Opening Statement of Chairman J. Christopher Giancarlo before the Open Commission Meeting

June 4, 2018

Good morning.  This meeting will come to order.  This is a public meeting of the Commodity Futures Trading Commission (CFTC).

I am pleased to be joined today by my colleagues, Commissioners Brian Quintenz and Rostin Benham in our first public meeting together as a Commission.

These hearings require great preparation.  I would like to thank the CFTC staff for their hard work and input.

We are here today to consider one final rule amending the swap data access provisions and two proposed rules amending the Volcker Rule and Swaps Dealer de minimis calculations.

Indemnification Rule

I turn first to the final rule on amendments to the swap data access provisions of Part 49, also formerly known as the swap data repository (SDR) indemnification rule.

Eight years ago, Congress included in the Dodd-Frank Act a requirement that foreign and domestic regulators indemnify SDRs and the Commission for any expenses arising from litigation relating to the information provided by SDRs.  Foreign and domestic regulators were unable or unwilling to provide this indemnification hindering the ability to share swaps data.  The indemnification requirement also hindered the ability of foreign and domestic regulators to access SDR data to assess risks their regulated entities are assuming, and the impact of such risks on the broader markets.

I am pleased that Congress has since amended the Dodd-Frank Act to take out the indemnification requirement.  We therefore can change our regulations accordingly, which we propose to do today.

In addition to the removal of the indemnification requirement, the final rule adds a category of “other regulators” that the Commission may deem to be appropriate to receive access to SDR swap data.

The final rule sets out the process by which appropriateness is determined for those entities that are not already specifically enumerated.  This process is a change to current Commission regulations, as it would apply to any such entity, including domestic regulators not enumerated in Commission regulations and foreign regulators.

The statute also now requires a SDR to receive a written agreement from each requesting entity stating that the entity shall abide by the confidentiality requirements described in the CEA prior to sharing information with the requesting entity.  Commission regulations currently require the SDR and the requesting regulator to execute a confidentiality agreement, but do not provide a form or details of such an agreement.

The final rule modifies the current Commission regulations by providing a form of confidentiality arrangement, as Appendix B to part 49, and by requiring the confidentiality arrangement to be between the requesting regulator and the Commission.  The Commission expects that this will benefit SDRs in that most, if not all, confidentiality arrangements will be exactly the same, and the Commission will be in the place of entering into the confidentiality agreements with regulators.

We received comments from the affected CFTC-registered SDRs on the proposed rule that I believe that we have sufficiently addressed.  The final regulations provide long-awaited clarity to the official sector regarding the CFTC’s requirements to determine access to, and safeguard the confidentiality of, transactional information reported to SDRs.

In my experience as a Commissioner and Chairman of the CFTC, I have found, as have other foreign and domestic regulators, that conducting oversight of global derivatives markets can be difficult as a result of the current fragmented financial regulatory structure.  In this regard, I expect that the final rule will enable authorities to enhance their oversight of derivatives markets across product and asset classes by marrying up the trading and position data they receive from regulated entities with the data sets obtained directly from SDRs.  In so doing, I believe we have made significant progress towards cross-border data sharing and enhancing transparency in the global swaps market.

Because today’s swaps markets are global in scope, utilizing the data and information available in only one jurisdiction does not provide a complete picture of cross border trading activity and systemic risk.  To that end, I expect that CFTC staff will seek to facilitate access to SDR data for authorities with which we have a history of regulatory assistance and that similarly seek to facilitate CFTC access to data maintained by trade repositories in their jurisdiction.  Such data sharing represents an opportunity for greater cooperation among market and prudential regulators, as well as among foreign and domestic regulators, providing more effective financial market oversight, expanding data driven policymaking, and improving early warning systems to reduce the probability or severity of a financial crisis.

These regulations will have a direct positive impact on the operational readiness of the official sector, providing authorities with critical information to make sound near-term and long-term policy and oversight decisions. 

I am particularly pleased that this rule represents a final step in eliminating a major legal impediment to sharing swaps market data with overseas regulators.  The Dodd-Frank Act’s original insistence on an indemnification requirement may have been well-intentioned to protect the safety of data held in SDRs, but Congress wisely determined that any such benefit is outweighed by the greater public interest of allowing international regulators to share and access information to carry out the regulatory and supervisory functions necessary to protect the global financial markets.

It is essential that policymakers in other jurisdictions make determinations similar to these before us today concerning current legal barriers to information sharing.  Even a law, like the new EU General Data Protection Regulation (GDPR), which has laudable objectives, must not be applied in ways that hinder the sharing and access of information between European and U.S. regulators for regulatory and supervisory purposes.  Such a result could have dangerous implications for our global markets.  I hope today’s action by the CFTC will encourage international regulators and policymakers to take affirmative steps to address other existing legal barriers to information sharing and access.

The Volcker Rule

I turn next to the proposal for amendments to the Volcker rule. 

Section 619 of the Dodd-Frank Act added a new section 13 to the Bank Holding Company Act of 1956 (BHC Act) that is commonly known as the Volcker Rule.  The new section generally prohibits “banking entities” from engaging in “proprietary trading” for the purpose of selling financial instruments to profit from short-term price movements.  Section 13 of the BHC Act also generally prohibits banking entities from acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or a private equity fund (“covered funds”). 

As we know, the Volcker rule is named for former Federal Reserve Chairman, Paul Volcker.  The basic premise of the Volcker Rule is to restrict use of insured bank depositors’ money for bank proprietary trading but permit it for market making, hedging and other traditional financial service activities. It is a sound premise, but one that relies on correctly identifying and separating these activities, a task that is far from simple.  No other major economy outside of the United States has adopted restrictions similar to the Volcker Rule.

Recognizing that the “devil is in the details,” Congress left the finer points of developing Volcker Rule regulations to five agencies: the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission (SEC), and the CFTC (together, the “Agencies”).  The Agencies issued the final rule in December 2013.

We now have four years of experience with the initial version of the Volcker Rule.  In that time, concern has grown that US regulators’ first pass at the rule was not ideal in several respects.  Specifically, the current rule causes confusion as to what is acceptable activity, presumes unacceptable activity in various cases and imposes highly intensive compliance burdens in all cases unfairly benefitting large Wall Street banks over smaller regional ones.

A year and a half ago, I had the opportunity to speak about the rule with Chairman Volcker.  Chairman Volcker said that he was proud of the rule that bears his name.  But he also said told me that regulators should have come up with something more straightforward than what is currently in place, especially for smaller banks.

The amendments to the Volcker Rule in the proposal before us today address that concern.  The proposal seeks to simplify and tailor the Volcker Rule to increase efficiency, right-size firms’ compliance obligations, and allow banking entities – especially smaller ones - to more efficiently provide services to clients.  It adopts a risk-based approach relying on a set of clearly articulated standards for both prohibited and permitted activities and investments.

The proposal addresses a number of targeted areas of widespread concern.  First, it tailors the application of the Volcker Rule to a firm’s risk profile and size and scope of trading activities.  In particular, it further streamlines compliance obligations for firms with smaller trading operations.  These changes reflect the experience of the Agencies that the costs and uncertainty faced by smaller and mid-size firms of complying with the 2013 final rule have been disproportionately high relative to the amount of their typical trading activity.

Second, the draft proposal seeks to streamline and clarify for all banking entities certain definitions and requirements related to the proprietary trading prohibition and limitations on covered fund activities and investments.  To this end, and where appropriate, the Agencies have sought to codify, or otherwise address, matters currently covered by staff guidance through responses to Frequently Asked Questions (FAQs).  Additionally, the Agencies are seeking in this proposal to reduce reporting, recordkeeping and compliance program complexity where appropriate.

