Remarks of Commissioner Rostin Behnam at the FIA Boca 2018 International Futures Industry 43rd Annual Conference, Boca Raton, Florida

Accountability & Moving Forward

March 15, 2018

Introduction

Good afternoon and thank you for the kind introduction. I’m thrilled to be the crowd warmer for the Washington Outlook panel. Joking aside, the crowd warmer’s job is to get the audience in the mood for the main act -- to make you all feel integral to what’s about to occur on stage and to elicit and encourage you to react. Your engagement and reactions are critically important, especially now as we have all been promised deliverables in terms of Project KISS¹, Reg. Reform 2.0,² and CFTC and SEC harmonization,³ and we are increasingly expectant of proposals for resolving outstanding regulatory issues such as the de Minimis exception, position limits, and Regulation Automated Trading (Reg AT).

As we continue to evaluate our regulatory landscape and make critical determinations as to which parts to revisit, which to complete, and how we can guide legislation and develop regulations to address technological developments in our markets in a thoughtful, collaborative manner, we must: (1) hold one another accountable; (2) adhere to regulatory process; (3) be wary of false progress; and (4) demand genuine dialogue.

Accountability

In the aftermath of the bitcoin self-certification discussions of 2017, I expressed my concerns that the Commission’s accountability (and responsibility) is greatly impacted by adherence to the regulatory processes established by the Commodity Exchange Act (CEA), Commission regulations, and the Administrative Procedure Act.⁴ Process establishes the guideposts in the narrative of how we carry out our mission so that in the future, when we encounter new issues and challenges, we have markers we can point to. Rejection of process in favor of ad hoc decision making may make for good memes, but it leaves our record vulnerable to revision, future regulatory uncertainty, and unintended consequences. Though I’ve heard echoes that process is sometimes wielded to stifle progress,⁵ I prefer to consider former longtime Chicago journalist Sydney J. Harris’s point of view that, “The greatest enemy of progress is not stagnation, but false progress.”

Moving Forward

As we move forward into Q2 of 2018, we need to make sure we don’t slip into a repeat of 2017. To be blunt, there were a lot of soundbites. To date, Project KISS has produced a “tiered list of significant efforts” and an interim final rule that replaces “the complex and confusing lettering for defined terms” in Commission Regulation 1.3 with an alphabetized list.^6, 7 While I approved the publication of the interim final rule in the Federal Register,⁸ I did so only after pointing out a couple things. First, I’m not sure that 21^st century regulators or our market participants are truly confused by the standard numbering system for rules in the Code of Federal Regulations (or that they turn away from their computers to flip through the hard copy volume of the CFR to find terms).⁹Second, the release should at least acknowledge and solicit comments regarding the costs and burdens associated with administering the removal of the level 1 paragraph designations from such things as relationship documentation and internal compliance systems. And third, whether substantive and more mission critical work was sacrificed to put out this rule.¹⁰

Let me just pause to say that I do appreciate the willingness of staff to incorporate my suggested edits and thank them for their time.

Not Going Back

By now you’ve heard from the Chairman, Commissioner Quintenz, and a host of others about how the issues shaping the 2018 agenda present opportunities to reach workable solutions within the tenets of our regulations and the Dodd-Frank Act, while strengthening our position as a premier 21^st century regulator. I believe any changes must be narrowly targeted and surgical to ensure core reforms are kept whole and intact.

To be clear, while I strongly oppose any wholesale roll backs of Dodd-Frank initiatives, I believe a principles-based approach to implementation can be suitable in certain instances. A principles-based approach provides greater flexibility and focuses on thoughtful consideration, evaluation, and adoption of policies, procedures, and practices as opposed to checking the box on a predetermined, one-size-fits-all outcome. It allows for greater calibration and consideration of each entity’s unique risk profile within the rule set while reducing our own regulatory footprint. However, the best principles-based rules in the world will not succeed absent: (1) clear guidance from regulators; (2) adequate means to measure and ensure compliance; and (3) willingness to enforce compliance and punish those who fail to ensure compliance with the rules. In short, it requires accountability.

Keep on Truckin’

We are all encouraged to stay focused on our priorities, and those include some legislative proposals, opportunities for regulatory reform and completion of the Dodd-Frank agenda, and some forward thinking progress towards bringing innovative technologies and changes to our markets into the regulatory fold. For me, it also includes overseeing the CFTC’s Market Risk Advisory Committee (MRAC).

Since the beginning of the New Year, the Trump administration and Congress has shifted some attention towards Dodd-Frank reforms. The Senate just passed the first Dodd-Frank legislative package since President Obama signed the bill in 2010, and sent the package to the House of Representatives. The House Financial Services Committee recently held an oversight hearing focused on nearly a dozen derivatives bills. Senior level administration officials have also recently discussed changes to capital requirements and potentially revisiting the Volcker Rule in 2018. As I have said many times in the past, and earlier in these remarks, targeted, surgical regulatory changes are warranted to address unintended consequences; but, I caution against any efforts, small or large, to undermine core principles and policy established in Dodd-Frank. Bear Stearns failed nearly 10 years to the day. Seems like a long time ago; but we must not displace history as we continually seek to cement and develop sound, transparent, and robust regulatory policy.

More personally, I am happy to announce today that an official notice has been published in the federal register inviting individual nominations to the MRAC. The federal register notice breaks ground for renewing the committee’s charter, reconstituting its membership, and setting an agenda for 2018. Having already met once this year, regarding bitcoin and the self-certification process, the MRAC is ripe for many more important, cutting edge discussions about market risk that even go beyond our discussions of systemic, market-wide risks.

I believe it’s time for the CFTC to follow the lead of our fellow regulators in the prudential space and focus on operational risk—the risk that remains after determining financing and systemic risk, and includes risks resulting from breakdowns in internal procedures, personnel, and systems. It includes fintech risks such as service disruptions, data compromise, and cybersecurity. It also includes risks from outsourcing and use of third-party products and vendors. And, it includes fraud and other personnel misconduct.

I’d like to conclude these remarks with my thoughts regarding the government outlook on fintech issues in 2018 and beyond. fintech certainly took center stage in 2017. Whether the meteoric rise of bitcoin, or the equally swift development of distributed ledger technology, the general public and policy makers have taken notice across the globe. I hope that the U.S. will take a leading role in paving the way for a well-defined, fair, and balanced regulatory regime.

In my view, the best and most efficient manner to achieve this important, and much needed goal involves the Financial Stability Oversight Council (FSOC). I applaud Secretary Mnuchin for his comments and commitment to establishing an FSOC interagency group of regulators to review the impact of cryptocurrencies.¹¹ But, given the pace of development in coins, payments systems, and distributed ledger technology, I believe more deliberate, swift, and comprehensive action is needed; and the authority granted to the FSOC in Dodd-Frank is the perfect means to execute the following: (i) convening member bodies; (ii) foster extensive discussions regarding, among other things, oversight responsibility, jurisdiction, and general policy approach of each regulatory body; (iii) engaging stakeholders, market participants, public interest groups, and foreign regulators; and (iv) delivering a detailed roadmap of policy findings and possibly legislative proposals to the Congress.

FSOC is perfectly suited to address the promise and risks posed by fintech. Regulators must take a leading role in this journey to ensure market participants do not too quickly develop systems and rules that may carelessly run afoul of core policy: safety and soundness; transparency; and prohibiting fraud and manipulation.

I look forward to any contribution I can make in these critically important discussions.

Thank you for your time, and with that I will now step aside for the main act.

¹ See, e.g., Michael Gill, Remarks of CFTC Chief of Staff Michael Gill at the National Press Club, CFTC Kiss Policy Forum, Washington, D.C., http://www.cftc.gov/PressRoom/SpeechesTestimony/opagill2.

² J. Christopher Giancarlo, Remarks of Chairman J. Christopher Giancarlo before Derivcon 2018, New York City, New York (Feb. 1, 2018), http://www.cftc.gov/PressRoom/PressReleases/opagiancarlo35.

³ CFTC (@CFTC), @CFTC & @SEC_News teams are hard at work on Title VII harmonization, Twitter (Feb. 27, 2018, 4:53 PM), https://twitter.com/CFTC/status/968605066889515009; Chris Giancarlo (@giancarloCFTC), Twitter (Feb. 27, 2018, 9:18 PM)

https://twitter.com/giancarloCFTC/status/968671749737992192.

⁴ Rostin Behnam, Opening Statement of Commissioner Rostin Behnam before the Market Risk Advisory Committee (Jan. 31, 2018), http://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement013118.

⁵ Id.

⁶ J. Christopher Giancarlo, Written Testimony of Chairman J. Christopher Giancarlo before the U.S. House Committee on Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies, Washington, D.C. (Mar. 7, 2018), http://www.cftc.gov/PressRoom/PressReleases/opagiancarlo39#PrRoWMBL.

⁷ Definitions, 83 Fed. Reg. 7979 (Feb. 23, 2018).

⁸ An interim final rule is effective immediately upon publication in the Federal Register. An agency may solicit comments on an interim final rule after it becomes effective, and may replace or change the interim final rule as a result of public comment. See Office of the Federal Register, A Guide to the Rulemaking Process, available at https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf .

⁹ See 1 CFR § 21.11.

¹⁰ Definitions, 83 Fed. Reg. at 7980.

¹¹ The Economic Club of Washington, D.C., U.S. Treasury Secretary Steven T. Mnuchin discusses tax reform, the national debt and debt limits, and cryptocurrencies (Jan. 12, 2018).https://economicclub.org/sites/default/files/transcripts/Steven_Mnuchin_Edited_Transcript.pdf

Last Updated: March 19, 2018

Keynote Address of Commissioner Brian D. Quintenz before FIA Annual Meeting, Boca Raton, Florida

March 14, 2018

Introduction

Thank you for that very kind introduction. I am honored to join you today at the 43^rd annual FIA international conference. Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the CFTC.

I. The 2016 Equivalence Agreement

Trust is fundamental and essential to our international engagements. It is the foundation of successful collaboration and goodwill between regulators. Participation in international standards-setting bodies and bilateral discussions with foreign regulators depend on trust.

The CFTC has had a positive and constructive cross-border relationship with the European Union. Together we have accomplished a number of important swaps market reforms. In fact, tomorrow, March 15^th, marks the second anniversary of our most important accomplishment—the 2016 CCP equivalence determination, which established a common approach to the regulation and supervision of cross-border CCPs.

