SPEECHES & TESTIMONY

Opening Statement of Chairman J. Christopher Giancarlo before the Open Commission Meeting

July 11, 2019

Good morning.  This meeting will come to order.  This is a public meeting of the Commodity Futures Trading Commission (CFTC).

Let me welcome my fellow Commissioners, their staffs, agency staff, and interested members of the public.  Thank you for your engagement in this important process.

We have two matters before us today.  I look forward to the staff presentations on each of them and their thorough consideration and disposition.  Another matter that was noticed for this meeting, a joint proposal with the SEC to align the minimum margin required on security futures with other similar financial products, has been unanimously actioned by seriatim and was announced earlier this week.  I thank the Commissioners and their staffs for its timely handling.

Before we take up the two remaining matters, I want to briefly address some idle speculation of late in the London press regarding my supposed candidacy for the position of Governor of the Bank of England, the United Kingdom’s central bank and prudential regulator.  As I have informed my fellow Commissioners, I have neither sought nor applied for the position, for which I understand the application process formally closed some time ago. 

More broadly, I confirm that I have not and will not, discuss, consider, apply for, or pursue any professional engagement or employment of any kind whatsoever here or abroad until after the completion of my service on the Commission. 

I mention this only to dispel any concerns that such press chatter may suggest about my engagement in today’s proceedings or, for that matter, any other subject now before the Commission.

Now for the matters at hand.  

The CFTC has been a consistent leader of the world’s major market regulators in enacting effective derivatives regulation and oversight.  By 2014, it was the first regulatory agency to implement most of the internationally agreed upon swaps market reforms. 

As a result, the CFTC now has more than five years of experience with its current regulatory framework, including the approach to its cross-border application.   This puts us in a position to appreciate that application’s different strengths and deficiencies.  Based on a careful analysis of that data and experience, it is possible to recognize successes, address flaws, recalibrate imprecision, and optimize measures.  This is particularly important with respect to the CFTC’s approach to regulating cross-border activities.

Last October, I published a white paper[1] on cross-border swaps regulation.  It proposed updating the agency’s current cross-border approach with an objective and risk-focused framework based on regulatory deference to third-country jurisdictions with comparable regulation and supervision, including those that have adopted the core G20 swaps reforms.

Stemming from that white paper, the staff has put into seriatim over the past several months four proposals on the cross-border reach of CFTC regulation.  The first proposal was unanimously approved by the Commission several weeks ago.  It establishes amendments to certain provisions of CFTC regulations governing the offer and sale of foreign futures and options to customers located in the United States.[2] The proposed amendments would codify the process by which the Commission may terminate exemptive relief issued pursuant to those regulations.[3] 

The next two proposals deal with issues related to the registration of derivatives clearing organizations (DCOs) and are the subject of today’s open meeting, which we will turn to shortly. 

The fourth proposal concerns the registration and regulation of swap dealers and major swap participants.  This proposal continues to be the subject of constructive dialogue with the Commissioners and their staffs.   It remains before the Commission for consideration in seriatim.  I commend the proposal to my fellow Commissioners and my successor for their thoughtful consideration and advancement. 

I want to note that these proposals have absorbed enormous time and attention from my fellow Commissioners and their staffs.  The Divisions have received excellent comments and engaged in extensive dialogue with each Commissioner office.  Whatever the final disposition of today’s proposals, I want to acknowledge that each of the proposals has benefited from the intelligence and bipartisan attention of my colleagues and their thoughtful staffs.

I also want to thank the agency staff for their fine work and input, especially the Division of Clearing and Risk and the Office of International Affairs.  These hearings require extensive preparation by them, for which we are grateful. 

Finally, I thank my own staff, especially Matt Daigler, who has devoted much of his time to seeing these proposals through.  I also want to publicly acknowledge my gratitude to Michael Gill, who is simply the finest, most capable and effective Chief of Staff and Agency COO in the federal government.  Mike managed my transition to the Chairman’s Office and will assist Dr. Tarbert with his.  I am deeply indebted to Mike for his matchless savoir faire.

Proposed Rule on Registration with Alternative Compliance for Non-U.S. Derivatives Clearing Organizations

I turn first to the proposed rule on registration with alternative compliance for non-U.S. DCOs.

This proposal addresses the registration of non-U.S. DCOs that clear swaps for U.S. persons.  The CFTC has almost two decades of experience overseeing non-U.S. DCOs engaging in activity in U.S. derivatives markets.  LCH Ltd was the first non-U.S. DCO to register with the CFTC 18 years ago.  Other CCPs became registered after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act).[4]  Through its supervisory powers, the CFTC has informally calibrated its day-to-day oversight of these registered DCOs based on the principle of deference to the oversight of primary regulators, while taking into account the specific circumstances of a particular non-U.S. DCO.

