Washington, D.C. — The U.S. Senate last night voted unanimously to confirm Rostin Behnam as Chairman of the U.S. Commodity Futures Trading Commission. Behnam has served as Acting Chairman since January and issued the following statement regarding his confirmation:

“I would like to thank President Biden, Majority Leader Schumer, Republican Leader McConnell, Chairwoman Stabenow, and Ranking Member Boozman for the honor to serve as the CFTC’s 15^th Chairman. I would also like to thank Commissioner Stump for her public service and leadership at the Commission and for her ongoing support as a friend and colleague. 

I am pleased to see the nominations of Kristin Johnson, Christy Goldsmith Romero, Summer Mersinger, and Caroline Pham, and look forward to supporting them through their confirmation process.

As I look ahead to 2022, the CFTC is uniquely positioned to further its role as a global leader in financial regulation.  With many challenges come many opportunities, and I am thrilled to be leading this incredible agency and its dedicated staff at a time of great change in our financial markets.”

Earlier this year, I informed Senate Republican Leader Mitch McConnell and the White House that I will not be seeking another five-year appointment at the upcoming conclusion of my current term.  As the President and the United States Senate consider the nomination of others to fill the position, I intend to continue working alongside Acting Chairman Behnam to carry out the important work of the Commodity Futures Trading Commission.

It is the honor of my career to count myself among those who serve as Commissioners at the CFTC – those whom I have had the privilege to work alongside, those who came before me, and those who will lead the agency in the future. I am humbled to have been tasked with such responsibility.

Like the markets we oversee, the composition of the Commission is, by design, constantly evolving to gain the benefit of fresh perspectives.  I am excited to see how those who will next fill the Commission carry forward the charge in their own unique ways while building upon the strong foundation built by many.

Earlier this year, I released a Primer with respect to cryptocurrencies and other digital assets.  My intent in releasing the Primer was to provide clarity as to the CFTC’s legal authorities when it comes to these assets in light of the recent growth in their popularity and the prevalence of confusion and misunderstanding regarding our regulatory function in this space as directed by Congress.

Since issuing this Primer, I have encouraged all regulators to provide clearer descriptions of their existing authorities to participants and the public.  Only from that point can we determine whether gaps exist, and properly evaluate the need for any new laws and regulations.  Otherwise, we risk stifling innovation due to poorly understood objectives and uncoordinated responses. 

I therefore applaud the recent joint statement issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency on crypto-asset policies.  I am pleased that these federal banking regulators have joined me in an effort to provide greater clarity around the impact of existing laws and regulations on certain crypto-asset activity.  Clearly outlining the application of various existing requirements is foundational to advancing proper oversight of these products and their various utilities. 

As digital assets play a larger role in our financial system and the economy on a whole, those who invest or engage in activities relating to such assets, as well as the general public, are entitled to clarity as to how this new financial asset class is regulated in the United States.  Until we remedy the current confusion about the application of federal and state regulators’ existing legal authorities with respect to digital assets, we cannot have an honest conversation about whether any agency needs new authorities.

Before considering any overhaul of our regulatory structure as it relates to digital assets (and to avoid regulating these assets through the exercise of enforcement authority), let’s get the facts straight about our current system.

Overview

Easterday Ranches, Inc. (a cattle feedyard) made false statements to, and violated position limits established by, a futures exchange regulated by the Commission.  Accordingly, the Commission appropriately brought (and today settles) charges against Easterday Ranches of violating provisions of the Commodity Exchange Act (“CEA”) that specifically address these types of misconduct. 

Unfortunately, the Commission has also elected to add a fraud charge involving cash transactions that the Commission does not regulate, on behalf of a single corporation that does not need the Commission’s assistance, and that is resulting in a settlement that is devoid of any practical effect.  I, therefore, respectfully dissent.  

At its core, what happened here was a “garden variety” business fraud involving cash commodity transactions.  One corporation (Easterday Ranches) defrauded another corporation (Tyson Fresh Meats, Inc.).  The courts in this country are chock-full of private litigation over alleged frauds of this nature.  In fact, Tyson initially sought relief by filing a civil suit against Easterday Ranches, which seems logical and appropriate. 

