Washington, D.C. — CFTC Commissioner Caroline D. Pham today released the following statement regarding an order filing and settling swap dealer compliance charges against BNP Paribas:

I am concerned that this ultimately is a missed opportunity for the Commission to fully enforce a culture of compliance and management accountability.  That is what “tone from the top” means.  On this point in particular, the Commission cannot be all talk.

The Commission’s decision not to require a senior officer of the swap dealer, in addition to the chief compliance officer, to sign the written consent order report on remediation status and any ongoing material non-compliance issues suggests that the Commission does not take management accountability seriously.

Management accountability is essential to ensuring that compliance with CFTC regulations is a priority and that there are sufficient resources dedicated to the swap dealer compliance program.  It is the business and management, not the Compliance department, who are the first line of defense.  I am disappointed that the Commission failed to send this strong message today, and my expectation is that we will not fail to do so again.

Separately, I commend the Division of Enforcement for their efforts and successful resolution of this case.

Good afternoon to you all.  Thank you very much for inviting me to speak at the 18th Technology of the Future Conference, in person for the first time in four years, and for the first time at Nasdaq headquarters in New York City.  It’s funny that no matter how much things change, some things are still the same—like the smile you get when reconnecting with colleagues and making new friends.  I’m excited to see so many leaders in financial markets getting together.  I’m excited to reconnect with some of you, and meet others for the first time.  Some of us—like me—have switched jobs once or twice since we last saw each other.

Looking out at the room at all the exchanges, clearinghouses, and central securities depositories (CSDs) represented here today, these are truly global markets.  It looks like only Antarctica is not covered, but we’ll see about that in another two years.  I won’t ask what strategic opportunities you all are exploring.

I’ll go ahead and say now that these are my views and do not reflect those of the Commission or any other Commissioner.

I’m so pleased to be here today with you.  This is the Technology of the Future Conference.  And so I’m going to talk about the Regulation of the Future.  But first, let’s talk about how far we’ve come.

Fifty-one years ago—three years before Congress even created the Commodity Futures Trading Commission (CFTC) as an independent agency—leaders in financial markets, the National Association of Securities Dealers (NASD)[1], came together and launched NASDAQ (National Association of Securities Dealers Automated Quotations).[2]  It was a ground-breaking and industry-led solution—with some nudging by the Securities and Exchange Commission (SEC)—that was a huge leap forward for the over-the-counter (OTC) market by creating “streaming” quotes.  Nasdaq enabled OTC stock market makers to update their bid/ask quotes electronically, and then shared this information widely.

Sitting atop desks, Nasdaq’s cathode-ray terminals showed just quotes, market-maker IDs, and stock names.  That was it.  And at the time it was miraculous.

That same year the astronauts of Apollo 14 landed on the moon.[3]  This was the third moon landing, but the first in the lunar highlands and the first with a Modular Equipment Transporter, basically a wheelbarrow for the moon.  Before safely returning home, the astronauts used that wheelbarrow to carry tools and collect geological samples like moon rocks and lunar soil to bring back to scientists on Earth for study. 

That same year the United States left the gold standard, and the United States dollar became a floating currency subject to market forces.[4]  This abrupt change fundamentally altered the international monetary system.  

That was also the year that scientists began publishing papers on the idea of punctuated equilibrium.[5]  Punctuated equilibrium was the idea that species are generally stable and changed very little for millions of years—until the punctuation of a rapid burst of change leads to a new species.  This idea of an evolutionary “big bang” changed our ideas about change. 

Nasdaq’s automated quotations system transformed the way our markets work and led to all-electronic trading.  And now all of you are here today, leaders of your firms, with potentially revolutionary ideas like Nasdaq’s idea 51 years ago, and working to innovate not only for today’s markets, but reimagine for tomorrow’s.  And that’s why we’re all here—to come together and talk about building the future of markets. 

We are again in the midst of what could be another moment of abrupt change that disrupts the current market structure equilibrium. 

There’s a lot going on.  New technologies—particularly distributed ledger technology (DLT) and blockchains, whether permissioned or permissionless—present opportunities and risks.[6]  They could present a future of potentially promising and untold advancements.  DLT could change the essential nature of money, payments, and finance.[7]  In the present, crypto markets recently have risen to, and fallen from, trillions of dollars in value.[8]  Non-bank financial intermediaries are playing larger and larger roles in financial markets.[9]  And all of this is against the backdrop of heightened global volatility, inflation fears, and geopolitical clashes. 

So this conference comes at just the right time.  Financial market infrastructures (FMIs), intermediaries, other participants, authorities, and global bodies are all focused on the promise and pitfalls of digital assets and DLT.  Legal and legislative developments such as proposed bills working their way through the U.S. Congress or others such as the European Union’s proposed Markets in Crypto-assets (MiCA) Regulation, and international efforts at the G20 and the Financial Stability Board (FSB), all raise questions about what the future global regulatory landscape could look like.  And recent plunges in crypto prices, “crypto crises” in liquidity and credit amplified by leverage, and substantial retail losses, make it crystal clear that we need to balance innovation with retail protection.[10] 

So this is what I’ll talk about today.  First, I’ll begin by noting that we’ve faced similar challenges and market changes before.  Second, I’ll identify fundamentals for responsible digital asset markets.  Finally, I’ll outline a pragmatic approach to next steps. 

 I.        WHERE WE'RE GOING LOOKS LIKE WHERE WE'VE BEEN

Digitalization—The New Electronification of Markets

Let’s take that trip down memory lane again.  Many years ago, trading involved reams of ticker tape, and people running from room to room or desk to desk.  Settlement of a trade could be whenever someone finally arrived and hand-delivered the money or the paper stock certificate—with the credit, liquidity, and counterparty risks in the meantime.  And the octagonal futures pits in Chicago and Kansas City, or the ringed pits in New York, were rowdy scenes with hand signals and shouts, trade slips and runners.  It always looks so fun in the movies, and that’s what led me to my first internship at the CFTC.  You know—pork bellies and frozen concentrate orange juice.

Today, traders look at screens and floors are much quieter, notwithstanding the occasional hijinks, or lunch delivered to the desk, or your kids and dogs if you’re trading from home.  The settlement cycle has been compressed from T+ “a lot.”  Now always-on, real-time markets are possible.  Technology has and will continue to transform our day-to-day life, and work, and our life’s work.

Nasdaq’s all-electronic markets—and the electronification of markets from equities, to FX, to rates, fixed income, and more—has led to more transparency, more access, more competition, more cost-efficiency, more liquidity.  Market structure has shifted, and shifted again.

Digitalization and digital asset markets have the promise of all these benefits and more.  But we must have guardrails to avoid the pitfalls.

