Introduction

Good morning and welcome to the first Market Risk Advisory Committee (MRAC) meeting of 2022.  It is an honor to sponsor this Committee.  The work of the MRAC and the other Commodity Futures Trading Commission (CFTC or Commission) Advisory Committees is critical to the development of the CFTC’s regulations and policies, industry best practice standards, and registrants’ independently developed internal compliance systems and controls.  This work influences approaches adopted by fellow U.S. regulatory agencies as well as standards embraced by regulators around the world.

The MRAC has long served as an effective venue for exchanging important and diverse views, engaging the thought-leadership of experts, and relying on discussion and debate to determine recommendations that advance public interest as outlined in the CFTC’s core principles—promoting financial stability, preserving market integrity, and enhancing customer protections.

Today is the first meeting of the reconstituted MRAC under my Sponsorship.  I am fortunate to have received the mantle of service as Sponsor of the MRAC from former Commissioner Sharon Bowen and Chairman Rostin Behnam who benefitted from the efforts of the then DFOs Petal Walker and Alicia Lewis, respectively.

Since its inception, MRAC has served as a critical forum, evaluating emerging developments and technologies, evolving market structure questions and concerns, and endemic systemic risk concerns at the earliest (embryonic or fledgling), maturing, and senior stages of development.  In formal meetings and less formal discussions, MRAC Committee members’ have previously considered the merits of self-certification in the context of the launch of two Bitcoin futures contracts, climate-related market risk, interest rate benchmark reforms, the market impact of the COVID-19 global pandemic, DCO governance, cybersecurity threats, systems safeguards, resiliency, and recovery.

In shaping our agenda today, members of the MRAC, renewed subcommittees, and newly-formed subcommittees should anticipate contributing to the creation of solutions to complex questions, issues, and concerns that will define the future of our markets and shape the economy of our nation and many nations around the world.

As I explained recently in framing the agenda for this meeting,

“Today, our markets stand at a crossroads, having witnessed a prolonged season of sustained growth and development, marked by the creation of many important, innovative technologies, that now may be followed by a more difficult season, characterized by the reverberations of a global pandemic; inflationary pressure; disturbing and disruptive geopolitical events; and increasingly frequent and intense, severe weather events, among other challenges.  In order to navigate such turbulence, it is imperative to effectively calibrate regulation, policy, and legislation governing existing and emerging market participants, products, and platforms to preserve the integrity of our markets and protect the welfare of customers and institutions.

“The CFTC’s MRAC serves as an invaluable resource to assist the CFTC in identifying and exploring timely issues in the derivatives and underlying commodity markets.  Consistent with this history and mandate, the MRAC will continue pathbreaking efforts to examine climate-related market risk as well as the development of sustainable resources, migration to new global interest rate benchmarks, and questions regarding central counterparty risk and governance. In addition, the MRAC will explore the future of market structure in finance, the impact of emerging technologies and alternative approaches to clearing and settlement, including but not limited to cloud migration, digital asset development and secondary market trading, and transformative climate-related initiatives that impact market structure.”

I will formally introduce you to the new Chair of the MRAC Committee, Alicia Crighton shortly and she will lead the dialogue this morning. Alicia, thank you for taking on this responsibility, the Committee is indeed fortunate to have you.  Before I turn the program over to Alicia, it may be useful to describe our agenda for today.

The Agenda

The Future of Finance

Our first panel today explores the future of finance. Over the past decade markets have witnessed remarkable, transformative growth and innovation.  Earlier this year, the Commission hosted a roundtable examining the impact of non-intermediation—a market structure that removes intermediaries that have historically facilitated activities such as the clearing and settlement of market transactions.  A recent proposal seeking to permit retail market participants to participate in leveraged transactions adopts a form of this model. Parallel to proposed changes in market structure, exponential growth in the market of digital assets, specifically cryptocurrencies, creates a related set of questions for our discussion today.  Industry participants interested in this market structure or newly emerging class of assets as well as traditional market participants desire a clear indication of the Commission’s next steps.  I am hopeful that this Committee and our subcommittees will directly participate in crafting balanced, effective reports, hearings, or proposals so that the Commission may advance regulatory clarity regarding these market structure and risk management challenges.

The Committee’s work will be supported by ongoing efforts in the Market Participant Division, Division of Market Oversight, the Division of Clearing and Risk, and the Division of Enforcement.  The Commission has already effectively employed its existing regulatory authority to police novel digital asset markets to prevent fraud and manipulation.

Since 2014, the CFTC has diligently exercised its enforcement authority and initiated over fifty enforcement actions pursuing violations under the Commodity Exchange Act (CEA)[1] and CFTC regulations[2] in which the underlying assets were digital asset commodities.[3]  All too often, these schemes have targeted vulnerable or marginalized retail investors.  This year alone, we have charged several individuals and entities with perpetrating more sophisticated fraud schemes, including Ponzi schemes, and the first digital asset “pump-and-dump” case brought by the CFTC.[4]  Just last week the CFTC filed both a settlement and an injunctive complaint in federal court relating to a novel decentralized blockchain-based software protocol that was designed to circumvent regulatory enforcement.[5]

A recent action illustrates the novel legal questions that emerging technologies pose. bZeroX, LLC and its founders created smart contracts on the Ethereum blockchain and enabled customers to engage in leveraged retail commodity transactions in digital asset commodities.  Under the CEA, these sorts of transactions must be conducted on a designated contract market (DCM) and offered by a futures commission merchant (FCM). bZeroX, however, had not registered with the CFTC at all. Moreover, in August 2021 bZeroX transferred control of its software protocols to a decentralized autonomous organization, or DAO, subsequently renamed as the Ooki DAO.  The founders later explicitly claimed that this transition to an unincorporated association would render the operations enforcement-proof.[6]  The CFTC in its complaint argues that this gambit failed and may create liability for certain members of the DAO.

Emerging technologies often don’t fit neatly into either the Commission’s traditional areas of responsibility or that of other regulators like the Securities and Exchange Commission (SEC). The lack of clarity on the regulatory framework has not gone unnoticed.

Both the White House and Congress very much intend to address these concerns.  On September 16, 2022, the White House released the first-ever Comprehensive Framework for Responsible Development of Digital Assets.[7]  At the core of the Framework lie six key priorities: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.

To further these priorities, the Framework outlines a variety of concrete steps government agencies (and their partners) will take to balance two overarching policy aims: fostering and driving domestic innovation, research, and competitiveness in global markets, and mitigating consumer- and investor-related downside risk, especially through strong, fair enforcement of existing statutes and rules, and the development of new, more focused regulations.  This, in addition to the creation of a Treasury-led interagency working group on a potential U.S. central bank digital currency, form the core of the Framework’s approach.

To better protect consumers, investors, and businesses, the Framework focuses on baseline enforcement by the SEC, CFTC, CFPB, and FTC of existing consumer- and investor-protection statutes.  Investigating unlawful practices and bringing enforcement actions, where appropriate, remains at the forefront of the Administration’s approach.  This, coupled with a directive to issue new guidance, rules, and potential legislation, can provide real clarity and regulatory certainty to market participants.

To foster financial stability, the Framework provides for broad collaboration and information sharing between the Department of Treasury and financial institutions to help bolster financial institutions’ ability to identify and mitigate significant risks, including cyber-related risks and risks associated with digital assets, so as to bolster and ensure the stability of our financial markets.