The agreement is built on two central components. The first is the CFTC’s comparability determination for EU-domiciled clearinghouses registered with the CFTC. Those clearinghouses are deemed compliant with certain CFTC requirements if they satisfy corresponding European laws, lessening the regulatory burden on EU CCPs. The determination also streamlines the registration process for EU-domiciled clearinghouses wishing to register with the CFTC. Currently, four European clearinghouses benefit from the CFTC’s determination.¹

The second component is the European Commission’s equivalence determination for US clearinghouses registered with the CFTC, which serves as the basis for recognition by the European Securities Markets Authority, or ESMA. Recognition is required for any foreign clearinghouse—a “third-country CCP”—to operate in the EU. Today, five CFTC-registered US clearinghouses are recognized to provide clearing services directly to EU market participants.²

Our agreement with the European Commission was a significant achievement. Generally, I have been pleased with the outcomes. Increased regulatory coordination allows market participants to hedge risk in efficient and resilient global markets, and it also promotes financial stability by holding CCPs on both sides of the Atlantic to high standards.

II. The European Commission’s Proposed Legislation to Amend EMIR Threatens to Nullify the 2016 Equivalence Agreement

Recently, the European Commission introduced legislation to revise the European Market Infrastructure Regulation—EMIR. That legislation aims to reassess the recognition status of all third-country CCPs and determine whether any clearinghouse is systemically important to the EU. Such designation would impose increased regulatory and supervisory burdens. Any third-country CCP deemed systemically important will be required to adopt all of EMIR and accept enhanced oversight by ESMA and the oversight of the European Central Bank. If a previously-recognized CFTC-registered US clearinghouse is considered systemically important, it will be required to submit to additional EU law outside the terms of the 2016 equivalence determination.

In the proposed legislation, the European Commission is unilaterally abandoning the “recognition conditions” set forth in the 2016 equivalence agreement.

The CFTC sees this as a clear breach and violation of our agreement.

III. Consequences for Reneging on Commitments

It is common knowledge that Brexit motivated the European Commission’s new CCP framework proposal.³ Once the United Kingdom leaves the EU, that framework would authorize the EU to either regulate UK clearinghouses from afar or force them to relocate to the continent; noncompliance would be met with exclusion from the EU marketplace. I recognize that any jurisdiction may amend its laws as the result of major economic and/or political developments. While Brexit presents significant challenges to the EU, it would be foolish for the EU to react by reneging on its agreement with the CFTC, the regulator of the world’s largest derivatives market. Yet that is exactly what the EU would be doing.

Chairman Giancarlo has insisted the 2016 agreement is retained in the new EU CCP supervision framework. He has never insisted the 2016 agreement is immutable—it has always contemplated revision and change. The specific triggers contemplated are a significant change in the CFTC’s regulatory regime or a significant increased risk posed to the EU by a recognized US clearinghouse. Neither condition exists.

Since 2016, no market developments have changed the risk US clearinghouses pose to the EU.⁴ The CFTC has made no material revision to its CCP regulatory or supervisory approach. The only change has been Brexit, a development irrelevant to the United States. The 2016 agreement is not predicated on the EU’s member-state composure. No justification exists for the EU to now renege on the 2016 agreement. We must not make a scarecrow of our accords.⁵

The EC’s proposal is unacceptable to the CFTC. It is unacceptable to the United States Treasury Department. It is unacceptable to senior United States Senators. And it is unacceptable to the White House, itself. The entire United States Government is steadfast in its opposition to the EC’s proposal.

Indeed, Chairman Pat Roberts (R-KS) and Ranking Member Debbie Stabenow (D-MI) of the Senate Agriculture Committee—the CFTC’s oversight committee—have made their criticism quite public.⁶ To dis-incentivize the EU from reneging on its promises, they have recommended the CFTC seriously reconsider the existing accommodations it extends to EU firms, exchanges, and CCPs doing business in US markets. I agree with that recommendation and am prepared to go even farther.

First, in my capacity as a Commissioner, I will vote against any additional EU equivalence determinations until we have specific assurance from European authorities they will honor their current commitments to the US. At this point, I see no reason for the CFTC to further pursue any cross-border harmonization with the EU.

Second, in recent weeks, a number of European national market regulators have approached the CFTC seeking no action relief from various CFTC rules and orders. I am now unwilling to support any effort by the CFTC to provide exemptive relief requested by EU authorities.

The EU must realize that there is a limit to our patience with their unwillingness to stand behind a deal.

Conclusion

My strong feelings on this matter are informed and reinforced by the extraordinary and repeated efforts I’ve seen Chairman Giancarlo make to explain our concerns to European authorities and the European Commission. Those were easy opportunities for the EU to reaffirm the cooperation we all want and expect. In each case, no reaffirmation was given.

I now have serious questions about our counterpart’s trustworthiness as well as their priorities. Is the EU still committed to minimizing cross-border burdens, market fragmentation, and protectionism? Or, as it appears, is Europe intent on creating a closed, self-contained environment in which they can operate without the support or engagement of outside regulators and businesses.

If it is indeed Europe’s intent, in response to recent events, to create a self-contained environment and close itself off, I say this: great, good luck, and guess what…I’ll help. On the contrary, if Europe is seeking an open relationship with the world markets, international businesses, and other regulators where ideas and competition can flourish, I would tell them: great, good news, and guess what…I’ll help.

I want a good, healthy, cooperative, productive and trustworthy relationship with the European Union. That is an outcome in which both the EU and US markets would thrive. But, it is not a condition upon which the success of US markets depends.

Let me close by stating that I have not wavered from my belief that cross-border deference provides an avenue for growth, resilience, and efficiency in our financial markets. I wonder if our EU counterparts could say the same.

Today the EC can state clearly its proposed legislation is not an abrogation of the 2016 equivalence agreement and we can move forward from this unfortunate episode.

¹ Eurex Clearing AG, ICE Clear Europe Ltd., LCH.Clearnet Ltd., and LCH.Clearnet SA.

² CME Inc., ICE Clear Credit LLC, ICE Clear US Inc., Minneapolis Grain Exchange Inc., and Nodal Clear LLC.

³ “An E.U. Plan to Invade US Markets” by Chairman Giancarlo, Wall St. Journal (Nov. 6, 2017).

⁴ “An E.U. Plan to Invade US Markets” by Chairman Giancarlo, Wall St. Journal (Nov. 6, 2017).

Written Testimony of Chairman Giancarlo before the US Senate Agriculture, Nutrition, and Forestry Committee (Feb. 15, 2018).

⁵ As adapted from William Shakespeare’s Measure for Measure, Act II, scene 1, where Angelo argues that a weak enforcement of the law would lead to its general disregard: “We must not make a scarecrow of the law, setting it up to fear the birds of prey, and let it keep one shape till custom make it their perch and not their terror.”

⁶ Letter from Senators Roberts and Stabenow to CFTC Chairman Giancarlo, dated Jan. 8, 2018.

Last Updated: March 14, 2018

Remarks of Commissioner Rostin Behnam before the Commodity Futures Trading Commission’s International Regulators Meeting, Boca Raton, Florida

March 13, 2018

Introduction

Thank you for the kind introduction. It is a pleasure to be with you today. Before I begin, just a quick housekeeping note that the views contained in this speech are my own and do not represent the views of the Commission. Before I dive into the main topic of my remarks this afternoon, I want to spend some time sharing some key points from my first six months at the CFTC, and my vision for the next six months and beyond.

I delivered my first public remarks as a Commissioner in November at Georgetown University. I announced that during my first year as a Commissioner, I would spend as much time as possible on a listening tour, visiting market participants and stakeholders in order to get a better sense of what’s working and what’s not working. Given the broad swath of CFTC stakeholders, this listening tour has taken me to New York (several times), New Jersey, California, Iowa, Illinois, and Kansas. And I look forward to many more visits in the next six months so that I can fully digest and analyze the full spectrum of issues, concerns, and comments.

At the same speech delivered at Georgetown, I asserted that the CFTC is at an inflection point. Nearly ten years to the day since Bear Stearns collapsed, and nearly eight years since the passage of Dodd-Frank, the CFTC has largely completed its congressionally mandated, post-crisis financial reforms. Ahead of many of its domestic and international counterparts, I suggested in the speech that the CFTC must continue to move forward, swiftly finalizing any incomplete rules, and only consider narrow, surgical tweaks to existing rules as a measure to correct unintended consequences.

Given the sometimes aggressive rhetoric in Washington these days to roll-back regulations, I argued that the CFTC must continue to demonstrate its leadership by not rolling back or watering down any key financial reforms. With that in mind, I will continue to extend my desire and willingness to work with Chairman Giancarlo as he considers Project Kiss and Swaps Reform 2.0 in the weeks and months ahead. I will also continue to focus on what I believe are cornerstones of good regulatory behavior: accountability and transparency. Working with all stakeholders, both domestically and internationally, I am confident that the CFTC can be a forward thinking 21^st century regulator that maintains strong, robust rules of the road for market participants, while protecting the public from fraud and manipulation.

Turning to the next few months, I will be squarely focused on the Market Risk Advisory Committee (MRAC). As sponsor of this advisory committee, I am currently laying the groundwork for renewing the committee’s charter, reconstituting its membership, and setting an agenda for 2018. Having already met once this year, regarding a very hot topic: bitcoin, I believe the MRAC, as it is more commonly known, is ripe for many more important, cutting edge discussions. I believe it’s time for the CFTC to follow the lead of our fellow regulators in the prudential space and focus on operational risk—the risk that remains after determining financing and systemic risk, and includes risks resulting from breakdowns in internal procedures, personnel, and systems. It includes fintech risks such as service disruptions, data compromise, and cybersecurity. It also includes risks from outsourcing and use of third-party products and vendors. And, it includes fraud and other personnel misconduct. Of course, the MRAC will continue to focus on central counterparties (CCPs), expanding its focus from default risks to cover related credit and liquidity risks. There are certainly many important issues to discuss within this space considering above all else, that the CFTC and its markets deal in risk; and I look forward to input from all interested stakeholders, including regulators, to better inform the MRAC’s roadmap ahead.

Deference is the Cornerstone of the CFTC’s Cross-Border Supervision

Deference: The CFTC’s Cross-Border Approach

The CFTC has a long history of regulatory deference to overseas regulators in the futures and swaps markets. What do we mean by deference? Deference is an essential regulatory tool that not only alleviates practical budgetary constraints; but, also respects the strength of deserving foreign counterparts, and encourages the fundamentals of working together towards a cohesive cross-border regulatory framework that supports strong, robust, and transparent regulations. If a home country authority implements a comprehensive regulatory and supervisory framework that is comparable to our regulations and laws, then that home country authority should maintain primary oversight over its domestic entities to which other foreign regulators should defer. A solid, outcomes-based comparability assessment of the consistency of the home regulator’s relevant regulations and supervisory programs is the foundation of such deference.¹ An example of this approach is the Part 30 exemption regime for foreign futures which the CFTC established in 1987.² This program permits non-U.S. intermediaries to trade directly with U.S. persons that wish to transact in foreign futures on the basis of compliance with the regulations of their home jurisdictions. Part 30 was a pioneering program that used comparability determinations in order to facilitate cross border harmonization. Today firms all over the world, including Asia, the U.K., and the European Union (EU) have access to U.S. customers without having to register with the CFTC through the use of this program.