This proposal will provide banking entities and their affiliates, including a number of swap dealers, FCMs and commodity pools subject to CFTC oversight, with greater clarity and certainty about what activities are permitted under the Volcker Rule.  For the CFTC, “banking entities” subject to the Volcker Rule include primarily swap dealers and FCMs that are:  insured depository institutions, certain foreign banking entities operating in the U.S. and affiliates of either of those two categories.  In addition, certain commodity pools that are owned or controlled by any such entity may also be banking entities or covered funds under the Volcker Rule.

Third, this proposal will address the implicit bias against market making in the current version of the Volcker Rule.  Last year, I testified to Congress that the 2013 Volcker Rule presumes that some activities are impermissible proprietary trading that really should be permissible market-making.  That presumption creates a bias against market activity and healthy trading liquidity – a first order concern for the CFTC as a market regulator.  Today’s proposal would remove the presumption, and that bias, by allowing banking entities the ability to more effectively and efficiently engage in routine market making. It will benefit CFTC registrants by allowing them to support trading markets more actively without having to prove that each trade was not on the wrong side of this presumption.

So why are these modest changes important?  Because, as monitored by the CFTC’s Market Intelligence Branch, current market conditions are becoming increasingly volatile as a result of a range of factors, including changes in US monetary policy, strong US economic growth and increased global political risk.  In higher volatility markets, such as we saw last week in European sovereign debt, durable trading liquidity and vigorous market making are essential to smooth out trading gaps in price and supply and avoid potential panic.[1] That is why these amendments to the Volcker Rule simplifying legitimate market making activity will enhance market orderliness and resiliency in times of market stress.

As important as are these improvements on their individual merits, equally important is that we and the other Agencies are today re-endorsing as a foundational element of US financial market regulation the Volcker Rule and its prohibition on bank proprietary trading with depositor funds. This fact must not go unrecognized in accounts of the important, but relatively modest amendments, before us today.

Today’s proposal is the product of a collaborative effort with the Federal Reserve, FDIC, OCC, and SEC.  I thank my fellow regulators for close cooperation, especially my fellow agency Chairman and friend, Martin Gruenberg, who will soon step down.  Marty worked with us to make sure today’s amendments do not disrupt the "core principles" of Volcker and that its prohibitions on proprietary trading remain "robust." 

I also thank CFTC staff for their fine work that resulted in today’s proposal. I look forward to reviewing comments from the public.

Swap Dealer de minimis

Finally, I want to turn to the proposal for the swap dealer de minimis definition.

Since becoming Chairman, I have committed to resolving this outstanding issue and giving market participants the regulatory certainty they need.  Still, as you know, last year I requested that the Commission postpone a decision on the de minimis threshold for a year.  That decision was understandably disappointing to some, including my fellow Commissioners, who said they were then ready to vote on it.

Yet, as I told Congress at the time, I did not just want to address the de minimis threshold; I wanted to get it right.

Today, I believe the staff has had adequate time to analyze the most current and comprehensive trading data and arrive at a recommendation for the best path forward in terms of managing risk to the financial system.  The staff has provided Commissioners with full access to the data they have used in their analysis.  They have also conducted additional and specific data analyses requested by Commissioners.

The data shows quite clearly that a drop in the de minimis definition from $8 billion to $3 billion would not have an appreciable impact on coverage of the marketplace.  In fact, any impact would be less than one percent - an amount that is truly de minimis. 

On the other hand, the drop in the threshold would pose unnecessary burdens for non-financial companies that engage in relatively small levels of swap dealing to manage business risk for themselves and their customers.  That would likely cause non-financial companies to curtail or terminate risk-hedging activities with their customers, limiting risk-management options for end-users and ultimately consolidating marketplace risk in only a few large, Wall Street swap dealers.

In my travels around the country over the past four years on the Commission, I have met numerous small swaps trading firms that make markets in local markets or in select asset classes.  These firms are often housed in small community banks, local energy utilities or commodity trading houses.  They all trade below the $8 Billion threshold.  Almost all of them say that if the de minimis threshold were to drop to $3 Billion, they would reduce their trading accordingly.  They just cannot afford to be registered as swap dealers.

Who are the winners if these small firms reduce their market making activities? Big Wall Street banks.  Who are the losers if these small firms reduce their market making activities?  Small regional lenders, energy hedgers and Ag producers, who become more dependent on Wall Street trading liquidity.  Who is the really big loser?  The US economy, which becomes more financially concentrated and less economically diverse.

That is why I think the proposed rule rightly balances the mandate to register swap dealers whose activity is large enough in size and scope to warrant oversight without detrimentally affecting community banks and agricultural co-ops that engage in limited swap dealing activity and do not pose systemic risk.  Leaving the threshold at the $8 billion level allows firms to avoid incurring new costs for overhauling their existing procedures for monitoring and maintaining compliance with the threshold.  It fosters increased certainty and efficiency in determining swap dealer registration by utilizing a simple objective test with a limited degree of complexity.  And it ensures that smaller market makers and the counterparties with which they trade can engage in limited swap dealing without the high costs of registration and compliance as intended by Congress when it established the de minimis dealing exception to begin with.

The changes proposed today will also not count swaps of Insured Depository Institutions (IDIs) made in connection with loans.  They would allow, for example, an insured depository institution swap dealer to write a swap with a customer 181 days after entering into a loan without counting it towards the $8 billion threshold.  These types of changes will allow small and regional banks to further serve customers’ needs without the added burden of unnecessary regulation and associated compliance costs. 

This proposal incorporates feedback and input from my two fellow Commissioners and their fine staffs.  We now look forward to feedback from the public and market participants.  We ask numerous questions about whether any additional exceptions or calculations should be included in the final rule.  Three years ago, I raised the question of whether there should be an exclusion from counting cleared swaps towards the registration threshold and that question is asked again.  Your response to questions regarding adding other potential components will help the Commission assess whether further adjustments to the de minimis exception may be appropriate in the final rule.

As discussed in the adopting release, staff continues to consult with the SEC and prudential regulators regarding the changes in the proposal in particular some of the questions regarding exclusions.   I remain committed to working with Chair Jay Clayton and the SEC in areas where harmonization is necessary and appropriate.

I also remain committed to finalizing this rule before the end of the year.  I recognize that market participants need certainty.  Today’s proposal is a major step forward in doing just that.  I applaud staff for this proposal and look forward to feedback.

Thank you.

Opening Statement of Commissioner Brian D. Quintenz, Open Meeting on Final Rule: Indemnification (Amendments to the Swap Data Access Provisions of Part 49 and Certain Other Matters), Proposed Rule: Volcker Rule (Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds), and Proposed Rule: De Minimis Exception (Amendments to Swap Dealer Registration De Minimis Exception)

June 4, 2018

Mr. Chairman, thank you for calling this meeting.  It is a great pleasure to participate today with you and my fellow Commissioner in my first open meeting, as well as the first under your Chairmanship.  The matters before us today are important and timely.

Proposed Rule: De Minimis Exception (Amendments to Swap Dealer Registration De Minimis Exception)

This rulemaking which governs swap dealer registration is fundamental to the Commission’s effective oversight of the swaps market. 

Swap dealers are subject to extensive and costly regulatory requirements: registration fees; minimum capital requirements; posting margin for uncleared swaps; IT costs for trade processing, reporting, confirmation, and reconciliation activities; costs to create and send clients daily valuation reports; costs for recordkeeping obligations; third party audit expenses; legal fees to develop and implement business conduct rules and many, many more. If that sounds like a big bill, it is. A prominent economic research firm estimated the present value of the cost for swap dealer registration compliance at $390 million per firm.[1]

Those significant requirements and costs are imposed to advance equally significant policy objectives, such as the reduction of systemic risk, increased counterparty protections, and enhanced market efficiency and integrity.  Therefore, the registration threshold, as the trigger mechanism for those costs and objectives, must be appropriately and specifically calibrated to ensure that the correct market group shoulders the burdens of swap dealer regulations because they are best situated to realize the corresponding policy goals of that registration.

