaps execution and cross-border activities of swap dealers, we all should recommit ourselves to deference processes (such as equivalence and substituted compliance) to increase regulatory coordination and reduce market balkanization.

Based on these principles, I have set forth a number of recommendations in my proposal to appropriately revise the CFTC cross-border framework.  These recommendations will be included in a White Paper to be published in the next few weeks.

Working with Like-minded Regulators

As I noted earlier, one of the primary objectives in revising the CFTC cross-border framework is to decrease derivatives market fragmentation and the systemic risk it may produce.  It is vital for global businesses to have the benefit of deep pools of trading liquidity with the maximum number of counterparts with which to hedge commercial and financial risk at the most competitive terms and prices.  Without unnecessary fragmentation, liquidity will naturally coalesce in well-ordered trading environments close to the underlying risk to be hedged.  For Singapore, it means consolidated liquidity pools for global market participants in particular with respect to Asian interest rate derivatives, local currency FX and energy.  Deep and unfragmented pools of liquidity will facilitate the efficient flow of capital across the globe and greatly benefit regional and global commercial activity and economic growth.

Another primary objective is to increase cooperation by greater reliance on regulatory deference.  Our relationship with MAS is a prime example of how deference can and does work.  U.S. market participants access Singaporean markets through number of regulatory mechanisms including the CFTC’s foreign futures regime, FBOT regime, and DCO regime.  For foreign futures, the CFTC defers completely to MAS for all regulatory and supervisory activities based on a finding that Singapore law imposes regulatory safeguards that are comparable to those imposed by U.S. law.  For the FBOT regime, while registration is required, we again defer to MAS for regulatory and supervisory activities based on a finding that MAS provides comparable, and comprehensive supervision and regulation as that conducted by the CFTC.  For the DCO regime, we once again defer to MAS for the day-to-day regulatory and supervisory management of SGX.  Our deference to MAS is a risk-based and outcomes-based determination that Singapore law and MAS have comprehensive and comparable laws and regulations as the U.S. and the CFTC.  It allows for effective information sharing and cooperative surveillance arrangements.

Through these efforts, we have forged a close regulatory bond with MAS that has created cross-border business opportunities for U.S. and Singapore firms while still ensuring market and customer protections.  It is a bond that we must reinforce.

It is my hope that by moving the CFTC towards a more deferential cross-border approach, other jurisdictions will do the same.  We must meet the challenge that extraterritorial regulatory overreach presents for both the U.S. and Singapore financial entities that wish to operate in global markets.

In order to reduce the complications, conflicts and confusion for market entities that operate in global markets, it is imperative that all financial market regulators recognize that an exact alignment of regulations is not always possible.  Nor is it preferable given the inherent differences in local domestic markets in areas of market structure, practice, customs, and laws.  If extraterritoriality is pushed forward, it has the potential to fragment markets, decrease resilience, and increase costs for all market participants.  This impact weakens the effective resiliency of the G20 reforms we have implemented over the past decade.

It should not be a surprise to anyone that I came to Asia this week.  Here are some of the fastest growing economies in the world and some of the most advanced financial markets.  Here – in Singapore, Japan, Australia and Hong Kong – we have major international derivatives markets.  Here we have a shared interest in minimizing market fragmentation caused by cross border regulatory overreach.

To this end, I hope like-minded regulators, like the CFTC, MAS and ASIC, among others, will work together in our various multilateral and bilateral fora to confirm that all key members of the international regulatory community support the principles that will guide the revision of the CFTC cross-border approach.  Such work will be a model of cooperation for regulators of the world’s major derivatives markets.

Conclusion

The CFTC traditionally shaped its cross-border policy based on certain basic understandings: that we all benefit if more choice is available to market participants; that market competition is healthy and necessary; and that efficient movement of capital across the globe, and the economic growth that results, is furthered by regulatory deference to other comparable jurisdictions.  I intend to re-align the CFTC’s current approach to return to that traditional course.  It is a path that is essential for the growth of not only U.S. markets, but also those of important global partners, such as Singapore.