Change Is Not New—And We’re Not the New Kid on the Block

Change is not new.  As the saying goes, we’ve seen this movie before.  I was working at the CFTC during another time of abrupt change over a decade ago.  Just after the financial crisis, I was a Commissioner’s counsel.  Our main focus then was rulemaking for all of the G20 reforms.  Congress had just passed the Dodd-Frank Act.  For the first time, there would be comprehensive regulation over the nearly $700 trillion dollar notional swaps market.  The CFTC got that authority.[11]  Regulators arguably created the biggest change to market structure for swaps since the first ISDA Master Agreement.  And then I lived through that change on the other side, working to implement Dodd-Frank, the Volcker Rule, and other global regulatory reforms at a global bank.  No good deed goes unpunished.

Back then, we had an existing asset class that had new rules.  And now, we have a potentially new asset class that potentially can use existing rules.

Well, the CFTC is not the new kid on the block.  Since Dodd-Frank, we’ve had hundreds of rulemakings for new or changed rules.  Show me another regulator with global jurisdiction, who’s handled that much volume and flow, for the most complex products, through that many market stresses and disruptions, and through incredible shifts in market structure like reforms for derivatives trading, margin, clearing, and benchmarks, or Brexit or IBOR transition.  Show me another regulator that oversees as many global systemically important entities—as many U.S. and non-U.S. FMIs and as many U.S. and non-U.S. banks.  Show me another regulator that has imposed billions and billions of dollars in penalties, with only about 160 staff in the Division of Enforcement.

And for the CFTC as well as other regulators, this is not a case of unknown unknowns.[12]  People talk about policing misconduct in the crypto markets—but we know what misconduct is.  People talk about contagion in the crypto markets—but we know what contagion is.  People talk about crypto bank runs—but we know what bank runs are.[13] 

These changes are not new.  The CFTC is not the new kid on the block.  This is not a case of unknown unknowns.  We know what to do.  We know how to do it. 

Core Principles—What’s Old Is New Again

From a market regulation and market conduct perspective, no matter how much things change, some things are still the same.  The basics apply across any asset class or technology.  Don’t lie.  Don’t cheat.  Don’t steal.  Be responsible. [14]  These Core Principles help ensure customer funds are protected, risks are managed, and trading is fair, efficient, and transparent.  They require each DCM to ensure its 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.  They also require DCMs to have appropriate risk and oversight procedures and controls. This principles-based approach lets DCMs innovate and compete fairly and evolve along with the derivatives markets, whether the underlying is corn or crypto, e-mini or ETH. 

The FX Global Code, a code of conduct for FX trading, is another example.[15]  The FX Code is designed to provide a common set of guidelines covering market participants and to promote the integrity and effective functioning of the wholesale FX markets.  The code is organized around six leading principles: ethics, governance, execution, information sharing, risk management and compliance, and effective confirmation and settlement.  It identifies good practices and processes at a global level. 

In this room, many of you are running your own exchanges, clearinghouses, and CSDs all around the world.  You have your own rulebooks, operational requirements, and hard-won experience implementing and enforcing them.  Core principles and codes of conduct and decades of running highly regulated businesses are good tools to have and use for any new asset class or technology.  

Digital Assets—New Technology, New-ish Products

Digital assets and DLT could make it possible to deliver financial services more quickly, securely, and at lower cost, especially cross-border.[16]  I’m talking about payments, financing, trading, collateral management, and more, across institutional and retail products and services.  The process enhancements and efficiencies are compelling.

These developments in underlying technology don’t necessarily change the what—for instance, the exchange of risk, value, or ownership interest.  But they do promise to change the how, through the development of new rails for the financial system—a question of pipes and plumbing, more than what’s flowing through them. 

Take a look at what’s inside the new pipes.  There’s a lot that’s not new or maybe just new-ish. 

That is especially true for tokenization of real assets—take an asset, make a token, and put it on a blockchain.[17]  Because these are existing financial products, if it’s the same risk, and the same activity, it should be the same regulation.  That should be the regulatory framework that should go with it.  Where the product or technology is truly novel, then at that point you may need more regulatory clarity or guidance.[18]  But regulators should also try to be as technology-neutral as possible to keep rules evergreen and not in need of constant updating.

More CFTC Jurisdiction—The New-New

The CFTC already has a ready-made regulatory framework for many digital assets.  We are a market regulator over commodity derivatives—futures, options, and swaps—and we oversee exchanges, clearinghouses, dealers, and other market participants and market professionals.  We oversee DCMs that list and trade crypto derivatives, and derivatives clearing organizations (DCOs) that clear crypto derivatives.  When you trade bitcoin or ether futures on a DCM and clear through a DCO, you get the same customer protections and transparency, including certainty over custody of margin and clarity regarding bankruptcy protections. 

The CFTC has dealt with products priced by reference to something else for a long time.  The statutory “swap” definition in Dodd-Frank is quite broad,[19] and we’ve spent a decade implementing and overseeing the current swaps framework.  In addition, some crypto trading in a lot of ways resembles emerging markets FX trading, and CFTC rules (with certain exceptions) cover a wide variety of FX derivatives—FX swaps, FX options, FX forwards, FX non-deliverable forwards (NDFs), currency swaps, and cross-currency swaps.  

Congress is considering several crypto legislative proposals.  It’s very encouraging that Congress is undertaking such a comprehensive effort to create a clearer and more holistic regulatory framework around digital assets in the United States.[20]  And to make very clear and even to expand the CFTC’s jurisdiction in this space.  That will make sure that there is sufficient regulatory clarity for the industry and enable growth in compliant digital asset markets with protections for the retail public.  Not only does that position the U.S. at the forefront of responsible innovation, it promotes American competitiveness in the international arena.  It’s not too late to inform international standards to minimize market fragmentation, and partner with non-U.S. regulatory counterparts on global coordination and cooperation.  And we can’t ignore the serious national security implications if money and markets move away from us, the United States.

That important work is urgent and ongoing.  As a critical mass continues to build with Congress, market participants, public interest groups, and other regulators, 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 important tools in its toolbox.  From my perspective, the SEC regulates the securities markets, and the CFTC has regulatory touchpoints with virtually everything else.  It’s well-known that the CFTC has strong anti-fraud and anti-manipulation enforcement authority over spot commodity markets, which we have used over and over.  The CFTC has successfully brought over 50 crypto enforcement actions since 2015, with hundreds of millions of dollars in penalties.[21]  The CFTC also has oversight over certain spot retail FX and spot retail leveraged commodity transactions.[22]  These could be good places to start while Congress thoughtfully works through tasking us with additional authority. 

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 for decades.    

II.         REGULATION OF THE FUTURE FOR TOMORROW'S MARKETS

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.[23]  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.[24]  There are also the inevitable scammers and fraudsters.  

Ten Fundamentals for Responsible Digital Asset Markets

As with electronification of markets and other shifts to market structure, where we’re going looks like where we’ve been.  I would like to identify ten fundamentals for responsible digital asset markets.  These may look familiar, but I told you that what’s old is new again.  And yes, this is a floor, not a ceiling.