I have stated previously, in great detail and with considerable evidence, the importance of appropriately calibrating the de minimis threshold so that entities posing no systemic risk and with a relatively small market footprint are not regulated under a regime that is more appropriate for the world’s largest, most complex financial institutions.[2]  If we fail to calibrate this threshold appropriately, firms at the margin will likely reduce their activity to avoid registration as opposed to serving their clients’ interests and accepting the burdens of registration. A public policy choice which drives away market participants and reduces market activity is undeniably flawed.

From my first confirmation hearing in 2016 to the present day,[3] including meetings with elected representatives, my second confirmation hearing,[4] interviews with the press,[5] discussions with market participants, and in public remarks at event forums, [6] I have been adamant that notional value is a poor measure of activity and a meaningless measure of risk, and therefore, by itself, is a deficient metric by which to impose large costs and achieve substantial policy objectives.[7]  Therefore, I have some reservations about this proposal’s continued reliance on a one-size-fits-all notional value test for swap dealer registration. 

I still, and will continue to, believe that the criteria for determining swap dealer registration should be more closely correlated to risk.  However, if any final rule is going to settle for an activity-based threshold, a notional value metric should at least be combined with additional measures (such as dealing counterparty count and dealing transaction count) to determine what constitutes a de minimis quantity of swap dealing activity.  Including additional measures should mitigate instances of “false positives” that could result from the use and deficiencies of any one activity-based metric.[8] 

While it would have been my preference that this concept appear in this proposal’s rule text as the operative standard, I am very grateful to the Chairman and the Division of Swap Dealer and Intermediary Oversight (DSIO) for including a robust discussion in the preamble on the merits of replacing the current notional value de minimis threshold with a three-prong test. Specifically, the preamble suggests an entity could qualify for the de minimis exception if its dealing activity is below any of the following three criteria: (i) a notional threshold, (ii) a proposed dealing counterparty count threshold, or (iii) a proposed dealing transaction count threshold.  In other words, an entity would have to surpass all three hurdles collectively in order to lose the de minimis exception’s safe harbor.

I have included several questions in the proposal that ask for feedback on this approach, particularly with respect to the dealing counterparty and transaction count thresholds which I believe would provide market participants with additional flexibility to serve their clients’ needs without triggering a very costly and burdensome registration process. I thank the staff of DSIO for including my questions in the proposal and welcome market participant’s feedback on this potential approach.

I also welcome comments on the Proposed Rule’s preamble discussion on accounting for exchange-traded or cleared swaps in an entity’s de minimis calculation.  Many of the policy goals of swap dealer regulation are accomplished when a swap is exchange-traded and cleared.  For example, systemic risk concerns are diminished with respect to cleared swaps: the swaps are standardized, the executing counterparties do not incur counterparty credit risk because they face the clearinghouse and not each other, and each side is required to post margin that helps guarantee performance and prevent unfunded losses from accumulating. Removing such swaps from the de minimis calculation would better align the registration threshold with risk and would also, I believe, encourage additional liquidity on SEFs.  I am hopeful that with the benefit of additional industry comment and further Commission analysis, the Commission will either adopt an exclusion for exchange-traded and cleared swaps or adjust their notional weighting in an entity’s de minimis calculation.

We must remember, the Commission is not establishing the de minimis exception in a vacuum. Subsequent to the adoption of the swap dealer definition, other regulatory requirements have gone into effect which also advance the goals of swap dealer registration, such as mandatory clearing, SEF trading, reporting swap data to repositories, and margin requirements for uncleared swaps. For example, regardless of whether an entity is registered as a swap dealer, its swap activity is transparent to the Commission because of the swap data and real-time reporting requirements that apply to all market participants.

When the Commission first established the $8 billion de minimis threshold in 2012, it did so without the benefit of swap data.[9]  Now almost six years later, staff has conducted a comprehensive analysis of the available swap data collected by Commission-registered SDRs and presented estimates about the impact that lower or higher notional amount thresholds would have on swap dealer registration.  Although much work remains to be done to further refine the data, particularly with respect to the non-financial commodity asset class, I commend staff for their hard work, progress, and thoughtful analysis.  I believe the data in the Proposed Rule clearly supports maintaining the de minimis threshold at $8 billion or potentially increasing it.  For example, at a $20 billion notional threshold, the estimated amount of notional swap activity that would no longer be covered by swap dealer regulation is approximately only 1/100^th of 1 percent of the $221 trillion market analyzed.  I am interested to hear from commenters about the policy and market implications of maintaining or raising the de minimis threshold.

Finally, I would like to commend the Chairman and DSIO for including many important improvements to the de minimis exception in this proposal which I fully support.  For instance, I support an appropriate Insured Depository Institution exemption that will allow for banks to serve their clients’ needs. By removing unnecessary timing restrictions and expanding the types of credit extensions that qualify for the exclusion, the proposal should improve the ability of IDIs to help their customers hedge loan-related risks as the statute intended.  I also support the proposed rule’s clarification that swaps that hedge financial risks may be excluded from an entity’s de minimis count.  Market participants should be able to use swaps to manage their financial and physical risks without concern that such activity may trigger swap dealer registration.

I will vote in favor of issuing this proposal to the public for feedback and look forward to hearing from market participants about how these proposed amendments may be further refined or calibrated to increase the efficacy of the de minimis threshold to meet the goals of swap dealer registration.

Proposed Rule: Volcker Rule (Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds)

I support today’s proposal to amend the Volcker Rule and efforts to acknowledge core elements of banking entities’ trading activities in a manner consistent with the statutory provisions that established the Volcker Rule.

I am pleased that the proposal would revise elements of the prohibition on proprietary trading to provide banking entities, including CFTC-registered swap dealers and futures commission merchants, with greater flexibility in their trading activities and to simplify their compliance with the rule.

Banks and financial intermediaries are in the business of taking risk. When a bank extends a mortgage to a home buyer, it is taking a proprietary risk.  When a bank provides working capital to a farmer, it is taking a proprietary risk.  When a bank provides a revolving credit facility to a small business, it is taking a proprietary risk. And, in the context of the CFTC’s jurisdiction, when a financial firm allows a client to hedge its exposures so that the client can focus on its core competency and better predict its operations, that financial institution is taking a proprietary risk.  All of these financial functions provide crucial support to our economy and go to the heart of the complexity of implementing the Volcker Rule – the distinction between taking a proprietary risk that serves clients and a proprietary trade that is generated purely by the financial institution.

This proposal intends to tailor the requirements of the Volcker Rule to focus on entities with relatively large trading operations, and to simplify regulatory requirements by clarifying prohibited and permissible activities.  I am particularly pleased that the proposal requests public input regarding key exceptions to the proprietary trading ban, concerning market-making, loan-related swaps, and risk-mitigating hedging.

I would like to highlight that today’s proposal serves as an example of effective cooperation among five regulators: the CFTC; the Securities and Exchange Commission; the Federal Reserve Board; the Office of the Comptroller of the Currency; and the Federal Deposit Insurance Corporation.  I firmly believe in inter-agency cooperation over areas of joint jurisdiction and applaud the Chairman for his hard work to develop productive and positive relationships with fellow regulators.

Finally, I would like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for their efforts on this matter.

Final Rule: Indemnification (Amendments to the Swap Data Access Provisions of Part 49 and Certain Other Matters)

I would like to thank the staff in our Division of Market Oversight for their work to amend Part 49 of the Commission’s Regulations to implement provisions of the Fixing America’s Surface Transportation Act of 2015 (Fast Act)[10].