Both the Senate Banking and the Senate Agriculture Committees are reviewing bipartisan bills that would expand the jurisdiction of the CFTC to include oversight of digital commodities.  The Digital Commodities Consumer Protection Act of 2022 (DCCPA),[8]  introduced by Senators Stabenow and Boozman, has received significant attention as it adopts a narrow framework for addressing imminent questions regarding jurisdiction over digital asset spot market transactions.  The proposed bill seeks to expand the definition of “commodity” in the CEA to include “digital commodities.”  The bill includes registration mandates, requiring any entity acting as a digital commodity platform to register with the Commission in one or more of the applicable categories (i.e., digital commodity broker, digital commodity custodian, digital commodity dealer, and digital commodity trading facility).  The DCCPA also includes an obligation for Digital Commodity Platforms to comply with all applicable core principles, which are designed to protect customers and the integrity of the digital commodity marketplace.

Additionally, the DCCPA would require participants in the digital commodities markets to join the National Futures Association, the self-regulatory organization for the derivatives markets.  By requiring registration, the DCCPA would then allow customers to use the CFTC’s Reparations Program to resolve disputes with registered entities and professionals, providing a strong tool for customer protection.  Our reparations program provides a cost-effective way for customers to address their grievances with a registrant without having to hire a lawyer and engage in costly litigation or arbitration.

Section 7 of the DCCPA may be transformative, because it requires the CFTC to conduct a study on the impact of digital assets on diverse communities and use the gathered data to facilitate the development of effective, thoughtful customer protections and tailored regulations to foster access and inclusion.  During a roundtable that I recently hosted at the CFTC, I invited experts and thought leaders to explore both concerns regarding retail investment in digital assets and the promise of building generational wealth for communities that are unbanked or underbanked and have experienced exclusion in traditional financial markets.[9]

As I have previously explained, it will be necessary to adopt a whole-of-government or comprehensive regulatory regime to ensure effective customer protections in digital asset markets.  These protections would include segregation of customer funds, compliance with know your customer and anti-money laundering regulations, risk disclosures and bankruptcy protections, as well as policies to manage conflicts of interest, require robust cybersecurity, and regular reporting of data.  Retail customers investing in novel products deserve the same protections as those investing traditional products.

As Congress works to draft legislation, we are prepared to support its efforts and to collaborate with our colleagues at other financial market regulators.  In the context of crafting regulations for swaps and security-based swaps, we have demonstrated that we can work hand in hand with regulators such as our sister agency the SEC to define the landscape of regulatory oversight.

The CFTC is well-situated to do its part developing and enforcing responsive regulation related to digital assets that are commodities.  As demonstrated during the demanding period following the adoption of the Dodd-Frank Act, the CFTC has deep expertise and the talent to get the job done. Based on the size of the market for digital commodities, however, additional funding would be necessary to support any expanded authority.

Climate-Related Market Risk

The second segment of this morning’s presentation examines issues explored by the Climate-Related Market Risk subcommittee.  According to data gathered by the National Oceanic and Atmospheric Administration’s (NOAA’s) National Centers for Environmental Information, since 1980, the United States has sustained more than three hundred weather and climate disasters, including droughts, floods, severe storms, cyclones, wildfires, and winter storm events that, in the aggregate, led to costs or damage exceeding more than $1 billion.[10]

Earlier this month we have seen Hurricane Fiona knocking out power in Puerto Rico and inflicting significant damage and loss of life, on the fifth anniversary of the terrible devastation inflicted by Hurricane Maria.[11]  Extreme weather causes not only physical damage to our infrastructure and property, but also disrupts the normal functioning of the economy, distorts prices, diverts resources, and changes risk calculations for capital investment.  All of these factors impact our markets in multiple ways.  Notwithstanding our long history of navigating these severe weather-related events, the increasing frequency, severity, and intensity, as well as the rising costs of these events, raise important policy questions and remarkable commercial concerns.

As a financial regulator with oversight over the derivatives markets, with their importance for risk-management, the CFTC is deeply thoughtful about the growing and systemic threat climate-related risk poses to our financial systems.  This Committee took a huge leap forward in this space before I arrived at the Commission in September 2020, when it published a wide-ranging report on climate risk in the U.S. financial system.  The report built on the good work of numerous international regulators and associations, including the International Organization of Securities Commissions (IOSCO), the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and the Financial Stability Board (FSB).  The report’s recommendations for U.S. financial regulatory agencies, ranging from requiring financial firms to integrate climate risk into their supervisory frameworks to supporting regulatory sandboxes to facilitate the development of innovative climate risk reduction tools, have deservedly found their way into the international climate risk dialogue.

In June of this year I supported the publication by the CFTC of a Request for Information (RFI) on Climate-Related Financial Risk in order to solicit comment from the public, including participants in our markets.[12]  The RFI seeks comments on how climate-related financial risk may affect “registered entities, registrants, or other market participants, and the soundness of the derivatives markets,” including an assessment of “how registrants and registered entities may need to adapt their risk management frameworks—including, but not limited to, margin models, scenario analysis, stress-testing, collateral haircuts, portfolio management strategies, counterparty and third-party service provider risk assessments, and enterprise risk management programs—as well as how market participants may need to adapt their dealing, trading, and advisory businesses in the derivatives markets.”  These inquiries are well within the ambit of the CFTC’s statutory authority and continue a long-established tradition of engaging in thoughtful dialogue with our market participants and diverse stakeholders in order to understand their concerns related to emerging and evolving risk management oversight.  Responses to the RFI are due shortly, on October 7, and will help to inform the work of the CFTC, as well as this Committee, on these issues.

In addition to the RFI, the CFTC held a public convening concerning the voluntary carbon markets in conjunction with the issuance of the RFI.  The voluntary carbon markets are a key tool in reducing carbon emissions and raising investment capital to promote innovation for carbon reduction.  Among many complimentary and comprehensive efforts, careful evaluation of carbon markets may reveal a useful path for mitigating climate-related financial risk.  Moreover, growing use of carbon offset derivatives listed on CFTC-regulated exchanges brings this subject squarely within the regulatory interest of the CFTC, and it is therefore incumbent upon us to ensure that the underlying markets are of high integrity and that the carbon offsets traded there in fact achieve the indicated carbon reductions.[13]

There are currently a number of initiatives, such as the Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Markets Integrity Initiative, that seek to ensure that voluntary carbon markets are transparent and efficient, dealing in high quality carbon credits, with integrity on both the buy- and sell-side, and integrity in the way that climate impact is measured and reported. ISDA has also undertaken a project to standardize documentation for trading voluntary carbon credits to facilitate secondary markets.

At the intersection of the issues of climate-related market risk and digital assets, there are threads that bind together two of the issues that we will discussed today—energy use for the trading and generation of digital assets.  From 2018 to 2022, annualized electricity used in connection with digital assets grew rapidly, with estimates of electricity usage doubling to quadrupling—recently amounting to the equivalent to 0.4% to 0.9% of annual global electricity usage.[14]  Because the profitability of mining these digital assets is directly tied to the cost of energy, miners move to areas with lower energy costs, straining local grids and affecting energy markets.[15]

Earlier this month, the Ethereum blockchain converted from a proof-of-work consensus mechanism, which requires energy-intensive computer calculations for validation of each block added to the blockchain, to a proof-of-stake consensus mechanism, a much less energy-intensive approach that substitutes an algorithmic transaction verification system based on miners depositing digital assets as collateral for the right to validate transactions on the network.  It is estimated that this so-called "Ethereum Merge" will significantly decrease the overall energy consumption associated with the Ethereum blockchain.  Whether other blockchains will follow suit is an open question, but one that urgently needs answering given the growing impact of digital assets on energy consumption.

The International Emissions Trading Association Council Task Group on Integrity in Digital Climate Markets is exploring the potential use of digital credits or tokens as a way to facilitate trading of carbon credits and utilize blockchain technology to create public registries that avoid double selling, duplicate claims, and non-authorized tokens.  Finally, given the continued focus on national climate commitments and targets, there is a risk that some countries may take steps to exert increased control over carbon abatement projects within their borders, impacting existing and planned voluntary projects and potentially disrupting markets.

