Remarks of Commissioner Brian D. Quintenz at the Institute of International Bankers Membership Luncheon

June 21, 2018

Remarks of CFTC Chairman J. Christopher Giancarlo before the Women in Derivatives Forum, Washington D.C.

June 12, 2018

Good afternoon, everyone.  It is a pleasure to speak to Women in Derivatives.

Thank you to Petal Walker, my former CFTC colleague, for hosting this event.  Petal is one of the most well informed lawyers in America on the impact of blockchain technology on derivatives markets.

And, thank you to Sarah Summerville, the Head of the CFTC’s Office of Diversity and Inclusion, for her help with my participation today.  Sarah is the human translation of the French phrase savoir faire; she knows how to handle any situation with grace and discretion.

Recently, in the Wall Street Journal (reporter Herminia Ibarra, May 20, 2018), there was a discussion about how women could succeed faster in business.  The number one step was networking – exactly what you provide with this organization. 

There is opportunity, advancement, and professional success through mobilizing professionals and through sharing ideas and experiences.  Networking is the key, and Women in Derivatives shows how this can happen in a complex, demanding, and difficult field.

I am reminded of a comment by Margaret Thatcher, “If you want something said, ask a man; if you want something done, ask a woman.”  Surely, the “Iron Lady” would have loved Women in Derivatives.

And, Lady Thatcher understood another important truth:  grit predicts success.  You probably know the work of Angela Duckworth, a professor at U Penn.  She advises the World Bank, NBA and NFL football teams, Fortune 500 CEOs, and others.  She has formed what she calls “the Grit Scale” – a scale that measures passion, endurance, and perseverance.   And, there is a lot of grit in this room:  accomplishment over adversity, commitment instead of defeat, courage over concession.

So, I am pleased to join you as colleagues, colleagues with grit, wisdom, drive, boldness, and intensity.  This is a room full of trailblazers, milestone makers, and daring doers.

In fact, I am joined by two colleagues who make sure your interests are front and center every day:  Maggie Sklar and Erica Richardson.  Would you both stand up?  Maggie is my Senior Counsel.  Erica is Director of the CFTC’s Office of Public Affairs.  Thank you both for your service and your hard work.  You have both made major contributions to the CFTC and the markets we oversee.

Yet, global derivative markets know no gender.  They demand competence, professionalism, and vision.  And, these are defining hallmarks for Women in Derivatives.  You need accurate information.  You want the resources to get the job done.

Therefore, today, I would like to use this forum to share for the first time about some important data analysis we have done at the CFTC.

As you know, the financial crisis of 2008 was the defining moment of the last decade.  The global turbulence was shocking … frightening.  We are still confronting the ripple effects. There is still a search for proper levels of transparency, liquidity, and responsibility. 

For me, as a supporter of the swaps reforms in the Dodd-Frank Act, it has always been how to balance systemic risk reduction with strong and broad based economic growth. How do we oversee derivatives markets in a way that fosters market vibrancy but mitigates systemic risk, that supports market innovation, but prosecutes misconduct and that is market intelligent while remaining independent and objective?

This last point is very important to me: Regulators cannot be effective, if they are not conversant with current market developments.  To that end, one of my first steps as CFTC Chairman, with the strong support of Petal Walker and her boss, Commissioner Sharon Bowen, was to create within the Division of Market Oversight a new unit called the “Market Intelligence Branch” or “MIB”.  The goal of MIB is to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends – such as the impact of new technologies, asset classes and trading methodologies - to increase our knowledge of evolving market structures and practices and promote efficient and sound markets.

It is some recent work of MIB that I want to share with you today.  The work that I will discuss is part of MIB’s broad review of trading conditions in the markets we oversee.  The work is a broad look at large intra-day price movements in US commodity futures markets, what that research calls “sharp price moves.”

The work, which will be posted soon on the CFTC website, concludes that:

1.         In large part, the U.S. commodity futures markets are operating well.  They remain, in core areas, highly efficient and incorporate new information quickly. 

2.         Neither the frequency nor intensity of sharp price movements appear to be consistently increasing over time; and 

3.         Most importantly, sharp price movements are linked to volatility, market fundamentals, and news releases – our research does not show signs of weakness or fragility in the futures markets causing disruptive price movements.

Okay, before we go through the analytical findings in more detail let me back up and review methodology.  This was a very data-intensive effort – MIB staff analyzed 2.2 billion transactions from 2012 through 2017. The data included 16 different futures contracts from all 4 major commodity market sectors: agricultural, energy, financial, and metals products. All data used for this project was sourced internally from the trade data provided to us by our exchanges, so it was a valuable use of the regulatory data the CFTC collects.

The primary metric used in the analysis was the 100 largest price movements in each contract – this is what we identified as “sharp price movements.” Our staff identified the top 100 price movements by calculating the largest percentage price movements in a rolling 3-minute window, using the volume-weighted average price in each minute. Once those values were calculated, they were ranked from largest to smallest and the 100 largest movements were retained for further analysis.

The 3-minute time window was chosen to capture the sharpest price movements in a relatively short period of time. The focus was on fast movements that both human traders and automated trading algorithms could react to. A range of time periods from 2 to 15 minutes were evaluated and the 3-minute interval worked the best for our analysis. Staff purposefully excluded time periods longer than 15 minutes to focus on fast price movements that occurred in short periods of time.

The top 100 price movements were chosen to focus on the most extreme observed changes in each contract. Many analyses like this begin by setting a high threshold based on the distribution seen in the data, usually something like the 99th percentile. This analysis started there as well but what we found was the 99th percentile actually wasn’t high enough for our purposes. Since the dataset was so large, there were still over 1 million data points in each contract above the 99th percentile. Several thresholds were evaluated and the top 100 was the most useful for this analysis. The key benefit to this approach is the ability to uniformly apply these metrics across a wide variety of contracts and compare the results.

Let me distinguish this analysis from other studies that have already been done, both by CFTC staff and external researchers, into specific flash events. That is not what we have done here.  This present work was primarily designed to determine what sharp price movements tell us about the healthy functioning of our exchange traded futures markets.

So, here are the major findings:

1.         There is no clear indication of a wide-spread increase in the frequency or intensity of sharp price movements in recent years; 

2.         Sharp price movements occur more often during periods of elevated volatility;  

3.         News and recurring market data releases are a factor in many contracts we studied; so much so that news events are a topic worthy of further study as well as something to be filtered out of future analyses; 

4.         Some contracts see large movements in overnight trading but not a disproportionate amount when compared to volume traded during day/night.  

So, what is the significance of these conclusions?

Well, I think they are important for a number of reasons, including to dispel at least one contemporary narrative.  That is that recent changes in market structure, particularly the growing presence of principal trading firms and high frequency trading, has in some way made markets less stable. 

MIB’s research does not support his narrative.  Not only has there not been any time trend toward more frequent sort-term price swings, but many of the biggest price swings can be explained, not by the activities of principal traders or HFTs, but by longer-term, heightened market volatility and by the direct revelation of information and news events. 

The analysis tells us that today’s US commodity futures markets continue generally to function well, are able to digest information quickly and readily accommodate heightened volatility. In short, US futures markets remain the premier price discovery mechanism for the world.

This is an important analysis, for which the CFTC’s new Market Intelligence Branch deserves much credit.  Like many research efforts, this one leads to more questions, so further study is planned.  For one thing, important concerns remain about satisfactory liquidity conditions and adequacy of market making outside of actively traded markets, asset classes and centers of liquidity curves.

I hope this information is helpful.  It could become an asset to your work. DMO staff plans to publish this research in the near future so keep an eye out for it.

Let me shift to another source of information.  The Economist magazine has called female economic empowerment the most profound social change of our time. (December 30, 2009).   I am sure many of you have heard of the book, The Confidence Code, by Katty Kay of the BBC and Claire Shipman of ABC News.  They argue that for all the progress, more needs to be done.  Women in the workplace need a “blueprint for confidence,” to get moving “in the right direction.” (p xix)  In their view, women should talk more, demand to be heard, take an equal role in business meetings. 

I am pleased that Women in Derivatives takes a backseat to no one, that your voices are strong, powerful, informed, and persuasive.  As we press forward into the future, we will need that credibility, confidence, and professionalism that already makes Women in Derivatives a model of networking and advancement.

If you will allow me, I would like to close with a tribute to a trailblazing business professional, who was highly influential in my own life – my mother, Ella Jane. 

Let me briefly tell you about her.  A few years after earning her undergraduate nursing degree, she returned few years later to Columbia University in the early 1960s with two young boys on her knee to earn her masters.  Two more sons later, she served as the administrator of a large skilled nursing facility in northern New Jersey.  She worked long and hard hours to succeed in a man’s world.  Still, she always seemed to have time for me and my brothers.  On Monday through Friday, she was up early in pumps and pearls and, yet, on Saturday, she taught her boys to punt a football and, even drop a water ski and slalom.

Thinking back now, mom never showed any pique in response to the certain subtle and unsubtle bias, the double standards and the patterns of conversation and behavior that she must have faced – bias and double standards that I have only come to appreciate as a father of a grown daughter.  As for my mother, she just seemed to overcome it with humor, grace and grit.

In fact, she has not stopped.  In her fifties, she earned her second masters degree from Columbia (in geriatric health); in her sixties, she ran a motor lodge in Vermont; in her seventies, she skied the Rockies; and, today, in her eighties, she just caught a 7am flight to San Francisco to visit her granddaughter.

And on it goes. It takes a strong woman to raise four strong sons. And it takes strong and open-minded men to raise strong and determined women. I know, because my brothers and I each have our own young and aspiring daughters.

I owe my mother so much more I can ever repay.

All I can do is pay it forward.  And, I try to do that each day.

Thank you, Women in Derivatives, for inviting me here today. It has been an honor.

I would be delighted to answer any questions.

Testimony of Chairman J. Christopher Giancarlo before the Senate Committee On Appropriations Subcommittee on Financial Services and General Government, Washington, D.C.