Unfortunately, the Commission has injected itself into this cash market, single-victim, business fraud by charging Easterday Ranches with violating an anti-fraud provision in the CEA and the Commission’s implementing regulations thereunder.  In doing so, it justifies the fears of unwarranted government overreach voiced by market participants[1] when the Commission was developing its rules to implement this anti-fraud enforcement authority, which was granted to it as part of the Dodd-Frank Act.[2] 

And to what end?  The settlement approved today includes a permanent injunction against future fraudulent conduct by a company that will soon be out of business, as well as orders of restitution and a civil monetary penalty (the “penalty”) that will never be paid.  

Procedural Posture

The settlement of this enforcement action encompasses all three counts of the Complaint that the Commission has filed against Easterday Ranches:

·       Count 1:  Fraud, in violation of CEA Section 6(c)(1) and Commission Rules 180.1(a)(1)-(3);

·       Count 2:  False statements to a registered futures exchange – the Chicago Mercantile Exchange (“CME”) – regarding Easterday Ranches’ inventory of cattle and related purchases and sales of cattle in applications for bona fide hedge exemptions from position limits, in violation of CEA Section 9(a)(4); and

·       Count 3:  Exceeding position limits established by CME, in violation of CEA Section 4a(e). 

The charges brought in Counts 2 and 3 of the Complaint (i.e., false statements to a futures exchange and position limit violations) fall squarely within the Commission’s statutory mandate under the CEA with respect to the futures markets.  I therefore voted to approve filing them, and I would support a settlement that is appropriately tailored to resolving these charges.  

It is evident, however, that the sizeable monetary sanctions imposed in this settlement (a penalty of $30 million and restitution to Tyson of the $233,008,042 in losses that it suffered as a result of the fraud) are driven not by those charges,[3] but rather by the fraud charge in Count 1 of the Complaint.  I voted not to file the fraud charge in Count 1, and I similarly dissent from the approval of a settlement whose terms clearly are structured primarily to resolve that charge.

The Commission’s Cash Market Enforcement Authority

The CEA has always provided the Commission with anti-manipulation authority over cash market transactions.  Why?  Futures contracts regulated by the Commission serve a price discovery function.  Well-functioning futures (and other derivatives products) rely upon a sound underlying cash market and may reference cash market indexes in their pricing.  Therefore, cash market transactions can potentially be part of a scheme to manipulate prices of derivatives that are regulated by the Commission.  Congress has recognized these relationships between prices of cash transactions and derivatives products, and thus the CEA historically has provided the Commission with anti-manipulation enforcement authority with respect to cash transactions. 

Section 753 of the Dodd-Frank Act is entitled “Anti-Manipulation Authority.”  It amended Section 6(c)(1) of the CEA[4] to include an enhanced “Prohibition Against Manipulation,” as well as a “Special Provision for Manipulation by False Reporting” and a provision addressing “Other Manipulation.”  Despite Congressional focus on manipulation,[5] courts have held that the prohibition on “any manipulative or deceptive device or contrivance” that the Dodd-Frank Act added in Section 6(c)(1) means that the Commission can bring an enforcement action based on fraud in a cash commodity transaction (i.e., one that does not involve a futures contract, swap, or other derivatives product) – even if no manipulation is alleged.

The anti-fraud enforcement authority provided to the Commission in CEA Section 6(c)(1) is an important tool for the agency.  Appropriate circumstances for its use are to protect the integrity of the derivatives markets that the Commission regulates, and where the alleged fraud in the cash market is widespread (particularly where it is targeted at retail customers who often are unable to bear the cost of pursuing judicial remedies on their own).  Indeed, for a number of years, the Commission has aggressively used this enforcement authority to punish and deter fraud involving cash commodity transactions for these purposes.  

Here, however, there is no indication that Easterday Ranches’ fraud against Tyson threatened the integrity of the futures markets.  Any such threat that may have arisen was in Easterday Ranches’ false statements to CME and its breach of position limits; that threat, however, is fully addressed by Counts 2 and 3 of the Complaint charging Easterday Ranches with violations of CEA Sections 9(a)(4) and 4a(e), respectively,[6] which are specifically targeted to such misconduct and which existed long before enactment of the cash market anti-fraud authority in the Dodd-Frank Act.  Nor did Easterday Ranches engage in a widespread fraud victimizing retail customers.  To the contrary, it committed a single-victim fraud against an entity that is fully possessed of the means to pursue its own legal remedies (which it is in fact doing). 