Another example of our approach is the 2016 CFTC and European Commission equivalence determination. On February 10, 2016, the CFTC and the European Commission issued a joint statement agreeing to support a common approach to regulation and supervision of cross-border CCPs.³ This agreement was not an afterthought. It took three years of extensive negotiations to put in place. Shortly thereafter, as part of our agreement, on March 15, 2016, the European Commission announced it would treat U.S.-registered clearinghouses as equivalent for purposes of recognition under the European Market Infrastructure Regulation (EMIR).⁴ Currently, there are five U.S.-registered derivatives clearing organizations (DCOs) that have received recognition under EMIR.⁵ Immediately after the European Commission’s decision, on March 16, 2016, the Commission reciprocated and approved a substituted compliance framework for EU-based clearinghouses registered with the CFTC.⁶ Under the framework, EU-based CCPs may comply with certain CFTC requirements for financial resources, risk management, settlement procedures, and default rules and procedures by complying with corresponding requirements under EMIR.⁷ Four European-based DCOs currently enjoy the benefit of the CFTC’s substituted compliance determination.⁸

European Commission Proposal to Amend EMIR

Our 2016 agreement is a successful testament to the cross-border regulation of CCPs. Our global markets are more efficient because of this agreement; there are less regulatory and supervisory burdens for our clearinghouses and less market fragmentation. However, last year, in the wake of Brexit, the European Commission proposed legislation to amend EMIR which would create a new European Framework to regulate and supervise CCPs.⁹ The proposal would expand the regulatory and supervisory authority of the European Securities and Markets Authority (ESMA) over both EU and third-country CCPs, alter the framework for the recognition of third-country CCPs, and provide the European Central Bank (ECB) and other EU central banks with direct oversight authority over both EU and third-country CCPs. It would, in effect, make EU authorities primary supervisors of third-country CCPs.

The proposal sets forth a new two-tier system for classifying and regulating third-country CCPs that operate in the EU. Under this proposal, all currently recognized CCPs will need to be reassessed as either “Tier 1” or “Tier 2” CCPs by ESMA. Tier 1 CCPs would be considered “non-systemically important,” and would continue to be able to operate under any existing recognition determination. Tier 2 CCPs would be considered “systemically important,” and would be subject to additional EU regulatory and supervisory requirements. Third-country CCPs in Tier 2 would be allowed to meet the additional EU requirements by following their home country rules to the degree that their home country regime is determined to be consistent with EMIR. If the home country rules of the third-country CCP are not consistent, then the CCP would be required to adopt and implement the EU requirements. Tier 2 CCPs would also be subject to the oversight of the ECB, which may require Tier 2 CCPs to adhere to additional requirements with respect to liquidity, segregation, and collateral.

The potential results are that the two U.S. CCPs that have been designated as systemically important by the U.S. Financial Stability Oversight Council (FSOC), CME and ICE Clear Credit, could be deemed Tier 2 CCPs and would be subject to additional regulatory and supervisory burdens beyond the equivalence conditions in the CFTC and European Commission equivalence determination. Moreover, if a Tier 2 CCP is deemed to be substantially systemically important to the EU by ESMA, such that even full compliance with EU requirements would not sufficiently reduce risks, ESMA may deny recognition and ask the European Commission to impose a location requirement for either the whole CCP or certain clearing services (i.e., only IRS products). LCH.Clearnet Ltd., which is based in London and regulated by the Bank of England and the CFTC, could be forced to relocate some or all of its euro-denominated clearing contracts to the EU under the proposal.

Our European colleagues suggest that the European Commission’s proposed legislation is a mirror copy of the CFTC regime.¹⁰ That is simply not the case. The proposed legislation contemplates a regime in the EU that would differ fundamentally in application and in substance from that of the CFTC. For instance, consider the cross-border application of the CFTC’s requirements to third-country CCPs and the cross-border application of EMIR to such CCPs. For third-country CCPs, the CFTC requirements apply to the U.S. side of the business only. In contrast, EMIR would apply to a third-country CCP’s entire business.

With respect to the designation of “systemically important,” I note that such a designation in the U.S. by the FSOC has been limited to U.S.-domiciled CCPs. Under the proposal, ESMA could designate a third-country CCP as systemically important; thereby, increasing the third-country CCP’s regulatory and supervisory burdens. The proposal also authorizes ESMA to conduct onsite inspections of a third-country CCP and provides ESMA with the discretion to invite the relevant third-country regulator of the CCP to participate. In contrast, while the CFTC reserves the right to examine CFTC-registered CCPs based outside of the United States, to date, the CFTC has not conducted onsite examinations of a non-U.S. based DCO on the continental EU. Moreover, the CFTC would not conduct an inspection or examination without the participation of the third-country regulator. For example, when the CFTC recently examined LCH.Clearnet Ltd., we did so in conjunction with the Bank of England, its primary regulator.

Concerns over how the European Commission’s Legislative Proposal would impact U.S. Clearinghouses

The European Commission’s proposed legislation would be detrimental to recognized U.S. CCPs. The proposal would likely subject recognized U.S. CCPs to overlapping regulation and duplicative supervision without due deference to existing CFTC regulation and supervision of those U.S. CCPs— due deference that was agreed upon in the 2016 CFTC and European Commission equivalence agreement. Moreover, this proposal would apply EMIR to all aspects of a third-country CCP’s business. This would be quite problematic for U.S. CCPs as there are aspects of EMIR that are inconsistent with the CFTC’s regulatory framework. For instance, under the CFTC’s regulatory framework for swaps, customer collateral provided for swaps is required to be segregated from a futures commission merchant’s own property pursuant to the legally segregated and operationally commingled segregation model (known as “LSOC”). This is in contrast to EMIR which requires that individual segregation be offered to clients for swaps. Recognized U.S. CCPs would not be able to offer individual segregation to their U.S. clients because individual segregation is inconsistent with the U.S. Bankruptcy Code. Consequently, this nuanced difference in regulation has direct and detrimental effects, among other things, on a recognized U.S. CCP’s ability to comply with U.S. law.

Moreover, I have serious concerns that a Tier 2 designation could result in the reopening and reconsideration of the 2016 CFTC and European Commission equivalence agreement and create uncertainty regarding the ability of EU market participants to continue to access third-country CCPs. As I previously mentioned, this agreement was the result of three years of negotiations. In the two years since the equivalence agreement, there have been no material changes to the CFTC’s regulatory or supervisory regime, and our recognized U.S. CCPs have not materially increased their EU-based activities. Therefore, reopening the agreement is unnecessary and can lead to a significant disruption of U.S. CCPs doing business in the EU and financial markets more generally.

Further, the proposal sets no limits on the ECB’s supervision of third-country CCPs. Under the CFTC’s regulatory and supervisory framework, the role of the Federal Reserve Board, the U.S. central bank, is limited to consultation with the CFTC regarding examinations and material rule filings of systemically-important U.S. CCPs. The Federal Reserve Board does not set policy or impose any additional requirements on CCPs. Moreover, the Federal Reserve Board has no role in the oversight of non-U.S. based CCPs registered with the CFTC. Therefore, this proposal is highly disconcerting.

If the proposed legislation becomes law, it is likely that the costs to clear through recognized U.S. CCPs will increase for all market participants. Such increases have the potential to de-incentivize central clearing and could lead to downstream effects such as fractured liquidity and increased systemic risk, which would affect the stability of the financial markets.

I echo Chairman Giancarlo’s sentiment that any change to our existing 2016 agreement is unacceptable.¹¹ My position is that U.S. CCPs must continue to be primarily regulated by U.S. regulators. CFTC regulation and supervision of its CCPs is strong, transparent, and exhaustive. As a result, there is no reasonable basis for the EU to have concurrent oversight over U.S. CCPs.

Looking Forward: What is the Fix?

The European Commission should abide by its commitment to the 2016 equivalence agreement, and provide the CFTC assurances in the legislation that recognized U.S. CCPs will be treated in accordance with the 2016 equivalence determination. This position is fully supported by key members of the U.S. Congress¹² and by the U.S. Administration.

Conclusion

I have heard repeatedly that a sovereign nation has the right to amend its rules and the right to renegotiate agreements. I agree, however, our CCPs will not be collateral damage in the ongoing Brexit battle between the U.K. and the EU. No matter what happens in that battle, U.S. markets will be open for business, will continue to thrive, and will provide the efficiencies of resiliency that market participants deserve.

Thank you for the opportunity to speak to you today.

¹ See also IOSCO Task Force on Cross-Border Regulation, Final Report (Sep. 2015) (advocating for an outcomes-based approach).

² 17 CFR Part 30.

³ The U.S. Commodity Futures Trading Commission and the European Commission: Common Approach for Transatlantic CCPs (Feb. 10, 2016), available athttp://www.cftc.gov/PressRoom/PressReleases/cftc_euapproach021016.

⁴ Commission Implementing Decision No. 2016/377 of 15 March 2016, 2016 O.J. (L70), 32 (EU); see also European Commission adopts equivalence decision for CCPs in USA (Mar. 15, 2016), available at http://europa.eu/rapid/press-release_IP-16-807_en.htm.

⁵ CME Inc., ICE Clear Credit LLC, ICE Clear U.S. Inc., Minneapolis Grain Exchange Inc., and Nodal Clear LLC have received recognition under EMIR which permits them to provide clearing services for European market participants.

⁶ Comparability Determination for the European Union; Dually-Registered Derivatives Clearing Organizations and Central Counterparties, 81 Fed. Reg. 15260, Mar. 22, 2016; see also CFTC Approves Substituted Compliance Framework in Follow-up to the Recent Equivalence Agreement between the US and the EU (Mar. 16, 2016), available athttp://www.cftc.gov/PressRoom/PressReleases/pr7342-16.

⁷ Under the CFTC’s substituted compliance framework for dually-registered DCOs and EU CCPs, the CFTC issued no action relief from certain CFTC requirements that are “not comparable” with EMIR requirements and thus, are not applied to EU-based DCOs in order to facilitate cross-border regulatory coordination with the EU. The relief covers CFTC requirements related to: the agency clearing model, LSOC (Part 22), gross margining for initial margin, collection of initial margin at a level that is greater 100% of the DCO’s initial margin requirement, prohibition against setting a minimum capital requirement of more than $50 million, straight-through-processing of swaps, clearing members maintenance of written risk management policies and procedures, submission of quarterly financial reports to CFTC, and the submission of annual audited year-end financial statements in accordance with U.S. GAAP. See CFTC Letter No. 16-26 (Mar. 16, 2016).

⁸ These DCOs are Eurex Clearing AG, ICE Clear Europe Ltd., LCH.Clearnet Ltd., and LCH.Clearnet SA.

⁹ Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorization of CCPs and requirements for the recognition of third-country CCPs, COM (2017) 331 final (June 13, 2017); see also Commission proposes more robust supervision of central counterparties (CCPs) (June 13, 2017), available at http://europa.eu/rapid/press-release_IP-17-1568_en.htm.