June 5, 2018

Introduction

Thank you, Chairman Lankford, Ranking Member Coons, and Members of the subcommittee.  I appreciate the opportunity to appear before you today, along with my fellow colleague from the Securities and Exchange Commission (SEC), Chairman Jay Clayton.

For more than a century, Americans have relied on U.S. derivatives markets to stabilize the cost of living.  These markets allow farmers and ranchers to hedge production costs and delivery prices so that consumers can always find plenty of food on grocery store shelves.  They are the reason why American consumers enjoy stable prices, not only in the supermarket, but in all manner of consumer finance from auto loans to household purchases.  Derivatives markets influence the price and availability of heating in American homes, the energy used in factories, the interest rates borrowers pay on home mortgages, and the returns workers earn on their retirement savings.

And not just consumers.  More than 90% of Fortune 500 companies use derivatives to manage commercial or market risk in their worldwide business operations.[1]  These markets allow the risks of variable production costs, such as the price of raw materials, energy, foreign currency, and interest rates, to be transferred from those who cannot afford them to those who can.

Even Americans not actively participating in commodity derivatives markets are affected by the prices generated by them.  Commodity derivatives markets provide a critical source of information about future harvest prices.  For example, a grain elevator uses the futures market as the basis for the price it offers local farmers at harvest.  In return, farmers look to exchange prices to determine for themselves whether they are getting fair value for their crop.  The U.S. Department of Agriculture (USDA) uses that same information to make price projections, determine volatility measures, and make payouts on crop insurance.[2]

In short, derivatives serve the needs of American society to help moderate price, supply and other commercial risks to free up capital for economic growth, job creation and prosperity.  While often derided in the tabloid press as “risky,” derivatives – when used properly – are tools for efficient risk transfer and mitigation.  It has been estimated that the use of commercial derivatives added 1.1% to the size of the U.S. economy between 2003 and 2012.[3]

American derivatives markets are the world’s largest, most developed, and most influential.  Many of the world’s most important agricultural, mineral, and energy commodities are priced in U.S. dollars in the U.S. derivatives markets.  Dollar pricing of the world’s commodities provides a tremendous advantage to American producers in global commerce, an advantage well recognized by competing economies abroad.

American derivatives markets are also the world’s best regulated.  The United States is the only major country in the Organization for Economic Co-operation and Development to have a regulatory agency specifically dedicated to derivatives market regulation: the Commodity Futures Trading Commission (CFTC).  The CFTC has overseen the U.S. exchange-traded derivatives markets for over 40 years.  The agency is recognized for its principles-based regulatory framework and econometrically-driven analysis.  The CFTC is recognized around the world for its depth of expertise and breadth of capability.

This combination of regulatory expertise and competency is one of the reasons why U.S. derivatives markets continue to serve the needs of participants around the globe to hedge price and supply risk safely and efficiently.  It is why well-regulated U.S. derivatives markets continue to serve a vital national interest – Dollar pricing of important global commodities.

In short, America’s well-regulated derivatives markets are a national advantage in global economic competition.  However, we must not take this advantage for granted.  In order for U.S. derivatives markets to remain the world’s best, U.S. markets must remain the world’s best regulated.  To be the best regulated, U.S. derivatives markets must have an adequately funded regulator.  The CFTC must have adequate resources to continue to serve its mission to foster open, transparent, competitive, and financially sound U.S. derivatives markets that remain the envy of the world.

Today, I look forward to discussing the CFTC’s resource requirements.

Budget Request

The FY 2019 budget submitted by the Commission reflects the true needs of a policy setting and civil law enforcement agency that has the duty to ensure the derivatives markets operate effectively and the public is protected from harm.  As the workload of the CFTC has increased dramatically – exponentially – and globally – over the last four years, we have been flat-lined in our budget – at $250 million in three of those years – and actually experienced a budget reduction of $1 million this year.  Even with the cuts to our budget, it is still incumbent upon us to evolve into a 21st century regulator because the demands on our agency from the markets don’t stop as a result of budget cuts.  In fact, those demands constantly increase.

In order for the CFTC to fulfill its duty to oversee these vital derivatives markets in FY 2019, the Commission is requesting $281.5 million and 716 full-time equivalents (FTE).  This is an increase of $32.5 million and 46 FTE over the resources provided in the FY2018 enacted budget[4] and is the same level of funding that the Commission requested in FY 2018.

The Commission’s budget request for FY 2019 reflects and builds on the efforts commenced in 2018.  The budget request of $281.5 million is the level of funding necessary to fulfill the CFTC’s statutory mission.

The CFTC budget request is bare-bones, no waste, fiscally conservative, and mindful of taxpayer dollars.  It is based on a rigorous analysis of each of the agency’s functions and expenditures.  As with FY 2018, we built the 2019 budget based upon the real needs of the Commission.  Each dollar of this budget serves a specific purpose in pursuit of the agency’s mission.

During the budgeting process, we identified ways that the agency could be more efficient.  Today, we are implementing changes necessary to realize those efficiencies.  Departments are being reorganized and streamlined to increase productivity and provide long-term cost savings.  We have also successfully negotiated the return of an entire floor of vacant office space in Kansas City back to our landlord.  It will result in significant savings over the remaining life of the Kansas City lease.  Going forward, we are committed to working with the General Services Administration in connection with all of the CFTC’s regional office leases upon their expiration.

In all matters of agency budgeting and expenditure, we seek to carry out the mission to foster open, transparent, competitive and financially sound markets, free from fraud and manipulation, in a way that best fosters broad-based economic growth and prosperity while respecting the American taxpayer through careful management of our agency resources.

There are areas where the modest increase in the agency’s budget that has been requested is necessary to fulfill the CFTC’s statutory mission.

21^st Century Financial Markets

Today, we meet at a tipping point.  The future is devouring the past, forging a new agenda, and threatening to move ahead of regulators, financial institutions, and government.  That is why we need 21^st century regulation for a 21^st century world.

Technology is leading us into a world that is much different than the world we knew five or ten years ago, much less when the Commission was created in 1975.   Much of our world today – from information to journalism to music to manufacturing to transportation to commerce to agriculture, even legal services – is undergoing a digital transformation.  It therefore should be no surprise then that our financial markets are going through the same digital revolution.

Technology is impacting trading, markets, and the entire financial landscape with far-ranging implications for capital formation and risk transfer.  These technologies include machine learning and artificial intelligence, algorithm-based trading, data analytics, “smart” contracts valuing themselves and calculating payments in real-time and distributed ledger technologies, which over time may come to challenge traditional market infrastructure.

It is no surprise that these technologies are having an equally transformative impact on U.S. derivatives markets.  One thing is certain: ignoring these changes in the market would be profoundly imprudent.  They will not go away.  Rather, the rate of change will accelerate.^[5]  Nor is ignorance a responsible regulatory strategy.  We cannot respond in a reactive way -- chasing to catch up with technology.  We must be proactive with a regulatory and statutory framework that is ahead of the curve, gives clarity and coherence to this often complex technology, and anticipates its evolution.  The same technology can give us advantages in market regulation.

Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence.  To do so, we must have the resources and tools to keep pace with rapid evolution of the markets we oversee.  Our budget request provides those resources and tools.

Among other things, our requested budget will also allow us to address market-enhancing innovation and financial technology (fintech).  LabCFTC is the focal point of the CFTC’s efforts to engage with fintech innovation for the benefit of the American public.  It helps us keep pace with changes in our markets, and proactively identify emerging regulatory opportunities, challenges and risks.  We have situated LabCFTC within the CFTC’s Office of the General Counsel.  This allows LabCFTC to leverage the expertise of the CFTC’s legal team to manage the interface between technological innovation, regulatory modernization, and existing rules and regulations.

LabCFTC has hosted innovators across the nation, ranging from startups to established financial institutions to leading technology companies.  These outreach efforts are designed to make the CFTC more accessible to fintech innovators, and to serve as a platform for informing the Commission’s understanding of emerging technologies.  The information gathered in these meetings also provides important insights to CFTC staff on market innovations that may influence policy development.

In fact, through its engagement with—and study of—innovative technologies, LabCFTC was recently able to recommend new virtual currency surveillance tools to our Enforcement division.  Our Enforcement team has been able to avail itself of this new technology and is now able to enhance certain surveillance and enforcement activities.  This important development helps underscore the value of LabCFTC, and its effort to ensure that we are prepared to be a 21st century digital regulator.

In addition to LabCFTC’s domestic activities, the Commission continues to proactively work with international regulators on fintech applications to coordinate approaches and to share best practices.  In February of this year the CFTC and the UK’s Financial Conduct Authority (FCA) entered into an arrangement to collaborate and support innovative firms through each other’s fintech initiatives – LabCFTC and FCA Innovate.  This is the first fintech innovation arrangement for the CFTC with a non-U.S. counterpart.  We believe that by collaborating with the best-in-class FCA fintech team, the CFTC can contribute to the growing awareness of the critical role of regulators in 21st century digital markets.

Cyber Security

Cyber security is critically important to protecting infrastructure and financial markets around the world.  In fact, it may well be the most important single issue facing our markets today in terms of market integrity and financial stability.

As market leaders and regulators, we must take every step possible to thwart cyber-attacks that have become a continuous threat to U.S. financial markets.  Responding to this threat must take priority requiring more of our resources in FY 2019.  Our understanding of the cyber threat must develop in pace with the constant evolution of the threat itself.  As we learn, we must engage in discussions with the DCOs about their cyber defenses and threat resiliency and recovery.  It is through the oversight and examination of systems safeguards that the Commission helps to ensure that DCOs are prioritizing cyber security activities.  With this budget request, the CFTC will be able to better undertake its duties to oversee cyber defense capabilities in the markets we regulate.

The same vulnerabilities hold true in the case of futures commission merchants where customer accounts hold records and information that requires protection.  We as an agency will work hard to ensure that regulated entities live up to their responsibility to ensure their IT systems are adequately protected from attacks and customers are protected.

As an agency, the Commission is faced with growing pressure to protect terabytes of data and maintain compliance with the Federal Information Security Modernization Act and Office of Management and Budget mandates.  Protecting our information comes with a price.  Some of the requested funding will enable us to enhance our internal cyber security including implementing additional cyber attack sensors and defenses to further protect the market data we collect.

