Remarks of Commissioner Brian D. Quintenz before the Structured Finance Industry Group Vegas Conference

Remarks of Commissioner Brian D. Quintenz before the Structured Finance Industry Group Vegas Conference

February 26, 2018

Introduction

Good morning. Thank you for that very kind introduction.

Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the Commission. I’m very pleased to be speaking here with you today at the Structured Finance Industry Group Vegas Conference.

Las Vegas is an exciting place. I know the first thing everyone wants right now is to have a Washington, D.C. regulator stand up and read a detailed policy speech line by line. So I’m going to do something different this morning. I’m going to tell you a joke. And then I’m going to read a detailed policy speech line by line.

I’m a fisherman, so I wanted to start off with a story about two old guys on a fishing trip. They are out in the middle of nowhere, on an island in Canada let’s say. Their trip has come to an end. A pontoon plane lands at their remote location to pick them up. After they load up and get on board, the weather deteriorates badly. The pilot tells them that they can’t take off and will have to wait for the weather to clear. One of the old guys looks up, and with bloodshot, glassy eyes, he tells the pilot, “Weather was worse than this last year and that pilot took off!” Not wanting his reputation with potential customers to suffer, the pilot reluctantly agreed to hit the throttle. The plane lifts off from the lake but alas, clips a tree on the other shoreline and crashes into the woods. The old men are thrown from the plane. One of them gradually comes to, sees his friend and asks out loud, “Joe, where are we?” The other old man raises his head, looks around, and says, “Ehh? Hmmm. Looks like about a hundred yards further than last year.”

The point of the joke is that incentives can make people do things they otherwise wouldn’t chose or want to do.

In the aftermath of the financial crisis, Congress called for, and federal regulators implemented, a vast array of reforms to strengthen the global financial system. However, questions remain as to whether some of those reforms accurately target the specific risks intended, if the reforms are calibrated appropriately vis-à-vis each other, and what incentives or disincentives they create. Indeed, there can be a fine line between reforms that strengthen the financial system versus those that punish it.

My concern is that, ten years post crisis, many regulators (the CFTC included) failed to appropriately assess the risks that they sought to control and that, as a result, we may be dis-incentivizing activity necessary to a healthy market and economy. For example, I continue to hear repeatedly, in the press and in public statements, about how derivatives are inherently “risky” – even standardized, cleared derivatives. I do not share this one-size-fits-all view. Quite the opposite, I think futures and swaps are powerful tools to manage and efficiently transfer risk to those most able to bear it and best able to price it. Yet many, especially those unfamiliar with the swaps market and the clearing model, still view every derivative as a bilateral, uncollateralized, undisclosed “risky bet” even when the derivative is an economic hedge that is cleared, margined, and publicly reported.

Whether this view originates from a global framework or is home grown, I think regulators everywhere always need to revisit any one-size-fits-all approach to derivatives risk. Because history has certainly shown us that when Washington prices financial risk, it usually gets it wrong.1

Today I would like to focus on three areas where, in my view, the risk of derivatives has been or is still being mispriced: measuring derivatives exposure, recognizing risk-reducing offsets, and calculating margin for uncleared swaps.

Swap Dealer Capital

Swap dealer registration subjects entities to significant costs and regulatory burdens. For some firms, capital costs may be the most determinative factor in their decision to remain, or become, swap dealers. If capital costs are too expensive, firms will leave the market or reduce their activity under the registration requirement. As a result, the swaps markets over time will become less liquid, more heavily concentrated, and less competitive. Those are not the hallmarks of a healthy financial system. To promote a vibrant swaps market, I believe it is critically important that the CFTC finalize a capital rule that is appropriately calibrated to the true risks posed by an entity’s swap dealing business.

I commend the general approach taken by CFTC staff in their December 2016 capital proposal (Proposal).2 The Proposal presents alternative capital approaches and permits firms to choose the approach that best matches their corporate and operating structures.3 Where possible, staff deferred to existing capital regimes of other domestic regulators in order to minimize conflicting or duplicative requirements. This is an appropriate approach where other regulators’ regimes are updated and reflect a calibrated approach to modern derivative instruments.

For example, under the Proposal’s Bank-Based Approach, some firms would be required to use standardized formulas based on a method developed over thirty years ago. That method, the current exposure method (CEM), has been widely criticized as overstating a firm’s derivative exposure due to overly simplistic calculations that do not reflect actual risk.4 In 2014, Basel signed off on an alternative approach, the Standardized Approach to Counterparty Credit Risk (SA-CCR), as a more risk-sensitive replacement for CEM.5 However, it has not yet been implemented in the United States, and the transition may have a long runway. Consequently, CEM remains the basis of the standardized approach codified in U.S. regulations.

This places the CFTC in a difficult position. We could incorporate CEM, a flawed approach to calculating derivatives exposure, into our own regulations for the sake of consistent regulations and simplified compliance. Or, we could develop a new methodology that more accurately reflects exposure (SA-CCR or otherwise), but which creates compliance complexity and regulatory inconsistency.

Neither outcome is entirely positive, however I see this as an opportunity for the Commission to be a thought leader and to make the case for a new alternative, one that takes into account the practical realities of the complex regulatory landscape, but also advocates for a more risk-sensitive approach reflective of this Commission’s expertise and experience in the derivative space.

I look forward to discussing these and other issues with staff and market participants as the Commission moves forward with finalizing the capital rule. The Commission has an opportunity to further refine its proposed capital calculations to better reflect the true risk of the swap dealer’s exposure and ensure that a firm’s capital requirement is proportionate to its risks.

Of course, our agency’s own proposed capital regulation is but one example of where the regulatory treatment of derivatives could be revised to more accurately address risk.

Supplementary Leverage Ratio

Another example is the Supplementary Leverage Ratio (SLR). The Basel Committee on Banking Supervision adopted the SLR as a non-risk based “backstop” to prevent the build-up of excessive leverage in the banking sector and to complement its risk-based capital framework.6 Under this approach, banks must hold a certain minimum amount of capital against their aggregate on- and off-balance sheet exposures, regardless of the actual risk profile of their assets.

As a true backstop, a leverage ratio can make some sense. However, as a binding capital constraint, especially on conditional or probabilistic off-balance sheet exposures, a leverage ratio creates many perverse outcomes and is a poor regulatory construct. When a risk-neutral capital regime becomes a binding constraint, banks are encouraged to divest themselves of lower risk assets with lower returns in favor of riskier assets with higher rates of return. This is exactly what we are currently seeing with the SLR’s outsized negative impact on clearing and custody services that are the heart of the futures and swaps markets.

More significantly, the SLR penalizes banks’ provision of clearing services by treating segregated customer margin as an exposure of the bank. Let me repeat that, the SLR characterizes segregated customer collateral that it holds in case of a customer’s default as an exposure of the bank and requires the bank to hold capital against it.

This may be a good time to take a step back and discuss the role of futures commission merchants (FCMs) and, more generally, the agency clearing model in the United States. Under the agency model, a clearing member FCM acts as an agent for its client, allowing the client to enter into the derivatives transaction with the central counterparty (CCP). Typically the clearing member FCM guarantees the client’s performance to the CCP, but not the CCP’s performance to the client.7 During the life of the trade, the client regularly posts margin to absorb any losses generated by the trade and help guarantee the client’s future performance. This margin is segregated from the FCM’s own funds and held by the CCP or a third party custodian bank.

It is important to understand the true exposure of the clearing member FCM under this agency transaction, which only arises from the possibility that the client goes bankrupt or is otherwise unable to satisfy the losses under the transaction with the CCP. In that situation, the client’s segregated margin would be applied to any amounts owed to the CCP with the clearing member FCM covering the remainder. In effect, the clearing member FCM’s true economic exposure for the cleared trade is limited to any amounts owed to the CCP that exceed the value of the client’s margin.

Under the SLR, the clearing member FCM must include in its leverage calculation its exposure resulting from its guarantee of the client’s trade. I believe this is an appropriate requirement. However, the SLR calculation prohibits clearing member FCMs from reducing this exposure by the amount of segregated margin posted by the client and then counts it as a source of leverage against which additional capital should be held.

This ignores the fact that segregated margin will always be used to absorb client losses before the CCP looks to the clearing member to absorb any residual losses. When margin is segregated, it remains an asset of the customer. It is only at the disposal of the clearing member FCM under a client default scenario and then can only be used to reduce the resulting exposure to the clearinghouse.8 The clearing member cannot use the margin to leverage itself under any circumstance. As a result, segregated margin is not just risk-free. It is actually more than risk-free—it is always risk-reducing. If the goal of the SLR is to calculate the clearing member’s most accurate exposure for a cleared trade, the SLR should always use the amount of segregated client margin as an offset.

The impact of this is no small matter. By one estimate, the average leverage exposure of the 14 largest clearing members was 80 percent higher when they were prohibited from using margin as an offset as compared to when offset was permitted.9

Without relief, I fear we will see additional FCMs exit the clearing business and the worrisome trend of FCM consolidation will continue. In recent years, five major banks have shuttered their swaps clearing businesses.10 As of 2017, the top five swaps clearing members controlled up to 75% of the business.11 

In the months ahead, I look forward to continuing conversations with domestic and international regulators about the risk-reducing nature of segregated margin. I hope through this ongoing dialogue we can work together to revise the SLR calculation to accurately reflect margin’s purpose and ensure that client clearing services are encouraged, rather than penalized.

Ten-Day Liquidation Period for Uncleared Swaps

The Dodd-Frank Act instructed the Commission, prudential regulators, and the SEC to adopt margin requirements for uncleared swaps to “offset the greater risk” they pose to the swap dealer and the financial system.12 The Act also directed regulators to ensure these margin requirements were “appropriate for the risk associated with the non-cleared swaps held as a swap dealer.”13Unfortunately, in my opinion, the margin requirements adopted by the Commission and U.S. prudential regulators in late 2015 for uncleared swaps contain many of the flaws discussed above.14 They incorporate standardized approaches to calculating margin that result in punitive margin requirements for uncleared swaps and fail to adequately differentiate among the risk profiles of different uncleared products.

Under the Commission’s final rules, initial margin for uncleared swaps must be calculated using either a standardized, grid-based method or models. Many swap dealers currently use the Standard Initial Margin Model (SIMM) developed by ISDA to calculate their initial margin charges because it is more cost-effective than the standardized approach.

When using models, firms must use a ten-day liquidation period for all swaps, regardless of the swap’s underlying liquidity or risk profile.15 In contrast, the minimum liquidation time for cleared agricultural, energy and metals swaps is one-day for purposes of calculating initial margin and five days for cleared interest rate and credit default swaps.16 Although the ten-day liquidation period is consistent with international standards and rules adopted by U.S. prudential regulators, there does not appear to be any empirical evidence to justify the selection of a ten-day window.17 Therefore, it is unclear why the rules assume, for example, that an uncleared commodity swap should have a liquidation period ten times longer than a cleared commodity swap.

Indeed, many commenters raised this point with the Commission and recommended liquidation periods that were tailored to the particular liquidity risks of the swap, rather than imposing a one-size-fits-all liquidation period.18One proposed alternative suggested allowing models to use market-based liquidation periods, subject to CFTC oversight.19 However, the rule was finalized with the across-the-board, ten-day liquidation period unchanged.

As a result, under our final margin requirements, uncleared swaps tend to be more costly relative to cleared swaps. Yet, many companies have complex hedging needs that cannot be adequately managed by standardized cleared products. Highly-customized, uncleared swaps are an irreplaceable form of precise hedging for American businesses. These companies are now being forced to choose between more precise hedging instruments that are more expensive versus less expensive hedging strategies with cleared products that are suboptimal and don’t align with their economic needs.

In one example from Congressional testimony, a pension fund’s costs of hedging had risen 2000% since derivative reforms were put into place.20Imagine that for a second. The additional costs are roughly equivalent to hiring 20 people to sit behind the employee who is responsible for hedging transactions, but contribute nothing. Speaking of pension funds, their managers often use total return equity swaps to change their plans’ market exposure over short to medium time frames. But, these swaps’ customized notional values and life spans (tenor) means they are not cleared and therefore subject to a 10-day liquidation horizon for margin calculations. Could someone, anyone, please give me a credible example of an S&P 500 total return swap that would take longer than one or two days to liquidate?

Ironically, this rule’s promotion of cleared derivatives may result in increased systemic risk if businesses execute mismatched hedges with increased basis risk or forgo hedging altogether because of cost. And of course, the economic costs of initial margin are not just the funds set aside to meet margin requirements. They also include the firm’s opportunity cost of lower returns from investing funds in eligible collateral rather than preferred investment opportunities.

In the final rule, the Commission itself acknowledged that not all uncleared swaps would require a 10-day liquidation period and that the requirement could lead to excessive initial margin.21 We now have the benefit of one and a half years of implementation experience.22 The Commission could now re-evaluate the impact of the 10-day liquidation window with the benefit of actual data. In addition, it could reconsider the feasibility of adopting a tailored approach by asset class or common product types.

Conclusion

I recognize that the CFTC’s regulations are part of a broader regulatory framework. Unilateral rule amendments by the CFTC that are not broadly accepted by other regulators may create as much confusion as relief. But we are still a regulator and have an obligation to make good public policy decisions based on sound logic and economic reality. As the regulator closest to, and with the most experience in, the derivatives markets, we will keep a keen eye on whether the costs imposed on derivatives by the total domestic regulatory framework are calibrated to actual risk or creating perverse outcomes. When we identify areas where regulations misprice risk and punish derivatives markets, we will confer with our regulatory counterparts and assist them in better understanding the reality of those impacts.

I started off with a joke about the two fishermen. As a fisherman myself, when the pilot told them he couldn’t take off, they should have gotten out of the plane with joy that they had another chance to do more fishing. Similarly, with the election of President Trump and the team of high quality regulators he has put in place, we now have a second chance to get these financial capital rules and economic incentives aligned. I’m optimistic that we can take full advantage of that opportunity and I look forward to having the CFTC lead the way.

Thank you very much for your kind invitation. I appreciated being here with you this morning.

1 See Melody Peterson, S.E.C. Warns Banks Against Overgenerous Reserve Levels, N.Y. Times (Nov. 14, 1998), http://www.nytimes.com/1998/11/14/business/sec-warns-banks-against-overgenerous-reserve-levels.html; and Peter Wallison, Bad History, Worse Policy: How a False Narrative about the Financial Crisis Led to the Dodd-Frank Act 131 (Rowman & Littlefield 2013).

2  Capital Requirements of Swap Dealers and Major Swap Participants, 81 Fed. Reg. 91252 (Dec. 16, 2016), http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2016-29368a.pdf.

3 Swap dealers that are also registered futures commission merchants must compute their capital requirements under CFTC Regulation 1.17.

4 Basel itself has recognized the limitations of CEM and proposed a more risk-sensitive approach to calculating counterparty credit risk. In doing so, Basel acknowledged that, “CEM had been criticized for several limitations, in particular that it did not differentiate between margined and unmargined transactions, that the supervisory add-on factor did not sufficiently capture the level of volatilities as observed over recent stress periods, and the recognition of netting benefits was too simplistic and not reflective of economically meaningful relationships between derivatives positions.” Basel Committee on Banking Supervision, The standardized approach for measuring counterparty credit risk exposures 1 (March 2014), https://www.bis.org/publ/bcbs279.pdf.

5 Id.

6 Basel Committee on Banking Supervision, Basel III leverage ratio framework and disclosure requirements 1 (Jan. 2014), http://www.bis.org/publ/bcbs270.pdf.

7 For a description of the agency clearing model, please see letter from FIA and ISDA to the Board of Governors of the Federal Reserve System (Nov. 22, 2017) regarding Supplemental Information Regarding Proposed Agency Information Collection Activities, https://www.federalreserve.gov/SECRS/2018/January/20180130/ICP-201723/ICP-201723_122117_131913_489732946702_1.pdf.

8 17 C.F.R. §§ 1.20-1.30 (futures); 17 C.F.R. §§ 22.2-22.7 (cleared swaps). These rules require FCMs to separately account for, and segregate as belonging to the client, all money, securities, and property received from a client as margin. The FCM cannot re-hypothecate the margin to leverage the bank and must maintain the collateral in cash or certain other very low risk, highly liquid assets, such as U.S. government and municipal securities “with the objectives of preserving principal and maintaining liquidity.” 17 C.F.R. §1.25.

9 This calculation used the Standardized Approach for Counterparty Credit Risk (SA-CCR) method to calculate a firm’s exposures. See FIA Letter to Basel Committee on Banking Supervision, Response to Basel Leverage Ratio Consultation Regarding the Proposed Calculation of Centrally Cleared Derivatives Exposures Without Offset for Initial Margin and its Impact on the Client-Clearing Business Model (July 6, 2016), https://fia.org/sites/default/files/2016-07-06_FIA_Comment_Letter_Basel_Committee_Leverage_Ratio.pdf.

10 The five firms are Deutsche Bank (https://www.ft.com/content/2392bc42-ee47-11e6-930f-061b01e23655), Nomura (https://www.ft.com/content/e1883676-f896-11e4-be00-00144feab7de), RBS (http://uk.reuters.com/article/uk-rbs-primeservices-divestiture-idUKKBN0DY0PU20140519), State Street (https://www.bloomberg.com/news/articles/2014-12-04/state-street-exiting-swaps-clearing-businessciting-new-rules) and BNY Mellon (http://www.pionline.com/article/20131210/ONLINE/131219993/bny-mellon-closes-us-derivatives-clearing-business).

11 Percentage calculated using total customer funds held for swaps as a proxy for total clearing activity. See FIA FCM Tracker, FCM Comparison Table, available at https://fia.org/fcm-comparison-table.

12 CEA Section 4s(e)(3)(A).

13 CEA Section 4s(e)(3)(A)(ii).

14 Margin and Capital Requirements for Covered Swap Entities; Final Rule, 80 Fed. Reg. 74840 (Nov. 30, 2015); Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants; Final Rule, 81 Fed. Reg. 636 (Jan. 6, 2016), http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2015-32320a.pdf.

15 17 C.F.R. §23.154(b)(2)(i).

16 17 C.F.R. §39.13(g)(2).

17 Basel Committee on Banking Supervision, Board of the International Organization of Securities Commissions, Margin requirements for non-centrally cleared derivatives 11 (Sept. 2013), https://www.bis.org/publ/bcbs261.pdf.

18 NERA Economic Consulting, Cost Benefit Analysis of the CFTC’s Proposed Margin Requirements for Uncleared Swaps (Dec. 2, 2014); letter from Pension Coalition dated Nov. 24, 2014 (supporting a 3-5 day close-out period); letter from Committee on Capital Markets Regulation dated Nov. 24, 2014 (recommending the Commission consider the liquidity characteristics of different types of non-cleared swaps); letter from SIFMA Asset Management Group dated Nov. 24, 2014 (liquidation period should be closer to five days than ten days).

19 NERA Economic Consulting, Cost Benefit Analysis of the CFTC’s Proposed Margin Requirements for Uncleared Swaps (Dec. 2, 2014).

20 Reauthorizing the CFTC: End-User Views Before the Subcomm. On Commodity Exchanges, Energy, and Credit of the H. Comm. on Agriculture, 114th Cong. 5 (2015) (statement of Lisa Cavallari, Director of Fixed Income Derivatives, Russell Investments on behalf of the American Benefits Council).

21 Additionally, the Commission noted, “the Commission expects that most of the instruments that could be liquidated in less than 10 days are currently being cleared, and therefore, the impact of the requisite 10 day close-out period may be limited.” 81 Fed. Reg. at 685.

22 Initial margin requirements for certain covered swap entities went into effect September 1, 2016. See 81 Fed. Reg. at 675.

 

Last Updated: February 27, 2018

Written Testimony of Chairman J. Christopher Giancarlo before the U.S. Senate Agriculture, Nutrition, and Forestry Committee

Written Testimony of Chairman J. Christopher Giancarlo before the U.S. Senate Agriculture, Nutrition, and Forestry Committee, Washington, D.C.

February 15, 2018

INTRODUCTION

Thank you, Chairman Roberts, Ranking Member Stabenow, and distinguished members of the Committee for this opportunity to discuss the work of the Commodity Futures Trading Commission (CFTC).

When I appeared before this Committee last summer, we discussed the importance of derivatives for the American farmer, rancher, and manufacturer. I outlined for you my priorities for the CFTC: to carry out the CFTC’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. I pledged that, if confirmed, I would focus on these priorities, avoid partisanship at the agency and work with each of you, with candor and promptness, in our common purpose of serving the American people and the agricultural producers upon which we all rely.