The Fast Act amended provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)[11] that proved unworkable. Most significantly, the Fast Act repealed the Dodd-Frank Act’s requirement that to obtain data from swap data repositories (SDR) registered with the CFTC, domestic and foreign authorities must indemnify the CFTC and SDRs from any claims arising from a SDR’s production of information to those authorities. Foreign regulators unfamiliar with the U.S. tort law concept of “indemnification” that is inconsistent with their traditions and legal structures, have opted against requesting any information from SDRs. Domestic regulators have also opted against requesting information from SDRs because of the indemnification requirement. Removing the indemnification requirement will facilitate the sharing of SDR information with domestic and foreign authorities and better enable regulators in the United States and abroad to monitor risk across the global financial system. 

[1] See National Economic Research Associates, Cost-Benefit Analysis of the CFTC’s Proposed Swap Dealer Definition 1(Dec. 20, 2011) (“NERA Report”), http://www.nera.com/content/dam/nera/publications/archive2/PUB_SwapDealer_1211.pdf. It is difficult to estimate the initial and incremental, ongoing costs of swap dealer regulation. NERA’s report regarding the costs of registration for non-financial energy firms remains one of the only comprehensive analyses produced.

[2] Keynote Address of Commissioner Brian Quintenz before the Smart Financial Regulation Roundtable (Nov. 2017), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz3.

[3] Transcript, “Hearing to Consider Pending CFTC Nominations,” Senate Agriculture, Nutrition, and Forestry Committee, September 15, 2016, 2016 WL 4938280 p.12)

[4] Transcript, “Hearing to Consider Pending CFTC Nominations,” Senate Agriculture, Nutrition, and Forestry Committee, July 27, 2017, 2017 WL 3215667 p.14 (“With regard to the de minimis threshold level, I think when this threshold was set originally it was really done without the benefit of a lot of data. I think if there is a scenario where this shortfall reduces from $8 billion to $3 billion. And instead of increasing registration, it would drive participants out of the market or force them to reduce their activity because of the cost that would be imposed upon them.”).

[5] Bain, Benjamin, “CFTC Swaps Dealer Threshold Criticized by Its Newest Republican,” Bloomberg (Oct. 9, 2017); and DeFrancesco, Dan, “CFTC’s Quintenz: Dealer Threshold Could Exclude Cleared Swaps - Commissioner Suggests Risks should be Better Considered in De Minimis Reappraisal,” Risk.Net (Oct. 24, 2017)

[6] “Fireside Chat: CFTC Commissioners,” FIA Expo Chicago (Oct 19, 2017) available at: https://expo2017.fia.org/articles/fireside-chat-cftc-commissioners, at 9’30” through 10’25”.

[7] For further discussion, see comment letter to CFTC from Financial Services Roundtable dated January 19, 2016 (“We do not see a benefit to requiring an entity that enters into a small number of swaps with a large notional amount but little exposure to choose between exiting the market or registering as a swap dealer, nor should entities that are taking on very large exposures without crossing a notional threshold, or a trade or counterparty count metric, be unregulated because they have concentrated risk in a small number of trades.”).

[8] For further discussion, see letter from Institute of International Bankers dated January 19, 2016.

[9] See Hearing to Review the 2016 Agenda of the Commodity Futures Trading Commission Before the H. Comm. on Agric., 114th Cong. 17 (2016) (response of Timothy Massad, former CFTC Chairman, to question posed by Congressman David Scott (D-GA)), https://agriculture.house.gov/uploadedfiles/114-40_-_98680.pdf.

[10] Public Law 114–94, 129 Stat. 1312 (Dec. 4, 2015).

[11] Public Law 111–203, 124 Stat. 1376 (Jul. 21, 2010).

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

April 5, 2018

Thank you Commissioner Behnam for your leadership in convening today’s meeting of the Agricultural Advisory Committee (AAC)—the first such meeting since 2015, much too long of a time to have gone by without the input of these experts.  While the practice of prior leadership of this Committee was to hold one meeting a year, I am hopeful that either with your leadership, Commissioner Behnam, or new leadership once additional Commissioners are confirmed, we can take more frequent advantage of this important panel’s significant expertise.

I am delighted to join you and Chairman Giancarlo, and all of the distinguished members of this Committee, for its inaugural meeting in the heartland of America’s farmers and ranchers.  For decades this Committee has provided the Commodity Futures Trading Commission (CFTC) with invaluable insights into the pressing issues of the day: agricultural trade options in the 1990s, the transition from pit to electronic trading in the 2000s, and perennial challenges involving deliverable supply and convergence.  I look forward to a robust discussion today about the state of our futures markets and their ability to serve as an effective price discovery and risk management tool for the Ag community.

It is fitting the AAC is meeting in Overland Park, a town founded by a gentleman named William B. Strang in 1905.[1]  Mr. Strang left home at the age of 15 and ultimately became an American railroad magnate, building railroads all over the country, including the Missouri and Kansas Interurban Railroad (running through Overland Park) that was built along the historic Santa Fe Trail.[2]  An avid believer in innovation, Mr. Strang built the first self-propelled railroad motor car in the world.[3]  Fascinated by progress, he also constructed an airfield in Overland Park in 1909—only six years after the Wright Brothers’ first flight—so that locals could witness the novelty of the new, so-called “flying machines.”    

I highlight Mr. Strang’s accomplishments because I believe they are a reminder of what is possible if we follow our aspirations and of how the vision of one person can have generational economic impacts.  The railroads that Mr. Strang built, in conjunction with America’s natural inland waterways, enabled cities like Chicago and Kansas City to become hubs of commerce and markets for America’s grain, produce and cattle. 

Today, of course, there are different challenges that must be overcome by modern vision, leadership and ingenuity.  As I will discuss in more detail tomorrow, the challenges facing the agricultural industry today—historically low commodity prices, intense international competition, ever slimmer profit margins—make it more important now than ever that the futures markets remain a trusted, effective tool for price discovery and risk management for America’s farmers and ranchers.  

Indeed, the need for futures prices to reflect supply and demand fundamentals impacts even those who choose not to directly participate in the futures markets.  Crop insurance, an essential risk management tool for many farmers, relies upon futures prices to determine the expected income of farmers in the event a payout is made.  Today, over 300 million acres of farmland is covered by crop insurance, with an insured value of over $100 billion.  I am interested to learn more about how the crop insurance program is working today from our first panel and make sure we all understand that a lack of convergence impacts not only risk management hedging, but also the effectiveness of the crop insurance safety net.    

In addition, given the past several years of depressed commodity prices, farmers’ use of credit is rising.  According to the USDA’s Economic Research Service, in 2017 the farm sector’s debt-to-income ratio, which measures a farmer’s ability to pay down liabilities, rose above 6 to 1.[4]  The last time we saw such a high debt-to-income ratio for farmers was the 1980s.[5]  I look forward to hearing from the Farm Credit Administration (FCA) today about the various ways the FCA and the private sector can continue to meet the financing needs of farmers and ranchers.

From our final panel, we will hear from CME about the recent implementation of block trading in certain agricultural products.  I am interested to hear the panel’s observations about how the expanded use of block trades in this space is impacting liquidity and price discovery.

Together, the futures markets and crop insurance are the cornerstones of the farm safety net.  They work together to ensure that farmers do not lose access to credit in a very volatile industry—so that farmers can continue to provide Americans, and the world, with high quality, low cost food.  I commend Commissioner Behnam for hosting this meeting today to explore how these issues are impacting the vitality of the Ag community, and thank Charlie Thornton, the Designated Federal Officer of the Committee, for all of his hard work in planning today’s meeting. 