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[25]—shadow banking 3.0—then the appropriate response is to bring them inside.[26]  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.[27]  

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.

 III.        A PRAGMATIC APPROACH TO NEXT STEPS

Do Androids Dream of Electric Sheep?

The future will stretch our imaginations.  Just as the internet’s emergence led to the profusion of social media, mobile connectivity, and cloud computing, today’s technologies may put us on the verge of a Metaverse of real-time, immersive, massively multi-person content, experiences, and connections.[28]  We could be moving from crypto and blockchain as a wrapper on value to a wrapper on reality.

Some foresee the Metaverse, Web3, crypto assets, non-fungible tokens (NFTs), and portable digital identity and ownership enabling a seamless convergence of our physical and digital lives—creating unified, virtual communities where people can work, play, relax, transact, and socialize.[29]  Pop stars and avatars already are performing live music concerts with varying degrees of real life intersecting with the virtual, from digital avatars on real stages, to live performers on streamed stages, to live digital performances done entirely online.[30]  For some, the Metaverse promises even better ways to do everything we do now: commerce, entertainment and media, education and training, manufacturing, and business in general.  With a broad take on the “Open Metaverse,” one report states that the total addressable market could grow to between $8 trillion and $13 trillion by 2030, with around five billion total users.[31]  

The technology of the future calls for the regulation of the future.  Significant infrastructure investment will be necessary in computing, data, networks, hardware, and software to achieve the Metaverse.[32]  We have to invest in our regulatory infrastructure as well.

One, Two, Three

So here are the next steps for how we get to the right regulatory future.  My work in the private sector taught me that the way to get things done is to get all the information, learn as much as possible, and then find pragmatic solutions.  Recent market events, including big losses for regular people, show us that we need to take action now. 

One.  We need to get all the information we can.  Here in the United States, SEC Commissioner Hester Peirce and I have called for joint CFTC-SEC public roundtables to evaluate recent crypto market events and risks, and to discuss how to regulate crypto responsibly and with greater clarity.[33]  Globally, I am sponsoring the CFTC’s Global Markets Advisory Committee, which is about having a level playing field and will focus on firms’ global business strategy and operations and the markets that are needed to support growth and effective risk management.  The GMAC is an international forum for executive leaders from both the public and private sectors to come together and create a shared vision for the future of markets.  I’m inviting international standard setters and non-U.S. regulators to participate.  One potential subcommittee could be on Digital Asset Markets.  Looking around the room, it’s clear this market evolution presents global challenges that need global solutions.  It’s so important that we talk together, so that regulators can leverage the expertise of people who are doing this every day.  You are all a part of this.  You need to be a part of the solution. 

Two.  We need to learn as much as we can.  We should remember hard-learned lessons from the financial crisis and Dodd-Frank and other G20 reforms.  Let’s be careful about “big bang” changes that could lead to market fragmentation and unintended consequences.  I have been on the implementation side of things, and it takes time to operationalize rules, build processes and systems, and put into place all the compliance and risk management programs—you need a runway.  We should move forward with both hard work and hard thinking, so we do it right the first time and don’t have to rely on dozens of one-off staff letters, exceptions, and temporary fixes.[34]  And if a new universe is really being created, we don’t want everything we know and have built to be blown up on the way there.

Three.  We need to find pragmatic solutions.  We should start with what we have.  I believe it’s usually faster, easier, and more reliable to use what’s existing and tried-and-true, than to stand up something entirely new.  So we should apply existing laws where we can.  When it comes to the CFTC, we have ready-made regulatory frameworks for derivatives markets 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.  Where we have rules at hand, let’s use them. 

We should harmonize the laws and rules we have and those we might have.  I know firsthand from implementing global regulatory reforms just how important harmonized rules are.  That means coordinating across authorities and jurisdictions.  That means not only the CFTC working with the SEC and other U.S. regulators, it also means working with non-U.S. regulators too. 

We should work towards forward-looking laws and regulations.  From the beginning, we should aim for durable, flexible regulations—we should try to future-proof what we do.  This proactive—not reactive—approach to regulation and oversight will ensure that we continue to meet our mandate both today and in the future, as technology and markets continue to evolve.  That’s what the CFTC is built to do—to anticipate and adapt more quickly to new changes and new risks. 

And one more thing.  In all this, we should keep retail protections front of mind.  It’s clear from billions of dollars of losses by the retail public, and the knock-on effects to the broader crypto markets, that regulators cannot fail to act any longer. 

*           *           *

BUILDING THE FUTURE OF MARKETS 

We’re facing fast-moving, disruptive challenges to current technologies and market structure.  But as Phil Mackintosh, Chief Economist and a Senior Vice President at Nasdaq, wrote last year while recognizing Nasdaq’s 50th anniversary: as we look forward, don’t forget to look back.[35]  In ways hard to foresee when Nasdaq was launched, computers have revolutionized financial markets across the world.  Automation has led to greater transparency and efficiency, with the most electronic markets tending to be the most transparent, broadly offering information and access.  These were fundamental changes requiring hard work, hard thinking, adaptation, and resilience.

Fifty-one years ago, the United States left the gold standard behind, and gold took its place among other assets in a more complex international financial system.  Will more innovations and this crypto winter usher in a new era beyond the bitcoin gold standard?  What new digital specie—what new digital money—will evolve?  Will markets find a new equilibrium, one that rests on Web3 and DeFi?  We have to do the heavy lifting.  We have to be pragmatic.  Wheelbarrows work on the moon.

In the 1990s, Nasdaq’s Technology of the Future built “the stock market for the next 100 years.”[36]  Today, with our Regulation of the Future—and with some nudging by the CFTC—we can build the global financial markets for the next 100 years and beyond.

I strongly support this enforcement action against BNP Paribas for violating swap data reporting requirements for more than five years, violating swap disclosure requirements, and for failure to supervise.  BNP failed to report accurately millions of swap transactions.  Certain swap dealer compliance issues were not timely identified, with the result that these violations persisted for years.  Despite BNP compliance personnel flagging a swap reporting issue, BNP did not adequately and timely address the issue apparently due to concerns that a comprehensive fix would take significant time and resources.  I also note that BNP or affiliated entities have been the subject of CFTC or other federal enforcement actions.

Swap data reporting is fundamental to post-crisis financial regulation.  It is one of the key measures in the Dodd-Frank Act to bring transparency to risk previously hidden.  This transparency is necessary for regulators to identify risk, particularly risk that could become systemic.  Transparency is also necessary for the CFTC to fulfill its mission to promote market resilience and integrity so that our markets remain the strongest and safest in the world.  The CFTC conducts market and financial surveillance—surveillance that relies on swap dealers fulfilling their reporting obligation to provide accurate and complete swap data.