Summer has gone. We are now amidst a world changing in front of us. There have been regulatory developments in Europe and elsewhere that demand our attention. And there is much work and activity at the Commission on which to report, including the new phenomenon of virtual currencies. I, therefore, thank you again for this opportunity to testify.

CROSS BORDER AGREEMENTS

I am grateful to you, Chairman Roberts and Ranking Member Stabenow, for your recent letter expressing strong support of the CFTC, both in its approach to the cross-border supervision of major clearinghouses and its current discussions with regulatory counterparts in the European Union (EU). Your letter confirms the critical importance of keeping in place the 2016 equivalence agreement for derivatives clearinghouse supervision by the CFTC and the EU authorities. Regulatory and supervisory deference needs to remain the key principle underpinning cross border supervision of Central Counterparties (CCPs). Deference continues to be the right approach to ensure that oversight over these global markets is effective and robust without fragmenting markets and trading activity.

CFTC-regulated CCPs are among the most robust and resilient in the world. Even in the face of extreme volatility, as we saw both recently and following the 2017 Brexit decision, CFTC-regulated CCPs have been able to successfully take on and manage risk, enabling valuable price risk transfer to support and stabilize the broader financial market. On the CFTC’s watch not a single CFTC-regulated CCP has ever defaulted or even come close to using its mutualized default resources to cover market losses. This is a testament to the strength of the CFTC’s existing regulatory and supervisory framework. In fact, since the financial crisis of 2008, the total initial margin for cleared futures and swaps held by CFTC-regulated CCPs has more than tripled to over $300 billion.

Of course, today’s markets are global. As 21st Century market regulators, we must work cooperatively across jurisdictions in order to promote growth and innovation while supporting the financial stability of our global markets. It was in this spirit that the CFTC carefully negotiated a cross border agreement in 2016 with the European Union to defer to each other on CCP oversight.

The 2016 equivalence agreement was no small accomplishment. Former Chairman Tim Massad deserves considerable credit for his fortitude and determination. The agreement was hard negotiated and took three years to accomplish. The CFTC made considerable concessions. The final agreement was approved by the European Commission and reviewed by all 28 EU member states.

The 2016 equivalence agreement is built upon the principle of regulatory and supervisory deference. It is straightforward: on one hand, through substituted compliance, the CFTC allows European CCPs to follow most of the EU CCP regime to demonstrate compliance with U.S. law; and, on the other hand, through equivalence and recognition, European authorities allow U.S. CCPs to follow most of the CFTC CCP regime to demonstrate compliance with EU law.

I supported the 2016 equivalence agreement then,1 and I support it today. It is an important signal to the markets and the international regulatory community that the United States and Europe can work together to successfully resolve critical cross-border issues. The agreement has contributed to stronger and more productive relations between the CFTC and its European and other overseas regulatory counterparts. Today, the CFTC and the European Securities and Markets Authority (ESMA) are developing a close relationship based on the understanding that we must cooperate in order to tackle regulatory and supervisory challenges that may lie ahead.

Right now, the EU bodies are debating new legislation proposed by the European Commission that would create a new European framework to regulate and supervise CCPs. It goes without saying that, as a sovereign political entity, the European Union has every right to revisit, without foreign interference, how it regulates and supervises CCPs that operate in its jurisdiction. We understand that there is an ongoing political debate in the EU right now about shifting additional power away from member states to pan-European institutions. We take no sides in that debate. Moreover, we welcome any and all efforts in the EU to enhance the regulation and supervision of its domestic CCPs.

The CFTC is committed to honoring its obligations under the 2016 equivalence agreement. Yet, there are some indications that the European Commission views the UK’s decision to exit the EU as a basis to vitiate the agreement. It appears that some EU policymakers want to go back to the negotiating table. There appears to be an expectation that the CFTC should be prepared to renegotiate many of the same issues covered by the existing agreement, but with new people and new authorities.

The United States will not be put into this position. We honor our commitments and expect others to do the same. The CFTC negotiated the 2016 equivalence agreement in good faith. A deal is a deal.

While we appreciate the EU’s need to address the ramifications of Brexit, the U.S. and its markets must not be its collateral damage. Other than Brexit, little has changed to justify changing the current approach to cross border CCP supervision. It remains true today, as it did two years ago, that with respect to our systemically important clearinghouses, the majority of their members are U.S. domiciled and the majority of their business comes from the U.S. In fact, for one of these clearinghouses, their European-based clearing business accounts for less than fifteen percent of their overall business. This has been true since 2016. There has been no significant change in the European risk profile of U.S. CCPs to justify increasing their regulatory and supervisory burdens.

When it comes to U.S. CCPs, we insist that the parties stay true to the terms of the 2016 equivalence agreement, give proper assurances that U.S. CCPs will not be treated differently than they are now, and pledge support for deference as the governing principle for how we regulate and supervise each other’s CCPs today and in the future. In fact, deference is the cornerstone for how the CFTC approaches the cross-border supervision of European CCPs. It is deference that supports strong cross-border markets, recognizes our commonalities, and builds upon the strengths of our respective jurisdictions.

To this end, I continue to press upon my European counterparts that the proposed legislation must preserve the tenants of our 2016 equivalence agreement. Since its execution, the agreement has been effective in allowing market participants in both jurisdictions – the U.S. and the EU – to hedge their risks in efficient and resilient markets. The agreement is very much in accord with the mutual pledges of the U.S. and Europe in the G-20 accords to cooperate actively to avoid market fragmentation, regulatory arbitrage, and market protection in these global derivatives markets.

Cross-border supervision of systemically important CCPs is far too important for piecemeal and contradictory rule-making. The proposed new EU approach would subject U.S. CCPs to new regulation and duplicative supervision. It would require the wholesale adoption by U.S. CCPs of many new and unproven European regulations. These burdens will increase the cost of clearing for American businesses that depend on well-regulated futures markets to manage risk in their business operations. This is not acceptable. American markets must continue to be regulated under American law by U.S. regulators overseen by the U.S. Congress.

Notwithstanding these concerns, there is also hope. Since becoming Chairman of the CFTC, I have made it one of my top priorities to strengthen the CFTC’s relations with our European counterparts. I have had numerous meetings with key regulatory counterparts and policymakers from the European Union, France, Germany, and the United Kingdom to discuss how to ensure effective regulatory cooperation and coordination between the CFTC and Europe. I have extended my hand in friendship and respect to each and every one of them. I will continue that approach.

I am proud of the fact that the CFTC has successfully negotiated with EU authorities in the past four months: (i) EU equivalence and CFTC exemptions for certain CFTC – and EU – authorized derivative trading venues; (ii) and, equivalence and substituted compliance decisions on margin requirements. Just like the CCP equivalence agreement of 2016, these decisions should be enduring achievements, as they are essential to ensuring a strong and stable trans-Atlantic derivatives market that supports economic growth both in the European Union and the United States.

Following this hearing, I have scheduled more meetings next week with European regulatory counterparts in London, Brussels, Frankfurt and Madrid. I will make clear that regulatory and supervisory deference is the right course for supervision of CCPs by U.S. and EU regulators. It has the support of the Administration. Thank you for making clear that it also has the bipartisan support of this Committee.

We must construct a stronger and more successful trans-Atlantic relationship to ensure that our markets can continue to flourish. Together with our European colleagues, we must strive for a comprehensive and universal approach that supports strong cross-border markets, recognizes and builds upon the strengths of our respective supervisory programs, and preserves the basic tenets of the 2016 equivalence agreement. I trust my European colleagues will do the right thing, preserve our good work of 2016 and embrace, not reject regulatory and supervisory deference.

VIRTUAL CURRENCIES

Let’s turn to virtual currencies. Emerging financial technologies are taking us into a new chapter of economic history. They are impacting trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer. These emerging technologies include machine learning and artificial intelligence, algorithm-based trading, data analytics, “smart” contracts, and distributed ledger technologies. Over time, these technologies may come to challenge traditional market infrastructure. They are transforming the world around us, and it is no surprise that these technologies are having an equally transformative impact on U.S. capital and derivatives markets.

Supporters of virtual currencies see a technological solution to the age-old “double spend” problem – that has always driven the need for a trusted, central authority to ensure that an entity is capable of, and does, engage in a valid transaction. Traditionally, there has been a need for a trusted intermediary – for example a bank or other financial institution – to serve as a gatekeeper for transactions and many economic activities. Virtual currencies seek to replace the need for a central authority or intermediary with a decentralized, rules-based and open consensus mechanism.2 An array of thoughtful business, technology, academic, and policy leaders have extrapolated some of the possible impacts that derive from such an innovation, including how market participants conduct transactions, transfer ownership, and power peer-to-peer applications and economic systems.3

Others, however, argue that this is all hype or technological alchemy and that the current interest in virtual currencies is overblown and resembles wishful thinking, a fever, even a mania. They have declared the 2017 heightened valuation of Bitcoin to be a bubble similar to the famous “Tulip Bubble” of the seventeenth century. They say that virtual currencies perform no socially useful function and, worse, can be used to evade laws or support illicit activity.4Indeed, history has demonstrated to us time-and-again that bad actors will try to invoke the concept of innovation in order to perpetrate age-old fraudulent schemes on the public. Accordingly, some assert that virtual currencies should be banned, as some nations have done.5

There is clearly no shortage of opinions on virtual currencies such as Bitcoin. In fact, virtual currencies may be all things to all people: for some, potential riches, the next big thing, a technological revolution, and an exorable value proposition; for others, a fraud, a new form of temptation and allure, and a way to separate the unsuspecting from their money.

Perspective is critically important. As of the morning of February 12, the total value of all outstanding Bitcoin was about $149 billion based on a Bitcoin price of $8,800. The Bitcoin “market capitalization” is less than the stock market capitalization of a single “large cap” business, such as Disney around $156 billion. The total value of all outstanding virtual currencies was about $430 billion. Because virtual currencies like Bitcoin are sometimes considered to be comparable to gold as an investment vehicle, it is important to recognize that the total value of all the gold in the world is estimated by the World Gold Council to be about $8 trillion, which continues to dwarf the virtual currency market size. Clearly, the column inches of press attention to virtual currency far surpass its size and magnitude in today’s global economy.

Yet, despite being a relatively small asset class, virtual currency presents complex challenges for regulators. Chairman Jay Clayton of the U.S. Securities and Exchange Commission (SEC) and I recently wrote:

The CFTC and SEC, along with other federal and state regulators and criminal authorities, will continue to work together to bring transparency and integrity to these markets and, importantly, to deter and prosecute fraud and abuse. These markets are new, evolving and international. As such they require us to be nimble and forward-looking; coordinated with our state, federal and international colleagues; and engaged with important stakeholders, including Congress6.

It is this perspective that has guided our work at the CFTC on virtual currencies. Our work has six broad elements: (1) staff competency; (2) consumer education; (3) interagency cooperation; (4) exercise of authority; (5) strong enforcement; and, (6) heightened review of virtual currency product self-certifications.

Staff Competency: LabCFTC

Last year, our agency was pleased to announce the launch of LabCFTC. In creating LabCFTC, we outlined an agenda designed to ensure that the CFTC would have the tools and understanding to keep pace with technological innovation in the algorithmic, digital world of the 21st century.

LabCFTC is the focal point of the CFTC’s efforts 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.

LabCFTC accomplishes its mission in three ways: (1) meeting with innovators, whether they are a startup or an established entity; (2) supporting or incorporating new technologies with the potential to improve our markets or enable the Commission to carry out its mission more effectively and efficiently; and (3) collaborating with external organizations, including domestic and international regulators, focused on sharing information and best practices related to fintech innovation.

Since its launch, LabCFTC has met with over 150 firms and organizations, including through ‘office hour’ sessions in New York, Chicago, Washington D.C., and earlier this year, the San Francisco Bay Area. Late last year, LabCFTC published a fintech primer on the topic of virtual currencies, and will soon be releasing a request for public feedback regarding a series of planned innovation competitions beginning in 2018. LabCFTC continues to work closely with domestic and international regulators on fintech engagement models, and is building out internal educational resources to help inform our staff and policy.

Finally, through its engagement with – and study of – innovative technologies, LabCFTC was recently able to recommend new virtual currency surveillance tools to our Enforcement division. I am pleased to report that our Enforcement team has in fact 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.

Customer Education

The CFTC believes that the responsible regulatory response to virtual currencies must start with consumer education.  Amidst the wild assertions, bold headlines, and shocking hyperbole about virtual currencies, there is a need for much greater understanding and clarity.

Over the past five months, the CFTC has produced an unprecedented amount of public educational materials on virtual currencies, all of which are located on the Commission’s dedicated “Bitcoin” web page. Launched on December 15, 2017, www.cftc.gov/bitcoin features both consumer and industry-facing materials which include a backgrounder on the CFTC’s oversight and approach to virtual currency markets, a “primer” on virtual currencies, several customer advisories on risks associated with speculating or investing in Bitcoin and other virtual currencies, a fact sheet outlining the self-certification process, and a CFTC Talks podcast on Bitcoin. The CFTC will be publishing two print brochures on Bitcoin and virtual currencies that will be available soon for widespread dissemination.

Along with the resources available on www.cftc.gov/bitcoin, the CFTC has produced several other podcasts on blockchain and virtual currencies, all of which are available on the Commission’s website or from various streaming services. For market participants, the CFTC also issues a weekly publication of Bitcoin futures “Commitment of Traders” data and an analysis of Bitcoin spot market data.

The CFTC’s Office of Customer Education and Outreach (OCEO), which was established in 2011 to administer the CFTC’s consumer education initiatives, has played an integral role in both authoring educational materials for consumers and working with partners to spread the word about the CFTC’s Bitcoin and virtual currency resources.

OCEO is conducting outreach to various 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. Some examples of outreach include coordinating with national non-profits, federal regulators and state agencies to conduct webinars, educational campaigns and in-person events. OCEO also provides partners with content to use for their constituent outreach and communications, in order to amplify the CFTC’s customer education efforts. OCEO is also reaching intermediaries through trainings which educate participants on the CFTC’s fraud prevention resources to protect and assist their constituencies.

Interagency Coordination

The CFTC’s enforcement jurisdiction over virtual currencies is not exclusive. As a result, the U.S. approach to oversight of virtual currencies has evolved into a multifaceted, multi-regulatory approach that includes:

  • The SEC’s increasingly strong action against unregistered securities offerings, whether they are called a virtual currency or initial coin offering in name;
  • State Banking regulators overseeing certain U.S. and foreign virtual currency spot exchanges largely through state money transfer laws;
  • The Internal Revenue Service treating virtual currencies as property subject to capital gains tax;
  • The Treasury’s Financial Crimes Enforcement Network (FinCEN) monitoring Bitcoin and other virtual currency transfers for anti-money laundering purposes.

The CFTC actively communicates its approach to virtual currencies with other Federal regulators, including the Federal Bureau of Investigation (FBI) and the Department of Justice (DOJ) and through the Financial Stability Oversight Council (FSOC), chaired by the Treasury Department. The CFTC has also been in close communication with the SEC with respect to policy and jurisdictional considerations, especially in connection with recent virtual currency enforcement cases. In addition, we have been in communication with overseas regulatory counterparts through bilateral discussions and in meetings of the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO).

CFTC Authority and Oversight

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

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

The CFTC has been straightforward in asserting its area of statutory jurisdiction concerning virtual currency derivatives. As early as 2014, former CFTC Chairman Timothy Massad discussed virtual currencies and potential CFTC oversight under the Commodity Exchange Act (CEA).7 And as noted above, in 2015, the CFTC found virtual currencies to be a commodity.8 In that year, the agency took enforcement action to prohibit wash trading and prearranged trades on a virtual currency derivatives platform.9 In 2016, the CFTC took action against a Bitcoin futures exchange operating in the U.S. that failed to register with the agency.10 Last year, the CFTC issued proposed guidance on what is a derivative market and what is a spot market in the virtual currency context.11 The agency also issued warnings about valuations and volatility in spot virtual currency markets12 and launched an unprecedented consumer education effort described earlier herein.

Enforcement

The CFTC Division of Enforcement is a premier Federal civil enforcement agency dedicated to deterring and preventing manipulation and other disruptions of market integrity, ensuring the financial integrity of all transactions subject to the CEA, and protecting market participants from fraudulent or other abusive sales practices and misuse of customer assets.

The CFTC has been particularly assertive of its enforcement jurisdiction over virtual currencies. It has formed an internal virtual currency enforcement task force to garner and deploy relevant expertise in this evolving asset class. The task force shares information and works cooperatively with counterparts at the SEC with similar virtual currency expertise.

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. These include:

  • Gelfman Blueprint, Inc., which charged defendants with operating a Bitcoin Ponzi scheme that fraudulently solicited approximately 80 persons supposedly for algorithmic trading in virtual currency that was fake, the purported performance reports of which were false, and – as in all Ponzi schemes – payouts of supposed profits to customers actuality consisted of other customers’ misappropriated funds.
  • My Big Coin Pay Inc., which charged the defendants with commodity fraud and misappropriation related to the ongoing solicitation of customers for a virtual currency known as My Big Coin;
  • The Entrepreneurs Headquarters Limited, which charged the defendants with a fraudulent scheme to solicit Bitcoin from members of the public, misrepresenting that customers’ funds would be pooled and invested in products including binary options, and instead misappropriated the funds and failed to register as a Commodity Pool Operator; and
  • Coin Drop Markets, which charged the defendants with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.

These recent enforcement actions confirm that the CFTC, working closely with the SEC and other fellow financial enforcement agencies, will aggressively prosecute bad actors that engage in fraud and manipulation regarding virtual currencies.

New Product Self-Certification

Under CEA and Commission regulations and related guidance, futures exchanges may self-certify new products on twenty-four hour notice prior to trading. In the past decade and a half, over 12,000 new futures products have been self-certified.13 It is clear that Congress and prior Commissions deliberately designed the product self-certification framework to give futures exchanges, in their role as self-regulatory organizations, the ability to quickly bring new products to the marketplace. The CFTC’s current product self-certification framework has long been considered to function well and be consistent with public policy that encourages market-driven innovation that has made America’s listed futures markets the envy of the world.

Practically, both the CME Group (CME) and CBOE Futures Exchange (CBOE) had numerous discussions and exchanged numerous draft product terms and conditions with CFTC staff over a course of months prior to their certifying and launching Bitcoin futures in December 2017. CME launched a Bitcoin Reference Rate in November 2016. CBOE first proposed to CFTC staff a Bitcoin futures product in July 2017. This type of lengthy engagement is not unusual during the self-certification process for products that may raise more complex issues.

The CFTC staff undertook its review of CME’s and CBOE’s Bitcoin futures products with considered attention. Given the emerging nature and heightened attention of these products, staff conducted a “heightened review” of CME’s and CBOE’s responsibilities under the CEA and Commission regulations to ensure that their Bitcoin futures products and their cash-settlement processes were not readily susceptible to manipulation,14 and the risk management of the associated Derivatives Clearing Organizations (DCOs) to ensure that the products were sufficiently margined.15

Over the course of its review, CFTC staff obtained the voluntary cooperation of CME and CBOE with a set of enhanced monitoring and risk management steps.

Designated contract markets (DCMs) setting exchange large trader reporting thresholds at five bitcoins or less;

  • DCMs entering direct or indirect information sharing agreements with spot market platforms to allow access to trade and trader data making up the underlying index that the futures contracts settle to;
  • DCMs agreeing to engage in monitoring of underlying index data from cash markets and identifying anomalies and disproportionate moves;
  • DCMs agreeing to conduct inquiries, as appropriate, including at the trade settlement and trader level when anomalies or disproportionate moves are identified;
  • DCMs agreeing to regular communication with CFTC surveillance staff on trade activities, including providing trade settlement and trader data upon request;
  • DCMs agreeing to coordinate product launches to enable the CFTC’s market surveillance branch to monitor developments; and
  • DCOs setting substantially high initial16 and maintenance margin.

The first six of these elements were used to ensure that the new product offerings complied with the DCM’s obligations under the CEA core principles and CFTC regulations and related guidance. The seventh element, setting high initial and maintenance margins, was designed to ensure adequate collateral coverage in reaction to the underlying volatility of Bitcoin.