Thank you.

Remarks by Chairman J. Christopher Giancarlo at FIA Japan, Tokyo, Japan

A New Approach to Cross-Border Swaps Reform:
One Market, One Regulator, One Set of Rules

September 11, 2018

It is time to recognize the systemic risk to the global financial system of dividing global markets for institutional commercial risk transfer into a series of limited and divided trading pools based on the inconsequentiality of corporate nationality.  The time has come to complete the important mission of global swaps reform in a manner that is harmonious and effective without fragmenting world markets.

Introduction

Good afternoon.  I am delighted to be speaking to you at FIA Japan.  I wish to thank Yasuo Mogi, Richard Clairmont and Mike Ross for organizing this year’s seminar.  Ear-lier today, I had the great pleasure to meet with JFSA Commissioner Endo and Vice Minister Himino, who I admire enormously.

I am delighted to be back in Japan, and particularly Tokyo.  Tokyo is a vibrant, thriving hub of financial, commercial and artistic activity.  From the captivating cityscapes to the dynamic culture, the city is an intricate mix of tradition and modernism.  It fuses the past and present together like no other place in the world.  This city is truly unique.

Tokyo is also one of the command centers of the world economy where innovations in economic, financial and business activities are continually evolving.  I believe these innovations are essential for the growth and prosperity of the Japanese and global economy.  And it is in the spirit of innovation that I would like to talk to you today.  I would like to discuss my proposal to update and improve the CFTC’s cross-border swaps framework, which I will be formally setting out in a white paper to be published in the next few weeks.

In updating the CFTC’s cross-border approach, I aim to achieve three objectives:

1. to increase the CFTC’s cooperation with other global regulators, like the JFSA, in order to reduce duplicative regulation and redundant supervision;
2. to rationalize our sometimes overlapping and overly burdensome regulations that have led to higher costs and operational complexity for market participants; and
3. to reduce dangerous market fragmentation and foster deep and consolidated liquidity pools that are essential to the resiliency and systemic stability of our financial markets.

I believe this approach is not only mandated by the Dodd-Frank Act and an appropriate use of the CFTC’s capabilities and resources, but it will also enhance market health and resiliency in global markets, such as Tokyo, which is a critical global market for swaps trading and clearing.  Indeed, in my view, the CFTC and the JFSA regimes share many symmetries – not just with respect to derivatives regulation, but in a greater sense with respect to our shared commitments to the G20 reforms, market integrity and vigor.

Updating the CFTC’s Cross-Border Framework.

As I explained in London last week, financial regulators around the world have made tremendous progress in implementing the reforms set forth by the G20 leaders in Pitts-burgh in 2009.  In the last five years, there has been a flurry of global regulatory activity, including the implementation of trade reporting requirements, central clearing mandates, margin requirements for non-centrally cleared derivatives, and capital requirements for non-centrally cleared derivatives.  While the CFTC was one of the first regulators to implement many of these reforms, and merits praise for its leadership in the G20 swaps reform initiative, it does not mean that the CFTC got every aspect of its implementation efforts right in its first attempt.

Problems with the CFTC’s current cross-border approach

I have spent the past five years observing how the CFTC’s approach to cross-border swaps regulation has impacted global markets – not just U.S. markets, but also markets in financial centers such as Tokyo.  The CFTC’s approach to imposing CFTC transaction rules on swaps traded by U.S. persons even in jurisdictions committed to implementing the G20 reforms is an over-expansive assertion of our jurisdiction.  It is based on a flawed factual premise – namely, the idea that every swap a U.S. person enters into, no matter where and how transacted, must be subject to CFTC swaps regulations.  Our miscalculation has resulted in a number of problems and unintended consequences, including the following:

• it is over-expansive, unduly complex and operationally impractical;
• it is conceptually inconsistent in utilizing a “U.S. entity” test for swaps activity abroad and a “territorial” test for swaps activity in the United States;
• it relies on a substituted compliance regime that applies an arbitrary rule-by-rule com-parison of CFTC and non-U.S. rules under which a transaction or entity may be subject to a patchwork of U.S. and non-U.S. regulation;
• it demonstrates insufficient lack of deference to non-U.S. regulators that have adopted comparable swaps reforms for their jurisdictions, which is, in fact, inconsistent with the CFTC’s history of applying the principles of international comity to comparable non-U.S. regulation;
• it fails to distinguish between those swaps reforms designed to mitigate cross-border risk and those swap reforms designed to address trading and operational practices such as transactional procedures that are suitable for tailoring to local trading conditions and market customs; and
• it has driven global market participants away from transacting with entities subject to CFTC swaps regulation and caused fragmentation of what were once global markets into a series of less liquid, separate liquidity pools that are less reliant to market shocks, thereby increasing systemic risk rather than diminishing it.

It is time to address this issue.  It is time to recognize the systemic risk to the global fi-nancial system of dividing global markets for institutional commercial risk transfer into a series of limited and divided trading pools based largely on the inconsequentiality of corporate nationality.  Fragmented pools of trading liquidity are shallower, more brittle and less resilient in the event of sudden market events, resulting in higher price and transaction volatility.  Such fragmentation of global swaps markets is not prescribed by the Pittsburgh swaps reforms, nor is it justified as an unavoidable by-product of reform implementation.  The time has come to complete the important mission of global swaps reform in a manner that is harmonious and effective without fragmenting world markets.

Last week in Europe, I described a new approach to the cross-border implementation of swaps reform that is focused on mitigating systemic risk transfer across borders while affording regulatory deference to trading jurisdictions that have adopted comparable swaps reforms.  The goal is to better calibrate global swaps reform in a cooperative manner across jurisdictions to enhance market durability, increase trading liquidity and stimulate broad-based economic growth and revival.

In jurisdictions that have adopted G20 swaps reforms that are comparable on an out-comes-basis with the CFTC’s swaps framework, my approach would reconstitute currently divided liquidity pools into consolidated trading markets under one sovereign regulator and one set of comparable swaps rules.  In Vienna, one experienced industry observer dubbed the approach the “One-One-One Plan”, meaning each jurisdiction should have one undivided trading market, one competent regulator and one set of trading rules appropriate to local market conditions.  This approach achieves two goals.  First, it enhances financial stability and resiliency of global markets by consolidating sufficiently deep liquidity pools to better respond to market volatility.  Second, it promotes the development and growth of global markets, including here in Japan.

Turning the page

To construct a more balanced and appropriate cross-border approach, I have set out a series of principles.

The first principle is distinguishing between swaps reforms that focus on market structure and trading practices, on the one hand, and those swaps reforms that focus on global systemic risk concerns, on the other.  For the former, we should show greater deference to non-U.S. regulatory authorities’ rules designed to address local market structure and trading practices.  For example, whether or not a non-U.S. trading venue requires a request for quote from three or ten dealers has almost nothing to do with transfer of counterparty risk to the U.S. financial system.  Thus, the CFTC should not seek to regulate and oversee that behavior.  Rather, the focus of its cross-border over-sight should be with respect to cross-border activity that has direct systemic risk considerations for the U.S. markets.

When it comes to swaps reforms that do involve global systemic risk transfer, another principle is the pursuit of multilateral coordination to achieve strong levels of comparability on the basis of comity, but not identicality.  The alternative world is one in which every regulator asserts global jurisdiction over swaps trading abroad by their home-domiciled institutions.  This in turn leads to overlapping, duplicative and even inconsistent regulations that would be deleterious to the global economy.

In turn, regulation of U.S. swaps markets can and will only be done by U.S. regulatory authorities, not by others.  The CFTC has exclusive statutory responsibility in this area, and it will be a rule maker for these markets, not a rule taker of foreign swaps rules.  The CFTC will decide what is appropriate regulation for U.S. markets and market participants, just as other non-U.S. regulators should be expected to act as rule makers for their jurisdictions.  The CFTC has been successfully regulating derivatives trading for decades and has extensive systems, capabilities and experience.  The CFTC has every right to expect that non-U.S. regulators defer to it on oversight of U.S. derivatives trading markets.