This case should serve as a message to all swap dealers that the CFTC will bring justice for failures in swap data reporting.  It has been more than 10 years since the Dodd-Frank Act swap data reporting rules have been in place.  It is far past time for swap dealers to come into compliance with the law.

I strongly support this enforcement action against JP Morgan for violating CFTC swap data reporting requirements for years, and failing to report accurately more than 2.1 million swap transactions.  I am quite concerned by the duration and substantial nature of violations by JP Morgan.  I also note that JP Morgan has been the subject of several CFTC enforcement actions over the years, and the subject of many other federal agency enforcement actions.

Swap data reporting is fundamental to post-crisis financial regulation.  It is one of the key measures in the Dodd Frank Act to bring transparency to risk previously hidden.  This transparency is necessary for regulators to identify risk, and ultimately to reduce risk that could become systemic.  Transparency is also necessary for the CFTC to fulfill its mission to promote market resilience and integrity so that our markets remain the strongest and safest in the world.  This requires, among other things, the CFTC to conduct market and financial surveillance—surveillance that relies on swap dealers fulfilling their obligation to provide accurate and complete data.

This case should serve as a message to all swap dealers that the CFTC will bring justice for failures in swap data reporting.  It has been more than 10 years since the Dodd-Frank Act swap data reporting rules have been in place.  It is far past time for swap dealers to come into compliance with the law.

Today, the Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Western District of Texas against Cornelius Johannes Steynberg of South Africa and Mirror Trading International Proprietary Limited (MTI), a South African company, alleging that they operated a fraudulent scheme to solicit, accept, and pool more than $1.7 billion to trade off-exchange, retail foreign currency (forex) on a leveraged, margined and/or financed basis.  Defendants engaged in an international fraudulent multilevel marketing scheme via various websites, in addition to social media, to solicit bitcoin from members of the public for participation in their pool.  At least 23,000 of the pool participants—most, if not all, of whom were not eligible contract participants—were from the United States.

Instead of trading forex as represented, Defendants misappropriated pool funds, misrepresented their trading and performance, provided fictitious account statements as well as created a fictitious broker at which trading purportedly took place, and in general operated the pool as a Ponzi scheme.  As a matter of fact, the little trading that Defendants did was unprofitable, and they misappropriated essentially all of the at least 29,421 bitcoin accepted from participants.  The CFTC’s complaint seeks full restitution on behalf of defrauded participants, as well as disgorgement, civil monetary penalties, permanent trading and registration bans, and other relief.  Notably, this fraud represents the largest to date charged by the CFTC involving Bitcoin.

Fraudsters often take full advantage of new technology, global connectivity, and perceived lack of a cop on the beat to perpetrate their scams.  This action demonstrates that the Division of the Enforcement (DOE) is committed to protecting Americans, regardless of the technology or borders involved, and that the CFTC is very much focused on detecting and prosecuting these frauds, including by working closely with our counterparts overseas.  I want to commend DOE staff for their outstanding collaboration with domestic and foreign counterparts in investigating this matter, including the South African Financial Sector Conduct Authority, the Financial Services Commission of Belize, the Finnish Financial Supervisory Authority, the Texas State Securities Board, the Alabama Securities Commission, the North Carolina Secretary of State, Securities Division, the Mississippi Secretary of State, Securities Division, the U.S. Attorney’s Office for the Southern District of New York, and the Federal Bureau of Investigation’s Southern District of New York Field Office.

Today, the Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Southern District of Florida against Empires Consulting Corp., a Florida corporation, and three individuals, alleging that they operated a fraudulent scheme to solicit, accept, and pool at least $41.6 million, including at least $14.3 million from over 2,300 individuals in the United States.  Defendants’ solicitations were largely via the internet or online, through the company’s website, videos posted on social media platforms, and emails.  Defendants initially solicited participants to fund their accounts using cryptocurrencies, including, among others, bitcoin, ether, and tether.

Defendants misrepresented their registration status and performance, and misappropriated at least $5 million in pool participant funds.  I applaud the efforts of the Division of Enforcement staff in filing this civil enforcement action against the Defendants and seeking full restitution on behalf of defrauded participants, as well as disgorgement, civil monetary penalties, permanent trading and registration bans, and other relief.  I also recognize the parallel actions filed today by the Securities and Exchange Commission (SEC) and the Department of Justice, as well as the assistance provided to the CFTC by the SEC and the National Futures Association.

Chairman Maloney, Ranking Member Fischbach, and Members of the Subcommittee, thank you for the opportunity to appear before you today to share my views on digital asset regulation as the Director of the Division of Market Oversight at the Commodity Futures Trading Commission (CFTC, Agency or Commission).

CFTC Mission

As you know, the CFTC is the primary regulator of the futures, options, and swaps markets.  The Agency’s mission is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.

Our governing statute, the Commodity Exchange Act (CEA or Act), serves the public interest by mandating the establishment of a regulatory framework that allows the Agency to ensure market integrity, protect customer funds, avoid systemic risk, and police derivatives markets for manipulative activity, fraud and other abuses, while fostering innovation and fair competition.[1]  As the transactions within our jurisdiction “are affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities,”[2] the CEA outlines “a system of effective self-regulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission.”[3]

Designated Contract Market Registration, Compliance Obligations, and Product Listing

Generally, in order for an entity to provide a trading facility for market participants (including retail customers) to trade futures, the market must apply to the Commission to be designated as a contract market.[4]  To obtain and maintain designation, an entity must comply, on an initial and ongoing basis, with twenty-three Core Principles set forth in the CEA and CFTC regulations.[5]  By design, the designated contract market Core Principles ensure customer protections, establish guardrails that provide clarity regarding the risks and protections involved in trading derivatives products, and enhance transparency, without hindering the trading facilities’ ability to innovate and compete fairly.  This firm but flexible approach has allowed the CFTC, with authority from Congress, to evolve along with the derivatives markets.

The CFTC oversees designated contract markets through various tools, including rule enforcement reviews and system safeguards examinations to ensure compliance with the Core Principles.  The CFTC also conducts direct surveillance of trading on designated contract markets.  Designated contract markets are separately required to serve as self-regulatory organizations,[6] and must establish and maintain effective oversight programs, including monitoring and enforcing compliance with their rules.  As self-regulatory organizations and designated contract markets, they play a key role in safeguarding the integrity of the derivatives markets by, among other things, ensuring that their members understand and meet their regulatory responsibilities.