In crafting its process of “heightened review” for compliance, CFTC staff prioritized visibility, data, and monitoring of markets for Bitcoin derivatives and underlying settlement reference rates. CFTC staff felt that in gaining such visibility, the CFTC could best look out for Bitcoin market participants and consumers, as well as the public interest in Federal surveillance and enforcement. This visibility greatly enhances the agency’s ability to prosecute fraud and manipulation in both the new Bitcoin futures markets and in its related underlying cash markets.

As for the interests of clearing members, the CFTC recognized that large global banks and brokerages that are DCO clearing members are able to look after their own commercial interests by choosing not to trade Bitcoin futures, as some have done, requiring substantially higher initial margins from their customers, as many have done, and through their active participation in DCO risk committees.

After the launch of Bitcoin futures, some criticism was directed at the self-certification process from a few market participants. Some questioned why the Commission did not hold public hearings prior to launch.  However, under the CEA and CFTC regulations, it is the function of the exchanges and clearinghouses - and not CFTC staff17 - to solicit and address stakeholder concerns in deciding to list or clear new products. The CFTC staff’s focus is on how the futures contracts and cash settlement indices are designed to reduce threats of manipulation and the appropriate level of contract margining to meet CEA and Commission regulations.

I feel strongly that interested parties, especially clearing members, should indeed have an opportunity to raise appropriate concerns for consideration by regulated platforms proposing virtual currency derivatives as well as by DCOs considering clearing new virtual currency products. That is why I have asked CFTC staff to add an additional element to the Review and Compliance Checklist for virtual currency product self-certifications. That is, requesting DCMs and Swap Execution Facilities (SEFs) to disclose to CFTC staff what affirmative steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and FCMs. Further, CFTC staff will take a close look at DCO governance around the clearing of new products and formulate recommendations for possible further action.

Although there is ready legal support in statute and CFTC regulation for many of the elements of the virtual currency review checklist, the staff will continue to work with exchanges on a voluntary basis at present. Nevertheless, it is worth considering if specific rule changes are appropriate to accommodate the virtual currency review checklist in its own right. I have asked the CFTC’s General Counsel to discuss with my fellow Commissioners the statutory basis for the various elements of the review checklist.  I have also asked him to propose for Commission consideration possible regulatory and/or statutory steps to underpin the staff’s review process for virtual currency products. Commissioner Behnam has asked some important questions on the self-certification process that merit thoughtful consideration as we go forward.18

I believe that the CFTC’s response to the self-certification of Bitcoin futures has been a balanced one. It has resulted in the world’s first federally regulated Bitcoin futures market. Had it even been possible, blocking self-certification would not have stopped the rise of Bitcoin or other virtual currencies. Instead, it would have ensured that virtual currency spot markets continue to operate without effective and data-enabled federal regulatory surveillance for fraud and manipulation.

Potential Benefits

I have spoken publicly about the potential benefits of the technology underlying Bitcoin, namely Blockchain or distributed ledger technology (DLT).19 Distributed ledgers – in various open system or private network applications – have the potential to enhance economic efficiency, mitigate centralized systemic risk, defend against fraudulent activity and improve data quality and governance.20

DLT is likely to have a broad and lasting impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.21 When tied to virtual currencies, this technology aims to serve as a new store of value, facilitate secure payments, enable asset transfers, and power new applications.

Additionally, DLT will likely develop hand-in-hand with new “smart” contracts that can value themselves in real-time, report themselves to data repositories, automatically calculate and perform margin payments and even terminate themselves in the event of counterparty default.22

DLT may enable financial market participants to manage the significant operational, transactional and capital complexities brought about by the many mandates, regulations and capital requirements promulgated by regulators here and abroad in the wake of the financial crisis.23 In fact, one study estimates that DLT could eventually allow financial institutions to save as much as $20 billion in infrastructure and operational costs each year.24 Another study reportedly estimates that blockchain could cut trading settlement costs by a third, or $16 billion a year, and cut capital requirements by $120 billion.25Moving from systems-of-record at the level of a firm to an authoritative system-of-record at the level of a market is an enormous opportunity to improve existing market infrastructure.26

Outside of the financial services industry, many use cases for DLT are being posited from international trade to charitable endeavors and social services. BNSF Railway Co, a unit of Berkshire Hathaway Inc. recently announced that it became the first major U.S. railroad to join the Blockchain in Transport Alliance, a group of more than 200 companies considering transportation and logistics applications of digital ledger technology. 27 Other DLT use cases include: legal records management, inventory control and logistics; charitable donation tracking and confirmation; voting security and human refugee identification and relocation.28

Yet, while DLT promises enormous benefits to commercial firms and charities, it also promises assistance to financial market regulators in meeting their mission to oversee healthy markets and mitigate financial risk. What a difference it would have made on the eve of the financial crisis in 2008 if regulators had access to the real-time trading ledgers of large Wall Street banks, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios. I have previously speculated29 that, if regulators in 2008 could have viewed a real-time distributed ledger (or a series of aggregated ledgers across asset classes) and, perhaps, been able to utilize modern cognitive computing capabilities, they may have been able to recognize anomalies in market-wide trading activity and diverging counterparty exposures indicating heightened risk of bank failure. Such transparency may not, by itself, have saved Lehman Brothers from bankruptcy, but it certainly would have allowed for far prompter, better informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued.

Policy Considerations

Virtual currencies require attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space. SEC Chairman Clayton and I stated in our joint op-ed, that:

“Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence. In recent months, we have seen a wide range of market participants, including retail investors, seeking to invest in DLT initiatives, including through cryptocurrencies and so-called ICOs—initial coin offerings. Experience tells us that while some market participants may make fortunes, the risks to all investors are high. Caution is merited.

“A key issue before market regulators is whether our historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets. Check-cashing and money-transmission services that operate in the U.S. are primarily state-regulated. Many of the internet-based cryptocurrency trading platforms have registered as payment services and are not subject to direct oversight by the SEC or the CFTC. We would support policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era.”30

As the Senate Agriculture Committee and other Congressional policy makers consider the current state of regulatory oversight of cash or “spot” transactions in virtual currencies and trading platforms, consideration should be given to shortcomings of the current approach of state-by-state money transmitter licensure that leaves gaps in protection for virtual currency traders and investors. Any proposed Federal regulation of virtual currency platforms should be carefully tailored to the risks posed by relevant trading activity and enhancing efforts to prosecute fraud and manipulation. Appropriate Federal oversight may include: data reporting, capital requirements, cyber security standards, measures to prevent fraud and price manipulation and anti-money laundering and “know your customer” protections. Overall, a rationalized federal framework may be more effective and efficient in ensuring the integrity of the underlying market.

CFTC ENFORCEMENT ACTIVITY

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.31 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. The following is a summary of recent CFTC enforcement activity.

Overview of FY 2017

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. The CFTC obtained orders totaling $412,726,307 in restitution, disgorgement and penalties. Specifically, in the fiscal year, the CFTC obtained $333,830,145 in civil monetary penalties and $78,896,162 in restitution and disgorgement orders. Of the civil monetary penalties imposed, the CFTC collected and deposited at the U.S. Treasury more than $265 million.

Retail Fraud

The CFTC brought a significant number of retail fraud actions in FY 2017 (20 out of the 49). For example, in February 2017, the CFTC filed and settled charges against Forex Capital Markets LLC for $7 million for defrauding retail foreign exchange customers over a five year time period by concealing its relationship with its most important market maker and misrepresenting that its platform had no conflicts of interests with its customers. That month the CFTC also brought an action charging Carlos Javier Ramirez, Gold Chasers, Inc., and Royal Leisure International, Inc. with misappropriating millions in customer funds and engaging in fraudulent sales solicitations in connection with a Ponzi scheme involving the purported purchase of physical gold.

In May 2017, the CFTC filed charges against an individual and his company with defrauding 40 investors out of at least $13 million in connection with a commodity pool they operated; investors included family members and members of his church. In June 2017, the CFTC filed charges against two individuals and their company with fraudulently soliciting customers, including at a church gathering, and defrauding them out of more than $11 million. The pair was also arrested by the FBI on related criminal charges.

In September 2017, the CFTC filed one of the largest precious metals fraud cases in the history of the Commission. As alleged, the Defendants defrauded thousands of retail customers—many of whom are elderly—out of hundreds of millions of dollars as part of a multi-year scheme in connection with illegal, off-exchange leveraged precious metal transactions.

Market Manipulation

In February 2017, the CFTC settled with RBS for $85 million for attempted manipulation of ISDAFIX, a leading global benchmark for interest rate swaps and related derivatives. The CFTC also brought actions against The Royal Bank of Scotland plc and Goldman Sachs Group, Inc. and Goldman, Sachs & Co. for attempted manipulation of the ISDAFIX, resulting in $85 million and $120 million in penalties, respectively. In February 2018, the CFTC settled with Deutsche Bank Securities Inc. for $70 million for attempted manipulation of ISDAFIX. Since 2012, the CFTC has imposed over $5 billion in penalties against banks and brokers with respect to benchmark manipulation settlements.

Disruptive Trading

In November 2016, the CFTC entered into a consent order with Navinder Singh Sarao and Nav Sarao Futures Limited PLC to settle allegations related to the 2010 flash crash for $25.7 million in monetary sanctions, $12.9 million in disgorgement, and a permanent trading and registration ban. In December 2016, the CFTC settled with trading company 3Red and trader Igor Oystacher imposing a $2.5 million penalty, a monitor for three years, and requiring the use of certain trading compliance tools for intentionally and repeatedly engaging in a manipulative and deceptive spoofing scheme while placing orders for and trading futures contracts on multiple registered entities.

In January 2018, the CFTC fined Citigroup $25 million for failing to diligently supervise the activities of its employees and agents in conjunction with spoofing orders in the U.S. Treasury futures markets. Later that year, in July 2017, the CFTC entered into its first non-prosecution agreements (NPA) with three former Citigroup traders who admitted to spoofing in the U.S. Treasury futures markets in 2011 and 2012. The NPAs emphasize the traders’ timely and substantial cooperation, immediate willingness to accept responsibility for their misconduct, material assistance provided to the CFTC’s investigation of Citigroup, and the absence of a history of prior misconduct.

In January 2018, in conjunction with the DOJ and FBI, the CFTC announced criminal and civil enforcement actions against three banks and six individuals involved in commodities fraud and spoofing schemes. The banks were fined $46.6 million in penalties. Appendix A summarizes CFTC enforcement activities in the areas of manipulation, attempted manipulation, false reporting, spoofing, and/or manipulative or deceptive device since FY 2011.

CURRENT AGENDA

Swaps Data Reporting

As part of the Commission’s Roadmap to Achieve High Quality Swaps Data issued on July 10, 2017 and the CPMI-IOSCO harmonization process, we will be proposing several changes to swap data reporting rules. These efforts seek to eliminate redundancy, streamline reporting, and harmonize internationally.

At the heart of the 2008 financial crisis was the inability of regulators to assess and quantify the counterparty credit risk of large banks and swap dealers. The legislative solution was to establish swap data repositories (SDRs) under the Dodd-Frank Act.  Although much hard work and effort has gone into establishing SDRs and supplying them with swaps data, nine years after the financial crisis the SDRs still cannot provide regulators with a complete and accurate picture of bank counterparty credit risk in global markets.  In part, that is because international regulators have not yet harmonized global reporting protocols and data fields across international jurisdictions.

Of all the many mandates to emerge from the financial crisis, visibility into counterparty credit risk of major financial institutions was perhaps the most pressing. The failure to accomplish it is certainly the most disappointing.

The CFTC is committed to success in the global reform efforts towards swaps data reporting. That is why we are actively engaged in global swaps data harmonization efforts while simultaneously looking to improve upon the current processes for swaps reporting that were put in place back in 2012 and 2013. 

On the international front, the CFTC is co-leading several global initiatives to harmonize derivatives reporting along with fellow overseas regulators via Committee on Payments and Market Infrastructures-International Organization of Securities Commission (CPMI-IOSCO) and the Financial Stability Board (FSB):

  • Unique transaction identifiers (or UTIs) to track the lifecycle of a derivative transaction from creation until final termination;
  • Unique product identifiers (or UPIs) to identify the instrument type and elements of the product referenced in a derivative; and
  • Critical data elements (or CDEs) to provide basic information about the terms of the transaction, such as notional amount, price, and collateral movements.

CPMI-IOSCO published final technical guidance on UTIs in early 2017 and final guidance on UPIs is expected soon. We expect that guidance on CDE fields to be published by Q1 of 2018. 

An FSB sponsored group, the Group on UPI and UTI Governance, continues to work on governance issues for these identifiers, such as implementation. This important international work is ongoing with the CFTC’s full support and involvement.

Meanwhile, here at home, the CFTC issued for comment in July a swaps data reporting “Roadmap.”  The CFTC received 22 comment letters on the Roadmap that were overwhelmingly well informed and supportive. Division of Market Oversight (DMO) staff carefully considered them and is working to implement many of the recommendations.

A major focus of implementing the Roadmap will be incorporating harmonized UTI, UPI, and CDE guidance into our reporting regime. Wherever possible, we want to harmonize CFTC reporting elements with international CDE guidance. Still, it is possible that the CFTC will require some additional fields for CFTC specific use cases that are not addressed at the international level.

The Roadmap has carefully calibrated the release of CFTC rules to follow the release of international technical guidance on CDEs in order to avoid conflict. Furthermore, the Roadmap attempts to incorporate a realistic implementation timeline to allow for the appropriate building and testing by all relevant parties. We are sensitive to the complexity of changes to rules with multiple interconnected parts like swaps reporting. We will work with market participants to set realistic compliance dates.

To be clear, the international CPMI-IOSCO process is aimed at harmonizing what must be reported on a derivative, not when and how to report. We need to make sure that the when and how are also covered. In the end, CFTC when and how rules for swaps reporting may be different than those adopted by overseas regulators. In some areas, where we believe we have the better approach, such as single-sided reporting, we intend to pursue the CFTC’s current approach. Yet, in other areas where, in light of experience, it appears that overseas regulators have adopted a better way, such as T+1 regulatory reporting, we will consider making changes.

Swaps data reporting is new for all of us. No regulator has yet found the optimal approach to success. Yet, we are all determined to get there. None are more determined than the CFTC. That is why we published the swaps data Roadmap. 

There is an old saying, “If you don’t know where you’re going, you’ll never get there.” The Roadmap shows where the CFTC is going. We are determined to get there.

Entity Netted Notionals

The CFTC recently proposed a more accurate measurement of the size of the interest rate swap (IRS) markets, specifically focused on its risk transfer function. Under the methodology proposed in a paper by CFTC Chief Economist Bruce Tuckman the size of the IRS markets would be determined by the calculation of "Entity-Netted Notionals" (ENNs) instead of the current gross notional measure used today that broadly overstates risk transfer in the markets.32

ENNs are calculated by: (1) converting the long and short notional amounts of each counterparty to five-year risk equivalents; (2) netting longs against shorts in a given currency within pairs of legal entities; and (3) summing the resulting net longs or shorts across counterparties.

Under the ENNs calculation, the value of the current IRS markets would be approximately $15 trillion, which represents roughly 8% of the current $179 trillion market valuation using the conventional notional calculation methodology. Measured with ENNs, the $15 trillion size of the interest rate swap market is of the same order of magnitude as other fixed income markets, such as: the US Treasury market at $16 trillion, the corporate bond market at $12 trillion, the mortgage market at $15 trillion, and the municipal securities market at $4 trillion. At $15 trillion, the IRS market is more normalized and intelligible as part of the US economy.

However, ENNs are not intended to measure counterparty or operational risk. I have not asked the CFTC staff to use the calculation to rethink regulatory thresholds, such as the swap dealer de minimis registration threshold.

De Minimis and Position Limits

The CFTC has been ahead of most of the world’s market regulators in implementing G-20 market reforms. It has also completed most mandates set out in the Dodd-Frank Act. Nevertheless, there are still some Dodd-Frank rulemakings that remain incomplete or still have outstanding questions that need addressing: calculation of the de minimis exception to the swap dealer registration requirement and position limits on derivative transactions. The CFTC will continue to move forward on these in 2018.

Swap Dealer De Minimis. The level of the de minimis threshold is a critically important issue. It must be addressed with sound data and thorough analysis. It must be addressed this year.

Last October, I called for a one-year delay in implementation of the threshold. I noted that the Commission had recently sworn in two new commissioners and appointed a new Director of the Division of Swap Dealer and Intermediary Oversight (DSIO). I felt the delay was necessary for them and the staff to understand and analyze complete and current trade data. I said, that, “It is hard to get something as complicated as this right when we are under a time crunch.”

I am pleased to say that DSIO has now compiled and analyzed swap dealer trading data through the end of 2017. DSIO staff is in the process of scheduling meetings over the next few weeks to present this data and analysis to my staff and that of my fellow Commissioners. That data and analysis will provide the basis for thorough consideration of the de minimis threshold by the full Commission in the months to come. I have previously pledged to complete this rulemaking in 2018. I intend to keep that pledge.

Position Limits. As you know, in December 2016, the CFTC put forth a position limits proposal for public consideration and input. I voted in favor. The proposal generated dozens of detailed comments and concerns in the first half of 2017. During the course of 2017, staff of the CFTC’s Division of Market Oversight (DMO) analyzed those comments and provided written summaries for all of the Commissioners’ staffs. More recently, DMO staff began work on revisions to the proposal that are responsive to the public comments. I look forward to sitting down with the Division in the near future to discuss their suggestions.

When I testified before this Committee last June, I 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. This rulemaking has been underway for some time. There are thousands 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 got it right.

That is why I believe that a 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. We must ensure regulatory barriers do not stand in the way of long standing hedging practices of American farmers and ranchers, who depend on our markets.

Fiscal Year 2019 Budget Request

If fulfilled, the CFTC’s FY 2019 budget request submitted to Congress would maximize the Commission’s ability to oversee our nation’s swaps, futures and options markets.

The FY 2019 budget 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 give the Commission 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.

In order for the CFTC to fulfill its duty to oversee these vital derivatives markets in FY 2019, I am requesting $281.5 million. This is an increase of $31.5 million over the enacted FY 2017 appropriation and is the same level of funding that I requested in FY 2018. I believed then and still believe that this is the level of funding necessary to fulfill our statutory mission.

The Commission will invest in its capacity to develop economic modeling and econometric capabilities aimed at boosting the CFTC’s analytical expertise and monitoring of systemic risk in the derivatives markets, in particular with regard to 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.

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, the Commission will also need to enhance its financial analysis tools to aggregate and evaluate risk across all DCOs.

As part of this request, the Commission will 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. 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 these surveillance and enforcement efforts.

CFTC / Kansas State University Conference on Agricultural Commodities Futures Markets

The CFTC has teamed up with the Center for Risk Management Education and Research at Kansas State University to host a conference titled, “Protecting America’s Agricultural Markets: An Agricultural Commodity Futures Conference,” on April 5 – 6, 2018, in Overland Park, Kansas. This first-of-its-kind conference will include robust presentations and discussions on current macro-economic trends and issues affecting American agricultural futures markets and the importance of these markets for managing risk and protecting participants from manipulation, fraud, and other unlawful activities. This is our first, and hopefully not last, conference focused on derivatives-markets issues impacting the agricultural community in America’s Heartland.

CONCLUSION

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. This hearing is an important part of finding that balance. The CFTC remains grateful for the consistently thoughtful and bipartisan support of the Senate Committee on Agriculture, Nutrition, and Forestry. Thank you for inviting me to participate and I look forward to your questions.

Appendix A is available under Related Links.

1 See, Statement of Commissioner J. Christopher Giancarlo on European Union Determination of U.S. Central Counterparty Clearinghouse Equivalence, February 10, 2016 http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement021016

2 See generally, CFTC Talks, Episode 24, Dec. 29, 2017, Interview with Coincenter.org Director of Research, Peter Van Valkenburgh, at http://www.cftc.gov/Media/Podcast/index.htm.