Biofuels and Climate

The MRAC must operate in support of the CFTC and in tandem with national and international complimentary work streams. In February 2022, U.S. Department of Agriculture Secretary Vilsack introduced the Partnership for Climate-Smart Commodities to support the production of climate-smart commodities—these are agricultural commodities that are produced using recognized climate-friendly practices. Climate-smart commodities will include biofuels that convert biomass into transportation fuel.

The incentives created through programs like the Partnership will profoundly impact how traditional agricultural commodities are produced, refined, and marketed.  The investments needed to support retrofitting into a green economy cannot happen without derivatives, which means that they cannot happen without sound and clear guidance from the CFTC. More than ever, the commodities markets—both financial and physical—are correlated.

Interest Rate Benchmark Reform

The MRAC has served as a central hub in the CFTC’s work in facilitating the transition from LIBOR and other interbank offered rates—which were susceptible to manipulation—to alternative reference rates.[16]  The third segment of this agenda today focuses on transition efforts. On July 13, 2021, the MRAC voted to approve a recommendation from its Interest Rate Benchmark Reform Subcommittee to recommend that interdealer brokers prioritize trading in swaps referencing the Secured Overnight Financing Rate (SOFR) rather than USD LIBOR for particular market segments and products, in light of the decision to phase out use of LIBOR generally, an approach referred to as SOFR First.  Over the intervening months, additional portions of the market have transitioned from LIBOR to SOFR.[17]  Most recently, I supported the issuance of a final rule modifying the swap clearing requirement in support of the transition from LIBOR and other interbank offered rates to alternative reference rates, which has its last effective date on June 30, 2023, for the transition away from USD LIBOR in the fixed-to-floating swap, basis swap, and FRA classes.[18]

CCP Risk and Governance

The Dodd-Frank Act introduced groundbreaking reforms that directed significant volumes of OTC transactions to DCOs hand-in-hand with reforms that required DCOs to adopt comprehensive risk mitigation practices and governance procedures.  DCO Core Principle O expressly directs each DCO to establish governance arrangements that “permit the consideration of the view of owners and participants.”

The Commission recently issued a proposal to build on a DCO governance framework that is compliant with the PFMIs and addresses the critically important and unfinished debate about how DCO governance should operate within the broader Dodd-Frank Act regulatory framework.  The proposed rulemaking will require DCOs to stand-up risk management committees and directs the DCOs’ boards of directors to consult with and consider feedback from the committees on all matters that could materially affect a DCO’s risk profile.

In the coming months, we will navigate refined interpretations of standards that may introduce enhanced governance requirements, including when decisions of DCOs should be interpreted as having a material impact on a DCO’s risk profile.  Ideally, market participants and DCOs will build consensus around interpreting these standards.

Market Structure

The final panel this morning examines emerging issues in market structure.  In February and March of 2020, our markets faced concerning shocks from the appearance of a global pandemic.  Rising, and in some instances, unpredictable calls for collateral left many who rely on our markets scrambling to meet margin requirements.  Markets witnessed unprecedented volatility coupled with extreme trading volumes and, at times tight liquidity, placing extraordinary pressure on market infrastructures.  Two years later, geopolitical events, namely the invasion of Ukraine encouraged persistent volatility, particularly in the interest rate markets and the markets for energy and agricultural commodities.  Inflationary pressures and broken supply chains have introduced tremendous challenges for core CFTC constituencies and stakeholders.  Coupled with these concerns, the frequency and severity of unprecedented weather events has significantly influenced market conditions

Under the CEA, the CFTC’s jurisdiction is broad and directly intertwined with the macro-economic and environmental conditions that I have just described, because of their profound impact on the markets for financial derivatives, energy derivatives, derivative instruments related to agricultural (wheat, corn, soybeans, cotton, pork, cattle) and precious metal (gold, silver, iron, copper) commodities, and equity futures and swaps.  Yet, in the coming years, the CFTC’s jurisdiction may expand further to new frontiers including the rise of Web3, migration to cloud services, and the evolution of digital assets including cryptocurrencies as well as other financial products created through the use of decentralized distributed digital ledger technology, commonly described as blockchain technology.

The MRAC is an opportunity for us to hear from the best and brightest minds in our industry and engage in dialogue about what you are seeing in your businesses, and where you are going, and what risks you face.  Technology is evolving faster than the law, and we want to be responsible and responsive to market participants and the public so that our decisions are always well researched, well-considered, and in the best interests of growing our markets and protecting our market participants.  But we can’t do it alone. Increasing our engagement with the industry is critical to our success as a regulator in overseeing our markets.

As an example, digital assets and blockchain technology offer many potential benefits, including increased efficiency, lower transaction costs, and improved access.  These innovations are not without their risks, however.  The disintermediation of traditional market participants and the decentralization of financial transactions challenges us as regulators to consider how these emerging concepts will impact markets designed for traditional derivatives.  The MRAC can play a role in helping us create better policies around data security and cyber security, governance, customer protection, and other unanticipated risks.

Closing

Before we move into the substance of today’s meeting, I want to thank Chairman Behnam and Commissioners Goldsmith Romero, Mersinger, and Pham and all of our Members and panelists for joining in person or virtually today here at the CFTC’s Washington, D.C. offices.  We are fortunate to have a distinguished group of expert presenters, industry representatives voicing diverse perspectives, public interest advocates, and academics.

I am grateful to Bruce Fekrat, the Committee's Designated Federal Officer (DFO).  Bruce started working in my office in June, and MRAC has been a priority for him since the day that he arrived.  Just six short weeks ago, Marilee Dahlman agreed to serve as the Alternate Designated Federal Officer for the Committee (ADFO).  Bruce and Marilee have demonstrated exceptional professionalism and their tremendous work ethic and commitment will be on display throughout the day.  Finally, allow me to thank Lillian Cardona for her service as ADFO for the Interest Rate Benchmark Reform Subcommittee.  This meeting would not have been possible without their hard work and significant effort.

With that, I will turn it over to my fellow commissioners who are joining us virtually today for their remarks.  I look forward to a robust and informative discussion.

(As prepared for delivery at the World Federation of Exchanges Annual Meeting hosted by the Malta Stock Exchange)

Good morning, and thank you for the honor of speaking with you today.  I am incredibly grateful to the World Federation of Exchanges for their invitation to be a part of this conference and participate in these important conversations.  And I am not just saying that because we are in Malta at a gorgeous hotel overlooking the Mediterranean Sea.

Before I begin, I must provide my standard disclaimer that the views I express today are my own and do not necessarily reflect the views of the Commodity Futures Trading Commission or my fellow commissioners.

Field of Dreams

I am incredibly honored to be serving as one of five commissioners of the US Commodity Futures Trading Commission (CFTC).  The CFTC is the US regulator of futures, swaps, and options products, including market infrastructure providers that are registered with us as futures exchanges, clearinghouses, and swap execution facilities (some of whom I see represented here).

But since I am still new on the job with just five months served as a commissioner at the CFTC, I would like to start by sharing a little about myself.  I have entitled these remarks “Field of Dreams” because I grew up on a farm in the middle of South Dakota, a sparsely populated state whose economy depends on agricultural production.  My parents still grow and harvest row crops to make a living.  When you hear about the fields of wheat and corn as far as the eye can see, that was my childhood.