Among other things, the Core Principles require each designated contract market to establish and enforce rules to:  ensure the protection of customer funds;[7] protect market participants and markets from abusive practices; and promote fair and equitable trading on the contract market.[8]  The Core Principles also require each designated contract market to ensure that the contracts they list are not readily susceptible to manipulation, and require a designated contract market to have rules and resources in place to detect and prevent manipulation, price distortion, and disruptions of the cash-settlement or delivery process.[9]  The Core Principle addressing system safeguards requires each designated contract market to: establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, through the development of appropriate controls and procedures and the development of automated systems that are reliable, secure and have adequate scalable capacity; establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery; and periodically conduct tests to verify that backup resources are sufficient to ensure continued order processing and trade matching, price reporting, market surveillance, and maintenance of a comprehensive and accurate audit trail.[10]

Under the CEA and the Commission’s contract review regulations, prior to listing any new product for trading, a designated contract market must submit to the Commission all new product terms and conditions, and subsequent associated amendments.[11]  In all such submissions and amendments, a designated contract market is legally obligated to meet certain Core Principles—including Core Principle 3, which requires that a designated contract market only list contracts for trading that are not readily susceptible to manipulation.[12]  Under the CEA, the designated contract market may file its new product submission under a process called “self-certification” by certifying that the product to be listed complies with the Act and CFTC regulations and providing a concise explanation and analysis of the product and its compliance.[13]

Similarly, under the CEA and the Commission’s rule review regulations, prior to implementing a new or amended rule, a designated contract market must submit to the Commission the text of the rule and note any substantive opposing views to the rule that were not incorporated into the rule.[14]  In all such submissions, a designated contract market is legally obligated to meet Core Principles. The designated contract market may file its new or amended rule submission through self-certification by certifying that the rule complies with the Act and CFTC regulations and providing a concise explanation and analysis of the operation, purpose and effect of the new or amended rule and its compliance.[15]

CFTC Regulatory Jurisdiction Involving Digital Assets

Digital assets have been broadly determined by the CFTC and federal courts to be commodities under the CEA.[16]  As discussed below, the CFTC has broad regulatory oversight over any futures, options, and swaps listed by designated contract markets.

The CFTC has regulated exchange listed futures contracts on digital assets since late 2017.  By way of background, in 2017, three designated contract markets expressed interest to the CFTC in listing digital asset-based derivatives contracts for trading.[17]  These designated contract markets voluntarily provided the CFTC with advance draft contract terms and conditions for their proposed contracts.[18]  In December 2017, the three designated contract markets self-certified that they would list bitcoin derivatives contracts for trading.[19]  Though the Commission did not determine to stay the certifications or seek public comment at the time, the CFTC published two documents in connection with these self-certification submissions to provide the public with background information on the CFTC’s oversight of, and approach to, virtual currency futures markets.[20]

A few months later in 2018, staff issued an advisory to encourage innovation and growth of digital asset derivatives products to be traded on designated contract markets and cleared by derivatives clearing organizations within an appropriate oversight framework under the Core Principles.[21]  Specifically, staff clarified their priorities and expectations when reviewing new virtual currency derivatives to be listed on a designated contract market or to be cleared by a derivatives clearing organization.[22]

Since then, the trading of futures contracts in digital assets has grown notably.  Today, of the sixteen designated contract markets that the CFTC oversees, five list for trading futures and options contracts on bitcoin, ether, or both.  Market participants are actively trading over a dozen different futures and options contracts on digital assets across these five designated contract markets.  When market participants trade digital asset-based futures contracts on a designated contract market, they are afforded the same customer protections and transparency as when they trade in futures contracts on any other asset class—including certainty over custody of their margin and clarity regarding bankruptcy protections.

CFTC Cash Market Enforcement Actions Involving Digital Assets

While the CFTC does not have direct statutory authority to regulate cash markets, the CFTC maintains anti-fraud, false reporting, [23] and anti-manipulation enforcement authority over commodity cash markets in interstate commerce (including digital asset cash markets).  When the CFTC becomes aware of potential fraud or manipulation in an underlying market, we investigate and address misconduct through our enforcement authority.  In the digital asset space, since 2014, the CFTC has aggressively exercised its enforcement authority bringing more than 50 enforcement actions.

Most recently, in FY 2021, the CFTC filed numerous cases charging retail fraud involving digital assets,[24] and cases charging platforms with illegally offering off-exchange trading in digital assets.[25]  In all, the CFTC filed over 20 enforcement actions that included digital asset-related allegations of misconduct in FY 2021.

Thus far in FY 2022, the CFTC has filed several enforcement actions involving digital assets, including an action for making untrue or misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin.[26]  In addition, the Commission recently filed a complaint involving allegations for making false or misleading statements of material facts or omitting to state material facts to the CFTC in connection with the self-certification of a bitcoin futures product.[27]

The Derivatives Markets the CFTC Oversees Work Well

The CEA and the CFTC’s regulatory framework have worked well for our futures markets for many decades.  The CFTC’s focus on customer protections, market integrity, price discovery and transparency has proven to be effective, even in times of volatility.  The strength of our futures markets is why in 2010, Congress tasked the CFTC with creating an oversight system for the over-the-counter swaps markets after the 2008 financial crisis.

Following enactment of the Dodd-Frank Act, the CFTC thoughtfully and quickly enacted regulations to register trading facilities for swaps as swap execution facilities and to regulate the trading of swaps on swaps execution facilities as well as customer protections for swaps traded bilaterally.  Today, the swaps markets that the CFTC oversees exceed $300 trillion in gross notional outstanding.  Of the swaps in the credit and interest rates markets (two of the largest swap asset classes in terms of volume and notional outstanding), a notable portion of the swaps positions are cleared at a derivatives clearing organization.  By bringing the previously opaque over-the-counter swaps market under the CFTC’s oversight, our extensive swaps markets now benefit from transparency, enhanced customer protections, and promoted competition.

Conclusion

Through the CFTC’s extensive experience overseeing the trading of digital asset-based derivatives on CFTC-regulated exchanges as well as the CFTC’s vigilant exercise of jurisdiction of its enforcement authority over commodity cash markets in interstate commerce, the CFTC has developed a keen understanding of digital assets, and will continue to deliver on its commitment to protect customers to the fullest extent of its statutory authority.

Thank you for the opportunity to appear before the Subcommittee.  I look forward to answering any questions you may have.

Thank you very much for inviting me here to speak with you all today.  I’m so glad to be here, especially because my very first meeting as a Commissioner was with ACSA.  It just seems right that my first keynote speech is with you all too.  And it’s an honor to be part of a historic Commission, and the first full Commission in over two years—finally.  I know a lot of people have been waiting for this.

I should give a short disclaimer and a quick confirmation.  The disclaimer is that my views are my own and don’t necessarily reflect those of the Commission or other Commissioners.  The confirmation is that yes, my dress is 100% cotton.

I’d like to tell you a bit more about myself, where I come from, and how I do things.  I was born and raised in Modesto, in California’s Central Valley, and we had peach and almond orchards.  It’s about a three-hour drive from here.  We used to come to Lake Tahoe in the winter, so I have a lot of great memories here, including a lot of falling down on the ski slopes.  I did 4-H when I was little and showed horses at the Stanislaus County Fair and California State Fair—luckily, I fell a lot less there.  And my family taught me the values of hard work and lifelong learning.