3 See Marc Andreessen, Why Bitcoin Matters, New York Times DealBook (Jan. 21, 2014), https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/; Jerry Brito and Andrea O’Sullivan, Bitcoin: A Primer for Policymakers, George Mason University Mercatus Center (May 3, 2016),https://www.mercatus.org/publication/bitcoin-primer-policymakers; Christian Catalini and Joshua S. Gans, Some Simple Economics of the Blockchain, Rotman School of Management Working Paper No. 2874598, MIT Sloan Research Paper No. 5191-16 (last updated Sept. 21, 2017),https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874598; Arjun Kharpal, People are 'underestimating' the 'great potential' of bitcoin, billionaire Peter Thiel says, CNBC (Oct. 26, 2017), https://www.cnbc.com/2017/10/26/bitcoin-underestimated-peter-thiel-says.html; Hugh Son, Bitcoin ‘More Than Just a Fad,’ Morgan Stanley CEO Says, Bloomberg (Sept. 27, 2017), https://www.bloomberg.com/news/articles/2017-09-27/bitcoin-more-than-just-a-fad-morgan-stanley-ceo-gorman-says; Chris Brummer and Daniel Gorfine, Fintech: Building a 21st-Century Regulator’s Toolkit, Milken Institute (Oct. 21, 2014), available at http://www.milkeninstitute.org/publications/view/665.

4 Virtual currencies are not unique in their utility in illicit activity. National currencies, like the US Dollar, and commodities, like gold and diamonds, have long been used to support criminal enterprises.

5 Countries that have banned Bitcoin include Bangladesh, Bolivia, Ecuador, Kyrgyzstan, Morocco, Nepal, and Vietnam. China has banned Bitcoin for banking institutions.

6 Jay Clayton and J. Christopher Giancarlo, Regulators Are Looking at Cryptocurrency: At the SEC and CFTC We Take Our Responsibility Seriously,Wall Street Journal, Jan. 24, 2018, https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency-1516836363.

7 Testimony of CFTC Chairman Timothy Massad before the U.S. Senate Committee on Agriculture, Nutrition and Forestry (Dec. 10, 2014), http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-6.

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

9 In re TeraExchange LLC, Dkt. No. 15-33 (CFTC Sept. 24, 2015), http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfteraexchangeorder92415.pdf.

10 In re BXFNA Inc. d/b/a Bitfinex, Dkt. No. 16-19 (CFTC June 2, 2016), http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf.

11 CFTC, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60335 (Dec. 20, 2017), www.gpo.gov/fdsys/pkg/FR-2017-12-20/pdf/2017-27421.pdf.

12 CFTC, A CFTC Primer on Virtual Currencies (Oct. 17, 2017),http://www.cftc.gov/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf.

13 Prior to the changes made in the Commodity Futures Modernization Act of 2000 (CFMA) and the Commission’s subsequent addition of Part 40, exchanges submitted products to the CFTC for approval. From 1922 until the CFMA was signed into law, less than 800 products were approved. Since then, exchanges have certified over 12,000 products. For financial instrument products specifically, the numbers are 494 products approved and 1,938 self-certified.See http://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm.

14 See CEA Section 5(d)(3), 7 U.S.C. 7(d)(3); Section 5(d)4), 7 U.S.C. 7(d)(4); 17 C.F.R. 38.253 and 38.254(a), and Appendices B and C to Part 38 of the CFTC’s regulations.

15 CEA Section 5b(c)(2)(D)(iv), 7 U.S.C. 7a-1(c)(2)(D)(iv) (“The margin from each member and participant of a derivatives clearing organization shall be sufficient to cover potential exposures in normal market conditions.”).

16 In the case of CME and CBOE Bitcoin futures, the initial margins were ultimately set at 47% and 44% by the respective DCOs. By way of comparison that is more than ten times the margin required for CME corn futures products.

17 Unlike provisions in the CEA and Commission regulations that provide for public comment on rule self-certifications, there is no provision in statute or regulation for public input into CFTC staff review of product self-certifications. It is hard to believe that Congress was not deliberate in making that distinction.

18 Statement of Commissioner Behnam before the Market Risk Advisory Committee (January 21, 2018), http://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement013118

19 J. Christopher Giancarlo, Keynote Address of Commissioner J. Christopher Giancarlo before the Markit Group, 2016 Annual Customer Conference New York, May 10, 2016, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-15.

20 Id.

21 See, e.g., Larry Greenemeier, Can't Touch This: New Encryption Scheme Targets Transaction Tampering, Scientific American, May 22, 2015, http://www.scientificamerican.com/article/can-t-touch-this-new-encryption-scheme-targets-transaction-tampering/.

22 See Massimo Morini & Robert Sams, Smart Derivatives Can Cure XVA Headaches, Risk Magazine, Aug. 27, 2015, http://www.risk.net/risk-magazine/opinion/2422606/-smart-derivatives-can-cure-xva-headaches; see also Jeffrey Maxim, UBS Bank Is Experimenting with “Smart-Bonds” Using the Bitcoin Blockchain, Bitcoin Magazine, June 12, 2015, https://bitcoinmagazine.com/articles/ubs-bank-experimenting-smart-bonds-using-bitcoin-blockchain-1434140571; see also Pete Harris, UBS Exploring Smart Bonds on Block Chain, Block Chain Inside Out, June 15, 2015, http://harris-on.typepad.com/block_chain_io/2015/06/ubs-exploring-smart-bonds-on-block-chain.html; See generally Galen Stops, Blockchain: Getting Beyond the Buzz, Profit & Loss, Aug.–Sept. 2015, at 20, http://www.profit-loss.com/articles/analysis/technology-analysis/blockchain-getting-beyond-the-buzz.

23 See, e.g., Oversight of Dodd-Frank Act Implementation, U.S. House Financial Services Committee, http://financialservices.house.gov/dodd-frank/(last visited Mar. 2, 2016).

24 Santander InnoVentures, Oliver Wyman & Anthemis Group, The Fintech Paper 2.0: Rebooting Financial Services 15 (2015), http://santanderinnoventures.com/wp-content/uploads/2015/06/The-Fintech-2-0-Paper.pdf.

25 Telis Demos, Bitcoin’s Blockchain Technology Proves Itself in Wall Street Test, Apr. 7, 2016, The Wall Street Journal, http://www.wsj.com/articles/bitcoins-blockchain-technology-proves-itself-in-wall-street-test-1460021421.

26 Based on conversations with R3 CEV, http://r3cev.com/.

27 Ryan Henriksen, Buffett’s BNSF railroad eyes blockchain for shipping freight, Reuters, February 5, 2018, https://www.msn.com/en-us/finance/companies/buffetts-bnsf-railroad-eyes-blockchain-for-shipping-freight/ar-BBIJTUr.

28 Frisco d’Anconia, IOTA Blockchain to Help Trace Families of Refugees During and After Conflicts, Cointelegraph.com, Aug. 8, 2017, https://cointelegraph.com/news/iota-blockchain-to-help-trace-families-of-refugees-during-and-after-conflicts.

29 See supra note 22.

30 See supra note 5.

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

32 Richard Haynes, John Roberts, Rajiv Sharma, and Bruce Tuckman, January 2018, Introducing ENNs: A Measure of the Size of Interest Rate Swap Markets,http://www.cftc.gov/PressRoom/PressReleases/pr7691-18

 

Last Updated: February 15, 2018

Opening Statement of Chairman J. Christopher Giancarlo before the Technology Advisory Committee Meeting

Opening Statement of Chairman J. Christopher Giancarlo before the Technology Advisory Committee Meeting

February 14, 2018

Thank you, Commissioner Quintenz. I want to thank all of the participants. Good morning.

I know that some of you are here because of interest in the topic of virtual currencies. But, we will also examine the impact and implications of other uses of technology in financial markets and trade, including blockchain and distributed leger technology, data analytics, artificial intelligence, automated trading technologies, cybersecurity, and so much more.

There is a common theme: technology is quickly taking us into new territory with vast ripple effects. What was once science fiction is becoming technological reality. Financial technology, or “fintech” is having a transformative impact on US derivatives markets. The landscape is changing for trading, markets and the entire financial structure, domestic and global, with far ranging implications for capital formation and risk transfer.

Last week, I had the honor to testify before the US Senate Banking Committee. I said that the first element in the CFTC’s engagement with virtual currencies, as with all technology innovations, was to learn everything we can about the emerging technology and its potential applications. Good public policy and regulation can only be built on a foundation of thorough understanding of the subject matter.

In May of last year, our agency was pleased to announce the launch of its LabCFTC initiative, and soon after the appointment of our Director of LabCFTC and Chief Innovation Officer, Daniel Gorfine. In creating LabCFTC, we outlined an agenda designed to ensure that the CFTC would have the ability to keep pace with technological innovation in support of America’s vital national interest in maintaining the world’s deepest and most durable, competitive, and vibrant capital and risk transfer markets in the algorithmic, digital world of the 21st century.

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.

Since its launch, LabCFTC has held over 150 meetings with entities ranging from established financial service firms to start-up companies. It has conducted these meetings through ‘office hour’ sessions in New York, Chicago, Washington D.C., and earlier this year, the San Francisco Bay Area. LabCFTC also published its first primer last October on the topic of virtual currencies, which will be the subject of discussions today. And soon it will be seeking to crowdsource topics for potential innovation competitions.

In selecting Daniel to serve as the Designated Federal Officer and Acting Chair of the TAC, Commissioner Quintenz and I sought to ensure that the efforts of the TAC and LabCFTC were mutually reinforcing and that each could help to inform the other. It is this type of cross-pollination and breaking down of siloes in our organization that can enhance our regulatory efforts as we modernize our approach to engaging with rapidly digitizing markets.

So, this meeting is timely. We see what is on the horizon. We must be prepared and responsible. The present is prelude to the future. As we confront the challenges ahead, we will rely on the wisdom of advisory groups like TAC.

I look forward to your deliberations. Thank you.

 

Last Updated: February 14, 2018

Opening Statement of Commissioner Rostin Behnam before the Technology Advisory Committee Meeting

Opening Statement of Commissioner Rostin Behnam before the Technology Advisory Committee Meeting

I’d like to begin by wishing Commissioner Quintenz a Happy Valentine’s Day; and equally important, thanking him for convening today’s meeting, and for his sponsorship and leadership of the Technology Advisory Committee (TAC).

You have proposed a comprehensive agenda, and I look forward to exploring these issues of far-reaching consequence with you, Chairman Giancarlo, and the TAC today and throughout 2018.

I’d also like to thank Daniel Gorfine, CFTC Chief Innovation Officer, Director of LabCFTC, and the TAC's Designated Federal Officer for planning today’s thoughtful and timely agenda.

Finally, I would like to thank the panelists for sharing their time and insight. It is nice to see many familiar faces, and I look forward to meeting members who I have not yet met.

Committees like the TAC, and also the Market Risk Advisory Committee (MRAC) and Agricultural Advisory Committees (AAC), both of which I am sponsoring, contribute to the overall mission of the Commission by providing a diversity of views and a high-level of expertise on matters that evolve rapidly and carry widespread and sometimes systemic consequences. These advisory committees ensure that the Commission remains abreast of market issues on the horizon that could revolutionize our markets in terms of stability, transparency, and competition; or potentially disrupt markets with shock-triggering liquidity events, increased systemic risk, and susceptibility to fraud and manipulation.

Turning to today’s agenda and the year to come, I commend the Committee for identifying and endeavoring to tackle a wide range of complex, novel, and interconnected issues. Twice-awarded Nobel Prize winner Linus Pauling once said, “The best way to have a good idea is to have a lot of ideas.” With that in mind, and the combined knowledge in this room, I anticipate that the TAC is going to have a great year.

Leading off today’s meeting are virtual currencies and their underlying blockchain or distributed ledger technologies (DLTs). Given the events of the last several months, which included the historic listing of the first bitcoin futures contracts, the price of bitcoin skyrocketing to over $19,000, the filing of multiple CFTC enforcement actions related to bitcoin fraud, and my personal education in bitcoin, DLT, digital wallets, Ether, Ripple, proof of stake, and something called a CryptoKitty—which I understand is a blockchain collectible – it is no surprise that the TAC will be exploring these important regulatory developments.

As the CFTC continues to aggressively dive into these topics, educating ourselves, engaging with market participants, and ultimately shaping regulatory themes and oversight, we must remain vigilant to transparency and accountability to ensure that stakeholders, customers, and the general public may engage and have an opportunity to contribute to these sea change discussions.

Pivoting to the future of data analytics, machine learning, and artificial intelligence, as the agenda suggests, we need to encourage dialogue between the Commission, the industry, and all other stakeholders to ensure that we provide appropriately tailored oversight and customer protections, while ensuring accountability. Our regulations need to keep pace with technology. Our approach to oversight should reflect current technologies and demonstrate our capacity to participate meaningfully in the adoption of new technologies.

In regard to automated trading technologies, I am pleased that the TAC plans to resuscitate at least some of Regulation AT (Reg AT). As I discussed in prepared remarks last week, the Commission issued proposals in both 2015 and 2016 to establish pre-trade risk controls in an effort to mitigate the potential dangers of an unchecked automated trading system. I am happy to see that this issue will be discussed today, as I think it is vitally important that the Commission take immediate action on Reg AT before an automated trading system run amok causes harm to market participants. As I said last week, the question of a market event, flash crash or otherwise, is not if, but when.

I look forward to the discussion today, and to future discussions with industry participants regarding thoughtful, appropriate regulation of automated trading. Inaction in regard to automated trading simply is not an option.

Lastly, I am pleased that the meeting will close with a discussion of cybersecurity emerging trends and best practices. As I have also said before, although each entity, private institution, or government regulator must prioritize the protection and safety of its own organization, cyber defense is an all hands on deck exercise that demands both financial and human resources to protect our institutions, data, identity, and – in many cases – sovereignty. To that end, cyber risk cannot be viewed as a territorial exercise, where we only seek to protect our own. Any attack on our government or private institutions presents broad market risk, and we must view it as such in order to address and eliminate any symptoms in a systematic manner.

With all these interesting and challenging issues in mind, I would like to briefly acknowledge my support for the President’s FY2019 budget request; specifically its level setting of, at least in part, the CFTC’s funding mechanism with other U.S. financial regulators. Since Dodd-Frank was signed into law by President Obama nearly eight years ago, the CFTC and its staff have done an amazing job in meeting new statutory responsibilities and duties – with limited resources.

Combining the CFTC’s new Dodd-Frank responsibilities, with existing responsibilities, and the continuous advent and development of new technologies, including those discussed today, mean the CFTC’s overall duties will continue to grow. I am hopeful that these challenges will be recognized, and consequently supported with funding that at the least matches the President’s request. Too much is at stake, and the risks to the financial system are too great.

I look forward to hearing from the panels on all of these important subjects.

Thank you again to Commission Quintenz, Daniel Gorfine, our panelists and the entire TAC. I look forward to today’s discussion.

 

Last Updated: February 14, 2018

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

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

February 14, 2018

Good morning and welcome to the first 2018 meeting of the Technology Advisory Committee (TAC or Committee). I want to take a moment to thank you all very much for taking the time to be here today, particularly those of you traveling from across the country. I would also like to thank Dan Gorfine, the Acting Chair of the Committee and the Director of LabCFTC, as well as Jorge Herrada, for their hard work in planning this meeting and putting together such a robust agenda for our discussion.

Before we begin, let me first extend a very warm welcome to all of our new members. We are delighted that each of you so generously chose to volunteer your time to participate. I look forward to hearing from you, along with all of the other Committee members, as we discuss the crucial issues before the TAC today. I also wanted to take a moment to express my regret that Columbia Business School Professor R.A. Farrokhnia will not be able to join us today. I hope he is able to come down for a future meeting.

With that, I would now like to recognize Chairman Giancarlo and Commissioner Benham to make their opening remarks.

Technological changes in the derivatives markets have rapidly evolved since this Committee last met over 22 months ago. I am hopeful that we can build upon the extensive work of past TAC meetings to address the issues and challenges currently emerging in our financial markets. The Committee will explore five key areas today, each of which exemplifies how technology is impacting the functionality of global derivatives markets and how traders participate in them. These are also areas where the CFTC can demonstrate leadership and provide effective oversight that fosters the integrity, strength, and liquidity of our markets.

My intent is for the Committee to use this meeting to identify the issues within each of these areas that it wishes to explore in greater detail, with the ultimate goal of providing the Commission with actionable, practical advice. In many cases, I anticipate that subcommittees may need to be formed to enable the kind of focused review and thoughtful consideration necessary to arrive at those recommendations.

Blockchain and the Potential Application of Distributed Ledger Technology to the Derivatives Markets

The first area the Committee will discuss is blockchain and the potential application of distributed ledger technology, otherwise known as DLT, to the derivatives markets. DLT has the potential to transform how firms handle the execution, processing, reporting, and recordkeeping of derivatives transactions. Market participants may find that using DLT to satisfy their regulatory obligations results in greater accuracy, greater efficiency, and less cost. They may also find that, like many new opportunities, DLT also presents challenges. Much work remains to be done in order to realize the full promise of DLT. From scalability issues, to the complete digitalization of derivative contracts, to DLT’s compatibility with existing CFTC regulations, there are many facets of DLT for the TAC to consider.

Market and Regulatory Developments Involving Virtual Currencies and Related Futures Products

Next, the Committee will discuss market and regulatory developments involving virtual currencies and related futures products. The proliferation of virtual currencies over the course of the past year, while exciting from an innovation standpoint, raises a multitude of legal and regulatory questions and challenges. Definitional questions about whether a particular virtual currency or token is a security or a commodity continue to be debated. In addition to these foundational legal questions, the growing demand to trade virtual currencies also elevates the risks to consumers posed by potential fraud and manipulation on spot platforms.

I share Chairman Giancarlo’s view that we should respect the enthusiasm of investors for new digital currencies and meet that enthusiasm with thoughtful, balanced regulation. The CFTC should not attempt to make value judgments about which new products are worthwhile and which are not – the markets, investors, and consumers need to decide that for themselves. However, the CFTC should aggressively target fraudulent and manipulative behavior, whether in the derivatives markets or in the underlying cash markets. I commend the Division of Enforcement’s relentless efforts on that front to protect investors and the integrity of the marketplace.

The current regulatory framework of virtual currencies is a patchwork of state and federal jurisdictions. As the markets for virtual currencies mature, the Commission, along with its fellow state, federal, and international regulators, should ensure a rational approach to regulatory oversight, not one based on fear or inexperience. Jurisdictional gaps should be identified and addressed. In conjunction with those efforts, and as I said at last week’s Yahoo Finance All Markets Summit, I think a self-regulatory organization, or SRO, for cryptocurrency exchanges could spur the development of standards around cybersecurity policies, data retention, protection of customer accounts, trading practices, and other issues. Self-regulation has a long history in derivatives markets. In the 19th century, futures exchanges took the initiative to develop formal rules and disciplinary procedures to enforce fair trade practices and curb manipulation before comprehensive federal regulation was enacted. It is worth exploring whether an SRO model could assist cryptocurrency exchanges establish and enforce standards that protect investors and deter fraud. I look forward to hearing from the Committee about the possibility of such an SRO.

These are only a few of the novel issues that the Commission will grapple with as this nascent, but burgeoning, asset class continues to evolve. I hope the Committee’s expertise can assist the Commission in developing smart policies that address the unique risks and opportunities presented by virtual currencies and related financial products.

Future of Machine Learning, Artificial Intelligence, and Computing Power

The Committee will also address machine learning, artificial intelligence, or AI, and computing power. We will have the pleasure of hearing from Mr. Tim Estes, President and Founder of Digital Reasoning. Digital Reasoning developed a product that uses machine learning to facilitate electronic communications surveillance. The product uses machine learning to determine the meaning of words in emails and chats based on their context. The program is also designed to flag potentially problematic behavior patterns of employees and mark those communications for further review. Mr. Estes will speak with us today about advances in machine learning technology and their future impact on the financial markets.

Developments and Challenges with Automated Trading Technologies

Fourth, the Committee will examine the developments in, and challenges posed by, automated trading technologies. In the past, I have expressed my view that Regulation Automated Trading or “Reg AT” was a missed opportunity by the Commission to explore the real risks of the modern trading environment. I believe the Commission should only pursue additional regulation in this space after it has identified specific risks associated with automated trading, examined how those risks are being addressed through the market’s incentive structure, and then determined if regulation can play a proper role in alleviating those risks. Once that threshold determination has been made, the Commission must work to thoughtfully calibrate the costs and scope of the regulation with the specific risk it is meant to target. The Commission should not adopt automated trading regulations to address amorphous, hypothetical concerns or simply for the sake of having them on the book.

The TAC can serve as a forum to reconsider the risks of automated trading with a fresh eye. To the extent automated trading risks can be addressed through regulation, the Committee can explore what form that regulation should take. Reg AT essentially proposed a registration scheme to address automated trading risks, but there are other possible approaches. For example, the Commission could pursue a principles-based approach that enables best practices to evolve over time. I am hopeful these kinds of conversations can better inform the Commission about the true risks posed by automated trading and how the Commission can best respond to them.