Another principle is the utilization of a flexible, outcomes-based approach to substituted compliance.  The CFTC has a long history of working collaboratively with non-U.S. regulators, and we have tried to do so in our substituted compliance program.  But we need to rethink our rule-by-rule approach.  Where there is a sufficient level of regulation to justify a comparability assessment in the aggregate, we can streamline our substituted compliance determinations.  We also need to avoid including conditions or complexity when it is not needed.  Particularly for swaps execution and cross-border activities of swap dealers, we should all recommit ourselves to deference processes (such as equivalence and substituted compliance) to increase regulatory harmonization and reduce market balkanization.

Concrete steps

Following these principles, I am recommending that the CFTC adjust our current cross-border approach in a number of ways.  One adjustment is with respect to the expansion of the CFTC’s use of its exemptive authority for non-U.S. CCPs that clear swaps.  If the non-U.S. CCP is regulated comprehensively in a jurisdiction that has comparable regulations to the CFTC’s regime, and does not pose substantial risk to U.S. markets, the non-U.S. CCP should be able to seek exemption from registration as a derivatives clearing organization (DCO).  The exemption would permit such non-U.S. CCPs to pro-vide clearing services to U.S. customers indirectly through non-U.S. clearing members, without the non-U.S. CCP or its non-U.S. clearing members having to register with the CFTC as a DCO or futures commission merchant (FCM), respectively.

This is analogous to how non-U.S. CCPs clear foreign futures through the CFTC’s Parts 30 and 48 regimes without registering in the United States.  This is a balanced approach, ensuring the same treatment for both the futures and swaps markets and demonstrating a commitment to deference as a pillar of the CFTC’s cross-border framework.

Similarly, the CFTC should exempt non-U.S. trading venues from registering as swap execution facilities (SEFs) if they are subject to comparable and comprehensive regulation elsewhere.  Generally, the particular mechanics of swaps trade execution on a regulated trading platform supervised by a competent, non-U.S. regulator that has adopted comparable swaps reforms generally does not present concerns of global systemic risk requiring the imposition of the CFTC’s particular form of trading rules.

Symmetries with Japanese regulatory approach

When I considered the CFTC’s cross-border reform approach and recommendations, I noted the symmetries with JFSA’s recent decision to adopt a more substantive, forward-looking and holistic approach to its framework.  Both the CFTC and the JFSA have reflected on how we each have implemented the recent reforms.

As former JFSA Commissioner Mori observed, we need to be mindful of the cumulative impact of the many forms of medicine that regulators have delivered to the economy and we should consider whether our reform efforts are addressing the root causes of the financial crisis and meeting the goals of the G20 reforms.[i]

We do need to be flexible in our implementation because over time our rules will require adjustment as the circumstances in the swaps markets change and the effects of our initial reform efforts become known to us and market participants.  I completely agree with the JFSA that:

• our mutual goal of financial stability must be balanced with sustainable growth;
• we need to assess the unintended consequences of our regulations; and
• we must adopt a “forward-looking” approach, for the future threats may differ from the past threats.[ii]

This is perfectly aligned with my views on how to implement a balanced cross-border approach.  It is important to not just focus on individual parts but look at the “total picture.”

For example, consider the principle of conducting CFTC’s substituted compliance through a holistic lens that promotes consistency between regulatory frameworks.  This is far better than a rule-by-rule comparison premised on the mistaken belief that all global markets and market participants are identical and should be regulated and supervised exactly the same.

Sometimes the solution is not always more detail, more regulation or greater quantity of rules.  Sometimes the solution is simply better regulation.

Conclusion

The stakes are high.  Global swaps reforms, properly coordinated, should foster sustainable growth.  They should not divide global markets into a series of ever smaller, more fragile and less durable pools of trading liquidity that is a threat to market resiliency.