Fast forward—I grew up and moved to the big city.  And the hard work and learning continued.  In my career, I’ve traveled the world and engaged with thousands of colleagues, policymakers, executives, and clients from dozens of countries and nearly every sector of the economy.  I’ve worked on tackling the most significant international financial policy issues.  I’ve built global programs and teams and implemented global financial regulatory reforms.  I’ve seen just how big the world is, and how small it is, too.  Time and again, I saw firsthand how important it is to get all the information, to learn as much as possible, and then to take a pragmatic approach to finding solutions.

You might remember when I was in Commissioner Scott O’Malia’s office during Dodd-Frank.  One of my favorite parts of the job was meeting with ag producers and commercial end-users to learn more about how our rules would actually impact them.  Then, when I worked at a global bank, one of my favorite parts of the job was working with our commodities and other businesses to understand what clients needed.  And now that I’m a Commissioner, one of my favorite parts of the job is to hear from people trying to run their businesses, create jobs, and support the economy—to make and move the things we eat and wear and use every day. 

We all work for our clients and customers.  And we all know that client and customer relationships are built on trust.  I work for the American people, and I’ve been given the public’s trust.  That’s something I believe very deeply and a responsibility I take very seriously.  And so what I wanted to do with you today was share how I am approaching the job and talk about what’s going on. 

Clear Rules of the Road

Going back to first principles, it’s important for there to be clear rules of the road.  I’ve seen it from both sides—from government and from the private sector—that you need clear rules to go about your day-to-day business.  When you make business decisions, there’s no gray area in yes or no.  You have to decide to buy something, or not; to build something, or not; to make a choice, one way or the other. 

I believe that markets work best when there are clear and simple rules with common standards.  I learned that lesson again and again.  Regulation shouldn’t unnecessarily increase operational complexity or costs, especially costs that then get passed down.  People’s jobs are hard enough, and there’s enough going on in the world, without making it even harder.

Growth and Progress

Although I’m in only week 11 of my term as Commissioner, I’ve been getting out and about after being cooped up for two years.  This week I was in Nebraska meeting with family farmers, and over the past weeks I’ve done learning tours and met with so many different stakeholders to understand what they do and what they care about.  It really is one of the best parts of my job.  So far, I’m looking at things through two lenses—growth and progress. 

First, we should support growth in both traditional and new markets.  In traditional markets, there should be deep, liquid markets that best provide risk management and price discovery.  End-users and others need reliable and efficient ways to hedge their risks.  And for new markets and products, we have a mandate to promote responsible innovation and fair competition.

Second, we should be making progress on what’s in front of the CFTC, and hopefully it doesn’t take us so long.  I was an intern at the CFTC when the position limits rulemaking first began.  By the time it was done, I was a managing director at Citigroup.  The CFTC has a pivotal role in a lot of big-ticket items, and I’d like to see us move the needle on them during my term. 

Global Markets Advisory Committee

One of the many proud traditions at the CFTC is that Commissioners get to sponsor advisory committees comprised of members of the public.  I’m excited to sponsor the Global Markets Advisory Committee (GMAC).[1]

The big picture is that the GMAC promotes a level playing field for global business and global markets.  It’s as simple as that.  

I’m relaunching the GMAC with a fresh approach to that goal.  Under my sponsorship, the GMAC will focus on firms’ global business strategy and operations and the markets that are needed to support growth and effective risk management.  It is an international forum for executive leaders from both the public and private sectors to come together and create a shared vision for the future of markets. 

When I was in Madrid recently for the ISDA Annual Meeting, I met with the Chair of the Basel Committee on Banking Supervision (currently the Governor of the Banco de España), and senior officials from the U.S. Treasury Department, the Financial Stability Board, the International Organization of Securities Commissions (IOSCO), the European Commission, the European Securities and Markets Authority (ESMA), the UK Financial Conduct Authority, and the Comisión Nacional del Mercado de Valores (CNMV).  I shared with them my plan for the GMAC, and I’m inviting international standard setters and non-U.S. regulators to participate and promote global collaboration and coordination.  We need global solutions to global challenges.

As described in its charter, the GMAC was created to advise the CFTC on issues that affect the integrity and competitiveness of U.S. markets and U.S. firms engaged in global business, including the regulatory challenges of a global marketplace that reflects the increasing interconnectedness of markets and the multinational nature of business.  The GMAC also makes recommendations regarding international standards for regulating futures, swaps, options, and derivatives markets, as well as intermediaries.  Members include financial market infrastructures, swap data repositories, intermediaries including swap dealers, market participants, end-users, service providers, public interest groups, and regulators.

We just received nominations for GMAC members and potential priorities.  In the wide range of nominees, I’m so pleased at the number of successful executives who have built leading global firms and are willing to take the time to serve and now build the future of markets in addition to running their businesses.  With their insights and those of others, the GMAC will truly be a driver for growth and progress. 

The top concerns that have been submitted for the GMAC to take on include important global market structure issues such as cross-border harmonization and market fragmentation; global commodity markets and volatility; and interconnectedness of cash and derivatives markets, including Treasury market reform and sovereign debt.  Other top concerns are digital asset markets and trade reporting.  So I’m looking to have potential subcommittees on Global Market Structure, Digital Asset Markets, and Trade Reporting.

The GMAC has a critical role as the world faces immense challenges, and we should not miss this opportunity to lead. 

On the Job

That’s how I’m approaching my job as Commissioner.  I’m also very excited about my top-notch team—Meghan Tente, Gates S. Hurand, and Keaghan Ames—that makes it possible for me to do what I do.  It’s been wonderful to be welcomed back to the CFTC by so many familiar faces.  It’s an honor to work again with such impressive staff who are so dedicated to the agency’s mission.  Let’s talk about some issues that the CFTC is looking at right now. 

Global Commodity Markets and Volatility

One is volatility.  I don’t have to tell you that we’re seeing high levels of volatility in the global commodity markets, and not just in one or two products.[2]  COVID-19 and its effects on the global economy and international trade, supply chains, production, and demand are all contributors to one of the biggest economic disruptions in decades.  Now that the world is coming back from the pandemic, we are still working through these issues as well as new ones.  And many of these issues involve market fundamentals and externalities that impact value chains, price action, and volatility.  All of that puts stresses on the system.  Let us know if you have concerns about certain markets and if there’s something we should be looking into.

Climate and Carbon Markets

Another area is climate.  This is a priority for Chairman Behnam.  The CFTC recently asked for comments from the public on an expansive set of climate issues including data, scenario analysis and stress testing, risk management, disclosure, product innovation, voluntary carbon markets, digital assets, greenwashing, financially vulnerable communities, and public-private partnerships and engagement.[3]  And we also hosted a roundtable last month on voluntary carbon markets. 