Cybersecurity Developments and Best Practices

Lastly, the Committee will discuss cybersecurity developments. I expect this discussion will begin an ongoing dialogue between the industry and the CFTC about what constitutes cybersecurity best practices. The TAC can facilitate discussions about how the Commission and market participants alike can improve data transmission, storage, archiving, and disposal processes to protect against cyber threats.

Thank you to all of our members and presenters for taking the time to be here with us today and for their flexibility with rescheduling this meeting on such short notice. I am very excited to hear from you. Let’s get started.

 

Last Updated: February 14, 2018

Statement of Commissioner Brian D. Quintenz Regarding CFTC’s FY 2019 Budget Request

Statement of Commissioner Brian D. Quintenz Regarding CFTC’s FY 2019 Budget Request

February 12, 2018

I support Chairman Giancarlo’s FY 2019 $281.5 million budget request. The Chairman has undertaken a thoughtful and disciplined approach to determining the resources necessary for the agency to fulfil its mission and position it as a 21st Century regulator.

While the Chairman’s budget request increases the agency’s FTE (Full Time Equivalent) employees to 716, it is important to note that the agency’s FTE count has steadily decreased over the past three years due in part to flat funding. In FY 2016, the agency had 714 FTEs while in FY 2017 it had 689 FTEs and only 670 FTEs this year. From that perspective, the current request asks for roughly the same number of FTEs as three years ago. However, the composition of the Chairman’s proposed FY 2019 FTEs will be quite different from what the agency maintained in FY 2016 and will help realize the Chairman’s vision for the agency: increased interfaces with fintech advancements, robust and timely examination processes for clearinghouses, and enhanced econometric analyses of rules, products, and markets. I fully support this vision, and as the sponsor of the Commission’s Technology Advisory Committee, I am excited to play a role in advancing the agency’s understanding of, and participation in, innovative technological concepts in our markets.

We live in a world of scare resources. Every organization wishes it had more financial and human capital. Regardless of Congress’ ultimate appropriation to the agency, the CFTC remains dedicated to streamlining its operations and prioritizing its market regulation to best utilize the funding that it receives.

 

Last Updated: February 12, 2018

Remarks of CFTC Chief of Staff Michael Gill at the National Press Club, CFTC Kiss Policy Forum

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

February 12, 2018

Thank you. And, I want to thank The Risk Desk for hosting this forum.

The National Press Club has a long and distinguished history. It is an honor to speak here. The past is present in these rooms.

There have been many presentations over the last four decades here on the topic of the proper way to review regulations. You may know, thirty-seven years ago, almost to the day, there was much comment about President Reagan’s executive order on federal regulation (Executive Order 12291 dated February 17, 1981). The President wanted to streamline government by assessing the cost and the burden of regulations, to enhance agency accountability, to eliminate duplication, and to reconsider the reasoning behind specific regulations.

In reporting his views, the New York Times argued that the executive order “touched off an intense economic, political, and philosophical debate.”

Chairman Giancarlo does not seek to enter into a political or partisan debate. He simply believes there is a way to improve regulation, a positive approach in which every party benefits. The program we are discussing today, Project KISS or “Keep It Simple, Stupid,” begins with the premise that, no matter how well-intentioned, regulations should be periodically examined and questioned, brought out into the light, and those that are out of date, duplicative, or unnecessarily complicated should be updated or improved.

The KISS program evolved out of a simple list of cumbersome regulations that then-Commissioner Giancarlo and Amir Zaidi kept while Amir served as counsel to the Commissioner. At the time, Commissioner Giancarlo put it to Amir this way, “In most tasks in life there should be simplicity behind the complexity, and we must hone in on the practical to be successful.”

On February 24, 2017, President Trump issued an Executive Order on “Enforcing the Regulatory Reform Agenda.” Although the Commodity Futures Trading Commission (CFTC), as an independent agency, is not strictly bound by President Trump’s Executive Order, we believe the KISS effort is in line with the President’s objectives. That’s why we are here today, to tell you about our efforts at the CFTC to simplify our regulations and address outdated rules, and to bring some clarity to the process. I will provide some context. Then, we will have a panel discussion with my colleagues Brian Bussey, Amir Zaidi, and Matthew Kulkin.

Project KISS is an attempt to enhance the application of rules and practices in a policy-neutral way. We are working to make Legislative and Executive direction more effective and efficient.

This is a matter of necessary housekeeping; time to simplify and clean up the clutter. And, we found that, in forty years, we had accumulated a moderate amount of complex clutter.

The goal is to become better regulators, which in turn leads to more efficient markets and greater economic growth.

So, in addition to the staff led process, we invited public comments for suggestions. We opened a process to identify rules and practices that could become more simple and up-to-date. We set aside a separate page on CFTC.gov for these proposals. That way the suggestions would be transparent and would allow for a robust, accessible review and comment period.

Commentators included exchanges, asset managers, clearinghouses, trading platforms, think tanks, law firms, trade associations, and our own staff. Some of you are in the room with us, today.

There were a total of 149 comment submissions from the public and 51 proposals from staff. A breakdown shows that 35 submissions concerned registration, 37 reporting, 20 clearing, 20 executions, and 37 were in other miscellaneous categories.

We divided the responses into three categories:

  • Tier One is simple housekeeping with no discretionary policy changes;
  • Tier Two we classified as reducing regulatory burdens with minor policy implications; and
  • Tier Three is about initiatives that had more significant policy implications, and by our own definition, fall out of the KISS initiative. But these suggestions have not been cast aside. The Commission will also be studying ways to amend our regulations so that their effect more closely aligns with the intent of the Congress. These policy changes, however, are for another day.

The suggestions were then examined and discussed among staff and prioritized.

Before I tell you about some of the proposals, a few important caveats are in order. The first is the actions we are discussing today are but a start, there are many more rules we need to review, but the Chairman believes it is important to provide a guidepost on our efforts over the next few months. There are also specific efficiencies that will be incorporated into larger policy changes outside the KISS process. Many of the suggestions that came from the public will most likely be addressed in those more substantive policy reviews. The second caveat is that none of the proposals, after being considered and possibly amended after discussions with the full Commission, will be implemented straight away. Most will have a proper notice and comment period. Which segues into the third, and most important caveat, these proposals we will be discussing today are at the staff stage. The Chairman makes absolutely clear the Commission will be further reviewing these suggestions and providing input into their final design.

So let’s talk about what’s on the horizon.

Division of Clearing and Risk

The Division of Clearing and Risk (DCR) is considering recommending a proposed change to codify in regulation the process the Commission has followed in granting exemptions from Derivative Clearing Organization (DCO) registration. The benefits of this would be greater transparency in the DCO exemption process, making it easier for clearinghouses to seek an exemption; and reduced staff time and resources required to process clearinghouse requests for exemption.

Another proposed set of changes DCR is considering would involve amending various DCO regulations. For example, one change would codify an interpretative letter that gives DCOs some flexibility in determining when the customer margin “bump-up” rule – which requires customer initial margin to be greater than clearing member initial margin – applies. Another change would eliminate the requirement that DCOs petition for a Commission order when seeking to hold cleared swaps customer collateral in a futures customer account, allowing it to be done by rule filing, consistent with the process for holding futures in the swaps customer account. And another change would eliminate the need for DCOs that require full collateralization for positions to comply with certain risk management standards.

The benefits of these changes would include clarifying certain requirements for DCOs that may have caused confusion in the industry, and streamlining the process for comingling futures and swaps in customer accounts, (thereby saving DCO and Commission staff time and resources).

Yet, another proposed change would be to codify existing no-action relief through amendments to the Commission’s required clearing rules for certain small bank holding companies, savings and loan holding companies, and community development financial institutions to qualify for an exemption to the clearing requirement, and to codify existing no-action relief relating to an exemption for swaps between affiliates.

Further, DCR is considering recommending extensive proposed amendments to current Part 190 regulations based largely on a set of Model Part 190 Rules prepared by a subcommittee of the American Bar Association’s Business Law Section. Specifically, the amendments would revise and reorganize provisions that pertain to FCM liquidation, add explicit provisions that pertain to a DCO liquidation, clarify general provisions, and simplify standard forms.

The benefits would be updating the regulations to account for changes to the Commodity Exchange Act (CEA) and derivatives market practice since Part 190 was adopted in 1983; incorporation of lessons learned from the MF Global and Peregrine Financial Group bankruptcies; and reducing burdens on customers with claims.

Division of Market Oversight

Within the Division of Market Oversight, one proposed change would be to revisit, revise and re-propose guidance on peaking supply contracts, including to clarify that other similar customary commercial agreements are not swaps.

Another proposed change would be to codify the no-action letter DMO issued last year with respect to notice filing requirements under the final aggregation rule for position limits. This change would clarify when an entity must submit a notice filing to claim an exemption from aggregation of position limits.

This would provide clarity to the marketplace; streamline existing notice filing requirements; and reduce the number of notice filings received by the Commission, but still allow the Commission to conduct oversight over position limits aggregation.

Further, DMO suggested a revision to remove the applicable “hard coded” reporting levels under Part 15 (Large Trader Reporting Levels) from the regulatory text and instead publish such lists on the CFTC website, allowing staff to update, as appropriate, without requiring a rulemaking. Currently, a rulemaking is required anytime staff wishes to change existing reporting levels or add new commodities under the Part 15 reporting requirements. Further, new commodities listed by an exchange default to the lowest reporting level (25 contracts), which may not be appropriate.

Another proposed change is to reduce the timeline to complete designated contract market rule enforcement reviews (RERs) with an effort to streamline the process.

Several proposed changes would codify and improve several no-action letters with respect to the swap execution facility (SEF) rules in Part 37 of the Commission’s regulations. Staff previously provided no-action relief for SEF confirmation requirements for uncleared swaps, SEF error trade policies, and SEF audit trail requirements for post-execution allocation information. Staff will be proposing changes to these are other requirements as part of a SEF proposed rulemaking.

Staff will also be proposing several changes to swap data reporting rules as part of the Commission’s Roadmap to Achieve High Quality Swaps Data issued on July 10, 2017 and the CPMI-IOSCO harmonization process. These efforts seek to eliminate redundancy, streamline reporting, and harmonize internationally.

Division of Swap Dealer and Intermediary Oversight

Within the Division of Swap Dealer and Intermediary Oversight, several proposed changes would codify no-action letters for swap dealers related to trading activity. One would incorporate permanent no-action relief, some of which has been in place for years, into the regulations. For example, it would codify NAL 13-11 to allow swap dealers to allocate disclosure obligations to other swap dealers acting as executing dealers in prime brokerage transactions. Another proposal would codify NAL 13-70 to provide exceptions to business conduct and documentation requirements for swap dealers entering into “intended to be cleared swaps” on SEFs. Another swap dealer-related proposal would codify NAL 17-12 to permit SDs entering into swaps with separately managed accounts to treat each account of the same legal entity as a separate counterparty for purposes of applying a maximum Minimum Transfer Amount (MTA) of $50,000 per account.

These will eliminate inefficiency and possible compliance errors resulting from needing to locate and interpret letters not published in the Federal Register.

Related, we have identified several swap dealer business conduct standard rules where amendments, guided by our implementation experience or Project KISS comments, indicate efficiencies can be achieved. These changes would add flexibility for different types of swap dealers and simplify and clarify requirements. We would also simplify risk management rules (1.12 for FCMs and 23.600s for swap dealers) to allow more effective programmatic risk management rather than prescriptive policies and procedures that don’t apply for many registrants.

For example, we would modify quarterly reporting obligations in light of new National Futures Association monthly risk reporting. We would adjust risk unit reporting line requirements to accommodate different types of swap dealers. We would simplify segregation notice requirements to reduce burden and increase potential for more segregation. We would modify SD reconciliation requirements that overlap with reconciliation required by subsequent margin regulations.

In the FCM space, we would also take steps in line with these principles. We would codify no-action letters and staff interpretations regarding FCM’s receipt and holding of customer funds. Like swap dealers, we would eliminate duplicative filing requirements for segregation acknowledgment letters. We would revise required notices under Regulation 1.12 to place focus on significant regulatory matters. We would also modernize FCM record requirements to reflect the shift to an increasingly electronic environment. Finally, we would simplify risk management rules to allow more effective programmatic risk management rather than prescriptive policies and procedures that don’t apply for many registrants.

The benefits of these changes include eliminating duplicative filings and focusing regulatory notices on significant regulatory matters. It will allow FCMs, CFTC and DSROs to focus resources on mission critical matters and reduce costs. The purpose is to refresh regulations to reflect modern operating procedures resulting from technological and other advances and ensure regulations are periodically reviewed for sufficiency and relevancy.

With respect to our regulations for commodity pool operators and commodity trading advisers, we would amend certain Part 4 regulations to codify currently applicable staff letters regarding CPO and CTA registration relief such as for family offices (12-37 and 14-143), JOBS Act solicitation activities (14-116), and business development companies (12-40). While making those changes, we would also propose to fix erroneous cross-references, clarify terms, delete references to obsolete technology, and update provisions to include swap activity.

Next Steps

What next? Well, we still have a lot of assessment and implementation groundwork to do. Over the rest of this year, the staff will be recommending to the Commission specific action regarding many of the changes I have discussed today. Market participants and the public want a comprehensible, rational, and operable regulatory environment. A modern agency should seek to make compliance with its rules more straightforward, less costly and less complex. Surely, that is a reasonable expectation in an advanced digital age. We look forward to continued engagement with market participants and the public. Together, let’s keep it simple.

Finally, I want to plug another exciting project the agency will be undertaking under Chairman Giancarlo’s leadership. The CFTC and the Center for Risk Management Education and Research at Kansas State University will jointly host, “Protecting America’s Agricultural Markets: An Agricultural Commodity Futures Conference,” on April 5th to 6th, 2018, in Overland Park, Kansas. This first-of-its-kind conference will include robust presentations and discussions on current macro-economic trends and issues affecting American agricultural futures markets and the importance of these markets for managing risk and protecting participants from manipulation, fraud, and other unlawful activities. This is our first, and hopefully not last, conference focused on derivatives-markets issues impacting the agricultural community in America’s Heartland. I hope to see you there.

Thank you.

 

Last Updated: February 15, 2018

Remarks of Commissioner Rostin Behnam before the FIA/SIFMA Asset Management Group, Asset Management Derivatives Forum 2018, Dana Point, California

Remarks of Commissioner Rostin Behnam before the FIA/SIFMA Asset Management Group, Asset Management Derivatives Forum 2018, Dana Point, California

February 8, 2018

Introduction

Good afternoon. And thank you for your warm welcome, and most importantly for inviting me to share your warmer weather. When Laura Martin invited me to speak here today, she kindly offered that I pick the structure. Given my fondness for illuminating and sometimes irreverent one-on-ones with FIA President and former CFTC Commissioner (and Acting Chair) Walt Lukken, I didn’t want to pass on that opportunity. But, before that, I thought I would begin with some brief remarks to give you a sense of my current approach as a relatively new Commissioner.

You’ve caught me at a good time. I’m about five months into my term. I’ve formed my legal team, and still in the early days of a listening tour, I have traveled to seven states and met with over forty market participants, convened the Market Risk Advisory Committee (MRAC) to open up a dialogue on the self-certification process of the first bitcoin futures contract, and weathered a government shutdown by only missing a single scheduled speaking appearance. Fortunately – well, actually, I will let you all be the judge – there is no threat that I will have to leave an empty chair today.

In November, I delivered my first remarks as a CFTC Commissioner at Georgetown University. I said a lot that day, but my main message was that I believe the CFTC is at an inflection point in implementing the Dodd-Frank Act, and that while there are a lot of strategic decisions ahead, our policy goals are firm: reducing systemic risk, preserving market liquidity, and above all else, incentivizing market participants to use the derivatives markets to manage risk.

It’s only been a few months since that maiden speech, and while I can’t say that I’ve been asked to deliberate on issues impacting Dodd-Frank reforms or even some more strategic initiatives, the wheels are turning and CFTC staff is working diligently on putting together a 2018 agenda. Of course, that last statement is not quite true when it comes to our Division of Enforcement, which has either filed or settled 27 cases since I took my oath in September.

During these past months, I’ve taken a slightly different approach to the Commissioner position, preferring to share my views directly with members of industry, market participants, end-users, and the public instead of making prepared public remarks. I believe that delivering remarks on issues that are not ripe for consideration can at times become white noise, and ultimately get drowned out when it’s time for action. So, instead of speechmaking, I’ve been partaking in meetings and conversations in an effort to formulate the goals and ideals that will guide and anchor me for the next few years, and to make sure my goals and ideals are grounded in the real-world concerns and challenges of market participants. Colored in part by the events of the last two months involving the relatively nascent crypto asset space, and my own experience in convening the MRAC, I’ve formulated some initial thoughts on how I can add value to the Commission and to the legally significant and systemically important issues on the horizon.

Accountability

I’ve been thinking about goals and priorities. Are there issues I can support that have remained in the margins but deserve to be in the headlines of our agenda? How can I bring greater transparency and engagement into Commission decision-making? How do we remain thoughtful, deliberative regulators amidst the urge to rapidly keep pace with technology driven changes?

Right now, as I think of the possible answers to these questions and more, I keep returning to accountability. The Commission needs to account for its actions, accept responsibility, provide transparency, and act responsibly. In turn, our registrants and the market participants must also be accountable. Support and buy-in to our regulations—and in some instances, the concept of being regulated or exempted from regulation—is critical to achieving accountability. And we do that through collaborative efforts and engagement.

The issues that will shape the 2018 agenda present opportunities to reach workable solutions within the tenets of our regulations and the Dodd-Frank Act. While I strongly oppose any 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, but more importantly 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. 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.

Moving Forward in 2018

Turning to some of the issues I will likely be elaborating on with Walt, I’d like to begin by providing a brief recap of last week’s MRAC meeting. I would then like to discuss Reg AT—the Commission’s proposed rule for addressing the regulation of automated trading. In the second part of these remarks, I will attempt to level set expectations for the Commission’s agenda when it comes to your interests and make a few suggestions. Finally, I would like to share some thoughts on the Enforcement Division’s current efforts and progress in employing its self-reporting strategy.

MRAC Recap

The purpose of last week’s MRAC was to provide a public forum for open dialogue regarding the CFTC’s regulatory self-certification process for new products. This process has been in place for over 15 years, and has served market participants, the CFTC, and the general public very well. In addition to having a very good discussion about the CFTC’s authority under Part 40 of its regulations, much of the day focused on the listing of the first Bitcoin futures contracts. My message was twofold: I unequivocally support the self-certification process; however, I believe, specifically with respect to the Bitcoin contracts, the CFTC should have exercised its existing authority to accept voluntary product submissions for review and approval – by the entire Commission, instead of self-certification.

Ultimately, the CFTC received sharp criticism from large market participants, and responded after self-certification with the ad-hoc adoption of an informal “heightened review” process. Formality aside, the Commission’s overall approach to the Bitcoin futures was appropriately calibrated to the level of risk presented. Nevertheless, as highlighted in the various discussions at the MRAC, the approach presents itself as a hybrid between the somewhat ministerial act of self-certification and the more fulsome evaluation underlying Commission approval. This approach muddled the record, left major market participants out of the conversation and ill-prepared to serve their clients, and raised concerns that this will be the new status quo. In the end, I think many market participants were left scratching their heads, and the public was left in the dark.

Several of the MRAC statements focused on how any process beyond that contained in the self-certification rules amounted to a bureaucratic stall, undermining innovation and the free market approach. We heard that it’s not the Commission’s job to determine the suitability of products trading in our markets nor should we engage even when products are introduced that have questionable social utility. Our job, it was said, is simply to ensure that the new contracts are not readily susceptible to manipulation. Echoing the Chairman’s eighth element of heightened review, commenters maintained that it is the exchanges’ duties, as self-regulatory organizations (SROs), to consult with futures commission merchants, liquidity providers, and end-users prior to listing new products. Our job in this process would be no more than to receive a disclosure of the steps taken to gather and accommodate appropriate input from concerned parties. Although, at least one MRAC member suggested that while it appeared that the exchanges and Commission were proceeding through the requirements of voluntary submission for Commission review and approval, the processes for both Bitcoin contracts ended abruptly with self-certifications – much to the surprise of market participants.