I share this with you for a few reasons.  First is because I often share stories from my life on the farm, and growing up in that setting impacts so much of my approach to my work as a regulator.  That way of life is truly the lens through which I view the world.  After all, while the markets the CFTC regulates include a wide variety of products and participants, they have their roots in—and continue to serve as a means for—helping producers and end-users of agricultural commodities discover prices and manage the risks that are inherent in producing, selling, buying, and consuming these commodities.  I know firsthand about these risks because I lived them.  As a result, the ability of end-users to effectively manage these risks through orderly and efficient markets is of paramount importance to me.

Second, while this may strike some of you as odd, I often find that analogies from the farm apply to our financial markets, too.  For example, farmers must carefully plan and cultivate their fields to successfully profit from their crops, including tracking what past crops grew on the fields and what that means for suitability of the soil for the next crop.  At the same time, the farmer is looking ahead at what might happen to the fields in the future, identifying risks and threats to the crops planted for future harvests.  I think there is a good analogy to the work of our global clearinghouses and exchanges, which must use lessons of the past to cultivate the markets of today, while also planning for risks and threats lurking in the future.

Where the Corn Grows

Continuing with my farm analogies, I have always been fascinated by the straight rows of a corn field as the plants grow and mature.  When the kernels sprout, the first leaves push through the soil, creating an illusion of green stripes standing stark against the dark soil in between the rows.  In the summer months, as the corn stalks grow and the leaves broaden, the plants appear to wave in the wind as though they are a line of dancers celebrating the warm breeze.  I used to ride my bike down the gravel roads each weekend to see how much the plants changed as the heat of summer accelerated their development.

As the corn plants continued to grow taller, they eventually formed tassels and produced ears of corn that stuck out randomly throughout the once linear crop rows.  Yet, even with the young cobs growing at odd angles, you could still find a direct view of the sun spreading light down the rows of corn stalks, peeking through the foliage like a beacon to the opposite end of the field.

Over the years, I learned that, of course, these crop rows were not inadvertent.  First, it is easier to plant and harvest crops in row.  These lines provide a uniform direction for the farmer to follow in the care and tending of the crop.  In addition, these rows also provide a level of support and protection for the plants.  A single corn stalk might not stay upright in the wind and could easily dry out in the scorching summer sun without protection.  But the crops standing in the row prop each other up, and their leaves offer some level of protection to the plants around them.

So why all this talk about corn?  Because, just like the rows of corn from my childhood that I just described, the exchanges and clearinghouses from around the world that have come together here to address shared challenges, risks, and opportunities, must pull in a common direction for success.  Yes, some of you may be competitors individually, but collectively, you are united in the common goals of maintaining liquid, vibrant, and resilient markets under the protections of best practices and industry standards to transition those markets safely into the future.

As we have seen, stable markets can turn volatile in a matter of moments.  While some days the markets are quiet and everything is routine, in the face of sudden change, exchange trading and central clearing must react seamlessly in order to ensure stability and protection to weather the storm and intense heat.  This is not an easy feat, but one that is critical to the stability of the global financial system.

Reaping What We Sow

And the global financial system recently has reaped concrete benefits of your efforts.  From the start of the pandemic, clearinghouses and exchanges identified where routine processes needed to change to adapt to a new environment.  We should all pause for a moment to appreciate just how remarkable it is that, despite the unprecedented circumstances, our markets continued to function successfully.  This is a testament to everyone in this room.  Without your leadership, ingenuity, and nimble actions, the economic realities of the pandemic could have brought these markets to the brink.  But instead, they not only continued to function, but they also became the real heroes of the financial system, absorbing major shocks to the system from numerous challenges caused by the pandemic and the global economic shutdown.

Planting New Seeds

Yet, here we are today, facing new challenges that may make the pandemic seem like yesterday’s news.  The landscape around us continues to change rapidly.

In the world of derivatives where I spend my time, we are seeing new contracts focusing on emerging market trends such as “ESG” criteria, new products such as “event contracts” being offered by new exchanges, and new offerings directed at retail traders, including proposed new business models to offer retail access to margined products outside the traditional intermediation model.

Many of these new challenges, of course, are driven by new technology.  Technologies like blockchain and Web3 are innovative and groundbreaking, presenting amazing opportunities for consumers and businesses alike.  And we simply need to look back at history to see that technological innovations of the past have made markets safer and more efficient.

For example, our regulated derivatives markets and their operational infrastructure are no strangers to technological adaptation.  Well-functioning trading pits dominated the scene before the birth of electronic trading.  While electronic trading was in its infancy, the trading pits continued to operate as the primary method of trading.  As electronic trading usage expanded, the trading pits operated alongside new, electronic markets.  But the efficiency offered through electronic trading eventually led to the closure of most trading floors.  This orderly shift was proof of the ability of global exchanges and clearinghouses to responsibly evaluate and respond to innovation.

Fast forward to today, and we see the same scenario playing out.  While policy makers wrestle with the dangers posed by unregulated platforms and products, regulated exchanges and clearinghouses have been unceremoniously adopting blockchain technology where it makes sense, and have begun offering financial products involving various digital assets.  As with the evolution of electronic trading a few decades ago, progress has been methodical—and undoubtedly too slow for some.  But there is so much to understand and digest in this brave new world that slow growth seems appropriate.

But the pace of technological innovation should not detract from its success.  This story of success is not the narrative of any one entity, but rather a story written by efforts of the global exchange and clearing community.  And meetings like this, where exchanges and clearinghouses from around the world come together to apply the lessons of the past to the challenges of today while looking ahead to the future, will continue to be invaluable as we face whatever changes come next.

Conclusion

Once again, thank you so much to the World Federation of Exchanges for inviting me to join you for this important conference and for allowing me to be a part of the conversation.  A special thank you to the Malta Stock Exchange for sharing this beautiful island with us.  The citizens of Malta have been so hospitable and accommodating.  I can already tell my time here will be too short and I will need to come back on vacation.

Finally, thank you all for your attention and kind reception.  I am looking forward to the rest of the conference, especially the upcoming session I will be moderating on resiliency and recovery.

Good afternoon to you all.  Thank you to R3 for inviting me to speak at CordaCon in London.

I am grateful to be in such a special place, although not one without sadness.  I send my deepest condolences to the people of the United Kingdom, the Commonwealth, and all those who honor the life and legacy of Her Late Majesty Queen Elizabeth II.

The United Kingdom’s special relationship with the United States runs from foreign policy to culture to finance.  London is the most important overseas financial center for the United States economy.  Our countries currently trade more than $260 billion dollars’ worth of goods and services each year, we are each other’s number one source of foreign direct investment, and two-way direct investment totals over $1 trillion.  New York and London have long vied for first place among the world’s leading financial centers.  London’s history and financial innovations relating to market structure, financial products like contracts for difference, foreign exchange, and technology have placed it among the forefront of finance.

Indeed, more than 800 years ago, the Magna Carta was sealed in Runnymede, an hour or so’s drive from here.  Beyond the historical particulars, that document—and the innovations it contained—have come to serve as a foundational expression of ways individuals could seek rights and protection.  These principles find new forms in the U.S. Bill of Rights and beyond, woven into our special relationship that continues today.  This relationship includes a close and vital commerce—not just of goods and services, but also of ideas.

This is why we’re all here—to come together and talk about building the future of markets and to engage in the commerce of ideas and innovations.  And not a moment too soon.

It continues to be a time of rapid innovation.  Financial market infrastructures (FMIs), intermediaries, other participants, authorities, and global bodies are all laser focused on crypto assets and DLT.  Legal and legislative developments—think of the proposed bills working their way through the U.S. Congress, and others such as the European Union’s Markets in Crypto-assets (MiCA) Regulation, and international efforts at the G20, the Financial Stability Board (FSB), and the International Organization of Securities Commissions (IOSCO)—together raise questions about what the future global regulatory landscape for crypto assets could and should look like.  And the crypto crash, risk management failures, and substantial retail losses, gives urgency to the need to balance innovation with retail protection and appropriate regulation.