Oversight Of Virtual Currencies

In FY 2018, certain exchanges self-certified several new contracts for futures products for virtual currencies.  These innovations impact the regulatory landscape and with this budget request, the Commission will invest more in new technologies and tools that support important surveillance and enforcement efforts.

Under the CEA, Commission regulations, and related guidance, exchanges have the responsibility to ensure that their Bitcoin futures products and their cash-settlement process are not readily susceptible to manipulation, and DCOs have the responsibility of risk management to ensure that the products are sufficiently margined.  The CFTC has the authority to ensure compliance with both.  In addition, the CFTC has legal authority over virtual currency derivatives in support of anti-fraud and manipulation including enforcement authority in the underlying markets.

Recently, CFTC staff issued an advisory[6] giving registered exchanges and clearinghouses guidance for listing virtual currency derivative products.  The guidance will help ensure that market participants follow appropriate governance processes with respect to the launch of these products.  It clarifies CFTC staff’s priorities and expectations in its review of new virtual currency derivatives to be listed on a designated contract market or swap execution facility, or to be cleared by a DCO.  The advisory should help exchanges and clearinghouses effectively and efficiently discharge their statutory and self-regulatory responsibilities, while keeping pace with the unique challenges of emerging virtual currency derivatives.

The CFTC has been in close communication with the SEC with respect to policy and jurisdictional considerations, and in connection with our recent enforcement cases. We have also been working with the U.S. Treasury and the Financial Stability Oversight Council.  In addition, we have been in communication with our foreign counterparts through bilateral discussions and through international bodies like the International Organization of Securities Commissions.

Economic Modeling and Econometric Capabilities

The budget request, if met, would boost the CFTC’s ability to monitor systemic risk in the derivatives markets by increasing both its analytical expertise and its capacity to process and study the voluminous data provided by market participants since the passage of the Dodd-Frank Act.  These investments will allow for the expansion of sophisticated quantitative and econometric analyses that are necessary for risk modeling, stress tests, and other stability-related evaluations, especially with respect to central counterparty clearinghouses.  These analyses will, in addition, enhance the quality of CFTC policy development, rulemaking and cost-benefit considerations.

Agency Reform and The Kiss Project

Since becoming Chairman, I have made efforts to normalize operations and practices, and found opportunities to reinvest and maximize current resources.  That means a return to greater care and precision in rule drafting; more thorough econometric analysis; and a reduced docket of new rules and regulations to be absorbed by market participants.

The KISS initiative launched last March included a review of rules and processes, and the invitation for public comment to collect ideas on how the CFTC can be a more effective regulator.  The effort has produced a tiered list of significant actions that will lessen regulatory burdens.^[7]  Recently, the agency unanimously approved an amendment replacing the complex and confusing lettering for defined terms with a simple alphabetical list.^[8]  The replacement will remove unnecessary complexity from our rules and should help make regulatory compliance less burdensome.

Internally, we have embraced the Administration’s Reform Plan concept and have implemented in-depth organizational reviews to ensure that the agency is staffed to provide the most effective services to the American taxpayer.  This ongoing effort has already borne results.  We are now leveraging knowledge gained from enforcement actions and surveillance efforts to enable the provision of more efficient and timely consumer education materials to the public.  The Primer on Virtual Currency, Bitcoin webpage, and podcasts are just a few of the initiatives resulting from these efforts.

Swaps Reform

We now have more than four years of U.S. experience with the current CFTC regulatory framework for swaps and have learned from its varied strengths and shortcomings.  Four years provides a significant sample size to evaluate the effects of these reforms and their implementation.  Based on a careful analysis of that data and experience, we are in position to address flaws, recalibrate imprecision and optimize measures in the CFTC’s initial implementation of swaps market reform.

At the end of April, I released a White Paper on swaps reform called “Swaps Regulation Version 2.0.”  The White Paper was co-authored with Bruce Tuckman, the CFTC’s Chief Economist.  This White Paper analyzes the range of academic research, market activity, and regulatory experience with the CFTC’s current implementation of swaps reform.  It explores and considers a range of improvements to the current reform implementation that is pro-reform, aligned to legislative intent, and better balances systemic risk mitigation with healthy swaps market activity in support of broad-based economic growth.

Increased Examinations Of Clearinghouses

The Commission expects the number of derivatives clearing organizations (DCOs) to continue to increase in FY 2019, with many expanding their business to other products and other jurisdictions around the world.  As the number of DCOs increase, the complexity of the oversight program will increase.  It is imperative that the Commission ‎strengthen its examination capability to enable it to keep pace with the growth in the amount of swaps cleared by DCOs pursuant to global regulatory reform implementation.  As the size and scope of DCOs have increased, so too has the complexity of DCO’s risk management programs and liquidity risk management procedures.  In addition, increased funding will enable the Commission to enhance its financial analysis tools used to aggregate data and evaluate risk across all DCOs.

Enforcement

The day after the White House announced its intention to nominate me as CFTC Chairman, I spoke to hundreds of industry executives at the annual Futures Industry Association Conference.  I issued a warning to those who may seek to cheat or manipulate America’s derivatives markets.  I said, “[t]here will be no pause, let up or reduction in our duty to enforce the law and punish wrongdoing in our derivatives markets.  The American people are counting on us.” ^[9]  Through robust enforcement of our laws and regulation, we will continue to send a clear signal to the marketplace about our seriousness in punishing bad behavior and compensating victims.

In the past several months the CFTC has filed a series of civil enforcement actions against perpetrators of fraud and market abuse involving virtual currency.  These actions and others to follow confirm that the CFTC, working closely with the SEC and other fellow financial enforcement agencies, as well as with criminal enforcement agencies, will aggressively prosecute those who engage in fraud and manipulation of U.S. markets for virtual currency.

In the fiscal year that ended September 30, 2017, the CFTC brought numerous significant actions to root out manipulation and spoofing and to protect retail investors from fraud.  The CFTC also pursued significant and complex litigation, including cases charging manipulation, spoofing, and unlawful use of customer funds.

As of this morning, the Commission has filed 13 manipulative conduct cases in 2018 - the most manipulation cases the CFTC has ever filed in a single year, which was last year (12 cases).

But it is not just about the numbers; it is about making our markets safer and removing bad actors from the marketplace.  We believe that to adequately deter future misconduct, we must prosecute not just the companies responsible, but also the individuals involved in the wrongdoing.  We also believe that, to maximize deterrence, we must work with our criminal law enforcement partners to ensure that wrongdoers face not just civil liability, but also the prospect of criminal prosecution and time in jail.

In January 2018, the CFTC filed manipulation and spoofing cases against six individuals in coordination with the Department of Justice (DOJ) and the Federal Bureau of Investigation, which brought criminal charges against the same individuals.  This constitutes the largest coordinated prosecution with the criminal authorities in the history of the CFTC.  These prosecutions were equally significant for DOJ: in a press statement, the Assistant Attorney General characterized it as “the largest futures market criminal enforcement action in Department history.”[10]

I also pledged last year that the agency would look to benefit from cooperation with civil and criminal capabilities of other federal and state regulators and enforcement agencies.  We have been making good on that pledge.  Two weeks ago, I signed an important agreement, marking a milestone in the area of U.S. federal and state financial fraud detection and prosecution. That was a memorandum of understanding (MOU) between the CFTC and individual state securities commissions will focus our collective resources to better uphold the law.[11]

This MOU establishes protocols and procedures, for the access, use, and confidentiality of information and treatment of non-public information in the course of law enforcement.  It creates a framework for cooperation that will result in:

• Leveraging state and federal resources to support enforcement actions;
• Enhancing the impact of enforcement efforts and their deterrent effect;
• Encouraging the development of consistent and clear governmental responses to violations of the Commodity Exchange Act;
• Preventing the duplication of efforts by multiple authorities; and
• Facilitating vital exchanges of information and communications between the Commission and State Securities Administrators.

Complementing its enforcement efforts, the CFTC has also strengthened its Whistleblower Program, and provided whistleblowers additional incentives to report wrongdoing to the CFTC.  In May 2017, to further protect whistleblowers, the CFTC added protections prohibiting employers from retaliating against whistleblowers and from taking steps that would impede would-be whistleblowers from communicating with the CFTC about possible misconduct.  In the near future, the CFTC also anticipates issuing its largest ever whistleblower awards.  These incentives are working.  In FY 2017, the Commission received a record number of whistleblower reports — nearly twice as many as in any other year, and FY 2018 is on track to receive nearly twice as many as in FY 2017.

The Commission takes its enforcement efforts very seriously and prides itself on being a premier Federal civil enforcement agency dedicated to deterring and preventing manipulation and other disruptions of market integrity.

Full funding of our budget request will allow us to continue to carry out our mission in the area of enforcement.

Rule Harmonization

Soon after Chairman Clayton was sworn in as SEC Chairman, we began discussing ways to ensure that our respective agencies are working together in areas where our regulatory interests are complimentary or overlapping.  Now, almost eight years after the Dodd-Frank Act officially required the CFTC and SEC to “consult and coordinate … for the purposes of assuring regulatory consistency,”[12] I am pleased to say that both agencies are undertaking an active and cooperative review of our Dodd-Frank regulations.  With the helpful assistance of Commissioner Quintenz, CFTC staff has been actively engaging with our SEC counterparts – and jointly with outside stakeholders – to identify areas ripe for further alignment.  Our agencies are also working to finalize an updated information-sharing agreement that will help us further our collaborative efforts in the swaps and fintech age.  I believe that Congress and the American people expect regulators to communicate and coordinate closely on issues where our regulatory interests are complementary or overlapping.  I am optimistic this review process will lead to regulatory changes that will enhance our oversight efforts while reducing unnecessary complexities and lessening costs for both regulators and our shared market participants.