The CFTC and the JFSA oversee some of the world’s largest derivatives markets.  It is perhaps overlooked globally, but never by either of us, that we fit well together.  We share a like-minded vision of a balanced and effective implementation of G20 reforms that is in accord with sustainable growth.  Our symmetries benefit both of our economies.

I conclude by providing a concrete example.  Last month, the CFTC issued an Order of Registration to Osaka Exchange to provide its members with direct access to its electronic order and trade matching systems.  The registration of Osaka was premised on deference – that the laws of Japan are consistent with the laws of the United States.  This deference gives market participants in both of our jurisdictions the opportunity to develop their business and to prosper without sacrificing our need as regulators to vigilantly maintain the financial stability offer markets.  This is a winning formula.  One I hope we can repeat many more times in the future.

The time has come to complete the mission of global swaps reform in a manner that is harmonious and effective without fragmenting world markets.  I thank you, our dear Japanese friends and colleagues, for being our partners in that vitally important mission.

Thank you.

Remarks by Chairman J. Christopher Giancarlo at the Eurofi Financial Forum, Vienna, Austria

September 6, 2018

Good evening.  It is my great pleasure to be here again at Eurofi.  I wish to thank David Wright, Didier Cahan and Marc Truchet for organizing once again a great conference.  Thanks also to our Austrian colleagues for their gracious hospitality.

I am most pleased to be with you and address the leaders of the European financial regulatory community.

It is also my immense pleasure to be here in Vienna.  This is a city that has been described as more than a city; Vienna is “a way of life.”  Here that way of life produced Carl Menger, Friedrich von Wieser, the great Friedrich von Hayek, and Ludwig von Mises.  It was they who made clear that human rights and advancement are inseparable from economic liberty and free enterprise.

Vienna has been described as having a “supranational, cosmopolitan consciousness.”  When someone speaks in Vienna, they address the world.  This is certainly true here this evening.

Since becoming CFTC Chairman, I have made it my highest priority to build strong bonds with my counterparts in Europe and other parts of the world.  Effective cross border relations are central to the mission of the CFTC because of the global nature of the futures and derivatives markets which the CFTC regulates.  I have striven to interact with my foreign counterparts with respect, humility and goodwill.  We policymakers and regulators have a shared interest and responsibility to ensure our markets are vibrant, efficient and value-enhancing.  Our common interest and mission mean we should be working together and not apart.

A year ago, at Eurofi in Tallinn and in a contemporaneous article in Les Echos of Paris, I expressed my view that regulatory and supervisory deference is the best way to ensure harmony between regulatory regimes.  I depicted a vision for CFTC-EU regulatory coordination that would focus on ensuring consistently high-quality regulatory outcomes across our respective markets while respecting the differences in laws and regulations that are necessary to support the unique characteristics of our local markets.

While I believe that my call for deference was not a radical idea, but just common sense, I have felt my message has not fully achieved the positive effect intended.  While I am proud of undeniable concrete achievements – most notably the accomplishment with Vice President Dombrovskis last fall of equivalence for US trading venues and exemptions for EU trading venues – I remain concerned with proposals and pronouncements here in the EU about financial regulation and supervision of third country firms that seem to reject deference as the governing principle for cross-border regulation.

We are all aware of the history of cross-border regulation between the CFTC and EU.  Many here in Europe understandably criticized past CFTC actions for over-extending CFTC rules to European markets and firms.  They were right to expect greater regulatory deference from a fellow framing nation of the 2009 G-20 Pittsburgh Accords.

But I fear that history has now made us too cynical.  We have forgotten how to reach for what is possible in favor of acting to protect what we have today.  We have created hooks and raised barriers when we should be seeking openness and encouraging competition.

Earlier this week in Europe, I presented new views on how best to apply swaps reform regulation to firms and transactions across borders.  I announced that I will publish shortly a comprehensive and detailed white paper analyzing the shortcomings of the CFTC’s current approach and recommending improvements that better allow cross-border derivatives markets to thrive while meeting the goals of the G20.  I gave several concrete examples that foreshadow the extensiveness and level of detail of my recommendations.  My white paper will not be about theory, but hard reality.