Corda is a blockchain intended for enterprise applications, including by financial institutions.  As you all know, financial institutions are highly regulated, no matter where you are in the world.  That means that financial institutions and their activities are inside the regulatory perimeter and subject to important safeguards.  That means that important protections for risks to the entity and the financial system are in place. And, importantly, that means that protections for clients, customers, and consumers—whether institutional or retail—apply to financial activities.

The CFTC has been talked about a lot recently.  In the U.S., there is a big debate over spot crypto market regulation.  But it seems to me that every time someone is talking about the CFTC, there is confusion over the CFTC’s current role in ensuring that there are important protections for the retail public in our markets.

We can see the 800-year-old principles of the Magna Carta in the extension of these protections beyond just the most powerful.  That’s what I’d like to tell you more about today: the CFTC and retail protection.  First, I’ll briefly describe the CFTC regulatory framework for retail protection.  Second, I’ll lay out the CFTC divisions and offices that have a role in retail protection.  Finally, I’ll propose how the CFTC could do even more under an expanded retail protection mandate by creating an Office of the Retail Advocate.

I’ll go ahead and say now that the views I express today are my own, and not necessarily those of the Commission or other Commissioners.

CFTC Regulatory Framework and Retail Protection

At its core, the CFTC writes and enforces rules, and supervises market activity and market participants.  Under the authority granted by Congress in the Commodity Exchange Act (CEA) of 1936, as amended, the CFTC registers and oversees exchanges, clearinghouses, large traders, and the companies and individuals who handle customer funds or offer trading advice.

Holding wrongdoers accountable is an important part of the CFTC’s oversight of the markets.  The CFTC investigates and prosecutes violations of the CEA and CFTC regulations, and provides other adjudicatory forums to address alleged misconduct.  To help market participants protect themselves, the CFTC educates customers about their rights, protections, and how to spot, avoid, and report fraud.  And under the Bank Secrecy Act (BSA) and Patriot Act amendments, the CFTC works to prevent, detect, and prosecute international money laundering and the financing of terrorism with respect to CFTC-registered futures commission merchants (FCMs) and introducing brokers (IBs).

Let me tell you about the sheer scale of what the CFTC does.  Since Dodd-Frank, we’ve had hundreds of rulemakings for new or changed rules.  We have global jurisdiction for the most complex products—derivatives—across all asset classes, from corn and wheat, to gold and palladium, to Treasury futures and interest rate swaps, to weather and event contracts.  We have safeguarded our markets through incredible stresses, disruptions, and dislocations, and through incredible shifts in market structure like reforms for derivatives trading, margin, clearing, and benchmarks, or Brexit or IBOR transition.  We have oversight of global systemically important entities—U.S. and non-U.S. FMIs and U.S. and non-U.S. banks.  And we have imposed billions and billions of dollars in penalties, with only about 160 staff in the Division of Enforcement.

Not only does the CFTC do all of that in its oversight of institutional markets, but the CFTC also ensures market integrity and fairness, protects customers and customer funds, and enforces against fraud, manipulation, and other market abuses in retail markets too.

How does the CFTC do that?

The CFTC provides resources for the retail public to check registration and disciplinary history and submit a tip or complaint about violations or suspicious activities.  The CFTC provides a path for people to obtain reparations in an inexpensive, expeditious, fair, and impartial forum.  People can check the CFTC’s Registration Deficient List (RED List) to identify unregistered foreign entities that solicit Americans to trade.  People can learn about trading and how to protect against fraud or other abuses by reading CFTC publications, advisories, and articles or watching CFTC videos.  Finally, the CFTC also has dedicated customer education resources for the agricultural community, as well as on binary options and digital assets.

As the U.S. Congress, the Administration and Treasury Department, other regulators, market participants, and public interest groups work on digital assets regulation, I believe we’ll see the benefit of having the CFTC’s principles-based framework that is more flexible and more adaptable to new changes and new risks.

In the meantime, the CFTC has broad existing authorities.  In my view, the SEC regulates the securities markets, and the CFTC has regulatory touchpoints with virtually everything else.  There’s no question that the CFTC has strong anti-fraud and anti-manipulation enforcement authority over spot commodity markets, which we have used from the beginnings of the agency.  The CFTC has successfully brought nearly 60 crypto enforcement actions since 2014, with hundreds of millions of dollars in penalties, and recently filed an action charging a $1.7 billion dollar international Bitcoin Ponzi scheme.  The CFTC also has oversight over certain spot retail FX and spot retail leveraged commodity transactions.[1]  I believe that these could be good places to start while Congress thoughtfully works through tasking us with additional authority.

As I’ve said before, the key takeaways are that the CFTC’s regulatory framework is relatively asset- and technology-neutral.  Our focus on principles-based regulation, customer protections, market integrity, risk management, price discovery, and transparency has worked well for our markets—including retail markets—for decades.

Retail Engagement

The basics for market regulation and market conduct apply across any asset class or technology.  Don’t lie.  Don’t cheat.  Don’t steal.  Be responsible.  The following CFTC Divisions and Offices, among others, have roles in retail protection and upholding these basics.

The Market Participants Division (MPD) oversees the registration and compliance activities of firms with retail customers.  These firms include FCMs, IBs, commodity pool operators (CPOs), commodity trading advisors (CTAs), retail foreign exchange dealers (RFEDs), swap dealers (SD), and other swaps and futures market participants.

In its oversight, MPD seeks to ensure that these registered market participants are financially sound, protect customer assets, and meet statutory fitness and conduct standards.  These requirements are thorough.  They include: capital, margin, customer asset segregation, and customer protection requirements; internal and external business conduct standards, including ethics, governance, execution, information sharing, risk management and compliance, and effective confirmation and settlement; and reporting, disclosure, and record keeping obligations.

The National Futures Association (NFA), as a self-regulatory organization (SRO) under CFTC oversight with certain delegated functions, also plays a significant role in protecting the retail public.  The NFA registers and licenses CFTC registrants on the CFTC’s behalf.  Among other things, the NFA conducts examinations, and enforces customer protection rules such as marketing and advertising.  And then there are other designated SROs that have rules, protect against market abuse, and enforce compliance.

The Office of Proceedings runs the CFTC’s Reparations Program.  Customers that have been the victims of alleged misconduct, by registered trading firms or individuals, that violates the CEA can seek damages for losses through the CFTC’s Reparations Program.  The Reparations Program provides an affordable and efficient forum for these victims.  The CFTC’s Judgment Officer can hear reparations claims, review evidence, and take the necessary steps to issue a binding and enforceable decision.

The Office of Customer Education and Outreach (OCEO) does just that: it publishes financial education messages and conducts outreach.  Promoting awareness and sharing warnings of scams and schemes can help people avoid fraud, deception, and unsuitable financial products.   A recent example is a warning of scams linked to the Covid-19 crisis or risks of cryptocurrencies.  The Dodd-Frank Act mandates that the CFTC undertake customer education initiatives and provides for a Customer Protection Fund of up to $100 million dollars.

The Division of Enforcement (DOE) protects the public and preserves market integrity by detecting, investigating, and prosecuting violations of the CEA and CFTC regulations.  DOE investigates leads, tips, and complaints and aggressively prosecutes harm to retail customers, including in areas like precious metals, foreign exchange, and binary options.  DOE includes the Market Surveillance Branch, which monitors trading activity to detect and prevent manipulation or abusive practices and to ensure compliance with CFTC regulations for speculative position limits.