Foreign Competition

As you may know, in the first quarter of this year, the Shanghai International Energy Exchange launched a yuan-denominated crude oil contract allowing non-Chinese market participants to trade for the first time in Chinese commodity markets. Early in the second quarter, China opened a yuan-denominated iron ore contract to international traders.  There is also talk of China allowing international market participants to trade Chinese futures contracts in fuel oil, copper and even soybeans.

China is the world’s largest consumer of oil and fuel and a major global purchaser of iron ore for its world leading steel production.  The opening up of China’s domestic futures markets to international participation is part of a long term strategy by the Chinese government to expand China’s influence over the pricing of key industrial commodities.

The development of Chinese commodity futures markets as viable regional price benchmarks for key industrial commodities has competitive implications for the United States.  We cannot be complacent about the historical primacy of our derivatives markets.  Our best response for U.S. commodity market participants and, indeed, for global markets, is to ensure that derivatives markets in the United States are unrivaled in their openness, orderliness, and liquidity. This requires, of course, that the regulation of U.S. markets continue to be of the highest quality.

To achieve this regulatory objective, U.S. derivatives markets must have an adequately funded regulator.  The CFTC must have suitable resources to continue to serve its mission to foster open, transparent, competitive, and financially sound U.S. derivatives markets that remain the envy of the world.  Full funding of the CFTC’s budget request will allow it to fulfill its mission to serve this vital national interest.

Conclusion

Members of the Subcommittee, we meet one day after the anniversary of the “miracle at Dunkirk,” the rescue of the British and French forces trapped and then improbably evacuated in 1940.  That may be the single most important event of the Second World War, enabling Europe to hold on until America entered the war.

Like many of you, I was struck by the recent movie about Winston Churchill, “Darkest Hour.”  Faced with the threat of catastrophe, Churchill told the nation, “We shall not fail or falter; we shall not weaken or tire… Give us the tools, and we will finish the job.”  When those tools came (and they did come), they were American tools that got the job done.

We need the tools to do our job of protecting the markets that Americans rely on each day.  With the proper balance of sound policy, regulatory oversight, and hard work, America’s deep, liquid, and sensibly regulated derivatives markets will allow us to meet the challenges of the future and ensure a healthy U.S. economy where our citizens can flourish.

Thank you.

CFTC Commissioner Brian D. Quintenz Announces TAC Subcommittees

June 4, 2018

Commodity Futures Trading Commission (CFTC) Commissioner Brian Quintenz issued the following statement regarding the establishment of subcommittees for the Technology Advisory Committee:

“I am pleased to announce that the Commission has approved the establishment of the Technology Advisory Committee’s four subcommittees this morning. I have been anxious to form these subcommittees and look forward to letting their experts develop thoughtful, robust analysis on automated and modern trading markets, cybersecurity, distributed ledger technology and market infrastructure, and virtual currencies. I would like to thank Dan Gorfine and Jorge Herrada of LabCFTC for their work supporting the TAC and the development of these subcommittees. I would also like to acknowledge the work of Dan Davis and Michelle Ghim of the Office of General Counsel for their efforts bringing this seriatim forward for the Commission’s approval.”

Remarks of Commissioner Rostin Behnam at the BFI Summit
“Fostering Open, Transparent, Competitive, And Financially Sound Markets” United Nations Plaza
New York, NY

June 4, 2018

Introduction

Good evening.  The United Nations has played a special role in my life.  I grew up close by, about 20 miles away in northern New Jersey.  More importantly, my Aunt is the founder and president of the International Health Awareness Network (IHAN), which works in consultative status with the Department of Public Information of the United Nations.  Consequently, from the first days of that ambitious project back in 1987, she was often in these buildings advocating her vision, and seeking support for the organization, which aspires to “educate, empower and provide health care to socioeconomically underserved women and children.”  My family would come to see her here.  And occasionally, I had the great fortune of participating at IHAN events, listening to the speeches, and hearing about the organization’s vision to fulfill its mission.  Those moments are themselves transformational, and foundational in setting my agenda for facilitating change in the future.

Additionally, in 2008, my sister’s wedding reception was held in the Delegates Dining Room of the United Nations.  A spectacular night for my family, and another reason why this building and institution is so special to me.

So, it is an honor to come here today for this summit.  And, I want to acknowledge the partnership between blockchain and the United Nations Development Programme, the UN Refugee Agency, and the World Economic Forum.  This partnership, announced in March, is a creative coalition to look at the applications of Blockchain from natural resource conservation to the protection of democratic systems.  And, I agree with Fernandez de Cordova, who spoke earlier today, when he said the future is now and we must engage in a “multi-stakeholder approach.”  Yes, we must.

The work of this summit could not be more vital.  We are literally discussing a new world.  Just as the founders of the United Nations spoke with optimism in 1948, so we may be hopeful about the future.  Anything is possible.  With your wisdom and guidance, we can transform this world into something wonderful.  But in every transformation, there is the possibility that progress won’t march forward in the straight line we as optimists tend to envision.  If we are not thoughtful, if we do not remain ever diligent to the movements within the transformation, we may unleash corruption, criminality, and division on a greater scale.  Blockchain could become a source for repression and totalitarianism.  The work before us is daunting and difficult.  But, the rewards could be amazing and game changing.  Our cooperation could heal the divisions that torment our world as we confront tragedy throughout our torn planet.

In the summer of 1960, then Secretary General Dag Hammarskjöld, often called the greatest statesman of the twentieth century, released a UN paper on economic development.  He wrote that economic development was the common ground that united all nations, creating what he called an “economic interdependence of the world community.”  This interdependence was a partial result of the “accelerating rate of advancement in science and technology.”

This was before the cell phone, at the dawn of the computer age.  The Secretary General was a visionary before his time, almost three generations ahead of his contemporaries, with the imagination to glimpse the future.  He didn’t see developments like virtual currencies or blockchain technology.  But he saw past air travel, refrigerators, and television.  Now, we stand on the edge of that future, fifty-eight years later, with shadowy, incomplete fragments of the developments ahead.  Tonight, we meet to confront the vast and powerful pull of technology as it accelerates us into our unwritten journey.  Technology is creating a world where new possibilities emerge, possibilities that seem to traditionalists like science fiction.  But fiction is rapidly becoming fact.  Blockchain technology and other aspects of a new virtual world are remaking our economic, social, and political relations.  The new virtual world offers tantalizing new possibilities and potentially powerful dangers.

CFTC

As a commissioner, I work on the frontlines of these developments at the Commodity Futures Trading Commission (CFTC).  Our independent Federal agency, founded in 1975, and formerly a part of the United States Department of Agriculture, regulates derivatives, which include futures, options, and swaps.  More simply, derivatives are financial products whose price is derived from the value of an underlying commodity, which can be anything from a bushel of wheat to a barrel of oil to even weather events.  Derivatives are widely used by the most sophisticated companies, manufacturers, and banks.  But, more importantly, and getting back to our market’s earliest roots, our world’s farmers and ranchers critically rely on the derivatives markets to discover prices for their harvest and manage price risk, which can make or break an entire growing season.

Although largely unknown, the CFTC’s markets serve a critical purpose that touches every American, impacting their gasoline, home energy and food prices, and even their retirement plans and savings.  But, much like the topic of discussion today, the power and promise of the derivatives markets, can be easily overshadowed by the risk of fraud and manipulation.  The derivatives markets played a key role in the financial crisis.  I mentioned that the CFTC regulates swaps.  Prior to 2010, swaps, a financial tool, most commonly used to manage risk, were unregulated, operating completely in the shadows, outside the purview of regulators around the globe.

Regarding blockchain and financial technology more generally, we have been out front on this issue, and outspoken, for the last couple of years.  We have been providing oversight in our markets, especially to make blockchain and other technologies more transparent and to ensure that the markets are free from fraud and manipulation.  It isn’t easy.  Some people call this new technology “the Wild West.”  I guess my agency is the equivalent of Wyatt Earp in Tombstone.  We have engaged in notable enforcement actions, both in the United States, working with the Securities and Exchange Commission (SEC), the Department of Homeland Security, the Department of Justice and the Department of Treasury, among others.  And we are providing public information to educate our citizens, thereby deterring fraud, misinformation, misrepresentation, manipulation, or other criminality.

More about all of this in a few minutes.

The debate on virtual assets is just beginning.  None of us know where it will end.  But it has forced us to rethink.  We have learned that virtual assets respect no borders.  Regulation is often behind the curve, unable to keep up with daily developments.  At least the developments we know about.  As a result, some countries have outlawed virtual currencies.  Others have new, strict laws to control them.  Many countries simply don’t know what to do.  Their policy is bewilderment.  Or avoidance.  And, some countries think virtual currencies are only a problem for developed countries like Switzerland, or Germany, or Singapore, or the United States.

But virtual currencies may – will – become part of the economic practices of any country, anywhere.  Let me repeat that:  these currencies are not going away and they will proliferate to every economy and every part of the planet.  Some places, small economies, may become dependent on virtual assets for survival.  And, these currencies will be outside traditional monetary intermediaries, like government, banks, investors, ministries, or international organizations.

We are witnessing a technological revolution.  Perhaps we are witnessing a modern miracle.

Corruption

That may be good.  Or bad.  One of the often discussed problems in developing countries is corruption.  I know it is a perennial problem, undermining the work of the United States and virtually all international organizations.  It may be the single greatest impediment to social justice, equality, hunger, peaceful resolution of conflict, and a host of other problems.  My agency deals with corruption in our markets on a daily basis—as soon as a new product becomes available to the retail public, fraudsters come up with new ways to take advantage of those just seeking to invest their hard-earned dollars.

Now, with the advent of virtual assets, technology may provide a solution.  And, the single greatest weapon against corruption may be the cell phone.  There are 6.8 billion cell phones in the world, almost one for every person on the planet.  Technology could simply bypass corruption.  Here is our chance to put money directly into the hands of those who need it, without bribery, rake-offs, graft, and shakedowns.  Virtual currencies could transform the economic and social landscape.  It could mean a massive, and equitable, shift of wealth.  Technology could be transformational, without a military take-over, civil war, or political or religious creed.