The Commission has neither the capacity nor the expertise to become an “uber cop on the beat” to police all fraud in all cash transactions involving all commodities.  It is essential, therefore, that the Commission exercise caution in applying the new anti-fraud authority over cash commodity transactions provided in the Dodd-Frank Act.  Yet, far from exercising caution, the Commission has reached to bring a single-victim cash market fraud charge against Easterday Ranches in this case that, from a policy perspective, there is no reason to bring. 

Tangential Relationship to Regulated Futures Markets 

In order to give the case the appearance of being related to the derivatives markets that the Commission regulates, the Commission’s Complaint alleges that Easterday Ranches defrauded Tyson in order to cover losses that Easterday Ranches had incurred in trading cattle and corn futures contracts.[7]  But while futures losses may have provided a motive for Easterday Ranches’ fraud, that fraud in no way implicated the Commission’s regulation of the futures markets.  The Commission’s Complaint against Easterday Ranches does not allege a single act of fraud relating to any futures contract purchased or sold by either Easterday Ranches or its victim, Tyson. 

I believe the Commission, in this case, should have focused its attention on the charges in Counts 2 and 3 of the Complaint that are directly relevant to the futures markets that lie at the heart of the Commission’s responsibilities under the CEA.  Unfortunately, the Commission instead has expended its limited human and budgetary resources on a fraud charge at the outer edge of its jurisdiction, with no appreciable benefit to the markets we regulate.  I believe this represents a poor use of the taxpayer funds with which we have been entrusted, which I cannot support.

The Commission’s Settlement of its Fraud Charge Against Easterday Ranches Has No Practical Effect

My understanding based on the information available to me is as follows: 

Easterday Ranches filed for bankruptcy shortly after the fraud on Tyson came to light, and Tyson, after having filed a civil suit to recover its losses resulting from the fraud, is now pursuing its claims in the bankruptcy proceeding.  Easterday Ranches’ land has been sold at auction as part of the bankruptcy proceeding, and the company is expected to be liquidated and cease doing business as part of (or shortly after the close of) the bankruptcy proceeding.[8] 

The settlement provides that both the $233 million in restitution to Tyson, and the $30 million penalty, are expressly subordinated to the claims of all other creditors in the bankruptcy proceeding, including Tyson.  Accordingly, even if the restitution and penalty are not discharged in the bankruptcy proceeding, Tyson will not receive any restitution from the Commission’s settlement, and separately the civil monetary penalty will not be paid, unless all other creditors have been paid out in full.  But Easterday Ranches’ bankruptcy estate does not appear to have assets sufficient to cover all creditors’ claims against it, and thus it is unlikely that all other creditors will be made whole.  

Simply put:  Tyson appropriately sought relief via the filing of a civil suit and will now seek recovery in bankruptcy court.  These are the correct venues for its remedies.  And as for the Commission, the settlement of its fraud charge against Easterday Ranches results in a large penalty that will not be paid, as well as a permanent injunction against future fraudulent conduct and a registration ban against a soon-to-be-defunct corporate entity.[9] 

In my opinion, the Commission’s pursuit of a fraud charge against Easterday Ranches has not added to any positive outcome. 

Conclusion 

The Commission’s governmental interest as regulator of the U.S. futures markets is fully vindicated in this case by its charges that Easterday Ranches violated the CEA by making false statements to a futures exchange and exceeding applicable position limits.  I am disappointed that the Commission has unnecessarily devoted resources to an additional fraud charge that represents an inappropriately expansive application of its cash market anti-fraud enforcement authority.  While that fraud charge has resulted in a settlement with big sanctions numbers, the restitution and penalty on Easterday Ranches as part of this settlement will not be paid, and the fraud charge has not served the public interest well. 

[1]  See, e.g., Letter from Craig S. Donohue, CME Group Inc., at 10 (January 3, 2011) (“the prohibition on fraud or deception ‘in connection with ... any commodity’ sweeps  so broadly  that, on its face, it could even subject someone to liability for putting out a deceptive weather forecast or supermarket advertisement.”), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=27269&SearchText; Letter from Harry Ng, American Petroleum Institute, and Greg Scott, National Petrochemical & Refiners Association, at 3-4 (January 3, 2011) (“The Commission’s use of the term ‘commodity’ indicates that the rule would apply to virtually every commercial transaction in the economy . . .;” and “[the Commission’s proposed rule] would also place an enormous burden on the Commission’s resources by obligating the Commission to assume responsibility for policing commercial transactions for products and services far outside the areas of the Commission’s traditional jurisdiction and expertise.”), available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=26875&SearchText.