The Whistleblower Office is a branch of DOE that administers the CFTC’s Whistleblower Program, which was established by the Dodd-Frank Act.  The Whistleblower Program provides monetary incentives to individuals who come forward to report possible violations of the CEA, and has awarded hundreds of millions of dollars.  It also provides anti-retaliation protections for whistleblowers.

The Division of Market Oversight (DMO) registers and oversees exchanges and certain trading platforms.  DMO reviews applications for registration and examines for compliance with the CEA and CFTC regulations, including the Core Principles.  Designated contract markets (DCMs), one type of exchange, have to comply with twenty-three Core Principles.  These Core Principles help ensure customer funds are protected, risks are managed, and trading is fair, efficient, and transparent.  DCMs also have to ensure that listed contracts are not readily susceptible to manipulation, and to have rules and resources in place to detect and prevent manipulation, price distortion, and disruptions of the cash-settlement or delivery process.  And DCMs have to have appropriate risk and oversight procedures and controls.

A Proposal for the Office of the Retail Advocate

As you can see, the dedicated staff of the CFTC are on the job every day to protect retail markets.  I commend them for their hard work and tireless service.

Now, as I’m sure you’re aware, there are a number of U.S. legislative proposals that would make clear and expand the CFTC’s authority over spot digital commodity markets.  I am pleased that the Congress is tackling these important issues.  The CFTC will faithfully execute the law, whatever it may be, and uphold our mandate to ensure market integrity and protect against market abuse and misconduct.

You may also be aware that there are some who raise questions about the CFTC’s engagement with the retail public and our oversight of retail markets.  As I’ve just described at length, the CFTC has the experience, expertise, and track record for the job.

But I have another answer that should remove any doubt—should the CFTC be granted additional authorities over retail markets, then one proposal could be to also establish an Office of the Retail Advocate that would further enshrine the CFTC’s current customer protection mandate under Dodd-Frank.

Like I’ve said before, what’s old is new again.  Many government agencies have offices that are mandated to engage with and promote the interests of the public—to stand up and speak for people who might not otherwise have a voice, who are being overlooked or left behind or worse in their pursuit of the American dream and the opportunities from American innovation and capital markets.  The rules need to work for everyone, big or small.

Having an Office of the Retail Advocate is a tried-and-true way to advance customer protection.  I believe in using good ideas when you find them, and the SEC and the U.S. Small Business Administration (SBA) both have offices that champion those who need it.

The SEC has an Office of the Investor Advocate, which was established by statute.  It has four core functions: to provide a voice for investors in policymaking, to assist retail investors in resolving problems they have with the SEC or an SRO, to study investor behavior and conduct research and economic analysis, and to support the SEC’s Investor Advisory Committee.  The SEC also has the Office of the Advocate for Small Business Capital Formation and the Office of Investor Education and Advocacy.

The Office of Advocacy of the U.S. SBA is the independent voice for small business within the Federal government, the watchdog of the Regulatory Flexibility Act, and a source of small business statistics and research. Its impact is far-reaching and it represents the millions of Americans that are small business owners.

I hope that these ideas spark further discussions on ensuring that the retail public has a voice in these debates in Washington, D.C.

Regulation of the Future: Building the Future of Markets

My approach is to get all the information, learn as much as possible, and then find pragmatic solutions.  I’ve been doing learning tours with market participants to get as much information as possible about the technology, use cases, opportunities, and risks.  I’ve been traveling internationally to learn from other jurisdictions who have implemented regulatory sandboxes and regulatory registration and oversight regimes.  I’ve had the benefit of their years of observations and learnings. Now, I hope to apply all of this to make good policy that is informed and pragmatic.

Ten Fundamentals for Responsible Digital Asset Markets

As I’ve said before, digital assets and DLT could change our markets.  It might still be early, but there are promising use cases if we can achieve blockchain stability and scalability across layer 1, 2, or whatever’s next.  There are also familiar and in some ways predictable risks that could impact consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution.  There are also the inevitable scammers and fraudsters.

I’ve identified ten fundamentals for responsible digital asset markets.  This is a common-sense starting point and there is broad agreement across international standard setters and authorities on these fundamentals or slight variations.

First, we need to identify the particular product or service.  You have to know what something is before you know what rules apply.  This means knowing whether a product is a security.  This means knowing whether it is a novel, native crypto asset or a traditional financial instrument cleverly rebranded but still subject to existing laws and regulations.  These kinds of questions are being worked through here in the U.S. as well as abroad in other jurisdictions, and at the international standard setter level.

Second, the product or service must be within the regulatory perimeter.  If there are areas of the financial system that are apparently outside and unregulated, such as a “shadow” crypto financial system—shadow banking 3.0—then the appropriate response is to bring them inside.  This is what the CFTC did in large part for the OTC swaps market after Dodd-Frank.  And while Congress continues its work on developing legislation, there may be other ways as well to make sure the CFTC and others are exercising the full extent of their existing market oversight, supervisory, and enforcement authorities.

Third, we must mitigate systemic risk.  We’ve seen disruptions spread from the collapse of projects such as Terra and Luna, revealing potentially undisclosed connections, exposures, and interdependence among large participants that increases the risk of spread amongst and beyond crypto.  We need to address this.

Fourth, we must combat illicit finance and national security risks.  Our markets need to be safe from exploitative money laundering, cybercrime and ransomware, narcotics and human trafficking, and the financing of terrorism.

Fifth, we must appropriately use activity-based and entity-based regulation.  Market regulators oversee product activity, and who engages in it.  Prudential supervisors oversee entities, and the activities they engage in.  Same, but different.  

Sixth, we must protect customers and the retail public.  There should be requirements for disclosure, suitability, and education at a minimum.  People should know what they are getting into.  Recent news reports, about potential lack of protections in the event of bankruptcy for customers holding digital assets on platforms, raise real concerns.  

Seventh, we must ensure transparency.  DLT presents great opportunities in this regard. 

Eighth, we must vigorously enforce market conduct rules.  If you are lying, cheating, or stealing—if you break the rules—then you should face the consequences.

Ninth, we must address conflicts of interest.  There should be requirements for appropriate governance and oversight; prevention or management of conflicts of interest such as prohibition, disclosure, or information barriers; and alignment of incentives amongst market participants.

Tenth, we must promote free markets that will unlock American innovation.  I believe that markets work best when there are clear and simple rules with common standards.  That’s something I learned time and again in government and in the private sector.  Regulation shouldn’t unnecessarily increase operational complexity or costs, especially costs that then get passed down.  The rules shouldn’t be so difficult, conflicting, or overlapping that they are impossible to implement in the real world.  Lack of regulatory coherence impedes the ability of regulated institutions—who have the experience and the resources—to actively participate in digital asset activities and responsible innovation.

The CFTC already has a principles-based regulatory framework for many digital assets that aligns to these ten fundamentals.  We are ready to go.  Where we have rules at hand, let’s use them, as recommended in one of the recent Treasury reports under the President’s Executive Order.  Recent market events, including big losses for regular people, show us that we need to take action now.

I believe we must focus on forward-looking laws and regulations that are durable and flexible.  As technology and markets continue to evolve, this proactive—not reactive—approach will future-proof our regulation and oversight.

Conclusion

These new technologies present opportunities and risks.  DLT platforms, whether permissioned or permissionless, promise potentially substantial and rapid gains in efficiency, transparency, and access across a wide range of use cases.

As we engage in the commerce of ideas, and as we adapt to these new changes and new risks in markets and beyond, regulators must keep retail protections front and center.  The CFTC’s offices and divisions will continue their work.  We have ready-made regulatory frameworks for derivatives markets—both institutional and retail—that have stood the test of time.  We have our core principles and business conduct standards.  We have broad anti-fraud and anti-manipulation authority.  And should new authorities be granted, and new mandates such as an Office of the Retail Advocate, we will use those as well as our existing retail protections and efforts.