However, economic elites know all this.  They will not be idle.  This is what I mean by a powerful danger.  If the kleptocracy controls technology and the means of distribution, then they simply accumulate more wealth at the expense of their citizens, draining wealth in cryptocurrencies rather than dollars or euros.  Virtual assets may be a stranglehold.  In other words, technology can be a weapon against the work of the United Nations and others trying to alleviate poverty or violence.  Virtual assets become a means of deeper control of wealth and a means of exploitation.

Of course, social media gives us an example of a virtual battlefield.  Censorship accompanies social media in many countries.  Or simply consider the size of Google or Facebook, larger than many countries, and wealthier.  And more influential, with massive data collection.  Then increase all that exponentially.  That is the sort of situation that must give us pause.  But, events are happening so fast that there isn’t time for reflection or wonder.  We are simply trying to understand that which at the time of Dag Hammarskjöld was impossible to imagine.

Poverty

I know some have argued that virtual assets could be a way to spread the wealth and end poverty.  They have argued blockchain could be the means for ending poverty…that such a possibility should drive the virtual debate.

The so-called “unbanked” could now be on the virtual grid.  And, those without computers, some four billion people, could gain an important connection through cell phones.  And, the discussion has extended to micro-lending, micro-transactions, greater transparency, and greater financial inclusion.  I used a word a moment ago that should echo throughout this hall:  transformative.  The old limits and parameters may crumble, with the dawn of new technology.

Agriculture

Agriculture is another place where blockchain can change the world.  Prior to joining the CFTC in September, 2017, I served as Senior Counsel to U.S. Senator Debbie Stabenow, Ranking Member of the Senate Committee on Agriculture, Nutrition, & Forestry.  The Committee’s work is expansive, touching nearly all elements of the agriculture value chain, from the farm to the grocery store.  For decades, the Committee has been committed to finding solutions to global hunger and food safety.  Through blockchain technology, finding solutions to these challenges may become significantly more attainable.  Food could arrive on grocery shelves faster, using an intricate system of measures meant to trace location from the farm to the table, with the additional bonus of providing abundantly more information about the product source.  Recently, the Los Angeles Times Business Section (May 27) argued that the e coli outbreak in romaine lettuce in the United States that led to illness and fatalities could have been prevented by applying advances in blockchain; both in terms of eliminating the tainted lettuce and preventing another outbreak.  The argument went further:  that we could eliminate food waste and even improve distribution through networks domestically and internationally.  These are possibilities we cannot ignore.  I believe that farmers and consumers will greatly benefit from improvements in agriculture through Blockchain.

Health Care

There are also implications for health care.  Blockchain could become an important way to improve health status and to reduce costs.  Health care is often fragmented and disparate.  Patients lose their records and control of the privacy of those records.  There is important information about their health over time, such as DNA information, test results recorded in medical records, and other vital information.  Blockchain could allow patients to create smart records that gather and harmonize information, leading to better continuity of care and even new models of care.  Blockchain could also address medical fraud and waste.  And, as a result, help contain the rising cost of health care.

I mentioned my Aunt earlier.  She would be astounded at the potential.  Perhaps it is my opportunity to return the favor she has been providing for so many years.

United Nations

And, what is the role of the United Nations?  Should the institution become an international regulator?  Should it become the equivalent of a virtual bank?  What enforcement mechanisms should be used?  These are questions that have followed the work of the United Nations since its inception, but become magnified in a virtual world on a virtual plane.  Are any institutions READY to step into a virtual future.

CFTC and LabCFTC

Well, at the CFTC, we have tried.  There are several steps underway.  For example, I urge the members of this summit to follow an international dialogue under the name “LabCFTC”.  LabCFTC is the focal point of the CFTC’s efforts to facilitate market-enhancing innovation and fair competition for the benefit of the American public. It also helps to ensure that we can keep pace with changes in our markets, and proactively identify emerging regulatory opportunities, challenges, and risks. We have situated LabCFTC within the CFTC’s Office of the General Counsel. It allows LabCFTC to leverage the expertise of the CFTC’s legal team to manage the interface between technological innovation, regulatory modernization, and existing rules and regulations.

LabCFTC has hosted innovators across the nation, ranging from startups to established financial institutions to leading technology companies. These outreach efforts are designed to make the CFTC more accessible and to serve as a platform for informing the Commission’s understanding of emerging technologies. The information gathered in these meetings also provides important insights to CFTC staff on market innovations that may influence policy development. In fact, through its engagement with—and study of—innovative technologies, LabCFTC was recently able to recommend new virtual currency surveillance tools to our Enforcement division. Our Enforcement team has been able to avail itself of this new technology, and is now able to enhance certain surveillance and enforcement activities. This important development helps underscore the value of LabCFTC, and its effort to ensure that we are prepared to be a 21st century digital regulator.

In addition to LabCFTC’s efforts undertaken domestically, the Commission has been proactive in working with international regulators on financial technology (or fintech) applications to harmonize approaches and to share best practices. A few months ago, the CFTC and the UK’s Financial Conduct Authority (FCA) signed an arrangement that commits the regulators to collaborating and supporting innovative firms through each other’s fintech initiatives – LabCFTC and FCA Innovate. This is the first fintech innovation arrangement for the CFTC with a non-US counterpart. We believe that by collaborating with the best-in-class FCA fintech team, the CFTC can contribute to the growing awareness of the critical role of regulators in 21st century digital markets.

Regulation of Bitcoin

Another example is regulation.  In 2018, two exchanges self-certified several new contracts for futures products for virtual currencies.  They will not be the only ones.  There are those looking for capital formation and risk transfer.  They include machine learning and artificial intelligence, algorithm-based trading, data analytics, “smart” contracts valuing themselves and calculating payments in real-time, and distributed ledger technologies, which over time may come to challenge traditional market infrastructure. They are transforming the world around us, and it is no surprise that these technologies are having an equally transformative impact on US capital and derivatives markets.

Supporters of virtual currencies see a technological solution to the age-old “double spend” problem – that has always driven the need for a trusted, central authority to ensure that an entity is capable of, and does, engage in a valid transaction.  Traditionally, there has been a need for a trusted intermediary – for example a bank or other financial institution – to serve as a gatekeeper for transactions and many economic activities. Virtual currencies seek to replace the need for a central authority or intermediary with a decentralized, rules-based and open consensus mechanism.  Others, however, argue that this is all hype or technological alchemy and that the current interest in virtual currencies is overblown and resembles wishful thinking, a fever, even a mania.  They have declared the 2017 heightened valuation of Bitcoin to be a bubble similar to the famous “Tulip Bubble” of the seventeenth century.  They say that virtual currencies perform no socially useful function and, worse, can be used to evade laws or support illicit activity. Indeed, history has demonstrated to us time-and-again that bad actors will try to invoke the concept of innovation in order to perpetrate age-old fraudulent schemes on the public.

In 2015, the CFTC determined that virtual currencies, such as Bitcoin, met the definition of “commodity” under the Commodity Exchange Act or “CEA,” our governing statute.  Nevertheless, the CFTC does NOT have regulatory jurisdiction under the CEA over markets or platforms conducting cash or “spot” transactions in virtual currencies or other commodities or over participants on such platforms.  More specifically, the CFTC does not have authority to conduct regulatory oversight over spot virtual currency platforms or other cash commodities, including imposing registration requirements, surveillance and monitoring, transaction reporting, compliance with personnel conduct standards, customer education, capital adequacy, trading system safeguards, cyber security examinations or other requirements.  In fact, current law does not provide any U.S. Federal regulator with such regulatory oversight authority over spot virtual currency platforms operating in the United States or abroad. However, the CFTC does have enforcement jurisdiction to investigate fraud and manipulation in underlying virtual currency spot markets and, as appropriate, conduct civil enforcement actions where fraud or manipulation is found.

In contrast to the spot markets, the CFTC does have both regulatory and enforcement jurisdiction under the CEA over derivatives on virtual currencies traded in the United States.  This means that for derivatives on virtual currencies traded in U.S. markets, the CFTC conducts comprehensive regulatory oversight, including imposing registration requirements and compliance with a full range of requirements for trade practice and market surveillance, reporting and monitoring and standards for conduct, capital requirements and platform and system safeguards.

The CFTC has been straightforward in asserting its area of statutory jurisdiction concerning virtual currencies derivatives.  As early as 2014, former CFTC Chairman Timothy Massad discussed virtual currencies and potential CFTC oversight under the CEA.   And as noted above, in 2015, the CFTC found virtual currencies to be a commodity.  In that year, the agency took enforcement action to prohibit wash trading and prearranged trades on a virtual currency derivatives platform.  In 2016, the CFTC took action against a Bitcoin futures exchange operating in the U.S. that failed to register with the agency.  Last year, the CFTC issued proposed guidance on what is a derivative market and what is a spot market in the virtual currency context.  The agency also issued warnings about valuations and volatility in spot virtual currency markets and launched an unprecedented consumer education effort.

Under the CEA and Commission regulations and related guidance, exchanges have the responsibility to ensure that their Bitcoin futures products and their cash-settlement process are not readily susceptible to manipulation and the entity has sufficient capital to protect itself.  The CFTC has the authority to ensure compliance. In addition, the CFTC has legal authority over virtual currency derivatives in support of anti-fraud and manipulation including enforcement authority in the underlying markets.

Enforcement is another aspect of our response.  In the past several weeks the CFTC has filed a series of civil enforcement actions against perpetrators of fraud and market abuse involving virtual currency. These actions and others to follow confirm that the CFTC, working closely with the SEC and other fellow financial enforcement agencies, will aggressively prosecute those who engage in fraud and manipulation of US markets for virtual currency.

We need to think about how to make this work internationally!

I wanted to add a comment about education.  This is an important aspect of our work.  We have a duty to educate the public, making them aware of the volatility, the temptations, the potential for fraud, and consequences of trading in virtual assets.  This education should be undertaken on a large, perhaps unprecedented scale.

Conclusion

I started by mentioning the late Secretary General, Dag Hammarskjöld.  At a dinner in 1957, he said that “the work for peace is basically a work for the most elementary of human rights:  the right of everyone to security and freedom from fear.”