These statements seem to presume that our political motivations as Commissioners inhibit our ability to provide sound judgement, to be held accountable, and to protect our markets to our fullest capabilities within our authority. Further, they suggest that the voluntary submission and approval process may be obsolete. I hope that really is not where we are, and I am optimistic that the entire Commission will have the opportunity to deliberate and invite public comment on whether to incorporate the Chairman’s “Heightened Review” into our existing regulatory framework, or perhaps just use the tools that we already have available to us through the voluntary submission process.

To be clear, I’d like to believe that there are facts and circumstances that evoke the desire to have the regulator involved, and that our expertise and experience is a value added. Even if the only purposes we serve – beyond satisfying ourselves that new products comply with the Commodity Exchange Act (and Commission regulations), and are not readily susceptible to manipulation – is to bring transparency to the process, level the playing field in terms of information, and provide a public forum for open dialogue.

Reg AT and Beyond

The Commission issued proposals for Reg AT, or Regulation Automated Trading, in both 2015 and 2016,1 in order to establish pre-trade risk controls to mitigate the potential dangers of an unchecked automated trading system. I think the Commission must prioritize this issue and take action before an automated trading system runs amok, causing harm to market participants through a flash crash or other system failure. In this age of technology driven financial markets, the question of a flash crash or automated trading system failure is not a question of if, but simply when.

Towards the end of 2016, Chris Clearfield of System Logic, a research and consulting firm focusing on issues of risk and complexity, wrote a piece advocating “Vision Zero” for our markets.2 “Vision Zero” is a multi-national road traffic safety project that aims to achieve a highway system with no fatalities or serious injuries involving road traffic, while increasing safe, healthy, equitable mobility for all.3 It originated in Sweden in 1997, and since then, annual road fatalities in Sweden have dropped by half.4 The success of Sweden’s Vision Zero, Clearfield maintains, provides a lesson that could be applied to our financial markets. “Traffic safety regulators there make errors part of the equation by recognizing that mistakes will happen—and creating structures to absorb and buffer those mistakes.”5 The same, Clearfield argues, should be true of our financial Vision Zero. “In every situation, a trader or a piece of technology might fail, or a shock might trigger a liquidity event. What’s important is that the structures are in place to limit – not amplify – the impact on the overall system.”6

Clearfield’s article provides some insight into what it takes to build those regulatory structures, and it includes reducing regulatory complexity and thoughtful collaboration between firms and regulators. Regulation, he warns, cannot be enforcement-driven, since we must aim to learn from small errors to prevent the bigger ones. We also must recognize, on both sides, that we have difficult and challenging jobs. Regulators, like the CFTC, may find themselves with conflicting mandates; for example, avoid duplicative burdens while protecting market participants. But, as regulators, we also need to acknowledge that not all of our policies provide benefits that outweigh the costs.

As we move forward on Reg AT – and I don’t think inaction is an option – we should keep Vision Zero in mind, and work collaboratively with industry to establish appropriate principles and structures in furtherance of well-reasoned, targeted regulation.

Asset Managers All-in

In preparing for this conference, my staff and I met with the Commission experts in the Division of Swap Dealer and Intermediary Oversight (DSIO) to gather information on the issues raised by your constituency and which may receive some of that headline treatment I mentioned earlier. You’ve all submitted numerous thorough and thoughtful letters in response to Project Kiss and to seek various forms of no-action and other relief stemming from the implementation of Dodd-Frank and related reforms. I’m pleased to report that DSIO has read every letter, is considering your suggestions with its own, and is developing an agenda going forward. Most immediately, DSIO is considering recommending codification of several existing no-action letters and is working with the SEC towards further harmonization efforts. These efforts, which may be tied into the larger conversations between Chairman Giancarlo and SEC Chairman Clayton, will largely focus on identifying duplicative, conflicting, and/or inconsistent compliance obligations for commodity pool operators (CPOs), commodity trading advisors (CTAs), and registered investment advisers, and determining whether and what changes are appropriate to further align the regulatory requirements for asset managers engaging in both the securities and derivatives markets. I’ve been advised that, given the technical nature of the relevant provisions of the Commission regulations and the diversity among the entities they impact, we cannot promise that the industry will see these efforts come to fruition within the next few months. And, just because a matter is not being acted upon immediately does not mean that it is not under active consideration.

In discussing the more specific concerns asset managers have raised, it would be difficult to support a wholesale restoration of the exemptions previously incorporated in Part 4 to their breadth prior to the 2012 amendments.7 There has been much industry opposition to the post Dodd-Frank expansion of the application of Part 4. Commenters generally focus on the lack of benefits that registration provides to investors due to concurrent SEC oversight or the fact that Dodd-Frank never specifically required the 2012 amendments.8Unfortunately, few commenters acknowledge that the Commission has a regulatory interest in overseeing entities that actively engage in the derivatives markets, and even more significantly, provide retail customers exposure to these markets. This is not to suggest that the Commission is not open to considering strategic revisions to the various exemptive provisions of Part 4. However, if we are going to move forward and collaborate, there must be some recognition that our regulatory spheres are not so clearly self-contained. To say that the CFTC brings nothing to the table ignores Congressional mandates, the Commission’s mission, and the institutional knowledge that is unique to the CFTC. The CFTC and SEC’s areas of expertise differ. The CFTC is uniquely situated to understand the risks posed by derivatives as a component of an investment portfolio; the SEC has simply not historically had to develop that same expertise.

I understand there is greater opportunity to harmonize, streamline, and align in areas of reporting and recordkeeping. These are broad areas and require consideration of the timing and frequency of required reports as well as line items and calculation methods. I also understand that past discussions and negotiations have often begun with an assumption that it would be the CFTC abdicating its role as primary regulator or modifying its regulatory approach. In my experience, productive conversations between two parties, regulators or not, rarely start with a request that one party step aside. I would be supportive of an industry led proposal (1) framed around solutions, (2) rooted in a cooperative partnership between the constituents you represent, and (3) supportive of preserving the mechanisms we use to oversee and protect derivatives markets and their market participants.

Enforcement

In November, I highlighted the Enforcement Division’s employment of a self-reporting strategy to incentivize disclosure of violations. I expressed my hope that the self-reporting strategy, akin to cooperation, will produce results. However, I noted that I would be keeping a sharp eye on its progress to ensure the CFTC’s enforcement division remains vigilant in policing the markets, and the primary cop on the beat.

I’ve spent some more time with Enforcement staff and had more opportunities to review and deliberate on enforcement actions since November. I’ve also had some more time to consider how enforcement efforts going forward will aid in shaping a greater culture of compliance. In considering our Director of Enforcement’s initial rollout of the updated advisory on self-reporting and cooperation,9 I appreciate his commitment to ensuring that the program recognizes that to achieve optimal deterrence, there needs to be buy-in from the communities we police, i.e. the markets. That buy-in includes not only ensuring that members of our community cooperate in bringing others to justice, but includes coming together to teach the younger members, i.e. the new market entrants, to behave.

I appreciate this approach, and agree that it should bring about greater compliance. However, I think it’s important that we constantly think about how best to reach the real “community.” We need to be asking ourselves whether the Commission’s settlement orders, which often contain the universe of publicly available information on a matter, are clear in describing the misconduct and how that conduct runs afoul of our Act and regulations. Our “community” cannot be limited to the persons and entities who commit the wrongdoing, because to be optimally effective, the buy-in and teachable moments must reach the entire market. It’s not enough to rely on individuals and individual entities to self-police because the information, the guidance may not make it outside of their immediate circle. We need to remember that our message, our clear statement as to which conduct falls outside our laws, needs to reach new market entrants, and unfortunately as we’ve recently been reminded, the new fraudsters may not operate in any “community.” We need to educate beyond the individuals who are in the closed door negotiations. Accordingly, to increase accountability, as I continue to review enforcement matters, I will be focusing more intently on the story being told and the message being sent with regard to how and why the particular individual or entity reached its settlement.

Closing

I hope I’ve given you a little more insight into who I am and how I hope to add value to the Commission. Thank you for having me and I’m looking forward to stepping down and speaking with you further.

1 See Regulation Automated Trading, 81 FR 85334 (proposed Nov. 25, 2016) and Regulation Automated Trading, 80 FR 78824 (proposed Dec. 17, 2015).

2 Chris Clearfield, Vision Zero for our Markets, The Risk Desk, Dec. 21, 2016, at 4.

3 Vision Zero Network, What is Vision Zero?, https://visionzeronetwork.org/about/what-is-vision-zero (last visited Feb 3, 2018).

4 Government of Sweden, Renewed Commitment to Vision Zero; Intensified efforts for transport safety in Sweden (2016), available at http://www.government.se/4a800b/contentassets/b38a99b2571e4116b81d6a5eb2aea71e/trafiksakerhet_160927_webny.pdf.

5 Clearfield, supra note 2.

6 Id.

7 See Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 FR 11252 (Feb. 24, 2012).

8 See, e.g., Letter from SIFMA Asset Management Group to Christopher Kirkpatrick, Secretary of the U.S. Commodity Futures Trading Commission, Kiss Initiative –Registration (Sept. 29, 2017), available athttps://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61341&SearchText=SIFMA; Letter from Investment Advisor Association to J. Christopher Giancarlo, Chairman of the U.S. Commodity Futures Trading Commission, Recommendations for “Project Kiss” to Simplify CFTC Rules (Sept. 29, 2017), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61479&SearchText=IAA ; Letter from Managed Funds Association to Christopher Kirkpatrick, Secretary of the U.S. Commodity Futures Trading Commission (Sept. 29, 2017), available athttps://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61475&SearchText=MFA.

9 James McDonald, Speech of James McDonald, Director of the Division of Enforcement Commodity Futures Trading Commission Regarding Perspectives on Enforcement: Self-Reporting and Cooperation at the CFTC, NYU Program on Corporate Compliance & Enforcement/Institute for Governance & Finance (Sept. 25, 2017), http://www.cftc.gov/PressRoom/SpeechesTestimony/opamcdonald092517.

 

Last Updated: February 8, 2018

Written Testimony of Chairman J. Christopher Giancarlo before the Senate Banking Committee

Written Testimony of Chairman J. Christopher Giancarlo before the Senate Banking Committee, Washington, D.C.

February 6, 2018

Introduction: Virtual Currency

Thank you, Chairman Crapo, for the invitation to testify before the Committee. Thank you, Ranking Member Brown, and all the members of the Committee for this opportunity to discuss virtual currencies.

At the outset, I would like to note that this hearing is timely, even fortuitous. Emerging financial technologies broadly are taking us into a new chapter of economic history. They are impacting trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer. They include machine learning and artificial intelligence, algorithm-based trading, data analytics, “smart” contracts valuing themselves and calculating payments in real-time, and distributed ledger technologies, which over time may come to challenge traditional market infrastructure. They are transforming the world around us, and it is no surprise that these technologies are having an equally transformative impact on US capital and derivatives markets.

The more specific topic for today’s hearing, however, is virtual currency. Broadly speaking, virtual currencies are a digital representation of value that may function as a medium of exchange, a unit of account, and/or a store of value. Virtual currencies generally run on a decentralized peer-to-peer network of computers, which rely on certain network participants to validate and log transactions on a permanent, public distributed ledger, commonly known as the blockchain.

Supporters of virtual currencies see a technological solution to the age-old “double spend” problem – that has always driven the need for a trusted, central authority to ensure that an entity is capable of, and does, engage in a valid transaction. Traditionally, there has been a need for a trusted intermediary – for example a bank or other financial institution – to serve as a gatekeeper for transactions and many economic activities. Virtual currencies seek to replace the need for a central authority or intermediary with a decentralized, rules-based and open consensus mechanism.1 An array of thoughtful business, technology, academic, and policy leaders have extrapolated some of the possible impacts that derive from such an innovation, including how market participants conduct transactions, transfer ownership, and power peer-to-peer applications and economic systems.2

Others, however, argue that this is all hype or technological alchemy and that the current interest in virtual currencies is overblown and resembles wishful thinking, a fever, even a mania. They have declared the 2017 heightened valuation of Bitcoin to be a bubble similar to the famous “Tulip Bubble” of the seventeenth century. They say that virtual currencies perform no socially useful function and, worse, can be used to evade laws or support illicit activity.3Indeed, history has demonstrated to us time-and-again that bad actors will try to invoke the concept of innovation in order to perpetrate age-old fraudulent schemes on the public. Accordingly, some assert that virtual currencies should be banned, as some nations have done.4

There is clearly no shortage of opinions on virtual currencies such as Bitcoin. In fact, virtual currencies may be all things to all people: for some, potential riches, the next big thing, a technological revolution, and an exorable value proposition; for others, a fraud, a new form of temptation and allure, and a way to separate the unsuspecting from their money.

Perspective is critically important. As of the morning of February 5, the total value of all outstanding Bitcoin was about $130 billion based on a Bitcoin price of $7,700. The Bitcoin “market capitalization” is less than the stock market capitalization of a single “large cap” business, such as McDonalds (around $130 billion). The total value of all outstanding virtual currencies was about $365 billion. Because virtual currencies like Bitcoin are sometimes considered to be comparable to gold as an investment vehicle, it is important to recognize that the total value of all the gold in the world is estimated by the World Gold Council to be about $8 trillion which continues to dwarf the virtual currency market size. Clearly, the column inches of press attention to virtual currency far surpass its size and magnitude in today’s global economy.

Yet, despite being a relatively small asset class, virtual currency presents novel challenges for regulators. SEC Chairman Clayton and I recently wrote:

The CFTC and SEC, along with other federal and state regulators and criminal authorities, will continue to work together to bring transparency and integrity to these markets and, importantly, to deter and prosecute fraud and abuse. These markets are new, evolving and international. As such they require us to be nimble and forward-looking; coordinated with our state, federal and international colleagues; and engaged with important stakeholders, including Congress5.

It is this perspective that has guided our work at the CFTC on virtual currencies.

Introduction: The Mission of the CFTC:

The mission of the CFTC is to foster open, transparent, competitive, and financially sound derivatives markets.6 By working to avoid systemic risk, the Commission aims to protect market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act (CEA).

The CFTC was established as an independent agency in 1974, assuming responsibilities that had previously belonged to the Department of Agriculture since the 1920s. The Commission historically has been charged by the CEA with regulatory authority over the commodity futures markets. These markets have existed since the 1860s, beginning with agricultural commodities such as wheat, corn, and cotton.

Over time, these organized commodity futures markets, known as designated contract markets (DCMs) regulated by the CFTC, have grown to include those for energy and metals commodities, collectively including crude oil, heating oil, gasoline, copper, gold, and silver. The agency now also oversees these commodity futures markets for financial products such as interest rates, stock indexes, and foreign currency. The definition of “commodity” in the CEA is broad. It can mean a physical commodity, such as an agricultural product (e.g., wheat, cotton) or natural resource (e.g., gold, oil). It can mean a currency or interest rate. The CEA definition of “commodity” also includes “all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.”

In the aftermath of the 2008 financial crisis, President Obama and Congress enhanced the CFTC’s regulatory authority. With passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the agency now also oversees most of the U.S. swaps market in addition to exchange traded futures markets.

Futures, swaps and other derivatives markets are essential means for commercial and financial risk mitigation and transfer. These markets allow the risks of variable production costs, such as the price of raw materials, energy, foreign currency and interest rates, to be transferred from those who cannot afford them to those who can. They are the reason why American consumers enjoy stable prices in the grocery store, whatever the conditions out on the farm.

But derivatives markets are not just useful for agricultural producers. They impact 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.

To ensure the integrity of US derivatives markets, the CFTC regulates derivatives market participants and activities. The agency oversees a variety of individuals and organizations. These include swap execution facilities, derivatives clearing organizations, designated contract markets, swap data repositories, swap dealers, futures commission merchants, commodity pool operators, and other entities. The CFTC also prosecutes derivative market fraud and manipulation, including misconduct in underlying spot markets for commodities.

I. CFTC Authority and Oversight over Virtual Currencies

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

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

II. Assertion of CFTC Authority

The CFTC has been straightforward in asserting its area of statutory jurisdiction concerning virtual currencies derivatives. As early as 2014, former CFTC Chairman Timothy Massad discussed virtual currencies and potential CFTC oversight under the Commodity Exchange Act (CEA).7 And as noted above, in 2015, the CFTC found virtual currencies to be a commodity.8 In that year, the agency took enforcement action to prohibit wash trading and prearranged trades on a virtual currency derivatives platform.9 In 2016, the CFTC took action against a Bitcoin futures exchange operating in the U.S. that failed to register with the agency.10 Last year, the CFTC issued proposed guidance on what is a derivative market and what is a spot market in the virtual currency context.11 The agency also issued warnings about valuations and volatility in spot virtual currency markets12 and launched an unprecedented consumer education effort (detailed in Section IV herein).

  • a. Enforcement

The CFTC Division of Enforcement is a premier Federal civil enforcement agency dedicated to deterring and preventing price manipulation and other disruptions of market integrity, ensuring the financial integrity of all transactions subject to the CEA, and protecting market participants from fraudulent or other abusive sales practices and misuse of customer assets. Appendix A heretosummarizes recent CFTC enforcement activities.

The CFTC has been particularly assertive of its enforcement jurisdiction over virtual currencies. It has formed an internal virtual currency enforcement task force to garner and deploy relevant expertise in this evolving asset class. The task force shares information and works cooperatively with counterparts at the SEC with similar virtual currency expertise.

In September 2017, the CFTC took enforcement action against a virtual currency Ponzi scheme.13 Over the past few weeks, the CFTC filed a series of civil enforcement actions against perpetrators of fraud, market manipulation and disruptive trading involving virtual currency. These include:

(i) My Big Coin Pay Inc., which charged the defendants with commodity fraud and misappropriation related to the ongoing solicitation of customers for a virtual currency known as My Big Coin;

(ii) The Entrepreneurs Headquarters Limited, which charged the defendants with a fraudulent scheme to solicit Bitcoin from members of the public, misrepresenting that customers’ funds would be pooled and invested in products including binary options, and instead misappropriated the funds and failed to register as a Commodity Pool Operator; and

(iii) Coin Drop Markets, which charged the defendants with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.

These recent enforcement actions confirm that the CFTC, working closely with the SEC and other fellow financial enforcement agencies, will aggressively prosecute bad actors that engage in fraud and manipulation regarding virtual currencies.

  • b. Bitcoin Futures

It is important to put the new Bitcoin futures market in perspective. It is quite small with open interest at the CME of 6,695 bitcoin14 and at Cboe Futures Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 2018). At a price of approximately $7,700 per Bitcoin,15 this represents a notional amount of about $94 million. In comparison, the notional amount of the open interest in CME’s WTI crude oil futures was more than one thousand times greater, about $170 billion (2,600,000 contracts) as of Feb 2, 2018 and the notional amount represented by the open interest of Comex gold futures was about $74 billion (549,000 contracts).

Prior to the launch of Bitcoin futures, the CFTC closely observed the evolution of virtual currencies over the past several years. One exchange, CME Group, launched a Bitcoin Reference Rate in November 2016. And, another exchange, CBOE Futures Exchange (Cboe), first approached the CFTC in July 2017. The CFTC anticipated receiving proposals for the launch of Bitcoin futures products in late 2017.

Under CEA and Commission regulations and related guidance, futures exchanges may self-certify new products on twenty-four hour notice prior to trading. In the past decade and a half, over 12,000 new futures products have been self-certified.16 It is clear that Congress and prior Commissions deliberately designed the product self-certification framework to give futures exchanges, in their role as self-regulatory organizations, the ability to quickly bring new products to the marketplace. The CFTC’s current product self-certification framework has long been considered to function well and be consistent with public policy that encourages market-driven innovation that has made America’s listed futures markets the envy of the world.

Practically, both CME and Cboe had numerous discussions and exchanged numerous draft product terms and conditions with CFTC staff over a course of months prior to their certifying and launching Bitcoin futures in December 2017. This type of lengthy engagement is not unusual during the self-certification process for products that may raise certain issues. The CFTC staff undertook its review of CME’s and Cboe’s Bitcoin futures products with considered attention. Given the emerging nature and heightened attention of these products, staff conducted a “heightened review” of CME’s and Cboe’s responsibilities under the CEA and Commission regulations to ensure that their Bitcoin futures products and their cash-settlement processes were not readily susceptible to manipulation,17 and the risk management of the associated Derivatives Clearing Organizations (DCOs) to ensure that the products were sufficiently margined.18

Staff obtained the voluntary cooperation of CME and Cboe with a set of enhanced monitoring and risk management steps.