The main purpose of this rulemaking is to address the current informality of the CFTC’s approach and, in doing so, introduce significant additional areas where the CFTC can defer, appropriately and consistent with its risk oversight responsibilities, to non-U.S. DCOs’ home country supervisors.  Among other things, this proposal sets forth a framework under which non-U.S. DCOs that do not pose a substantial risk to the U.S. financial system would have the option of being fully registered with the CFTC as a DCO but meet their registration requirements through compliance with their home country requirements. 

These DCOs that are “fully registered with alternative compliance” would still be able to offer customer clearing through futures commission merchants (FCMs), just like other fully registered DCOs.  Consistent with the commitment to apply supervisory deference under Title VII of the Dodd-Frank Act where appropriate, the home country regulator would have supervisory primacy over these DCOs with the CFTC much more narrowly focused than is currently the case, from both a legal and practical perspective, on U.S. customer funds protection at these DCOs.  This narrow focus on customer funds protection is appropriate to help ensure the legal requirements relating to segregation at both the FCM and DCO level are met, and that, if necessary, the bankruptcy protections afforded to customers under the CFTC’s FCM model work as intended. 

In determining whether a non-U.S. CCP potentially poses “substantial risk to the U.S. financial system,” the proposal would use objective criteria and provide transparency about such criteria.  The proposed definition of substantial risk to the U.S. financial system consists of two 20 percent tests.  The first focuses on the percentage of initial margin from a “U.S. origin” (i.e., initial margin posted by U.S.-domiciled clearing members and clearing members ultimately owned by U.S.-domiciled holding companies, regardless of the domicile of the clearing member) at a specific non-U.S. DCO.  The second focuses on the “U.S. origin” business of the non-U.S. DCO as a percentage of the overall U.S. cleared swaps market.  Where both of these “20/20” thresholds are close to 20 percent, the Commission would be able to exercise discretion in determining whether the DCO poses substantial risk to the U.S. financial system. 

I believe that objective and transparent criteria, such as the ones set forth in the proposal, are what all regulators around the world should strive for to provide appropriate predictability and stability to the markets.

Supplemental Proposal on Exemption from Derivatives Clearing Organization Registration

I next turn to the proposed rule addressing exemptions from registration for non-U.S. DCOs. 

The proposal would provide a non-U.S. DCO that does not pose a substantial risk to the United States, and that is subject to “comparable, comprehensive supervision and regulation” by appropriate regulators in the DCO’s home jurisdiction, the option to be an exempt DCO.  This proposal supplements regulations proposed by the Commission in August 2018 that would codify the policies and procedures that the Commission is currently following with respect to granting exemptions from registration as a DCO.[5]  The proposal is grounded in section 5b(h) of the Commodity Exchange Act,[6] which provides that non-U.S. clearing organizations that are subject to “comparable, comprehensive supervision and regulation” by a home country regulator are eligible for an exemption from DCO registration.[7]

Unlike the current CFTC approach to exempt DCOs, the proposal would permit exempt DCOs to offer customer clearing to U.S. eligible contract participants – i.e., non-retail customers – through foreign clearing members that are not registered as FCMs.  To be eligible for this exemption, the DCO and the FCM would be required, among other things, to provide clear and succinct disclosure to U.S. eligible contract participants on the bankruptcy protections that would be afforded to them under relevant non-U.S. law.  To facilitate this proposal, the Commission also is proposing to allow persons located outside of the United States to accept funds from U.S. persons to margin swaps cleared at an exempt DCO, without registering as FCMs.

This proposal is similar to the CFTC’s long-standing approach to foreign futures clearing, which provides U.S. customers, including retail customers, with the ability to opt out of the bankruptcy protections offered under U.S. law to foreign futures funds.  I believe it is wholly appropriate to permit U.S. eligible contract participants that are institutional, not retail, investors to exercise business judgment in this area.  In other words, I believe it is appropriate to afford these institutional investors the opportunity to weigh the potential economic benefits of accessing products cleared at a non-U.S. CCP through a non-U.S. intermediary that would otherwise not be available to them, with the attendant potential risks relating to the use of a non-FCM intermediary.  These are risks that institutional – and potentially retail – investors in those non-U.S. markets take every day when they choose to clear swaps through those non-U.S. intermediaries at non-U.S. CCPs.