As we move forward to the innovations, markets, and regulations of the future, we can draw on fundamental principles stretching hundreds of years back, just a few miles from here: the ideas that legal protections should not be limited to the most powerful.  As we head into an exciting future, we should have flexible regulations that stay evergreen for everyone.

*         *         *

References

Raphael Auer, Marc Farag, Ulf Lewrick, Lovrenc Orazem and Markus Zoss, “Banking in the shadow of Bitcoin?  The institutional adoption of cryptocurrencies,” Bank for International Settlements Working Paper No. 1013 (May 18, 2022), available at https://www.bis.org/publ/work1013.htm.

Bank for International Settlements Annual Economic Report 2022, available at https://www.bis.org/publ/arpdf/ar2022e.htm.

CFTC Chairman Rostin Behnam, Testimony Regarding the Legislative Hearing to Review S.4760, the Digital Commodities Consumer Protection Act at the U.S. Senate Committee on Agriculture, Nutrition, and Forestry (Sept. 15, 2022).

Commodity Futures Trading Commission, “Annual Report on the Whistleblower Program and Customer Education Initiatives” (Oct. 2020).

Commodity Futures Trading Commission, “CFTC Strategic Plan 2020-2024” (July 8, 2020).

Commodity Futures Trading Commission, “Customer Advisory: Use Caution When Buying Digital Coins or Tokens” (July 16, 2018).

Commodity Futures Trading Commission, “FY2020 Division of Enforcement Annual Report” (Dec. 2020).

Commodity Futures Trading Commission, “President’s Budget Fiscal Year 2023” (Mar. 21, 2022).

Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, speech at Eden Hall, the British High Commissioner’s Residence in Singapore, “Some lessons from the crypto winter” (July 12, 2022).

Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, speech at SIBOS, “Is ‘crypto’ a financial stability risk?” (Oct. 13, 2021).

Daniel Davis, “The CFTC’s Focus on Retail Markets,” Futures and Derivatives Law Report (Mar. 2022).

Exec. Order No. 14067 of Mar 9, 2022, “Executive Order on Ensuring Responsible Development of Digital Assets,” 87 Fed. Reg. 14143 (Mar. 14, 2022).

Financial Stability Board, “Assessment of Risks to Financial Stability from Crypto-assets” (Feb. 16, 2022), available at https://www.fsb.org/2022/02/assessment-of-risks-to-financial-stability-from-crypto-assets/.  

Ronit Ghose, Judy Zhang, Kaiwan Master, Ronak S. Shah, and Yafei Tian, “Future of Money: Crypto, CBDCs, and 21st Century Cash,” Citi (April 2021), available at https://www.citivelocity.com/citigps/future-of-money/.

Chair of the Basel Committee on Banking Supervision and Governor of the Bank of Spain Pablo Hernández de Cos, Keynote speech at the 36th Annual General Meeting of the International Swaps and Derivatives Association, “Computers and money: the work of the Basel Committee on cryptoassets” (May 12, 2022), available at https://www.bis.org/speeches/sp220512.htm.

Magna Carta (1215). 

Sharmin Mossavar-Rahmani, Matheus Dibo, Jakub Duda, Oussama Fatri, Shahz Khatri, Shep Moore-Berg, and Yousra Zerouali, “Digital Assets: Beauty Is Not in the Eye of the Beholder,” Goldman Sachs (June 2021), available at https://www.goldmansachs.com/what-we-do/consumer-and-wealth-management/private-wealth-management/intellectual-capital-f/beauty-is-not-in-the-eye-of-the-beholder/.

CFTC Commissioner Caroline D. Pham, Commodity Futures Trading Commission, Keynote address at the 18th Nasdaq Technology of the Future Conference—Reimagining Tomorrow’s Markets, “Regulation of the Future: Building Responsible Digital Asset Markets” (June 28, 2022).

CFTC Commissioner Caroline D. Pham, Commodity Futures Trading Commission, Keynote Address at the EUROFI Financial Forum Prague 2022, “Money and Life, the Metaverse, and Everything” (Sept. 7, 2022).

Executive Director, Markets Sarah Pritchard, Speech at the CityUK Annual Conference, “Finding opportunity in a world of uncertainty” (June 30, 2022).

U.S. Department of Treasury, “The Future of Money and Payments: Report Pursuant to Section 4(b) of Executive Order 14067” (Sept. 2022).

U.S. Department of Treasury, “Crypto-Assets: Implications for Consumers, Investors, and Businesses” (Sept. 2022). 

U.S. Embassy & Consulates in the United Kingdom, “Our Relationship: Policy & History,” available at https://uk.usembassy.gov/our-relationship/policy-history/.

U.S. Securities and Exchange Commission Office of the Investor Advocate, “Fiscal Year 2023 Report on Objectives” (June 30, 2022); see also https://www.sec.gov/advocate. 

CFTC Chairman Heath P. Tarbert, Remarks to the City of London Corporation, “A Special (Regulatory) Relationship” (Sept. 24, 2020).

U.S. Small Business Association Office of Advocacy, bulletin, “The Small Business Advocate” (May 31, 2022); see also https://www.sba.gov/.

Today, the Commodity Futures Trading Commission (CFTC or Commission) issued a series of orders settling charges against swap dealers and affiliated futures commission merchants[1] Bank-Affiliated Entities) for failing to maintain, preserve, and produce records in compliance with CFTC recordkeeping requirements and for failing to diligently supervise matters related to their businesses as CFTC registrants. These orders require market participants who failed to meet legal and compliance obligations under the Commodity Exchange Act (CEA) and CFTC regulations to pay over $700 million in civil monetary penalties collectively and to implement immediate and effective remediation measures to ensure appropriate recordkeeping and supervision.

While it is true that innovative digital technologies and highly-attractive social-media tools and platforms, including chat-based apps downloaded to personal cell phones, may enable faster and easier communication, our recordkeeping requirements exist for important reasons. Preserving employees’ transaction-related communications and other significant records and documentation is critical to enabling effective surveillance and enforcement of CFTC regulations, reducing fraud and market manipulation, protecting investors, and preserving the integrity of our markets. Coupled with these concerns, toggling between authorized and unauthorized communication tools and engaging in offline communications of confidential client information or protected market data creates cybersecurity and privacy threats for customers, as well as banks and bank-affiliated entities and their employees. Convenience must not compromise our core values—customer protection and market integrity.

According to the CFTC’s investigation, employees at the Bank-Affiliated Entities failed to comply with CFTC recordkeeping requirements, as well as firm-wide internal recordkeeping policies. The investigation also found that managers failed to diligently supervise their employees’ compliance with recordkeeping obligations.

I recognize this is not the first time the Commission has uncovered this misconduct at major financial institutions registered with the CFTC.[2] The egregious and widespread nature of this behavior, in tandem with an increasing reliance on novel communications platforms available on personal mobile devices, indicates a concern that—unless effectively addressed—may negatively impact market-participants’ internal compliance, the integrity of communications across market relationships, the Commission’s ability to carry out its mandate to oversee registrants, and the Division of Enforcement’s ability to effectively and efficiently investigate conduct that may violate the CEA and/or CFTC regulations.

It is important to note that relevant technologies are evolving quickly. Today’s resolutions reveal a need for entities operating within our markets to address imminent operational challenges. Increased reliance on simple, easy-to-access but unauthorized chat and text platforms will pose a significant challenge for many types of entities operating in our markets. Internal compliance programs must adopt internal controls consistent with this new landscape. Firms must inculcate a culture of compliance at all levels of their organization to mitigate the risks associated with using unauthorized chat and text platforms.