[2]  Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank Act”).

[3]  In its settlement of In re Armkat LLC, CFTC Docket No. 19-29 (September 25, 2019), the Commission settled charges of position limit violations on two days – the same as charged in its Complaint against Easterday Ranches – and imposed a penalty of $140,000, with no award of restitution.  And while the facts differ somewhat, the Commission’s settlement of In re Credit Suisse International and Credit Suisse Securities (USA) LLC, CFTC Docket No. 16-10 (March 22, 2016), is illustrative regarding sanctions in these matters.  One Respondent received a penalty of $525,000 for exceeding position limits on several days despite having been granted a bona fide hedge exemption.  The second Respondent was found to have violated CEA Section 6(c)(2), 7 U.S.C. §9(2), for making false statements to Commission staff that had the effect of inflating the amount of hedge exemptions, and received a penalty of $140,000.  No restitution was awarded against either Respondent.

[4]  CEA Section 6(c)(1), 7 U.S.C. § 9(1).

[5]  That the focus of this new enforcement authority was manipulation also was evinced by the comments of Senator Maria Cantwell (who sponsored the provisions) and Senator Blanche Lincoln (the Chair of the Senate Agriculture Committee, which is the Commission’s authorizing Committee) during the Senate floor debate on the legislation that eventually became the Dodd-Frank Act.  Senator Cantwell stated the purpose of this authority as follows:  “My amendment strengthens the Commodity Futures Trading Commission’s authority to go after manipulation and attempted manipulation in the swaps and commodities markets.”  She added that “it is very important to have a strong bright line, a law on the books against manipulation” because “[c]urrent law makes it very difficult for the Commodity Futures Trading Commission to prove market manipulation.”  During that same floor debate, Senator Lincoln stated that “[m]arket manipulation is an ever-present danger in derivatives trading” and that “Senator Cantwell’s amendment will give the CFTC a very important new weapon in its arsenal to combat ever-evolving forms of manipulative trading schemes that undermine public confidence in the proper functioning of these markets.”  156 Cong. Rec. S3348-3349 (daily ed. May 6, 2010) (statements of Sen. Maria Cantwell and Sen. Blanche Lincoln).

[6]  CEA Sections 9(a)(4) and 4a(e), 7 U.S.C. §§ 13(a)(4) and 6a(e), respectively.

[7]  See Complaint, ¶¶ 3, 23, and 27.

[8]  The co-owners and co-managers of Easterday Ranches were Gale Easterday and his son, Cody Easterday.  Gale Easterday passed away in December 2020.  Cody Easterday has pled guilty to criminal charges based on his role in the fraud on Tyson, and has resigned his position as an officer and manager of Easterday Ranches.

[9]  Of course, in the absence of a fraud charge, the settlement with Easterday Ranches would still subject it to a permanent injunction against future false statements to a futures exchange and position limit violations, and the Commission could have sought a registration ban as part of its settlement of those charges.

Before beginning, I note that the views I express today are my own and not necessarily those of the Commission I am proud to serve upon nor my fellow Commissioners.

I am very happy to be here with you all in Chicago.  Due to the pandemic, it has been a while since I have had the opportunity to speak in person.  I am a little out of practice, so I am going to need a little help from the audience today.  I hope we can also have a bit of fun by starting with a friendly game of “Family Feud.” 

Two of the conference attendees have agreed to be our first contestants.

Top three answers are on the board.

In 2021, what topic is a CFTC Commissioner most often asked to address when invited to speak?  

1. Crypto/Digital Assets
2. Climate Change/Carbon Markets
3. ESG

I asked this question because it really demonstrates where the public’s interest is focused.  Interestingly, these topics are well beyond the traditional mandate of the Commodity Futures Trading Commission (CFTC).  Sure, we have CFTC-regulated products that are based upon the demand for crypto, emission reductions, and impact investment, but those products comprise a small portion of the markets we oversee.  Nonetheless, it seems to be where at least some of you – and many of your clients – are focused, so I thought I would spend a bit of time talking about each today. 