Statement of Commissioner Behnam on Staff Advisory With Respect to Virtual Currency Derivative Product Listings

May 21, 2018

Today, the Division of Market Oversight and the Division of Clearing and Risk issued a CFTC staff advisory regarding Virtual Currency Derivative Product Listings.  I support and commend the staff, under the direction of the Chairman, for providing this advisory regarding the listing process.  In January, I sponsored a meeting of the Commission’s Market Risk Advisory Committee to shine a light and promote inclusive dialogue on the Commission’s role in the listing of new products pursuant to the Commodity Exchange Act and Commission Regulations 40.2 and 40.3.  Today’s advisory is another step in providing the public with greater transparency into this process.  While this staff advisory clarifies expectations, it does not equate a change to the regulatory process.  Such changes require a more fulsome and formal process, subject to Commission deliberation and public notice and comment.  I look forward to continuing to explore our options, which I hope will include some parameters for determining when self-certification may not be appropriate, and for determining when such matters are appropriately brought before the Commission.

Remarks of Chairman J. Christopher Giancarlo at the North American Securities Administrators Association (NASAA) Conference, Washington, D.C.

May 21, 2018

Thank you, Michael Pieciak.  Good morning everyone.

We are here to highlight the importance of cooperative enforcement among the Commodity Futures Trading Commission and individual States securities commissions.

Last year, the day after the White House announced its intention to nominate me as CFTC Chairman I pledged that the agency would look to benefit from cooperation with civil and criminal capabilities of other federal and state regulators and enforcement agencies.  Today, I am making good on that pledge.

In just a moment, we will sign an important milestone in the area of US federal and state financial fraud detection and prosecution. This Memorandum of Understanding (MOU) between the CFTC and individual States securities commissions will focus our collective resources to better uphold the law.

I am particularly pleased to sign this agreement today in your presence.  I believe that by signing this document, I am making an agreement with each one of you.   And, I am proud to do so.

This MOU will establish 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 of 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 (SSAs).

Together, we will work to better connect the dots and see patterns of illegal activity that we currently miss.  As I will discuss shortly, rapidly emerging financial technology generates a greater need for cooperation.  And therefore I am pleased that we sign this agreement on NASAA’s 99th anniversary.

For almost ten decades the NASAA has been a trusted organization, a respected voice, and a powerful advocate.  You have taken significant action to thwart manipulation, fraud, and misappropriation of financial instruments and investments, including digital assets.  You have helped address money laundering, terrorism, and other criminal enterprises.  Your work has benefitted every American. The nation owes you a debt of gratitude.

And the CFTC has relied on you. For over 40 years CFTC has worked with your organization.  We have collaborated on joint enforcement actions, training and consumer fraud advisories. And we have arranged for several members of your organization to be detailed to our staff.

The CFTC and your member states have historically partnered to combat fraud in forex, commodity pools and precious metals. This partnership has been facilitated by the fact that our statute allows states to bring injunctive actions as co-plaintiffs with the CFTC in federal court for violations of the CEA.  Let me give you a few examples that highlight our joint successes.

In a forex fraud case involving the misappropriation of over $40 million from 600 customers, the CFTC and the State of Oregon jointly filed a federal injunctive action as co-plaintiffs to stop a massive fraud scheme.  As a result of close cooperation with the US Department of Justice, over $100 million in civil monetary sanctions were imposed and the principal defendant was sentenced to 8 years in prison.

In another case involving an $8.7 million affinity Ponzi scheme targeting 140 members of the Oklahoma City ethnic Chinese community, the CFTC and the State of Oklahoma filed an injunctive action as co-plaintiffs.  The federal court ordered the Defendants to pay over $26 million in restitution and civil monetary penalties.

Additionally, the CFTC and South Carolina worked together to stop a precious metals Ponzi scheme where the defendants misappropriated over $90 million from 800 customers in sixteen states. Due to the coordinated efforts of the CFTC, South Carolina, and DOJ, the main defendant was ordered to pay approximately $57 million in civil monetary sanctions and sentenced to almost 20 years in prison.

I want to thank Joe Borg and everyone in this room for their support with such fine work.

Today, technology is leading us into a complex, virtual future.  New financial tools are impacting trading, markets and the entire economic 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.

One thing is certain: ignoring these changes in the market would be a profound mistake. They will not go away. We must be proactive in making a regulatory and statutory framework that is ahead of the curve, prevents and punishes fraud and criminality, gives clarity and coherence to these emerging technologies, and anticipates the evolution of new instruments such as virtual currencies. 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.

We are at the juncture of changing times.  The American public expects a coordinated approach to overseeing these vital markets and protecting commercial and retail market participants from fraud.

As we think about the current and evolving state of regulatory oversight of virtual currency markets, we should explore the interplay of state and federal laws to ensure a coherent and rationalized approach – an approach that permits market-enhancing innovation to proceed, but that also keeps market integrity and consumer protection top of mind.

At the federal level, the CFTC will continue to enforce our statute and regulations to ensure the integrity of U.S. swaps and futures markets.  We work closely with the U.S. Treasury and the Financial Stability Oversight Council.  At the same time, our colleagues at FinCEN continue to apply anti-money laundering and terrorist finance rules, bank regulators assess and mitigate risks and exposures of our banking system, and our sister agency, the Securities and Exchange Commission, looks to impose necessary investor protections, especially around illegal unregistered securities offerings.

In fact, during the past year, the CFTC and the SEC have recommitted ourselves to close cooperation with respect to policy and jurisdictional considerations and in connection with enforcement matters.  This close coordination between the Federal government’s primary financial market regulators reflects the personal commitment of me and SEC Chairman Jay Clayton.  It also reflects our realization that the American taxpayer expects nothing less from agencies of their Federal government.  They should expect careful agency cooperation to continue under our leadership.  I expect that bad actors in the markets may come to dread it.

Meanwhile, all of you at the state level continue to act to protect and educate your citizens as age-old schemes are perpetrated under the cloak of novel technology.  Indeed, we accept regulatory overlap between state and Federal authority for fraud and misconduct that preys on the significant public attention that surrounds virtual currency.  It is critical to have as many cops on the beat when it comes to pursuing bad actors that harm our consumers in what is otherwise a promising area of innovation.

For this reason, we are so very pleased to partner with NASAA and all of you in order to pursue our collective goal of upholding the integrity of our markets. We applaud NASAA on a new program being announced today. It complements the CFTC’s on-going virtual currency investigations with NASAA members.

Indeed, 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 other financial enforcement agencies, will aggressively prosecute those who engage in fraud and manipulation.

The bottom line is that we don’t know where the future will take us.  But, as we move into that future, the nation, and the world, can count on your efforts.

Today, with this MOU, we turn speech into action.  As we discuss digital assets and the future, we must prepare for the present and future needs of oversight, law enforcement and consumer education.  This MOU provides a much needed resource for the CFTC and state securities authorities.  It gives us scaffolding that builds upon a firm foundation for the future.

And, the audience is global.  The world is looking to the United States for leadership and guidance.  Our best practices help countries formulate a response to the problems we confront that is ahead of the curve, sensible and effective.

As you know, CFTC has also been at the regulatory horizon on virtual assets, especially with our criteria for heightened review of new virtual currency products.

In the next few days, the CFTC website will publish a CFTC staff advisory providing guidance to exchanges and clearinghouses on certain enhancements when listing a derivative contract based on virtual currency.  The advisory will clarify staff priorities and expectations in reviewing new virtual currency derivatives to be listed on a designated contract market or swap execution facility, or to be cleared by a derivative clearing organization.  This advisory will reflect CFTC staff’s current thinking based on our growing experience with virtual currency derivatives.  As new products are brought forth, staff will reevaluate and revisit the advisory, as necessary, to address any new and emerging issues.