The substantial penalties levied in these cases are appropriate in light of the longstanding and pervasive nature of the conduct. Nevertheless, I believe that the Commission must think hard about additional policies to deter this type of misconduct in the future.

The Securities and Exchange Commission (SEC) also announced today the entry of orders settling charges against the Bank-Affiliated Entities and imposing civil monetary penalties for related recordkeeping and supervision violations. I am hopeful that this joint effort by the CFTC and SEC sends a strong message to the industry that we will continue to pursue this egregious behavior and there will be serious consequences for bad actors.

Finally, I applaud the excellent work of the Division staff for their efforts in shedding light on this conduct, including Devin Cain, James Wheaton, Benjamin J. Rankin, Jack Murphy, Jake Mermelstein, Alejandra de Urioste, R. Stephen Painter, Jr., Lenel Hickson, Jr., and Manal Sultan.

[1]  Bank of America, N.A. and BofA Securities, Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated; Barclays Bank, PLC, and Barclays Capital Inc.; Cantor Fitzgerald & Company; Credit Suisse International and Credit Suisse Securities (USA) LLC; Citibank, N.A., Citigroup Energy Inc., and Citigroup Global Markets Inc.; Deutsche Bank AG and Deutsche Bank Securities Inc.; Goldman Sachs & Co. LLC, f/k/a Goldman, Sachs & Co.; Jefferies LLC and Jefferies Financial Services, Inc.; Morgan Stanley & Co. LLC, Morgan Stanley Capital Services LLC, Morgan Stanley Capital Group Inc., and Morgan Stanley Bank, N.A.; Nomura Global Financial Products, Inc., Nomura Securities International Inc., and Nomura International PLC; UBS AG; UBS Financial Services Inc., and UBS Securities LLC.

[2]  See Complaint, CFTC v. Gorman, No. 21-cv-870, 2021 WL 345412 (S.D.N.Y Feb. 1, 2021) (complaint charging trader with making false or misleading statements to Division staff concerning his deletion of unapproved personal device communications that were subject to a Division preservation request); see also In re JPMorgan Chase Bank, N.A., CFTC No. 22-07, 2021 WL 6098347 (Dec. 17, 2021) (consent order imposing $75 million monetary penalty for recordkeeping and reporting violations related to unapproved communication methods).

I vote to approve the Commodity Futures Trading Commission’s (“CFTC”) enforcement actions that hold 11 Wall Street banks and other financial institutions accountable for senior executives, traders, and other employees’ widespread use of unauthorized communications methods — like encrypted messaging apps and private emails and texts — to avoid creating records and evade regulatory and bank oversight.[1] These cases shut down and bring transparency and public accountability to Wall Street’s pervasive and evasive bank practices that jeopardize market integrity and violate the law. The CFTC is requiring all defendants to admit wrongdoing,[2] pay historically high penalties for recordkeeping violations of the law (a combined $1.8 billion between CFTC and parallel Securities and Exchange Commission (“SEC”) cases), and fix internal policies and practices to ensure that both U.S. regulators and bank executives can prevent, detect, and correct unauthorized illegal communications.[3]

By bringing these cases at the same time, and in parallel with the SEC, the Commission is sending a strong message to all that we regulate that we will not tolerate efforts to evade our regulatory oversight – oversight that these entities signed up for when they registered with the Commission.

Wall Street institutions do not get to keep regulators in the dark while enjoying all of the benefits of being a regulated entity in U.S. financial markets. Those choosing to participate in U.S. financial markets are on notice — The era of evasive communications practices is over. The CFTC will hold you accountable.

It’s time for Wall Street to stop waiting for an enforcement action before it changes its practices. Tone at the top must change on Wall Street. Change can only happen if the banks’ C-suite establishes a culture of compliance over evasion.”

– Commissioner Christy Goldsmith Romero

The illegal conduct impeded the CFTC’s ability to oversee markets and ensure compliance with laws that protect investors, promote market integrity, and serve other public interests. The illegal conduct also impeded the banks’ ability to supervise their employees and ensure that bank practices matched internal bank policies prohibiting these communication methods. The CFTC found significant unauthorized communication practices at the direction of senior executives, who knew they were violating bank policies but wanted to obfuscate communications surrounding trading.[4] The conduct found serves as a red flag about Wall Street’s culture.

1. The widespread evasive use of unauthorized communications undermines law enforcement.

The CFTC is sending a zero-tolerance message that we will not allow Wall Street to undermine our law enforcement by obfuscating or deleting communications surrounding trading. As the CFTC was conducting important investigations related to market integrity, we found evidence that communications were moved offline to unauthorized communication methods going years back.

In one example, Bank of America employees used WhatsApp, with one trader writing, “We use WhatsApp all the time but we delete convos regularly.” The head of a trading desk routinely directed traders to delete messages on personal devices and to use Signal, including during the CFTC’s investigation. In another example, the CFTC found evidence of offline communications at Nomura, and Nomura traders then took efforts to obstruct the investigation. A trader deleted messages including WhatsApp after the CFTC sent a request to preserve documents. The deleted messages included incriminating statements about trading.&

Disturbingly, in several instances, when the CFTC brought this illegal conduct to the bank’s attention, it was not taken seriously, and there were efforts to obstruct CFTC law enforcement.

2. Wall Street serves as the first line of defense against insider trading, market manipulation and other illegal behavior that undermines market integrity, which they cannot fulfill when they don’t have a “tone at the top” to stop the practice of using self-deleting, self-managed encrypted messaging apps that violate their own policies that implemented the law.

Wall Street financial institutions serve as the first line of defense for market integrity through policies and supervision designed to follow the law. When this breaks down, market integrity is on the line. A common theme among the cases is that tens of thousands of communications were intentionally meant to keep the bank’s internal compliance and regulators in the dark. Many private communications channels are encrypted end-to-end and leave no recoverable record for the bank’s supervision.

Another common theme is that the CFTC found senior executives — the very people responsible for keeping a bank’s house in order – who directed employees to use unauthorized communications channels and delete messages. Some executives even lied to the CFTC and SEC.

3. A broader message

It’s time for Wall Street to stop waiting for an enforcement action before they change their practices. The illegality that the CFTC found was disturbingly widespread, evasive, directed or sanctioned by senior bank executives, and a clear violation of the law and internal bank policies. It was well known within these banks that their internal policies were being flagrantly violated in practice. But no one stopped it. In the future as more time passes from these enforcement actions, and as there is adoption of new technologies and evolving means of private communication, I am concerned that there again will be a temptation for some to evade regulatory requirements and keep the CFTC in the dark.

Tone at the top dictates a bank’s culture and that tone must change on Wall Street. The tone at the top the CFTC found was one of evasion and obfuscation, to keep bank compliance and regulators in the dark. Change can only happen if the bank’s C-suite establishes a culture of compliance over evasion. It is far past time for the C-suite to step up.

[1] The 11 defendants are commonly known as Bank of America, Barclays, Cantor Fitzgerald, Credit Suisse, Deutsche Bank, Goldman Sachs, Jefferies, Morgan Stanley, Nomura, UBS, and Citibank.

[2] I recently called for more defendant admissions in CFTC settlements. See Statement by Commissioner Christy Goldsmith Romero: Proposal for Heightened Enforcement Accountability and Transparency in Settlements (Sept. 19, 2022), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement091922.

[3] The CFTC’s penalties are substantial—$711 million across the 11 banks—and supplement SEC penalties of similar magnitude, bringing total penalties to more than $1.8 billion. The fines individually dwarf the next largest penalties assessed for records-related violations.

[4] It is important to distinguish that the illegal conduct was not the occasional use of texting for convenience in the post-pandemic world. In fact, much of the illegal conduct occurred pre-pandemic.