Crypto and Digital Assets

I’ll begin with digital assets.  Before regulators go about engaging in a jurisdictional power-grab, I think market participants need us to provide clearer descriptions of our current authorities.  Only from that point can we determine whether gaps exist.  

On a frequent basis, I am reminded that the public is confused by the application of each federal and state regulator’s current regulatory and enforcement regime.  Until we remedy that confusion, we cannot have an honest conversation about whether any agency needs new authorities.  And only then can informed stakeholders contribute to designing a workable regulatory structure.

One clear example of where regulators owe the marketplace clarity is with respect to the persistent tendency to draw a distinction between commodities and securities.  Oftentimes, this confusion seems to stem from well-intentioned product developers seeking to determine if they need to face the CFTC or the Securities and Exchange Commission (SEC) in achieving proper U.S. regulatory compliance, and in doing so they ask the wrong question: “Is my product a security or is it a commodity?”.  I am alarmed that those who are genuinely seeking to enter a regulatory environment with these new products have been led to believe that this is the fundamental question they must answer.

As most everyone here knows, the CFTC does not regulate commodities.  So, any pronouncement that an asset is a commodity should not be interpreted as a roadmap to the CFTC for regulatory oversight.  Unfortunately, far too many of those seeking to genuinely innovate in this space, and those looking to participate in this space, have been misinformed as to this point.  I am trying my best to level-set and correct the proliferation of this misinformation.  I want to be very clear that the CFTC regulates derivatives – we are specifically charged by Congress to regulate futures and swapsSee Section 2(a)(1)(A) of the Commodity Exchange Act (CEA), 7 U.S.C. § 2(a)(1)(A). – many of which have commodities as their underlying assets, but we do not regulate the underlying commodities themselves. 

For example, natural gas is a commodity, and the CFTC regulates futures contracts and swaps on natural gas.  But the CFTC does not regulate the transmission and sale of natural gas for resale in interstate commerce.  Rather, that is left to the Federal Energy Regulatory Commission.

While the SEC does regulate securities (and I will leave it to them to hash out what qualifies as a security), the CFTC regulates derivatives, not commodities. That said, the derivatives we regulate include some derivatives on securities.This includes, for example, futures contracts on broad-based stock indexes.

Complicated?  Unfortunately, yes.  But it is how our system is designed today, with multiple regulators involved in the oversight of assets depending on the nature and function of the specific product.

Separately, and perhaps the root of some of the confusion as to the CFTC’s role in the digital asset space, is the more expansive enforcement authority we have to deter fraud and manipulation in the cash markets (notably, this anti-fraud/anti-manipulation authority extends beyond the derivatives markets we regulate and into the cash markets).See CEA Sections 6(c)(1) and 9(a)(2), 7 U.S.C. §§ 9(1), 13(a)(2), respectively. Congress provided the CFTC with this expanded enforcement authority because such fraudulent or manipulative activity in the cash markets may have an impact on the derivatives markets we are tasked to oversee.  Given the confusion that exists, I believe we must consistently clarify that this broader enforcement authority does not suggest that we are conducting day-to-day regulatory oversight in these cash or spot crypto markets.  Failing to be clear on this point gives the public a false sense of security and leaves those seeking a regulatory home perplexed.

We need to minimize the confusion and stop allowing silly distinctions between commodities and securities to drive the discussion.  Only then can we have an honest conversation about next steps. 

Meanwhile, a regime already exists for regulating futures and swaps on digital assets, and we at the CFTC have for some time been applying our regime in this space, much as we do for other futures and swaps based on vastly different assets, ranging from crude oil futures to credit default swaps.  My opinion is that we should stick to what we do best in regulating the infrastructure that supports futures and swaps markets.  Whether based upon corn, crypto, or credit defaults, the derivatives markets we regulate function very differently from those markets that facilitate exchange of the underlying assets.  Before expanding the CFTC’s authority into the cash markets, careful consideration should be given to whether the market infrastructure we oversee today can logically benefit the cash markets, which have historically been beyond our expertise.