As you may know, US futures exchanges and clearinghouses are self-regulatory organizations for the markets they operate.  As front-line regulators, they should be proactive, flexible and engage in heightened review of new virtual currency contracts and their oversight to ensure proper surveillance of the trading and clearing of these contracts given the risks.

I believe that this advisory should help exchanges and clearinghouses effectively and efficiently discharge their statutory responsibilities as SROs, while keeping pace with the unique challenges of emerging virtual currency derivatives.

In drawing to a close, I note that a great American author, Tom Wolfe, passed away last week.  He was one of my favorite writers.  He had marvelous insight, striking panache and a potent pen.  He coined such terms as, “The Right Stuff,” “Good Ol’ Boy” and “Radical Chic”.

Tom Wolfe’s last book was on language.  He talked about the “inexplicable power of the word.”  He said that language is our way of coming to grips with a changing world.

I thought about that with the signing of the MOU and the panels today.  The world is indeed changing, moving into a virtual universe.  Language and ideas are being transformed.  Distributed ledgers, virtual currencies and other exponential digital technologies are taking us into a new era.

And this conference today is a step into that new world.  Our ideas will be tested, molded, and transformed.  The inexplicable power of the word will be tested.  Through discussions like this one, that power will lead us into the future.

Which brings me back to the importance of today MOU on cooperative enforcement.  This agreement increases the ability of the CFTC and state securities administrators to share information, discover misconduct and deter it.  It eliminates burdensome red tape.  It enhances long-standing relationships among our agencies.  It supports our vital missions for now and for the future.

I am honored and proud to sign it.

Thank you.

Remarks of Commissioner Rostin Behnam before Energy Risk USA, Houston, Texas

Delivering a Message on Relationship Patterns

May 15, 2018

Introduction

Good morning.  It’s an honor to be here with you.  Shortly after being sworn in as a CFTC Commissioner in September 2017, I announced a listening tour.  My goal was, and still is, to spend this first year as a Commissioner traveling to as many places as my schedule (and family) will allow; visiting market participants and stakeholders, both large and small, to help inform my thinking for the balance of my term, specifically about what CFTC rules, regulations, and policies are working or—more importantly—not working.  More simply, how I can be an effective regulator in Washington, D.C.

When I first thought about embarking on a listening tour, Houston came straight to mind.  Although New York and Chicago may be the first American cities that many think about as hubs of the domestic derivatives market, I certainly have always considered Houston an equally important location because of the crucial importance this city plays in global energy production and domestic energy independence.  The important role of the end-user cannot be overstated.  And I am confident many of you will agree with me, that the derivatives markets play an integral role in your ability to make short and long-term business decisions regarding everything from exploration, research and development, and transportation – to name just a few.

I was flattered to receive an invitation to speak at this distinguished conference, not only as a matter of building a relationship with this key stakeholder and registrant community, but also to share my ideas, on your turf.  Later today I will travel to Austin for a few site visits, and then make more site visits in Houston tomorrow, and wrap up with another speaking engagement in town on Thursday.  A full week for sure, but one that I relish and believe will help shape my thoughts in the future on policy, and your role in our markets.

Although I am not new to the issues and challenges that your industry faces, I am still a relatively new Commissioner.  Being a newcomer is not always easy, and when you are making decisions in a new or uncertain environment, risk and trust become crucial factors in the equation.  You need to learn the patterns to better understand relationships.  I am reminded of a story involving my parents, when they were still relative newcomers to this country.  As a relatively new parent myself, this memory, and the lessons I take from it, has that much more meaning today.

When I was 8 years-old, I wanted a birthday party.  Now, my parents were not accustomed to the concept of the typical American child’s birthday.  I invited all of my neighborhood friends, and of course, despite my objection, my mother invited some of her friends and their kids, all of whom were also relative newcomers and none of whom were from our neighborhood.

We were all having a good time when my mom, who worked as a midwife, had to leave to deliver a baby.  So, she left the party, leaving us kids with her friends. But, remember, my mom’s friends were not from the neighborhood and also not familiar with the practice of helicopter parenting a birthday party.  So when the other parents realized my mother, who they implicitly trusted as a member of our neighborhood, had up and left us with her friends, that trust did not transfer.  This pattern was unfamiliar and there was no relationship with those left in charge, and therefore, we, the children, may as well have been left completely unsupervised.  What could possibly have gone wrong?

My friends and I were unaware that there was an issue, and I was very accustomed to the pattern of my mother having to leave at all hours of the day and night, and almost always on short notice, to tend to patients; so this specific occurrence, during my birthday party, didn’t raise any red flags – for me.  And, despite the apparent lack of supervision, there was relatively little risk of leaving us “unsupervised” because my mom’s friends were there, and they were adults with all the skills and capabilities to prevent complete and utter disaster.  Really, all that happened was one adult left.  But trust is a tricky thing to nail down; it can have a variety of meanings depending on the context.  Trust implicitly depends on one’s willingness to depend on somebody--or something--in a given situation with a feeling of relative security.[1]  It is situational and subjective and having patterns and relationships can go a long way to building trust.  In that instance, in that situation, the trust was based on a common pattern, a familiar relationship, and without it, there was risk.  It did not matter whether that risk was real or perceived; the trust was broken.

Trust, relationships, and even the need to supervise manifest through human interactions.  It’s been over ten years since the global financial crisis spurred comprehensive regulatory restructuring that introduced new products, exchanges, activities, relationships, and prohibited conduct in the derivatives markets.  At the same time, this massive reform provided the opportunity to shift our markets into the 21st century, embracing fully electronic trading venues, straight-through processing, electronic surveillance and a flurry of innovative compliance and oversight solutions from the fintech space.  We are increasingly moving away from building trust and analyzing risk based on personal interactions with one another and in the markets.  Instead, we employ algorithms and machine learning that consume data and information, digest patterns and pieces of intelligence, and signal us when it is time to step in with some old fashioned human brainpower.

I’m not saying that innovative solutions that no longer require a high degree of human involvement are not valuable.  Indeed, as I’ve said before, the U.S. needs to play a more direct, inclusive role in the fintech economy and support responsible innovation.[2]  However, as a regulator, I want to be clear that our increasing reliance on the soundness of new structures and technologies does not diminish our commitment to a culture of compliance, rooted in trust and responsible supervision.  It also does not absolve registrants and market participants of their duties under the Commodity Exchange Act (CEA).  Whether you are relying on technology or delegating your duties, your duties to comply with our rules and regulations and contribute to the integrity of our markets cannot be abdicated.

I understand that there are members of this audience that believe you’ve been unfairly swept up into the fold of Dodd-Frank regulation.  Many of you represent physical hedgers, end-users with a truly de minimis risk footprint.  Others represent some of the largest players in the energy space, operating in the global markets as dealers that bear little resemblance to the humble, hometown energy companies which one may associate with your corporate logo.  As I fulfill my responsibilities as a Commissioner, considering the road ahead and what policy adjustments the CFTC must make, I will also reflect on the past, specifically the hard work of the previous administration and prior CFTC Chairmen who served in extraordinary times in our markets.  Certainly, not everything was done perfectly; we cannot expect perfection in most facets of life, let alone market oversight when the policy shift is so transformational.  But, I am confident that intentions were sound, the goals were well grounded, and a vast majority of the regulatory principles have been successful.

There are a lot of risks inherent in making the decisions we as regulators are entrusted to make.  But, choosing not to act, to not make decisions critical to providing the foundations for the relationships between the regulator and regulated out of fear of falling short impedes market integrity and undermines trust.  I’ve been vocal about wanting to complete the Dodd-Frank agenda and avoid overhauls before having time to adequately reflect.  We are eight-years into implementation and—though this may be an often overused sentiment—it is irresponsible to allow the agenda of the proclaimed perfect to be the enemy of the good.  I am committed to remaining actively engaged in the issues before the Commission, and, as we continue to fine-tune our regulations and consider remedial measures, I will utilize my knowledge and new experiences and reflect and respond, where necessary, to ensure unintended consequences are cured, and the CFTC remains a trusted regulator.