Blockchain is more than technology:  it is an advance that reaches out into every aspect of life.  We could use Blockchain to address the most basic, the most primal problems on our planet:  corruption, income distribution, poverty, food, and health care.  And, the fear billions of people experience everyday as they try to survive.

As a young child, I would come to this building in search of solutions to the problems of the world.  Now, today, we may have found one of those solutions – bigger, bolder, more comprehensive, and more effective than anything imagined before.  And, as a regulator, I am pleased to be part of your discussion.

We have discussed the most basic problems through the prism of a rising technology.  I join with you in our search – our struggle – to find solutions that find the human face of this technology.

Thank you.

Statement of Dissent of Commissioner Rostin Behnam before the Open Commission Meeting on June 4, 2018

De Minimis Exception to the Swap Dealer Definition

June 4, 2018

Introduction

I respectfully dissent from the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) notice of proposed rulemaking addressing the de minimis exception to the swap dealer definition (the “Proposal”).  I have a number of concerns with specific criteria of the various exceptions proposed and contemplated in the Proposal.  However, my gravest concern is that the Commission is moving far beyond the task before it— setting the aggregate gross notional amount threshold for the de minimis exception— to redefine swap dealing activity absent meaningful collaboration with the Securities and Exchange Commission (“SEC”), as required by the Dodd-Frank Act,[1] and to the detriment of market participants eager for regulatory certainty.  Equally concerning, the Proposal’s various ancillary components not only detract from its core purpose, but may signify the Commission’s willingness to exploit the de minimis exception to undermine the swap dealer definition and circumvent Congressional intent.

As discussed in the preamble to the Proposal, the regulatory history sets forth a clear path towards— and a deadline to complete— today’s determination to propose an amendment that would set the aggregate gross notional amount (“AGNA”) threshold for the de minimis exception at $8 billion in swap dealing activity entered into by a person over the preceding 12 months prior to the termination of the phase-in period on December 31, 2019.[2]  Since the Commission’s first Order Establishing a New De Minimis Threshold Phase-in Termination Date in 2016,[3] market participants have endured undue and prolonged uncertainty because the Commission has not acted decisively on the de minimis threshold.  When the Commission punted again in October 2017, I urged the Commission to take further action now or let the current rule take effect.[4]

It is now June 2018.  Given the twelve month lookback for calculating the AGNA, absent Commission action, market participants will need to start tracking their swap dealing activity on January 1, 2019 to determine whether their dealing activity would require registration when the phase-in period ends on December 31, 2019.  The Commission has less than six months to either finalize the Proposal or kick it down the road again by issuing a third order establishing yet another phase-in termination date sometime in the future.

Six months is an ambitious time frame for even a simple rule.  While CFTC-specific data is not available, at least one study concluded that the average amount of time for federal regulatory agencies to finalize rules is generally between 14 and 20 months.[5]  The Part 49 amendments that we also voted on today, for example, took over 16 months between the Commission proposal and a final rule, and that rule only addressed a single industry comment letter that was nine pages long.  However, given our extensive history with the AGNA for the de minimis exception, I believe that had the Commission observed the course it was on, and focused on the task at hand, it could have crafted the Proposal to address the issues most critical to market participants (the de minimis threshold, the exclusion for insured depository institution swaps in connection with originating loans to customers or “IDI Swap Dealing Exclusion,” and the hedging swap exclusion), consistent with requirements of the Commodity Exchange Act (the “CEA” or “Act”) and Congressional intent and within the six month window we are now in.

Instead, the Commission, having waited too long to address these critical issues jointly with the SEC, veered off course, and relies too heavily on an alternative means to reach its destination: the de minimis exception.[6]  Though this alternative path is within the Commission’s authority, I believe that in utilizing the de minimis exception to address longstanding concerns with the IDI and physical hedging exclusions, the Commission stopped respecting the difference between what is permissible and what is proper.  As a consequence, the Proposal morphed into a loophole for the Commission to explore the extent to which it may unilaterally alter the swap dealer definition.  Such overreach not only may call into question the integrity of this agency, but it could prolong the uncertainty currently plaguing market participants as they (and the general public) sort through the matters ancillary to the de minimis AGNA threshold, which alone raise over 50 individual questions in requests for comments.

Commission Authority under Regulation 1.3, Swap Dealer, (4)(v)

Under paragraph 4(v) of the swap dealer definition, the Commission may change the requirements of the de minimis exception by rule or regulation, and may do so independent of the SEC (“De Minimis Exception Authority”).[7]  While this authority permits the Commission to revisit the de minimis threshold, in the SD Definition Adopting Release, the Commission stated that in determining whether to revisit the threshold, it intended to focus on whether the de minimis exception (1) results in a swap dealer definition that encompasses too many entities whose activities are not significant enough to warrant full Title VII regulation; (2) results in an undue amount of dealing activity to fall outside of the regulatory framework; or (3) leads to inappropriate reductions in counterparty protections.[8]

While the Commission’s authority with respect to the de minimis exception is broad, the Commission cannot lose sight of its purpose, as set forth in the CEA[9], and the underlying Congressional intent.[10]  As well, this authority is not intended to provide a de facto means to alter the swap dealer definition, by for example, excepting from consideration swaps that are exchange-traded and/or cleared when calculating the AGNA for purposes of the de minimis threshold, or excepting from such consideration entire categories of swaps.

Exclusions vs. Exceptions

IDI De Minimis Provision

Turning to the Proposal, and the critical issues, I am concerned with the Commission’s use of its De Minimis Exception Authority to address longstanding concerns that the IDI Swap Dealing Exclusion, which was jointly adopted with the SEC as paragraph (5) to the swap dealer definition (“SD Definition), is unnecessarily restrictive, lacks clarity, and limits the ability of IDIs to serve customers in connection with their lending activity—which is inconsistent with the CEA.[11]  As explained in the Proposal, “rather than proposing to revise the scope of activity that constitutes swap dealing,” which would require a joint rulemaking with the SEC, the Commission is proposing to amend paragraph (4) of the SD Definition, which addresses only the de minimis exception.  Accordingly, the Proposal is to include both the IDI Swap Dealing Exclusion and a separate, slightly broader IDI De Minimis Provision in the SD Definition.

Conducting a side-by-side comparison of the current text of paragraph (5) and proposed paragraph (4)(i)(C) of the SD Definition, it is difficult to understand what hurdles may have prevented the CFTC and SEC from engaging in a joint rulemaking to address these relatively modest differences, which are generally well supported by the record.  It’s especially noteworthy given the close working relationship between the two agencies and ongoing harmonization efforts.[12]  The end result is that, if finalized, instead of simply disregarding or “excluding” all swap activity that meets a single set of criteria, IDIs will have to develop an additional analysis to address swap activity that cannot be excluded from their determinations for purposes of the SD Definition, but might nevertheless be excepted from their AGNAs when calculating dealing activity for the purpose of the de minimis threshold.  It is difficult to understand why the Commission would want to create additional regulatory burdens in the context of this Proposal, and the document provides no explanation other than that the Commission has discretion under its De Minimis Exception Authority.

Hedging De Minimis Provision

I am similarly concerned that the Commission’s use of its De Minimis Exception Authority to provide greater regulatory certainty with respect to swaps entered to hedge physical or financial exposures (the “Hedging De Minimis Provision”) will— out of an abundance of caution— be utilized by market participants as a limitation on the universe of hedging swaps they consider to be outside their swap dealing activity.  In this instance, instead of amending the Physical Hedging Exclusion,[13] which is in the nature of a safe harbor and provides that, subject to certain requirements, swaps entered into by a person for hedging physical positions are not considered for purposes of determining whether that person is a swap dealer, the Commission is proposing an exception with respect to a person’s AGNA for the de minimis threshold for swaps entered to hedge financial or physical positions.  While this exception will, if finalized, exist in the Commission regulations alongside the Physical Hedging Exclusion, it is not truly a safe-harbor and could end up limiting the discretion inherent in the SD Definition.

An exception, as proposed for the Hedging De Minimis Provision, ostensibly creates a precise rule, leaving compliance staff or even regulatory enforcement agencies with limited discretion when evaluating difficult scenarios.  As the Commission has stated, “In general, entering into a swap for the purpose of hedging is inconsistent with swap dealing.”[14]  The Commission also has emphasized that all relevant facts and circumstances about a swap ought to be considered when determining whether a person is a swap dealer.[15]  It seems that an exception limited solely to determining whether a person has exceeded the AGNA de minimis threshold may prove unduly limiting and inconsistent with the SD Definition.[16]

Premature Delegation

The Proposal purports to create Commission authority to determine the methodology to be used to calculate the notional amount for any group, category, type, or class of swaps for purposes of the AGNA de minimis threshold calculation and immediately delegates that authority to the Director of the Division of Swap Dealer and Intermediary Oversight (“DSIO”).  The Commission has, to my knowledge, not released public guidance on this issue since 2012.[17]  The Proposal cites two letters, one responding to the Chairman’s recent Project KISS initiative, and the other responding to the request for comments on the Swap Dealer De Minimis Exception Preliminary Report,[18] in support of the inherent need to empower the Director of DSIO to independently— and without limitation— provide clarity about the appropriate notional amount calculation methodologies for purposes of the de minimis threshold in a timely manner.  As well, both the public guidance and requests cited in the Proposal address or respond to the need for clarity regarding commodity swaps, further calling into question the breadth of the proposed delegation.

For most swaps, calculation of notional amount is a matter of standard industry practice.  There is not any controversy as to how notional amount is calculated.  Giving the Director of DSIO broad authority to determine how this calculation is made for all categories of swaps is a remedy that is not commensurate to the limited issue of how to determine the notional value of commodity swaps.  It also provides an opportunity for mischief.  This provision could subsume the entire de minimis threshold by giving the Director of DSIO broad authority to determine what swaps count toward the threshold – and perhaps more importantly, what swaps do not.

