Introduction

Good morning.  It’s a pleasure to be here for the first Global Markets Advisory Committee (“GMAC”) under Commissioner Pham’s sponsorship.  The work of the Commodity Futures Trading Commission’s Advisory Committees is critical to the development of the CFTC’s regulations and policies, as well as industry best practices.  I’m sincerely looking forward to GMAC’s work and the regulation-focused dialogue that this very impressive group will contribute to over the coming months and years.

I want to thank Commissioner Pham, Gates Hurand—GMAC’s Designated Federal Officer—and Meghan Tente—GMAC’s Alternate Designated Federal Officer, for the hard work it took to bring us all together today.  I also want to thank you, GMAC’s membership and today’s panelists, for devoting your time and resources to further the CFTC’s regulatory mission.

Market Structure

Prior to the global financial crisis of 2008, a substantial subset of market participants used over-the-counter (“OTC”) derivatives to aggregate catastrophic exposures to risk without transparency and wholly outside of the regulatory perimeter.  Instead of mitigating risk, the opaque, bespoke, bilateral OTC derivatives markets inefficiently concentrated risk exposures resulting in crises for individual firms such as AIG and Lehman Brothers and triggered systemic failures that undermined the stability and integrity of the global financial system.

Over 14 years have passed since the collapse of Lehman Brothers, and in the intervening years, Title VII of the Dodd-Frank Act, and Commission regulations implementing its requirements, have introduce effective guardrails in these derivatives markets.  Today, the significant volume of OTC interest rate swaps are now cleared through clearinghouses,[1] that are themselves regulated as systemically important financial market infrastructure.[2]  A significant portion of interest rates swaps are executed through swap execution facilities[3] that operate under prescriptive execution requirements designed to promote price discovery and transparency.[4]  All swaps transactions are reported to swaps data repositories, giving regulators invaluable information about the distribution and size of outstanding risks.[5]  For uncleared swaps, initial and variation margin payments are mandatory.[6]  Needless to say, the Commission’s work in implementing the Dodd-Frank Act reforms has significantly improved market structure and liquidity patterns, including the liquidity patterns of trading on swap execution facilities.

Considering the regulatory landscape even more broadly, the salience of regulatory reform and evolving market structure are by no means limited to the United States.  There are ongoing structurally-impactful parallel regulatory reforms in the derivatives markets globally.  For the Commission, and US market participants, MiFID and MiFIR requirements are compatible regulatory frameworks that interact on a daily basis with the regulatory framework established under the Dodd-Frank Act.  Of the 24 Financial Stability Board (“FSB”) member jurisdictions, the overwhelming majority have adopted comprehensive regulatory reforms that require centralized clearing and trade reporting of OTC derivatives in addition to implementing capital and uncleared margin rules for regulated financial institutions and firms.[7]  Upon reflection, witnessing market structure changes since 2008 as a consequence of comparable financial reforms is indeed a uniquely shared global experience.

Commodity Market Volatility

Beginning in February and March of 2020, the financial markets faced deeply concerning shocks.  In every sense of the term, market conditions stress tested the effectiveness of the regulatory reforms codified under the Dodd-Frank Act and its international analogues. The onset of the COVID-19 global pandemic, destabilizing geopolitical events, and macroeconomic conditions marked by persistent inflation and periods of sustained volatility demonstrated the critical need for effective and responsive regulatory oversight.[8]

A critical focus for me, and a key part of our responsibility as Commissioners, is to ensure that our physically-settled benchmark futures contracts optimally serve their price basing and hedging functions.  Although volatility may have moderated in recent months, there is no room for complacency.

Digital Asset Markets

In 2022, the crypto winter—which spanned the year’s all four seasons, seemed to only get colder and colder.  While the crypto contagion did not reach the broader financial system, it revealed that the crypto industry is rife with risks, as painfully demonstrated by the successive failures of TerraLuna, Three Arrows Capital (3AC), Voyager Digital, Celsius Network, and BlockFi and FTX and, in January, the lending units of Genesis Global.[9]

At each turn, these collapses were accompanied with devastating losses, often experienced by unsuspecting retail customers lured by marketing schemes into high-risk transactions that rendered their investments worthless.  These retail participants went to bed thinking that they were protected customers of a bona fide financial enterprise and woke up as mere unsecured creditors.  This outcome is immensely inconsistent with the foundational principal of protecting customer funds that underpins the Commission’s thinking and regulatory actions.