¹⁰ EU policy makers have also made such statements to the press. See Neil Roland and John Rega, CFTC’s Giancarlo to voice concerns about EU bill in Europe visit, MLex, Feb. 16, 2018; Jim Brunsden and Philip Stafford, What is London’s Euro Clearing Market and Why is Brussels Worried?, Fin. Times, June 13, 2017.

¹¹ Testimony of Chairman J. Christopher Giancarlo before the U.S. Senate Comm. on Agric., Nutrition, and Forestry, Feb. 15, 2018, available athttp://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo38.

¹² Letter from Senators Pat Roberts and Debbie Stabenow, Chairman and Ranking Member, Comm. on Agric., Nutrition and Forestry, U.S. Senate (Jan. 8, 2018), available at https://www.agriculture.senate.gov/imo/media/doc/01-08-18%20CFTC%20EUROPEAN%20CLEARING%20LETTER.pdf.

Last Updated: March 14, 2018

Keynote Address of Chairman J. Christopher Giancarlo before FIA Annual Meeting, Boca Raton, Florida

March 14, 2018

Thank you. Good morning. Thank you, Walt. It is great to be here at FIA’s 43^rdInternational Futures Industry Conference. It is certainly the one annual event that brings together all participants in the global derivatives markets.

So I am delighted to have this opportunity to speak to all of you about our work at the CFTC. Thank you for your attendance.

There is a comment attributed to Isaac Newton. He said that, if he saw farther than others, it was because he stood on the shoulders of giants.

Today, I can’t help but think of one of the giants of the derivatives industry: Leo Melamed. We all see farther because of Leo. Many of you know Leo. Some of his colleagues and friends are here today. We have all, directly or indirectly, been influenced by him.

Leo is the Chairman Emeritus of the CME Group and one of the central figures in American commerce and trade. He has just announced his retirement. In the world of derivatives, he has been a leader who shaped and guided our thinking. In electronic commerce, he actually took us into a new world. He is often called the “father of financial futures.”

Leo Melamed’s vision, brilliance, and accomplishment have spread out from Chicago to include the entire world, a world that began for him with harsh clarity through escaping with his family from Nazi-invaded Poland. Then, the stuff of legend: crossing wartime Siberia by railroad and then by boat to Japan, crossing the Pacific by ship only months before Pearl Harbor. He and his family eventually found safety in America. From there, he stumbled into the world of finance by mistake, yet by pluck and hard work, he thrived and conceived great innovations in trade and commerce. He founded and chaired the NFA from 1982 through 1989, and provided direction and guidance of the Chicago Merc as it grew into one of the great institutions of American finance.

Leo has been a grand figure striding the world’s financial landscape. A consummate professional, a creative visionary. And, what I admire most: a fearless believer in the promise of tomorrow.

Leo dared to define his own future, not have it defined for him. When he started out in Chicago seventy years ago, he found markets that were small, commodity based, and domestic. He leaves markets that are enormous, diversified and international.

And, we are here today - standing on Leo’s shoulders - participating in global derivatives markets that are legacy of a man who was not afraid to envision a brighter and more prosperous future. I dedicate my remarks today to Leo Melamed.

A year ago, I addressed you from this stage. I explained my vision for the CFTC, which is to help foster economic growth, right size the CFTC’s regulatory footprint and enhance our markets. This is a vision much in line with Leo’s legacy.

So, let me review what we’ve done since then and what’s ahead.

Fostering economic growth:

At the CFTC, we have taken several steps to align our work with efforts towards revival of the American economy.

Project Kiss: On February 24, 2017, President Trump issued an Executive Order on “Enforcing the Regulatory Reform Agenda.” Although the CFTC, as an independent agency, is not strictly bound by the Executive Order, I believe that the time has come to re-examine the implementation of our regulations. We established a process to work with the public to identify areas where regulations could be simpler, more coherent, and more understandable. We developed an initiative called “Project KISS,” gathering input both within the agency and from the public. Now, Project KISS is not about changing policy. It's designed to simplify and make our rules and regulations less complex, less costly, less burdensome.

Complex rules are great for the big players in our markets, who can afford the lawyers necessary to interpret them. But simpler rules make our markets more accessible to small and medium-size firms, which, as we know, are the engines of economic growth and job creation.

A month ago, my Chief of Staff, Mike Gill, outlined the current Project KISS program. Look for a series of “Kissable” rule improvements over the course of the year to come.

Market Intelligence: The great Wayne Gretzky once explained that the secret to his success was that he skated to where the puck was going, not to where it had been. In the CFTC’s work overseeing the world’s most dynamic markets, we must also anticipate the development and direction of markets and “skate” to where they are going.

That is why we have created a new market intelligence branch. Its function is to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends – such as the impact of new technologies and trading methodologies. We also created a Chief Market Intelligence Officer, who engages with industry participants, other regulators, and the new Market Intelligence branch. Together, they are a key part of the CFTC’s goal of being a 21^st Century regulator.

LabCFTC: We also developed another initiative to keep pace with technological innovation: LabCFTC. It is the focal point of our effort to engage with innovators, facilitate market-enhancing technology and fair competition and manage the interface between technological innovation, regulatory modernization and existing rules and regulations.

In less than a year of operation, LabCFTC has met with over 150 fintech innovators, from startups to large institutions and from lower Manhattan, to Chicago to Silicon Valley. It has observed demonstrations of many new technologies with the potential to improve our markets and enable the Commission to carry out its mission more effectively and efficiently.

Going forward, LabCFTC seeks ways to collaborate with external organizations, including domestic and international regulators, focused on sharing information and best practices in fintech innovation. A recent example is the collaboration agreement that UK Financial Conduct Authority CEO Andrew Bailey and I signed last month in London to share information on fintech innovation.

Right-sizing the CFTC’s regulatory footprint

Back To Basics: We are committed to right-sizing the CFTC’s regulatory footprint following years of expansive Dodd-Frank rule writing. This means resumption of normalized operations and practices, including greater care and precision in rule drafting, more thorough econometric analysis, less contracted time frames for public comment and a reduced docket of new rules and regulations to be absorbed by market participants.

Internally, we are rebuilding agency morale and esprit d’corps. We remain optimistic of appropriate agency funding after three years of flat budgets. We also recently achieved a two-year collective bargaining agreement with our union. We have filled key positions with capable leaders, including the General Counsel, Director of Enforcement and heads of the Division of Market Oversight (DMO), Division of Swap Dealer & Intermediary Oversight (DSIO), and Division of Clearing and Risk (DCR). Today, we are an agency that takes seriously our mission of quality and effective public service.

Cooperation works both ways. We have enhanced our relationships with other federal agencies, including the SEC, Federal Reserve, and FDIC, and with state agencies. We have new, operational metrics: partnership, harmonization, information sharing, sound budgeting, good customer service, pro-active and forward-looking thinking, technological proficiency and problem-solving.

Enhancing US derivatives markets

Enforcement: A year ago, I stood at this podium and issued a warning to those who may seek to cheat or manipulate America’s derivatives markets. I said, “There will be no pause, no let up and no reduction in our duty to enforce the law and punish wrongdoing in our derivatives markets. The American people are counting on us.”

In the year that has passed, the CFTC Division of Enforcement has made good on my warning. As the Wall Street Journal recently reported, the Division of Enforcement has filed almost as many fraud and manipulation cases in the past five months as it has in any prior fiscal year.

In January alone, the CFTC worked with the Department of Justice and FBI in bringing criminal charges against six individuals and several large market participants involved in commodities fraud and spoofing schemes. That action was the largest futures market criminal enforcement action in American history.

I am committed to punishing bad actors in the marketplace. That commitment is not only that of a regulator, but as a former marketplace operator, who knows that market integrity is essential to fostering robust trading and responsible risk taking.

A visible example of that commitment has been in the area of virtual currencies. Over the past several months, the CFTC filed a series of civil enforcement actions against perpetrators of fraud, market manipulation and disruptive trading involving virtual currency. One case involved a possible Ponzi scheme that fraudulently solicited algorithmic trading in virtual currency, made false reports and misappropriated funds. Another concerned potential commodity fraud and misappropriation. A third charged the defendants with fraud in connection with purchases and trading of Bitcoin and Litecoin. You get the picture.

Customer Education: Market growth and surveillance are also assisted, even stimulated, through consumer education.  The CFTC’s Office of Consumer Education and Outreach engages with a range of audiences such as retail investors, industry professionals, seniors, and vulnerable populations who may be targeted by unscrupulous individuals with the intent to defraud them of their savings. We plan to expand this engagement in the year to come.

Okay. Those are some of the things we have been doing. Let me now tell you what is ahead:

Dealer De Minimis: This year we will complete rules on de minimis levels for swap dealer registration. Staff of the CFTC’s Division of Swap Dealer and Intermediary Oversight have now presented my fellow Commissioners and me with current swap dealing data and analysis and are now addressing follow up questions. I am hopeful that the data will enable the Commission to reach a consensus on an appropriate de minimis level. I know my fellow Commissioners share my determination to complete the rule this year.

Supplemental Leverage Ratio: We remain focused on working with other US financial sector regulators to address elements of the Supplemental Leverage Ratio that inhibit greater central clearing of derivatives, a key mandate of the Dodd-Frank Act. The October 2017 Department of Treasury report on capital markets¹ thoughtfully addressed these concerns. Specifically, the current SLR definition of total exposure is not reflective of a clearing member’s true exposure to swaps. We will work hard with other financial and prudential regulators to form a consensus around appropriate adjustments to the SLR.

SEF Rules: I have written and spoken about the fragmentation of global swaps markets caused by the CFTC’s flawed implementation of the swaps execution mandate under Dodd-Frank.² I have asked DMO staff to reconsider the current swaps trading rules to fully accord with Congressional intent, better align to inherent market dynamics, fully allow US swap intermediaries to fairly compete in world markets and begin to reverse the tide of global market fragmentation. I intend to put before the Commission a rule proposal for notice and comment in the next few months.

Position Limits: I am committed to moving forward with a final position limits rule.  It is an enormously important undertaking that will impact America’s farmers, ranchers, and manufacturers and their ability to hedge legitimate production costs. There are hundreds of comment letters on the topic and there are opinions on all sides of the issue, including by American agriculture producers.  Based on public comments, it is clear that the Commission has not yet gotten it right.

DMO staff have begun work on revisions to the proposal that are responsive to the public comments. I have told them to ensure that American farmers, ranchers and producers can continue to use long standing hedging practices in our markets. I look forward to sitting down with the Division in the near future to discuss their progress.

Any final position limits rulemaking should be done properly by a full Commission of five commissioners. It will ensure that any final position limits rule is indeed final and stands the test of time and changes in future administrations.

Regulation AT: Regulation AT was an initiative of my predecessor, Chairman Massad. My position was and continues to be that, while there were some good things in the proposal, there were other things that were unacceptable and perhaps unconstitutional, including that proprietary source code used in trading algorithms be accessible at any time to the CFTC and the Justice Department without a subpoena.