I’m concerned that the Commission is proposing to both establish its authority and immediately delegate such authority without any internal discussion, without any public deliberation, and within this Proposal.  The Commission has simply not articulated a sound rationale for moving abruptly forward on this rule proposal without fulsome consideration of its legal authority, potential risks, and possible alternatives.  Indeed, upon review of the Proposal, it came to my attention that the Commission’s proposed delineation of authority to determine the methodology for calculating notion amounts in proposed paragraph (D)(vii)(A) of the SD Definition may contradict its De Minimis Exception Authority.

The De Minimis Exception Authority provides that the Commission may by rule or regulation change the requirements of the de minimis exception.  Given that the methodology for calculating notional amounts for purposes of the AGNA for the de minimis threshold would be a “requirement” of that exception, one could assume that the authority to alter it resides with the Commission, and that the Commission would need to engage in rulemaking to establish a methodology.   Of course, the De Minimis Exception Authority includes a “may” versus a “shall,” and therefore the Commission has discretion to engage in rulemaking, but I believe the “may” applies more generally to suggest that the Commission may change the requirements of the de minimis exception, and if it chooses to do so, rulemaking is the vehicle.  My point is that the Commission’s precise authority and attendant parameters are unclear, and it would therefore be more prudent to first, define the parameters of the notional amount calculation issue, conduct additional research and explore our options to address it, and then propose a more cogent solution in a separate rulemaking so as not to further detract from the more salient and critical issues before the Commission as part of this Proposal.

Ancillary Matters

Having become comfortable with using its De Minimis Exception Authority, the Commission appears to have determined to use this Proposal to seek comment on “other potential considerations for the de minimis threshold.”  These considerations run the gamut from re-considering the merits of using AGNA by itself by seeking comment on adding alternative criteria in the form of a dealing counterparty or dealing transaction count threshold to excepting from consideration when calculating the AGNA for purposes of the de minimis threshold (1) swaps that are exchange-traded and/or cleared and (2) swaps that are categorized as non-deliverable forward transactions.  These “considerations” result in the combined inclusion of more than 50 individual requests for comment, detracting from any reasonable market participant’s (or the public’s) ability to provide comments on the more critical issues raised by this Proposal.  Moreover, each “potential consideration” raises individual concerns as to whether the Commission is attempting to undermine the swap dealer definition and circumvent Congressional intent.

Dealing Counterparty Count and Dealing Transaction Count Thresholds

The Commission is seeking comment on whether an entity should be able to qualify for the de minimis exception if its level of swap dealing activity is below any one of three criteria: (1) an AGNA threshold; (2) a proposed dealing counterparty count threshold; or (3) a proposed dealing transaction count threshold.  In support of its request for comment, already limited Commission staff resources were utilized to construct an alternative to the proposal aimed at suggesting that, despite its analysis in the Proposal in support of setting the AGNA threshold for the de minimis exception at $8 billion, a $20 billion AGNA “backstop” threshold was appropriate.  This analysis and attendant request for comment suddenly appeared in the Proposal after hours on May 31, 2018, providing my office less than 17 hours to respond before DSIO intended to submit a final voting copy to the Commission’s Office of the Secretariat.

Not only is the inclusion of this request for comment in this Proposal overwhelmingly misplaced, but its inclusion at such a late hour in the process undermines the inherent fairness of the rulemaking process.  Foremost, the Commission already rejected the use of counterparty and transaction count thresholds as determinative criteria for the de minimis threshold.[19]  Moreover, the Commission is required to take the Swap Dealer De Minimis Exception Final Staff Report (“Final Staff Report”) and comments into account when weighing further action on the de minimis exception at the end of the phase-in.[20]  According to the Final Staff Report, “many of the commenters stated that the Commission should not use the alternative factors of Counterparty and/or Transaction Count as part of a de minimis exception because they are misleading or arbitrary indicators of dealing activity.”[21]  The footnote cites 11 comment letters representing at least 12 entities including major industry and trade organizations.[22]  In comparison, only two commenters supported the use of the alternative factors.[23]

While I believe it may be appropriate for the Commission to explore other factors or criteria in defining the scope of the de minimis threshold, inclusion of even a request for comments on dealing counterparty count and dealing transaction count thresholds should be out of scope—even as a request for comment— for this Proposal, which speaks directly to the end of the phase-in, and is proceeding on a constrained time schedule such that even providing Commissioners the courtesy of ample opportunity to evaluate the merits of including this line of questioning was dispensed with.

Exchange-Traded and/or Cleared Swaps

Similar to the dealing counterparty and transaction count threshold, the Commission has already rejected arguments that swaps executed on an exchange should not be considered in determining if a person is a swap dealer.[24]  However, beyond that, the breadth of the request for comment suggests that a discussion regarding how the utilization of exchange trading and/or clearing in the swap market may address the underlying policy goals of swap dealer registration is significant and raises issues that should be considered in the context of a joint discussion with the SEC and prudential regulators regarding the SD Definition.  Even further, it may require Congressional action to amend the statutory swap dealer definition, which does not distinguish exchange traded and/or cleared swaps from over-the-counter swaps, and in fact, may suggest that there is no distinction given the focus on market making, which significantly occurs on exchanges.[25]  In responding to this request for comment, I hope that commenters address whether an exception for exchange-traded and/or cleared swaps—even if limited to consideration when calculating the AGNA for purposes of the de minimis threshold—would be consistent with the statutory definition of “swap dealer” in CEA section 1a(49) and Congressional intent.

Non-Deliverable Forwards

Similarly, I believe that the issue of whether the Commission should consider an exception for NDFs from consideration when calculating the AGNA of swap dealing activity for purposes of the de minimis threshold is inappropriate.  Such an exception ignores that the SD Definition is activities-based.[26]  The real issue that should be addressed is whether NDFs are swaps and, if so, whether they ought to be excluded from consideration in the SD Definition.[27]  Instead of attempting to begin a conversation through use of its De Minimis Exception Authority, the Commission should use its relationships with the Secretary of the Treasury, the SEC and prudential regulators and engage in a meaningful dialog regarding the appropriate categorization and consideration of NDFs outside of this Proposal.

Conclusion

I am disappointed with today’s Proposal and would have liked to been able to support the portions that were well supported by the data and analysis and could lead to a clear and legally sound resolution of the de minimis threshold, providing much needed regulatory certainty for a critical cohort of market participants.  I am hopeful that market participants have sufficient time to evaluate and respond to the most critical aspects of this Proposal and do not get overwhelmed or overly optimistic with regard to lines of questioning that take us further afield from Congressional intent and therefore are less likely to come to fruition.  I understand that messaging creates expectations; sometimes, we must focus on what’s right and not what seems easy.

Opening Statement of Commissioner Rostin Behnam before the Open Commission Meeting on June 4, 2018

June 4, 2018

Thank you Mr. Chairman.  I would like to start with a very big thank you to all of the Commission staff who worked to make today’s meeting possible – both those who will be presenting at the table today and those who worked tirelessly behind the scenes.

I am very pleased to be here this morning for the Commission’s first open meeting since 2016.  I am optimistic that this will be the first of many public meetings, as the Commission begins to move to propose and implement important rules such as the ones we are discussing today.  I came to the Commission in September of 2017 with great excitement and anticipation about the chance to roll up my sleeves and participate in this endeavor.  Last October, when we moved the phase in date for the de minimis threshold back another year, I said that we should have dealt with this issue then.  I am glad that the day is finally here to discuss the de minimis threshold in a public forum, and begin the process of engaging with the public and market participants to hopefully formulate a final rule on this important issue, and finally provide long needed regulatory certainty.

Also on the schedule for today is a final rule amending Part 49 of the Commission’s regulations regarding swap data access.  The Fixing American’s Surface Transportation Act of 2015 (“FAST Act”) modified CEA section 21 to remove a requirement that entities requesting access to SDR swap data execute a confidentiality and indemnification agreement.  In January 2017, the Commission issued proposed amendments to Part 49 related to the FAST Act removing references to the previously required indemnification agreement.  I am very happy that we are discussing a final rule today, nearly two and a half years after passage of the FAST Act and nearly a year and a half after our own proposal.  I am hopeful that this is an indicator that we will be addressing some long outstanding proposals and issues in the coming months.  I also want to compare this to our timeline for the de minimis threshold and point out that the indemnification rule has taken us more than 16 months to go from proposal to final rule, on a rule where we address one industry comment that was 9 pages in length.  Making strong, effective final rules takes a lot of time and hard work, as staff can attest.  I am not saying that we have moved too slowly on indemnification – I think we have moved at an appropriate pace, and I know that staff was working hard throughout the past 16 months.  My point is that this is how long good rulemaking often takes.  We have our work cut out for us on de minimis if we want to get a final rule done by October.

The longest item on our agenda for today is proposed amendments to the Volcker Rule – the rules under Section 13 of the Bank Holding Company Act (Part 75 of our regulations) related to prohibitions and restrictions on proprietary trading.  Under the statute, authority for developing the regulations is divided among the Fed, the FDIC, the OCC, the SEC, and the CFTC.  Last week, the Fed, the FDIC, and the OCC all voted to issue the same proposed amendments that we vote on today.  Following the 2008 financial crisis, Congress adopted Title VII of Dodd-Frank, which improved transparency through mandatory clearing and exchange trading of standardized swaps, and comprehensive recordkeeping and reporting requirements.  The Volcker Rule is one of the core reforms in response to the financial crisis.  My concern is that our action may encourage a return to the risky activities that led to the financial crisis, or perhaps further consolidate power among a few financial institutions.

I would like to close my opening remarks the same way I started them – by thanking Commission staff for their hard work – both on these rules and in their daily work despite limited resources.  I look forward to the presentations.

Indemnification Statement

I want to thank staff for their presentation, answers, and hard work on this rule.  As I said in my opening marks, reforms established in 2009 by the G20 leaders and later included in Title VII of Dodd-Frank have shed much needed light on the previously unregulated swaps market.  The CFTC, and our foreign counterparts, are in a much better position to consider and evaluate data, and ultimately identify market risk as a result of today’s final rule.  Additionally, today’s final rule will further enhance our position by making it easier for regulators to share data.  Greater access to data and cooperation among regulators, domestically and internationally, furthers the goal of transparency established by the G20 leaders in 2009 and codified in Dodd-Frank, and is a critical tool in preventing future financial disruptions, big and small.