Regardless of your registration status, if you are participating in our markets—if you are “any person,”[3] you are subject to the CEA, and perhaps most significantly, to its prohibitions on fraud, manipulation, and disruptive trade practices.  If you are registered with the CFTC, you may have additional duties to diligently supervise various persons and activities within your business line.[4]  And, if you are providing services or acting as a third party vendor to participants and registrants in our markets, that relationship may bring you under our jurisdiction. 

Today I would like to share with you my thoughts on the CFTC’s enforcement program and some of the trends in the prosecution of spoofing cases and matters involving supervisory duties and third-party service providers.  Intrinsic to that discussion is the Commission’s leveraging of surveillance and data analytics capabilities in support of those efforts, and how market participants may similarly use data and fintech to remain compliant and contribute to the overall supervision of our markets.  This last point will lead into a brief discussion of the issues I hope to address as Sponsor of the Commission’s Market Risk Advisory Committee (MRAC).  Finally, I would like to share some high level thoughts on the remaining CFTC agenda for 2018.

Enforcement

Overview

The CFTC’s mission is to foster open, transparent, competitive and financially sound markets, prevent and deter price manipulation and other disruptions to market integrity, and to protect all market participants and the public from fraud, manipulation, and abusive practices.[5]  The CFTC accomplishes its mission through a system of effective self-regulation, direct oversight, and a strong enforcement program.  The Dodd-Frank Act strengthened the Commission’s enforcement authorities in particular through the addition of new and broader anti-fraud and manipulation authorities[6] and the creation of the CFTC Whistleblower Program.[7]  Along with the rules and regulations issued by the Commission to implement these new statutory provisions, the Division of Enforcement’s strength is amplified by consistently attracting top leadership from the United States Attorney’s Office—the chief prosecutor for the United States in criminal law cases.[8] 

In March of 2017, Chairman Giancarlo appointed former Assistant U.S. Attorney James McDonald as Director of Enforcement.  In addition to continuing to foster the Commission’s effective working relationship with the Department of Justice, in September Mr. McDonald invigorated efforts to employ a self-reporting strategy to incentivize cooperation and disclosure of violations.[9]  As I’ve mentioned in prior remarks, I appreciate Mr. McDonald’s commitment to ensuring that the enforcement program recognizes that achieving optimal deterrence requires buy-in from the communities we police, i.e. the markets.  That buy-in includes not only ensuring that market participants cooperate in bringing others to justice, but includes clearly articulating expectations through our speaking orders, so that all market participants and persons new to CFTC jurisdiction understand the risks inherent to engaging in certain activities—or failing to engage, when red flags fly.

Self-reporting and cooperation, again, relies on trust and relationships.  Trust needs to be earned, of course, and it flows in both directions.  We need to be careful, as an agency, that we do not abdicate (or appear to abdicate) our responsibility to police the markets by simply passing the onus on to the market participants themselves.  Cooperation should work to make us a more effective cop on the beat.  We need to be diligent to make sure that it does, and I will be watching to ensure that we continue to have a robust enforcement program.

The Division of Enforcement’s efforts in prosecuting cases under its new anti-disruptive trade practices authority—or anti-spoofing authority, as it is more commonly known, have gone a long way towards addressing major concerns in our markets, especially when it comes to low hanging fruit in terms of the more standard, archetypical violative trading patterns.  The aggressive and coordinated enforcement approach between the CFTC and the Department of Justice (DOJ) is one factor.  Another is the increased effective use of data.  Enforcement is utilizing Commission data, analytics, and forensics and leveraging the tools utilized by self-regulatory organizations like CME Group to monitor for and detect conduct and patterns typical of spoofing and other manipulative behaviors.  A Spoofing Task Force recently emerged to coordinate efforts internally across the Enforcement offices in Washington, New York, Chicago, and Kansas City.  Beyond detection, by working with our criminal law enforcement partners, bringing actions against individual bad-actors and those who fail to establish and implement adequate supervisory and compliance programs, and incentivizing whistleblowing by strengthening anti-retaliation protections, the Commission is aiming to incite compliance culture and maximize deterrence.[10]

Trends

Although arguably already embedded in the CEA as prohibited conduct as a form of fictitious trading or manipulative activity[11], “spoofing” entered our lexicon as part of the Dodd-Frank Act in 2010 and generally prohibits “bidding or offering with the intent to cancel the bid or offer before execution.”[12]  Spoofing is when a trader is placing orders in the market that he or she has no intention of trading to create the appearance that the price of the commodity is trending either up or down, and then executing orders designed to take advantage of that price movement.  Spoofing introduces false information into the market, undermining market integrity and harming those who play by the rules and who use the markets to hedge their risks.  Evidence of spoofing is identifiable by patterns.  But, as we will get to, a pattern alone cannot always be trusted.  Though easy to identify and label, a violation of spoofing requires intent.  And at this point in the case law, that still requires a human.

In January, the Commission announced the filing of eight actions involving spoofing and related manipulative activity.[13]  The actions involved the settlement of three corporate cases against major financial institutions, and the filing of five complaints charging six individuals and one company with spoofing and manipulation in the futures markets.  The corporate cases are all significant in that they involved global banking and financial services firms and fines ranging from $1.6 to $30 million—all of which would have been substantially higher but for each banks’ substantial cooperation and remediation efforts.  As well, in the case of one bank, the significant civil monetary penalty reflects additional findings of supervisory failures.

In one of the corporate cases, the Order found that during a six and a half year period, traders engaged in a scheme to manipulate the price of precious metals futures contracts by utilizing a variety of manual spoofing techniques with respect to precious metals futures contracts traded on the Commodity Exchange, Inc. (COMEX), and by trading in a manner to trigger customer stop-loss orders.[14]  Generally, according to the Order, the traders placed large bids or offers in the futures market with the intent to cancel before execution (spoof orders) after another smaller bid or offer (resting order) was placed on the opposite side of the same market.  According to the Order, the traders placed their spoof orders with the intent to create the false appearance of market depth, which they knew would and did create the impression of greater buying or selling interest than would have existed otherwise.  The Order found further that the firm failed to perform its supervisory duties diligently—an independent violation of Commission Regulation 166.3.  Specifically, the Order found that while the firm’s electronic surveillance system identified specific instances of potential misconduct, it did not follow up on the majority of those red flags.  As well, while the firm’s surveillance systems alerts put it on notice of potential misconduct, it failed to take adequate steps to address or remedy the issues.[15]

As I mentioned, a violation under Commission Regulation 166.3 is an independent violation for which no underlying violation is necessary.  A violation of Regulation 166.3 is demonstrated by showing either that: (1) the registrant’s supervisory system was generally inadequate; or (2) the registrant failed to perform its supervisory duties diligently.[16]  As our developing spoofing case law demonstrates, this duty to supervise includes ensuring that employees receive sufficient training and that their activities are monitored through adequate systems and controls to detect spoofing.