At heart, Reg AT is a registration scheme that would put hundreds if not thousands of automated traders under CFTC oversight, a role for which our agency has inadequate resources. While I share genuine concerns about the inevitability of some future market disruption exacerbated by automated trading algorithms, there is nothing in Reg AT’s proposed imposition of burdensome fees and registration requirements on scores of trading firms that will prevent such an event.

When I voted against the current proposal, I said that the relatively blunt act of registering automated traders does not begin to address the complex public policy considerations that arise from the digital revolution in modern markets. We should and must do better.

I am open to considering whether there are elements in Reg AT that could serve as the basis for a new and truly effective rule. I believe my fellow Commissioners have some good ideas. Our new Market Intelligence Branch and Office of Chief Economist will provide critical market analysis of the role of algorithmic trading. In February, the UK FCA and the Prudential Regulatory Authority published papers outlining their respective regulatory governance and compliance expectations in respect of algorithmic trading. There is a growing body of data and analysis for us to draw upon. Yet, the goal must be an effective rule, not just any rule.

Cross Border

I began earlier by describing the global nature of today’s markets. Regulators must work cooperatively across borders to promote growth and innovation while supporting the financial stability of global markets.

And true to our word, we at the CFTC have spent considerable time and resources to forge strong relations and seek cross border coordination with regulators all over the world. I personally have sought to meet with as many of my foreign regulatory counterparts as possible. I have been an active participant in international bodies like the FSB and IOSCO. At the same time, CFTC staff are leading international working groups and task forces to build consensus and common ground with foreign authorities on a wide range of topics including international data standards, cybersecurity, crypto-assets and fintech, information-sharing and derivatives reforms.

Illustrative of these efforts are two significant equivalence milestones we reached with the European Commission in the past six months: comparability and equivalence of margin for uncleared swaps and an equivalence and exemption framework for swaps trading platforms. These tangible successes represent the CFTC’s willingness to work in good faith with the EU to avoid disruption to the trans-Atlantic market and my belief that regulatory and supervisory deference must be the basis for CFTC-EU engagement.

I fully expect that the CFTC’s relationship with the European Union will grow stronger in time. I believe that our cooperation on key regulatory issues is vital to spurring economic growth in both of our jurisdictions. Especially in the face of uncertainty over the United Kingdom’s future relationship with the rest of the European Union, embracing deference and cooperation between Europe and the United States is the only sensible path forward. I call on my friends in Europe to join me in this effort.

Conclusion

So, this is our agenda going forward both domestically and internationally. I look forward to reporting on our progress to you again next year.

I want to close with a reference to a film I saw recently: The Darkest Hour. It is the story about Winston Churchill and the lead up to his great 1940 speech expressing defiance and determination in the face of defeat.

What a remarkable individual. His vision, determination, and courage made him equal to the moment, defiance in the face of threatening danger. He would neither flag nor fail. Never give in or give up.

I call on us to do the same.

Our country and, particularly, our capital markets, have always attracted the fearless, the intrepid, the dauntless. That is because the very purpose of our markets is to defy fear, to hedge exposure, mitigate loss and control risk.

Let us endeavor to fearlessly build our markets, just like Leo Melamed, who came to this country, explored every advantage, and gave back more than he took.

Let us do the same. I turn to each and every one of you here: be fearless, be creative, be smart, be bold – with confidence, build the markets of tomorrow.

Thank you.

¹ See U.S. Department of Treasury, A Financial System That Creates Economic Opportunities, Capital Markets, Oct. 2017, https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.

² Commissioner J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank, Jan. 29, 2015, http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf.

Last Updated: March 14, 2018

Statement of CFTC Commissioner Brian D. Quintenz on a Proposal by Cameron and Tyler Winklevoss for a Virtual Commodity SRO

March 13, 2018

I congratulate Cameron and Tyler Winklevoss on their energetic leadership and thoughtful approach in outlining a virtual commodity self-regulatory organization (SRO) concept.

Ultimately, a virtual commodity SRO that has the most independence from its membership, the most diversity of views, and the strongest ability to discover, reveal, and punish wrongdoing will add the most integrity to these markets. I encourage Gemini (or any other market participant, advocacy group, platform, or firm) to be aggressive in promoting these qualities within any SRO construct.

Last Updated: March 13, 2018

Keynote Address by Commissioner Brian D. Quintenz before the DC Blockchain Summit

March 7, 2018

Introduction

Good afternoon and thank you for that very kind introduction. As an alumnus, I’m always happy to be back at the McDonough School of Business. It’s great to be with you here at the DC Blockchain Summit. I want to congratulate Perianne and the Chamber of Digital Commerce on hosting such a fascinating event with such robust participation by the DLT and cryptocurrency community. What you have accomplished in advocacy and connectivity in such a short period is incredible.

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

I want to start with a story about my childhood. I have a fraternal twin brother. Growing up, we were pretty competitive – academically, socially, and athletically. One of the sports we both played was tennis. As some of you know, amateur tennis at the juniors, high school, and college level is kind of a unique sport in terms of its rule enforcement. The players themselves act as the referees. But if you think about the landscape of competitive tennis, as the seriousness of the sport and the consequences of winning increase, and the players become professionals, umpires ultimately are called in to officiate the game. The incentives become too skewed for a player to make the right call in a tight situation. I believe we are at that same point with regard to cryptocurrency exchanges where millions, if not billions, of dollars’ worth of products are transferred on a daily basis. Some level of independent officiating is now required.

Before we get in to that, however, let’s take a step back and talk about how we, the Commodity Futures Trading Commission (CFTC) – the traditional regulator of frozen concentrated orange juice and pork belly futures – got involved in cryptocurrencies.

Since Satoshi Nakamoto first published his groundbreaking paper on cryptography and a cryptocurrency called bitcoin almost decade ago,¹ we have witnessed exponential growth in the technology underlying bitcoin – distributed ledger technology (DLT) – and its dizzying array of potential applications. We have also seen the proliferation of thousands of new cryptocurrencies² – such as litecoin, ether, ripple, zcash, monero, to name a few – as well as tokens, such as utility tokens, like Filecoin, that can be used to rent cloud storage space.³The transaction platform landscape is advancing rapidly as well. People can now purchase bitcoin from multiple locations in and around the District of Columbia, including a falafel shop in Adams Morgan, a beer and wine market in Columbia Heights, and a laundromat in Falls Church.⁴

Although it sometimes feels like it, the markets for these cryptocurrencies and digital assets did not develop overnight. And neither did the CFTC’s thinking around these products and markets.

The Beginning

Congress, through the Commodity Exchange Act (CEA), granted the CFTC exclusive jurisdiction over futures, options, and swaps on commodities.⁵ In turn, the CEA defines the term “commodity” very broadly to include, among other things, all goods and articles and “all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.”⁶

In December 2014, then Chairman Timothy Massad first declared through Congressional testimony that the Commission viewed virtual currencies as commodities. The former Chairman explained that although the Commission did not have policies and procedures specific to virtual currencies like bitcoin, the Commission’s “authority extends to futures and swaps contracts in any commodity” and therefore “derivative contracts based on a virtual currency represent one area” within the Commission’s responsibility.⁷

Nine months later, in September 2015, this interpretation was formalized through a CFTC enforcement action. The CFTC filed and settled a complaint against a bitcoin trading platform called Derivabit, which was owned and operated by a company called Coinflip. The Derivabit trading platform offered to connect buyers and sellers of bitcoin options contracts. In the order, the Commission asserted jurisdiction over Derivabit’s activities by determining that “bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”⁸ Based upon this finding, the CFTC found that Derivabit had illegally offered commodity options without being registered as an exchange or swap execution facility with the Commission.⁹

The Coinflip case was the first time the CFTC asserted jurisdiction over contracts involving bitcoin by recognizing that bitcoin was a commodity. That jurisdiction, though, is limited when it comes to the actual trading of bitcoin itself.

It is important to recognize that, in the derivatives markets, the CFTC has both oversight and enforcement authority, while in the spot markets, or the platforms where commodities themselves are actually bought and sold, the CFTC has only enforcement authority.

In terms of oversight authority over derivatives trading, the CFTC’s role is broad and far reaching, including setting requirements for: registration of trading platforms or firms, trade execution, orderly trading, data reporting, and recordkeeping.

But in the spot markets for commodities, neither the CFTC nor any other federal agency has that same oversight authority. This means the agency cannot impose things like registration requirements on platforms or participants in the cash markets, surveillance and monitoring requirements on spot platforms, or otherwise require compliance with business conduct standards or other trading requirements. The CFTC only has enforcement authority to police fraud and manipulation in the actual trading of commodities. Pursuant to this enforcement jurisdiction, the CFTC can investigate potential fraud and manipulation in the underlying virtual currency spot markets.

One area where the Commission has taken enforcement action on spot exchanges involves “look-alike futures contracts” offered to retail customers. In the Dodd-Frank Act, Congress added a provision to the CEA known as the retail commodity provision, which states that if an entity offers a commodity for sale to a retail customer on a margined, leveraged, or financed basis – in other words, with borrowed funds – then the agreement is regulated as if it were a futures transaction.¹⁰ Regulated like futures, these contracts then become subject to CFTC requirements related to exchange trading and registration.¹¹However, there is an important exception to the Commission’s retail commodity jurisdiction for cases where the commodity is actually delivered to the buyer within 28 days.

Within a year of the Coinflip case, the CFTC filed and settled a case against a Hong Kong-based company called Bitfinex.¹² Bitfinex held itself out as a spot exchange where retail customers could buy and sell bitcoin and other virtual currencies. However, the exchange permitted retail customers to purchase bitcoin on a leveraged, margined or financed basis, thereby transforming what might have been vanilla spot transactions into look-alike futures contracts within the Commission’s jurisdiction.

In the case of Bitfinex, the Commission found that Bitfinex failed to actually deliver the bitcoin to the buyers because Bitfinex held the bitcoin in its own private wallet and retained control of all the “private keys” that permitted access to the wallet.¹³ Accordingly, the Commission found that these financed retail commodity transactions did not meet the exception for actual delivery and should have been executed on a registered exchange like any other futures contract. In addition, the Commission determined that Bitfinex should have been registered as a futures commission merchant.

While I agree with the outcome of the Bitfinex case, it is an example of the Commission making policy through enforcement. Prior to Bitfinex, the CFTC had never before addressed what “actual delivery” means in the context of virtual currencies – although the agency had issued guidance in 2011 about what actual delivery means in the context of physical commodities, like wheat or oil. Therefore, before the Bitfinex case, there may have been some confusion about what constitutes actual delivery for cryptocurrencies. As a general matter, I think the optimal approach to the regulation of incipient, but growing, markets is for the regulator to provide the market with some guidance or even a bright line test that gives some indication of the agency’s interpretation of its regulations and how it might adjudicate certain situations. That is why, although I believe the Bitfinex case was settled correctly, I was pleased to see the Commission issue proposed guidance about the meaning of actual delivery in the context of virtual currency transactions.¹⁴

The proposed interpretation builds upon past Commission guidance and focuses on whether the customer can take possession and control of the commodity and use the commodity freely in commerce 28 days after purchase.¹⁵ I am looking forward to reviewing public comments and believe they will greatly benefit the development of a clear standard for when financed virtual currencies are considered actually delivered to retail customers.