Some non-U.S. DCOs that are currently exempt from registration may elect to remain exempt or register under the full registration regime with alternative compliance, discussed earlier.  In either case, they would be able to offer customer clearing, but in different ways.  Exempt DCOs would be able to offer customer clearing to U.S. eligible contract participants through non-U.S. intermediaries operating in their markets, while fully registered DCOs subject to alternative compliance would be able to permit customer clearing through U.S. FCMs.  In both cases, in terms of regulatory oversight of the DCO, the CFTC would defer to the primary regulator or regulators of the DCO.​

I thank CFTC staff for their fine work that resulted in today’s proposal.  I look forward to reviewing comments from the public.

Conclusion

My thanks to my colleagues, Commissioners Brian Quintenz, Rostin Benham, Dawn Stump, and Dan Berkovitz.  Today’s rule proposals, as with most everything we have done together, have benefitted from your thoughtfulness and intelligence. 

This will be our last public meeting together as a Commission.  I thank each of you for your dedication and commitment to the CFTC mission.  It has truly been a pleasure to serve with you.

I have had the profound honor to lead this fine agency for thirty months now.  In my time as skipper, I have strived to set the agency off in a smooth course toward a clear horizon under an honest and capable crew. 

I hope that my time at the helm will be known for intellectual depth, paradigm resetting, and policy recalibration.  I hope it will be considered a time for winning of hearts and minds among market participants in both agriculture and financial communities and with other regulators here in America and on the global stage.  I hope it will be seen as a time of international cooperation while championing American markets and upholding U.S. regulatory sovereignty.

Perhaps more importantly, I trust our work will be recognized for its human touch and professionalism and the building of trust among the Chairman, the Commissioners, and our fine agency employees, as well as with our stakeholders in Congress and the markets we oversee.  I believe that today the CFTC is known widely to act in a forthright and candid manner, displaying leadership when appropriate and thoughtfulness and due consideration at all times.  I know that the CFTC’s reputation as a trusted and worthy counterparty will be reinforced by the pivotal actions taken today.

If I have been consistent in anything in my time on deck, it has been in asserting the value proposition of free market capitalism.  The proposition that broad and sustained prosperity generally occurs here in America and, in fact, anywhere in the world where there are open and competitive markets, free of political interference, combined with free enterprise, personal choice, voluntary exchange and legal protection of person and property.

This value proposition is a source of human expression, aspiration, and creativity. Freedom of choice is a social good in its own right, a moral and economic imperative.  Life, liberty, and the pursuit of happiness are about the freedom of the individual – not just moral or political freedom – but economic freedom as well, freedom to live in a self-directed manner and conduct honest commerce as one may determine.

Under free market capitalism, well-regulated and well-ordered trading activity is a forum of human self-expression and economic advancement.  Freedom to act in the marketplace is a part of freedom itself.  Billions of market actors, following their own self-interests and individual needs, make the decisions that direct the future, not have it directed for them.

It is not the role of the federal government to restrict liberty, but to safeguard it.  It is not the role of market regulation to constrain the free market, but to enhance it. 

Regulators enhance free markets through greater market intelligence, sound and data-driven policy prescriptions, and determined enforcement against fraud, manipulation, and misbehavior.  They also do so through an approach to cross-border market regulation that is risk-based and committed to deference to competent regulatory authorities.  It is this vision of market regulation that we have striven to embody and proclaim at the CFTC.

As I leave you today, I unabashedly encourage staying the course of free market capitalism – a course that is unmatched in reducing global poverty, sustaining prosperity and unlocking human potential.  No other system else even comes close to elevating the human condition.

Let us be not afraid.  Rather, let us set sail to a future of human aspiration.  A future where economic expression and market participation are of social value all by themselves – and good for us all.

It is a bright future, indeed.  The course is set.

Now, with a spirit of gratitude and heart full of affection, I thank you and say…

Farewell.

 

[1] See CFTC Chairman J. Christopher Giancarlo, Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation (Oct. 1, 2018), available at: https://www.cftc.gov/sites/default/files/2018-10/Whitepaper_CBSR100118_0.pdf.

[2] Foreign Futures and Options Transactions, 84 FR 32105 (July 5, 2019), available at: https://www.govinfo.gov/content/pkg/FR-2019-07-05/pdf/2019-13828.pdf.

[3] Id.

[4] Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf.

[5] Exemption From Derivatives Clearing Organization Registration, 83 FR 39923 (Aug. 13, 2018).

[6] 7 U.S.C. 7a-1(h).

[7] The Commission has construed “comparable, comprehensive supervision and regulation” to mean that the home country’s supervisory and regulatory framework should be consistent with, and achieve the same outcome as, the statutory and regulatory requirements applicable to registered DCOs.  Further, the Commission has deemed a supervisory and regulatory framework that conforms to the Principles for Financial Market Infrastructures to be comparable to, and as comprehensive as, the supervisory and regulatory requirements applicable to registered DCOs.