Climate Change and Carbon Markets

Turning now to our second most requested speaking topic – climate and carbon markets.  Anyone who reads a paper or watches the news is familiar with the various concerns and opinions pertaining to the impact of climate change on the global economy.  Like many things we as a nation grapple with, this one is multi-faceted to the point that sometimes the basics get lost in the mix.  If we are to have an honest conversation about a path forward, we must consider the entire picture, which is well beyond just the environmental goals, but also involves strong impact investor sentiments as well as everyday consumer needs.  Balancing these interests is no small task, and we should do so very thoughtfully.  

Let’s start with investors.  It is undeniable that many are seeking to invest in a way that drives transition to reduced carbon emissions.  And as a result, those that supply our nation with food and energy are themselves exploring how to expedite transition by committing resources to the next generation of technology.  I support market-driven outcomes such as this, as preferred to government mandates.  That said, I am not naïve to the fact that others of my colleagues in various agencies may prefer the government to play a more prominent role in driving these developments.

Regardless of what or who creates the momentum and my own personal views on the preferred impetus, as a nation, we would be well served to contemplate the new transitional and physical risks that are being introduced – the potential for stranded assets, changes in asset prices, credit risks, supply disruptions, and so forth.  Investors should work with those that provide our economy with essential goods and services to determine how best to balance carbon reduction efforts against these new risks during the transition they seek.  It would be unfortunate for the government to be the source of such new risks.

It’s a balancing act, and while institutions finance new technologies to advance carbon emission reduction, those that continue to support existing infrastructure in the meantime should not be penalized.  Abandoning established food and energy supply methods during a time when many are trying to transition cannot be the price we pay to advance alternative production methods.  Otherwise, it is the U.S. consumers who will ultimately suffer. 

Additionally, the best solutions likely benefit from drawing upon the experience of those who today supply our country with such goods and services.  Their experience with the infrastructure and markets, as well as the influence of investor pressure they are already responding to, cannot be dismissed if we are genuinely interested in adapting without the unnecessary disruptions other countries have experienced.  As such, I was pleased to see that a recent report from the Financial Stability Oversight Council (FSOC) recommended the formation of a Climate-related Financial Risk Advisory Committee to help the FSOC gather information and analysis on climate-related financial risks.See FSOC, Report on Climate-Related Financial Risk 2021, at 5, 119 (October 21, 2021) (Recommendation 1.2), available at FSOC Report on Climate-Related Financial Risk (treasury.gov).  I hope such a committee will have balanced representation to include current energy and agricultural producers who are on the front lines of taking on new risks to balance the demands of environmental improvements, impact investors, and consumers.

Perhaps that is where the CFTC can be of most help in lending our expertise in facilitating risk management tools.  Whether these new risks are driven by government mandates or consumer and investment demand, derivatives will be used to manage such.  We will regulate the resulting risk management tools just as we do with respect to risk arising from all other asset classes.  In fact, we already are doing so, as today we oversee approximately 175 exchange-listed climate-related derivatives products.

“ESG” – Environmental, Social, Governance Factors

The discussion of climate change naturally leads to a broader conversation on ESG.  Difficult questions remain in how to value a company’s ESG standing – opinions vary widely, and reliable data is often hard to come by. 

Diversity in the context of ESG is perhaps an example of the valuation confusion that exists.  Some suggest it belongs in the “S” category (social) for the greater good and fairness it represents, but how does one measure goodness and fairness?  Others believe diversity is a component of the “G” category (governance) – a simple metric in the tally of individuals represented.  In the context of governance, I have repeatedly stated my belief that encouraging a diverse set of views yields alternative ways of considering challenges and broadens the options for solving problems.  And I believe that is a benefit to any decision-making body – public company, government agency, or otherwise.  But numbers alone will not achieve this objective; inclusion is critical – more on the importance of inclusion later.

When I set aside my personal views and focus on my job of regulating the derivatives markets developing in response to demand for ESG investing, I am reminded that difficult questions remain, even as demand persists.  And the way in which these underlying standards develop will impact the ability to realize well-functioning derivatives markets in this area.  I appreciate that so many of you are working on this task.  As new markets and products develop in our space, we need much input.

__________

As I would now like to shift my remarks to other matters that may be of interest, I would like to ask our “Family Feud” contestants back to the stage for round 2.  

Top three answers are on the board.