A New Chapter

We entered a new chapter in cryptocurrencies this past December when both CME Group and Cboe listed futures contracts on bitcoin. Let me take a minute to address some concerns I have heard regarding cryptocurrency futures generally.

For those who may be concerned by the speed at which new cryptocurrency futures contracts may be listed, it is not the case that a token or cryptocurrency can be created today and have a futures contract tomorrow. One of the core principles in the CEA to which an exchange must adhere in listing futures contracts is to ensure the financial integrity of its transactions, including the clearance and settlement of the transactions with a clearinghouse. One measure of a futures contract’s financial integrity is the contract’s initial margin level. In order to gain comfort that a contract’s initial margin level is set commensurate with the volatility of the underlying asset, the Commission generally likes to see a historic time series of price data on that asset covering either a full economic cycle or including periods of significant stress. In terms of bitcoin futures, the Commission had five years’ worth of price data, with multiple periods of stress, with which to back test initial margin sufficiency. I would expect to see similar time periods of price data for any new cryptocurrency futures contract proposals.

From a risk perspective, it is important to note that the Commission is concerned with one or two day price volatility, not weekly or monthly volatility, and certainly not percentage moves across quarters or years. This is because variation margin payments are exchanged at the end of every trading day, which resets any positive or negative economic exposure back to zero. Losses, therefore, cannot accumulate over time. Both CME and Cboe set initial margin requirements for the bitcoin futures contracts that take into account their potential one-day volatility. CME’s initial margin is currently set at 47 percent of the notional value of the contract, while Cboe’s initial margin requirement is 44 percent. As a point of comparison, these margin requirements are roughly ten times more than the initial margin required for CME corn futures products.

The amount that a futures contract’s daily price change eats into the initial margin posted by traders is called margin erosion. Staff monitors contracts’ margin erosion on a daily basis to ensure the required initial margin levels remain adequate. Over the past two months, we have seen only one example of bitcoin’s price movements eroding the contract’s initial margin by up to 50%. In contrast, during that same time period, on eleven separate occasions, volatility in the WTI crude oil contract eroded initial margin levels by more than 50%, sometimes upwards of 70%. Similarly, during that time period, there were five instances of price movements in CME’s 10-year Treasury futures contract eroding initial margin by more than 50%. As a general matter, based on CFTC regulations, two to three initial margin breaches per year would be reasonable. Therefore, to date, the initial margin for bitcoin futures contracts has performed as required. While it is important to monitor and regularly re-evaluate the performance of the bitcoin futures contracts, I believe that the Commission and clearinghouses have the tools and expertise to make any necessary adjustments.

Looking Ahead

In the midst of this technological revolution, which promises to transform the building blocks not just of our financial markets, but of commerce in general, I am honored to sponsor the Commission’s Technology Advisory Committee (TAC). The TAC will serve as an immeasurable well of knowledge from which the Commission may draw. We had our first meeting of 2018 three weeks ago, where the TAC recommended that the Commission create four subcommittees to provide actionable advice regarding cryptocurrencies, DLT, cybersecurity, and the modern trading environment. That last subcommittee will explore the real risks of the modern trading environment so that a properly calibrated replacement to Regulation Automatized Trading (Reg AT) can be considered by the Commission. We are still in the process of forming these subcommittees and I look forward to their first meetings.

During the TAC meeting, I also expressed my willingness to explore how a new, private independent organization could perform an oversight function for U.S. cryptocurrency platforms. For example, we see this model working today through the National Futures Association (NFA) and the Financial Industry Regulatory Authority (FINRA). Currently, a patchwork of state and federal regulators have jurisdiction over the cryptocurrency industry. In my opinion, the area with the greatest need for enhanced regulatory certainty and oversight is the spot market. Today, state regulators and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) regulate cryptocurrency platforms as money service businesses.¹⁶ While cryptocurrency exchanges can resemble traditional money transmission services, there are enough differences to warrant different regulatory treatment. As Congress works with federal and state regulators to determine the appropriate regulatory framework for cryptocurrencies, I believe an SRO-like entity could develop industry standards that could inform, or even serve as a blueprint for, future action.

Indeed, we are already seeing a movement toward self-regulation in the cryptocurrency sector. A cryptocurrency trade association called “CryptoUK” was recently established in the United Kingdom.¹⁷ The organization has established a code of conduct for its members which includes guidelines around due diligence checks, customer protections, and pricing transparency. Similarly, the heads of two cryptocurrency trade groups in Japan, together with the country’s 16 spot exchanges, have committed to establishing a new self-regulating body.¹⁸ In the United States, efforts toward standardization are also underway at the state level. Seven states have agreed to recognize each other’s money service business licenses¹⁹ and a model state virtual currency law has been published.²⁰

I think an independent, self-regulating body for spot platforms in the United States could significantly contribute to these ongoing efforts to rationalize and formalize cryptocurrency regulation. Initially, this entity could establish best practices for spot platforms, including setting minimum standards of fitness for their employees. Eventually, it could enforce rules on its own membership, supervise them for compliance, and provide a forum for customers to seek redress against member platforms, just like FINRA and NFA do for the securities and derivatives markets today. An SRO-like, independent regulatory body could create uniform standards for these trading platforms, reduce the possibility of regulatory arbitrage, and avoid duplicative regulation.²¹

A private cryptocurrency oversight body has several advantages. First, as a private membership organization, it could begin providing oversight over spot platforms far more quickly than any federal regulatory regime, which could only be established following the promulgation of a new law, given the current lack of oversight jurisdiction. A case in point is the regulation of the off-exchange retail foreign exchange (“retail forex”) industry. The NFA began regulating this sector seven years before the CFTC.²²

SRO-like entities also provide numerous efficiencies. They are funded by their members, not by the federal government. They can adopt and amend rules more quickly than a federal agency. The rules and best practices published by an SRO are informed by practical experience because the organization has input from industry participants. This is especially beneficial in the case of a rapidly evolving industry, like cryptocurrency, where products and trading conventions are constantly changing.

Additionally, past SROs have not limited their functions to enforcing fair trading practices. In the 1890s, the Butter and Cheese Exchange of New York (the predecessor to the New York Mercantile Exchange (NYMEX)) implemented groundbreaking methods of standardizing butter, cheese, and eggs. NYMEX graded and inspected butter before the U.S. Department of Agriculture.²³There is certainly a broad role for a private cryptocurrency oversight body to play in developing these markets.

I would also point out that there is a long history of SROs in the U.S. futures industry, dating back to the mid-nineteenth century, decades prior to the adoption of federal regulation.²⁴ The Chicago Board of Trade (CBOT) began enforcing rules on its members in 1859.²⁵ In 1897, when CBOT member Joe Leiter, the “Wheat King,” attempted to corner the December wheat market, the CBOT suspended Leiter from the exchange.²⁶ In contrast, state anti-corner statutes were ineffective during this era, and, despite the introduction of 200 futures regulation bills in Congress between 1880 and 1920, no federal legislation was passed until 1921 – over twenty years after the CBOT suspended the Wheat King from the market.²⁷

Moreover, Congress has repeatedly called for self-regulation in conjunction with federal oversight of financial markets. When the CFTC was first created in 1974, its authorizing statute

included provisions for a “registered futures association” or RFA to be supervised by the CFTC.²⁸ The NFA became the first RFA in 1981 and still serves this function today. FINRA traces its history to the Maloney Act of 1938, which created the National Association of Securities Dealers to promote oversight of the over-the-counter securities market. The Municipal Services Rulemaking Board has served as the SRO for firms operating in the municipal securities markets since the Securities Acts Amendments of 1975.

Any SRO-like body should have policies and procedures to address potential conflicts of interest between itself and the industry it regulates. It should strive to have a fair representation of diverse views among its members and leadership. But, such entities need not develop standards for independence and fairness from scratch. The International Organization of Securities Commissioners (IOSCO) has developed internationally recognized Principles for Self-Regulation.²⁹ According to this benchmark, an SRO should establish standards of corporate governance to effectively manage any conflicts of interest. IOSCO calls upon SROs to observe standards of fairness and confidentiality when exercising powers and responsibilities, and to avoid rules that may create anti-competitive situations or allow any market participant to unfairly gain advantage in the market.³⁰ The SRO should also have the ability to enforce compliance by its members with its standards and should develop rules that promote investor protection and market integrity.³¹ Compliance with IOSCO’s robust set of protocols would lend credibility to any SRO-like body for cryptocurrency spot platforms.

Ultimately IOSCO’s framework calls for the SRO to be subject to the oversight of a government regulator, who can assume responsibility should the SRO exhibit conflicts of interest or prove unable to discharge its responsibilities.³²To-date, Congress has not authorized the creation of an SRO to serve in this capacity in the cryptocurrency markets. Notwithstanding this fact, I believe that while Congress considers what, if any, further federal action in this area is appropriate, an SRO-like entity could begin to develop ideas and standards that would strengthen the integrity of the spot markets. We regularly hear from cryptocurrency market participants that they desire a more credible, regulated marketplace. I believe that a private, cryptocurrency oversight body could help bridge the gap between the status quo and future government regulation.

Conclusion

While my tennis matches with my brother never rose to the level that necessitated an official referee (although that might have led to less brotherly squabbling), I think we’ve come to the point with cryptocurrencies where an independent body must step up, establish, and enforce the rules of play. It is my hope that cryptocurrency platforms in the United States will consider the many benefits, including enhanced credibility, that the establishment of an SRO-like organization may provide.  Moreover, in light of the global market for cryptocurrencies, and the efforts currently underway in the United Kingdom and Japan, there is no reason why a private, cryptocurrency oversight body could not achieve global significance.  I look forward to working together with you and other industry participants to find ways to strengthen the integrity of these growing markets.  Thank you. 

¹ Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (Oct. 2008), https://bitcoin.org/bitcoin.pdf.

² Cryptocurrency Market Capitalizations, CoinMarketCap, https://coinmarketcap.com/all/views/all/.

³ Josiah Wilmoth, Three Types of ICO Tokens, Strategic Coin, http://strategiccoin.com/3-types-ico-tokens/.

⁴ Bitcoin ATM Map, https://coinatmradar.com/bitcoin-atm-near-me/.

⁵ CEA Section 2(a)(1)(A).

⁶ CEA Section 1a(9).

⁷ The Commodity Futures Trading Commission: Effective Enforcement and the Future of Derivatives Regulation Before the S. Comm. on Agric., Nutrition, and Forestry, 111th Cong. 55 (2014) (statement of Timothy Massad, Chairman of the Commodity Futures Trading Commission).