In January 2017, the Commission issued an order filing and settling charges against a firm dually registered as a futures commission merchant and swap dealer.[17]  In addition to finding that five of the firm’s traders engaged in spoofing more than 2,500 times in various Chicago Mercantile Exchange (CME) U.S. Treasury futures products over roughly a 17-month period, the Order found several related supervision failures.  The Order found that the firm provided insufficient training, emphasizing that, for most of the traders involved the only communication they received about spoofing consisted of a single compliance alert containing the CEA’s anti-spoofing language.  The Order also found that the firm failed to have adequate systems and controls in place to detect the spoofing, and that even when alerted to a spoofing incident involving one of its traders, a supervisor and other members of the desk failed to comply with then existing policies regarding reporting violations of the Act.[18]

Returning to the January 2018 matters, the civil complaints include charges against three individuals who allegedly engaged in spoofing and manipulation as traders for major banks, and who allegedly taught their subordinates to spoof as well; two individuals who allegedly engaged in spoofing and manipulation as traders for proprietary trading firms; and one individual and company who allegedly built a computer program designed to spoof and manipulate the market.[19]  I think this last matter is worth a few moments of time given the nature of the conduct at issue.

Backing up a bit, spoofing can be challenging to prove because it requires evidence of the defendant’s intent to cancel a bid or offer prior to execution.  Because orders can go unfilled or be cancelled for legitimate reasons, and some market makers employ high frequency trading strategies that are legal, and may result in a large percentage of cancelled orders, in isolation, trade data may not be enough to support a finding of intent in a spoofing matter.  That is, the pattern alone may not evince misconduct.  We need to go further into understanding the intent behind the pattern.  Of course, that wasn’t such a stretch in the criminal case of Michael Coscia, which followed and was aided by a prior CFTC civil settlement.[20]

Coscia was the first trader to be convicted on spoofing charges, and in August 2017, became the first to have his conviction upheld in a United States Court of Appeals.[21]  Just yesterday, the Supreme Court denied Coscia’s Petition for Certiorari, making the decision of the Court of Appeals final.[22]  Coscia commissioned the design of computer algorithms to place and quickly cancel bids and offers in a number of futures contracts in the CME Group markets and on the ICE Futures Europe exchange.  At trial, testimony from Coscia’s programmer revealed that Coscia had asked him to create a program that would act “[l]ike a decoy” to “pump [the] market.” [23]  The government demonstrated, relying in part on Coscia’s prior testimony from a deposition taken by the CFTC, that Coscia’s algorithm was designed to enter but avoid executing any of the large orders responsible for triggering favorable market moves, automatically cancelling the large orders under any conditions where they were at risk of being filled.[24]

Getting back to the individual and company who allegedly built a computer program designed to spoof and manipulate the market, the allegations in the matter include aiding and abetting spoofing and a manipulative and deceptive scheme.  According to the complaint, the individual is a computer programmer with over eighteen years of experience programming custom software applications for the trading industry.[25]  As alleged, the programmer and his company designed and developed a custom trading software application for a trader that would help him spoof and inject false information into the market regarding supply and demand for the E-mini S&P.  The programmer and others worked closely with the trader to meet the desired specifications.  The trader, as alleged, ultimately engaged in thousands of practices involving spoofing.  The complaint alleges that the programmer –who himself was knowledgeable regarding various strategies used by high frequency and algorithmic traders, and was familiar with how those strategies could affect trading in the futures markets, including by disrupting orderly trading and contributing to spoofing—and his company aided and abetted the trader’s spoofing by designing and developing the custom trading software which they understood would be used to engage in spoofing.[26]

The Message

I think our Enforcement Director said it best back in January when he remarked that the CFTC’s goals of holding wrongdoers accountable and deterring future misconduct are best achieved by holding companies and individuals accountable.  The Commission is working hard to identify and prosecute individual traders who engage in spoofing as well as individuals who teach others how to spoof, who build the tools designed to spoof, or who otherwise aid and abet the wrongdoing.

The Commission’s spoofing initiatives provide a plethora of examples of bad actors abusing technology to inject false information into the market, distorting prices, destroying trust and undermining market integrity.  There are also examples of other, perhaps not as bad actors, failing to use technologies to detect, deter, and otherwise generally supervise those for whom they are responsible.  Our own surveillance and use of more sophisticated technologies coupled with increased self-reporting and cooperation and the involvement of our criminal counterparts, have cumulatively contributed to the disappearance of some of the more obvious spoofing patterns.  While the more sophisticated schemes will likely continue to infect our markets, I am confident that we have the right cops on the beat.

Pivoting slightly towards how I’ve been processing the facts and figures coming out of our Enforcement program in the context of my role at the Commission, I am reminded again of the constant need to check in with one another, to build trust, and work on relationships.  During a panel on electronic access at a recent industry conference, a senior director for market regulation at one of the larger future exchanges noted that as more traders migrate from bilateral trading to electronic exchanges, there is a presumption that there are rules, but they aren’t always sure as to what they are and how they apply.  There is also a tendency to presume that the electronic nature of their new automated environment may provide a false sense of supervision, that there is constant monitoring for risky behaviors and risk generally, and so, individual duties are somewhat lessened.  We need to make sure our newcomers are brought into the fold, and become part of our community.  As much as we can talk about cooperation, and as much as our speaking orders can describe how certain actions and failures to act run afoul of our statute and regulations, we as regulators need to be clear as to where the lines are drawn.  We must make sure that our goals and objectives for the integrity of our markets do not get lost in translation.

Market Risk Advisory Committee

As many of you know, I am the sponsor of the CFTC’s Market Risk Advisory Committee (MRAC).  The Committee is tasked with advising and making recommendations to the Commission on matters relating to evolving market structures and risk, as well as systemic issues that impact the stability of the derivatives markets and other financial markets.  I convened the Committee in January to provide a public forum for an open dialogue regarding the CFTC’s regulatory self-certification process for new products, specifically those in the crypto-asset space.  Since that time, my team and I have worked diligently on renewing the MRAC’s charter, reconstituting its membership, and setting its agenda.  Phase One of this process is now complete with the approval and publication of the renewal charter last week.  Phase Two, membership selection, is winding down and I anticipate notifying candidates in the next few weeks.  I hope to convene the Committee in July and one additional time before the year ends.

I thank all of you who submitted nominations for membership as well as suggestions for MRAC priorities.  Based on the tremendous feedback received, the MRAC’s agenda will consist of a wide range of issues involving benchmark risk, clearinghouse risk, operational risk and third-party service providers, and financial technology risk, all of which could have an impact on financial stability and are ripe for discussion.  Consistent with my remarks this morning, identifying risk, and attempting to develop sound policy that balances risk reduction with market innovation and development, will importantly include identifying patterns and building relationships.  I am excited about the MRAC, and believe, under my leadership, it will serve as a venue of deep, thoughtful consideration of critical market issues that affect all participants.

The Remains of 2018

In the next few months, the Commission, under Chairman Giancarlo’s leadership, will likely move forward on major rulemaking efforts on the swap dealer de minimis threshold and swap execution rules.  As well, the Commission will begin to issue various burden-reducing proposals in support of the Project Kiss Initiative.  We will likely round out the year with a re-proposal of the position limits rule, although that timing may be tempered by the hopeful appearance of new commissioners.

As the Commission starts to throttle up work in the second half of this year, I am hopeful and committed to ensuring the CFTC remains diligent in its core responsibilities, including – as I mentioned earlier – fulfilling its mission.  As with many other agencies, the CFTC is grappling with a tight budget, and has been doing so for a number of years.  We are fully focused on doing more with less.  This is a challenge we do not shy away from, and as an organization are committed to meeting.

Closing

I started these remarks with an anecdote from my childhood.  One of those special, or at least in the case of my birthday party, unique moments in time that gets chiseled in the mind.  These memories serve as benchmarks, as lessons, as capsules to reflect on in future endeavors.  And as I continue to build my time as a CFTC Commissioner, I hope to initiate and create more of these memories in our space, in a manner that helps all of us develop a relationship founded on trust, transparency, and commitment.  I am confident that with these principles in mind, we can mutually achieve our goals, support American enterprise and economic growth, and continue to build the safest, strongest and most desirable derivative markets in the world.  Thank you.