1. Designated contract markets (DCMs) setting exchange large trader reporting thresholds at five bitcoins or less;

2. DCMs entering direct or indirect information sharing agreements with spot market platforms to allow access to trade and trader data making up the underlying index that the futures contracts settle to;

3. DCMs agreeing to engage in monitoring of underlying index data from cash markets and identifying anomalies and disproportionate moves;

4. DCMs agreeing to conduct inquiries, as appropriate, including at the trade settlement and trader level when anomalies or disproportionate moves are identified;

5. DCMs agreeing to regular communication with CFTC surveillance staff on trade activities, including providing trade settlement and trader data upon request;

6. DCMs agreeing to coordinate product launches to enable the CFTC’s market surveillance branch to monitor developments; and

7. DCOs setting substantially high initial19 and maintenance margin for cash-settled instruments.

The first six of these elements were used to ensure that the new product offerings complied with the DCM’s obligations under the CEA core principles and CFTC regulations and related guidance. The seventh element, setting high initial and maintenance margins, was designed to ensure adequate collateral coverage in reaction to the underlying volatility of Bitcoin.

In crafting its process of “heightened review” for compliance, CFTC staff prioritized visibility, data, and monitoring of markets for Bitcoin derivatives and underlying settlement reference rates. CFTC staff felt that in gaining such visibility, the CFTC could best look out for Bitcoin market participants and consumers, as well as the public interest in Federal surveillance and enforcement. This visibility greatly enhances the agency’s ability to prosecute fraud and manipulation in both the new Bitcoin futures markets and in its related underlying cash markets.

As for the interests of clearing members, the CFTC recognized that large global banks and brokerages that are DCO clearing members are able to look after their own commercial interests by choosing not to trade Bitcoin futures, as some have done, requiring substantially higher initial margins from their customers, as many have done, and through their active participation in DCO risk committees.

After the launch of Bitcoin futures, some criticism was directed at the self-certification process from a few market participants. Some questioned why the Commission did not hold public hearings prior to launch.  However, it is the function of the futures exchanges and futures clearinghouses - and not CFTC staff20 - to solicit and address stakeholder concerns in new product self-certifications. The CFTC staff’s focus was on how the futures contracts and cash settlement indices are designed to bar manipulation and the appropriate level of contract margining to meet CEA and Commission regulations.

Interested parties, especially clearing members, should indeed have an opportunity to raise appropriate concerns for consideration by regulated platforms proposing virtual currency derivatives and DCOs considering clearing new virtual currency products. That is why CFTC staff has added an additional element to the Review and Compliance Checklist for virtual currency product self-certifications. That is, requesting DCMs and SEFs to disclose to CFTC staff what steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and FCMs. Further, CFTC staff will take a close look at DCO governance around the clearing of new virtual currency products and formulate recommendations for possible further action.

The CFTC’s response to the self-certification of Bitcoin futures has been a balanced one. It has resulted in the world’s first federally regulated Bitcoin futures market. Had it even been possible, blocking self-certification would not have stopped the rise of Bitcoin or other virtual currencies. Instead, it would have ensured that virtual currency spot markets continue to operate without effective and data-enabled federal regulatory surveillance for fraud and manipulation. It would have prevented the development of a regulated derivatives market that allowed participants to take “short” positions that challenged the 2017 rise of Bitcoin prices.

III. Adequacy of CFTC Authority

The CFTC has sufficient authority under the CEA to protect investors in virtual currency derivatives over which the CFTC has regulatory jurisdiction under the CEA. As noted above, the CFTC does NOT have regulatory jurisdiction over markets or platforms conducting cash or “spot” transactions in virtual currencies or over participants on those platforms. For such virtual currency spot markets, CFTC only has enforcement jurisdiction to investigate and, as appropriate, conduct civil enforcement action against fraud and manipulation.

Any extension of the CFTC’s regulatory authority to virtual currency spot markets would require statutory amendment of the CEA.21 The CFTC is an experienced regulator of derivatives markets that mostly serve professional and eligible contract participants. Such extension of regulatory authority would be a dramatic expansion of the CFTC’s regulatory mission, which currently does not give the CFTC regulatory authority (distinct from enforcement authority) over cash commodity markets.

IV. Educating Investors and Market Participants

The CFTC believes that the responsible regulatory response to virtual currencies must start with consumer education. Amidst the wild assertions, bold headlines, and shocking hyperbole about virtual currencies, there is a need for much greater understanding and clarity.

Over the past six months, the CFTC has produced an unprecedented amount of consumer information concerning virtual currencies (listed in Appendix B hereto). These consumer materials include an information “primer” on virtual currencies (Appendix C hereto), consumer and market advisories on investing in Bitcoin and other virtual currencies (Appendix D hereto), a dedicated CFTC “Bitcoin” webpage, several podcasts (available on the Commission’s website and from various streaming services) concerning virtual currencies and underlying technology, weekly publication of Bitcoin futures “Commitment of Traders” data and an analysis of Bitcoin spot market data.

In addition, the CFTC’s Office of Customer Education and Outreach (OCEO)is actively engaging with responsible outside partners to better educate consumers on Bitcoin and other virtual currencies. The OCEO is currently partnering with:

• The Consumer Financial Protection Bureau (CFPB) to train US public library staff to identify and report consumer in virtual currencies;

• the American Association of Retired Persons (AARP) to distribute a virtual currency “Watchdog Alert” to 120,000 AARP members;

• North American Securities Administrators Association (NASAA) Investor Educators, who are responsible for conducting outreach to the public on avoiding investment fraud, including in virtual currencies;

• the National Attorneys General Training and Research Institute (NAGTRI), which is the research and training arm of the National Association of Attorneys General (NAAG), to inform State AGs about the availability of CFTC’s virtual currency resources; and

• The Federal Reserve Bank of Chicago to help consumers manage their finances better, OCEO will again coordinate with NFA, FINRA and SEC to hold a webinar on fraud prevention in virtual currencies.

V. Interagency Coordination

As noted, the CFTC’s enforcement jurisdiction over virtual currencies is not exclusive. As a result, the U.S. approach to oversight of virtual currencies has evolved into a multifaceted, multi-regulatory approach that includes:

• The Securities and Exchange Commission (SEC) taking increasingly strong action against unregistered securities offerings, whether they are called a virtual currency or initial coin offering in name.

• State Banking regulators overseeing certain US and foreign virtual currency spot exchanges largely through state money transfer laws.

• The Internal Revenue Service (IRS) treating virtual currencies as property subject to capital gains tax.

• The Treasury’s Financial Crimes Enforcement Network (FinCEN) monitoring Bitcoin and other virtual currency transfers for anti-money laundering purposes.

The CFTC actively communicates its approach to virtual currencies with other Federal regulators, including the Federal Bureau of Investigation (FBI) and the Justice Department and through the Financial Stability Oversight Council(FSOC), chaired by the Treasury Department. The CFTC has been in close communication with the SEC with respect to policy and jurisdictional considerations, especially in connection with recent virtual currency enforcement cases. In addition, we have been in communication with overseas regulatory counterparts through bilateral discussions and in meetings of the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO).

VI. Potential Benefits

I have spoken publicly about the potential benefits of the technology underlying Bitcoin, namely Blockchain or distributed ledger technology (DLT).22Distributed ledgers – in various open system or private network applications – have the potential to enhance economic efficiency, mitigate centralized systemic risk, defend against fraudulent activity and improve data quality and governance.23

DLT is likely to have a broad and lasting impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.24 When tied to virtual currencies, this technology aims to serve as a new store of value, facilitate secure payments, enable asset transfers, and power new applications.

Additionally, DLT will likely develop hand-in-hand with new “smart” contracts that can value themselves in real-time, report themselves to data repositories, automatically calculate and perform margin payments and even terminate themselves in the event of counterparty default.25

DLT may enable financial market participants to manage the significant operational, transactional and capital complexities brought about by the many mandates, regulations and capital requirements promulgated by regulators here and abroad in the wake of the financial crisis.26 In fact, one study estimates that DLT could eventually allow financial institutions to save as much as $20 billion in infrastructure and operational costs each year.27 Another study reportedly estimates that blockchain could cut trading settlement costs by a third, or $16 billion a year, and cut capital requirements by $120 billion.28Moving from systems-of-record at the level of a firm to an authoritative system-of-record at the level of a market is an enormous opportunity to improve existing market infrastructure.29

Outside of the financial services industry, many use cases for DLT are being posited from international trade to charitable endeavors and social services. International agricultural commodities merchant, Louis Dreyfus, and a group of financing banks have just completed the first agricultural deal using distributed ledger technology for the sale of 60,000 tons of US soybeans to China.30 Other DLT use cases include: legal records management, inventory control and logistics, charitable donation tracking and confirmation; voting security and human refugee identification and relocation.31

Yet, while DLT promises enormous benefits to commercial firms and charities, it also promises assistance to financial market regulators in meeting their mission to oversee healthy markets and mitigate financial risk. What a difference it would have made on the eve of the financial crisis in 2008 if regulators had access to the real-time trading ledgers of large Wall Street banks, rather than trying to assemble piecemeal data to recreate complex, individual trading portfolios. I have previously speculated32 that, if regulators in 2008 could have viewed a real-time distributed ledger (or a series of aggregated ledgers across asset classes) and, perhaps, been able to utilize modern cognitive computing capabilities, they may have been able to recognize anomalies in market-wide trading activity and diverging counterparty exposures indicating heightened risk of bank failure. Such transparency may not, by itself, have saved Lehman Brothers from bankruptcy, but it certainly would have allowed for far prompter, better-informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued.

VII. Policy Considerations

Two decades ago, as the Internet was entering a phase of rapid growth and expansion, a Republican Congress and the Clinton administration established a set of enlightened foundational principles: the Internet was to progress through human social interaction; voluntary contractual relations and free markets; and governments and regulators were to act in a thoughtful manner not to harm the Internet’s continuing evolution.33

This simple approach is well-recognized as the enlightened regulatory underpinning of the Internet that brought about such profound changes to human society. During the almost 20 years of “do no harm” regulation, a massive amount of investment was made in the Internet’s infrastructure. It yielded a rapid expansion in access that supported swift deployment and mass adoption of Internet-based technologies. Internet-based innovations have revolutionized nearly every aspect of American life, from telecommunications to commerce, transportation and research and development. This robust Internet economy has created jobs, increased productivity and fostered innovation and consumer choice.

“Do no harm” was unquestionably the right approach to development of the Internet. Similarly, I believe that “do no harm” is the right overarching approach for distributed ledger technology.

Virtual currencies, however, likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space. SEC Chairman Clayton and I recently stated in a joint op-ed, that:

“Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence. In recent months, we have seen a wide range of market participants, including retail investors, seeking to invest in DLT initiatives, including through cryptocurrencies and so-called ICOs—initial coin offerings. Experience tells us that while some market participants may make fortunes, the risks to all investors are high. Caution is merited.

“A key issue before market regulators is whether our historic approach to the regulation of currency transactions is appropriate for the cryptocurrency markets. Check-cashing and money-transmission services that operate in the U.S. are primarily state-regulated. Many of the internet-based cryptocurrency trading platforms have registered as payment services and are not subject to direct oversight by the SEC or the CFTC. We would support policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era.”34

  •  

As the Senate Banking Committee, the Senate Agriculture Committee and other Congressional policy makers consider the current state of regulatory oversight of cash or “spot” transactions in virtual currencies and trading platforms, consideration should be given to shortcomings of the current approach of state-by-state money transmitter licensure that leaves gaps in protection for virtual currency traders and investors. Any proposed Federal regulation of virtual currency platforms should be carefully tailored to the risks posed by relevant trading activity and enhancing efforts to prosecute fraud and manipulation. Appropriate Federal oversight may include: data reporting, capital requirements, cyber security standards, measures to prevent fraud and price manipulation and anti-money laundering and “know your customer” protections. Overall, a rationalized federal framework may be more effective and efficient in ensuring the integrity of the underlying market.

Conclusion

We are entering a new digital era in world financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination.

With the proper balance of sound policy, regulatory oversight and private sector innovation, new technologies will allow American markets to evolve in responsible ways and continue to grow our economy and increase prosperity. This hearing is an important part of finding that balance.

Thank you for inviting me to participate.

Appendix A

CFTC Enforcement Activities: Fiscal Year (FY) 2017 Year Through the Present

Overview of FY 2017

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. The CFTC obtained orders totaling $412,726,307 in restitution, disgorgement and penalties. Specifically, in the fiscal year, the CFTC obtained $333,830,145 in civil monetary penalties and $78,896,162 million in restitution and disgorgement orders. Of the civil monetary penalties imposed, the CFTC collected and deposited at the U.S. Treasury more than $265 million.

Retail Fraud

The CFTC brought a significant number of retail fraud actions in FY 2017 (20 out of the 49). For example, in February 2017, the CFTC filed and settled charges against Forex Capital Markets LLC for $7 million for defrauding retail foreign exchange customers over a five year time period by concealing its relationship with its most important market maker and misrepresenting that its platform had no conflicts of interests with its customers. That month the CFTC also brought an action charging Carlos Javier Ramirez, Gold Chasers, Inc., and Royal Leisure International, Inc. with misappropriating millions in customer funds and engaging in fraudulent sales solicitations in connection with a Ponzi scheme involving the purported purchase of physical gold.

In May 2017, the CFTC filed charges against an individual and his company with defrauding 40 investors out of at least $13 million in connection with a commodity pool they operated; investors included family members and members of his church. In June 2017, the CFTC filed charges against two individuals and their company with fraudulently soliciting customers, including at a church gathering, and defrauding them out of more than $11 million. The pair was also arrested by the Federal Bureau of Investigation (FBI) on related criminal charges.

In September 2017, the CFTC filed one of the largest precious metals fraud cases in the history of the Commission. As alleged, the Defendants defrauded thousands of retail customers—many of whom are elderly—out of hundreds of millions of dollars as part of a multi-year scheme in connection with illegal, off-exchange leveraged precious metal transactions.

Market Manipulation

In February 2017, the CFTC settled with RBS for $85 million for attempted manipulation of ISDAFIX, a leading global benchmark for interest rate swaps and related derivatives. The CFTC also brought actions against The Royal Bank of Scotland plc and Goldman Sachs Group, Inc. and Goldman, Sachs & Co. for attempted manipulation of the ISDAFIX, resulting in $85 million and $120 million in penalties, respectively. In February 2018, the CFTC settled with Deutsche Bank Securities Inc. for $70 million for attempted manipulation of ISDAFIX.

Since 2012, the CFTC has imposed over $5 billion in penalties against banks and brokers with respect to benchmark manipulation settlements.

Disruptive Trading

In November 2016, the CFTC entered into a consent order with Navinder Singh Sarao and Nav Sarao Futures Limited PLC to settle allegations related to the 2010 flash crash for $25.7 million in monetary sanctions, $12.9 million in disgorgement, and a permanent trading and registration ban. In December 2016, the CFTC settled with trading company 3Red and trader Igor Oystacher imposing a $2.5 million penalty, a monitor for three years, and requiring the use of certain trading compliance tools for intentionally and repeatedly engaging in a manipulative and deceptive spoofing scheme while placing orders for and trading futures contracts on multiple registered entities.

In January 2017, the CFTC fined Citigroup $25 million for failing to diligently supervise the activities of its employees and agents in conjunction with spoofing orders in the U.S. Treasury futures markets. Later that year, in July 2017, the CFTC entered into its first non-prosecution agreements (NPA) with three former Citigroup traders who admitted to spoofing in the U.S. Treasury futures markets in 2011 and 2012. The NPAs emphasize the traders’ timely and substantial cooperation, immediate willingness to accept responsibility for their misconduct, material assistance provided to the CFTC’s investigation of Citigroup, and the absence of a history of prior misconduct.

In January 2018, in conjunction with the Department of Justice (DOJ) and FBI, the CFTC announced criminal and civil enforcement actions against three banks and six individuals involved in commodities fraud and spoofing schemes. The banks were fined $45.6 million in penalties.

Virtual Currency

In September 2017, as part of its work to identify and root out bad actors in the virtual currency markets, the CFTC brought its first virtual currency anti-fraud enforcement action in Gelfman Blueprint, Inc., which charged an individual and his corporation with fraud, misappropriation, and issuing false account statements in connection with operating a Bitcoin Ponzi scheme.

In January 2018, the CFTC brought three virtual currency enforcement actions: (i) My Big Coin Pay Inc., which charged the defendants with commodity fraud and misappropriation related to the ongoing solicitation of customers for a virtual currency known as My Big Coin; (ii) The Entrepreneurs Headquarters Limited, which charged the defendants with a fraudulent scheme to solicit Bitcoin from members of the public, misrepresenting that customers’ funds would be pooled and invested in products including binary options, making Ponzi-style payments to commodity pool participants from other participants’ funds, misappropriating pool participants’ funds, and failing to register as a Commodity Pool Operator; and (iii) CabbageTech, Corp., which charged the defendants with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin.

APPENDIX B

Virtual Currency Educational Materials and Outreach Activities

CFTC’s Bitcoin web page Resources

Launched on December 15, 2017, the CFTC now has a dedicated web page, www.cftc.gov/bitcoin, where the public can access educational materials on the CFTC’s regulatory oversight authority of virtual currencies and ways to avoid fraud in the virtual currency space.

Current resources available on www.cftc.gov/bitcoin :

• “CFTC Backgrounder on Oversight of and Approach to Virtual Currency Futures Markets”

• LabCFTC’s Virtual Currency Primer

• CFTC Talks Virtual Currency Podcast, “Roundtable with CFTC leaders on Bitcoin”;

• Self-Certification Fact Sheet

• Customer Advisories on “Understand the Risks of Virtual Currency Trading” and “Beware ‘IRS Approved’ Virtual Currency IRAs”

Forthcoming resources to be featured on www.cftc.gov/bitcoin:

• Customer Advisories (under development; issuance expected in February 2018)

• Brochures (available digitally and printed in mid-February 2018):

  • o Bitcoin pump-and-dump schemes

    o Avoiding fraud in Bitcoin-to-gold trades

    o “Virtual Currency”

    o “Bitcoin Basics”

    • § 6-paneled brochure on the definition of virtual currencies, the risks associated with them, and ways to avoid fraud

      § 2-sided Bitcoin brochure that speaks about the currency’s distinct traits, that fact that it is a commodity, and recommendations for spotting fraud

Virtual Currency Outreach Activities by Audience

• Reaching retail investors and industry professionals via in-person presentations at industry events, conferences and trade shows

• Targeting seniors, vulnerable populations and those who serve them:

• Outreach to key virtual currency demographics, such as Millennials, through digital communications designed to engage these demographics through channels and in forums they are predisposed to engage

• Engaging the general public through institutional partnerships and direct communication:

  • o Connecting national non-profits who serve seniors and vulnerable populations to relevant CFTC virtual currency materials to use for their constituent outreach and communications

    o Distribution of both digital and print virtual currency materials to state regulators for their fraud prevention outreach

    o Participation in trainings for intermediaries, such as library staff, to educate them on the CFTC’s fraud prevention resources to protect and assist their constituencies

    o Working with other federal financial regulators and self-regulatory organizations to hold joint outreach activities, such as webinars, educational campaigns and community-level outreach, to build public awareness of the CFTC’s virtual currency resources

    o Utilizing print and radio features to reach the public through media placements

Appendix C and D are available under Related Links.

1 See generally, CFTC Talks, Episode 24, Dec. 29, 2017, Interview with Coincenter.org Director of Research, Peter Van Valkenburgh, at http://www.cftc.gov/Media/Podcast/index.htm.

2 See Marc Andreessen, Why Bitcoin Matters, New York Times DealBook (Jan. 21, 2014), https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/; Jerry Brito and Andrea O’Sullivan, Bitcoin: A Primer for Policymakers, George Mason University Mercatus Center (May 3, 2016),https://www.mercatus.org/publication/bitcoin-primer-policymakers; Christian Catalini and Joshua S. Gans, Some Simple Economics of the Blockchain, Rotman School of Management Working Paper No. 2874598, MIT Sloan Research Paper No. 5191-16 (last updated Sept. 21, 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874598; Arjun Kharpal, People are 'underestimating' the 'great potential' of bitcoin, billionaire Peter Thiel says, CNBC (Oct. 26, 2017), https://www.cnbc.com/2017/10/26/bitcoin-underestimated-peter-thiel-says.html; Hugh Son, Bitcoin ‘More Than Just a Fad,’ Morgan Stanley CEO Says, Bloomberg (Sept. 27, 2017), https://www.bloomberg.com/news/articles/2017-09-27/bitcoin-more-than-just-a-fad-morgan-stanley-ceo-gorman-says; Chris Brummer and Daniel Gorfine, FinTech: Building a 21st-Century Regulator’s Toolkit, Milken Institute (Oct. 21, 2014), available at http://www.milkeninstitute.org/publications/view/665.