⁸ In re Coinflip, Inc., CFTC Docket No. 15-29, at 3 (Sept. 17, 2015), http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf.

⁹ Id. at 4. Most recently, Judge Weinstein of the U.S. District Court for the Eastern District of New York affirmed the Commission’s conclusion that virtual currencies were commodities subject to the Commission’s jurisdiction in a Preliminary Injunction Order.

¹⁰ CEA Section 2(c)(2)(D).

¹¹ Id.

¹² In re BFXNA Inc., CFTC Docket No. 16-19 (June 2, 2016), http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf.

¹³ Id. at 3, 6.

¹⁴ Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60335 (Dec. 20, 2017), http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2017-27421a.pdf.

¹⁵ 82 Fed. Reg. at 60339.

¹⁶ See, e.g. FinCEN Guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (Mar. 18, 2013), https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering; “Virtual Currency” licenses issued by the State of Washington Dept. of Financial Services and the “BitLicenses” issued by the New York State Dept. of Financial Services, https://dfi.wa.gov/bitcoin; http://www.dfs.ny.gov/legal/regulations/bitlicense_reg_framework.htm.

¹⁷ Hannah Murphy, UK Crypto Companies Link Up for Self-Regulation, Financial Times (Feb. 13, 2018),
https://www.ft.com/content/d6db427c-10c1-11e8-940e-08320fc2a277.

¹⁸ Takahiko Wada, Japan's Cryptocurrency Exchanges to Form New Self-Regulating Body, Reuters (Feb. 20, 2018), https://www.reuters.com/article/us-crypto-currencies-japan/japans-cryptocurrency-exchanges-to-form-new-self-regulating-body-sources-idUSKCN1G4156.

¹⁹ U.S. States Join Forces on Fintech Licenses, Reuters (Feb. 6, 2018), https://www.reuters.com/article/us-fintech-regulations/u-s-states-join-forces-on-fintech-licenses-idUSKBN1FQ2CK. The seven states are Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington.

²⁰ National Conference of Commissioners on Uniform State Laws, Uniform Regulation of Virtual Currency Business Act (2017), http://www.uniformlaws.org/Act.aspx?title=Regulation%20of%20Virtual-Currency%20Businesses%20Act.

²¹ The SEC considered these themes in a 2005 assessment of SROs. SeeConcept Release Concerning Self-Regulation (Release No. 34-50700; File No. S7-40-04) (Mar. 8, 2005), https://www.sec.gov/rules/concept/34-50700.htm.

²² See discussion of NFA’s “Forex Dealer” membership category in Testimony of Daniel J. Roth, President and CEO, NFA, Before the Subcommittee of General Farm Commodities and Risk Management of the U.S. House of Representatives Committee on Agriculture (June 19, 2003), https://www.nfa.futures.org/news/newsTestimony.asp?ArticleID=1115.

The CFTC adopted rules for retail foreign exchange dealers in 2010. See Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75 Fed. Reg. 55410 (Sept. 10, 2010).

²³ Jane Kagan Vitiello, Trading Through Time, The History of the NYMEX 1872-1997 36-46 (Milan, Italy: Amilcare Pizzi, S.p.A, 1997).

²⁴ The first comprehensive federal regulation of the futures industry was the Futures Trading Act, enacted in 1921. The Futures Trading Act was replaced by the Grain Futures Act of 1922, which was then replaced by the Commodity Exchange Act in 1936.

²⁵ Jerry W. Markham, The History of Commodity Futures Trading and its Regulation 4 (New York: Praeger Publishers, 1987); Jonathan Lurie, The Chicago Board of Trade, 1859-1905, The Dynamics of Self-Regulation 27-28 (Urbana, Ill.: Univ. of Illinois Press, 1979).

²⁶ Markham, at 5-6.

²⁷ Markham, at 6 and 10.

²⁸ Title III of the Commodity Futures Trading Commission Act of 1974 (currently sec. 17 of the Commodity Exchange Act).

²⁹ Objectives and Principles of Securities Regulation, International Organization of Securities Commissions 5 (May 2017), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD561.pdf.

³⁰ Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation, International Organization of Securities Commissions 55-61 (May 2017), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD562.pdf.

³¹ Id.

³² Id.

Last Updated: March 8, 2018

Written Testimony of Chairman J. Christopher Giancarlo before the U.S. House Committee on Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies, Washington, D.C.

March 7, 2018

Thank you, Chairman Aderholt, Ranking Member Bishop and Members of the Subcommittee for the opportunity to testify before you today on the Commodity Futures Trading Commission (Commission or CFTC) FY 2019 Budget Request.

For more than a century, U.S. businesses have relied on the derivatives markets to hedge their cost of production. These markets have allowed farmers and ranchers to hedge their costs of production and delivery price so that Americans can always find plenty of food on grocery store shelves. The 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. More than 90 percent of Fortune 500 companies use derivatives to manage commercial or market risk in their worldwide business operations. In short, derivatives serve the needs of society to help moderate price, supply and other commercial risks to free up capital for economic growth, job creation and prosperity.

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. At a time in history when the nature of our financial markets are rapidly transforming, as digital technologies are having an increasing impact on everything in the early Twenty-First Century from information transfer to retail shopping to personal communications, this budget will provide the Commission with the resources it needs to put in place and oversee responsible regulations that allow for innovation and enable our markets to remain competitive and safe at home and abroad.

Just as the Industrial Revolution changed the world within years and decades, the current technological revolution is now changing our world every day, with time compressing years into days, and days into minutes. Therefore, we must reset our own thinking and shape an appropriate regulatory response.

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 $31.5 million and 46 FTE over the resources provided under the Further Extension of Continuing Appropriations Act, 2018, P.L. 115-123, and is the same level of funding that the Commission requested in FY 2018.

When I appeared before this subcommittee last year, I spoke about my approach to budgeting. In the private sector, we would never simply take last year’s budget number and add a percentage increase. Rather, each dollar requested had to serve a purpose. So, when I sat down with our leadership team, my budget baseline was zero. I pledged to carry out the Agency’s 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.

The Commission’s budget request for FY 2019 reflects and builds on the efforts from 2018. I believed then and I believe now that $281.5 million is the level of funding necessary to fulfill our statutory mission.

21^st Century Technology

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 a disaster. They will not go away. Nor is it a responsible regulatory strategy. As the axiom of Moore’s Law¹ states, technological power doubles about every 18 months. We must not respond in a reactive way; chase to catch up with technology. We must be proactive with a regulatory and statutory framework that is ahead of the curve, prevents and punishes fraud and criminality, gives clarity and coherence to this dark and often inaccessible technology, and anticipates the evolution of 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 and the American public deserves a well-equipped regulator overseeing these vital markets

Agency Reform and the Kiss Project

Since I became 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 CFTC has embraced the Administration’s directive that each federal agency minimizes the costs borne by their regulation. The KISS initiative I launched last March included a review of rules and processes, and the invitation for public comment to collect ideas on how we can be a more effective regulator. The effort has produced a tiered list of significant efforts² the Commission is undertaking that will lessen regulatory burden. Recently, we released³ notification on the proposed replacement for the complex and confusing lettering for defined terms with a simple alphabetical list. The replacement will remove unnecessary complexity from our rules and should help to make regulatory compliance less burdensome.

Internally, I have embraced the Administration’s Reform Plan concept and have implemented in-depth organizational reviews to ensure that as an agency, we are staffed and providing the most effective services to the American tax-payer. This is an on-going effort but it 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.

Economic Modeling and Econometric Capabilities

The budget request, if met, would boost the CFTC’s analytical expertise and monitoring of systemic risk in the derivatives markets, especially with central counterparty clearinghouses. These investments include the expansion of sophisticated econometric and quantitative analysis devoted to risk modeling, stress tests, and other stability-related evaluations necessary for market oversight. Furthermore, such analysis conducted by the CFTC will aid in rulemaking, policy development, and enhance the Commission’s ability to provide high-quality cost benefit considerations for decision-making.

Increased Examinations of Clearinghouses

The Commission expects the number of designated clearing organizations (DCOs) to continue to increase in FY 2019, with many expanding their business to 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 examinations capability to enable it to keep pace with the growth in the amount and value of swaps cleared by DCOs pursuant to global regulatory reform implementation. As the size and scope of DCOs increase, so too has the complexity of the counterparty risk management oversight programs and liquidity risk management procedures of the DCOs under CFTC regulation here and abroad. In addition, funding will also enable the Commission to enhance its financial analysis tools used to aggregate and evaluate risk across all DCOs.

Cyber Security

Cyber security is critically important to protecting infrastructure and financial markets around the world. I feel strongly that it is 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 on the world’s financial markets. The cyber threat must take priority, which is why we will devote more resources to cybersecurity in FY 2019. Threats and attacks occur on DCOs regularly. Vulnerabilities are continually discovered that require the Commission to analyze the vulnerability, understand the root cause of the vulnerability, and to engage in discussions with the DCOs as to how they are protecting the organization, and the marketplace, against the vulnerability. It is through the examination of systems safeguards that the Commission helps to ensure the DCOs are prioritizing cyber security activities. With this budget request, the CFTC will be able to address some of the needs to support these unplanned occurrences.

As an agency, the Commission is faced with growing pressure to protect terabytes of data, and maintain compliance with FISMA and OMB mandates. Protecting our information comes with a price. Some of the additional funding requested will also allow us to make internal cyber security improvements including implementation of additional cyber security sensors and defenses to further protect the market data we collect on a daily basis.

Financial Technology

The requested budget will also allow the Commission to also address market-enhancing innovation through financial technology (fintech). Fintech comprises a range of technology in the financial services sector and includes innovations in retail banking, investment, and virtual currencies like bitcoin.

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 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 efforts undertaken domestically, the Commission has been proactive in working with international regulators on fintech applications to harmonize approaches and to share best practices. Last month 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 financial technology (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.

Oversight of Virtual Currencies

In FY 2018, the 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 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 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.

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 FSOC. In addition, we have been in communication with our foreign counterparts through bilateral discussions and the International Organization of Securities Commissions.

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 Security and Exchange Commission (SEC) and other fellow financial enforcement agencies, will aggressively prosecute those who engage in fraud and manipulation of US markets for virtual currency.

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 Conference.⁴ I issued a warning to those who may seek to cheat or manipulate America’s derivatives markets. I said, “There will be no pause, no let up and no reduction in our duty to enforce the law and punish wrongdoing in our derivatives markets. The American people are counting on us.” I am committed to punishing bad actors in the marketplace and to do so with swift justice to stop their bad actions. 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 fiscal year that ended September 30, 2017, the CFTC brought 49 enforcement-related actions, which included 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.

One-third of the way through FY 2018, the Commission has filed 11 manipulative conduct cases. The most manipulation cases the CFTC has ever filed in a single year is 12, which the CFTC filed in FY 2017. Below is a chart that shows the numbers over the past several years.