I do, however, want to briefly highlight the additional responsibilities the Division of Market Oversight will inherit because of this rule.  The CFTC has dedicated staff who will never say that a job cannot be done, regardless of budget constraints.  However, this rule creates additional responsibilities for an agency that is operating on a shoestring budget.  I am hopeful that Congress will provide us with the budget we need fulfill our mission, and be the best regulator we can possibly be.

Volcker Rule Statement of Commissioner Rostin Behnam

I want to thank staff for their presentation, answers, and hard work on this rule.  As I said in my opening remarks, my biggest concern is that our action today will encourage a return to the risky activities that led to the financial crisis, and perhaps further consolidate trading activity into a few institutions.  However, as I have often stated, I am a strong believer that regulators, myself included, must constantly evaluate the efficacy of the rules we implement and enforce.  The Volcker Rule is no exception.  Regulators must strive to ensure that our rules protect customers, and the public more broadly; but, also allow market participants to operate and conduct their business in an efficient manner with clear rules of the road.

On page 15 of the 494 page document before us today, it says “[w]ith this proposal, and based on experience gained over the past few years, the Agencies seek to simplify and tailor the implementing regulations, where possible, in order to increase efficiency, reduce excess demands on available compliance capacities at banking entities, and allow banking entities to more efficiently provide services to clients, consistent with the requirements of the statute.”  Simply put, we are trying to make things clearer and easier for banking entities.  My concern is that we are missing the mark here.  In fact, we are actually further complicating the Volcker rule and calling it simplification.

Where once there was one set of rules for all banking entities, there will now be three categories of banking entities with different rules for each.  Banking entities with Significant trading assets and liabilities, banking entities with Limited trading assets and liabilities, banking entities in between with Moderate trading assets and liabilities.  We will have different ways of calculating assets and liabilities depending on which tier we are establishing, treating foreign banking organizations differently depending on whether we are considering them for a limited or significant designation.  And then at the end, when we have determined what bucket each bank is in, there is still a safety valve that will allow regulators to move the entity into a different bucket under Regulation 75.20.  Let me be perfectly clear – I support the idea that regulators will be able to determine that a banking entity with limited or moderate trading assets and liabilities may be treated as a banking entity with significant trading assets and liabilities where the size or complexity of their activities or risk of evasion does not warrant a presumption of compliance.  If we are going to have this unnecessarily complex tapestry, the backstop in Regulation 75.20 is imperative.  But I question whether we should have this complex tapestry at all.

There are other potential issues here that give me pause.  The expansion of what constitutes risk-mitigating hedging activities potentially provides a method to evade oversight.  Specifically here at the CFTC, we need to think very carefully about how the definition of hedging activity in the proposal compares to our definitions of hedging activity in the context of other critical rules like the de minimis threshold or position limits.  I look forward to hearing from the commenters on this important issue.

I also find that I am a little befuddled as to exactly what a presumption of compliance is, at least in the context of this rule.  It seems clear to me from the rule that the idea is not that a bank with limited trading assets and liabilities is actually any less likely to violate the Volcker rule by engaging in prohibited proprietary trading.  Instead, the idea behind today’s rule is to reduce the impact of the Volcker rule’s restrictions on banks below the $10 billion threshold.  That may be a laudable goal and the right result, but it also is one that ultimately may require a statutory change.  What we should not be doing is presuming compliance for entities that we don’t think are any more likely to be compliant than other entities that do not receive the presumption.

Finally, I would like to talk a little bit about process.  Back in 2014, when we issued the original final Volcker Rule Regulations, Commissioner Scott O’Malia wrote a dissent lamenting the process that led to the vote.  He pointed out that he only received a near final draft for review six days before the vote, that no term sheet or other information was provided to aid in digesting a massive document, that he had only received a partial draft three weeks before the vote, etc.  He said “I am disappointed that today’s vote on the final rule is besmirched by the purposeful circumvention of measured review by each Commissioner’s office.”  Four years later, the story is largely the same.  My office received a near final draft for review five days before the agencies began voting on these rules.  Like Commissioner O’Malia, I first received a partial draft three weeks before voting began.  Worse, I was blocked from the process – I was told in no uncertain terms that the document we were seeing had been negotiated by the agencies (including the CFTC, without my input), and that essentially what I was seeing was a fait accompli.

Some may hear me say this and think “good.”  That’s what’s good for the goose is good for the gander.  That the transgressions of past Chairmen should be felt by new Commissioners.  My message is that we are better than this.  I came to this Agency ready to roll up my sleeves and work – together with the Chairman and Commissioner Quintenz – to make our rules better.  I remain optimistic that we can find ways to do so.  The more viewpoints are represented in our deliberations, the better the outcomes will be for our markets.

Unfortunately, the concerns I have outlined, and my exclusion from the process, leave me unable to support this proposal.  I look forward to hearing from the commenters on my concerns and I’m sure many others, and I hope that we can have a fulsome dialogue that leads to agreement on a sensible final rule.

De Minimis Exception Statement (Amendments to Swap Dealer Registration De Minimis Exception)

As I mentioned during my opening statement, I arrived at the Commission ready to participate in discussions and ultimately a rulemaking to amend the de minimis exception and set a threshold where the facts and data takes us—be it $8 billion, $3 billion, or some other amount of swap dealing activity.  All along, I have been open to hearing from Commission staff regarding their analysis of the swap data repository data and have been very impressed and intrigued by our own Office of Chief Economist’s proposal to use entity-netted notional amounts (ENNs) as an alternative risk-focused measurement of the swaps market.^[1]  I have prepared by meeting with stakeholders, reviewing the paper trail created since the finalization of the swap dealer and other entity definitions in 2012, and reflecting on the dominance this issue played during my six years as counsel on the Senate Agriculture, Nutrition, and Forestry Committee.  In other words, I prepared for and anticipated the contents of today’s Proposal to be both consistent with this record and mindful of the tremendous time constraint that the Commission and the stakeholders are working under.  Additionally, I assumed that the Commission would fully observe all requirements to collaborate and consult with our fellow regulators and avoid the temptation to use this particular rulemaking vehicle as an opportunity to simultaneously address matters ancillary to the critical, time sensitive issues before the Commission following two deferrals of the phase-in termination date.

When first briefed on the contours of this Proposal, I committed to reviewing the supporting data and analysis in support of setting the aggregate gross notional amount threshold for the de minimis exception at $8 billion in swap dealing activity entered into by a person over the preceding 12 months.  Early on, I agreed with Commission staff that, with sufficient data as support, it was appropriate to expand and clarify activities excluded from the de minimis threshold for the insured depository institution (“IDI”) exclusion and financial hedging.  These issues represented longstanding, well-reasoned concerns.  At the time, I also agreed that we should codify existing no-action relief related to the de minimis exception for swaps resulting from portfolio compression exercises and swaps between non-US counterparties and international financial institutions based in the United States.^[2]  Regarding Commission staff proposals to clarify calculation methodologies for “notional amount” for certain swaps and give the Director of the Division of Swap Dealer and Intermediary Oversight unfettered authority to issue notional amount calculation guidance, I immediately indicated my concerns, having neither been confronted by market participants with such issues, nor informed of the Commission’s practice in providing such guidance or any rationale for delegating Commission authority to a division director.  I immediately thought about how this specific delegation would have been viewed under old agency leadership; or conversely, how will it be viewed in the future under new leadership.  I was also skeptical of initial Commission staff recommendations to include seeking comments on ancillary issues pitched as changes to the de minimis threshold.

Though not entirely unreceptive to considering other changes to the de minimis threshold, given the looming deadline for automatic termination of the phase-in period, I do not believe the Commission or the industry should be expending precious time and resources on ancillary matters that could be considered in a separate rulemaking(s), or discussed more exhaustively within different CFTC venues.  When adopting the regulatory mechanism for altering the requirements of the de minimis exception by rule or regulation, the Commission stated that, in determining whether to exercise its authority, it intended to focus on whether the de minimis exception results in a swap dealer definition that encompasses too many entities whose activities are not significant enough to warrant full regulation; or, alternatively, whether it leads to “an undue amount of dealing activity to fall outside of the ambit of the Title VII regulatory framework, or leads to inappropriate reductions in counterparty protections (including protections for special entities).”^[3]  It is not clear that the Commission is observing this well-reasoned and forward thinking strategy to preserve the purpose of the de minimis exception and limit the temptation to engage in regulatory overreach.  As it is, I have serious concerns regarding the Commission’s apparent intent to use its authority to revise the de minimis threshold as a measure to alter the “swap dealer” and perhaps even the “swap” definitions in contravention of a statutory obligation to do so jointly with the Securities and Exchange Commission (“SEC”).

Although I remained open-minded to supporting today’s Proposal, I cannot.  The Proposal was rushed, and based upon review of the three “complete” drafts my office received between May 24^th and June 1^st, it seems Commission staff has been more focused on addressing the ancillary matters than on addressing concerns I consistently expressed throughout the last several weeks.  These concerns do not represent points of partisan policymaking nor do they seek to detract from the Chairman’s message.  Rather, my concerns focus on matters of both legal sufficiency and permissibility and on concerns that we will miss our deadline and be forced to issue yet another order extending the termination of the phase-in period to address the new and completely avoidable legal and policy issues created by today’s Proposal.  These concerns include: (1)  the Proposal’s breadth; (2) the Commission’s decision to address the IDI and hedging exclusions as exceptions from the de minimis threshold calculation instead of engaging with the SEC to address them as exclusions from dealing activity; (3) the creation and immediate delegation of authority to issue notional calculation guidance, absent any kind of Commission exploration or deliberation; and (4) the Proposal’s apparent reliance on the Commission’s authority to change the requirements of the de minimis threshold to seek comment on potential changes outside the scope of that authority.

I thank Commission staff for their hard work and presentation.  I will submit my written dissent for publication in the Federal Register