As many of you know, former Commissioner Dan Berkovitz and I have had a close working relationship that pre-dates our time at the CFTC.  And as such, we often compared notes on various matters.  During the first half of 2021, what topic most often dominated my conversations with former Commissioner Berkovitz?  (And as a reminder, the topic of positions limits is “so 2020,” and, therefore, a reasonable guess for prior years, but not in 2021.)  

1. Event Contracts
2. Retail Interest in Derivatives Markets
3. Interesting Podcasts or Non-Fiction Books

As to this last topic, anyone who knows Dan appreciates that he is an avid inquirer.  Very rarely did we end a conversation without my adding another non-fiction book or podcast to my library list.  Perhaps someday he will publish his favorites – too many for me to recount here, so I had better focus my remarks on the many days that Dan and I read our favorite “book” together, the Commodity Exchange Act (CEA).  And I am not joking, we often read excerpts from the CEA as we contemplated new questions about novel contracts or the application of the statute in the context of increased retail participation or disintermediation.  In fact, he returned my call one day last spring as I was walking to pick up my daughter from school – I told him I might need to call him back because I didn’t have the CEA in front of me, and he kindly asked which section I wanted to discuss and then proceeded to read it to me such that I could point out my specific query within Section 5c(c)(5)(C) of the CEA – true story. 

Event Contracts

For those who may not have memorized the CEA, Section 5c(c)(5)(C) deals with a special consideration for CFTC review of event contracts.CEA Section 5c(c)(5)(C), 7 U.S.C. § 7a-2(c)(5)(C).  Congress has generally limited the CFTC’s ability to disapprove new contracts unless it finds they are violating the CEA or CFTC regulations.  These limitations date back to the Commodity Futures Modernization Act of 2000,Commodity Futures Modernization Act of 2000, Appendix E of Public Law 106–554, 114 Stat. 2763 (2000). but were left in place by Congress when it enacted the Dodd-Frank Act a decade later.Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) (Dodd-Frank Act).

Also in the Dodd-Frank Act, Congress addressed the trading of a narrow set of event contracts by granting the CFTC a bit more discretion to determine that certain of these contracts MAY be contrary to the public interest if they involve specifically enumerated activities including: (1) activity that is unlawful under any Federal or State law; (2) terrorism; (3) assassination; (4) war; (5) gaming; or (6) other similar activity determined by the CFTC, by rule or regulation, to be contrary to the public interest.CEA Section 5c(c)(5)(C)(i), 7 U.S.C. § 7a-2(c)(5)(C)(i).

So, what does all of this mean?  While the CEA provides a fairly wide allowance for contracts to be traded on events that could happen in the future by demonstrating compliance with the statutory core principles and CFTC regulations, there is additional legal analysis that the CFTC must undertake for event contracts.  With regard to event contracts, we must answer two additional questions:

• • • First, we must determine if the contracts involve any of the enumerated activity – gaming, terrorism, assassination, war, unlawful activity.

• • • If the answer is yes, then we must answer whether such contracts are contrary to the public interest.  If yes again, then the contract cannot be listed.CEA Section 5c(c)(5)(C)(ii), 7 U.S.C. § 7a-2(c)(5)(C)(ii).

Otherwise, if the answer to either of these questions is “no,” then we are tasked to honor the process established by Congress of reliance on a demonstration of compliance with the core principles and CFTC regulations as the standard for new contract listings.

How a person (including any Commissioner or CFTC staff member) feels about these contracts is a subjective determination.  My job is to objectively apply the statutory criteria for listing event contracts.  We will then regulate and oversee the listing entities as we do all of our registrants. 

Retail

Beyond event contracts, the interest from retail market participants in many other products the CFTC regulates is another topic worth exploring.  I would like to discuss three recent developments with respect to retail participation generally that I find to be very interesting:

• • • First, access – initial demand for many new asset classes is increasingly derived from retail participants.  Take, for example, crypto derivatives. 

• • • Second, product development – we have seen the introduction of smaller-sized “micro” futures on such things as crude oil, as futures exchanges attempt to attract retail traders to their platforms.   

• • • Third, infrastructure – last year, the CFTC granted designated contract market (DCM) designations to several new futures exchanges whose business models focus on retail traders. 