3 Virtual currencies are not unique in their utility in illicit activity. National currencies, like the US Dollar, and commodities, like gold and diamonds, have long been used to support criminal enterprises.

4 Countries that have banned Bitcoin include Bangladesh, Bolivia, Ecuador, Kyrgyzstan, Morocco, Nepal, and Vietnam. China has banned Bitcoin for banking institutions.

5 Jay Clayton and J. Christopher Giancarlo, Regulators Are Looking at Cryptocurrency: At the SEC and CFTC We Take Our Responsibility Seriously,Wall Street Journal, Jan. 24, 2018, https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency-1516836363.

6 See CFTC, Mission and Responsibilities, http://www.cftc.gov/About/MissionResponsibilities/index.htm.

7 Testimony of CFTC Chairman Timothy Massad before the U.S. Senate Committee on Agriculture, Nutrition and Forestry (Dec. 10, 2014), http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-6.

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

9 In re TeraExchange LLC, Dkt. No. 15-33 (CFTC Sept. 24, 2015), http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfteraexchangeorder92415.pdf.

10 In re BXFNA Inc. d/b/a Bitfinex, Dkt. No. 16-19 (CFTC June 2, 2016), http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf.

11 CFTC, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60335 (Dec. 20, 2017), www.gpo.gov/fdsys/pkg/FR-2017-12-20/pdf/2017-27421.pdf.

12 CFTC, A CFTC Primer on Virtual Currencies (Oct. 17, 2017),http://www.cftc.gov/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf.

13 On September 21, 2017, the CFTC filed a complaint in federal court in the Southern District of New York against Nicholas Gelfman and Gelfman Blueprint, Inc., seehttp://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfgelfmancomplaint09212017.pdf.

14 Each CME contract represents 5 Bitcoin.

15 The price changes day to day.

16 Prior to the changes made in the Commodity Futures Modernization Act of 2000 (CFMA) and the Commission’s subsequent addition of Part 40, exchanges submitted products to the CFTC for approval. From 1922 until the CFMA was signed into law, less than 800 products were approved. Since then, exchanges have certified over 12,000 products. For financial instrument products specifically, the numbers are 494 products approved and 1,938 self-certified.See http://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm.

17 See CEA Section 5(d)(3), 7 U.S.C. 7(d)(3); Section 5(d)4), 7 U.S.C. 7(d)(4); 17 C.F.R. 38.253 and 38.254(a), and Appendices B and C to Part 38 of the CFTC’s regulations.

18 CEA Section 5b(c)(2)(D)(iv), 7 U.S.C. 7a-1(c)(2)(D)(iv) (“The margin from each member and participant of a derivatives clearing organization shall be sufficient to cover potential exposures in normal market conditions.”).

19 In the case of CME and Cboe Bitcoin futures, the initial and maintenance margins were ultimately set at 47% and 44% by the respective DCOs. By way of comparison that is more than ten times the margin required for CME corn futures products.

20 Unlike provisions in the CEA and Commission regulations that provide for public comment on rule self-certifications, there is no provision in statute or regulation for public input into CFTC staff review of product self-certifications. It is hard to believe that Congress was not deliberate in making that distinction.

21 The CFTC has jurisdiction over retail foreign currency markets and retail commodity transactions that use leverage, margin or financing with some exceptions. Congress responded to concerns in the regulation of leveraged retail FX by providing the CFTC oversight responsibilities for Retail Foreign Exchange Dealers (RFEDs). The CFTC Re-authorization Act of 2008 amended the CEA to create a new registration category for RFEDs that include disclosure requirements and leverage limitations to customers.

22 J. Christopher Giancarlo, Keynote Address of Commissioner J. Christopher Giancarlo before the Markit Group, 2016 Annual Customer Conference New York, May 10, 2016, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-15.

23 Id.

24 See, e.g., Larry Greenemeier, Can't Touch This: New Encryption Scheme Targets Transaction Tampering, Scientific American, May 22, 2015, http://www.scientificamerican.com/article/can-t-touch-this-new-encryption-scheme-targets-transaction-tampering/.

25 See Massimo Morini & Robert Sams, Smart Derivatives Can Cure XVA Headaches, Risk Magazine, Aug. 27, 2015, http://www.risk.net/risk-magazine/opinion/2422606/-smart-derivatives-can-cure-xva-headaches; see also Jeffrey Maxim, UBS Bank Is Experimenting with “Smart-Bonds” Using the Bitcoin Blockchain, Bitcoin Magazine, June 12, 2015, https://bitcoinmagazine.com/articles/ubs-bank-experimenting-smart-bonds-using-bitcoin-blockchain-1434140571; see also Pete Harris, UBS Exploring Smart Bonds on Block Chain, Block Chain Inside Out, June 15, 2015, http://harris-on.typepad.com/block_chain_io/2015/06/ubs-exploring-smart-bonds-on-block-chain.html; See generally Galen Stops, Blockchain: Getting Beyond the Buzz, Profit & Loss, Aug.–Sept. 2015, at 20, http://www.profit-loss.com/articles/analysis/technology-analysis/blockchain-getting-beyond-the-buzz.

26 See, e.g., Oversight of Dodd-Frank Act Implementation, U.S. House Financial Services Committee, http://financialservices.house.gov/dodd-frank/(last visited Mar. 2, 2016).

27 Santander InnoVentures, Oliver Wyman & Anthemis Group, The Fintech Paper 2.0: Rebooting Financial Services 15 (2015), http://santanderinnoventures.com/wp-content/uploads/2015/06/The-Fintech-2-0-Paper.pdf.

28 Telis Demos, Bitcoin’s Blockchain Technology Proves Itself in Wall Street Test, Apr. 7, 2016, The Wall Street Journal, http://www.wsj.com/articles/bitcoins-blockchain-technology-proves-itself-in-wall-street-test-1460021421.

29 Based on conversations with R3 CEV, http://r3cev.com/.

30 Emiko Terazono, Commodities trader Louis Dreyfus turns to blockchainhttps,Financial Times, Jan. 22, 2018, www.ft.com/content/22b2ac1e-fd1a-11e7-a492-2c9be7f3120a.

31 Frisco d’Anconia, IOTA Blockchain to Help Trace Families of Refugees During and After Conflicts, Cointelegraph.com, Aug. 8, 2017, https://cointelegraph.com/news/iota-blockchain-to-help-trace-families-of-refugees-during-and-after-conflicts.

32 See supra note 22.

33 The Telecommunications Act of 1996 (See Telecommunications Act of 1996 (Pub. L. No. 104-104, 110 Stat. 56 (1996))) and the ensuing Clinton administration “Framework for Global Electronic Commerce” (See Clinton administration, Framework for Global Electronic Commerce, http://clinton4.nara.gov/WH/New/Commerce/) established a simple and sensible framework: a) the private sector should play the leading role in innovation, development and financing; and b) governments and regulators should “do no harm” by avoiding undue restrictions, supporting a predictable, consistent and simple legal environment and respecting the “bottom-up” nature of the technology and its deployment in a global marketplace.

34 See supra note 5.

 

Last Updated: February 9, 2018

 

Remarks of CFTC Commissioner Brian D. Quintenz at the DerivCon 2018: SEFCON Transformed, Pivoting from Adoption to Adaptation

Remarks of CFTC Commissioner Brian D. Quintenz at the DerivCon 2018: SEFCON Transformed, Pivoting from Adoption to Adaptation

February 1, 2018

Introduction

Thank you for that very kind introduction.

Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the Commission. I’m very pleased to be speaking here with you today at DerivCon 2018.

Let’s take a trip back in time. It’s the early 1980s. Beverly Hills Cop and Ghostbusters are the two top grossing films. Prince and Tina Turner are dominating the airwaves. The torture device also known as the rotary telephone1 is being replaced with a push-button model. Answering machines are all the rage. Chances are you do not have a personal computer at home; only 8% of U.S. households do.2 Those computers use floppy disks and run DOS. And IBM and the World Bank enter into a transaction, which is widely considered to be the first swap.3

Fast forward to the present. As of 2015, over 78% of U.S. households have a desktop or laptop.4 That percentage increases to 94% among those 45 years or younger if you include smartphones.5 Approximately seventy percent of U.S. households have home broadband. The top website is Google, we can track car service arrivals in real time, and approximately 1,400 virtual currencies exist.6

Over the past 30 years, advancements in technology and data have revolutionized how we approach even the most mundane aspects of ordinary life. Entertainment, transportation, payments, politics, have all been digitized. Financial regulation is no different. Over the past ten years, the Commodity Futures Trading Commission (CFTC) has made tremendous strides toward collecting and utilizing swap data to further its regulatory mandates. I’d like to spend some time now to reflect on how we got to where we are today and what we hope to accomplish in the future.

An Opaque Derivatives Markets

Almost ten years ago, in the midst of the financial crisis, the over-the-counter (OTC) derivatives markets contracted significantly as market participants struggled to understand their exposures to one another.7 The more firms doubted the creditworthiness of their counterparties, the less willing they were to trade, and more exacerbated each firm’s own liquidity and credit position became. In the aftermath of the crisis, G-20 members pledged to enact reforms to repair our global financial markets and support our future financial stability and prosperity.8 One such reform was mandatory reporting of OTC derivatives to trade repositories in order to “improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.” 9 I believe increasing transparency was the most important principle of swap market reform by far.

Since that time, the CFTC has played a key leadership role in enacting derivatives market reforms—and the agency’s work regarding swap data reporting is no exception. The CFTC was the first regulator in the world to implement swap data reporting requirements.10 As of December 2012, swap dealers and major swap participants began reporting certain asset classes of swaps to swap data repositories or SDRs.11 Once SDR reporting went into effect, the Commission began to receive millions of transaction records annually. For the first time, the basic terms of each trade—such as the counterparties, price, and notional amount—were reported to the Commission. The CFTC could begin to see an individual firm’s swap transactions with various counterparties and answer the basic questions of who, what, when, and where with respect to the swap markets. This data was also disseminated anonymously to the public in real-time in order to provide post-trade transparency to the markets.

However, frequently the data reported was incomplete or incorrect. For example, trade reports would only identify one counterparty, would leave the notional field blank, or would contain off-market, erroneous prices. With the benefit of experience, the CFTC and market participants have made substantial progress toward improving swap data integrity. For example, in 2014, roughly half of all reports for credit default swaps (CDS) lacked complete price information; approximately 15% of all CDS trades lacked a legal entity identifier, making it difficult to identify the counterparty. By 2018, roughly 95% of all CDS trades had complete counterparty and price information.

Although we have made significant improvements, we still have a long way to go. One of the primary objectives of the G-20 Pittsburgh summit was to ensure that regulators could readily analyze swap data to identify and measure risk exposures in the market, in particular counterparty credit risk. We have not yet reached our goal. In large part, this is because regulators are still working to harmonize global reporting standards and data fields across jurisdictions. Without a certain degree of homogeneity, it is simply impossible for the data to be aggregated globally.

International Harmonization Efforts

In September 2014, the Financial Stability Board (FSB) asked the Committee on Payments and Infrastructures and the International Organization of Securities Commissioners, known as CPMI-IOSCO, to develop global guidance on the harmonization of data elements reported to trade repositories and important for the aggregation of data by authorities.12

Over the last three years, the CFTC, acting as a co-chair of the CPMI-IOSCO harmonization group, has worked with our international counterparts to harmonize data standards for swaps trade reporting. Our hard work is finally yielding concrete results. One year ago, CPMI-IOSCO issued final guidance regarding unique transaction identifiers, or UTIs.13 UTIs ensure an OTC transaction is recorded only once, which will facilitate consistent global aggregation and analysis. This past fall, CPMI-IOSCO also issued final guidance on unique product identifiers, or UPIs.14 UPIs will be assigned to each distinct derivative product, allowing data analysis by product type.

CPMI-IOSCO is now working to publish final detailed technical specification guidance on critical data elements (CDEs) in the first or second quarter of 2018. CDEs capture a swap’s primary economic terms, like counterparties, notional amount, price, and the duration of the swap, all of which are essential to perform meaningful global swap data analysis.

In addition to enumerating these critical fields, the guidance will also provide standardized definitions and reporting formats, so that market participants will be able to report the same field consistently. To the extent these fields are adopted identically across jurisdictions, global aggregation and measurement of risk, including counterparty credit risk, increasingly becomes a reality.

The Path Forward

So what does the path forward look like?

In July 2017, the CFTC’s Division of Market Oversight, or DMO, initiated a comprehensive review of existing reporting regulations, soliciting input from market participants and SDRs about how the CFTC could improve its reporting regime.15 DMO identified two primary objectives for the agency’s data reporting overhaul: (1) receiving accurate, complete, high quality data on swap transactions that enable it to fulfill its oversight role; and (2) streamlining reporting by reducing the number of data messages and fields that must be reported. At the same time, DMO published a Roadmap to Achieve High Quality Swaps Data (Roadmap), which provides market participants with a sense of the anticipated rollout, making it easier for participants to plan ahead for the design, testing, and implementation of any required system changes.16

Improving Data Accuracy, Completeness and Quality

In my opinion, improving data accuracy, completeness, and quality are connected, but individual, concepts, with each goal targeting a basic reporting scheme fundamental: accuracy through a counterparty’s role in data confirmation, completeness through an SDR’s role as data gatekeeper, and quality through reporting deadlines.

First, DMO is identifying the best way for counterparties to confirm the accuracy of their trade reports with the SDR.  Currently there is some ambiguity under our reporting rules regarding the respective responsibilities of each counterparty to affirmatively verify the accuracy of their SDR data.  In my view, a sensible outcome would be for the counterparty who is best situated to confirm the data.  In all likelihood, this would be the reporting counterparty.  The reporting counterparty already has a relationship with the SDR and also can verify the accuracy of trade reports against its own internal trade records.  If the non-reporting counterparty discovers an error, it can notify the reporting party of the error, who can then correct the error with the SDR.17

Increasing data completeness involves enhancing the SDR’s ability to act as a gatekeeper of the data. Although an SDR cannot confirm individual trade details, it can determine if market participants are reporting all required fields in an appropriate format. In my opinion, SDRs should automatically reject trade reports with missing or invalid fields. The Commission has the opportunity to establish clear standards for what minimum set of fields must be reported in order for a trade report to be considered complete by an SDR. Faulty trade reports impede the Commission’s ability to analyze the data.

Finally, to enhance data quality, the Commission can lengthen reporting deadlines. I support providing market participants additional time to meet their regulatory reporting obligations. A later regulatory reporting deadline would help counterparties report trades correctly the first time, instead of reporting an erroneous trade that requires later correction. One possibility is moving to a T+1 deadline, which is ESMA’s standard. I also believe that reporting to the real-time public tape is an important concept, provided there are appropriate exceptions for block trades and other unique types of transactions. To realize a robust real-time reporting scheme, the Commission should revisit the fields subject to real-time reporting, so that only those fields which are known at execution and critical to price discovery are included.

Streamlining Reporting Obligations

I think the key to DMO’s second objective of streamlining reporting lies primarily in incorporating the final CPMI-IOSCO guidance about critical data elements into CFTC reporting regulations. To do so, the Commission will need to propose revised data fields for both real-time and regulatory reporting. In my view, the goal should be for each required data field to be associated with a specific use that advances one of the Commission’s regulatory mandates. To the maximum extent possible, the data fields we propose should match the CPMI-IOSCO fields so that our ability to aggregate data globally is enhanced. However, in some instances, I recognize that the fields will likely need to differ to accommodate specific Commission needs or rules.

Hand-in-hand with proposing this revised set of data fields, the Commission will also need to issue proposed technical specifications. Deciding upon a final set of data fields and uniform technical specifications may be the most important and the most onerous part of our effort to improve data standards. I look forward to hearing feedback from market participants and SDRs as we work to harmonize and finalize our data fields and specifications.

Conclusion

In closing, swap data standardization, collection, assimilation, and analysis have required enormous work and decisive leadership. Chairman Giancarlo’s Roadmap and DMO’s work at both the agency and the international level is finally turning the corner on visibility into the swaps markets. We have an unprecedented amount of swaps data at our fingertips – the vision of the Pittsburgh G-20 agreement is within reach. Thank you so much for having me. It is an honor to be here.

1 Seehttp://lh3.ggpht.com/_X6JnoL0U4BY/S8BMPKouS8I/AAAAAAAAXXQ/13kP5qVwGOg/tmp1294_thumb_thumb1.jpg?imgmax=800.

2 Reuben Fischer-Baum, What ‘Tech World’ Did You Grow Up In, Wash. Post, Nov. 26, 2017, https://www.washingtonpost.com/graphics/2017/entertainment/tech-generations/?utm_term=.32b775af8a1b.

3 Seventy Years of Connecting Capital Markets to Development, The World Bank, http://treasury.worldbank.org/cmd/htm/70-years-in-capital-markets.html.

4 Camille Ryan and Jamie M. Lewis, U.S. Census Bureau, Computer and Internet Use in the United States: 2015 4 (Sept. 2017), https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf.

5 Id.

6 Fischer-Baum, supra note 2. These statistics are as of 2016.

7 Fin. Crisis Inquiry Comm’n, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States 298–300, 329, 363, 386 (2011), http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf. For example, outstanding credit derivatives fell by 48% between December 2007 and June 2010.

8 Leaders’ Statement: The Pittsburgh Summit, G-20 (Sept. 24-25, 2009), https://www.oecd.org/g20/summits/pittsburgh/G20-Pittsburgh-Leaders-Declaration.pdf.

9 Id.

10 OTC Derivatives Market Reforms: Fifth Progress Report on Implementation, Financial Stability Board 22-25 (April 15, 2013), http://www.fsb.org/2013/04/r_130415/. See also Mark Bramante, Depository Trust & Clearing Corporation, Swap Data Reporting Rules, SCI 3rd Annual OTC Derivatives Seminar 15 (Oct. 19, 2012), http://www.structuredcreditinvestor.com/PDFs/DTCC_Bramante.pdf.

11 Press Release, Division Q&A – On Start of Swap Data Reporting, CFTC (Oct. 10, 2012), http://www.cftc.gov/LawRegulation/DoddFrankAct/startreporting_qa_final. Reporting requirements for credit and interest rate swaps for swap dealers and major swap participants began on October 12, 2012. However, the first swap dealers and major swap participants registered with the CFTC on December 31, 2012. Reporting for non-swap dealer and non-major swap participants began on April 10, 2013, although DMO granted no-action relief extending the reporting compliance date for certain counterparties. See Time-Limited No-Action Relief for Swap Counterparties that are not Swap Dealers or Major Swap Participants, from Certain Swap Data Reporting Requirements of Parts 43, 45 and 46 of the Commission’s Regulations, No-Action Letter 13-10 (April 9, 2013), http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-10.pdf.

12 Feasibility Study on Aggregation of OTC Derivatives Trade Repository Data, Financial Stability Board (Sept. 19, 2014), http://www.financialstabilityboard.org/wp-content/uploads/r_140919.pdf.

13 Unique Transaction Identifier Technical Guidance, CPMI-IOSCO (Feb. 2017), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD557.pdf. Last December, FSB issued a final implementation plan for UTIs, recommending that all jurisdictions implement UTIs no later than the end of 2020. See Governance arrangements for the unique transaction identifier (UTI): Conclusions and implementation plan, Financial Stability Board 16 (Dec. 29, 2017), http://www.fsb.org/wp-content/uploads/P291217.pdf.

14 Unique Product Identifier Technical Guidance, CPMI-IOSCO (Sept. 2017), https://www.bis.org/cpmi/publ/d169.pdf.

15 Division of Market Oversight Announces Review of Swaps Reporting Regulations, Press Release (July 10, 2017), http://www.cftc.gov/PressRoom/PressReleases/pr7585-17. The CFTC received over 20 comment letters from market participants. See General CFTC Comments for DMO Swap Data Reporting Review, https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1824&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_50.

16 Roadmap to Achieve High Quality Swaps Data, DMO (July 10, 2017), http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/dmo_swapdataplan071017.pdf.

17 17 C.F.R. § 45.14(b).

 

Last Updated: February 7, 2018

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