I believe in market-driven solutions.  Weather has always been unpredictable, and from the beginning CFTC markets have been used to hedge those risks.  I’ve met with innovators who are developing new products and enabling technology to manage physical risk and transition risk.  And carbon markets are an area where there could be opportunities for new revenue streams in addition to facilitating the climate transition.  I’ve met with startups who are partnering with small farmers on regenerative agriculture and carbon capture.

Given the breadth of the CFTC’s climate request for information, we need to be thoughtful about our next steps here.  I discussed some of my concerns in my concurring statement.[4]  We need to focus on our mandate and mission, and be mindful of where other regulators have the expertise and the primary authority and are already addressing the issues.  We need to do our best to avoid duplicative, overly burdensome, or costly rules.  We really need to consider the potential effects of any new requirements on hedgers and end-users, especially small entities—real businesses in the real economy.  I want to hear what you think about all this.

Non-intermediated Clearing and Market Structure

A third area is non-intermediated clearing.  The CFTC needs to be transparent in how it’s approaching this issue, and recently hosted an all-day roundtable discussion.  It was very helpful to hear expert perspectives from so many highly respected names in our markets.  I generally believe in ongoing innovation and evolution that is responsible.  As things change, we need to consider the potential for unintended consequences.  This is an area with a lot of important questions to ask.  CFTC markets have stood the test of time for a long while now—if there’s a big shift, we need to be prepared for what happens next. 

Let’s Get to Work

I mentioned one of my favorite parts of the job is meeting with, hearing from, and learning from people.  That’s because I take very seriously my responsibility to engage with the public.  And it’s also just who I am. 

I’m going to keep on learning as much as I can.  It is so important for us to talk with each other—for your voices and ideas to be heard.  You all know how important it is to speak with and hear from your clients and customers.  Like I said earlier, I work for the American people.  I am so glad to join you here today, to speak with you, and hear from you.  We have to work together to protect and improve our markets.  So let’s keep talking, and let’s get to work.  Thank you. 

(As prepared for delivery at the FIA Forum: Commodities 2022)

Thank you all for the opportunity to talk with you today.  I am very excited to be here at the FIA Forum: Commodities 2022.  It is a real honor to speak as part of this forum, and even more so as the keynote for today’s lunch.  

I need to give my standard disclaimer that the views I share today are my own and do not reflect the views of the Commission or my fellow commissioners.  I will go ahead and add another disclaimer: this is my first keynote address.  Maybe that is more of a warning than a disclaimer.  But, with that in mind, if you would like to offer feedback at the end of this speech in lieu of asking me detailed, technical questions, I will have no issues with that approach.  

Even constructive criticism is welcome.  I have four children and the oldest two are teenage girls, so there is a lot of feedback shared in our house and it is almost always criticism – and rarely constructive.

Before I begin, I want to take a moment to say thank you to my rockstar team – my senior counsels, Terry Arbit and Libby Mastrogiacomo, and my chief of staff, Chris Lucas.  By the way, Chris is right up front here if you have any suggestions or complaints to share.  

My team suggested that I come up with a title for my inaugural speech: something clever that accurately sums up all my thoughts in a catchy phrase.  After some deep thought, and a deeper Google search, I happened upon a song written and performed by Ernest Tubb in 1946 called “There’s a Little Bit of Everything in Texas.”[1]

Well, there is a little bit of everything in this speech…and we are in Texas…

Along those lines, I will start with…

A little bit about me…

For those of you who do not know me, I am Summer Mersinger and I am one of four new Commissioners at the Commodity Futures Trading Commission (“CFTC” or “Commission”).  I was nominated at the beginning of the year, confirmed by the Senate and sworn in just in April.  

I started my career working on Capitol Hill, and prior to becoming a commissioner, I spent a few years working at the CFTC: first, as the director of legislative and intergovernmental affairs under former Chairman Heath Tarbert, and more recently as chief of staff to former Commissioner Dawn Stump.  

The position is new to me, but the agency is not.  Spending two years getting to know the agency and the staff has prepared me for this job, and I feel incredibly fortunate to have this opportunity.

That covers the more recent entries on my resume, but it does not provide a very full picture of the experience I bring to the job.  I am a farm girl, born and raised in central South Dakota where my dad still grows wheat, sunflowers, corn, and soybeans.  

My great-grandparents immigrated to South Dakota from Eastern Europe in the late 1800s and my dad’s childhood home, which my grandfather built with his own hands, still stands amidst the fields of wheat and corn growing on the virgin soil my ancestors first plowed.  Each of my parents was one of seven children, and they had to make their own way in life with a lot of hard work.  They scrimped and saved every penny to eventually build up our own farm operation that now stands at 5600 acres of land.  

In fact, in my younger years, we lived on a cattle ranch near the Missouri River where my dad worked as a ranch-hand as he slowly acquired farmland.  In an interesting turn of events, that cattle ranch is now a world-class, exclusive golf and hunting resort where my brother works as a hunting guide and my dad does some custom farming, planting cover crops for pheasants, which are the main attraction for the resort guests in the fall and winter.  When I go home, I can revisit the pasture my 4-H show calves grazed and play a few holes of golf, literally at the same time.

I share with you all of this background to highlight why I am so invested in the work we do at the CFTC.  We all know that our commodity futures markets were formed to help producers and end-users of agricultural commodities discover the price for these commodities and to manage the risks that are inherent in producing, selling, buying, and consuming these commodities.[2]  I know firsthand about these risks because I lived them.  

That mostly covers my background.  So now, again keeping with my theme, I will turn to…

A little bit about my interests…

I often get asked about my agenda as a new commissioner and, honestly, I have struggled to answer that question.  I think the reason answering that question seems difficult to me is because I do not have an agenda that is distinct from the mission of the CFTC.  

I want to help promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound oversight.[3]  And while I cannot predict what will happen next in our markets, what I can tell you is that I will prioritize my efforts on making sure the CFTC remains focused on ensuring that these derivatives markets continue to serve their intended price discovery and risk management functions for physical commodities in our agriculture and energy sectors.

The derivatives markets have grown exponentially since their inception, including the expansion of derivatives trading into numerous new asset classes, the development of important new financial products such as swaps, and the introduction of new contracts focusing on emerging market trends such as “ESG” criteria[4] and – everyone’s favorite – cryptocurrency.  But this evolution and growth does not negate the need for these markets to continue to work for those in the agriculture and energy sectors of our economy.  

The record prices for a barrel of crude oil, as well as soaring natural gas and food prices, we are seeing today demonstrate just how important derivatives contracts are in times of increasingly volatile physical commodity markets.  The derivatives markets impact business bottom lines and individuals’ pocketbooks across the economy.