I think all of these things demonstrate how the CFTC’s principles-based approach to compliance with our requirements enables us to be a bit more nimble than other regulators in permitting innovation and evolution to occur.  I trust that when conducting rule enforcement reviews, our market oversight staff will pay close attention to the new retail-focused DCMs in order to make sure these exchanges fulfill their legal obligations – just as we do for any market infrastructure provider.

At the same time, I am hopeful the CFTC will undertake new initiatives to help assure that retail traders are properly informed about how the futures markets operate and the degree of risk that such trading inherently entails. 

And I would be remiss if I did not add that we are continually carrying out our market surveillance and investigative functions to assure that the futures markets trade in an orderly manner and to guard against manipulation, disruptive trading, and other types of abuse which harm the futures markets and those who trade on them – both institutional and retail traders alike.        

While the advantage of the principles-based regulatory framework is that it is sufficiently flexible to allow the CFTC to adapt to changing market dynamics, there are aspects of our current regime that are a bit ill-fitting for some of the recent trends.  For example, our clearing rules are designed around a structure where an intermediary stands between clients and clearinghouses as a guarantor, and where clients use leverage to increase their exposure.  Perhaps this works well for some retail offerings, but many new retail-focused derivatives clearing organizations (DCOs) do not use an intermediary model. 

To date, we have accommodated this model by imposing conditions such as requiring products to be fully collateralized.  But I think anyone who assumed that was the end of the story might be a tad naïve.  Certainly, we might expect future requests from these registrants to offer leveraged clearing.  Yet, our DCO rules are written for a legacy structure of intermediaries operating in markets largely dominated by institutional clients.  If the trend of growing retail interest persists, we will eventually have to address this very thoughtfully, with an eye towards maintaining the safety and soundness of the clearinghouses while at the same time encouraging retail access to the clearing infrastructure.  

__________

Before I close, I think we have time for one more friendly competition.  This time the game is “Jeopardy,” and our contestants are all CFTC alumni. 

And the categories are:

1. 1. CFTC C-Hair
   2. Women Before Me

Please remember to frame your response in the form of a question. 

During the past 10 years, the CFTC has had six Chairmen (including Acting Chairmen).  Among these men, only two – Heath Tarbert and Mark Wetjen – share a physical feature that distinguishes them from the others.

                        Answer: What is a full head of hair?

During the CFTC’s 47 years, on only one occasion have three female Commissioners served simultaneously.  These women formed the majority of the Commission in 1994/95 – points will be awarded for each correct name.

                        Answers:     Who is Barbara Holum?

Who is Mary Schapiro?

Who is Sheila Bair?

I look forward to the day – perhaps soon – when more female Commissioners serve simultaneously.  But having men and women serve as Commissioners is just one example of the diversity of experiences and views that I believe benefits all decision-making bodies, including the CFTC.  If all leaders in an organization have homogeneous experiences, opinions, and areas of expertise, that will limit ideas.  Encouraging a diverse set of views yields alternative ways of considering challenges and broadens the options for solving problems. 

But diversity is only part of the equation.  Inclusion and retention are critical.  An organization’s employees must feel comfortable sharing their unique opinions.  It is unacceptable for any employees to feel they must pull back for fear of failure or to adapt to the majority or the status quo in a way that causes us to lose the benefit of diverse viewpoints.  Furthermore, without proactive steps to retain employees, we again risk losing the benefit of diversity. 

Closing

In closing, I want to thank everyone for playing along in my game-show themed talk, but I also want to assure you that there is no family feud or double jeopardy playing out at the CFTC.  As you are well aware, we are a little light on Commissioners right now.  As a result, matters requiring Commission-level approval can only proceed if the two of us agree.  Some have suggested this affords me the opportunity to simply oppose the Acting Chairman’s agenda by canceling his vote with an opposing vote of my own.  Anyone who knows me or Russ Behnam understands that is not how either of us chooses to do our work.  I have known and worked with Acting Chair Behnam for a long time – even before we arrived at the CFTC.  We are much more inclined to try our hand at “Let’s Make a Deal.”  And even as the two of us are currently limited in our ability to communicate directly with one another about agency business, our teams have also worked together for several years, and they serve us well in finding common ground.  Nevertheless, I will be true to my principles, and I know he will be, too.  But we will not play games with your markets.