It’s heartening to see the thoughtful work of our global standard-setters and the momentum behind legislative efforts—particularly on the international front.  The FSB, the Basel Committee on Banking Supervision (“BCBS”), and IOSCO’s Fintech Task Force have prominently issued standards that are foundational to developing functional risk-based oversight frameworks for digital assets.[10]  Internationally, the UK and EU are progressing full speed with legislative and regulatory initiatives.[11]

As demonstrated by today’s GMAC meeting, the Commission does not intend to stand idly by as regulatory work progresses internationally.  International cooperation is imperative.  The Commission will actively engage its international peers and standard-setters to contribute directly to the developing regulatory landscape.  

Through its close proximity to the cryptocurrency ecosystem—the Commission has gained extensive experience that could be leveraged by our international peers and standard-setters—including experience that is relevant to framing customer disclosures, prohibiting abusive and disruptive trading practices, establishing execution and settlement requirements, applying oversight to intermediated and disintermediated market structures and developing best practices for the custody of digital assets.  As our international peers begin building cryptocurrency regulatory frameworks, they should know that the Commission is committed to supporting their efforts, and imparting its experience through an ongoing open dialogue.

Thank you for allowing me to join you today. I am excited by the colloquy and exchange of ideas that this forum will generate. I look forward to the presentations over the course of the morning and this afternoon.

[1] According to data reported to Commission registered swap data repositories, approximately 85% of the total gross notional outstanding value of interest rate swaps positions (approximately USD 245 trillion) was attributed to cleared swaps as of November 25, 2023.  See CFTC Weekly Swaps Report, https://www.cftc.gov/MarketReports/SwapsReports/L1GrossExpCS.html.

[2] See Systemically Important DCO Rules, https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_10_SystemicDCO/index.htm.

[3] In all of 2022, 58.4% of interest rate swaps traded in terms of notional value and 69.6% of interest rates swaps traded in terms of total trade count were executed on SEFs.  SwapsInfo Full Year 2022 and the Fourth Quarter of 2022 Review, https://www.isda.org/a/8VygE/SwapsInfo-Full-Year-2022-and-the-Fourth-Quarter-of-2022-Review-Full-Report.pdf.

[4] See 17 CFR 37.9.

[5] Data reported to the Commission indicates that 90% of swaps positions held by swap dealers were cleared when measured in notional value in contrast to 6% of swaps positions held by non-financial firms.  See https://www.cftc.gov/sites/default/files/2023-01/ENNs_IRS_2022Q3_ada.pdf.

[6] The International Swaps and Derivatives Association (“ISDA”) publishes a margin survey that analyzes the amount and type of initial margin and variation margin posted for non-cleared derivatives. The latest survey finds that the 20 largest market participants collected USD 286.0 billion of initial margin for their non-cleared derivatives transactions at year-end 2021.  In addition, “phase-one firms” collected USD 936.5 billion of variation margin for

their non-cleared derivatives transactions at year-end 2021, including USD 527.9 billion of regulatory variation margin and USD 408.7 billion of discretionary variation margin.  See ISDA Margin Survey Year-End 2021, https://www.isda.org/a/TwVgE/ISDA-Margin-Survey-Year-End-2021.pdf.

[7] See FSB OTC Derivatives Market Reforms, Implementation Progress in 2022, https://www.fsb.org/wp-content/uploads/P071122.pdf.

[8] Keynote Address of Sir Jon Cunliffe, Deputy Governor for Financial Stability, Bank of England, at the FIA and SIFMA Asset Management Derivatives Forum (February 9, 2022).

[9] Chapter 11 Petition, In re Genesis Global Holdco LLC, No. 1:23-BK-10063 (Bankr. S.D.N.Y. January 19, 2023).

[10] The BCBS has actively developed prudential rules for the appropriate treatment of digital assets.  https://www.bis.org/bcbs/publ/d545.htm.  In July of 2022, IOSCO’s Fintech Task Force issued its Crypto-Asset Roadmap which should culminate in in 2023 policy recommendations regulating digital assets and decentralized finance.  IOSCO Crypto-Asset Roadmap for 2022-2023 (July 7, 2022).