Recently, I became the sponsor of the CFTC’s Energy and Environmental Markets Advisory Committee (“EEMAC”).  During this time of intense geopolitical turbulence and volatility, I see this advisory committee as critical to the work we are doing at the CFTC.  

As part of my work on this committee, I want to hear from the real experts in industry and the broader public regarding how the CFTC can best promote price discovery and risk management.  Regulators cannot operate in a vacuum, and consulting with those who are experienced and knowledgeable about these markets is vital to our ability to do our job and understand how the CFTC’s policies, rulemakings, and oversight impact these markets.  

But as a new commissioner, I am quickly learning that sometimes the agenda is set by matters currently before or on the horizon for Commission consideration, so I guess this is the point where I talk about…

A little bit of everything…

Let’s start with the increased interest, and certain emerging trends, in providing retail access in our cleared derivatives markets.  Some of you – especially any of you that may have seen our recent staff roundtable on this topic[5] – may be thinking, “This is where she starts talking about crypto.”

But I am not talking just about crypto.  New technology and new registrants are increasingly focused on offering retail traders access to our cleared derivatives markets through new business models that can apply equally to crypto and non-crypto derivatives.  

In some cases, there is a desire to offer retail access outside of the traditional model of placing futures orders through intermediaries such as futures commission merchants (“FCMs”), which has been used in derivatives trading for decades.  Currently, non-intermediated retail access to our markets is primarily limited to fully collateralized products, but there is now a desire to offer retail traders non-intermediated access to margined products, too.  This is something we must grapple with as an agency.

I appreciate innovation, and I welcome new technology that leads to innovation.  I also understand that just because the old way of doing things is working, that does not mean there cannot be a new and improved way that we should embrace.  Indeed, the purpose of the CEA as stated by Congress includes “promot[ing] responsible innovation,”[6] and historically, the U.S. derivatives markets under the CFTC’s oversight have been some of the most innovative markets in the world.  

All other things being equal, the success or failure of a particular innovation should be determined by the marketplace, not the regulator.  And it is the role of the CFTC as regulator to evaluate whether all other things are equal – that is, whether a proposed innovation poses an undue risk of disruption or other harm to the markets and those who participate in them.  There can be times when these risks are too high to experiment with substantial changes to a system that is working well.

The simple fact is that the CEA, and the CFTC’s implementing regulations, were written at a time when all futures trading was done through intermediaries such as FCMs.  We should, therefore, have a fulsome discussion around whether or not changes can or should be made to our rules in order to accommodate new and previously unforeseen business models in our space made possible by technology.

An important part of that discussion must focus on protecting our legacy agriculture and energy derivatives markets, which must continue to function as effective price discovery and hedging tools for commercial enterprises in our economy.  

I also would like to discuss the recent actions by federal regulatory agencies, including the CFTC, with the stated goal of addressing financial risk related to climate change.  

I do not want anyone to be confused or assume I am oblivious to the financial risks of extreme weather.  As I mentioned in discussing my background, I have lived these risks.  My family’s livelihood was often threatened by severe storms, drought, and other weather-related conditions.  The financial risk was real and often a harsh reality of operating a farm.  So, let’s just set aside any of those thoughts that maybe I am not committed to the environment or mitigating climate-related financial risks.  

I am concerned, however, that we are seeing significant mission-creep across the federal financial regulatory agencies in the name of addressing climate change.  Just this month, the CFTC released a Request for Information on climate-related financial risk[7] where, as I detailed in a separate statement,[8] the agency is seeking information on questions far outside of our jurisdiction.  

I did concur in the vote to allow these questions to be published in the Federal Register, but only because I support efforts to engage the public in our work.  That being said, I question what we plan to do with much of the information we are requesting because we do not have the statutory authority under the CEA to promulgate rules on many of these topics.  

I also am disappointed that these questions seem to exclude agriculture from the discussion.  This is particularly unfortunate since our agency’s roots and history are embedded in the agriculture community, which has been using legacy agriculture futures contracts to hedge climate risk since the inception of the futures markets decades ago.  Any discussion of the financial risks deriving from extreme weather and climate must include America’s farmers and ranchers, who are at the whim of the weather in their mission to feed and clothe the world.

And if you don’t mind, I would like to share…

Just a little bit more…

Ending on a positive note, I want to share with you that the CFTC is again at full force with five commissioners and a confirmed chairman.  My fellow commissioners all bring unique backgrounds and expertise to their role, which will be a real benefit to the agency as well as the derivatives markets.  

The Commission has historically worked in a bipartisan manner, focusing on progress vs. politics, and I hope to see that tradition continue.  I do not know what all we will address or accomplish over the next few years, but I can tell you that my colleagues are all wonderful people who value integrity above all else in fulfilling the mission of the CFTC.  

Thank you all so much for your time and attention, and thanks to FIA for allowing me this opportunity to address all of you today.  

[1] Ernest Tubb, “There’s a Little Bit of Everything in Texas” (Unichappell Music Inc. 1946).

[2] Congress recognized this as well when it enacted the Commodity Exchange Act (“CEA”), which is the CFTC’s governing statute.  In the CEA, Congress found that commodity derivatives transactions “are affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair and financially secure trading facilities.”  CEA Section 3(a); 7 U.S.C. § 5(a).

[3] As stated by Congress, the purpose of the CEA, and the CFTC, is to serve the public interests in the use of derivatives transactions to manage and assume price risks, discover prices, and disseminate pricing information “through a system of effective self-regulation of trading facilities, clearing systems, market participants and market professionals under the oversight of the Commission.”  CEA Section 3(b); 7 U.S.C. § 5(b).

[4] See Environmental, Social, and Governance (ESG) Criteria, Investopedia, available at Environmental, Social, and Governance (ESG) Criteria (investopedia.com) (last visited June 22, 2022).

[5] See CFTC Announces Staff Roundtable Discussion on Non-Intermediation (May 25, 2022), available at https://www.cftc.gov/PressRoom/Events/opaeventstaffroundtable052522, for agenda, participant list, and archived webcast for this roundtable. 

[6] CEA Section 3(b), 7 U.S.C. §5(b).

[7] Request for Information on Climate-Related Financial Risk, 87 Fed. Reg. 34856 (June 8, 2022).

[8] Concurring Statement of Commissioner Summer K. Mersinger Regarding Request for Information on Climate-Related Financial Risk, 87 Fed. Reg. at 34861.

CFTC Commissioner Caroline D. Pham today made the following statement on the unanimous U.S. Senate confirmations of Mark Uyeda and Jaime Lizárraga:

“I congratulate Mark Uyeda and Jaime Lizárraga on their historic and unanimous Senate confirmation as SEC Commissioners. It is encouraging to see more diverse leadership in financial services and government. In addition to recognizing their deep expertise and many accomplishments, I especially want to recognize that this is the first time in the SEC’s 88-year history that an Asian Pacific American will serve as Commissioner. I look forward to opportunities for our agencies to work together.”