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 the January 2018, the CFTC filed manipulation and spoofing cases against six individuals in coordination with the Department of Justice and the FBI, 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.”

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.

Conclusion

Thank you again for this opportunity to appear before the subcommittee regarding the CFTC’s FY 2019 budget request. As I said earlier, we meet at a time in history when a familiar world is disappearing and a new one emerging.

Like millions of Americans, I have been impressed with the new movie about Winston Churchill, “Darkest Hour.” I am reminded of an insightful quote from Winston Churchill, “We shall not fail or falter; we shall not weaken or tire… Give us the tools, and we will finish the job.”

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 private sector innovation, new technologies and global trading will allow American markets to evolve in responsible ways, and continue to grow our economy and increase prosperity.

I look forward to answering your questions.

¹ Moore’s Law and the Future of Information Technology, Reviewed, Tyler Wells Lynch , September 03, 2013

² Remarks of CFTC Chief of Staff Michael Gill at the National Press Club, CFTC Kiss Policy Forum, Washington, D.C. February 12, 2018

³ Giancarlo: We’re Making Government Function More Efficiently for Taxpayers and Market Participants, February 15, 2018

⁴ Remarks of Acting Chairman J. Christopher Giancarlo before the 42^nd Annual International Futures Industry Conference, Mar. 15, 2017, at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20

Last Updated: March 7, 2018

Remarks by CFTC Executive Director Anthony C. Thompson at the Black History Month Celebration, U.S. Department of Homeland Security, Washington, D.C.

February 28, 2018

Mr. Hawkins, thank you for that most gracious introduction. I also would like to thank Ms. Paula Thomas, Chief of Equal Employment Opportunity and Inclusion for inviting me to today’s program.

Director El Frances Cissna, ladies and gentlemen of the U.S. Citizenship and Immigration Service, other distinguished members of the U.S. Department of Homeland Security, it is truly an honor to be with you today for this black history salute.

We are all the product of those who came before us. No one is an island. Robert Kennedy once remarked that, “Each time a man stands up for an ideal, or acts to improve the lot of others, or strikes out against injustice, he sends forth a tiny ripple of hope, and crossing each other from a million different enters of energy and daring those ripples build a current which can sweep down the mightiest walls of oppression and resistance.”

That’s why Black History Month matters. We recognize the many contributions of those who came before, those who stood up and stepped forward, those who enable us to be here today. And, from the Buffalo Soldiers to the Harlem Hellcats to the veterans of Afghanistan and Iraq, Black Americans have made substantial contributions and sacrifices for our country.

Now, I am keenly aware we are here today to commemorate the contributions of Black Americans in times of war. Dr. Patton and I are here to offer some brief reflections on our military experiences. Yet, in my case, I would be remiss to not personally pay homage to all of the untold feats of heroism, bravery, and patriotism, repeated over and again, by Black Americans in times of war. These contributions, many before the advent of the American Revolution, made American history and helped create America.

And we must not forget those who make our country safe in other ways. I also want to take this opportunity to thank each of you for what you do in protecting the American public. This country and all her citizens owe you a deep debt of gratitude. Again, thank you.

It is important for me to go beyond just recounting my military biography. It is just as important to pay tribute to those who helped me set my value system, and cast the mold.

For example, I was not quite 10 years old on April 4^th, 1968, when Dr. King was assassinated on the balcony of the Loraine Motel in Memphis. Dr. King spoke for the best in American ideals and worked tirelessly to make the constitution embrace everyone.

I can vividly recall at that moment and period of enlightenment, how my life changed forever and gave me the passion to appreciate my heritage, and the impact of Black Americans on the larger fabric of American society.

This history helped transform America then to our America, now. He was one of the most influential figures in our history. Dr. King’s martyrdom and the accompanying messages and images of that era were the singular events that changed my small world, and gave me a sense of purpose.

His cause transformed my personal awareness beyond the single city block where I was raised in Fort Worth, Texas. Like many of my generation, I grew up with a new purpose in my heart and new frame of mind.

Dr. King gave me pride, his vision gave me courage, his example gave me strength, and his sacrifice provided me guidance. What he did for me he also sparked in millions of Americans, and in people around the world, people like Nelson Mandela in South Africa.

In my case, I was determined to live the dream that was deeply rooted in The American Dream. I knew I would never let anyone or anything stop me from reaching my true potential. You see, my destiny would be determined by the content of my character, my perseverance, and my attitude.

So, before I ever joined the United States Air Force, Dr. King lit a fire in me.

A little over seven years after my awakening, at the age of 17, I started serving the American people in 1975 by enlisting right out high school into the Air Force.

Like many of you, I had to work my way up the ladder. I began my journey as a Finance Technician, responsible for pay, disbursement, and accounting functions in support of the broader Air Force mission, at the rank of SSgt. and five years after enlisting; I was commissioned as a Second Lieutenant.

When I take stock of my various experiences in American society; the military offers one of the best opportunities to reach ones true potential. And, it undoubtedly needs to be, when one can be asked to pay the ultimate sacrifice, as multitudes of serviceman have. I served the first 15 years of my Air Force career during the Cold War Era, and I happened to be in Germany during that glorious moment when the Berlin Wall fell, and over the next several years helped broker various agreements and treaties as the Soviet Union gradually dissolved.

Afterwards, the Air Force was engaged in, and I supported conflicts in the Balkans, Desert Storm, Operation Enduring Freedom in Afghanistan and Operation Iraq Freedom. While never in direct combat, I would be remiss in not noting my presence in the building, when the commercial airliner crashed into the Pentagon on 9-11, another life defining event. Through it all, I gained an immense personal appreciation for why the military; while not perfect, is known for firsts when it comes to equality. Over the course of my career, for me and my fellow airmen, it was all about mission accomplishment, and the ability to be challenged, and to deliver on what often appeared to be impossible challenges.

When I began my journey, I did not envision becoming part of the top tier of Air Force leadership as a Colonel, the most senior field grade rank within a 325,000 person organization. Today, Colonels are among the top 7% of senior leadership.

In the last 100 years, there have been many profound events which have impacted blacks in uniform. In my estimation, the most important event that made it possible for me to reach my station in the Air Force occurred in 1948, when President Harry S. Truman signed Executive Order 9981 which ordered the integration of the armed forces shortly after World War II.

This was a major advance in civil rights for men and women in uniform. Although blacks have fought in every war from the American Revolution to the current war on terror; with honor, valor, and distinction, the issues prior to this Executive Order, were rooted in the lack of opportunities to lead combat troops of any race, to fight with the full rights of an American citizen; both at home and abroad, and the inability to find stability in career advancement, especially in the senior officer ranks.

Enforcement of the order was not easy, and most of the initial effectiveness of the order was accomplished several years later by President Dwight D. Eisenhower's administration from 1953–1961, including the desegregation of military schools, hospitals, and bases. The effort did not end there, but it was a profound start!

To illustrate how pivotal this was, as a nation, we have acknowledged countless instances of black heroism in every American war, yet medals of valor were not always awarded fairly.

One of the most compelling examples which speaks directly to systemic inequities for blacks in wartime throughout American history is the story of Lt. Vernon Baker. In early spring, of 1945, his unit was pulled from the reserve status and ordered into combat. On the morning of April 5th, Baker participated in an attack on the German stronghold of Castle Aghinolfi. During the assault, Baker led his heavy weapons platoon through German Army defenses to within sight of the castle, personally destroying a machine gun position, two observation posts, two bunkers, and a network of German telephone lines along the way.

It was for these and other actions, including leading a battalion advance under heavy fire that epitomized his gallantry.

In 1993, a study commissioned by the U.S. Army described systematic racial discrimination in the criteria for awarding decorations during World War II. At the time, no medals of honor had been awarded to the Black American soldiers who served in World War II. After an exhaustive review of files, the study recommended that ten black Distinguished Service Cross recipients have their military awards upgraded to the Medal of Honor.

On January 13, 1997, President Bill Clinton awarded the Medal of Honor to seven of the World War II veterans; Lt. Baker was the only living recipient of the medal at the time.

The military has many accounts where great Black Americans who sacrificed to make a difference. There are numerous examples of pioneers in our own Air Force that inspired me to uphold, as they upheld, the ideals of freedom, integrity, and determination we speak of today.

Consider-- Benjamin O. Davis, Jr., the first African-American general in the Air Force. He was born a stone’s throw away from where we assemble today in our nation’s Capital, during an era of segregation and discrimination against Black Americans. As a cadet at the U.S. Military Academy, other cadets shunned him and only spoke to him when forced to by their official duties. He didn’t have roommates in the dorms. He ate alone in his tent when in the field. This silent treatment continued throughout his four years at the U.S. Military Academy.

You can’t help but be inspired by perseverance through his belief in a higher cause and through his determination to succeed as an army officer. He remained committed to the primacy of his mission and deferred his protests until after World War II. His focus on mission performance, not only led to an astounding war record, but also became a core element behind President Truman’s decision to integrate the armed forces in 1948.

And, who could have imagined on the 18^th August 2017, eight decades after his graduation, from the U.S. Military Academy at WestPoint, the hallowed halls of the institution that silenced him, would now honor him as one its finest by dedicating a $200m cadet barracks in his name. In terms of relevance, previous WestPoint graduates who received this rare privilege were President Dwight D. Eisenhower, and Five-Star Gen. Douglas MacArthur.

Or, think about the contributions of General Daniel “Chappie” James, Jr., the first African-American Four-Star General in the Air Force…he understood adversity at an early age. As a teenager, he pointed to a plane flying above his Pensacola, Florida, home and told his friends that he too would one day fly. His friends laughed and quickly reminded him that he was black.

But General James never saw this as a handicap; he embraced his race and his country. Even in America’s darkest hour of discrimination, the general said, “This is my country and I believe in her, and I believe in her flag, and I’ll defend her, and I’ll fight for her and serve her. If she has any ills, I’ll stand by her and hold her hand until in God’s given time, through her wisdom and her consideration for the welfare of the entire nation, things are made right again.”

You see, it’s not about who we are at the start – it’s about who you are determined to be at the end. When I was challenged in my Air Force career, I thought about the things those who went before me put up with and their successes, so I could have the career I was able to enjoy.

I have embraced the great Americans of all races in times of war; and through their example I realized: it’s not about where you come from – it’s about where you’re determined to go. It’s about the freedom to dream big dreams, the freedom to work hard and achieve, and the freedom to believe and succeed.

My mother told me while growing up: “It is not in the land, it’s in the man.”

So my focus has always been on improving the man, not being distracted by obstacles along the way that got in the way.

Because of the great Americans we have honored today, and countless others like them, it drastically increased the odds that I am able to stand before you today: a retired Colonel, a public servant, and an African American to share a message built around freedom, dignity and determination.

Thank you and God bless America.

Last Updated: March 5, 2018