This white paper will serve as a roadmap for a series of rulemakings that I intend to put forward to the full CFTC Commission in the future and, with their input, thereafter for public notice and comment and eventually adoption.

Most importantly, I am giving substance to what I mean by deference.  Deference is not just a slogan.  It is a regulatory approach that can be applied to concrete regulatory challenges –regulation of swaps trading venues, regulation of central clearinghouses, and regulation of swap dealers.  These ideas are specific and clear in showing how regulatory and supervisory deference can be applied to the regulation of the cross-border markets.  As CFTC Chairman, I look forward to taking steps put these ideas into effect.

Addressing the world from this great city of Vienna, I call on you – the policymakers and regulators of Europe – to join me in adopting a similar approach to the cross-border application of swaps reform regulation.  We have a rare and precious opportunity to trust one another; to put into place contemporaneously laws, rules and regulations that enshrine regulatory and supervisory deference in how we treat third country firms and transactions.

Regulatory deference has been the common practice of the European Union.  The EU pioneered the use of equivalence and recognition to make it possible for outside firms to serve European markets.  On such a basis, the EU and the CFTC showed how well we can work together in applying a joint framework of equivalence and substituted compliance and exemptions.  We did it in 2016 when we reached agreement on the regulation and supervision of CCPs, and we did so again in 2017 when we reached agreement on the regulation of trading venues and uncleared margin requirements.

Now is the time to expand the use of equivalence and recognition.  The EU should commit to an equivalence determinations process that focuses on achieving comparable regulatory outcomes and not rule-by-rule exactitude.  Thus, EU can provide necessary legal and regulatory certainty to third country firms.  And the EU should rely as much as possible on third country regulators and supervisors.  I want the CFTC to do the same.

But here I must express some concern.

Current EU legislative proposals on CCP supervision are going in a different direction.  These proposals, when understood alongside comments from some European officials, raise doubt about continuance of the policy of deference.

I fully respect the EU policymaking process and the goal of enhancing EU regulatory capabilities.  I have even greater professional and personal respect for EU public officials.

Thus, it concerns me that decisions may be made in the next few months that will end up having a deleterious effect on transatlantic financial trade.

I come here today to put forward to you – European policymakers and regulators – a plain choice.  I will embark the CFTC on the course of greater regulatory deference, including concrete proposals to further open up the CFTC regulatory regime to European firms and markets.  My proposal seeks to recognize the power and authority of EU authorities to regulate and supervise the European market with limited involvement from the CFTC.  It welcomes an EU approach that will do the same to US firms and markets.  This is one approach.

The other approach is to reject what I put forward and to continue down the path of expanding direct European regulation and supervision over third country firms.

The choice of approach is yours to make.  I sincerely hope that we all recognize the unique opportunity before us to achieve true regulatory coordination between the US and Europe.  It is time to seize that opportunity by putting in place the relevant laws, standards and policies to reciprocate our path of deference with a European recommitment to that most beneficial approach.

Or reject this approach and turn down that very different path of overlapping and confounding cross border regulation with its high regulatory cost and constraints on economic growth.  This would be the legacy of policymakers making such a choice. 

To be clear, the course I set for the CFTC will be robustly debated in the United States.  The prospect of my course being fully implemented will be greatly enhanced if the European Union, as well as our other non-U.S. counterparts, pursue a common approach and harmed if they do not.  I look to you to make the right choice and to express your choice with clear statements and clear legislative and regulatory actions.

I started by mentioning the great influence Vienna has on the world of economics.  Friedrich Hayek argued that free market economics is the foundation of the highest form of human freedom.  And, ultimately, that is what I am urging with these recommendations: the freedom of private enterprise that fires the imagination, liberates trade and commerce, unleashes markets lifts our fellow citizens into greater prosperity. 

Vienna also has been called “the city of dreams.”  Let’s realize the dreams of cross border regulatory coordination and make it a reality.

Here at Eurofi this week, working together, we can implement a vision of regulation that will take us well into the 21st Century.

Thank you.